M/s Swaranandhra IJMII Intergrated Town ship Development Pvt. Ltd., Hyderabad V. DCIT, Circle 3(3), Hyderabad

ITA 2072/HYD/2011

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 66587 (ITAT-HYDERABAD)
• Duration Of Justice: 1 year(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-12-2012
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Assessment Year: 2007-2008
• Appeal Filed On: 14-12-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: K HARILAL NAIK M RAVINDER SAI
• Assessee Lawyers: DR M V R PRASAD
• Keywords: Sale consideration of property below Jantri Value; Related party transaction; Business income; Depreciation; Transfer pricing; Business expenditure; Share purchase agreement; Diversion of income; International transaction; Reasonable cause; Fair market value; Avoidance of tax; Arm length price; Capital receipt; Commercial expediency; Onus to prove; Sham transactions; Revised return; Unabsorbed depreciation; Revenue expenditure
• Section: 92C; 40A(3); 143(3); 92B; 92F; 92A; 10AA; 234B; 80IB; 54; 37; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL IN THE INCOME TAX APPELLATE TRIBUNAL IN THE INCOME TAX APPELLATE TRIBUNAL IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH A', HYDERABAD BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER ITA NO. 2072/HYD/2011 ASSESSMENT YEAR 2007-08 M/S. SWARNANDHRA IJMII INTEGRATED TOWNSHIP DEVELOPMENT COMPANY PVT. LTD. HYDERABAD PAN: AAHCS3641P VS. THE DEPUTY CIT CIRCLE-3(3) HYDERABAD ASSESSEE RESPONDENT ASSESSEE BY: DR. M.V.R. PRASAD RESPONDENT BY: SRI K. HARILAL NAIK /M. RAVINDER SAI DATE OF HEARING: 17.10.2012/ 20 .1 2 .2012 DATE OF PRONOUNCEMENT: 31.12.2012 O R D E R O R D E R O R D E R O R D E R PER CHANDRA POOJARI, AM: THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST TH E ORDER OF THE DISPUTE RESOLUTION PANEL (DRP), HYDERABAD DATED 23. 9.2011 FOR ASSESSMENT YEAR 2007-08. 2. THE ASSESSEE COMPANY M/S. SWARNANDHRA IJMII INTEGRA TED TOWNSHIP DEVELOPMENT COMPANY PVT. LTD. WAS ESTABLISHED TO CA RRY OUT THE DEVELOPMENT OF INTEGRATED TOWNSHIP IN THE LAND ADME ASURING 34.71 ACRES SITUATED AT SY. NO. 1009/1, KUKATPALLY VILLAGE, RAN GAREDDY DIST., BY VIRTUE OF THE DEVELOPMENT AND SHAREHOLDERS AGREEMENTS DATED 4 .11.2003 ENTERED BETWEEN ANDHRA PRADESH HOUSING BOARD AND IJMII. TH US, THE ASSESSEE IS ENGAGED IN THE BUSINESS OF DEVELOPMENT OF INTEGRATE D TOWNSHIP AND SALE OF FLATS. THE RETURN OF INCOME WAS FILED ON 30-10-200 7 DECLARING A TOTAL INCOME OF RS. 15,95,32,740 AND SUBSEQUENTLY FILED A REVISE D RETURN OF INCOME ON 22.08.2010 DECLARING THE TOTAL TAXABLE INCOME AT NI L AFTER SET OFF OF CARRIED FORWARD LOSSES. THE CASE WAS SUBJECTED TO SCRUTINY BY THE ASSESSING OFFICER, IN COURSE OF ASSESSMENT PROCEEDING, THE ASSESSEE-CO MPANY PRODUCED ITS BOOKS OF ACCOUNT AND VARIOUS OTHER DETAILS AS REQUI RED BY THE TRANSFER PRICING IT A NO. 2072/HYD/2011 M/S. SWARNANDHRA IJMII INTEGRATED TOWNSHIP DEVELOPMENT COMPANY PVT. LTD. ================================== 2 OFFICER AND ASSESSING OFFICER FROM TIME TO TIME. TH E TRANSFER PRICING OFFICER HAS PASSED THE ORDER U/S. 92CA(III) OF THE INCOME T AX ACT, 1961 ON 30 TH APRIL, 2010 DETERMINING THE ADJUSTMENTS TO ARMS LENGTH PRI CE AT RS. 38,34,39,496. SUBSEQUENTLY, THE ASSESSMENT WAS FINA LLY COMPLETED ON 30.12.2010 DETERMINING THE TOTAL INCOME AT RS. 101, 45,42,242. THE ORDER WAS SERVED ON 04.01.2011. 3. BRIEF FACTS RELATING TO THE DISALLOWANCE ARE AS FOL LOWS: AS PER CLAUSE 4.1.6 OF THE SHAREHOLDERS AGREEMENT, THE COMPANY HA S PAID LAND COMPENSATION TO THE LAND OWNERS I.E,, ANDHRA PRADES H HOUSING BOARD (APHB) AN AMOUNT OF RS. 2,200 PER SQ. YARD FOR THE LAND TR ANSFERRED BY APHB TO THE COMPANY. THE LAND COMPENSATION OF RS. 2,200 PER SQ. YARD IS TERMED AS GUARANTEED COMPENSATION IN THE SAID AGREEMENT. FURT HER, THE LAND COMPENSATION IS CONSIDERED AT RS. 1,400 AS A LAND C OST AND RS. 800 AS ANTICIPATED PROFITS FROM THE BUSINESS OF TOWNSHIP D EVELOPMENT TO THE TUNE OF RS. 13,43,97,120. THE ASSESSING OFFICER HAS DISALL OWED AN AMOUNT OF RS. 13,43,96,800 BEING PART OF THE LAND COMPENSATION AS DISTRIBUTION OF PROFITS TO APHB. 3.1 AS PER CLAUSE 14.1.6 OF SECTION 4 OF THE SHAREHOLDE RS AGREEMENT, THE COMPANY HAS PAID INCENTIVE TO IJMII AN AMOUNT OF RS . 18,59,85,000. THE DEVELOPMENT OF TOWNSHIP IS THE EFFORT OF IJMII. CO NSIDERING THE PARTICIPATION OF IJMII AND ITS INVOLVEMENT AS CONSTRUCTION CONTRA CTOR, AN INCENTIVE WAS PROPOSED TO IJMII IN THE SHAREHOLDERS AGREEMENT. AC CORDINGLY, AS PER THE TERMS AND CONDITIONS OF THE CONTRACTUAL AGREEMENT B ETWEEN THE SHAREHOLDERS THE COMPANY HAS PAID THE INCENTIVE TO THE IJMII. 3.2 THE ASSESSING OFFICER INTERPRETED THE SHAREHOLDERS AGREEMENT BY TREATING THE COMPANY IS NOT A PARTY TO THE AGREEMEN T. THE ASSESSING OFFICER HAS DISALLOWED AN AMOUNT OF RS. 18,59,85,000 INCENT IVE PAID TO IJMII FOR ITS ROLE AS CONSTRUCTION CONTRACTOR AND NOT OTHERWISE. 3.3 DURING THE FINANCIAL YEAR, THE ASSESSEE COMPANY HAS PAID INTEREST U/S 234B AND 234C AN AMOUNT OF RS. 55,77,852/-. WHILE FILING THE RETURN OF IT A NO. 2072/HYD/2011 M/S. SWARNANDHRA IJMII INTEGRATED TOWNSHIP DEVELOPMENT COMPANY PVT. LTD. ================================== 3 INCOME, THE ASSESSEE HAS DISALLOWED THE INTEREST PA ID U/S 234B AND 234C UNDER THE HEAD INTEREST ON DELAYED STATUTORY PAYMEN TS. HOWEVER, WITHOUT CONSIDERING THE ASSESSEE VOLUNTARY DISALLOWANCE, TH E ASSESSING OFFICER HAS DISALLOWED THE SAID AMOUNT OF RS. 55,77,852 AGAIN. 3.4 THE ASSESSEE SOLD THE FLATS TO THE PURCHASERS. AS P ER THE TERMS OF AGREEMENT, THE ASSESSEE HAS TO COMPLETE THE CONSTRU CTION WITHIN 12 MONTHS FROM THE DATE OF AGREEMENT OR ANY OTHER SPECIFIED P ERIOD. HOWEVER, CONSIDERING THE INORDINATE DELAY IN COMPLETING THE CONSTRUCTION, THE ASSESSEE HAS PAID DELAY IN HANDING OVER CHARGES OF RS. 7,74, 36,597 TO THE PURCHASERS. THE SAID PAYMENT OF RS. 7,74,36,597 WAS TREATED BY THE ASSESSING OFFICER AS INTEREST AND DISALLOWED THE SAID AMOUNT U/S. 40(A)( IA) OF THE I.T. ACT, 1961 UNDER THE GUISE OF NON-DEDUCTION OF TDS. THE ASSESS ING OFFICER HAS DISALLOWED AN AMOUNT OF RS. 7,74,36,597 DELAY IN HA NDING OVER CHARGES PAID TO THE PURCHASERS. 3.5 AS PER CLAUSE 4.16 OF SECTION 4 OF THE SHAREHOLDERS AGREEMENT, THE ASSESSEE HAS PAID THE LAND COMPENSATION TO THE LAND OWNERS. AS PER THE TERMS AND CONDITIONS OF THE SHAREHOLDERS AGREEMENT, THE ASSESSEE COMPANY CONSTRUCTED 500 LLG HOUSES AND HANDED OVER TO THE L AND OWNER AS PER THE AGREED PRICE. SINCE, THE 500 LIG HOUSES WERE SOLD T O THE LAND OWNER, THE LAND PERTAINING TO THE SAID HOUSES NEED NOT BE TRANSFERR ED TO THE ASSESSEE AND AGAIN RE TRANSFER THE SAME TO THE LAND OWNER. THE A SSESSING OFFICER HAS DISALLOWED THE LAND COST ATTRIBUTABLE TO THE 500 LI G HOUSES AN AMOUNT OF RS. 1,92,19,200. 3.6 AS PER CLAUSE 4.1.6 OF SECTION 4 OF THE DEVELOPMENT AND SHAREHOLDERS AGREEMENT, THE ASSESSEE HAS HANDED OVER 500 LIG HOU SES CONSISTING OF 450 SQ. FT. EACH AT A TOTAL CONSIDERATION OF RS. 9 CROR ES. THE SAID TRANSACTION IS DONE BY THE ASSESSEE ABSOLUTELY AS PER THE CONTRACT UAL AGREEMENT. THE ASSESSING OFFICER HAS DISALLOWED THE COST OF CONSTR UCTION IN EXCESS OF RS .9 CRORES AT AN AMOUNT OF RS. 18,06,75,000. IT A NO. 2072/HYD/2011 M/S. SWARNANDHRA IJMII INTEGRATED TOWNSHIP DEVELOPMENT COMPANY PVT. LTD. ================================== 4 3.7 THE ASSESSEE COMPANY AWARDED DEVELOPMENT OF TOWNSHI P WORK TO IJMII. ON SUCH DEVELOPMENT WORK, SOME OF THE WORK BILLS SUBMITTED BY THE IJMII WERE PAID BELATEDLY. ON SUCH BELATED PAYMENTS , THE ASSESSEE HAS PAID INTEREST TO THE IJMII AS PER THE MINUTES OF THE MEE TING DRAWN BETWEEN THE PARTIES. THE ASSESSING OFFICER DISALLOWED AN AMOUNT OF RS. 2,21,95,301. 3.8 THE ASSESSING OFFICER HAD ADDED A SUM OF RS 38,34,3 9,486 BASED ON THE ORDER OF THE TPO AS PER DETAILS GIVEN BELOW: I) THE TPO HAS ALSO TREATED A SUM OF RS 34,86,00,000 P AID BY THE ASSESSEE COMPANY TO IJMII AS DEEMED INTERNATION AL TRANSACTION. IT WAS EXPLAINED TO THE TPO THAT THERE SHOULD BE AT LEAST ONE NON RESIDENT COMPANY FOR A TRANSACTION TO BE TREATED AS A DEEMED INTERNATIONAL TRANSACTION. HOWEVER THE SAME WAS NOT CONSIDERED AND A SUM OF RS 34,86,00,000 WAS TRE ATED AS A DEEMED INTERNATIONAL TRANSACTION BETWEEN TWO RESI DENT COMPANIES. THE PAYMENT MADE TO IJMII WAS REPORTED I N FORM 3 CD U/S 40(A)(2)(B). II) THE ASSESSEE MADE A PAYMENT OF RS 2,32,72,451 AS TE CHNICAL SERVICES FEES TO ITS AE. DESPITE GIVING THE TECHNIC AL SERVICES AGREEMENT AND OTHER DETAILS AS TO BENEFITS RECEIVED FROM THE AE AND THE PAYMENTS MADE AT ARMS LENGTH PRICE WAS T REATED AS NIL AND THE AO HAS MADE AN ADDITION OF RS 2,32,7 2,451/- BASED ON THE TPO ORDER. III) THE ASSESSEE HAS ALSO MADE A PAYMENT OF RS 1,15,67, 035 AS REIMBURSEMENT OF BANK GUARANTEE CHARGES TO ITS AE . THE AE WAS SANCTIONED A LOAN ON AN OVERALL BASIS FROM STAN DARD CHARTERED BANK MALAYSIA BOTH FUND AND NON FUND BASE D. THE SHARE OF THE ASSESSEE OF RS 1,15,67,035 WAS REIMBUR SED TO ITS AE. THE TPO TREATED THE ARMS LENGTH PRICE OF REIMBU RSEMENT TOWARDS BANK GUARANTEE CHARGES AT RS NIL. THE ASSES SING OFFICER MADE AN ADDITION OF RS 1,15,67,035/- TO THE TOTAL INCOME OF THE ASSESSEE BASED ON THE TPO ORDER. IT A NO. 2072/HYD/2011 M/S. SWARNANDHRA IJMII INTEGRATED TOWNSHIP DEVELOPMENT COMPANY PVT. LTD. ================================== 5 THUS THE DETAILS OF ADDITIONS ARE AS UNDER: S. N O. ITEM AMOUNT (RS.) I) DISALLOWANCE OF COST OF LAND TRANSFERRED TO APHB 13,43,96,800 II) DISALLOWANCE OF INCENTIVE PAID 18,59,85,000 III) DISALLOWANCE OF INTEREST PAYMENT 55,77,852 IV) DISALLOWANCE OF DELAY IN HANDING OVER CHARGES 7,74,36,597 V) DISALLOWANCE OF LAND COST RELATING TO LAND SOLD BY APHB ON 500 LIG HOUSES 1,92,19,200 VI) DISALLOWANC E OF COST OF CONSTRUCTION OF THE HOUSES HANDED OVER TO APHB 18,06,75,00 VII) DISALLOWANCE OF INTEREST PAID TO IJM (INDIA) LTD. 2,21,95,301 VIII) ADDITION U/S. 92CA(4) 38,34,39,486 THUS, THE TOTAL INCOME OF THE ASSESSEE WAS DETERMIN ED AT RS. 101,45,42,242. HOWEVER, THE DRP GRANTED RELIEF TOW ARDS INTEREST PAYMENT AT RS. 55,77,852 AND THE TOTAL INCOME DETER MINED AT RS. 100,89,64,390 AFTER DRP ORDER. 3.9 THE ASSESSEE WENT IN APPEAL BEFORE THE DISPUTE RESO LUTION PANEL (DRP). REGARDING DISALLOWANCE OF LAND TRANSFERRED BY APHB AT RS. 13,43,97,120, THE DRP OBSERVED THAT IT IS MADE OUT OF PROFIT, TAXES ARE TO BE PAID U/S. 155-O OF THE ACT AND CONFIRMED THE DISALL OWANCE. REGARDING DISALLOWANCE OF INCENTIVE PAID AT RS. 18,59,85,000, IT WAS OBSERVED THAT IT IS UNREASONABLE AND CONFIRMED THE DISALLOWANCE. REGAR DING DISALLOWANCE OF INTEREST AT RS. 55,77,852 THE DRP OBSERVED THAT THE ASSESSEE HAD ALREADY DISALLOWED THE SAME IN ITS COMPUTATION OF INCOME AN D THE ASSESSING OFFICER MADE FURTHER ADDITION WHICH RESULTED IN DOUBLE ADDI TION. ACCORDINGLY, THE DRP DIRECTED THE ASSESSING OFFICER TO DELETE THE SA ME. REGARDING THE DISALLOWANCE OF DELAY IN HANDING OVER CHARGES AT RS . 7,74,36,597, SINCE NO PROOF IS ADDUCED, THE DISALLOWANCE IS CONFIRMED. R EGARDING DISALLOWANCE O COST OF LAND RELATING TO LAND SOLD BY THE APHB ON 5 00 LIG HOUSES AT RS. 1,92,19,200 AND WITH REGARD TO DISALLOWANCE OF COST OF CONSTRUCTION OF HOUSES HANDED OVER TO APHB AT RS. 18,06,75,000, IT WAS OBSERVED BY THE DRP THAT IT IS A DIVERSION OF PROFIT AND CONFIRMED THE DISALLOWANCE. WITH REGARD TO DISALLOWANCE OF INTEREST PAID TO IJMII AT RS. 2,21,95,301 IT IS OBSERVED THAT PREFERENTIAL TREATMENT HAS BEEN GIVEN TO THE CONTRACTOR CUM SHAREHOLDER AND NO INTEREST IS CHARGED. ACCORDINGL Y, IT WAS DISALLOWED. IT A NO. 2072/HYD/2011 M/S. SWARNANDHRA IJMII INTEGRATED TOWNSHIP DEVELOPMENT COMPANY PVT. LTD. ================================== 6 AGAINST THESE FINDINGS OF THE DRP THE ASSESSEE IS I N APPEAL BEFORE US WITH THE FOLLOWING GROUNDS OF APPEAL: 1.1 THE ORDER PASSED BY THE LEARNED DEPUTY COMMISS IONER OF INCOME TAX, CIRCLE 3(3), HYDERABAD UNDER SECTION 143(3) READ WITH SECTION 144C(13) TO THE EXTENT IT IS PREJUDICIAL TO THE ASSESSEE IS BAD IN LAW AND LIABL E TO BE QUASHED. 2.1 THE LEARNED DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 3(3), HYDERABAD HAS ERRED IN MAKING ADDITION OF RS. 13,43,96,800 IN RESPECT OF COST OF LAND TRANSFERRED BY APHB TO THE ASSESSEE. 2.2 THE LEARNED DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 3(3), HYDERABAD HAS ERRED IN TREATING A PORTION OF THE PAYMENT MADE TO APHB AS PAYMENT TOWARDS PROFITS. 2.3 ON FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND LAW APPLICATION, THE ADDITION MADE BY THE ASSESSING OFF ICER AMOUNTING TO RS. 13,43,96,800 IS INCORRECT, CONTRAR Y TO FACTS, UNDERLYING DOCUMENTS AND THEREFORE TO BE DEL ETED IN ENTIRETY. 3.1 THE LEARNED DEPUTY COMMISSIONER OF INCOME-TAX , CIRCLE 3(3), HYDERABAD HAS ERRED IN DISALLOWING INCENTIVE PAID TO CONTRACTOR AMOUNTING TO RS. 18,59,85,0001- ON TH E GROUND THAT THE SAID PAYMENT IS NOT REASONABLE AS P ER SECTION 40A OF THE ACT. 3.2 THE LEARNED DEPUTY COMMISSIONER OF INCOME TAX , CIRCLE 3(3), HYDERABAD HAS ERRED IN MAKING DISALLOWANCE UN DER SECTION 40A WITHOUT DEMONSTRATING THE EXCESS OVER T HE 'MARKET VALUE'. 3.3 THE CONCLUSIONS OF THE LEARNED DEPUTY COMMISS IONER OF INCOME TAX, CIRCLE 3(3), HYDERABAD IN DISALLOWING T HE IMPUGNED PAYMENT IS INCORRECT, CONTRARY TO FACTS AN D LAW AND IS TO BE DISREGARDED. 3.4 ON FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND LAW APPLICABLE, THE ADDITION MADE BY THE ASSESSING OFFI CER AMOUNTING TO RS. 18,59,85,000 IS TO BE DELETED IN ENTIRETY. 4.1 THE LEARNED DEPUTY COMMISSIONER OF INCOME TAX , CIRCLE 3(3), HYDERABAD HAS ERRED IN DISALLOWING PAYMENT IN THE NATURE OF 'HANDING OVER CHARGES' AMOUNTING TO RS. IT A NO. 2072/HYD/2011 M/S. SWARNANDHRA IJMII INTEGRATED TOWNSHIP DEVELOPMENT COMPANY PVT. LTD. ================================== 7 7,74,36,597. ON FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND LAW APPLICABLE, NO ADDITION IS TO BE MADE IN RESPECT OF THE ABOVE PAYMENT. THE ADDITION MADE IS TO BE DELETED IN ENTIRETY. 5. I THE LEARNED DEPUTY COMMISSIONER OF INCOME TA X, CIRCLE 3(3), HYDERABAD HAS ERRED IN MAKING ADDITION OF RS. 1,92,19,200 IN RESPECT OF COST OF LAND ATTRIBUTABLE TO HOUSES HANDED OVER TO APHB. ON FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND LAW APPLICABLE, THE ADDITION MADE BY THE ASSESSING OFFICER IN RESPECT O F THE ABOVE PAYMENT IS TO BE DELETED IN ENTIRETY. 6.1 THE LEARNED DEPUTY COMMISSIONER OF INCOME TAX , CIRCLE 3(3), HYDERABAD HAS ERRED IN MAKING ADDITION OF RS. 18,06,75,000 IN RESPECT OF COST OF CONSTRUCTION OF HOUSES HANDED OVER TO APHB. ON FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND LAW APPLICABLE, THE ADDITION MADE BY THE ASSESSING OFFICER IN RESPECT O F THE ABOVE PAYMENT IS TO BE DELETED IN ENTIRETY. 7.1 THE LEARNED DEPUTY COMMISSIONER OF INCOME TAX , CIRCLE 3(3), HYDERABAD HAS ERRED IN DISALLOWING INTEREST P AID TO M/S. IJMII INDIA LTD AMOUNTING TO RS. 2,21,95,301 I N COMPUTING THE BUSINESS INCOME. ON FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND LAW APPLICABLE, THE DISALLOWANCE OF INTEREST PAID IS BAD IN LAW. THE AD DITION MADE ON THIS COUNT IS TO BE DELETED IN ENTIRETY. 8.1 THE LEARNED DEPUTY COMMISSIONER OF INCOME TAX , CIRCLE 3(3), HYDERABAD HAS ERRED IN MAKING ADDITION IN RES PECT OF TRANSFER PRICING ADJUSTMENT MADE BY THE TPO AMOUNTING TO RS. 38,34,39,486/- ON FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND LAW APPLICABLE, THE ADDITION ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT IS TO BE DELETED IN ENTIRETY. 8.2 THE LEARNED DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 3(3), HYDERABAD HAS ERRED IN MAKING A REFERENCE TO TRANSFER PRICING OFFICER FOR DETERMINING ARM'S LENG TH PRICE WITHOUT DEMONSTRATING AS TO WHY IT WAS NECESS ARY AND EXPEDIENT TO DO SO. 8.3 THE LEARNED TRANSFER PRICING OFFICER HAS ERRED IN MAKING ADJUSTMENTS UNDER CHAPTER X IN RESPECT OF TRANSACTI ONS WHICH WERE NOT 'INTERNATIONAL TRANSACTIONS' AS DEFI NED IN SECTION 92B OF THE ACT. 8.4 THE LEARNED TRANSFER PRICING OFFICER HAS ERRED IN NOT IT A NO. 2072/HYD/2011 M/S. SWARNANDHRA IJMII INTEGRATED TOWNSHIP DEVELOPMENT COMPANY PVT. LTD. ================================== 8 APPRECIATING THAT THE PROVISIONS OF CHAPTER X DO NO T APPLY IN RESPECT OF TRANSACTIONS WITH 'RESIDENT' EN TITIES. 8.5 THE LEARNED ASSESSING OFFICER, LEARNED TRANSFE R PRICING OFFICER AND HONOURABLE DISPUTE RESOLUTION PANEL HAV E ERRED IN (A) PASSING THE ORDER WITHOUT DEMONSTRATING THAT ASSESSEE HAD MOTIVE OF TAX EVASION. (B) IGNORING THE FACT THAT THE MEMBERS OF DISPUTE RESOLUTION PANEL ALSO BEING JURISDICTIONAL COMMISSIONER/DIRECTORS OF INCOME TAX OF THE ASSESSEE, THE CONSTITUTION OF THE DISPUTE RESOLUTIO N PANEL IS BAD IN LAW. (C) NOT APPRECIATING THAT THE CHARGING OR COMPUTATION PROVISION RELATING TO INCOME UNDER THE HEAD 'PROFIT S & GAINS OF BUSINESS OR PROFESSION' DO NOT REFER TO OR INCLUDE THE AMOUNTS COMPUTED UNDER CHAPTER X AND THEREFORE ADDITION MADE UNDER CHAPTER X IS BAD IN LAW. 8.6 THE HON'BLE DRP HAS ERRED IN CONFIRMING THE AD DITIONS MADE BY THE TPO DESPITE NOT AGREEING TO THE CONCLUS IONS OF THE LEARNED TPO ON MANY ISSUES. 8.7 THE HON'BLE DRP HAS ERRED IN CONFIRMING THE AD DITIONS (I) ONLY WITH A VIEW TO KEEP THE MATTER ALIVE AND (II) FOR THE REASON THAT THE DEPARTMENT DOES NOT HAVE RECOURSE T O ANY REMEDY AGAINST THE DIRECTIONS IN FAVOUR OF THE ASSESSEE. 8.8 THE LEARNED ASSESSING OFFICER, TPO AND THE DRP HAS ERRED IN MAKING ADDITIONS IN RESPECT OF INDIVIDUAL INTERNATIONAL TRANSACTIONS DESPITE MAKING ADJUSTMEN T AT ENTERPRISE LEVEL PROFIT MARGIN USING TNMM. 8.9 THE FINDINGS AND THE CONCLUSIONS OF THE LEARNE D TRANSFER PRICING OFFICER, DRP AND THE ASSESSING OFFICER ARE INCORRECT, BAD IN LAW AND LIABLE TO BE QUASHED. 8.10 ON FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND LAW APPLICABLE, THE ADDITION ON ACCOUNT -OF TRANSFER PR ICING ADJUSTMENT AMOUNTING TO RS. 38,34,39,486/- IS TO BE DELETED IN ENTIRETY. 9.1 THE LEARNED DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 3(3), HYDERABAD HAS ERRED IN LEVYING INTEREST UNDER SECTION 234B AND 2340 OF THE ACT. ON FACTS AND IN T HE CIRCUMSTANCES OF THE CASE AND LAW APPLICABLE, INTER EST IS IT A NO. 2072/HYD/2011 M/S. SWARNANDHRA IJMII INTEGRATED TOWNSHIP DEVELOPMENT COMPANY PVT. LTD. ================================== 9 NOT LEVIABLE UNDER SECTION 234B AND 234D. THE ASSESSEE DENIES ITS LIABILITY TO PAY INTEREST UNDER SECTION 234B AND 234D. 10.1 IN VIEW OF THE ABOVE AND OTHER GROUNDS TO BE ADDUCED AT THE TIME OF HEARING, THE ASSESSEE PRAYS THAT THE OR DER PASSED BY THE LEARNED DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 3(3), HYDERABAD TO THE EXTENT PREJUDICI AL TO THE ASSESSEE BE QUASHED OR IN THE ALTERNATIVE, THE ABOVE GROUNDS ARE SUMMA RISED AS BELOW: (I) ADDITION OF RS. 13,43,96,8001- BE DELETED; (II) ADDITION OF RS. 18,59,85,000/- BE DELETED; (III) ADDITION OF RS. 7,74,36,5971@ BE DELETED; (IV) ADDITION OF RS. 1,92,19,200/- BE DELETED; (V) ADDITION OF RS. 18,06,75,0001- BE DELETED; (VI) ADDITION OF RS. 2,21,95,301/- BE DELETED; (VII) ADDITION ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT AMOUNTING TO RS. 38,34,39,486/- BE DELETED; (VIII) INTEREST LEVIED UNDER SECTION 234B AND 2340 BE DELETED. 3.10 THE ASSESSEE ALSO FILED ADDITIONAL GROUND AS FOLLOW S: 1. ASSUMING WITHOUT ADMITTING THAT THE VARIOUS ADDITIO NS MADE TO INCOME RETURNED ARE CORRECT, THE LEARNED ASSESSING OFFICER HAS ERRED IN NOT SETTING OFF BROU GHT FORWARD BUSINESS LOSS TOTALLY AMOUNTING TO RS. 2,36 ,46,319 IN COMPUTING THE TAXABLE INCOME FOR THE YEAR UNDER CONSIDERATION. 2. ASSUMING WITHOUT ADMITTING THAT THE VARIOUS ADDITIO NS MADE TO INCOME RETURNED ARE CORRECT, THE LEARNED ASSESSING OFFICER HAS ERRED IN NOT SETTING OFF UNAB SORBED DEPRECIATION TOTALLY AMOUNTING TO RS. 28,05,937 IN COMPUTING THE TAXABLE INCOME FOR THE YEAR UNDER CONSIDERATION. 3.11 THE ASSESSEE FILED A PETITION FOR ADMITTING THE ADD ITIONAL GROUND. WE ARE ADMITTING THE ADDITIONAL GROUND AFTER SATISFYIN G THAT THE REASONS ADVANCED BY THE ASSESSEE COUNSEL ARE BONA-FIDE AND THE ASSESSEE IS HAVING REASONABLE CAUSE FOR NOT RAISING THE ABOVE GROUNDS ON EARLIER OCCASION. IT A NO. 2072/HYD/2011 M/S. SWARNANDHRA IJMII INTEGRATED TOWNSHIP DEVELOPMENT COMPANY PVT. LTD. ================================== 10 4. WITH REGARD TO ADDITION IN RESPECT OF COST OF LAND TRANSFERRED TO ANDHRA PRADESH HOUSING BOARD (APHB) AT RS. 13,43,96,800 (G ROUND NOS. 2.1 TO 2.3), THE AR SUBMITTED AS FOLLOWS: 4.1 THERE WAS AN ACUTE SHORTAGE OF QUALITY RESIDENTIAL ACCOMMODATION IN THE STATE OF ANDHRA PRADESH. IN ORDER TO ALLEVIATE THIS PROBLEM, THE GOVT. OF ANDHRA PRADESH THROUGH ITS ARM - ANDHRA PRADESH HOU SING BOARD CONSTITUTED UNDER THE ANDHRA PRADESH HOUSING BOARD ACT, 1956 (B OARD FOR SHORT HEREAFTER) DECIDED TO UNDERTAKE HOUSING PROJECTS IN A LARGE SCALE. THE BOARD HAD LIMITED FINANCIAL RESOURCES, TECHNICAL EXPERTIS E AND WHEREWITHAL TO UNDERTAKE THE HOUSING PROJECTS ON SUCH A LARGE SCAL E. THE GOVT. OF AP THEREFORE DECIDED THAT THE BOARD SHOULD UNDERTAKE T HE HOUSING PROJECTS WITH PARTICIPATION FROM THE PRIVATE SECTOR. 4.2 THE BOARD INVITED EXPRESSION OF INTEREST FROM PRIVA TE SECTOR COMPANIES WITH ESTABLISHED TRACK RECORD IN HANDLING GIANT HOU SING PROJECTS. IN THE COMPETITIVE BIDDING PROCESS, M/S IJM (INDIA) INFRASTRUCTURE LIMITED (IJMII FOR SHORT HEREAFTER) EMERGED AS THE COMPETENT AND ELIGI BLE PRIVATE SECTOR PARTICIPANT TO DEVELOP THE PROPOSED INTEGRATED TOWN SHIP PROJECT IN KUKATPALLY, HYDERABAD, IN JOINT PARTICIPATION WITH THE BOARD. 4.3 A MEMORANDUM OF UNDERSTANDING (MOU) WAS ENTERED INT O BETWEEN THE BOARD AND IJMII ON 15.5.2002 IN THE PRESENCE OF THE THEN HON'BLE CHIEF MINISTER OF ANDHRA PRADESH. THE MOU WAS ENTERED INT O WITH A VIEW TO DEVELOP AN INTEGRATED TOWNSHIP PROJECT OVER AN AREA OF ABOU T 34.71 ACRES OF LAND IN KUKATPALLY, HYDERABAD. THE MOU INTER ALIA PROVIDED FOR MANY ASPECTS OF DEVELOPMENT OF THE TOWNSHIP PROJECT AS WELL AS RELA TIONSHIP BETWEEN THE BOARD, IJMII AND ALL OTHER CONCERNED MATTERS GOVERN ING THE MANAGEMENT AND AFFAIRS OF THE COMPANY. THE BOARD AND IJMII DECIDED TO PROMOTE A JOINT SECTOR COMPANY TO UNDERTAKE THE INTEGRATED TOWNSHIP PROJECT. 4.4 IT WAS AGREED IN THE MOU THAT THE JOINT SECTOR COMP ANY I.E., THE ASSESSEE SHALL BE RESPONSIBLE FOR THE CONSTRUCTION AND IMPLEMENTATION OF THE HOUSING PROJECTS AS CONTEMPLATED BY THE BOARD AND I T SHALL BE BOUND BY THE IT A NO. 2072/HYD/2011 M/S. SWARNANDHRA IJMII INTEGRATED TOWNSHIP DEVELOPMENT COMPANY PVT. LTD. ================================== 11 POLICY FRAMEWORK OF THE GOVT. OF ANDHRA PRADESH. TH E ASSESSEE WAS TO BE BOUND BY THE GUIDELINES OF THE GOVT. OF AP AND THE BOARD FROM TIME TO TIME AND SHALL UNDERTAKE THE HOUSING PROJECTS ON TERMS A CCEPTED AND FINALISED BY THE GOVT. OF AP AND THE BOARD. 4.5 THE ASSESSEE I.E., M/S SWARNANDHRA IJMII INTEGRATED TOWNSHIP DEVELOPMENT (P) LIMITED WAS INCORPORATED ON 25.3.20 03 AS A SPV TO UNDERTAKE THE DEVELOPMENT OF AN INTEGRATED TOWNSHIP PROJECT. THE BOARD AND IJMII ARE THE SHAREHOLDERS OF THE ASSESSEE IN THE R ATIO OF 49:51. THE FIRST MEETING OF THE BOARD OF DIRECTORS OF THE ASSESSEE W AS HELD ON 26.3.2003. THE BOARD OF DIRECTORS DISCUSSED, PASSED RESOLUTION S AND THE RECORDED THE MINUTES ON THE FOLLOWING ASPECTS IN THE SAID MEETIN G. (I) CHAIRMAN TO CONDUCT THE PROCEEDINGS OF THE MEETING; (II) APPOINTMENT OF FIRST DIRECTORS, ADDITIONAL DIRECTOR AND CHAIRMAN OF THE COMPANY, AND MANAGING DIRECTOR; (III) CIRCUMSTANCES LEADING TO THE FORMATION OF THE COMPA NY AND MATTERS CONCERNING THE SHARE CAPITAL AND SHAREHOLDI NG PATTERN; (IV) APPROVAL OF FOREIGN INVESTMENT PROMOTION BOARD (FIP B) FOR DEVELOPMENT OF INTEGRATED TOWNSHIP PROJECT; (V) APPOINTMENT OF IJMII AS THE MAIN CONTRACTOR AND PRO JECT MANAGER FOR THE DEVELOPMENT OF INTEGRATED TOWNSHIP PROJECT, ENTERING INTO SALES AND MARKETING AGREEMENT WITH IJ MII; (VI) ENTERING INTO TECHNICAL COLLABORATION AGREEMENT WIT H M/S IJM PROPERTIES SDN. BHD, MALAYSIA (VII) APPOINTMENT OF M /S CESMA INTERNATIONAL, SINGAPORE AS THE ARCHITECTS OF THE PROJECT; (VIII) POWER OF ATTORNEY FROM THE BOARD IN FAVOUR OF THE A SSESSEE; (IX) COMMENCEMENT OF SITE CLEARING AND EARTH WORKS; (X) REGISTERED OFFICE OF THE COMPANY, FINANCIAL YEAR, A PPOINTMENT OF FIRST AUDITORS, COMMON SEAL, PRINTING AND SIGNIN G OF SHARE CERTIFICATES AND SHARE TRANSFER ENDORSEMENTS AND OP ENING OF BANK ACCOUNT. IT A NO. 2072/HYD/2011 M/S. SWARNANDHRA IJMII INTEGRATED TOWNSHIP DEVELOPMENT COMPANY PVT. LTD. ================================== 12 4.6 'DEVELOPMENT & SHAREHOLDERS AGREEMENT' DATED 4.11.2 003 WAS ENTERED INTO BETWEEN THE SHAREHOLDERS OF THE ASSESS EE COMPANY VIZ., BOARD AND IJMII. THE SAID AGREEMENT WAS ENTERED INTO TO S ET FORTH OR AGREE UPON THE RESPECTIVE RIGHTS AND OBLIGATIONS FOR THE PROPOSED DEVELOPMENT OF TOWNSHIPS AND HOUSING PROJECT AND TO PROVIDE FOR THE GOVERNAN CE, MANAGEMENT AND OPERATION OF THE ASSESSEE COMPANY. A POWER OF ATTOR NEY WAS GIVEN BY THE BOARD TO THE ASSESSEE ON THE SAME DAY I.E., 4.11.20 03 FOR THE PURPOSE OF UNDERTAKING THE DEVELOPMENTAL WORK ON THE LAND PROV IDED BY THE BOARD. 4.7 THE BOARD MADE AVAILABLE THE LAND OWNED BY IT TO TH E ASSESSEE FOR THE PURPOSE OF DEVELOPMENT OF INTEGRATED TOWNSHIP. IN C ONSIDERATION OF THE LAND PROVIDED BY THE BOARD FOR THE PURPOSE OF DEVELOPMEN T OF INTEGRATED TOWNSHIP, IT WAS ENTITLED TO AN OVERALL COMPENSATION AT THE R ATE OF RS. 2,200/- PER SQUARE YARD. THE SAID AMOUNT COMPRISED OF RS. 1,400 /- AS THE LAND COST AND RS. 800/- AS THE ANTICIPATED PROFITS OF THE BOARD F ROM THE BUSINESS OF THE INTEGRATED TOWNSHIP DEVELOPMENT. THE SUM OF RS. 2,2 00/- PER SQUARE YARD WAS UNDERSTOOD AND REFERRED TO AS 'GUARANTEED COMPE NSATION' PAYABLE TO THE BOARD BY THE ASSESSEE. IT WAS AGREED THAT THE ASSES SEE SHALL PAY THE GUARANTEED PROFITS AT THE RATE OF RS. 800/- PER SQU ARE YARD WHETHER OR NOT THE ASSESSEE REALISES PROFITS FROM THE DEVELOPMENT OF I NTEGRATED TOWNSHIP. THE RELEVANT TERMS OF THE DEVELOPMENT & SHAREHOLDERS AG REEMENT IN THIS CONNECTION ARE AS UNDER. '4.1.6 FOR THE LAND MENTIONED UN SUB-CLAUSE 4.1.3 ABOVE, APHB SHALL BE ENTITLED TO AN OVERALL COMPENSATION A T THE RATE OF RS. 2,200/- (RUPEES TWO THOUSAND TWO HUNDRED ONL Y) PGR SQUARE YARD, WHICH COMPRISES OF RS. 1,400/- (RUPEES ONE THOUSAND FOUR HUNDRED ONLY) AS THE LAND COST AND RS . 800/- (RUPEES EIGHT HUNDRED ONLY) AS ANTICIPATED PROFITS BEING THE SHARE OF APHB FROM THE BUSINESS OF THE INTEGRATED T OWNSHIP DEVELOPMENT. THE SAID COMPENSATION AMOUNT SHALL BE REALISABLE BY APHB AS DETAILED BELOW: (A) SHARE CAPITAL: 49,000,000/- (B) 500 LOW-INCOME-GROUP APARTMENT UNITS WITH THE SIZE OF 450 SFT. EACH @ RS. 400/- PER SFT. : 90,000,000/- (C) PAYMENTS MADE THROUGH BANK: RS. 223,619,447/- IT A NO. 2072/HYD/2011 M/S. SWARNANDHRA IJMII INTEGRATED TOWNSHIP DEVELOPMENT COMPANY PVT. LTD. ================================== 13 THE AFORESAID GUARANTEED COMPENSATION OF RS. 2,200/ - PER SQUARE YARD IS INCLUSIVE OF THE LAND COST AND APHB' S SHARE OF ANTICIPATED PROFITS IN THE DEVELOPMENT OF INTEGRATE D TOWNSHIP. THE JOINT SECTOR COMPANY SHALL PAY THE GUARANTEED P ROFITS AT THE RATE OF RS. 800/- PER SQUARE YARD AMOUNTING TO RS. 13,43,97,120/- (RUPEES THIRTEEN CRORES FORTY THREE LAKHS NINETY SEVEN THOUSAND ONE HUNDRED TWENTY ONLY), TO APHB WHETHER OR NOT THE JOINT SECTOR COMPANY REALISES PROFITS FROM THE INTEGRATED TOWNSHIP. IF THE JOINT SECTOR COMPAN Y MAKES PROFITS AMOUNTING TO MORE THAN 15% OF THE TOTAL DEVELOPMENT COST, APHB AND IJMII SHALL BE ENTITLED TO SHARE SUC H ADDITIONAL PROFITS IN THE RATIO OF 49:51. FOR AVOIDANCE OF DOU BTS IT IS MADE CLEAR THAT IJMII SHALL ALONE BE ENTITLED TO RECEIVE ALL THE PROFITS GENERATED BY THE JOINT SECTOR COMPANY UP TO 15% OF THE TOTAL DEVELOPMENT COST' 4.8 THE BOARD OF DIRECTORS IN THEIR MEETING ON 2.2.2004 DISCUSSED AND RECORDED MINUTES REGARDING THE SHAREHOLDERS AND DEV ELOPMENT AGREEMENT DATED 4.11.2003 AND OTHER MATTERS. 4.9 THE ASSESSING OFFICER AND THE DRP HAVE DISALLOWED T HE PAYMENT OF RS. 800/- PER SQUARE YARD TOTALLY AMOUNTING TO RS. 13,4 3,96,800/- FOR THE REASON THAT THE SAID PAYMENTS ARE IN THE NATURE OF DISTRIB UTION OF PROFITS. 4.10 WITH REGARD TO THE QUESTION AS TO WHETHER A PAYMENT IS AN EXPENDITURE ALLOWABLE IN COMPUTING THE PROFITS OF THE BUSINESS OR WHETHER IT IS A DISTRIBUTION OF PROFIT DEPENDS ON THE REAL NATURE O F DISBURSEMENT AND ON A TRUE CONSTRUCTION OF THE CONTRACT BETWEEN THE PARTI ES. THE NOMENCLATURE GIVEN BY THE PARTIES CANNOT BE CONSIDERED AS CONCLU SIVE IN DETERMINING THE TRUE CONSEQUENCES OF AN AGREEMENT ENTERED INTO. [TR AVANCORE MINERALS CO. LTD V CIT [1955] 28 ITR 505 (TRAVANCORE & COCHIN HI GH COURT)] A DISTRIBUTION OF PROFIT CAN HAPPEN ONLY WHEN PROFITS ARE ASCERTAI NED AFTER PROVIDING FOR ALL OUTLAYS INCURRED IN EARNING SUCH PROFIT AND THEN TH E SAME IS DIVIDED. [UNION COLD STORAGE CO. LTD. V. ADAMSON (1931) 16 T.E. 293 ] 4.11 HE RELIED ON THE JUDGEMENT IN THE CASE OF LORD MA UGHAM IN INDIAN RADIO & CABLE COMMUNICATIONS CO., LTD. V. CIT [1937 ] 5 ITR 270 HELD: 'IT IS NOT UNIVERSALLY TRUE TO SAY THAT A PAYMENT T HE MAKING OF WHICH IS CONDITIONAL ON PROFITS BEING EARNED CANNOT PROPERLY BE IT A NO. 2072/HYD/2011 M/S. SWARNANDHRA IJMII INTEGRATED TOWNSHIP DEVELOPMENT COMPANY PVT. LTD. ================================== 14 DESCRIBED AS AN EXPENDITURE INCURRED FOR THE PURPOS E OF EARNING SUCH PROFITS. THE TYPICAL EXCEPTION IS THAT OF A PAYMENT TO A DIRECTOR OR A MANAGER OF A COMMISSION ON THE P ROFITS OF A COMPANY. IT MAY, HOWEVER, BE WORTH POINTING OUT THA T AN APPARENT DIFFICULTY HERE IS REALLY CAUSED BY USING THE WORD 'PROFITS' IN MORE THAN ONE SENSE. IF A COMPANY HAVI NG MADE AN APPARENT NET PROFIT OF E. 10,000 HAS THEN TO PAY E. 1,000 TO DIRECTORS OR MANAGERS AS THE CONTRACTUAL RECOMPENSE FOR THEIR SERVICE DURING THE YEAR, IT IS PLAIN THAT THE REAL NET PROFIT IS ONLY 9,000. ' 4.12 THE LEARNED AR SUBMITTED THAT IN THE CASE OF TRAV ANCORE MINERALS CO. LTD V CIT [1955] 28 ITR 505 (TRAVANCORE & COCHIN HI GH COURT), WHERE ROYALTY WAS PAYABLE TO THE LESSOR AT A PERCENTAGE OF NET PR OFIT OF THE LESSEE, IT WAS HELD THAT THE REFERENCE TO THE PERCENTAGE OF NET PR OFITS IS MERELY MEANT AS A MODE OF CALCULATION TO ARRIVE AT THE AMOUNT PAYABLE IN ORDER THAT THE INTERESTS OF BOTH THE PARTIES MAY BE SUBSERVED. IT WAS HELD T HAT THE NET PROFITS OF THE COMPANY SHOULD BE CALCULATED BY APPLYING THE PRINCI PLES OF BUSINESS. ACCORDINGLY THE PAYMENT OF ROYALTY HELD ALLOWABLE I N COMPUTING TAXABLE PROFITS. 4.13 HE RELIED ON THE JUDGEMENT IN THE CASE OF CIT V PARIKH (C) & CO (INDIA) LTD [1966) 29 ITR 661 (SC), WHERE THE MANAG ING AGENTS' COMMISSION WAS PAYABLE AS A PERCENTAGE OF NET PROFITS, IT WAS HELD THAT COMMISSION SO PAID WAS ELIGIBLE FOR DEDUCTION IN COMPUTING THE PR OFITS CHARGEABLE TO TAX. THE FACT THAT THE COMMISSION PAYABLE HAD TO BE COMPUTED AS A PERCENTAGE OF NET PROFITS WAS HELD NOT RELEVANT IN DETERMINING WHETHE R THE SAME IS ELIGIBLE FOR DEDUCTION. [NIZAM SUGAR FACTORY V C AG. IT [1964) 5 2 ITR 939 (AP)) 4.14 ACCORDING TO THE AR, THE INCOME-TAX IS A TAX ON T HE REAL INCOME, I.E., THE PROFITS ARRIVED AT ON COMMERCIAL PRINCIPLES SUB JECT TO THE PROVISIONS OF THE INCOME-TAX ACT. THE REAL PROFIT CAN BE ASCERTAINED ONLY BY MAKING THE PERMISSIBLE DEDUCTIONS. THERE IS A CLEAR-CUT DISTIN CTION BETWEEN DEDUCTIONS MADE FOR ASCERTAINING THE PROFITS AND DISTRIBUTIONS MADE OUT OF PROFITS. IN A GIVEN CASE WHETHER THE OUTGOINGS FALL IN ONE OR THE OTHER IS A QUESTION OF FACT TO BE FOUND ON THE RELEVANT CIRCUMSTANCES, HAVING R EGARD TO BUSINESS PRINCIPLES. THIS WAS THE VIEW OF THE SUPREME COURT IN POONA ELECTRIC SUPPLY IT A NO. 2072/HYD/2011 M/S. SWARNANDHRA IJMII INTEGRATED TOWNSHIP DEVELOPMENT COMPANY PVT. LTD. ================================== 15 CO. LTD V CIT [1965) 57 ITR 521. IN THE ABOVE DECIS ION, THE ASSESSEE COMPANY WAS LIABLE TO ADJUST ITS RATES FOR SALE OF ELECTRICITY PERIODICALLY SO THAT ITS PROFITS DID NOT EXCEED THE AMOUNT OF 'REAS ONABLE RETURN'. IN CASE IF IT WAS FOUND THAT THE ASSESSEE COMPANY HAD EARNED PROF ITS HIGHER THAN THE REASONABLE RETURN, IT WAS LIABLE TO REFUND A PART O F ITS PROFITS TO CONSUMERS. ON A QUESTION AS TO WHETHER THE AMOUNT REFUNDED TO CON SUMERS ARE ELIGIBLE FOR DEDUCTION IN COMPUTING THE TAXABLE PROFITS, THE SUP REME COURT HELD: '(I) THAT THE AMOUNTS CREDITED BY THE ASSESSEE DURING TH E ACCOUNTING YEARS TO THE 'CONSUMERS' BENEFIT RESERVE ACCOUNT', BEING A PART OF THE EXCESS AMOUNT PAID TO IT AND RE SERVED TO BE RETURNED TO THE CONSUMERS, DID NOT FORM PART OF THE ASSESSEE'S REAL PROFITS; AND TO ARRIVE AT THE TAXABLE INCOME O F THE ASSESSEE FROM THE BUSINESS UNDER SECTION 10(1) OF THE INDIAN INCOME-TAX ACT, 1922, THE AMOUNTS HAD TO BE DEDUCTED. (II) THAT, AS THE ASSESSEE HAD ADOPTED THE MERCANTI LE SYSTEM OF ACCOUNTING, THE AMOUNTS SO RESERVED FOR FUTURE PAYM ENTS WERE DEDUCTIBLE IN COMPUTING THE INCOME, PROFITS AND GAI NS FROM THE ASSESSEE'S BUSINESS FOR THE RELEVANT YEARS, SINCE T HE LIABILITY HAD ACCRUED IN THOSE YEARS. (III) UNDER SECTION 10(1) OF THE INDIAN INCOME-TAX ACT, 1922, PROFITS AND GAINS OF A BUSINESS CARRIED ON BY ANY A SSESSEE ARE NOT PROFITS REGULATED BY A STATUTE, BUT PROFITS IN A BUSINESS COMPUTED ON COMMERCIAL PRINCIPLES. THEY ARE BUSINES S PROFITS AND NOT STATUTORY PROFITS. THEY ARE REAL PROFITS AN D NOT NOTIONAL PROFITS. THE REAL PROFITS OF A BUSINESSMAN UNDER SE CTION 10(1) CANNOT OBVIOUSLY INCLUDE THE AMOUNTS RETURNED BY HI M BY WAY OF REBATE UNDER STATUTORY COMPULSION. IT IS AS IF H E RECEIVED ONLY THE ORIGINAL AMOUNT MINUS THE AMOUNT TO BE RET URNED. IN SUBSTANCE THERE CANNOT BE ANY DIFFERENCE BETWEEN A BUSINESSMAN COLLECTING FROM HIS CONSTITUENTS A SUM OF RS. Y IN ADDITION TO RS. X BY MISTAKE AND RETURNING RS. Y TO THEM AND ANOTHER BUSINESSMAN COLLECTING RS. X ALONE. THE AMO UNT RETURNED IS NOT A PART OF THE PROFITS AT ALL.' 4.15 IT WAS SUBMITTED THAT IN THE CASE OF CIT V TRAVAN CORE SUGARS AND CHEMICALS LTD [1973] 88 ITR 1 (SC), THE PROMOTERS O F THE RESPONDENT COMPANY VIZ., THE GOVT. OF TRAVANCORE AND SIR WILLI AM WRIGHT ON BEHALF OF PARRY & CO. LTD., ENTERED INTO AN AGREEMENT WHEREIN THE BUSINESS OF THREE CONCERNS WERE AGREED TO BE SOLD BY THE GOVERNMENT O F TRAVANCORE TO THE RESPONDENT COMPANY WHICH WAS TO BE FLOATED FOR THAT PURPOSE. UNDER THE SAID AGREEMENT, IN ADDITION TO THE CONSIDERATION FO R THE TRANSFER OF BUSINESS, IT A NO. 2072/HYD/2011 M/S. SWARNANDHRA IJMII INTEGRATED TOWNSHIP DEVELOPMENT COMPANY PVT. LTD. ================================== 16 THE GOVT. OF TRAVANCORE WAS ENTITLED TO A CERTAIN S UM CALCULATED AT A PERCENTAGE OF NET PROFITS OF THE RESPONDENT COMPANY . ON A QUESTION AS TO WHETHER THE SUMS PAID TO GOVT. OF TRAVANCORE UNDER THE AGREEMENT CONSTITUTES DIVERSION OF INCOME BY OVERRIDING TITLE OR WHETHER THE SAME IS ALLOWABLE AS DEDUCTION IN COMPUTING THE INCOME, THE KERALA HIGH COURT RULED IN FAVOUR OF THE RESPONDENT COMPANY ON BOTH THE QUE STIONS. THE SUPREME COURT AFFIRMED THE ABOVE DECISION AND HELD AS UNDER : 'ON A CONSTRUCTION OF THE TERMS OF THE CONTRACT IN THIS CASE AND THE OBLIGATIONS ARISING THEREFROM WE CANNOT SAY THA T THE CONCLUSIONS OF THE KERALA HIGH COURT ARE UNSUSTAINA BLE. THE ASSESSEE HAD NO CHOICE AT THE TIME OF INCEPTION, AS A CONDITION OF ITS COMING INTO EXISTENCE TO AGREE TO THE SEVERA L TERMS STIPULATED BY THE GOVERNMENT FOR TRANSFERRING THE P ROFIT-EARNING ASSETS. NO DOUBT, AS THE LEARNED ADVOCATE FOR THE R EVENUE SAID, THE COMPANY PAID THE GOVERNMENT IN FULL FOR THE VAL UE OF THE ASSETS AND THE COMPANY HAD, THEREFORE, NO OBLIGATIO N TO THE GOVERNMENT ON THAT ACCOUNT. THIS MAY BE TRUE TO SOM E EXTENT BUT THEN THERE ARE THE OTHER OBLIGATIONS WHICH ARE INTERLINKED WITH THE TRANSFER OF ASSETS NOTWITHSTANDING THE FAC T THAT THE COMPANY PAID A PRICE FIXED FOR THE TRANSFER OF THE ASSETS WHICH MAY NOT IN ALL CASES, AS IN THIS CASE IT IS NOT, BE THE TRUE VALUE OF THE ASSETS WHICH ARE THE SUBJECT-MATTER OF THE T RANSACTION. THE GOVERNMENT HAS ESTABLISHED BUSINESSES AND THEY WERE WILLING TO PART WITH THEM AT A CERTAIN PRICE PLUS C ERTAIN STIPULATIONS TO WHICH WE HAVE REFERRED WHICH FORM T HE CONDITIONS OF TRANSFER. IT MAY BE MENTIONED THAT UN DER THE CONTRACT THE COMPANY HAD TO ENGAGE ONLY THE TRAVANC ORE LABOUR AND STAFF THAT IT HAD TO TAKE APPRENTICES RE COMMENDED BY THE GOVERNMENT AND TRAIN THEM AND THAT THERE WAS NO LIMITATION AS TO THE PERIOD THE COMPANY HAD TO PAY 20% OR AS THE LATER AGREEMENT REVISED IT TO 10% OF THE NET PR OFITS, NOTIONALLY COMPUTED FOR THAT PURPOSE AFTER DEDUCTIO N OF CERTAIN ITEMS MENTIONED IN CLAUSE 7. ALL THIS APPEARS TO US TO BE A STIPULATION FOR PAYMENT OF AN AMOUNT FOR A CONCESSI ON GRANTED TO IT AND IS THEREFORE DEDUCTIBLE AT ITS INCEPTION. VIEWING IT FROM ANY POINT OF VIEW, WHETHER AS A REVENUE EXPENDITURE OR AS AN OVERRIDING CHARGE OF THE PROFIT-MAKING APPARATUS, O R AS LAID OUT AND EXPENDED WHOLLY AND EXCLUSIVELY FOR PURPOSES OF TRADE, THE ANSWER MUST BE IN THE AFFIRMATIVE AND AGAINST THE R EVENUE. THE APPEAL IS ACCORDINGLY DISMISSED WITH COSTS' 4.16 HE RELIED ON THE JUDGEMENT IN THE CASE OF CBDT V OBEROI HOTELS (INDIA) PVT. LTD [1998] 2311TR 148 (SC) IT WAS HELD : IT A NO. 2072/HYD/2011 M/S. SWARNANDHRA IJMII INTEGRATED TOWNSHIP DEVELOPMENT COMPANY PVT. LTD. ================================== 17 'WE DO NOT THINK THAT THIS IS A CORRECT STATEMENT A S THE ROYALTY, COMMISSION OR FEES CAN BE IN TERMS OF PERCENTAGE OF PROFITS EARNED BY THE FOREIGN ENTERPRISE ON ACCOUNT OF SERV ICES RENDERED BY THE INDIAN COMPANY. IT IS THE SUBSTANCE OF THE CASE WHICH MATTERS AND NOT THE NAME.' 4.17 HE RELIED ON THE JUDGEMENT IN THE CASE OF CIT V M EHSANA DISTRICT CO- OPERATIVE MILK PRODUCERS UNION LTD [2006] 282 ITR 2 4 (GUJ), THE RESPONDENT PAID ADDITIONAL PRICE TO MEMBER SOCIETIES SUPPLYING MILK ON LAST DAY OF THE PREVIOUS YEAR PURSUANT TO RESOLUTION OF ITS BOARD O F DIRECTORS. THE ASSESSING OFFICER AND THE FIRST APPELLATE AUTHORITY DISALLOWE D THE SAID PAYMENT FOR THE REASON THAT THE SAME AMOUNTED TO DISTRIBUTION OF PR OFIT AND A CASE OF PROFIT ADJUSTMENT WITH THE OBJECT OF EVADING TAX. THE TRIB UNAL IN ITS THIRD MEMBER DECISION HELD THAT THE PAYMENT WAS AN ADDITIONAL PU RCHASE PRICE AND IF IT IS REGARDED AS ADJUSTMENT OF PROFIT AT A PRE-DETERMINE D LEVEL, THE NATURE OF THE PAYMENT WOULD NOT CHANGE AND CANNOT BE TERMED AS DI STRIBUTION OF PROFITS. THE HIGH COURT ON APPEAL HELD THAT THE AMOUNT IN QU ESTION HAD GONE OUT OF THE COFFERS OF THE ASSESSEE AND HAD BEEN RECEIVED B Y THE MEMBER SOCIETIES. HE PLACED RELIANCE ON THE JUDGEMENT OF THE SUPREME COURT IN CIT V. ASHOKBHAI CHIMANBHAI [1965] (56 ITR 42) WHERE IT WA S HELD THAT PROFITS OF A BUSINESS DO NOT ACCRUE DAY TO DAY OR MONTH TO MONTH AND THE SAME ACCRUE AT THE YEAR END ON COMPARISON OF ASSETS AT TWO STATED POINTS, THE GUJARAT HIGH COURT HELD THAT PAYMENT TO MEMBER SOCIETIES WERE NO T MADE AFTER DRAWING THE ACCOUNTS AND AFTER DETERMINING THE PROFITS AND HENCE, THE QUESTION OF DISTRIBUTION OF PROFITS DOES NOT ARISE. IT WAS ALSO HELD THAT THE SAID PAYMENTS WERE ELIGIBLE FOR DEDUCTION IN THE PROCESS OF COMPU TING THE REAL PROFITS AND GAINS UNDER SECTION 28 AND ALTERNATIVELY AS A DEDUC TION UNDER SECTION 37. THE ALLEGATION OF TAX EVASION WAS JETTISONED TAKING NOTE OF THE FACT THAT (I) THE ASSESSEE-SOCIETY WAS WORKING UNDER SUPERINTENDENCE OF VARIOUS GOVERNMENT ORGANIZATIONS; (II) THERE WERE NOMINEE-DIRECTORS OF THE STATE GOVERNMENT AND FINANCIAL INSTITUTIONS ON THE BOARD OF DIRECTORS; ( III) THE DEPARTMENT HAS NOT BEEN ABLE TO DISCHARGE THE ONUS WHICH WAS ON IT; (I V) THERE WAS COMPLETE LACK OF EVIDENCE POINTING TO ANY 'PERSONAL GAIN' QUA THE ASSESSEE WHICH IS A CO- OPERATIVE SOCIETY. IT A NO. 2072/HYD/2011 M/S. SWARNANDHRA IJMII INTEGRATED TOWNSHIP DEVELOPMENT COMPANY PVT. LTD. ================================== 18 4.18 HE PLACED RELIANCE ON THE JUDGEMENT OF BOMBAY HIGH COURT IN THE CASE OF MANJARA SHETKARI SAHAKARI SAKHAR KARKHANA L TD [2008] (301 ITR 191) (BOM) WHEREIN HELD THAT WHERE A PAYMENT WAS MA DE TO CANE GROWERS AS PER THE RATE FIXED BY THE STATE GOVERNMENT WHICH WA S BINDING ON THE ASSESSEE AND WHICH WAS BASED ON THE PRICE RECOMMEND ED BY THE ASSESSEE AFTER THE FINALISATION OF ACCOUNTS. THE SAID PAYME NTS CANNOT BE REGARDED AS APPROPRIATION OR DISTRIBUTION OF PROFITS. 4.19 HE SUMMARISED THE PRINCIPLES UNDERLYING THE ABOVE AS UNDER: (A) THE QUESTION AS TO WHETHER A PAYMENT CONSTITUTES EX PENDITURE ALLOWABLE IN COMPUTING THE TAXABLE INCOME OR WHETHE R THE SAME IS A DISTRIBUTION OF PROFIT DEPENDS ON THE REAL NATURE OF DISBURSEMENT AND ON A TRUE CONSTRUCTION OF THE CONTRACT BETWEEN THE PARTIES. (B) THE NOMENCLATURE GIVEN BY THE PARTIES CANNOT BE CON SIDERED AS CONCLUSIVE IN DETERMINING THE TRUE CONSEQUENCES OF AN AGREEMENT ENTERED INTO. (C) A PAYMENT WHICH COMPUTED AS A PERCENTAGE OF PROFITS IS DEDUCTIBLE, IF THE CIRCUMSTANCES WARRANT, IN COMPUT ING THE PROFITS AND GAINS COMPUTED ON THE BASIS OF COMMERCIAL PRINC IPLES. (D) SUCH PAYMENTS ARE ALLOWABLE IN COMPUTING THE REAL ' PROFITS AND GAINS' CHARGEABLE UNDER SECTION 28(I). ALTERNATIVEL Y, THE SAID PAYMENTS ARE ALLOWABLE UNDER SECTION 37 OF THE ACT. (E) PAYMENT TO BE MADE COMPULSORILY BY VIRTUE OF STATUE OR AGREEMENT, IRRESPECTIVE OF EXISTENCE OF PROFITS, CANNOT BE REG ARDED AS 'DISTRIBUTION OF PROFITS'. THE SAID PAYMENTS ARE DE DUCTIBLE IN COMPUTING THE PROFITS TAXABLE UNDER THE ACT. (F) A PAYMENT AGREED TO BE MADE COMPULSORILY AT THE INC EPTION FROM INCOME WHICH MAY ACCRUE OR ARISE SUBSEQUENTLY, WHET HER BY VIRTUE OF STATUE OR CONTRACT, RESULTS IN DIVERSION OF INCO ME BY OVERRIDING TITLE. THE INCOME TO THE EXTENT OF PAYMENTS AGREED TO BE MADE COMPULSORILY AT THE INCEPTION IS NOT TAXABLE BY VIR TUE OF OVERRIDING TITLE. 4.20 HE SUBMITTED THAT IN THE PRESENT CASE, THE ASSESSEE WAS INCORPORATED BY THE GOVT. OF ANDHRA PRADESH THROUGH ITS ARM - TH E ANDHRA PRADESH HOUSING BOARD (BOARD). THE ASSESSEE WAS INCORPORATED AS A S PV WITH A VIEW TO IT A NO. 2072/HYD/2011 M/S. SWARNANDHRA IJMII INTEGRATED TOWNSHIP DEVELOPMENT COMPANY PVT. LTD. ================================== 19 ALLEVIATE THE ACUTE SHORTAGE OF HOUSING IN THE STAT E OF ANDHRA PRADESH. AS PER THE TERM OF THE MOU DATED 15.5.2002 THE ASSESSEE WA S RESPONSIBLE FOR THE CONSTRUCTION AND IMPLEMENTATION OF THE HOUSING PROJ ECTS AS CONTEMPLATED BY THE BOARD AND IT WAS BOUND BY THE POLICY FRAMEWORK OF THE GOVT. OF ANDHRA PRADESH. THE ASSESSEE WAS BOUND BY THE GUIDELINES O F THE GOVT. OF AP AND THE BOARD FROM TIME TO TIME. THE ASSESSEE UNDERTOOK THE DEVELOPMENT OF HOUSING PROJECTS ON TERMS ACCEPTED AND FINALISED BY THE GOVT. OF AP AND THE BOARD. 4.21 HE SUBMITTED THAT THE BOARD PROVIDED THE LAND REQ UIRED FOR DEVELOPMENT AND THE JOINT VENTURE PARTNERM M/S IJMI I UNDERTOOK TO ASSIST THE ASSESSEE IN DEVELOPMENT OF HOUSING PROJECTS, VIDE A GREEMENT DATED 4.11.2003, IT WAS AGREED THAT THE BOARD AND THE JOI NT VENTURE PARTNER SHOULD BE COMPENSATED FOR THEIR ROLE IN THE HOUSING PROJEC T. THIS AGREEMENT WAS BETWEEN THE SHAREHOLDERS OF THE ASSESSEE. THE TERMS OF THE AGREEMENT RELATING TO PAYMENTS PROPOSED TO BE MADE TO BOARD A ND IJMII WAS RATIFIED BY THE BOARD AND RECORDED IN THE MINUTES OF BOARD OF D IRECTORS MEETING HELD ON 2,2.2004. THE TERMS OF THE AGREEMENT DATED 4.1.2003 WAS SUITABLY INCORPORATED IN THE ARTICLES OF ASSOCIATION OF THE ASSESSEE. IN ACCORDANCE WITH THE TERMS OF AGREEMENT DATED 4.11.2003, THE BOARD W AS TO BE PAID RS. 2,200/- PER SQUARE YARD FOR THE LAND. THIS WAS TO B E DISCHARGED AS RS. 1,400/- TOWARDS THE LAND COST AND RS. 800/- UNDER T HE CAPTION 'SHARE OF PROFIT'. FROM ASSESSEE'S PERSPECTIVE, THE ENTIRE SU M PAID AMOUNTING TO RS. 2,200/- PER SQUARE YARD CONSTITUTED COST OF LAND. U NDER THE AGREEMENT DATED 4.11.2003, THE PAYMENTS TO BOARD WERE TO BE MADE WH ETHER OR NOT THE ASSESSEE REALISED PROFITS FROM THE DEVELOPMENT OF I NTEGRATED TOWNSHIP. THE PAYMENTS TO BOARD WERE NOT CONDITIONAL UPON THE PRO FITS REALISED BY THE ASSESSEE. THE PAYMENTS MADE TO BOARD WERE NOT MEASU RED OR COMPUTED WITH REFERENCE TO PROFITS REALISED BY THE ASSESSEE. THE AGREEMENT ALSO STATED THAT THE BOARD SHALL NOT BE ENTITLED TO ANY SHARE O F PROFITS GENERATED BY THE ASSESSEE UP TO 15% OF TOTAL DEVELOPMENT COST. THE P AYMENTS TO BOARD WERE MADE BEFORE DRAWING THE ANNUAL ACCOUNTS AND CONSEQU ENTLY BEFORE DETERMINATION OF PROFITS CHARGEABLE TO TAX. DECISIO NS EXPLAINING THE DIFFERENCE IT A NO. 2072/HYD/2011 M/S. SWARNANDHRA IJMII INTEGRATED TOWNSHIP DEVELOPMENT COMPANY PVT. LTD. ================================== 20 BETWEEN A PAYMENT CONSTITUTING DISTRIBUTION OF PROF IT AND A PAYMENT ALLOWABLE IN COMPUTING THE PROFITS HAVE BEEN DISCUS SED ABOVE. EVEN IN A CASE WHERE PAYMENT WAS MADE AS A PERCENTAGE OF A PROFIT, THE COURTS HAVE HELD THAT THE SAID PAYMENT, IN SUBSTANCE, IS ALLOWABLE I N COMPUTING THE REAL PROFITS AND GAINS CHARGEABLE TO TAX UNDER SECTION 28. 4.22 ACCORDING TO THE AR, THE FACTS OF THE PRESENT CASE DO NOT ENVISAGE PAYMENT TO BOARD BEING DEPENDENT OR CONDITIONAL UPO N PROFITS. THE AMOUNT PAYABLE TO BOARD IS ALSO NOT COMPUTED AS A PERCENTA GE OF PROFIT. THE PAYMENTS TO BOARD THEREFORE CANNOT BE REGARDED AS D ISTRIBUTION OF PROFITS. THE PAYMENT MADE TO BOARD THUS CONSTITUTED EXPENDIT URE ALLOWABLE IN COMPUTING THE PROFITS OF THE BUSINESS UNDER SECTION 28. ALTERNATIVELY AND WITHOUT PREJUDICE, THE SAID PAYMENTS PARTAKE THE CH ARACTER OF EXPENDITURE WHOLLY AND EXCLUSIVELY INCURRED FOR THE PURPOSE OF BUSINESS AND CONSEQUENTLY ALLOWABLE UNDER SECTION 37. 4.23 HE RELIED ON THE JUDGEMENT OF BOMBAY HIGH COURT IN THE CASE OF CIT V CRAWFORD BAYLEY AND CO. [1977]106 ITR 0884 (BOM), T HE ASPECT OF DIVERSION OF INCOME BY OVERRIDING TITLE WAS EXPLAINED AS UNDE R: 'IN RESPECT OF THIS MATTER THE MATERIAL QUESTION TO BE CONSIDERED IS, IS THERE DIVERSION OF INCOME BY AN O VERRIDING TITLE OR WHETHER THERE IS AN APPLICATION OF INCOME AFTER IT ACCRUED TO THE ASSESSEE-FIRM. THE TRUE TEST IN DETERMINING THI S QUESTION IS LAID DOWN IN SITALDAS TIRATHDAS'S CASE [1961} 41 IT R 367 (SC). THE TRUE TEST FOR THE APPLICATION OF THE RULE OF DI VERSION OF INCOME BY AN OVERRIDING CHARGE, IS WHETHER THE AMOU NT SOUGHT TO BE DEDUCTED, IN TRUTH, NEVER REACHED THE ASSESSE E AS HIS INCOME. OBLIGATIONS, NO DOUBT, THERE ARE IN EVERY C ASE, BUT IT IS THE NATURE OF THE OBLIGATION WHICH IS THE DECISIVE FACT. THERE IS A DIFFERENCE BETWEEN AN AMOUNT WHICH A PERSON IS OB LIGED TO APPLY OUT OF HIS INCOME AND AN AMOUNT WHICH BY THE NATURE OF THE OBLIGATION CANNOT BE SAID TO BE A PART OF THE I NCOME OF THE ASSESSEE. WHERE BY THE OBLIGATION INCOME IS DIVERTE D BEFORE IT REACHES THE ASSESSEE, IT IS DEDUCTIBLE; BUT WHERE T HE INCOME IS REQUIRED TO BE APPLIED TO DISCHARGE AN OBLIGATION A FTER SUCH INCOME REACHES THE ASSESSEE, THE SAME CONSEQUENCE, IN LAW, DOES NOT FOLLOW. IT IS THE FIRST KIND OF PAYMENT WH ICH CAN TRULY BE EXCUSED AND NOT THE SECOND. THE SECOND PAYMENT I S MERELY AN OBLIGATION TO PAY ANOTHER A PORTION OF ONE'S OWN INCOME, WHICH HAS BEEN RECEIVED AND IS SINCE APPLIED.' IT A NO. 2072/HYD/2011 M/S. SWARNANDHRA IJMII INTEGRATED TOWNSHIP DEVELOPMENT COMPANY PVT. LTD. ================================== 21 4.24 THE HIGH COURT IN THE ABOVE JUDGEMENT FURTHER HEL D THAT THE FACT THAT THE RECIPIENTS ARE NOT PARTIES TO THE CONTRACT IS N OT RELEVANT. THE RELEVANT OBSERVATIONS OF THE HIGH COURT ARE AS UNDER. 'ORDINARILY, IT IS TRUE THAT A PERSON WHO IS NOT A PARTY TO THE CONTRACT CANNOT ENFORCE IT, BUT THERE ARE SEVERAL W ELL RECOGNISED EXCEPTIONS TO THIS RULE. ONE OF THE WELL RECOGNISED EXCEPTIONS IS A CESTUI QUE TRUST. IN A CESTUI QUE T RUST EVEN THOUGH A PERSON MAY NOT BE A PARTY TO A CONTRACT HE CAN ENFORCE HIS RIGHT UNDER CONTRACT BY ADOPTING APPROP RIATE LEGAL PROCEEDINGS. SUCH IS THE CASE SO FAR AS THE RIGHTS OF A WIDOW OF A DECEASED PARTNER UNDER THESE PARTNERSHIP DEEDS AR E CONCERNED. SUCH PAYMENTS HAVE TO BE MADE BY REASON OF AN OVERRIDING TITLE AND THERE IS NO QUESTION OF INCOME BEING APPLIED BY THE ASSESSEE-FIRM AFTER IT ACCRUED TO IT . 4.25 ACCORDING TO THE AR, IN THE PRESENT CASE, AS EXPL AINED EARLIER, THE PAYMENTS TO BOARD WERE REQUIRED TO BE MADE MANDATOR ILY WHETHER OR NOT THE ASSESSEE MADE PROFITS. FURTHER, A PART OF SUCH PAYM ENTS WERE REALISED BY THE BOARD DIRECTLY BY SELLING SOME OF THE RESIDENTIAL U NITS. THE PAYMENTS TO BOARD THEREFORE DIVERTED BY OVERRIDING TITLE AND HENCE CA NNOT BE REGARDED AS INCOME OF THE ASSESSEE. ACCORDINGLY, HE PRAYED TO DELETE THE ADDITION OF RS. 13,43,96,800. 5. REGARDING DISALLOWANCE OF COST OF LAND TRANSFERRED TO APHB TO THE ASSESSEE THE LEARNED DR SUBMITTED THAT A READING OF CLAUSE NO. 4.16 OF THE AGREEMENT OF DEVELOPMENT AND SHAREHOLDERS AGREEMENT SHOWS THAT APHB WAS ASSURED OF PROFIT @ RS. 800 PER SQUARE YARD. THERE IS NO NECESSITY TO MENTION SEPARATELY THIS RATE OF RS.800 PER SQUARE Y ARD AND REFER TO IT AS 'ANTICIPATED PROFITS'. THE ASSESSEE HAS NOT REGISTE RED THIS AGREEMENT. THE LAND IS NEVER REGISTERED AND TRANSFERRED TO THE TAX PAYER BY THE APHB. SUCH EVIDENCE IS NOT PRODUCED. WHEN SPECIFICALLY QUESTI ONED AS TO WHY REGISTRATION IS NOT DONE, THE AR ONLY REPLIED THAT THERE IS NO NECESSITY TO REGISTER THE AGREEMENT. 5.1 ACCORDING TO THE DR, AGREEMENTS CAN BE MUTUALLY CON CLUDED WHICH CAN BE OF SELF-SERVING NATURE. SUCH AGREEMENTS CAN ALSO BE CONCLUDED TO AVOID TAX. FROM SUBSEQUENT PARAS OF AGREEMENT WHER EIN INCENTIVE IS ALSO IT A NO. 2072/HYD/2011 M/S. SWARNANDHRA IJMII INTEGRATED TOWNSHIP DEVELOPMENT COMPANY PVT. LTD. ================================== 22 PAID TO THE OTHER SHAREHOLDER, THE MATTERS WOULD GE T FURTHER CLARIFIED. FIRST THE EXACT WORDS USED IN THE AGREEMENT ARE TO BE CON SIDERED. THESE WORDS CLEARLY SHOW THAT THE 'ANTICIPATED PROFITS' ARE BEI NG PASSED ON. THE DETAILS OF RATE PER SQUARE YARD AS PER SUB REGISTRAR IS NOT PR ODUCED. KUKATPALLY HOUSING BOARD COLONY IS NEARBY AND IT IS ONE. OF TH E BIGGEST TOWNSHIPS IN ASIA, HENCE, IT IS ALSO FOR CONSIDERATION AS TO WHY THE C OMPANY FAILED TO REGISTER THIS DEVELOPMENTAL AGREEMENT TO GET IT RECOGNIZED O R GIVE IT THE AUTHENTICITY. MOREOVER, THE LAND WAS GIVEN IN TERMS OF ACRES BECA USE IT WAS NOT YET DEVELOPED. HENCE, THE RATE PER ACRE WOULD BE APPLIC ABLE AND NOT RATE PER SQUARE YARD. 5.2 THE DR SUBMITTED THAT EVEN IN PARA (D) CLAUSE 4.1.6 OF SHAREHOLDERS AGREEMENT, IT IS STATED THAT RS.13,43,97,120 I.E., LAND COST @ 800 PER SQUARE YARD, GUARANTEED PROFITS SHALL .BE PROGRESSIVELY RE ALIZED BY THE APHB FROM THE TAXPAYER 'FROM TIME TO TIME AS SALES COLLECTIONS AR E RECEIVED BY THE ASSESSEE TAXPAYER ON ACCOUNT OF SALE OF FLATS. THIS CLEARL Y SHOWS THAT ONLY THE PROFIT ACCUMULATED IS PAID AND THE PROFIT ON LAND WAS ARRI VED AT. IT SHOULD NOT BE IGNORED THAT THIS AGREEMENT IS SUBSEQUENT TO INCORP ORATION (I.E., AFTER 8 MONTHS) AND SECTION 40A(2)(A) AND (2)(B) PROVISIONS ALSO APPLY. BESIDES THIS, THE TAXPAYER KNEW FULLY WELL THAT IF SUCH PAYMENT I S MADE FROM OUT OF PROFITS, TAXES ARE TO BE PAID U/S. 115-O AND HENCE, THIS MET HOD IS ADOPTED. HENCE, THE CONTENTIONS OF THE TAXPAYER ON THIS ISSUE SHOUL D BE REJECTED. FINDINGS RELATING TO GROUND NOS. 2.1 TO 2.3 FINDINGS RELATING TO GROUND NOS. 2.1 TO 2.3 FINDINGS RELATING TO GROUND NOS. 2.1 TO 2.3 FINDINGS RELATING TO GROUND NOS. 2.1 TO 2.3 6. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATE RIAL ON RECORD WITH REGARD TO DISALLOWANCE OF RS. 13,43,96,800 TOW ARDS COST OF LAND TRANSFERRED TO APHB. THIS WAS DISALLOWED ON THE RE ASON THAT THIS PAYMENT IS MADE OUT OF PROFITS OF THE ASSESSEE AND IT IS APPRO PRIATION OF PROFITS PAID TO THE APHB. THE ASSESSEE WAS FORMED BY AN AGREEMENT DATED 4.11.2003 ENTERED BETWEEN APHB AND IJMII. THE FOUNDATION OF FORMATION OF THE ASSESSEE IS THIS AGREEMENT. CLAUSE 4.1.6 OF THE SA ID AGREEMENT STIPULATES AS FOLLOWS: IT A NO. 2072/HYD/2011 M/S. SWARNANDHRA IJMII INTEGRATED TOWNSHIP DEVELOPMENT COMPANY PVT. LTD. ================================== 23 4.1.6 FOR THE LAND MENTIONED IN SUB-CLAUSE 4.1.3 A BOVE, APHB SHALL BE ENTITLED TO AN OVERALL COMPENSATION AT THE RATE OF RS. 2, 200 (RUPEES TWO THOUSAND TWO HUNDRED ONLY) PER SQUARE Y ARD, WHICH COMPRISES OF RS. L,400 (RUPEES ONE THOUSAND F OUR HUNDRED ONLY) AS THE LAND COST AND RS. 800/- (RUPEE S EIGHT HUNDRED ONLY) AS ANTICIPATED PROFITS BEING THE SHAR E OF APH8 FROM THE BUSINESS OF THE INTEGRATED TOWNSHIP DEVELO PMENT. THE SAID COMPENSATION AMOUNT SHALL BE REALIZABLE BY APHB AS DETAILED BELOW:- (A) RS. 4,90,00,000 (RUPEES FOUR CRORES NINETY LAKHS ON LY) SHALL BE APPROPRIATED AND CONVERTED BY THE JOINT SE CTOR COMPANY TOWARDS APHB'S PERCENTAGE EQUITY INTEREST @ 49%, AS PER CLAUSE 2.3.1; (B) RS. 9,00,00,000 (RUPEES NINE CRORES ONLY) SHALL BE DIRECTLY REALIZED BY APHB BY ALLOTTING/SELLING FIVE HUNDRED (500) LOW- INCOME-GROUP APARTMENT UNITS OF THE SIZE OF 450 SQU ARE FEET EACH (INCLUSIVE OF APPORTIONED COMMON AREAS), AT RS.400/- PER SQ. FEET. PROVIDED HOWEVER, APHB SHALL CAUSE THE ALLOTTEES OF THE SAID 500 APARTMENT UNITS, TO P AY DIRECTLY TO THE JOINT SECTOR COMPANY, ALL OTHER COSTS, CHARG ES AND EXPENSES INCLUDING BUT NOT LIMITED TO STAMP DUTY, REGISTRATION, WATER, ELECTRICITY SEWERAGE DEPOSIT, MAINTENANCE CHARGES AND DEPOSIT, PARKING AREA ETC. (C) 15% OF THE BALANCE LAND COST AMOUNTING TO RS. 1,44,29,244 SHALL BECOME DUE AND PAYABLE BY THE JOI NT SECTOR COMPANY TO THE APHB ON THE 90 TH DAY FROM THE DATE OF APHB MAKING AVAILABLE TO THE JOINT SECTOR COMPAN Y, THE VACANT UNENCUMBERED LAND MENTIONED IN SUB-CLAUSE 4. 1.3; AND (D) THE BALANCE OF THE LAND COST AMOUNTING TO RS. 5,17, 65,716 AND THE GUARANTEED PROFITS OF RS. 800 PER SQ. YD AM OUNTING TO RS. 13,43,97,120 (RUPEES THIRTEEN CRORES FORTY T HREE LAKHS NINETY SEVEN THOUSAND ONE HUNDRED AND TWENTY ONLY) TOTALLING TO RS. 21,61,62,836 SHALL BE PROGRESSIVEL Y REALIZED BY THE APHB FROM THE JOINT SECTOR COMPANY FROM TIME TO TIME, FROM THE SALES COLLECTIONS RECEIVED BY THE JO INT SECTOR COMPANY FROM THE SALE OF APARTMENT UNITS (OTHER THA N THOSE REFERRED TO IN SUB-CLAUSE 4.1.4(B) ABOVE), DU RING THE PROPOSED DEVELOPMENT PERIOD OF THE INTEGRATED TOWNS HIP, AT A REDEMPTION RATE OF 15% OR A MUTUALLY AGREED FI XED AMOUNT UNTIL FULL SETTLEMENT. (E) NOTWITHSTANDING ANYTHING CONTAINED IN CLAUSE 2.3.2, BUT SUBJECT TO THE APPLICABLE LAWS AND IF THE PARTIES D ECIDE NOT TO UNDERTAKE NEW PROJECTS UNDER THE JOINT SECTOR CO MPANY. IT A NO. 2072/HYD/2011 M/S. SWARNANDHRA IJMII INTEGRATED TOWNSHIP DEVELOPMENT COMPANY PVT. LTD. ================================== 24 IN CONSIDERATION FOR PROVISION OF LAND FOR THE COMP ANY'S PROJECT AND AS A COMPENSATION TO APHB, IJMII WILL HAVE THE RIGHT TO ACQUIRE OR APHB WOULD HAVE THE RIGHT TO EN FORCE ACQUISITION OF THE ENTIRE SHARE CAPITAL HELD BY APH B WITHIN 90 DAYS FROM THE COMPLETION OF THE PROJECT FOR A CONSIDERATION OF RS. 4,90,00,000 (RUPEES FOUR CRORE S NINETY LAKHS ONLY) WHICH SHALL BE REDUCED FOR ANY D IVIDEND PAID BY THE COMPANY TO APHB IN ITS CAPACITY AS SHAR EHOLDER OR OTHERWISE, APHB WILL BE LIABLE FOR ANY TAXES, DU TIES AND CESS APPLICABLE TO THE AFORESAID TRANSFER OF SHARES . THE AFORESAID GUARANTEED COMPENSATION OF RS. 2,200/ - PER SQUARE YARD IS INCLUSIVE OF THE LAND COST AND APHB' S SHARE OF ANTICIPATED PROFITS IN THE DEVELOPMENT OF INTEGR ATED TOWNSHIP. THE JOINT SECTOR COMPANY SHALL PAY THE GUARANTEED PROFITS AT THE RATE OF RS. 800/- PER SQU ARE YARD AMOUNTING TO RS. 13,43,97,120 (RUPEES THIRTEEN CROR ES FORTY THREE LAKHS NINETY SEVEN THOUSAND ONE HUNDRED AND TWENTY ONLY) TO APHB WHETHER OR NOT THE JOINT SECTO R COMPANY REALIZES PROFITS FROM THE INTEGRATED TOWNSH IP. 6.1 AS PER CLAUSE 4.1.6 OF THE SHAREHOLDERS AGREEMENT, THE ASSESSEE HAS PAID LAND COMPENSATION TO THE LAND OWNERS I.E,, AND HRA PRADESH HOUSING BOARD (APHB) AN AMOUNT OF RS. 2,200 PER SQ. YARD FO R THE LAND TRANSFERRED BY APHB TO THE COMPANY. THE LAND COMPENSATION OF RS. 2 ,200 PER SQ. YARD IS TERMED AS GUARANTEED COMPENSATION IN THE SAID AGREE MENT. FURTHER, THE LAND COMPENSATION IS CONSIDERED AT RS. 1,400 AS A LAND C OST AND RS. 800 AS ANTICIPATED PROFITS FROM THE BUSINESS OF TOWNSHIP D EVELOPMENT. HOWEVER, AS FAR AS THE COMPANY POINT OF VIEW, THE TOTAL LAND CO MPENSATION AS GUARANTEED TO THE LAND OWNER IS RS. 2,200/- PER SQ. YARD. THE SAID COMPENSATION HAS TO BE PAID BY THE COMPANY WHETHER IT REALIZES ANY PROF ITS OR NOT. CONSIDERING THE TERMS AND CONDITIONS OF THE CONTRACTUAL AGREEMENT B ETWEEN THE SHAREHOLDERS, THE COMPANY HAS PAID THE COMPENSATION TO THE LAND OWNERS. WITHOUT CONSIDERING THE MERITS OF THE CONTRACTUAL A GREEMENT, THE ASSESSING OFFICER HAS DISALLOWED AN AMOUNT OF RS. 13,43,96,80 0 BEING PART OF THE LAND COMPENSATION AS DISTRIBUTION OF PROFITS TO APHB. T HE ASSESSING OFFICER HAS NOT MENTIONED THE SECTION AND PROVISION UNDER WHICH THE DISTRIBUTION OF PROFITS IS TREATED AS INCOME. IT A NO. 2072/HYD/2011 M/S. SWARNANDHRA IJMII INTEGRATED TOWNSHIP DEVELOPMENT COMPANY PVT. LTD. ================================== 25 6.2 THIS IS A CONTRACTUAL PAYMENT AND THE ASSESSEE IS H AVING NO CONTROL OVER THIS AND IF THE ASSESSEE FAILED TO ABIDE BY TH E AGREEMENT ENTERED BY THE APHB AND IJMII IT WOULD LEAD TO TOTAL BREAK-DOWN OF THE CONTRACT. THE TRUE TEST FOR ALLOWABILITY OF THIS EXPENDITURE IS WHERE AN AMOUNT IS SOUGHT TO BE DEDUCTED, IT NEVER TO BE REACHED THE ASSESSEE AS IT S INCOME. AN AMOUNT PAID, IF IT IS AN APPLICATION OF INCOME IT CANNOT B E ALLOWED. THE NATURE OF OBLIGATION UNDER WHICH THE ASSESSEE IS LIABLE TO BE INCURRED IS VERY DECISIVE. THERE IS A DIFFERENCE BETWEEN AN AMOUNT WHICH A PER SON IS OBLIGED TO APPLY OUT OF ITS INCOME AND AN AMOUNT WHICH BY THE NATURE OF THE OBLIGATION AS PART OF THE CONTRACTUAL OBLIGATION THE ASSESSEE TO BE IN CURRED. WHEREBY THERE IS OBLIGATION BY A CONTRACT AN AMOUNT INCURRED EVEN BE FORE OR AFTER THE INCOME REACHED THE ASSESSEE, IT IS TO BE ALLOWED; BUT WHER E THE INCOME IS REQUIRED TO BE APPLIED AFTER SUCH INCOME REACHES THE ASSESSEE T HE SAME CANNOT BE ALLOWED IF IT IS CLEAR APPROPRIATION OF PROFIT. IN OTHER WORDS, THE PAYMENT IS MERELY AN OBLIGATION TO PAY A PORTION OF ASSESSEES OWN INCOME, WHICH HAS BEEN RECEIVED AND IS SINCE APPLIED, IT CANNOT BE AL LOWED AS A DEDUCTION. IN THE PRESENT CASE, M/S. APHB IS ENTITLED TO RECEIVE A PORTION FROM THE ASSESSEES INCOME WHICH IS AS PER PRE-DETERMINED TE RMS IN THE CONTRACT AND THE ASSESSEE CANNOT OBLIGE TO VIOLATE THE SAME AND, THEREFORE, THE PAYMENT MADE BY THE ASSESSEE IS AN EXPENDITURE WHICH WAS NE CESSARY FOR THE PURPOSE OF BUSINESS OF THE ASSESSEE TO EARN ITS INCOME. FU RTHER, A FAIR AND COMPREHENSIVE READING OF THE STIPULATION IN THE AGR EEMENT SHOWS THAT THE ASSESSEE, THOUGH NOT A PARTY TO THE AGREEMENT (SUPR A), IT WAS ABIDED BY THE STIPULATION IN THE AGREEMENT. THAT AGREEMENT ITSEL F HAS GIVEN BIRTH TO THE ASSESSEE. WHEN THE AGREEMENT ITSELF IS A REASON FO R THE BIRTH OF THE ASSESSEE, THE ASSESSEE, AT ANY COST, IS BOUND BY TH E STIPULATION OR CONDITION THEREIN. THE LEGAL OBLIGATION CREATED BY THAT AGRE EMENT, BY WHICH THE ASSESSEE IS CREATED, AND THE ASSESSEE IS BOUND BY T HAT, AS IT IS AN ENFORCEABLE DOCUMENT AGAINST THE ASSESSEE. FURTHER , WHEN THE ASSESSEE SET APART A PORTION OF ITS RECEIPTS UNDER CONTRACTUAL O BLIGATION AND OVER WHICH THE ASSESSEE LOSES ALL CONTROL AND DOMAIN AND IT IS TO BE PAID TO THE PARENT PARTY AS DIVERTED AT SOURCE BY OVERRIDING TITLE AND IT CA NNOT FORM PART OF REAL INCOME OF THE ASSESSEE. IN THE PRESENT CASE, THERE IS A C LEAR DIVERSION OF A PORTION OF IT A NO. 2072/HYD/2011 M/S. SWARNANDHRA IJMII INTEGRATED TOWNSHIP DEVELOPMENT COMPANY PVT. LTD. ================================== 26 AMOUNT RECEIVED BY THE ASSESSEE WHICH WAS EARMARKED AT SOURCE AND IT DOES NOT AT ANY TIME FORM PART OF ASSESSEE'S OWN INCOME SO AS TO UTILISE THE SAME AT WILL OF THE ASSESSEE. THE QUESTION OF OWNERSHIP OF THE FUND IN THIS CONTEXT IS NOT RELEVANT. IT IS ALSO NOT RELEVANT WHETHER T HE ASSESSEE KEPT THIS FUND ITSELF FOR TIME BEING. AS THE ACCOUNTING YEAR COME S TO AN END, THE ASSESSEE HAS TO PART WITH THE SAME TO THE PARENT BODY. THE DEPARTMENT HAS TAKEN A PLEA BEFORE US THAT THE PROVISIONS OF THE AGREEMENT ARE NOT BINDING ON THE ASSESSEE AS THE ASSESSEE IS NOT THE PARTY TO THE AG REEMENT ENTERED BETWEEN THE APHB AND IJMII. AS WE HAVE OBSERVED EARLIER, T HESE TWO COMPANIES ARE PARENT COMPANIES WHO FORMED THE ASSESSEE THROUGH TH AT AGREEMENT. THEN, UNDOUBTEDLY, THE PROVISIONS OF THE AGREEMENT ARE NO T TO BE VIOLATED BY THE ASSESSEE. THE ASSESSEE CANNOT SAY THAT ONLY THE BE NEFICIAL CLAUSES IN THAT AGREEMENT WOULD BE FOLLOWED AND THE OTHER PART CANN OT BE ACTED UPON. THE AGREEMENT AS A WHOLE IS TO BE ACTED UPON BY THE ASS ESSEE IN ORDER TO GIVE FULL EFFECT TO THE AGREEMENT. THE OBLIGATION OF THE ASS ESSEE UNDER THE AGREEMENT IS NOTHING BUT AN ACTIONABLE CLAIM IN FAVOUR OF THE APHB. IT IS TRUE THAT THE BURDEN OF A CONTRACT CANNOT BE ASSIGNED WITHOUT THE CONSENT OF THE OTHER PARTY OF THE CONTRACT. BUT SO FAR AS THIS CONTRACT IS CONCERNED, A CONTRACT AS A WHOLE IS TO BE ACTED UPON FOR THE FUNCTIONAL OPERAT ION OF THE ASSESSEE. THE TERMS OF THE AGREEMENT ARE VERY CLEAR THAT UNLESS O BLIGATIONS CAST UPON THE ASSESSEE ARE CARRIED ON BY THE ASSESSEE, THE ASSESS EE CANNOT FUNCTION AND OPERATE. THE ASSESSEE IS BOUND BY THE TERMS THEREI N AND BEING SO IT IS NOT POSSIBLE TO ACCEPT ON BEHALF OF REVENUE THAT THIS I S A CASE WHERE INCOME HAS ACCRUED TO THE ASSESSEE AND LATER ON IT WAS APPLIED BY IT BY PASSING THE SHARE OF PROFIT IN FAVOUR OF THE APHB. AS PER AGREEMENT ENTERED BY APHB AND IJMII, THE RIGHT TO RECEIVE THIS PAYMENT WAS VESTED WITH T HE APHB AND THE ASSESSEE HAS TO COMPLY WITH THE AGREEMENT IN TRUE LETTER AND SPIRIT. IN VIEW OF THE ABOVE DISCUSSION, WE ARE OF THE OPINION THAT THE PA YMENT MADE BY THE ASSESSEE TO THE APHB IN TERMS OF THE AGREEMENT DATE D 4.11.2003 IS TO BE ALLOWED AS WHOLLY AND EXCLUSIVELY INCURRED FOR THE PURPOSE OF BUSINESS. THIS GROUND OF THE ASSESSEE IS ALLOWED. IT A NO. 2072/HYD/2011 M/S. SWARNANDHRA IJMII INTEGRATED TOWNSHIP DEVELOPMENT COMPANY PVT. LTD. ================================== 27 7. WITH REGARD TO DISALLOWANCE OF INCENTIVE (GROUND NO S. 3.1 TO 3.4) PAID TO IJMII AMOUNTING TO RS. 18,59,85,000, THE AR SUBM ITTED AS FOLLOWS: 7.1 AS PER CLAUSE 14.1.6 OF THE DEVELOPMENT & SHAREHOLD ERS AGREEMENT DATED 4.11.2003, THE ASSESSEE PAID INCENTIVE TO IJM II AMOUNTING TO RS. 18,59,85,000 AS PER THE MOU AND THE DEVELOPMENT AGR EEMENT, IJMII ASSISTED THE ASSESSEE IN DEVELOPMENT OF TOWNSHIP. I JMII WAS THE MAIN CONSTRUCTION CONTRACTOR IN DEVELOPING THE TOWNSHIP. THE INCENTIVE TO IJMII WAS THE CONSIDERATION PAID IN RELATION TO CONTRACT WORK UNDERTAKEN BY IJMII. THE SAID EXPENDITURE WAS QUANTIFIED UNDER THE AGREEMENT AS A PERCENTAGE (15%) OF THE COST OF DEVELOPMENT INCURRED FOR DEVELOPING THE INTEGRATED TOWNSHIP. IT IS INCONCEIVABLE THAT A SUBSTANTIAL CONTRACT WOULD BE UNDERTAKEN DEVOTING TIME, ATTENTION AND LABOUR ONLY ON A 'COST RECOVERY ' BASIS. COMMERCIAL REALITIES VISUALISE AND ACKNOWLEDGE A MARK UP TO SUCH COSTS. IN THE INSTANT CASE, THE PARTIES AGREED THAT 15% MARK UP COULD BE ADDED TO T HE COSTS INCURRED THE MARK UP WAS FOR THE CONTRACTOR. FOR THE ASSESSEE IT WAS A COST OF THE PROJECT. BEING A COST OF THE PROJECT, IT WAS DEDUCTIBLE. IT WAS AN EXPENDITURE INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS CARRIED ON BY THE ASSESSEE. IT WAS AGREED BY THE PARTIES THAT THE PAYMENT OF IN CENTIVE WILL BE SUBJECT TO AVAILABILITY OF PROFITS. FOR THE YEAR ENDING 31.3.2 007, THE COST OF DEVELOPMENT INCURRED WAS RS. 367,69,09,874/ AND 15% OF THE SAME AMOUNTED TO RS. 55,15,36,481/- HOWEVER, EXPENDITURE IN THE NATURE O F INCENTIVE WAS RECOGNISED ONLY TO THE EXTENT OF RS. 18,59,85,000 A ND AN AMOUNT OF RS. 33,76,53,731/- WAS NOT RECOGNISED DUE TO ABSENCE OF SUFFICIENT PROFITS. THE PURPOSE AND GENUINENESS OF THE EXPENDITURE HAS NOT BEEN DOUBTED BY THE LEARNED INCOME TAX AUTHORITIES. 7.2 THE LEARNED ASSESSING OFFICER HAS DISALLOWED THE IN CENTIVES PAID TO IJMII AMOUNTING TO RS. 18,59,85,000/- FOR THE FOLLO WING REASONS. (A) THE PAYMENT OF INCENTIVE IS NOT REASONABLE AND ATTR ACTS THE PROVISIONS OF SECTION 40A OF THE INCOME TAX ACT. (B) ASSESSEE IS NOT LIABLE FOR PAYMENT OF INCENTIVE AS IT IS NOT A PARTY TO THE SHAREHOLDERS AGREEMENTS. IT A NO. 2072/HYD/2011 M/S. SWARNANDHRA IJMII INTEGRATED TOWNSHIP DEVELOPMENT COMPANY PVT. LTD. ================================== 28 (C) PAYMENT OF INCENTIVE ABOVE THE CONTRACT PRICE AMOUN TS TO DISTRIBUTION OF PROFITS. (D) AS PER THE DETAILS AVAILABLE THE CLAIM OF INCENTIVE IS NOT RELATED TO THIS YEAR, AS THE PROJECT IS NOT YET COMPLETED. (E) IJMII HAS NOT EXECUTED THE WORK IN TIME TO TERM THE PAYMENT AS INCENTIVE FOR TIMELY COMPLETION. 7.3 THE AR SUBMITTED THAT THE HONOURABLE DRP HAS CONFIR MED THE IMPUGNED FINDINGS OF THE LEARNED ASSESSING OFFICER AND HAS CONFIRMED THE ADDITION AMOUNTING TO RS. 18,59,85,000/- 7.4 THE AR SUBMITTED THAT THE INCENTIVE PAID TO IJMII H AS BEEN DISALLOWED FOR THE REASON THAT THE SAID PAYMENTS ARE NOT REASO NABLE AND ATTRACTS THE PROVISIONS OF SECTION 40A OF THE INCOME TAX ACT. SE CTION 40A(2)(A) PROVIDES AS UNDER:- 'WHERE THE ASSESSEE INCURS ANY EXPENDITURE IN RESPE CT OF WHICH PAYMENT HAS BEEN OR IS TO BE MADE TO ANY PERS ON REFERRED TO IN CLAUSE (B) OF THIS SUB-SECTION, AND THE ASSESSING OFFICER IS OF OPINION THAT SUCH EXPENDITURE IS EXCE SSIVE OR UNREASONABLE HAVING REGARD TO THE FAIR MARKET VALUE OF THE GOODS, SERVICES OR FACILITIES FOR WHICH THE PAYMENT IS MADE OR THE LEGITIMATE NEEDS OF THE BUSINESS OR PROFESSION OF THE ASSESSEE OR THE BENEFIT DERIVED BY OR ACCRUING TO H IM THEREFROM, SO MUCH OF THE EXPENDITURE AS IS SO CONS IDERED BY HIM TO BE EXCESSIVE OR UNREASONABLE SHALL NOT BE AL LOWED AS A DEDUCTION. ' 7.5 THE AR DREW OUR ATTENTION TO THE SCOPE OF SECTION 4 0A(2) HAS BEEN SET OUT IN CBDT CIRCULAR NO. 6P (LXXVI-66) OF 1968, DAT ED 6-7-1968. 7.6 HE SUBMITTED THAT SECTION 40A(2)(A) IS PLACED AFTER SECTION 37, DISALLOWANCE UNDER SECTION 40A(2)(A) IS MADE IF THE EXPENDITURE OTHERWISE ALLOWABLE IS EXCESSIVE OR UNREASONABLE, A DISALLOWA NCE MADE UNDER SECTION 40A(2)(A) PRE-SUPPOSES THAT THE EXPENDITURE DISALLO WED HAS SATISFIED THE TESTS OF SECTION 37 AND IS OTHERWISE ALLOWABLE AS D EDUCTION, IN THE PRESENT CASE, THE INCENTIVE PAID TO IJMII HAS BEEN DISALLOW ED UNDER SECTION 40A(2)(A), IN OTHER WORDS, THE ASSESSING OFFICER HAS ACCEPTED THE FACT THAT THE INCENTIVE PAID TO IJMII IS AN EXPENDITURE WHOLLY AND EXCLUSIV ELY INCURRED FOR THE PURPOSE IT A NO. 2072/HYD/2011 M/S. SWARNANDHRA IJMII INTEGRATED TOWNSHIP DEVELOPMENT COMPANY PVT. LTD. ================================== 29 OF THE BUSINESS, THUS, THE CONTENTION OF THE ASSESS ING OFFICER THAT THE INCENTIVE PAID TO IJMII AMOUNTS TO 'DISTRIBUTION OF PROFIT' IS INCORRECT, BAD IN LAW AND LIABLE TO BE QUASHED, WITHOUT PREJUDICE, SU BMISSIONS IN RESPECT OF DISALLOWANCE UNDER SECTION 40A(2)(A) IS AS UNDER, 7.7 ACCORDING TO THE AR, SECTION 40A(2)(A) CANNOT HAVE ANY APPLICATION, UNLESS IT IS FIRST HELD THAT THE EXPENDITURE WAS EX CESSIVE AND UNREASONABLE, HE PLACED RELIANCE ON THE JUDGEMENT OF SUPREME COUR T IN THE CASE OF UPPER INDIA PUBLISHING HOUSE (P,) LTD. V, C IT [1979] 117 ITR 569. HE SUBMITTED THAT REASONABLENESS IS TO BE DECIDED ON THE BASIS OF FAI R MARKET VALUE OF THE GOODS, SERVICES OR FACILITIES. THE REASONABLENESS O F ANY EXPENDITURE IS TO BE SEEN FROM THE VIEWPOINT OF THE BUSINESSMAN AND NOT FROM THE VIEW POINT OF THE REVENUE AUTHORITIES. HE PLACED RELIANCE ON THE JUDGEMENT OF GUJARAT HIGH COURT IN THE CASE OF VOLTAMP TRANSFORMERS (P.) LTD. V. CIT [1981] 129 ITR 1051 AND ON THE JUDGEMENT OF DELHI HIGH COURT IN TH E CASE OF MITTAL METAL VS ITO (2008) 021 SOT 0186. 7.8 HE SUBMITTED THAT THE PROVISION OF SECTION 40A(2) I S INTENDED TO PREVENT EVASION OF TAX. [CBDT CIRCULAR NO. 6P (LXXV I-66) OF 1968] THOUGH THE OBJECT OF THE SECTION IS TO PREVENT EVASION OF TAX, THE PROVISION MUST BE WORKED NOT FROM THE STANDPOINT OF THE TAX COLLECTOR BUT FROM THAT OF A BUSINESSMAN. THE INCOME-TAX OFFICER MUST TAKE AN OV ERALL PICTURE OF THE FINANCIAL POSITION OF THE BUSINESS. HE SHOULD PUT H IMSELF IN THE POSITION OF THE PRUDENT BUSINESSMAN OR THE DIRECTOR OF THE COMPANY AND DEAL WITH A SYMPATHETIC AND OBJECTIVE APPROACH. HE PLACED RELIA NCE ON THE JUDGEMENT OF SUPREME COURT IN THE CASE OF CLT V. GANGADHAR BANER JEE AND CO. (P.) LTD. [1965] 57 ITR 176 (SC); CIT V. EDWARD KEVENTER (P) LTD [1972] 86 ITR 370 [APPROVED BY THE HON'BLE SUPREME COURT IN CIT V. ED WARD KEVENTER (P.) LTD. [1978] 115 ITR 149]. 7.9 ACCORDING TO THE AR, THE DISALLOWANCE UNDER SECTION 40A(2)(A) CAN BE MADE ONLY IF THE EXPENDITURE OTHERWISE ALLOWABLE IS EXCESSIVE OR UNREASONABLE. A DISALLOWANCE MADE UNDER SECTION 40A (2)(A) PRE-SUPPOSES THAT THE EXPENDITURE DISALLOWED HAS SATISFIED THE T ESTS OF SECTION 37 AND IS IT A NO. 2072/HYD/2011 M/S. SWARNANDHRA IJMII INTEGRATED TOWNSHIP DEVELOPMENT COMPANY PVT. LTD. ================================== 30 OTHERWISE ALLOWABLE AS DEDUCTION. IN THE PRESENT CA SE, THE INCENTIVE PAID TO IJMII HAS BEEN DISALLOWED UNDER SECTION 40A(2)(A). IN OTHER WORDS, THE ASSESSING OFFICER HAS ACCEPTED THE FACT THAT THE IN CENTIVE PAID TO IJMII IS AN EXPENDITURE WHOLLY AND EXCLUSIVELY INCURRED FOR THE PURPOSE OF THE BUSINESS. HOWEVER, FOR INVOKING THE PROVISIONS OF SECTION 40A (2)(A}, THE ONUS LIES UPON THE ASSESSING OFFICER THAT THE PAYMENT IS EXCESSIVE OR UNREASONABLE HAVING REGARD TO THE FAIR MARKET VALUE OF GOODS OR LEGITIM ATE NEEDS OF THE BUSINESS. UNDER THE GENERAL LAW, TRANSACTIONS EVEN WITH THE R ELATIVES AND ASSOCIATE CONCERNS CANNOT BE DISCARDED. IN OTHER WORDS, UNLES S IT IS SHOWN THAT THE TRANSACTION IN QUESTION IS A SHAM ONE OR UNLESS THE VALUE SHOWN IS NOT THE VALUE IN THE BOOKS OF ACCOUNT OR UNLESS IT IS NOT A BONA FIDE TRANSACTION, IT IS NOT OPEN TO THE TAXING AUTHORITIES TO DISREGARD THE FIGURES OF THE TRANSACTIONS SHOWN IN THE BOOKS OF ACCOUNT. THE ONUS IS ON THE D EPARTMENT TO PROVE THAT THE TRANSACTION WAS SHAM OR NOT BONA FIDE OR THE VA LUE SHOWN IN THE BOOKS WAS NOT THE VALUE REALLY PAID. THE ASSESSING OFFICE R MUST ESTABLISH THAT THE PAYMENT IS EXCESSIVE OR UNREASONABLE. ITO CANNOT PR OCEED MERELY ON THE BASIS OF SURMISES AND CONJECTURES. REVENUE HAS TO P LACE ON RECORD EVIDENCE AS REGARDS EXCESSIVENESS OR UNREASONABLENESS. HE PL ACED RELIANCE ON THE JUDGEMENT OF GUJARAT HIGH COURT IN THE CASE OF MAR GHABHAI KISHABHAI PATEL AND CO. V. CIT [1977] 108 ITR 54 (GUJ); S. K. ENGIN EERING V. JCIT [2006] 286 ITR (AT) 210 ITAT BANGALORE; MITTAL METAL VS ITO (2 008) 021 SOT 0186 (DELHI)]. HE SUBMITTED THAT THERE CANNOT BE ANY MICROSCOPIC CONSIDERATION AND A BROADER VIEW HAS TO BE TAKEN, TAKING INTO CON SIDERATION THE BUSINESS INTENTION AND BUSINESS CONSIDERATION UNDER SECTION 40A(2)(A). SO LONG AS THERE IS NO INTENTION TO EVADE TAX, SECTION 40A(2)( A) CANNOT BE INVOKED. HE PLACED RELIANCE ON THE JUDGEMENT OF KARNATAKA HIGH COURT IN THE CASE OF DCIT VS. MICROTEX SEPARATORS LTD (2007) 293 ITR 0451 AND CIT V. INDO SAUDI SERVICES (TRAVEL) P. LTD. [2009] 310 ITR 306 (BOM)] 7.10 THE AR SUBMITTED THAT THE DISALLOWANCE OF INCENTIVE PAID HAS BEEN MADE FOR THE REASON THAT THE ASSESSEE IS NOT LIABLE FOR PAYMENT OF INCENTIVE AS IT IS NOT A PARTY TO THE SHAREHOLDERS AGREEMENTS . HAVING MADE DISALLOWANCE U/S 40A(2)(A) THEREBY ACCEPTING THAT T HE IMPUGNED EXPENDITURE IT A NO. 2072/HYD/2011 M/S. SWARNANDHRA IJMII INTEGRATED TOWNSHIP DEVELOPMENT COMPANY PVT. LTD. ================================== 31 QUALIFIES FOR DEDUCTION UNDER SECTION 37, THE ASSES SING OFFICER CANNOT TURN AROUND AND CONCLUDE THAT THE ASSESSEE WAS NOT LIABL E FOR PAYMENT OF INCENTIVES. THE ASSESSING OFFICER CANNOT BLOW HOT A ND COLD AT THE SAME TIME. DISALLOWANCE CANNOT BE MADE FOR TWO OPPOSITE AND CO NTRARY REASONS. THE DISALLOWANCE IS TO BE DELETED FOR THIS REASON ALONE . 7.11 ACCORDING TO AR, EVEN OTHERWISE, THE CONCLUSION O F THE ASSESSING OFFICER THAT THE SINCE ASSESSEE WAS NOT A PARTY TO THE SHAREHOLDERS AGREEMENTS, IT WAS NOT LIABLE TO PAY INCENTIVE IS I NCORRECT. THE ASSESSEE WAS INCORPORATED SOLELY FOR THE PURPOSE OF DEVELOPMENT OF TOWNSHIP WITH APHB AND IJMII AS ITS SHAREHOLDERS. IT WAS IMPERATIVE FO R THE ASSESSEE TO AGREE TO THE TERMS OF MOU AND SHAREHOLDERS AGREEMENT. THE AS SESSEE HAD NO CHOICE AT THE TIME OF INCEPTION, AS A CONDITION OF ITS COM ING INTO EXISTENCE TO AGREE TO THE SEVERAL TERMS STIPULATED BY THE AP GOVERNMENT T HROUGH APHB AND THE OTHER SHAREHOLDER VIZ., IJMII. HE PLACED RELIANCE O N THE JUDGEMENT OF SUPREME COURT IN THE CASE OF CIT V TRAVANCORE SUGARS AND CH EMICALS LTD [1973] 88 ITR 1 (SC). THUS, THE FACT THAT THE ASSESSEE WAS N OT A PARTY TO THE SHAREHOLDERS AGREEMENT IS NOT RELEVANT. EVEN OTHERW ISE, SHAREHOLDERS CAN BIND THE COMPANY IN VARIOUS MANNER. FOR EXAMPLE, IN AN ANNUAL GENERAL MEETING, IT IS THE SHAREHOLDERS WHO APPOINT AUDITOR S, ADOPT FINAL ACCOUNTS, APPROVE DISTRIBUTION OF DIVIDENDS ETC. A SPECIAL RE SOLUTION IS PASSED BY THE SHAREHOLDERS TO BIND THE COMPANY. A COMPANY DOES NO T HAVE HANDS AND LEGS TO CONDUCT ITS BUSINESS. IT HAS TO OPERATE THROUGH BOARD OF DIRECTORS AND THE SHAREHOLDERS. THE GENERAL MANAGEMENT AND ADMINISTRA TION OF THE COMPANY HAS TO BE EXERCISED BY THE BOARD OF DIRECTORS. HOWE VER, THE BOARD OF DIRECTORS DOES NOT HAVE POWERS TO TAKE DECISIONS IN RESPECT O F CERTAIN MATTERS SUCH BORROWING IN EXCESS OF CERTAIN LIMITS, AMALGAMATION , SALE OF BUSINESS, APPOINTMENT OF AUDITORS ETC. THE SHAREHOLDERS HAVE TO APPROVE SUCH ACTIONS WHICH THEN BIND THE COMPANY. IN THE PRESENT CASE AL SO, THE PAYMENT OF INCENTIVE WAS APPROVED BY THE SHAREHOLDERS IN THE D EVELOPMENT AND SHAREHOLDERS AGREEMENT DATED 4.11.2003. SUBSEQUENTL Y THE BOARD OF DIRECTORS IN THEIR MEETING HELD ON 2.2.2004 DISCUSS ED THE MATTERS CONCERNED WITH THE AGREEMENT DATED 4.11.2004 AND RECORDED THE MINUTES. THE IT A NO. 2072/HYD/2011 M/S. SWARNANDHRA IJMII INTEGRATED TOWNSHIP DEVELOPMENT COMPANY PVT. LTD. ================================== 32 PAYMENT OF INCENTIVE WAS PROMOTED OUT OF BUSINESS N EEDS AND COMMERCIAL EXPEDIENCY. THE REVENUE CANNOT ITSELF PUT IN THE AR M CHAIR OF BUSINESSMAN AND DECIDE WHAT TYPE OF EXPENDITURE IS NECESSARY FO R THE CONDUCT OF BUSINESS. HE PLACED RELIANCE ON THE JUDGEMENT OF SUPREME COUR T IN THE CASE OF CIT V S A BUILDERS (288 ITR 1). THE ASPECT OF 'NECESSITY' O F AN EXPENDITURE IS IRRELEVANT FOR THE PURPOSE OF ALLOWABILITY OF AN EX PENDITURE FOR TAX PURPOSES. HE PLACED RELIANCE ON THE JUDGEMENT OF SUPREME COUR T IN THE CASE OF HE PLACED RELIANCE ON THE JUDGEMENT OF SUPREME COURT I N THE CASE OF SASSOON J. DAVID AND CO. (P.) LTD. V. CIT [1979]118 ITR 261. THUS, THERE IS NO MERIT IN THE CONTENTION OF THE ASSESSING OFFICER IN DISALLOW ING THE INCENTIVES PAID. 7.12 HE SUBMITTED THAT THE ASSESSING OFFICER HAS DISALLO WED THE INCENTIVE PAID TO IJMII FOR THE REASON THAT THE SAID PAYMENTS AMOUNTS TO DISTRIBUTION OF PROFITS. THE INCENTIVE PAID TO IJMII CONSTITUTED AN EXPENDITURE INCURRED FOR THE PURPOSE OF BUSINESS AND THE SAME IS ALLOWABLE IN CO MPUTING THE REAL PROFITS AND GAINS CHARGEABLE UNDER SECTION 28. ALTERNATIVEL Y, THE SAID PAYMENTS ARE ALLOWABLE UNDER SECTION 37. THE FACT THAT PAYMENT O F INCENTIVE WAS MEASURED OR QUANTIFIED AS A PERCENTAGE OF DEVELOPMENT COST S UBJECT TO AVAILABILITY OF PROFITS IS NOT A RELEVANT CRITERIA AT ALL. HE PLACE D RELIANCE ON THE JUDGEMENT OF SUPREME COURT IN THE CASE OF CIT VS. PONNI SUGARS A ND CHEMICALS LTD [2008] 306 ITR 392 (SC), WHEREIN HELD THAT WHERE SUBSIDY W AS ALLOWED BY THE GOVT. FOR THE PURPOSE OF REPAYMENT OF LOANS AND THE SAME WAS ALLOWED THROUGH A REBATE ON EXCISE DUTY, IT WAS HELD THAT THE FORM OR THE MECHANISM BY WHICH THE SUBSIDY WAS ALLOWED IS IRRELEVANT IN DETERMININ G WHETHER THE SUBSIDY ALLOWED IS CAPITAL RECEIPT OR REVENUE RECEIPT. IT W AS ALSO HELD THAT THE SOURCE OF SUBSIDY OR THE POINT OF TIME AT WHICH IT IS PAID IS NOT IRRELEVANT. IN THE PRESENT CASE, THE INCENTIVE PAID TO IJMII WAS A CON SIDERATION FOR UNDERTAKING THE CONSTRUCTION CONTRACT FOR DEVELOPMENT OF THE TO WNSHIP. THUS, THE SAID PAYMENTS ARE ALLOWABLE UNDER SECTION 28 OR UNDER SE CTION 37 IN COMPUTING THE PROFITS OF THE BUSINESS. ALTERNATIVELY AND WITH OUT PREJUDICE, THE SAID PAYMENTS CONSTITUTED DIVERSION OF INCOME BY OVERRID ING TITLE FOR THE ASSESSEE. IT A NO. 2072/HYD/2011 M/S. SWARNANDHRA IJMII INTEGRATED TOWNSHIP DEVELOPMENT COMPANY PVT. LTD. ================================== 33 7.13 ACCORDING TO HIM, THE ASSESSING OFFICER HAS DISAL LOWED THE INCENTIVE PAID TO IJMII FOR THE REASON THAT (I) THE CLAIM OF INCENTIVE IS NOT RELATED TO THIS YEAR, AS THE PROJECT IS NOT YET COMPLETED; AND (II) IJMII HAS NOT EXECUTED THE WORK IN TIME TO TERM THE PAYMENT AS INCENTIVE FOR T IMELY COMPLETION. THE ABOVE REASONS ARE IRRELEVANT IN DETERMINING THE ALL OWABILITY OF THE IMPUGNED EXPENDITURE. THE ASSESSEE WAS CONTRACTUALLY BOUND T O PAY INCENTIVE TO IJMII. AS EXPLAINED EARLIER, FOR THE YEAR ENDING 31.3.2007 , THE COST OF DEVELOPMENT INCURRED AMOUNTED TO RS. 367,69,09,874/- AND 15% OF THE SAME AMOUNTED TO RS. 55,15,36,481/- HOWEVER, EXPENDITURE IN THE N ATURE OF INCENTIVE WAS RECOGNISED ONLY TO THE EXTENT OF RS. 18,59,85,OOO/- AND AN AMOUNT OF RS. 33,76,53,731/- WAS NOT RECOGNISED DUE TO SUFFICIENT PROFITS. 7.14 HE SUBMITTED THAT THE ASSESSEE FOLLOWS MERCANTILE SYSTEM OF ACCOUNTING. IN COMPUTING THE PROFITS OF BUSINESS CH ARGEABLE UNDER THE ACT, THE EXPENDITURE ACTUALLY INCURRED AND THE LIABILITY ACCRUED IN RESPECT OF SUCH EXPENDITURE (BUT REQUIRED TO BE DISCHARGED AT SOME FUTURE DATE) SHOULD BE DEDUCTED. HE PLACED RELIANCE ON THE JUDGEMENT OF SU PREME COURT IN THE CASE OF CALCUTTA COMPANY LIMITED V. CIT [1959] 37 ITR I, , , , WHEREIN HELD AS FOLLOWS: 'THE ASSESSEE HERE IS BEING ASSESSED IN RESPECT OF THE PROFITS AND GAINS OF ITS BUSINESS AND THE PROFITS AND GAINS OF THE BUSINESS CANNOT BE DETERMINED UNLESS AND UNTIL THE EXPENSES OR THE OBLIGATIONS WHICH HAVE BEEN INCURRED ARE SET OFF AGAINST THE RECEIPTS. THE EXPRESSION 'PROFITS AND GAINS' HA S TO BE UNDERSTOOD IN ITS COMMERCIAL SENSE AND THERE CAN BE NO COMPUTATION OF SUCH PROFITS AND GAINS UNTIL THE EXP ENDITURE WHICH IS NECESSARY FOR THE PURPOSE OF EARNING THE R ECEIPTS IS DEDUCTED THEREFROM -- WHETHER THE EXPENDITURE IS AC TUALLY INCURRED OR THE LIABILITY IN RESPECT THEREOF HAS AC CRUED EVEN THOUGH IT MAY HAVE TO BE DISCHARGED AT SOME FUTURE DATE.' 7.15 UNDER THE MERCANTILE OR ACCRUAL SYSTEM OF ACCOUNT ING, INCOME AND EXPENDITURE ARE RECORDED AT THE TIME OF THEIR ACCRU AL OR INCURRENCE. FOR INSTANCE, INCOME ACCRUED DURING THE PREVIOUS YEAR I S RECORDED WHETHER IT IS RECEIVED DURING THE PREVIOUS YEAR OR DURING A YEAR PRECEDING OR FOLLOWING THE PREVIOUS YEAR. SIMILARLY, EXPENDITURE IS RECORDED I F IT BECOMES DUE DURING THE PREVIOUS YEAR, IRRESPECTIVE OF THE FACT WHETHER IT IS PAID DURING THE PREVIOUS IT A NO. 2072/HYD/2011 M/S. SWARNANDHRA IJMII INTEGRATED TOWNSHIP DEVELOPMENT COMPANY PVT. LTD. ================================== 34 YEAR OR NOT. THE PROFIT CALCULATED UNDER THE MERCAN TILE SYSTEM IS PROFIT ACTUALLY EARNED DURING THE PREVIOUS YEAR, THOUGH NO T NECESSARILY REALIZED IN CASH. 7.16 HE DREW OUR ATTENTION TO ACCOUNTING STANDARD-I, R ELATING TO DISCLOSURE OF ACCOUNTING POLICIES, ISSUED BY THE CENTRAL GOVER NMENT UNDER SECTION 145(2), REQUIRES THE ASSESSEES TO MAKE PROVISIONS T OWARDS ALL KNOWN LIABILITIES AND LOSSES, EVEN THOUGH THE AMOUNT CANN OT BE DETERMINED WITH CERTAINTY. THIS IS THE PRINCIPLE OF PRUDENCE. 7.17 HE REFERRED TO THE WORD 'PROVISION' AS DEFINED IN PARAGRAPH 7(1)(A) OF PART III OF SCHEDULE VI TO THE COMPANIES ACT TO MEAN 'ANY A MOUNT WRITTEN OFF OR RETAINED BY WAY OF PROVIDING FOR DEPRECIATION, R ENEWALS OR DIMINUTION IN THE VALUE OF ASSETS OR RETAINED BY WAY OF PROVIDING FOR ANY KNOWN LIABILITY OF WHICH THE AMOUNT CANNOT BE DETERMINED WITH SUBSTANTIAL AC CURACY. ' 7.18 HE CONTENDED THAT IF A BUSINESS LIABILITY HAS DEF INITELY ARISEN IN THE ACCOUNTING YEAR, THE DEDUCTION SHOULD BE ALLOWED AL THOUGH THE LIABILITY MAY HAVE TO BE QUANTIFIED AND DISCHARGED AT A FUTURE DA TE. WHAT SHOULD BE CERTAIN IS THE INCURRING OF THE LIABILITY. IT SHOULD ALSO B E CAPABLE OF BEING ESTIMATED WITH REASONABLE CERTAINTY THOUGH THE ACTUAL QUANTIF ICATION MAY NOT BE POSSIBLE. IF THESE REQUIREMENTS ARE SATISFIED THE L IABILITY IS NOT A CONTINGENT ONE. THE LIABILITY IS IN PRAESENTI THOUGH IT WILL BE DISCHARGED AT A FUTURE DATE. IT DOES NOT MAKE ANY DIFFERENCE IF THE FUTURE DATE ON WHICH THE LIABILITY SHALL HAVE TO BE DISCHARGED IS NOT CERTAIN. HE PLACED REL IANCE ON THE JUDGEMENT OF SUPREME COURT IN THE CASE OF BHARAT EARTH MOVERS V CIT [2000] 245 IT 428 (SC)]. 7.19 HE CONTENDED THAT IN THE PRESENT CASE, THE ASSESSE E WAS CONTRACTUALLY LIABLE TO PAY INCENTIVE TO IJMII. THE SAID PAYMENT WAS MEASURED AS A PERCENTAGE OF DEVELOPMENT COSTS INCURRED FOR D EVELOPMENT OF INTEGRATED TOWNSHIP. DURING THE YEAR, THE INCENTIVE PAYABLE WA S QUANTIFIED BASED ON THE QUANTUM OF DEVELOPMENT COSTS INCURRED TILL 31.3.200 7. ACCORDINGLY, THE LIABILITY TO PAY INCENTIVE CRYSTALLISED DURING THE YEAR. THE FACT THAT THE IT A NO. 2072/HYD/2011 M/S. SWARNANDHRA IJMII INTEGRATED TOWNSHIP DEVELOPMENT COMPANY PVT. LTD. ================================== 35 INCENTIVE PAYABLE IS TO BE FINALISED AFTER COMPLETI ON OF CONSTRUCTION BASED ON THE TOTAL COST OF DEVELOPMENT DOES NOT POSTPONE THE INCURRENCE OF LIABILITY. HENCE, INCENTIVE PAID TO IJMII IS ALLOWABLE IRRESPE CTIVE OF THE FACT THAT THE CONSTRUCTION OF THE TOWNSHIP HAD NOT BEEN COMPLETED AT THE END OF THE YEAR. SIMILARLY, THE FACT THAT THE EXECUTION OF WORK WAS NOT IN TIME IS IRRELEVANT FOR THE PURPOSE OF ALLOWABILITY OF EXPENDITURE. SINCE, SUBSTANTIAL COMPLETION OF THE PROJECT IS DONE AND ONLY SOME MINOR WORKS ARE P ENDING WHICH ARE VERY TIME CONSUMING SUCH AS INTERIORS, DESIGN CHANGES BY THE OWNERS ETC., ON FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND LAW APPLICABLE, INCENTIVE PAID TO IJMII AMOUNTING TO RS. 18,59,85,000/- IS FULLY A LLOWABLE IN COMPUTING THE BUSINESS INCOME. THE DISALLOWANCE OF THE SAID EXPEN DITURE IS TO BE DELETED IN ENTIRETY. 8. REGARDING DISALLOWANCE OF INCENTIVE PAID AT RS. 18, 59,85,000, THE LEARNED DR SUBMITTED THAT AS PER THE SHAREHOLDERS A GREEMENT, IF THE TAXPAYER MAKES PROFIT, M/S. IJMII IS ENTITLED TO RECEIVE AN INCENTIVE OF NOT EXCEEDING 15% OF THE TOTAL DEVELOPMENT COST AND THE BALANCE, IF ANY, MORE THAN 15% OF THE TOTAL DEVELOPMENT COST WILL BE SHARED BY APHB A ND IJMII IN THE RATIO OF THEIR SHAREHOLDING. DURING THE PREVIOUS YEAR RS.18 ,59,85,OOO/- HAS BEEN PROVIDED TOWARDS INCENTIVE TO IJMII. A REFERENCE WA S MADE IN PARA NO. 5.8 OF AGREEMENT IN THIS REGARD. HEREIN IT IS STATED THAT IJMII SHALL ALONE BE ENTITLED TO RECEIVE ALL THE PROFITS GENERATED BY THE TAXPAYE R UP TO 15% OF THE TOTAL COST. THE QUANTIFICATION OF INCENTIVE IS PREMATURE ACCORD ING TO THE AO. PAYMENT OF INCENTIVE TO THE CONTRACTOR IS SOMETHING PECULIAR. IT ALSO ENVISAGES THAT PROFIT OF OVER 15% WOULD CERTAINLY BE GENERATED. HOWEVER, THE PROFIT IS NORMALLY 8 TO 12% IN REAL ESTATE AND AFTER TAX IT WORKS OUT TO 5.6% TO 8.4% ONLY. THE AO ALSO NARRATED IN PAGE 6 OF HIS ORDER THE FACTS AS O BTAINED FROM THE RECORD OF M/S. IJMII THAT THE PROFIT DISCLOSED IS ONLY 0.09%. IF INCENTIVE IS CONSIDERED, IT COMES TO 4.8% WHICH IS STILL ON THE LOWER SIDE. 8.1 THE DR FURTHER SUBMITTED THAT THE TAXPAYER IS NOT A PARTY TO THE AGREEMENTS BETWEEN THE SHAREHOLDERS. HE ALSO RELIED ON THE DOCTRINE OF PRIVITY OF CONTRACT. ACCORDINGLY, FOR THE FOLLOWIN G REASONS THE SUM OF IT A NO. 2072/HYD/2011 M/S. SWARNANDHRA IJMII INTEGRATED TOWNSHIP DEVELOPMENT COMPANY PVT. LTD. ================================== 36 RS.18,59,85,OOO INCENTIVE PAID TO ONE OF THE SHAREH OLDERS I.E., IJMII: I) THE PAYMENT OF INCENTIVE IS NOT REASONABLE AND ATTR ACTS THE PROVISIONS OF SECTION 40A OF THE INCOME TAX ACT, II) SITCO IS NOT LIABLE FOR PAYMENT OF INCENTIVE AS IT IS NOT A PARTY TO THE SHAREHOLDERS AGREEMENTS. III) PAYMENT OF INCENTIVE ABOVE THE CONTRACT PRICE AMOUN TS TO DISTRIBUTION OF PROFITS. IV) AS PER THE DETAILS AVAILABLE THE CLAIM OF INCENTIVE IS NOT RELATED TO THIS YEAR; AS THE PROJECT IS NOT YET COMPLETED. V) JMII HAS NOT EXECUTED THE WORK IN TIME TO TERM THE PAYMENT AS INCENTIVE FOR TIMELY COMPLETION. 8.2 THE DR SUBMITTED THAT IT IS THE ASSESSEE'S CONTENTI ON THAT THE AO MISINTERPRETED THE SHAREHOLDERS AGREEMENT. THE SUBS EQUENT HAPPENINGS, ADMINISTRATION, GOVERNANCE AND ALL MANAGEMENT OF TH E TAXPAYER COMPANY IS SOLELY DEFINED IN THE SHAREHOLDERS AGREEMENT. IT IS ARGUED THAT THE INCENTIVE IS PAID FOR THE SERVICES RENDERED AND IT IS NOT A CASE OF DISTRIBUTION OF PROFITS. THE CONTRACTOR CAN BE PAID INCENTIVE. APPLICATION OF SECTION 40A IS NOT ATTRACTED IN THE IMPUGNED CASE. A READING OF THE SH AREHOLDERS AGREEMENT, PARA 4.1.6 AND THE ENTIRE SECTION 3 AND ESPECIALLY PARA 4 IS CRUCIAL TO THIS CASE. ONE OF THE SHAREHOLDERS I.E., APHB IS GIVEN RS. 800/- PER SQUARE YARD AS 'ANTICIPATED PROFIT'. THE OTHER SHAREHOLDER IJMI I BEING ALSO THE CONTRACTOR IS ALSO GUARANTEED 15% OF TOTAL DEVELOPMENTAL COST (BO TH THESE AMOUNTS ARE ALMOST THE SAME). WITH OR WITHOUT PROFIT BEING DISC LOSED, THESE SUMS ARE DEBITED AND CLAIMED AS EXPENDITURE IN THE CASE OF T HE TAXPAYER. THE TOTAL PROJECT COST/CONSTRUCTION IS ESTIMATED IS RS.367 CR ORES UP TO 31.03.2007. IT IS THE HOUSING BOARD PROJECT, WHERE THE FLATS ARE S OLD TO THE PUBLIC AND MONEY RAISED. THE COST OF THE LAND TO THE HOUSING BOARD I S NOT FOR SURE, BUT IT CANNOT BE ASSUMED THAT IT WAS HIGH. 8.3 THE DR SUBMITTED THAT A READING OF THE LETTER DATED 16.12.2009 FILED BEFORE THE ACIT, CIRCLE-3(3} SHOWS THAT THE INCENTI VE WAS PAID OUT OF THE PROFITS AVAILABLE IT IS MENTIONED THAT SUM OF RS.1 8,59,85,OOO/- IS THE PROFITS IT A NO. 2072/HYD/2011 M/S. SWARNANDHRA IJMII INTEGRATED TOWNSHIP DEVELOPMENT COMPANY PVT. LTD. ================================== 37 AVAILABLE AND PAID TO IJMII. FROM THE FACTS ABOVE, IT CAN CLEARLY BE SEEN THAT SECTION 2(22)(A) APPLIES TO THE FACTS OF THE CASE. IT READS: DIVIDEND INCLUDES - 'ANY DISTRIBUTION BY A COMPANY OF ACCUMULATED PROFITS, WHETHER CAPITALIZED OR NOT, IF SUCH DISTRIBUTION ENTAILS THE RELEASE BY THE COMPANY TO ITS SHAREHOLDERS OF ALL OR ANY PART OF THE ASSETS OF TH E COMPANY'. 8.4 THE DR SUBMITTED THAT ON THIS GROUND THERE IS NECES SITY TO HOLD THAT IT IS ONLY DIVIDEND THAT IS PAID TO THE SHAREHOLDER AN D HENCE THE DEDUCTION IS NOT ADMISSIBLE. ON THE OTHER SIDE, IT SHOULD ALSO BE N OTED THAT EVEN BEFORE THE WORK IS EXECUTED IN TIME AND WITHOUT EXAMINING THE QUALITY, AN INCENTIVE IS SOUGHT TO BE PAID IN CRORES. IN FACT, THIS IS A CA SE WHEREIN THERE WAS .SUBSTANTIAL DELAY IN HANDING OVER THE FLATS AND NE ARLY RS. 7 CRORES OF LIQUIDATED DAMAGES / COMPENSATION WAS PAID FOR THE DELAY IN EXECUTION AND HANDING OVER THE FLATS. THE COMMERCIAL COMPLEX WAS NOT COMPLETED IN TIME. IT IS NOT CLEAR HOW SUCH INCENTIVE WAS PAID AND WHA T IS THE NECESSITY FOR SUCH PAYMENT WHILE THE PROJECT WAS IN PROGRESS. IT IS A LSO A FACT THAT IJMII IS 51% SHAREHOLDER OF THIS COMPANY (TAXPAYER). IT IS ALSO TO BE SEEN THAT INCENTIVE AS WELL AS 'ANTICIPATED PROFITS' ARE TAKEN AWAY AND PR OFIT IS NOT DISCLOSED FOR INCOME TAX PURPOSES SUCH. THAT NO DIVIDEND TAX NOR ANY TAX NEED BE PAID. FURTHER, DIFFERENT CONTRACTS ARE CONCLUDED WITH IJM II TOWARDS TECHNICAL SERVICES EXECUTION OF WORK AND SEPARATE PAYMENTS AR E MADE. MOBILISATION ADVANCE IS ALSO PAID TO IJMII. THE PROFIT MARGIN OF THE TAXPAYER IS GIVEN IN THE T ABLE BELOW: ITEM FYE 2006 FYE 2007 FYE 2008 FYE2009 OPERATING REVENUE 151,55,48,204 190,20,17,413 10,31,74,585 9,33,80,730 OPERATING ;EXPENSES 153,87,37,152 186,35,01,499 11,18,96,786 14,66,95,733 OPERATING PROFIT ( - ) 1, 13,57,822 3,85,15,194 ( - )87,22,201 ( - )5,33,15,003 OP/SALES { - )0.75% 2.02% ( - ) 8.45% { - )57.09% OP/COST 0.74% 2.06% ( - )7.80% ( - )36.34% THE PROFIT DISCLOSED IS VERY NEGLIGIBLE WHICH CAN B E SEEN FROM THE ABOVE TABLE. THE TAXPAYER CLAIMED HUGE REFUND OF RS.5.90 CRORES FOR ASST. YEAR 2007-08. THE INCOME DISCLOSED BY APHB, ONE OF THE SHAREHOLDE RS, IS GIVEN BELOW: IT A NO. 2072/HYD/2011 M/S. SWARNANDHRA IJMII INTEGRATED TOWNSHIP DEVELOPMENT COMPANY PVT. LTD. ================================== 38 S L . NO. A.Y. NET PROFIT/LOS S AS PER P&L ALC INCOME RETURNED 1 2005 - 06 RS.43,62,70,753 ( - )RS.65,05,784 2 2006 - 07 ( - )121,67,49,541 ( - )8,70,76,260 3 2007 - 08 ( - )110,96,10,573 NIL 8.5 THE PROFIT/INCOME DISCLOSED BY THE TAXPAYER AS WELL AS ONE OF THE SHAREHOLDERS IS DEPICTED ABOVE. AMONG OTHER JUSTIFI ED REASONS ANOTHER ISSUE TO BE NOTICED IS THAT LOW INCOMES ARE ONLY DISCLOSE D BY TAXPAYER AS WELL AS ONE OF THE SHAREHOLDERS I.E., APHB. NO DOUBT, THE R EASON CAN BE TRACED TO THE SELF-SERVING NATURE OF THE AGREEMENT CONCLUDED AFTE R 8 MONTHS OF INCORPORATION. BASED ON ALL THE ABOVE REASONS, SUCH AS THE APPLICABILITY OF SECTIONS 2 (22), 40A(2) AND UNREASONABLENESS OF PAY MENT, THERE IS NO JUSTIFICATION TO ALLOW THE DEDUCTION ON ACCOUNT OF INCENTIVE PAID. HENCE. THIS GROUND OF OBJECTION SHOULD BE REJECTED FINDINGS FINDINGS FINDINGS FINDINGS WITH REGARD TO GROUND NOS. 3.1 TO 3.4 WITH REGARD TO GROUND NOS. 3.1 TO 3.4 WITH REGARD TO GROUND NOS. 3.1 TO 3.4 WITH REGARD TO GROUND NOS. 3.1 TO 3.4: :: : 9. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATE RIAL ON RECORD. THE SECOND GROUND IS WITH REGARD TO DISALLOWANCE OF INCENTIVE PAID TO IJMII AT RS. 18,59,85,000. THIS PAYMENT HAS BEEN DISALLOWED BY THE ASSESSING OFFICER ON THE REASON THAT THE PAYMENT IS NOT REASO NABLE AND IT WOULD ATTRACT PROVISIONS OF SECTION 40A(2) OF THE ACT. AS DISCUS SED IN EARLIER PARA, THIS PAYMENT WAS MADE IN TERMS OF THE AGREEMENT DATED 4. 11.2003. IT CANNOT BE CONSIDERED AS DISTRIBUTION OF PROFIT. THE EXPENDIT URE WAS INCURRED ON ACCOUNT OF COMMERCIAL EXPEDIENCY AND THE ASSESSEE HAS NO OP TION TO OVERLOOK THE AGREEMENT ENTERED BY PARENT BODIES. TO INVOKE THE PROVISIONS OF SECTION 40A(2), THE ASSESSING OFFICER IS REQUIRED TO BRING ON RECORD COMPARABLE MARKET VALUE FOR THE SERVICES RENDERED BY THE PARTI ES AND THE BURDEN OF PROOF UNDER THIS SECTION IS ON THE ASSESSING OFFICER. IF THE ASSESSEE INCURRED EXPENDITURE TO THE LEGITIMATE NEEDS OF THE BUSINESS OF THE ASSESSEE AND THE ASSESSING OFFICER FINDS THAT IT IS AN EXCESSIVE PAY MENT, THEN THE DUTY OF THE ASSESSING OFFICER IS TO BRING ON RECORD THE COMPARA BLE CASES AND DISALLOW THAT PORTION OF THE EXPENDITURE ONLY. THE ASSESSIN G OFFICER CANNOT DISALLOW THE ENTIRE EXPENDITURE BY OBSERVING THAT SECTION 40 A(2) IS APPLICABLE. HOWEVER, IT IS NOT THE CASE OF THE DEPARTMENT THAT THE EXPENDITURE WAS EITHER IT A NO. 2072/HYD/2011 M/S. SWARNANDHRA IJMII INTEGRATED TOWNSHIP DEVELOPMENT COMPANY PVT. LTD. ================================== 39 NOT INCURRED OR IF INCURRED THEN WERE INCURRED FOR OTHER THAN BUSINESS PURPOSES OR FOR ACQUIRING ANY PERSONAL BENEFIT OF T HE ASSESSEE. FOR THE DETAILS OF THE EVIDENCE PRODUCED BY THE ASSESSEE, T HE EXPENDITURE WERE INCURRED FOR THE PURPOSE OF CARRYING ON THE BUSINES S OF THE ASSESSEE IN TERMS OF CONTRACTUAL OBLIGATIONS WHICH IN TURN RESULT IN EARNING PROFIT IN THE BUSINESS OF THE ASSESSEE. IN OUR OPINION, IN THE PRESENT CA SE, THE INCENTIVE WAS PAID TO IJMII AS A CONSIDERATION FOR UNDERTAKING THE CONSTR UCTION CONTRACT FOR DEVELOPMENT OF INTEGRATED TOWNSHIP. THE ASSESSING O FFICER HAS NOT DOUBTED THE GENUINENESS AND PURPOSE OF THE EXPENDITURE. THE FACT THAT THE EXPENDITURE HAS BEEN DISALLOWED U/S 40A(2)(A) ITSEL F DEMONSTRATES THAT THE REQUIREMENTS OF SECTION 37 HAS BEEN SATISFIED. THE SCOPE AND REQUIREMENTS OF SECTION 40A(2)(A) HAS BEEN EXPLAINED ABOVE. IN O RDER TO DISALLOW AN EXPENDITURE UNDER SECTION 40A(2)(A), THE ASSESSING OFFICER HAS TO DEMONSTRATE WITH EVIDENCE THAT THE IMPUGNED EXPENDI TURE IS EXCESSIVE OR UNREASONABLE HAVING REGARD TO THE (I) FAIR MARKET V ALUE OF THE GOODS, SERVICES OR FACILITIES FOR WHICH THE PAYMENT IS MADE OR (II) THE LEGITIMATE NEEDS OF THE BUSINESS OF THE ASSESSEE; OR (III) THE BENEFIT DERI VED BY OR ACCRUING TO HIM THEREFROM. THE BURDEN OF PROOF UNDER SECTION 40A(2) (A) IS ON THE ASSESSING OFFICER. 9.1 IN OUR OPINION, THE ASSESSING OFFICER HAS TO COMPAR E THE PAYMENT MADE WITH THE FAIR MARKET VALUE OF THE GOODS, SERVI CES OR FACILITIES. IN THE PRESENT CASE, THE FAIR MARKET VALUE OF THE PAYMENT MADE TO IJMII HAS NOT BEEN BROUGHT ON RECORD BY THE ASSESSING OFFICER. TH E EXCESSIVENESS OR UNREASONABLENESS OF THE IMPUGNED PAYMENTS HAS NOT B EEN DEMONSTRATED HAVING REGARD TO THE FMV OF SUCH IMPUGNED PAYMENTS. THE DISALLOWANCE UNDER SECTION 40A(2)(A) IS, THEREFORE, IS NOT JUSTI FIED. 9.2 FURTHER, THE DISALLOWANCE CANNOT BE MADE UNLESS IT IS PROVED THAT THE PAYMENTS ARE EXCESSIVE OR UNREASONABLE HAVING REGAR D TO THE LEGITIMATE NEEDS OF THE BUSINESS OF THE ASSESSEE OR THE BENEFI T DERIVED BY OR ACCRUING TO HIM THEREFROM. IN THE PRESENT CASE, IJMII WAS THE M AIN CONTRACTOR FOR DEVELOPMENT OF THE INTEGRATED TOWNSHIP. THE ASSESSE E IS A JOINT VENTURE IT A NO. 2072/HYD/2011 M/S. SWARNANDHRA IJMII INTEGRATED TOWNSHIP DEVELOPMENT COMPANY PVT. LTD. ================================== 40 COMPANY BETWEEN APHB AND IJMII, WHEREIN APHB CONTRI BUTED THE LAND AND IJMII CONTRIBUTED ITS TECHNICAL EXPERTISE, SKILLS A ND EXPERIENCE WHICH WERE INDISPENSIBLE FAR THE ACTUAL DEVELOPMENT OF THE TOW NSHIP. AS EXPLAINED EARLIER, THE JOINT VENTURE PARTNER WAS INVITED SINC E APHB DID NOT HAVE THE TECHNICAL WHEREWITHAL TO DEVELOP THE TOWNSHIP IN A LARGE SCALE. IT THEREFORE INVITED TENDERS. IJMII WAS SELECTED FROM OUT OF VAR IOUS BIDDERS CONFIRMING THAT ITS PRICING WAS THE BEST. WITHOUT THE INVOLVEMENT O F IJMII, THE DEVELOPMENT OF TOWNSHIP WAS NOT POSSIBLE. THE PAYMENT THEREFORE SA TISFIED THAT LEGITIMATE NEEDS AND THE BENEFIT CRITERIA. THE FACT THAT THE A SSESSEE ALSO PAID PROJECT MANAGEMENT FEES AND OTHER SIMILAR FEES TO. IJMII AR E IRRELEVANT IN SO FAR IT PERTAINS TO DISALLOWANCE U/S 40A(2)(A). THESE PAYME NTS WERE MADE AS A CONSIDERATION FOR SERVICES SEPARATELY AVAILED FROM IJMII. THE ASSESSING OFFICER HAS NOT BROUGHT ANY EVIDENCE ON RECORD IN ORDER TO SUBSTANTIATE THAT THE IMPUGNED PAYMENTS WERE UNREASONABLE OR EXCESSIVE HA VING REGARD TO THE LEGITIMATE NEEDS AND THE BENEFIT THERE FROM. FURTHE R, AS EXPLAINED EARLIER, NO. DISALLOWANCE U/S 40A(2)(A) CAN BE MADE UNLESS THE R EQUIREMENT OF 'EVASION OF TAX' IS PRAYED. THE ASSESSING OFFICER HAS FAILED TO PROVE THAT THE PAYMENT OF INCENTIVE TO IJMII HAS LEAD TO EVASION OF TAX. THE ASSESSEE WAS ELIGIBLE TO SET OFF BROUGHT FORWARD LOSSES AND UNABSORBED DEPRECIAT ION AND HENCE THERE WAS NO INCENTIVE TO EVADE TAXES. THE ASSESSEE AND IJMII BOTH WERE DOMESTIC COMPANIES WITH UNIFORM TAX RATE FOR THE YEAR UNDER CONSIDERATION. IJMII WAS NOT ELIGIBLE FOR ANY TAX HOLIDAY LIKE SS. LOA, LOB, 10AA SO THAT THE INCENTIVE EARNED WAS TAX EXEMPT. IJMII HAS ALSO PAID TAX ON T HE INCENTIVE RECEIVED FROM THE ASSESSEE. THE TAXABLE INCOME OF IJMII WAS MORE THAN THAT OF THE ASSESSEE FOR THE YEAR UNDER CONSIDERATION. THUS, TH ERE WAS NO EVASION OF TAX. THE ASSESSING OFFICER HAS FAILED TO VIEW THE TRANSA CTION UNDERLYING THE PAYMENT OF INCENTIVE ON A HOLISTIC APPROACH FROM CO MMERCIAL OR BUSINESS PERSPECTIVE. THE DISALLOWANCE MADE IN VIOLATION OF THE REQUIREMENTS OF S. 40A(2)(A), BOARD CIRCULAR NO. 6P (LXXVI-66) OF 1968 , DATED 6-7-1968 AND THE PRINCIPLES LAID DOWN BY THE COURTS IS, THEREFORE, N OT JUSTIFIED. THEREFORE, ON THE BASIS OF THE DOCUMENTS PLACED ON RECORD, WE ARE OF THE OPINION THAT EXPENDITURE INCURRED WAS FOR COMMERCIAL EXPEDIENCY AND, THEREFORE, ARE TO BE ALLOWED AS BUSINESS EXPENDITURE. COMMERCIAL EXPEDI ENCY MUST BE DECIDED IN IT A NO. 2072/HYD/2011 M/S. SWARNANDHRA IJMII INTEGRATED TOWNSHIP DEVELOPMENT COMPANY PVT. LTD. ================================== 41 THE CONTEXT OF ASSESSEE'S BUSINESS OPERATIONS AND N OT FROM THE POINT OF VIEW OF THE ASSESSING OFFICER. IN OUR OPINION, IN THE PR ESENT CASE, THE ASSESSEE WAS CONTRACTUALLY LIABLE TO PAY INCENTIVE TO IJMII. THE SAID PAYMENT WAS MEASURED AS A PERCENTAGE OF DEVELOPMENT COSTS INCURRED FOR D EVELOPMENT OF INTEGRATED TOWNSHIP. DURING THE YEAR, THE INCENTIVE PAYABLE WA S QUANTIFIED BASED ON THE QUANTUM OF DEVELOPMENT COSTS INCURRED TILL 31.3.200 7. ACCORDINGLY, THE LIABILITY TO PAY INCENTIVE CRYSTALLISED DURING THE YEAR. THE FACT THAT THE INCENTIVE PAYABLE IS TO BE FINALISED AFTER COMPLETI ON OF CONSTRUCTION BASED ON THE TOTAL COST OF DEVELOPMENT DOES NOT POSTPONE THE INCURRENCE OF LIABILITY. HENCE, INCENTIVE PAID TO IJMII IS ALLOWABLE IRRESPE CTIVE OF THE FACT THAT THE CONSTRUCTION OF THE TOWNSHIP HAD NOT BEEN COMPLETED AT THE END OF THE YEAR. SIMILARLY, THE FACT THAT THE EXECUTION OF WORK WAS NOT IN TIME IS IRRELEVANT FOR THE PURPOSE OF ALLOWABILITY OF EXPENDITURE. SINCE, SUBSTANTIAL COMPLETION OF THE PROJECT IS DONE AND ONLY SOME MINOR WORKS ARE P ENDING WHICH ARE VERY TIME CONSUMING SUCH AS INTERIORS, DESIGN CHANGES BY THE OWNERS ETC., ON FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND LAW APPLICABLE, INCENTIVE PAID TO IJMII AMOUNTING TO RS. 18,59,85,000/- IS FULLY A LLOWABLE IN COMPUTING THE BUSINESS INCOME. ACCORDINGLY, THE DISALLOWANCE OF T HE SAID EXPENDITURE IS DELETED. WE, THEREFORE, ALLOW THE GROUND TAKEN BY THE ASSESSEE. 10. THE NEXT ISSUE (GROUND NO. 4.1) IS WITH REGARD TO D ISALLOWANCE OF HANDING OVER CHARGES AT RS. 7,74,36,597. 10.1 BRIEF FACTS OF RELATING TO THIS ISSUE ARE THAT AS P ER THE TERMS OF THE AGREEMENT ENTERED INTO WITH THE BUYERS, THE ASSESSE E HAS TO COMPLETE THE CONSTRUCTION AND HANDOVER THE POSSESSION OF THE VAC ANT FLATS TO BUYERS WITHIN THE AGREED DATE. IF THERE WAS ANY DELAY IN COMPLETI ON OF CONSTRUCTION OR HANDING OVER THE POSSESSION OF FLATS, THE ASSESSEE AGREED TO PAY LIQUIDATED DAMAGES AT THE RATE OF RS. 5/- PER SQ. FT OF BUILT UP AREA OF THE APARTMENT. DURING THE YEAR, THERE WAS A DELAY IN COMPLETION OF CONSTRUCTION BY THE ASSESSEE. A SUM OF RS. 7,74,36,597/- WAS THEREFORE PAID BY THE ASSESSEE TO VARIOUS BUYERS AS HANDING OVER CHARGES. 10.2 THE ASSESSING OFFICER HAS DISALLOWED THE ABOVE PAYM ENT UNDER SECTION IT A NO. 2072/HYD/2011 M/S. SWARNANDHRA IJMII INTEGRATED TOWNSHIP DEVELOPMENT COMPANY PVT. LTD. ================================== 42 40(A}(IA) FOR THE REASON THAT THE IMPUGNED PAYMENTS CONSTITUTE 'INTEREST' UNDER SECTION 2(28A) AND THE ASSESSEE HAS FAILED TO DEDUCT TAX AT SOURCE IN RESPECT OF THE SAID PAYMENTS UNDER SECTION 194A OF THE ACT. THE HON'BLE DRP HAS CONFIRMED THE DISALLOWANCE MADE BY THE ASSESSIN G OFFICER. 11. THE AR SUBMITTED THAT SECTION 4(2) PROVIDES THE BAS IS FOR DEDUCTION OF TAX AT SOURCE. SECTION 190 PROVIDES THAT TAX ON INC OME SHALL BE PAYABLE BY DEDUCTION OF TAX AT SOURCE IN ACCORDANCE WITH THE P ROVISIONS OF CHAPTER XVII, NOTWITHSTANDING THAT THE REGULAR ASSESSMENT IN RESP ECT OF ANY INCOME IS MADE IN A LATER ASSESSMENT YEAR. SECTION 194A MANDA TE DEDUCTION OF TAX AT SOURCE IN RESPECT OF INTEREST OTHER THAN INTEREST O N SECURITIES. HE DREW OUR ATTENTION TO THE TERM 'INTEREST' IS DEFINED IN SECT ION 2(28A). 11.1 THE AR SUBMITTED THAT AS PER SECTION 2(28A), INTERE ST MEANS INTEREST PAYABLE IN ANY MANNER IN RESPECT OF ANY MONEYS BORR OWED OR DEBT INCURRED. IT IS CLEAR FROM THE DEFINITION IN SECTION 2(28A) OF T HE INCOME-TAX ACT, 1961, THAT BEFORE ANY AMOUNT PAID IS CONSTRUED AS INTEREST, IT HAS TO BE ESTABLISHED THAT THE SAME IS PAYABLE IN RESPECT OF ANY MONEY BORROWE D OR DEBT INCURRED. HE PLACED RELIANCE ON THE JUDGEMENT OF DELHI HIGH COUR T IN THE CASE OF CLT V CARGILL GLOBAL TRADING P. LTD [2011] 335 ITR 94 (DE L)]. IN THE PRESENT CASE, THE PAYMENT OF HANDING OVER CHARGES TO VARIOUS BUYE RS WAS MADE FOR THE DELAY IN COMPLETION OF CONSTRUCTION OF FLATS. THE S AID PAYMENTS WERE NOT MADE IN CONNECTION WITH ANY MONEY BORROWED OR DEBT INCURRED BY THE ASSESSEE. HE PLACED RELIANCE ON THE FOLLOWING ORDER S/JUDGEMENTS: DELHI DEVELOPMENT AUTHORITY V ITO [1995] 53 ITD 19 AND TH E JUDGEMENT OF HIMACHAL PRADESH HIGH COURT IN THE CASE OF CIT V HP HOUSING BOARD [2012] 340 ITR 388 HAS HELD THAT PAYMENT OF INTEREST TO BU YERS FOR THE DELAY IN COMPLETION OF CONSTRUCTION AND HANDOVER OF FLATS CA NNOT BE CONSIDERED AS 'INTEREST' UNDER SECTION 2(28A) AND CONSEQUENTLY SU CH PAYMENTS ARE NOT LIABLE FOR TDS U/S 194A. 11.2 THE AR SUBMITTED THAT IN VIEW OF THE ABOVE, THE CON TENTION OF THE ASSESSING OFFICER THAT THE PAYMENT OF HANDING OVER CHARGES PARTAKES THE CHARACTER OF 'INTEREST' UNDER SECTION 2(28A) IS INC ORRECT, BAD IN LAW AND LIABLE IT A NO. 2072/HYD/2011 M/S. SWARNANDHRA IJMII INTEGRATED TOWNSHIP DEVELOPMENT COMPANY PVT. LTD. ================================== 43 TO BE QUASHED. THE DECISIONS RELIED ON BY THE ASSES SING OFFICER ARE ALSO DISTINGUISHABLE FOR THE SAME REASONS. THE DISALLOWA NCE MADE UNDER SECTION 40(A)(IA) SHOULD THEREFORE BE DELETED. 11.3 THE AR SUBMITTED THAT EVEN OTHERWISE, THE HANDING O VER CHARGES WERE ACTUALLY PAID DURING THE YEAR, AND THERE WAS NO SUM PAYABLE AS ON 31.3.2007 THE VISHAKHAPATNAM ITAT SB IN MERILYN SHIPPING AND TRANSPORTS V AD. CIT [20121 16 ITR (TRIB) 1 HAS HELD THAT DISALLOWANCE U NDER SECTION 40(A)(IA) CAN BE MADE ONLY IN RESPECT OF AMOUNTS REMAINING PAYABL E AS ON THE LAST DAY OF THE PREVIOUS YEAR AND THE PAYMENTS ACTUALLY MADE DU RING THE PREVIOUS YEAR CANNOT BE DISALLOWED UNDER SECTION 40(A)(IA). THE D ISALLOWANCE UNDER SECTION 40(A)(IA) SHOULD BE DELETED EVEN FOR THIS REASON. 12. THE LEARNED DR SUBMITTED THAT THE CASE IS TO BE EXA MINED WITH RESPECT TO EPC CONTRACT ON WHICH THE ASSESSEE RELIE D UPON. AS PER CLAUSE 38 OF THE AGREEMENT THE ASSESSEE WAS TO HANDOVER THE F LATS AFTER COMPLETION OF CONSTRUCTION WITHIN 12 MONTHS FROM THE DATE OF AGRE EMENT WITH THE PURCHASERS. HOWEVER, THERE WAS INORDINATE DELAY IN COMPLETING THE CONSTRUCTION AND THE ASSESSEE HAS TO PAY COMPENSATI ON TO THE PURCHASERS. THE AO HELD THAT THE IMPUGNED SUM IS TO BE TREATED AS INTEREST AS PER DEFINITION U/S 2(28A) AND TO THE EXTENT THERE WAS F AILURE TO DO TDS AND THE SAME IS HELD TO BE DISALLOWABLE U/S 40A(IA). HOWEVE R, THE CASE IS TO BE EXAMINED WITH RESPECT TO THE EPC CONTRACT ON WHICH THE ASSESSEE IS RELYING UPON. AS PER CLAUSE 38 WHICH DEALS WITH DELAY IN C OMPLETION, THE CONTRACTOR SHALL PAY TO THE EMPLOYER FOR EVERY DAY'S DELAY CER TAIN COMPENSATION. THESE SUMS ARE TO BE AS LIQUIDATED DAMAGES FOR DELAY AND NOT AS A PENALTY. AS PER APPENDIX:-B LIQUIDATED DAMAGES CLAUSE.38.1 THE TAX PAYER IS LIABLE TO COLLECT THE DAMAGES FROM THE CONTRACTOR-CUM-SHAREHOLDER, I. E. IJMII. THE AO HAS ALREADY POINTED OUT THAT IJMII HAS NOT EXECUTED THE WORK IN TIME TO TERM THE PAYMENT AS INCENTIVE FOR TIMELY COMPLETION. THERE I S NO EVIDENCE PLACED ON RECORD TO STATE THAT CONTRACTOR HANDED OVER POSSESS ION IN TIME AND HENCE, THE LIABILITY TO PAY LIQUIDATED DAMAGES SQUARELY VE STED IN THE TAX PAYER. SINCE NO PROPER PROOF IS ADDUCED, THE STAND OF THE ASSESS EE. TO BE REJECTED. IT A NO. 2072/HYD/2011 M/S. SWARNANDHRA IJMII INTEGRATED TOWNSHIP DEVELOPMENT COMPANY PVT. LTD. ================================== 44 FINDINGS IN RESPECT OF GROUND NOS. 4.1: FINDINGS IN RESPECT OF GROUND NOS. 4.1: FINDINGS IN RESPECT OF GROUND NOS. 4.1: FINDINGS IN RESPECT OF GROUND NOS. 4.1: 13. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATE RIAL ON RECORD. IN OUR OPINION, PAYMENT OF HANDING OVER CHARGES CAN NOT BE EQUATED WITH INTEREST DEFINED IN SECTION 2(28A) OF THE ACT. U/S . 2(28A) 'INTEREST' READS AS UNDER: 'INTEREST' MEANS INTEREST PAYABLE IN ANY MANNER IN RESPECT OF ANY MONEYS BORROWED OR DEBT INCURRED (INCLUDING A D EPOSIT, CLAIM OR OTHER SIMILAR RIGHT OR OBLIGATION) AND INC LUDES ANY SERVICE FEE OR OTHER CHARGE IN RESPECT OF THE MONEY S BORROWED OR DEBIT INCURRED OR IN RESPECT OF ANY CREDIT FACIL ITY WHICH HAS NOT BEEN UTILISED.' 13.1 IT IS CLEAR FROM THE ABOVE THAT BEFORE ANY AMOUNT P AID IS CONSTRUED AS INTEREST, IT HAS TO BE ESTABLISHED THAT THE SAME IS PAYABLE IN RESPECT OF ANY MONEY BORROWED OR DEBT INCURRED. IN THE PRESENT CAS E, ON THE AFORESAID FACTS APPEARING ON RECORD, IN OUR OPINION, THE HANDING OV ER CHARGES PAID WERE NOT IN RESPECT OF ANY DEBT INCURRED OR MONEY BORROWED. INSTEAD, THE ASSESSEE HAD MERELY PAID COMPENSATION FOR DELAY IN COMPLETION AN D HANDING OVER POSSESSION OF FLATS. WE PLACE RELIANCE ON THE FOLL OWING JUDGEMENTS IN SUPPORT OF OUR CONCLUSIONS: (A) DELHI DEVELOPMENT AUTHORITY V ITO [1995] 53 ITD 19 (DEL) IT CANNOT BE SAID THAT THE INSTALMENTS PAID BY THE ALLOTTEE TO THE DDA WERE 'MONEY BORROWED' BY THE LATTER OR THAT IT WAS 'DEBT INCURRED' BY THE LATTER AS BOTH THESE TERMS STIPULATE A LIABILIT Y ON THE PART OF THE DDA WHICH ON THE FACTS OF THE CASE IT WAS NOT EXCEP T TO THE EXTENT THAT IT AS OBLIGED TO CONSTRUCT THE DWELLING UNITS WITH THE FUNDS PROVIDED BY THE ALLOTTEES AND DELIVER THEM WITHIN A STIPULATED PERIOD. THEN AGAIN THE AMOUNTS OF INSTALMENTS DO NOT REPRESENT A 'DEPO SIT' IN THE HANDS OF THE DDA HAVING BEEN TAKEN TO THE INCOME ACCOUNT {AS STATED BY SHRI G. C. SHARMA AND NOT REBUTTED BY THE LEARNED D EPARTMENTAL REPRESENTATIVE} AND NOT DENOTING AN INTEREST EARNIN G EVENT. THE TRANSACTION FURTHER DOES NOT QUALIFY FOR CATEGORIZA TION UNDER THE OTHER TERMS APPEARING IN SECTION 2{28A} VIZ., 'SERVICE FE E' OR 'OTHER CHARGE' AND NOT DOES IT FALL FOR CONSIDERATION UNDER THE TE RMS 'CLAIM OR OTHER SIMILAR RIGHT TO OBLIGATION'. ACCORDING TO US THE D EFINITION OF INTEREST IN SECTION 2(28A} IS NOT WIDE ENOUGH TO ENCOMPASS ALL TYPES OF TRANSACTIONS MUCH LESS THE ONE UNDER CONSIDERATION. THE PROVISIONS OF SECTION 194A WOULD BE ATTRACTED ONLY IF THE CASE FA LLS UNDER SECTION IT A NO. 2072/HYD/2011 M/S. SWARNANDHRA IJMII INTEGRATED TOWNSHIP DEVELOPMENT COMPANY PVT. LTD. ================================== 45 2(28A} IRRESPECTIVE OF THE FACT THAT A PARTICULAR R ECEIPT MAY REPRESENT INCOME IN THE HANDS OF THE RECIPIENT. (B) CIT V HP HOUSING BOARD [2012] 340 ITR 388 (HP) 'THAT, IN CASE THE HOUSES WERE READY WITHIN THE STI PULATED PERIOD THE ASSESSEE WOULD NOT BE LIABLE TO PAY INTE REST. WHEN CONSTRUCTION OF A HOUSE WAS DELAYED THERE COULD BE ESCALATION IN THE COST OF CONSTRUCTION. THE ALLOTTEE DOES NOT GET THE RIGHT TO USE THE HOUSE AND WAS DEPRIVED OF THE RENTAL INC OME FROM SUCH HOUSE. HE WAS ALSO DEPRIVED OF THE RIGHT OF LI VING IN HIS OWN HOUSE. IN THESE CIRCUMSTANCES, THE AMOUNT WHICH WAS PAID BY THE ASSESSEE WAS NOT PAYMENT OF INTEREST BU T WAS PAYMENT OF DAMAGES TO COMPENSATE THE ALLOTTEE FOR T HE DELAY IN THE CONSTRUCTION OF HIS HOUSE/FLAT AND THE HARAS SMENT CAUSED TO HIM. THOUGH COMPENSATION HAD BEEN CALCULA TED IN TERMS OF INTEREST THIS WAS BECAUSE THE PARTIES BY M UTUAL AGREEMENT AGREED TO FIND OUT A SUITABLE AND CONVENI ENT SYSTEM OF CALCULATING THE DAMAGES WHICH WOULD BE UNIFORM F OR ALL THE ALLOTTEES. THE ALLOTTEES HAD NOT GIVEN THE MONEY TO THE ASSESSEE BY WAY OF DEPOSIT NOR HAD THE ASSESSEE BOR ROWED THE AMOUNT FROM THE ALLOTTEES. THE AMOUNT WAS PAID UNDE R A SELF- FINANCING SCHEME FOR CONSTRUCTION OF THE FLATS AND THE INTEREST WAS PAID ON ACCOUNT OF DAMAGES SUFFERED BY THE CLAI MANT FOR DELAY IN COMPLETION OF THE FLATS.' 13.2 IN VIEW OF THE ABOVE DISCUSSION, WE ARE OF THE OPIN ION THAT HANDING OVER CHARGES CANNOT BE EQUATED WITH THE WORD 'INTER EST' SO AS TO INVOKE THE PROVISIONS OF SECTION 40(A)(IA) OF THE ACT AND NO A DDITION IS POSSIBLE ON THIS COUNT. ACCORDINGLY, THIS GROUND OF THE ASSESSEE I S ALLOWED. 14. THE NEXT GROUND IS WITH REGARD TO ADDITION OF RS. 1 ,92,19,200/- (GROUND NO. 5.1) IN RESPECT OF COST OF LAND ATTRIBU TABLE TO FLATS HANDED OVER TO APHB. 14.1 FACTS RELATING TO THIS ISSUE ARE THAT AS PER THE DE VELOPMENT AND SHAREHOLDERS AGREEMENT DATED 4.11.2003, THE ASSESSE E PAID COMPENSATION TO BOARD AT THE RATE OF RS. 2,200/- PER SQ. YARD OF THE LAND CONTRIBUTED BY THE BOARD. A PART OF THE ABOVE CONSIDERATION WAS DIRECT LY REALISED BY THE BOARD BY ALLOTTING / SELLING 500 LOW INCOME GROUP APARTMENT UNITS OF THE SIZE OF 450 IT A NO. 2072/HYD/2011 M/S. SWARNANDHRA IJMII INTEGRATED TOWNSHIP DEVELOPMENT COMPANY PVT. LTD. ================================== 46 SQ.FT EACH AT RS. 400/- PER SQ. FT. THE ASSESSING O FFICER HAS MADE AN ADDITION OF RS. 1,92,19,200/- [ 1400 X 13,728] COMPUTED AT R S. 1400/- PER SQ. YARD IN RESPECT OF 13,728 SQ. YARDS REPRESENTING THE POR TION OF LAND ATTRIBUTABLE TO 500 APARTMENTS AS REFERRED ABOVE FOR THE REASON THA T THE ABOVE PORTION OF LAND WAS NOT TRANSFERRED TO THE ASSESSEE. 14.2 HE SUBMITTED THAT AS PER THE DEVELOPMENT AND SHAREH OLDERS AGREEMENT DATED 4.11.2003, THE BOARD MADE AVAILABLE THE ENTIRE LAND (INCLUDING 13,728 SQ. YARDS AS REFERRED ABOVE) TO A SSESSEE FOR THE PURPOSE OF DEVELOPMENT OF INTEGRATED TOWNSHIP. A POWER OF ATTO RNEY WAS ALSO GIVEN ON THE SAME DAY TO THE ASSESSEE TO CARRY OUT THE DEVEL OPMENTAL WORK IN RESPECT OF THE LAND CONTRIBUTED BY THE BOARD. THUS, THERE I S NO MERIT IN THE CONTENTION OF THE ASSESSING OFFICER THAT LAND TO THE EXTENT OF 13,728 SQ. YARDS HAS NOT BEEN OFFERED FOR DEVELOPMENT BY THE BOARD. THE ASSE SSEE PAID COMPENSATION AT THE RATE OF RS. 2200/- PER SQUARE YARD FOR THE E NTIRE LAND INCLUDING THE ABOVE PORTION OF 13,728 SQ. YARDS. MERELY BECAUSE A PORTION OF THE ABOVE COMPENSATION WAS REALISED BY THE BOARD DIRECTLY BY SELLING 500 FLATS, IT CANNOT BE CONCLUDED THAT THERE WAS NO CONTRIBUTION OF LAND BY THE BOARD. THE DIRECT SELLING OF FLATS BY THE BOARD WAS POSSIBLE O NLY AFTER COMPLETION OF CONSTRUCTION OF THESE FLATS BY THE ASSESSEE AND THE SAID CONSTRUCTION COULD NOT HAVE BEEN MADE BY THE ASSESSEE WITHOUT THE CONT RIBUTION OF LAND BY THE BOARD. FURTHER, (I) SALE OF 500 FLATS BY THE ASSESS EE AND PAYMENT OF SAME AS COMPENSATION TO BOARD OR (II) DIRECT REALISATION BY THE BOARD BY SALE OF FLATS, LEAD TO THE SAME RESULT. THE TWO WAY TRAFFIC OF FIR ST SELLING THE HOUSES BY THE ASSESSEE AND THEN PAYING THE SAME AMOUNT TO BOARD A S COMPENSATION WAS AVOIDED. THE COMPENSATION OF RS. 2,200/- PER SQ. YA RD PAID TO THE BOARD WAS PARTLY REALISED IN THE FORM OF DIRECT SALE OF 500 F LATS. HE PLACED RELIANCE ON THE JUDGEMENT OF SUPREME COURT IN THE CASE OF J.B. BODA AND CO. PVT. LTD. V. CIT [1997) 223 ITR 271 AND ALSO ON THE ORDER OF TRI BUNAL, SPECIAL BENCH, CHENNAI IN THE CASE OF ZYLOG SYSTEMS LIMITED V ITO [2011) 7 ITR (TRIB) 348 WHEREIN HELD THAT IN TAXATION MATTER 'A TWO-WAY TRAFFIC IS UNNECESSARY. TO INSIST ON A FORMAL REMITTANCE FIRST AND THEREAFTER TO RECEIVE THE COMMISSION IT A NO. 2072/HYD/2011 M/S. SWARNANDHRA IJMII INTEGRATED TOWNSHIP DEVELOPMENT COMPANY PVT. LTD. ================================== 47 FROM THE FOREIGN REINSURER, WILL BE AN EMPTY FORMAL ITY AND A MEANINGLESS RITUAL, ON THE FACTS OF THIS CASE' 15. THE AR SUBMITTED THAT ON FACTS AND IN THE CIRCUMSTA NCES OF THE CASE AND LAW APPLICABLE, ADDITION OF RS. 1,92,19,200/- I S TO BE DELETED IN ENTIRETY. 16. REGARDING ADDITION OF RS. 18.06.75.000/- (GROUND N. 6.1) TOWARDS OF CONSTRUCTION OF HOUSES HANDED OVER TO APHB, THE AR SUBMITTED AS FOLLOWS: 16.1 AS PER THE TERMS OF THE DEVELOPMENT AND CONSTRUCTIO N AGREEMENT DATED 4.11.2003, THE ASSESSEE PAID COMPENSATION TO BOARD AT THE RATE OF RS. 2,200/- PER SQ. YARD OF THE LAND CONTRIBUTED BY THE BOARD. A PART OF THE ABOVE CONSIDERATION WAS DIRECTLY REALISED BY THE BOARD BY ALLOTTING / SELLING 500 LOW INCOME GROUP APARTMENT UNITS OF THE SIZE OF 450 SQ. FT EACH AT RS. 400/- PER SQ.FT. THE ASSESSING OFFICER HAS MADE AN ADDITION O F RS. 18,06,75,000/- [RS. 803 X 2,25,000 SQ. FT] COMPUTED AT RS. 803/- PER SQ . FT IN RESPECT OF 2,25,000 SQ. FT OF BUILT UP AREA OF 500 LLG APARTME NTS [500 LLG HOUSES X 450 SQ. FT]. THE ASSESSING OFFICER COMPUTED THE AVERAGE COST OF CONSTRUCTION PER SQ. FT AT RS. 1,203/- PER SQ. FT. [TOTAL COST OF RS . 337,77,71,071/- DIVIDED BY TOTAL SALEABLE AREA OF 28,06,972 SQ. FT] AFTER CONS IDERING THAT THE ASSESSEE PROVIDED 500 LLG HOUSES AT RS. 400/- SQ. FT, THE AS SESSING OFFICER HELD THAT THE ASSESSEE HAS TRANSFERRED THESE 500 LLG HOUSES A T A DISCOUNT OF RS. 803/- PER SQ. FT [RS. 1203 - RS. 400] IT IS STATED BY THE ASSESSING OFFICER THAT THIS TRANSACTION ATTRACTS SECTION 40A(2)(A) OF THE ACT. IT IS CONCLUDED THAT THE ASSESSEE HAS NO OBLIGATION TO TRANSFER THE PROPERTI ES AT A DISCOUNTED PRICE. ACCORDINGLY, A SUM OF RS. 18,06,75,000/- HAS BEEN A DDED TO INCOME OF THE ASSESSEE. THE HON'BLE DRP HAS CONFIRMED THE ADDITIO N MADE BY THE ASSESSING OFFICER. 16.2 THE AR SUBMITTED THAT THE COMPUTATION OF AVERAGE CO ST OF CONSTRUCTION PER SQ. FT AT RS. 1,203/- PER SQ. FT. IS INCORRECT. VIDE SUBMISSIONS DATED 29.10.10 THE ASSESSEE SUBMITTED BEFORE THE ASSESSIN G OFFICER THAT THE COST OF CONSTRUCTION OF 500 LLG HOUSES IS ONLY RS. 635/- PER SQ. FT. FURTHER, THE ASSESSEE HAS ALSO RECOVERED RS. 35,000/- FOR EACH A PARTMENT SEPARATELY IN IT A NO. 2072/HYD/2011 M/S. SWARNANDHRA IJMII INTEGRATED TOWNSHIP DEVELOPMENT COMPANY PVT. LTD. ================================== 48 RESPECT OF WATER CHARGES AND ELECTRICITY CHARGES. T HUS, THE ACTUAL DISCOUNT AT WHICH THESE HOUSES ARE TRANSFERRED IS ONLY RS. 107/ - PER SQ. FT AS COMPUTED BELOW: SALE PRICE FOR HOUSES RS. 450/- PER SQ. FT ADD: AMOUNT RECOVERED SEPARATELY (RS. 35,000/450 SQ.FT.) RS. 78/- PER SQ. FT RS. 528/- PER SQ. FT LESS: COST OF CONSTRUCTION OF HOUSES RS. 635/- P ER SQ. FT DISCOUNT RS. 107/- PER SQ. FT 16.3 THE TRANSFER OF 500 LLG HOUSES AT A DISCOUNT WAS MA NDATORY FOR THE ASSESSEE IN TERMS OF THE DEVELOPMENT AND SHAREHOLDE RS AGREEMENT DATED 4.11.2003. THE APHB WAS OBLIGED TO PROVIDE RESIDENT IAL ACCOMMODATION TO LOW INCOME GROUP PEOPLE BY VIRTUE OF THE GOVERNMENT AL INSTRUCTIONS AND POLICY FRAMEWORK. THE TRANSFER OF 500 HOUSES AT A PRICE OF RS. 450/- PER SQ.FT WAS THEREFORE MADE AS A CONDITION PRE-REQUISITE FOR ENT ERING INTO DEVELOPERS AND SHAREHOLDERS AGREEMENT DATED 4.11.2003. THE ASSESSE E HAD NO CHOICE BUT TO ACCEPT TO THE TERMS OF THE SAID AGREEMENT. THE T RANSFER OF 500 HOUSES AT A PRICE OF RS. 450/- PER SQ. FT WAS THEREFORE OUT OF COMMERCIAL OR BUSINESS EXPEDIENCY. 16.4 THE LEARNED ASSESSING OFFICER HAS CONCLUDED THAT S. 40A(2){A) IS APPLICABLE IN THE PRESENT CASE. THE EXPRESSION USED IN SECTION 40A(2) IS 'INCURS ANY EXPENDITURE IN RESPECT OF WHICH PAYMENT HAS BEEN OR IS TO BE MADE TO ANY PERSON' [EMPHASIS SUPPLIED]. THE EMPHAS IZED WORDS CLEARLY SHOW THAT THERE HAS TO BE AN EXPENDITURE INCURRED A ND ACTUAL PAYMENT SHOULD HAVE BEEN OR IS TO BE MADE IN RESPECT OF SUCH EXPEN DITURE BEFORE THE PROVISION CAN BE SAID TO BE APPLICABLE. HE PLACED R ELIANCE ON THE JUDGEMENT OF DELHI HIGH COURT IN THE CASE OF UNITED EXPORTS V . CIT (2009) 185 TAXMAN 374 (DELHI) AND CLT V SUBBARAYA CHETTY (A.K.) AND S ONS [1980] 123 ITR 592 (MAD) 16.5 ACCORDING TO THE AR, THE TERM 'EXPENDITURE' IS EQUA L TO 'EXPENSE' AND 'EXPENSE' IS MONEY LAID OUT BY CALCULATION AND INTE NTION. THE IDEA OF 'SPENDING' IN THE SENSE OF 'PAYING OUT OR AWAY' MON EY IS THE PRIMARY MEANING OF THE TERM 'EXPENDITURE' ' EXPENDITURE' IS THUS WH AT IS 'PAID OUT OR AWAY' AND IS IT A NO. 2072/HYD/2011 M/S. SWARNANDHRA IJMII INTEGRATED TOWNSHIP DEVELOPMENT COMPANY PVT. LTD. ================================== 49 SOMETHING WHICH IS GONE IRRETRIEVABLY. HE PLACED RE LIANCE ON THE JUDGEMENT OF SUPREME COURT IN THE CASE OF INDIAN MOLASSES COMPAN Y (P) LTD. V. CIT [1959] 37 ITR 66 (SC). 16.6 IN THE PRESENT CASE, THERE WAS NO EXPENDITURE INCUR RED OR PAYMENT BY THE ASSESSEE TO APHB. ON THE OTHER HAND, THE ASSESS EE RECEIVED RS. 35,000/- PER UNIT TOWARDS ELECTRICITY AND WATER CHA RGES. THERE WAS A TRANSFER OF HOUSES AT A 'DISCOUNTED PRICE'. HOWEVER, THE SAM E DID NOT RESULT IN INCURRENCE OF AN EXPENDITURE. DISCOUNT GIVEN IS NOT AN EXPENDITURE. IT IS A LOSS. HE DREW OUR ATTENTION TO CBDT INSTRUCTION NO. 1175, DATED MAY 16, 1978 PROVIDES THAT A CHIT DISCOUNT IS A LOSS IN THE HANDS OF THE SUBSCRIBER. HE ALSO PLACED RELIANCE ON THE ORDER OF TRIBUNAL, SPEC IAL BENCH, CHENNAI IN THE CASE OF ACIT V K S SHETTY AND CO. [2003] 263 ITR (A T) 71, WHEREIN IT WAS HELD THAT CHIT DISCOUNT IS A LOSS. HE ALSO PLACED RELIAN CE IN THE ORDER OF THE TRIBUNAL, BANGALORE BENCH, IN THE CASE OF DCIT V SH REE LAKSHMI TRACTORS 2010-TIOL-572-ITAT-BANG WHEREIN IT WAS HELD THAT DI SCOUNT ALLOWED CANNOT BE DISALLOWED UNDER SECTION 40A(3) AS THERE WAS NO CASH PAYMENT. HE PLACED RELIANCE ON THE JUDGEMENT OF DELHI HIGH COURT IN TH E CASE OF UNITED MOTORS V CIT 2009-TIOL-477-HC-DEL-IT AND THE MADRAS HIGH COU RT IN CIT V SUBBARAYA CHETTY AND SONS [1980] 123 ITR 592 WHEREIN HELD THA T DISCOUNT ALLOWED IS NOT AN EXPENDITURE AND HENCE THE SAME CANNOT BE DIS ALLOWED U/S 40A(2)(A). THE TRANSACTION OF TRANSFER OF 500 LIG HOUSES TO AP HB RESULTED IN A LOSS TO THE ASSESSEE LOSS IS DIFFERENT FROM EXPENDITURE. HE ALSO PLACED RELIANCE ON THE JUDGEMENT OF SUPREME COURT IN THE CASE OF DR. T . A. QUERESHI V. CIT [2006] 287 ITR 547 (SC)]. LOSS IS SOMETHING WHICH COMES AB EXTRA. THERE IS NO SPENDING OR CASH OUTFLOW IN CASE OF LOSS. S. 40A (2)(A) THEREFORE HAS NO APPLICATION IN THE PRESENT CASE AS IT APPLIES ONLY TO AN EXPENDITURE AND NOT SALE PROCEEDS LESS RECEIVED. 16.7 THE ASSESSING OFFICER HAS ADDED A SUM OF RS. 18,06, 75,000/- FOR THE REASON THAT THE ASSESSEE SHOULD NOT HAVE TRANSFERRE D THE HOUSES FOR A LESSER SUM. THE ADDITION MADE REPRESENTS A SUM WHICH THE A SSESSEE NEVER RECEIVED OR EARNED. IN OTHER WORDS, THE ASSESSING OFFICER HA S IMPUTED INCOME IN IT A NO. 2072/HYD/2011 M/S. SWARNANDHRA IJMII INTEGRATED TOWNSHIP DEVELOPMENT COMPANY PVT. LTD. ================================== 50 MAKING ADDITIONS. THE REVENUE CANNOT QUESTION THE R ATES AT WHICH AN ASSESSEE PROVIDES SERVICES, SELLS GOODS OR LEASES P ROPERTY. THE FOLLOWING REASONS ARE IN SUPPORT OF THE ABOVE POSITION OF LAW . A) INCOME TAX ACT IS A FISCAL STATUTE. IT HAS TO BE IN TERPRETED STRICTLY. ONE CANNOT TAX AN ASSESSEE BASED ON INTENDMENT. IN THE ABSENCE OF CLEAR WORDS, INCOME ON WHICH TAX IS COMPUTED CANNOT BE DE EMED. THE INCOME TAX ACT DOES NOT CONTAIN ANY GENERAL PROVISI ON FOR IMPUTING INCOME IN EXCESS OF WHAT IS ACTUALLY EARNED OR RECE IVED BY THE ASSESSEE. THE INCOME RECEIVED AND COMPUTED AS PER T HE PROVISIONS OF THE ACT HAS TO BE ACCEPTED BY THE REVENUE AS THE TA XABLE INCOME. B) THE INCOME FROM DEVELOPMENT OF INTEGRATED TOWNSHIP, BEING BUSINESS INCOME, WOULD BE TAXABLE UNDER THE PROVISION OF CHA PTER IV-D, COMPRISING OF SECTIONS 28 TO 44DB. THERE ARE NO SPE CIFIC PROVISIONS IN CHAPTER IV-D, WHICH ENABLE THE REVENUE AUTHORITIES TO IMPUTE HIGHER INCOME TO THE ASSESSEE ON THE GROUND THAT TRANSACTI ONS ARE ENTERED INTO BY THE ASSESSEE AT RATES BELOW THE MARKET VALU E. C) ON THE OTHER HAND THERE IS A SPECIFIC PROVISION IN THIS CHAPTER, VIZ., SECTION 40A(2)(A) WHICH EMPOWERS THE ASSESSING OFFI CER TO ADOPT FAIR MARKET VALUE IN PLACE OF EXPENDITURE REFLECTED BY T HE ASSESSEE, IF IT IS FOUND THAT THE ASSESSEE HAS MADE EXCESSIVE OR UNREA SONABLE PAYMENTS AS EXPENDITURE TO SPECIFIED RELATED PARTIE S. D) IT IS ONLY IN SPECIFIC CASES THAT THE ACT PROVIDES FOR THE ADOPTION OF FAIR MARKET VALUE OR SIMILAR VALUE FOR THE PURPOSE DETER MINING THE INCOME. ONE CAN REFER TO SECTIONS 23, 50C, 80-IA(8), 80-IA( 10) AND SECTION 92 IN THIS REGARD. THE PROVISIONS OF SECTION 80-IA(8) AND 80-IA(10) HAVE BEEN INCORPORATED BY REFERENCE IN VARIOUS OTHER SEC TIONS INCLUDING IN SECTIONS 1OA, 80IB ETC. THESE PROVISIONS ARE NOT AT TRACTED IN THE PRESENT CASE. E) THE COURTS HAVE TIME AND AGAIN TAKEN THE VIEW THAT CONTRACTUAL VALUES CANNOT BE SUBSTITUTED WITH FAIR MARKET VALUES OR OT HER VALUES IN IT A NO. 2072/HYD/2011 M/S. SWARNANDHRA IJMII INTEGRATED TOWNSHIP DEVELOPMENT COMPANY PVT. LTD. ================================== 51 GENUINE COMMERCIAL TRANSACTIONS. HE REFERRED TO THE DECISION IN THE CASE OF SRI RAMALINGA CHOODAMBIKAI MILLS LTD. V. CI T, [1955] 28 ITR 952 (MAD); CIT V. A. RAMAN & CO., [1968] 67 ITR 11 (SE); CIT V. CALCUTTA DISCOUNT CO. LTD, [1973] 911TR 8 (SC); DAS AND COMPANY V. CIT, [1962] 45 ITR 369 (PAT.), CIT V. KESHAVLAL CHA NDULAL [1966] 59 ITR 120 (GUJ), ETC, IN SUPPORT OF THIS PROPOSITION. F) ASSESSEES ARE ENTITLED TO ARRANGE THEIR AFFAIRS IN A MANNER MOST BENEFICIAL TO THEM. JUST BECAUSE SOME TRANSACTIONS, WHICH ARE LEGAL AND ENFORCEABLE, INCIDENTALLY LEAD TO REDUCTION OF TAXES, THEY CANNOT BE TREATED AS SHAM TRANSACTIONS. AS LONG AS THE TRA NSACTIONS ARE GENUINE, THE REVENUE AUTHORITIES CANNOT INTERFERE W ITH THE INCOME OR LOSS RESULTING FROM SUCH TRANSACTIONS. THE FOLLOWIN G OBSERVATIONS OF THE HON'BLE SUPREME COURT IN THE CASE OF UNION OF INDIA V. AZADI BACHAO ANDOLAN, [2003} 263 ITR 707 (SE) ARE PERTINENT IN THIS CONTEXT: 'WE ARE UNABLE TO AGREE WITH THE SUBMISSION THAT AN ACT WHICH IS OTHERWISE VALID IN LAW CAN BE TREATED AS NON EST ME RELY ON THE BASIS OF SOME UNDERLYING MOTIVE SUPPOSEDLY RESULTING IN SOME ECONOMIC DETRIMENT OR PREJUDICE TO THE NATIONAL INTERESTS, A S PERCEIVED BY THE RESPONDENTS.' G) THE SUPREME COURT IN S.A BUILDERS LTD. V. CIT (A), [2007] 288 ITR 1 (SCJ, HAS DEFINED THE EXPRESSION 'COMMERCIAL EXPEDI ENCY' IN THE CONTEXT OF BUSINESS EXPENDITURE IN THE FOLLOWING MA NNER: 'THE EXPRESSION 'COMMERCIAL EXPEDIENCY' IS AN EXPRE SSION OF WIDE IMPORT AND INCLUDES SUCH EXPENDITURE AS A PRUDENT B USINESSMAN INCURS FOR THE PURPOSE OF BUSINESS. THE EXPENDITURE MAY NOT HAVE BEEN INCURRED UNDER ANY LEGAL OBLIGATION YET IT IS ALLOWABLE AS A BUSINESS EXPENDITURE IF IT WAS INCURRED ON GROUNDS OF COMMERCIAL EXPEDIENCY.' EXTENDING THE ABOVE PRINCIPLE IN THE CONTEXT OF INC OME, ONE CAN HOLD THAT THE DECISION TO CHARGE LESS OR MORE IS LEFT TO THE DISCRETION OF THE BUSINESSMAN. IF BUSINESS COMPULSIONS OR COMMERCIAL EXPEDIENCY IS THE BASIS FOR FIXING OF PRICES OF SERVICES AND CONS IDERATION IN OTHER CONTRACTS, THE SAME HAS TO BE RESPECTED EVEN BY REV ENUE AUTHORITIES. THE REVENUE AUTHORITIES CANNOT SUBSTITUTE ITS VIEWS TO THAT OF A BUSINESS MAN. NO BUSINESSMAN CAN BE COMPELLED TO MA XIMIZE HIS IT A NO. 2072/HYD/2011 M/S. SWARNANDHRA IJMII INTEGRATED TOWNSHIP DEVELOPMENT COMPANY PVT. LTD. ================================== 52 PROFITS. [S.A BUILDERS LTD. V. CIT (A) [2007] 288 I TR 1 (SC)] 16.8 HE SUBMITTED THAT COURTS HAVE HELD IN VARIOUS CASES THAT THE DEPARTMENT CANNOT IMPUTE A NOTIONAL INCOME TO AN AS SESSEE, EVEN IF THE CONSIDERATION CHARGED BY AN ASSESSEE FOR A TRANSACT ION APPEARS LOW TO AN ASSESSING OFFICER. HE REFERRED TO DECISION OF THE S UPREME COURT IN CIT V. M SIVRAMMURTHY AND RAGHU [1993} 204 ITR (ST.) 5 (SC), HIGHWAYS CONSTRUCTION CO. (P) LTD. V. CIT, [1993} 199 ITR 702 (GAU), B AN D A PLANTATIONS & INDUSTRIES LTD. V. CIT, [2000} 242 ITR 22 (GAU.); KESHRICHAND JAISUKHLAL V. CIT, [2001} 248 ITR 47 (GAU.) AND IN DEVELOPMENT INVESTORS LTD. V. CIT, [1997} 223 ITR 432 (GAU), CAUVERY SPINNING AND WVG. MILLS LTD V DC IT [2012} 340 ITR 550 (MAD), CIT V MONI KUMAR SUBBA [2011} 333 ITR 38 (DE L), CIT V ASIAN HOTELS LTD [2010} 323 ITR 490 (DEL), CIT V GOVIND AGENCIES P LTD (2007) 295 ITR 290 (ALL), CIT V J CHELLADURAI 204 TAXMAN 258 (MAD) IN SUPPORT OF THE ABOVE POSITION OF LAW. IN VIEW OF THE ABOVE, THE IMPUGNED ADDITION OF RS. 18,06,75,000/- IS TO BE DELETED IN ENTIRETY. 17. THE LD. DR SUBMITTED WITH REGARD TO DISALLOWANCE OF LAND COST RELATING TO HOUSES HANDED OVER TO APHB ON 500 LIG HOUSES AT RS. 1,92,19,200 AND WITH REGARD TO DISALLOWANCE OF COST OF CONSTRUCTION OF THE HOUSES HANDED OVER TO APHB AT RS. 18,06,75,000 TOTALLING AT RS. 19,98, 94,200/- THAT THIS IS THE TOTAL COST INCURRED BY THE TAXPAYER ON ACCOUNT OF T HE PROJECT AND THE SAME CAN BE ALLOWED AS DEDUCTION ONLY WHEN THERE IS PROP ER JUSTIFICATION. THIS LOSS/EXPENDITURE/COST INCURRED SHOULD BE FOR THE PU RPOSES OF ITS BUSINESS. IN CASE, THERE IS CERTAIN PORTION UNREALIZED BECAUSE O F STIPULATIONS OF AGREEMENT, THE SAME IS TO BE EXAMINED. FIRST OF ALL , THE ASSESSEE IS TO PROVE THAT IT RECOVERED ONLY RS. 400/- PER SQ. FT. TOWARD S SALE OR TRANSFER OF THESE 500 LIG HOUSES. THE ONUS IS ON THE TAX PAYER TO PRO VE THAT APHB ALSO SOLD THIS PROPERTY AT RS. 4OO PER SQ. FT. ONLY. IT CANN OT BE IGNORED THAT APHB IS ONE OF THE SHAREHOLDERS AND HENCE, THE PROFIT CANNOT BE DIVERTED TO THE SHAREHOLDER. THE SHAREHOLDER CANNOT BE ALLOWED TO S ELL THE FLATS AT A HIGHER PRICE AND APPROPRIATE THE PROFITS. SECONDLY, HAD TH E TAXPAYER SOLD THE FLATS AT A HIGHER PRICE AND PAID RS.9 CRORES AS PER THE AGRE EMENT, THE SITUATION WOULD BE DIFFERENT AS NO LOSS WOULD HAVE ARISEN TO THE TA XPAYER. IT IS ALSO TO BE IT A NO. 2072/HYD/2011 M/S. SWARNANDHRA IJMII INTEGRATED TOWNSHIP DEVELOPMENT COMPANY PVT. LTD. ================================== 53 NOTED THAT HAD THE TAXPAYER-SOLD IT DIRECTLY AT RS. 4OO/- AND CREDITED THE SALES ACCOUNT, THE LOSS OR THE EXPENDITURE MAY HAVE TO BE ALLOWED. BUT, HEREIN THE EXPENDITURE IS INCURRED FOR A SPECIFIED PERSON AS PER SEC.40A(2}(A)/(B) AS PER MUTUAL CONSENT AND AGREEME NT CONCLUDED BETWEEN THE SHAREHOLDERS WHICH IS NOT BINDING ON THE TAXPAY ER AS IT WAS NOT A PARTY TO THE SAME. IT IS ALSO TO BE SEEN THAT SUCH AGREEMEN T CAME INTO EXISTENCE AFTER 8 MONTHS OF INCORPORATION OF THE COMPANY. AGREEMENT CONCLUDED FOR MUTUAL CONVENIENCE CANNOT BE THE BASIS FOR ALLOWING SUCH E XPENDITURE. 17.1 THE DR SUBMITTED THAT REAL CONSIDERATION RECEIVED O N ACCOUNT OF 500 FLATS WOULD BE THE CORRECT CONSIDERATION FOR THE PU RPOSE OF INCOME-TAX. IF ONE HAS NOT CONSIDER THE REAL CONSIDERATION RECEIVED, I T WOULD BE A CASE WHERE PROFIT IS DIVERTED TO THE SHAREHOLDER BY INCURRING LOSS IN THE HANDS OF THE COMPANY/TAX PAYER AND HENCE, DISALLOWANCE IS CALLED FOR. THE INCOME IS TO BE TAXED ON THE CORRECT HANDS HE RELIED ON THE JUDGEM ENT IN THE CASE OF RAMPRASAD VS. ITO (82 TAXMANN 199) (ALL.) SUBMITTED THAT PROVISIONS OF LAW SUCH AS 40A(2) ETC. CANNOT BE IGNORED AND MUTUALLY CONVENIENT AGREEMENTS CONCLUDED CANNOT GAIN PRECEDENCE OR IMPORTANCE OVE R PRINCIPLES OF LAW. 17.2 THE DR SUBMITTED THAT THE TAXPAYER CANNOT TAKE THE STAND THAT IT WILL NOT REVEAL OR THAT IT HAS NO NECESSITY TO STATE AT WHAT RATE APHB SHAREHOLDERS SOLD THE FLATS. NOTHING PREVENTED THE TAX PAYER TO SELL DIRECTLY AND CREDIT SUCH CONSIDERATION TO ITS P&L ACCOUNT. THE NECESSITY TO CONCLUDE THIS AGREEMENT AFTER INCORPORATION OF THE COMPANY AND TO SELL THE FLATS ONLY THROUGH SHAREHOLDER IS NOT SUBSTANTIATED. THE EXPENDITURE I S IN FACT INCURRED FOR THE BUSINESS PURPOSE OF SHAREHOLDER AND NOT FOR TAXPAYE R'S BUSINESS. THE NECESSITY TO INCUR SUCH LOSS IS ALSO NOT ESTABLISHE D. THEN AGAIN, SEC. 40A(2)(A) ARISES IN THIS CASE AS APHB IS A SHAREHOL DER HOLDING 49% OF SHARES IN THE COMPANY. THE EXCESS EXPENDITURE IS INCURRED FOR THE SPECIFIED PERSON. FURTHER, IT ALSO AMOUNTS TO DIVERSION OF PROFIT SIN CE THE SHAREHOLDER, APHB, CAN SELL AT A FAR HIGHER THAN RS.400/- AND MAKE PRO FIT WHEREAS THE TAXPAYER INCURS LOSS WHICH IS THE QUANTUM OF ADDITION MADE B Y THE AO AS DISALLOWANCE. MOREOVER, ALREADY THE INCOMES DISCLOSED BY TAXPAYER AND APHB ARE POINTED IT A NO. 2072/HYD/2011 M/S. SWARNANDHRA IJMII INTEGRATED TOWNSHIP DEVELOPMENT COMPANY PVT. LTD. ================================== 54 OUT. THE TAX AVOIDANCE DEVICE IS ONCE AGAIN BROUGHT TO LIGHT BESIDES THE LEGAL ISSUES. HENCE. THE CONTENTION OF THE ASSESSEE IS TO BE REJECTED ON BOTH THE ABOVE DISALLOWANCES. FINDINGS WITH REGARD TO GROUND NOS. 5 AND 6 COLLECT FINDINGS WITH REGARD TO GROUND NOS. 5 AND 6 COLLECT FINDINGS WITH REGARD TO GROUND NOS. 5 AND 6 COLLECT FINDINGS WITH REGARD TO GROUND NOS. 5 AND 6 COLLECT IVELY IVELY IVELY IVELY IS IS IS IS GIVEN HEREIN GIVEN HEREIN GIVEN HEREIN GIVEN HEREIN BELOW BELOW BELOW BELOW: :: : 18. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATE RIAL ON RECORD. GROUND NO. 5 IS WITH REGARD TO ADDITION OF RS. 1,92 ,19,200 MADE ON ACCOUNT OF LAND COST RELATING TO LAND ATTRIBUTABLE TO FLATS HANDED OVER TO APHB. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIA L ON RECORD. WE FIND NO MERIT IN THE ARGUMENT OF THE LEARNED COUNSEL FOR TH E ASSESSEE. THE LAND WAS NOT REGISTERED IN FAVOUR OF THE ASSESSEE BY APHB. THE APHB IS ALWAYS THE OWNER OF THE IMPUGNED LAND. THERE IS NO QUESTION O F RETRANSFERRING OF THE SAID LAND TO APHB WHEN THE LAND ITSELF IS NOT REGIS TERED IN FAVOUR OF THE ASSESSEE AND THE COST OF THE LAND ATTRIBUTABLE TO T HE FLATS HANDED OVER TO APHB CANNOT BE CLAIMED AS DEDUCTION IN THE HANDS OF THE ASSESSEE. THIS GROUND IS REJECTED. 18.1 GROUND NO. 6 IS WITH REGARD TO DISALLOWANCE OF RS. 18,06,75,000 TOWARDS COST OF CONSTRUCTION OF HOUSES HANDED OVER TO APHB. ON THIS ISSUE ALSO THE ASSESSING OFFICER INVOKED THE PROVISIONS O F SECTION 40A(2) OF THE ACT. ACCORDING TO THE ASSESSING OFFICER, THE ASSESSEE HA S TRANSFERRED THE HOUSES AT LESSER PRICE. AS HELD IN THE EARLIER PARAS WITH REGARD TO DISALLOWANCE INCENTIVE, THE ASSESSING OFFICER IS REQUIRED TO BRI NG ON RECORD COMPARABLE CASES HAVING REGARD TO THE FAIR MARKET VALUE OF THE SERVICE RENDERED. THE BURDEN IS ON THE ASSESSING OFFICER TO BRING ON RECO RD THE PROOF WITH REGARD TO MARKET VALUE OF THE SERVICES RENDERED. IF THE ASSE SSEE SOLD THE HOUSES AT DISCOUNTED PRICE, THAT DISCOUNT ALLOWED CANNOT BE C ONSIDERED AS DISALLOWANCE U/S. 40A(2) OF THE ACT. THE PROVISION S OF SECTION 40A(2) PERTAIN TO DISALLOWANCE OF AN EXPENDITURE WHICH IS MADE BY THE ASSESSEE, THAT IT MEANS AN AMOUNT ACTUALLY SPENT BY THE ASSESSEE AND CLAIMED IN THE PROFIT AND LOSS A/C. THE EXPRESSION USED IN THIS PROVISIO N IS 'INCURS ANY IT A NO. 2072/HYD/2011 M/S. SWARNANDHRA IJMII INTEGRATED TOWNSHIP DEVELOPMENT COMPANY PVT. LTD. ================================== 55 EXPENDITURE IN RESPECT OF WHICH PAYMENT HAS BEEN MA DE OR IS TO BE MADE IN PERSON'. THIS CLEARLY SHOWS THAT ACTUALLY PAYMENT MUST BE MADE AND THERE HAS TO BE EXPENDITURE INCURRED BEFORE THE PROVISION CAN BE SAID TO BE APPLICABLE. A TRADE DISCOUNT, AND ADMITTEDLY IT IS NOT DISPUTED THAT SUBJECT MATTER OF THE CLAIM IS A DISCOUNTED PRICE OF OFFER AND NOT AN EXPENDITURE, CLEARLY, THEREFORE, DOES NOT ARISE THE QUESTION OF INVOKING THE PROVISIONS OF SECTION 40A(2). BEING SO, THE DISALLOWANCE IS NOT POSSIBLE. THIS GROUND OF THE ASSESSEE IS ALLOWED. 19. REGARDING DISALLOWANCE OF INTEREST PAID TO IJMII (G ROUND NO. 7.1), THE AR SUBMITTED THAT INTEREST PAID TO IJMII FOR DELAY IN PAYMENT OF CONTRACT BILLS HAS BEEN DISALLOWED FOR THE REASON THAT THE CONSTRU CTION AGREEMENT DATED 9.2.2004 DOES NOT PROVIDE FOR PAYMENT OF INTEREST. IT IS ALSO CONCLUDED THAT THE PAYMENT OF INTEREST IS HIT BY THE PROVISIONS OF SECTION 40A(2)(A) OF THE ACT. THE LEARNED ASSESSING OFFICER HAS ERRED IN NOT APPR ECIATING THAT THE PAYMENT OF INTEREST WAS AGREED TO BETWEEN THE PARTIES AND T HE SAME WAS PROMPTED OUT OF BUSINESS OR COMMERCIAL EXPEDIENCY. THERE WAS NO EVASION OF TAX SINCE INTEREST PAID TO IJMII WAS OFFERED TO TAX BY IJMII AND THE TAXABLE INCOME OF IJMII WAS HIGHER THAN THE TAXABLE INCOME OF THE ASS ESSEE. THE INTEREST WAS PAID AT PREVALENT BANK RATES. EVEN THOUGH THE CONST RUCTION AGREEMENT DID NOT PROVIDE FOR PAYMENT OF INTEREST, THE SAME WAS LATER ON AGREED BETWEEN THE PARTIES ORALLY AND LATER CONFIRMED IN WRITING. EVEN OTHERWISE, CONTRACTUAL OBLIGATION IS NOT NECESSARY FOR INCURRING THE EXPEN DITURE. EXPENDITURE INCURRED VOLUNTARILY OUT OF BUSINESS OR COMMERCIAL EXPEDIENC Y IS ALLOWABLE UNDER SECTION 37. HE PLACED RELIANCE ON THE JUDGEMENT IN THE CASE OF CIT V. ASSOCIATED ELECTRICAL AGENCIES 266 ITR 63 (MAD)] TA X WAS ALSO DEDUCTED AT PAID IN RESPECT OF THE INTEREST PAID TO IJMII. THE SAID EXPENDITURE BEING WHOLLY AND EXCLUSIVELY INCURRED FOR THE PURPOSE OF BUSINES S AND HENCE THE SAME IS ALLOWABLE UNDER SECTION 37 OF THE ACT. ACCORDING T O THE AR DISALLOWANCE OF INTEREST PAID AMOUNTING TO RS. 2,21,95,301/- SHOULD BE DELETED IN ENTIRETY. 20. WITH REGARD TO DISALLOWANCE OF INTEREST (GROUND NO. 7.1) PAID TO IJMII, THE LEARNED DR SUBMITTED THAT A PERUSAL OF THE SPEC IFIC CLAUSES OF THE IT A NO. 2072/HYD/2011 M/S. SWARNANDHRA IJMII INTEGRATED TOWNSHIP DEVELOPMENT COMPANY PVT. LTD. ================================== 56 AGREEMENT SHOW THAT SUCH A CLAUSE IS NOT INCORPORAT ED THEREIN. IN FACT, THE TAXPAYER OUGHT TO HAVE CHARGED LIQUIDATED DAMAGES O N DELAY IN CONSTRUCTION. IT IS ALSO SEEN THAT ON THE MOBILIZATION ADVANCE GI VEN TO THE CONTRACTOR-CUM- SHAREHOLDER, NO INTEREST IS CHARGED. THE PREFERENTI AL TREATMENT GIVEN TO THE CONTRACTOR-CUM-SHAREHOLDER IS NOT JUSTIFIED. MOREOV ER, PAYMENTS SUCH AS PROJECT MANAGEMENT, INCENTIVE, ETC., ARE ALSO MADE TO THE CONTRACTOR. THERE ARE FOUR CONTRACTS CONCLUDED SUCH AS CONSTRUCTION A GREEMENT, PROJECT MANAGEMENT AGREEMENT, SALES AND MARKETING AGREEMENT & TECHNICAL SERVICE AGREEMENT AND SUBSTANTIAL AMOUNTS PAID TO S HAREHOLDER M/S. IJMII. HENCE, THIS GROUND OF OBJECTION IS ALSO SHOULD BE R EJECTED. 20.1 THE DR PLACED RELIANCE IS PLACED ON THE DECISION OF THE TRIBUNAL BENCH 'D' MUMBAI (SPECIAL BENCH) IN ITA. NO. 5792/MUM/200 9 IN THE CASE OF M/S DALAL BORACHA STOCK BROKING PVT. LTD (2011)-TIOL-37 5-ITAT-MUM-SB. WHEREIN IT IS HELD THAT WHEN COMMISSION IS PAID TO THE DIRE CTOR OF THE ASSESSEE COMPANY WHO HOLD ALL THE SHARES OF THE COMPANY, DIS ALLOWANCE IS WARRANTED ON THE GROUND THAT THE COMMISSION WAS PAID IN LIEU OF THE DIVIDEND TO AVOID TAX ON DIVIDEND. APPLICATION OF SEC.40A(2) WAS ALS O CONSIDERED IN THE IMPUGNED DECISION. DISALLOWANCES MADE BY THE AO WI TH REGARD TO INCENTIVE FALL WITHIN THE PURVIEW OF THE FINDINGS GIVEN IN TH IS DECISION. FINDINGS WITH REGARD TO GROUND NO. 7.1 FINDINGS WITH REGARD TO GROUND NO. 7.1 FINDINGS WITH REGARD TO GROUND NO. 7.1 FINDINGS WITH REGARD TO GROUND NO. 7.1: :: : 21. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATE RIAL ON RECORD. THIS GROUND IS WITH REGARD DISALLOWANCE OF INTEREST PAID TO M/S. IJMII AT RS. 2,21,95,301. THIS PAYMENT WAS DISALLOWED ON THE RE ASON THAT AS PER THE AGREEMENT DATED 9.2.2004 THE ASSESSEE IS NOT REQUIR ED TO PAY INTEREST TO IJMII AND ALSO ACCORDING TO THE ASSESSING OFFICER P ROVISIONS OF SECTION 40A(2) ARE APPLICABLE TO THIS PAYMENT. THIS EXPENDITURE H AS BEEN ACTUALLY INCURRED BY THE ASSESSEE FOR THE PURPOSE OF ITS BUSINESS. T HE PAYMENT OF INTEREST IS NOT DEMONSTRATED BY THE ASSESSING OFFICER THAT IT I S PAID IN EXCESS OF THE PREVAILING MARKET RATE AND THE ASSESSEE HAVING INCU RRED THE EXPENDITURE WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS, THE SAME IS ALLOWABLE IN TERMS OF SECTION 37 OF THE ACT. ACCORDINGLY, THIS GROUND OF THE ASSESSEE IS ALLOWED. IT A NO. 2072/HYD/2011 M/S. SWARNANDHRA IJMII INTEGRATED TOWNSHIP DEVELOPMENT COMPANY PVT. LTD. ================================== 57 22. NOW WE WILL TAKE UP THE ISSUE RELATING TO TRANSFER PRICING. NOW WE WILL TAKE UP THE ISSUE RELATING TO TRANSFER PRICING. NOW WE WILL TAKE UP THE ISSUE RELATING TO TRANSFER PRICING. NOW WE WILL TAKE UP THE ISSUE RELATING TO TRANSFER PRICING. 23. THE AR SUBMITTED WITH REGARD TO ADJUSTMENT UNDER SE CTION 92CA AND ADDITION TO INCOME AMOUNTING TO RS. 38.34.39.486/- (GROUND NOS. 8.1 TO 8.9) AS FOLLOWS: 23.1 THE ASSESSEE IS A COMPANY CREATED AS A RESULT OF A JOINT VENTURE BETWEEN THE ANDHRA PRADESH HOUSING BOARD (APHB) AND IJM (INDIA) INFRASTRUCTURE LIMITED (HEREINAFTER REFERRED TO AS 'IJMII). IJMII, AN INDIAN COMPANY IS A SUBSIDIARY OF IJM CORPORATION, BERHAD (HEREINAFTER ALONG WITH ITS AFFILIATES REFERRED TO AS IJM GROUP OR AE). IJMII A ND APHB HOLD SHARES OF 51% AND 49% RESPECTIVELY IN THE ASSESSEE. 23.2 DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE H AD ENTERED INTO INTERNATIONAL TRANSACTIONS WITH ITS ASSOCIATED ENTE RPRISE (IJM GROUP). ONE OF THE INTERNATIONAL TRANSACTION CONSISTED OF PROVISIO N OF TECHNICAL SERVICES BY THE AE TO THE ASSESSEE. THE ASSESSEE PAID A FEE OF RS. 2,32,72,451/- FOR SERVICES RENDERED BY ITS AE. THE ASSESSEE REIMBURSE D BANK GUARANTEE CHARGES OF RS. 1,15,67,035/- AND OTHER EXPENSES OF RS. 62,125 TO ITS AE. 23.3 WITH RESPECT TO FESS FOR TECHNICAL SERVICES, THE AS SESSEE ADOPTED TRANSACTIONAL NET MARGIN METHOD (HEREINAFTER REFERR ED AS 'TNMM' FOR SHORT) TO JUSTIFY THE PRICE CHARGED IN THE INTERNATIONAL T RANSACTIONS. AFTER CARRYING OUT A METHODICAL SEARCH PROCESS ON PROWESS AND CAPITALINE DATABASE, THE ASSESSEE SELECTED 18 COMPANIES AS COMPARABLES. ADOP TING OPERATING PROFITS TO SALES AS THE PROFIT LEVEL INDICATOR (PLI), THE A RITHMETIC MEAN OF COMPARABLES WAS COMPUTED AT 8%. THE BUDGETED PLI OF THE ASSESSEE WAS COMPUTED AT 20%. SINCE THE ASSESSEE'S BUDGETED OPER ATING MARGIN ON SALES WAS MORE THAN THE ARITHMETIC MEAN OF COMPARABLES, T HE ASSESSEE CONCLUDED THAT ITS INTERNATIONAL TRANSACTIONS ARE AT ARM'S LE NGTH. 23.4 AS THE REIMBURSEMENTS REIMBURSEMENT OF BANK GUARANT EE CHARGES AND OTHER EXPENSES WERE MADE AT COST, THE ASSESSEE CONCLUDED THAT THE SAME ARE AT ARM'S LENGTH. IT A NO. 2072/HYD/2011 M/S. SWARNANDHRA IJMII INTEGRATED TOWNSHIP DEVELOPMENT COMPANY PVT. LTD. ================================== 58 23.5 IN THE ORDER PASSED UNDER SECTION 92CA, THE LEARNED TPO REJECTED SOME OF THE COMPARABLES SELECTED BY THE ASSESSEE AN D THEREAFTER REJECTED THE TP ANALYSIS. 23.6 DURING THE YEAR, APART FROM THE TRANSACTIONS WITH T HE AE, THE ASSESSEE ENTERED IN TO TRANSACTIONS WITH IJMII. THE TPO HAS HELD THE FOLLOWING TRANSACTIONS ENTERED INTO BY THE ASSESSEE WITH IJMI I, AS DEEMED INTERNATIONAL TRANSACTIONS U/S 92B(2) OF THE ACT: 23.7 THE TPO HAS HELD THAT THE ABOVE TRANSACTIONS WITH I JMII ARE DEEMED INTERNATIONAL TRANSACTIONS U/S 92B(2). THE TPO SELE CTED 25 COMPANIES AS COMPARABLE AND DETERMINED THE AVERAGE MARGINS AT 20 .35%. THE TRANSFER PRICING ADJUSTMENT HAS BEEN DETERMINED AT RS. 34,86 ,00,000/- 23.8 THE TPO ALSO PROPOSED TO PERFORM A SEPARATE TRANSFE R PRICING ANALYSIS IN RELATION TO FEES FOR TECHNICAL SERVICES PAID BY THE ASSESSEE TO ITS ASSOCIATED ENTERPRISES. THE TPO ADOPTED THE COMPARABLE UNCONTR OLLED PRICE METHOD (HEREINAFTER REFERRED AS 'CUP METHOD' FOR SHORT) AS THE MOST APPROPRIATE METHOD IN PLACE OF TNMM SELECTED BY THE ASSESSEE. T HE TPO DETERMINED THE ARM'S LENGTH PRICE OF TECHNICAL SERVICES FEES PAID BY THE ASSESSEE TO ITS ASSOCIATED ENTERPRISES AT NIL ON THE GROUND THAT TH E ASSESSEE HAS NOT RECEIVED ANY BENEFIT FROM IT. ACCORDINGLY THE TPO P ROPOSED TRANSFER PRICING ADJUSTMENT OF RS. 2,32,72,452/- 23.9 THE TPO DETERMINED THE ARM'S LENGTH PRICE OF BANK G UARANTEE CHARGES REIMBURSED BY THE ASSESSEE TO ITS AE AT NIL ON THE GROUND THAT THE ASSESSEE HAS NOT FURNISHED ANY DOCUMENTS/EVIDENCE TO JUSTIFY THE PAYMENT OF BANK GUARANTEE FEE. ACCORDINGLY THE TPO PROPOSED TRANSFE R PRICING ADJUSTMENT OF RS. 1,15,67,035/- SI NO. NATURE OF TRANSACTION AMOUNT (RS.) 1 PROJECT EXECUTION SERVICES 85,94,10,399 2 PROJECT MANAGEMENT SERVICES 36,22,079 3 REIMBURSEMENT OF EXPENSES 29,15,107 4 INCENTIVES 18,59,85,000 TOTAL 105,19,32,585 IT A NO. 2072/HYD/2011 M/S. SWARNANDHRA IJMII INTEGRATED TOWNSHIP DEVELOPMENT COMPANY PVT. LTD. ================================== 59 23.10 BASED ON ALL THE ABOVE, THE TPO PROPOSED A TRANSFE R PRICING ADJUSTMENT OF RS. 38,34,39,486/- DETAILED AS UNDER: SI NO. PARTICULARS TP ADJUSTMENT (INR) 1 DEEMED INTERNATIONAL TRANSACTIONS 34,86,00,000 2 FEES PAID TOWARDS TECHNICAL SERVICES 2,32,72,451 3 REIMBURSEMENT OF BANK GUARANTEE CHARGES 1,15,67,035 TOTAL 38,34,39,486 24. ABOUT THE DEEMED INTERNATIONAL TRANSACTIONS, THE LE ARNED AR SUBMITTED AS FOLLOWS; 24.1 THE ASSESSEE IS INVOLVED IN THE DEVELOPMENT OF 'RAI NTREE PARK' - AN INTEGRATED TOWNSHIP. IJMII IS THE EPC CONTRACTOR FO R THE PROJECT. FOR EXECUTING THE PROJECT, THE ASSESSEE ENTERED INTO TRANSACTIONS WITH IJMII, A COMPANY INCORPORATED UNDER THE PROVISIONS OF THE COMPANIES ACT, 1956. IJMII RENDERED SERVICES LIKE PROJECT MANAGEMENT AND PROJE CT EXECUTION SERVICES TO ASSIST THE ASSESSEE IN THE DEVELOPMENT OF RAINTREE PARK. 24.2 AS ALREADY SUBMITTED THE ASSESSEE IS A JOINT VENTUR E COMPANY OF APHB AND IJMII. IJMII HOLDS 51% OF THE SHARE CAPITAL OF THE ASSESSEE. IJMII IS A SUBSIDIARY OF IJM GROUP. DURING THE YEAR, THE ASSES SEE ENTERED IN TO TRANSACTIONS WITH IJMII. THE TPO HAS HELD THAT THOU GH THE TRANSACTIONS ARE ENTERED INTO BY THE ASSESSEE WITH IJMII, THE TERMS OF SUCH TRANSACTIONS ARE DETERMINED IN SUBSTANCE BETWEEN THE ASSESSEE AND IT S ASSOCIATED ENTERPRISE (IJM GROUP). THE TPO WAS OF THE VIEW THAT THOUGH TH E ASSOCIATED ENTERPRISE (IJM GROUP) IS NOT A PARTY TO THE TRANSACTION, YET IT HAS DETERMINED ITS ESSENTIAL TERMS. THE TPO HAS HELD THAT AS THE TERMS OF TRANSACTION, ARE FIXED OR DICTATED BY THE ASSOCIATED ENTERPRISE (IJM GROUP ), THE TRANSACTIONS CANNOT BE SAID TO HAVE BEEN ENTERED INTO BETWEEN THE ASSES SEE AND IJMII. THE TPO THUS HELD THAT IN SUBSTANCE, THE TRANSACTION IS A D EEMED INTERNATIONAL TRANSACTION U/S 92B(2) OF THE ACT. IT A NO. 2072/HYD/2011 M/S. SWARNANDHRA IJMII INTEGRATED TOWNSHIP DEVELOPMENT COMPANY PVT. LTD. ================================== 60 24.3 AFTER CONSIDERING THE TRANSACTIONS WITH IJMII AS DE EMED INTERNATIONAL TRANSACTIONS U/S 92B, THE TPO HAS DETERMINED THE TR ANSFER PRICING ADJUSTMENT AT RS.34,86,OO,OOO/-. 24.4 THE AR SUBMITTED THAT THE TPO HAS ERRED IN CONCLUDI NG THAT THE TRANSACTIONS BETWEEN THE-ASSESSEE AND ITS HOLDING C OMPANY IJMII, ARE INTERNATIONAL TRANSACTION, UNDER SECTION 92B(2). 24.5 THE SCOPE OF SECTION 92B(2) IS EXPLAINED IN CBDT CIRCULAR NO. 14 OF 2001, DATED 22.11.2001 WITH AN ILLUSTRATION AS UNDE R: 55.8 SUB-SECTION (2) OF SECTION 928 EXTENDS THE SC OPE OF THE DEFINITION OF INTERNATIONAL TRANSACTION BY PROVIDIN G THAT A TRANSACTION ENTERED INTO WITH AN UNRELATED PERSON S HALL BE DEEMED TO BE A TRANSACTION WITH AN ASSOCIATED ENTER PRISE, IF THERE EXISTS A PRIOR AGREEMENT IN RELATION TO THE T RANSACTION BETWEEN SUCH OTHER PERSON AND THE ASSOCIATED ENTERP RISE, OR THE TERMS OF THE RELEVANT TRANSACTION ARE DETERMINE D BY THE ASSOCIATED ENTERPRISE. AN ILLUSTRATION OF SUCH A TRANSACTION COULD BE WHERE THE ASSESSEE, BEING AN ENTERPRISE RE SIDENT IN INDIA, EXPORTS GOODS TO AN UNRELATED PERSON ABROAD, AND THERE IS A SEPARATE ARRANGEMENT OR AGREEMENT BETWEEN THE UNRELATED PERSON AND AN ASSOCIATED ENTERPRISE WHICH INFLUENCES THE PRICE AT WHICH THE GOODS ARE EXPORTE D . IN SUCH A CASE THE TRANSACTION WITH THE UNRELATED ENTERPRISE WILL ALSO BE SUBJECT TO TRANSFER PRICING REGULATIONS.' 24.6 HE SUBMITTED THAT IT IS CLEAR FROM A READING OF THE CBDT CIRCULAR THAT THE TRANSACTION BETWEEN AN ENTERPRISE AND AN UNRELA TED PERSON SHOULD HAVE BEEN INFLUENCED BY THE ASSOCIATED ENTERPRISE OF THE FIRST PARTY HAVING AN ARRANGEMENT OR AGREEMENT WITH THE UNRELATED PARTY. THE ASSOCIATED ENTERPRISE AND THE UNRELATED PERSON CAN BE SAID TO HAVE EXERCISED INFLUENCE OVER THE TRANSACTION IN QUESTION, IF THE TERMS OF S UCH TRANSACTION WOULD HAVE BEEN DIFFERENT BUT FOR SUCH INFLUENCE. THEREFORE, W HERE THE ASSOCIATED ENTERPRISE AND THE UNRELATED PERSON HAVE NOT BEEN A BLE TO INFLUENCE THE TRANSACTION BETWEEN AN ENTERPRISE AND THE UNRELATED PERSON, SECTION 92B(2) DOES NOT HAVE ANY APPLICATION. IT A NO. 2072/HYD/2011 M/S. SWARNANDHRA IJMII INTEGRATED TOWNSHIP DEVELOPMENT COMPANY PVT. LTD. ================================== 61 24.7 ACCORDING TO THE AR, THE NATURE, MANNER OR EXTENT O F INFLUENCE TO BE EXERCISED TO ATTRACT SECTION 92B(2) IS DEFINED. IT CAN TAKE TWO FORMS. FIRSTLY, IT CAN BE IN THE FORM OF A PRIOR AGREEMENT IN RELATION TO THE TRANSACTION IN QUESTION (BETWEEN THE ASSOCIATED ENTERPRISE AND THE UNRELATED PERSON). SECONDLY, THE TERMS OF THE TRANSACTION HAVE TO BE I N SUBSTANCE DETERMINED BY THE ASSOCIATE ENTERPRISE AND THE UNRELATED PARTY. 24.8 HE SUBMITTED THAT PRIOR AGREEMENT MEANS ONE WHICH IS INDEPENDENT OF AND PRIOR IN TIME IN COMPARISON TO THE TRANSACTI ON IN QUESTION. THE TERM 'AGREEMENT' GENERALLY CONNOTES A CONSENSUS AD IDEM, I.E., A MEETING OF MINDS TO ACHIEVE A PARTICULAR RESULT. IN THE CONTEX T OF SECTION 92B(2), THE RESULT SOUGHT TO BE ACHIEVED BY THE PRIOR AGREEMENT MUST BE AVOIDANCE OF TAXES OR SHIFTING OF INCOMES. OTHERWISE, CHAPTER X BECOMES INAPPLICABLE. SUCH PRIOR AGREEMENT WOULD CONSEQUENTLY BE IN THE N ATURE OF AN ARRANGEMENT OR AN UNDERSTANDING OR AN ACTION IN CONCERT BETWEEN THE UNRELATED PARTY AND THE ASSOCIATE ENTERPRISE, NOT MEANT TO BE IN PUBLIC DOMAIN AND IN MOST CASES UNWRITTEN. UNLESS TAINTED WITH AN OBJECT OF AVOIDIN G TAXES OR SHIFTING OF INCOMES, AN AGREEMENT IN RELATION THE TRANSACTION C ANNOT BE REGARDED AS A PRIOR AGREEMENT. 24.9 FURTHER, THE PRIOR AGREEMENT HAS TO BE IN RELATIO N TO SUCH TRANSACTION. THE OBJECT OF AVOIDING TAXES UNDER THE PRIOR AGREEM ENT SHOULD BE SOUGHT TO BE ACHIEVED BY INFLUENCING THE TRANSACTION BETWEEN ONE PARTY TO SUCH PRIOR AGREEMENT AND THE ASSOCIATED ENTERPRISE OF THE OTHE R. 24.10 EVEN WHERE THERE IS NO PRIOR AGREEMENT, IT IS SUF FICIENT, IF THE UNRELATED PERSON AND THE ASSOCIATED ENTERPRISE HAVE IN SUBSTANCE DETERMINED THE TERMS OF THE TRANSACTION. THE WORDS 'SUBSTANCE' MEANS THAT WHICH IS ESSENTIAL AND THAT WHICH IS USED IN OPPOSI TION TO 'FORM'. THE WORD 'DETERMINED', WHICH IS DERIVED FROM THE WORD 'DETER MINE', MEANS TO FIX THE CHARACTER BY PRESCRIBING IMPERATIVELY OR LAYING DOW N DECISIVELY OR AUTHORITATIVELY. IT A NO. 2072/HYD/2011 M/S. SWARNANDHRA IJMII INTEGRATED TOWNSHIP DEVELOPMENT COMPANY PVT. LTD. ================================== 62 24.11 THE SECOND TYPE OF INFLUENCE WILL ARISE IF THE AS SOCIATE ENTERPRISE AND THE UNRELATED PARTY ARE ABLE TO JOINTLY AND IMPERAT IVELY PRESCRIBE OR FIX THE ESSENCE OF THE CHARACTER OF THE TRANSACTION IN QUES TION. IN OTHER WORDS, THE INDIAN ENTITY WILL NOT HAVE AN OPPORTUNITY OF DETER MINING THE SUBSTANCE OF THE TRANSACTION AS PER ITS VOLITION. THE INDIAN ENTITY WILL HAVE TO YIELD ITSELF TO THE INFLUENCE OF ITS ASSOCIATE ENTERPRISE AND THE UNREL ATED PARTY. 24.12 IN THE PRESENT CASE, IJMII HAS ACTED AS EPC CONTR ACTOR OF THE ASSESSEE. THE CONTRACT WAS GRANTED BY THE ASSESSEE TO IJMII. THE TPO HAS NOT DEMONSTRATED AS TO HOW THE IJM GROUP HAS IN SUBSTAN CE DETERMINED THE ESSENTIAL TERMS OF CONTRACT. 24.13 ACCORDING TO THE AR, THE PRECONDITIONS TO ATTRACT SECTION 92B(2) HAVE NOT BEEN SATISFIED IN THE INSTANT CASE. IT CANNOT T HEREFORE BE DEEMED THAT THE TRANSACTION BETWEEN THE ASSESSEE AND IJMII IS ONE B ETWEEN ASSOCIATED ENTERPRISES. THEREFORE, THE BASIC CONDITION FOR THE EXISTENCE OF AN INTERNATIONAL TRANSACTION IS NOT SATISFIED. 24.14 AS ALREADY DETAILED, A CONDITION THAT IS REQUIRED TO BE SATISFIED FOR A TRANSACTION TO CONSTITUTE AN INTERNATIONAL TRANSACT ION IS THAT AT LEAST ONE AMONG THE ASSOCIATED ENTERPRISE SHOULD BE A NON-RES IDENT. BOTH THE ASSESSEE AND IJMII ARE RESIDENTS FOR THE PURPOSE OF INDIAN TAXATION, AS THEY ARE INDIAN COMPANIES. ANY TRANSACTION BETWEEN THEM WILL NOT CONSTITUTE AN INTERNATIONAL TRANSACTION. THUS THE SECOND CONDITIO N FOR ATTRACTING SECTION 928(1) IS NOT SATISFIED. 24.15 CIRCULAR NO. 14 OF 2001 EXPLAINING THE SCOPE OF S ECTION 928(2) CONSIDERS AN ILLUSTRATION. THE ILLUSTRATION DEALS W ITH AN INDIAN COMPANY EXPORTING GOODS TO AN UNRELATED PERSON ABROAD. A SE PARATE ARRANGEMENT BETWEEN THE UNRELATED PERSON AND THE AE INFLUENCES THE PRICES AT WHICH THE ASSESSEE IN INDIA EXPORTS GOODS. IN SUCH CIRCUMSTAN CES THE CIRCULAR CONTENDS THAT THE TRANSACTION BETWEEN THE ASSESSEE IN INDIA AND THE UNRELATED ENTITY ABROAD WOULD BE GOVERNED BY TRANSFER PRICING PROVIS IONS. THE 'UNRELATED ENTITY' IN THE ILLUSTRATION IS STATED TO BE ABROAD OBVIOUSLY FOR THE REASON THAT IT IT A NO. 2072/HYD/2011 M/S. SWARNANDHRA IJMII INTEGRATED TOWNSHIP DEVELOPMENT COMPANY PVT. LTD. ================================== 63 HAS TO BE A NON-RESIDENT. ONLY THEN, THE BASIC PREM ISE OF THE TRANSACTION BEING SUBJECT TO TRANSFER PRICING PROVISIONS WOULD SUFFICE. IN THE ASSESSEE'S CASE, IJMII IS NOT SITUATED ABROAD. GOING BY THE RA TIONALE OF THE CIRCULAR, THE TRANSACTIONS BETWEEN THE ASSESSEE AND IJMII CANNOT BE DEEMED TO BE AN INTERNATIONAL TRANSACTION. 24.16 THE ABOVE CAN ALSO BE UNDERSTOOD THROUGH THE DIAG RAMMATIC ILLUSTRATION BELOW: FACTS MATRIX IN THE ILLUSTRATION PROVIDED IN THE CB DT CIRCULAR FACTS MATRIX IN THE PRESENT CASE 24.17 TO SUMMARIZE, WHETHER AN INTERNATIONAL TRANSACTION EMERGES UNDER VARIOUS PERMUTATIONS AND COMBINATIONS OF TRANSACTIO NS BETWEEN RESIDENTS AND NON RESIDENTS IS TABULATED HEREIN BELOW: S. NO. PARTY 1 TO A TRANSACTION PARTY 2 TO A TRANSACTION INTERNATIONAL TRANSACTION? 1 RESIDENT NON - RESIDENT YES 2 NON - RESIDENT RESIDENT YES 3 NON - RESIDENT NON - RESIDENT YES 4 RESIDENT RESIDENT NO OVERSEAS ASSOCIATED ENTERPRISES INTERMEDIARY INDIAN ENTRY WOULD NOT BE AN INTERNATIONAL TRANSACTION EVEN IF SECTION 92B(2) SATISFIED, AS UNRELATED INTERMEDIARY (IF IJMII CAN BE SO CALLED) IS NOT ABROAD. THE UNRELATED INTERMEDIARY BEING INDIA OVERSEAS ASSOCIATED ENTERPRISES INTERMEDIARY INDIAN ENTRY WOULD BE AN INTERNATIONAL TRANSACTION, IF SECTION 92B(2) SATISFIED, THE UNRELATED INTERMEDIARY BEING ABROAD. INDIA IT A NO. 2072/HYD/2011 M/S. SWARNANDHRA IJMII INTEGRATED TOWNSHIP DEVELOPMENT COMPANY PVT. LTD. ================================== 64 24.18 THE TRANSACTIONS BETWEEN THE ASSESSEE AND IJMII FAL L UNDER ITEM 4 ABOVE. CONSEQUENTLY, THE TRANSACTION BETWEEN THE AS SESSEE AND IJMII DOES NOT CONSTITUTE AN INTERNATIONAL TRANSACTION. THE TR ANSFER PRICING PROVISIONS OF CHAPTER X ARE THEREFORE NOT ATTRACTED. 24.19 ACCORDING TO THE AR, THE DRP HAS AGREED WITH THE ABOVE CONTENTION. THE DRP HAS HELD THAT THE CONCLUSION OF THE TPO OF APPLYING THE TRANSFER PRICING PROVISIONS TO THE IMPUGNED TRANSACTION IS N OT CORRECT. HOWEVER, THE DRP DECLINED TO INTERFERE BY OBSERVING AS FOLLOWS: 'THE TPO HAS CONCLUDED THAT THE PROFITS ARE SHIFTED OUT OF THE COUNTRY BY THE FOREIGN ENTITIES (LM CORP AND /JM PR OPERTIES) BY CREATING /JMII AS A CONDUIT. INASMUCH AS THE FOREIG N HOLDING COMPANIES HAVE INVESTED IN INDIA, THEY ARE ENTITLED TO THE RETURNS ON THEIR INVESTMENTS SUBJECT TO THE LAWS OF THE LAND. IN THIS CASE, WHEN THE RETURNS ARE PAID ABROAD, THEY B ECOME SUBJECT TO THE PROVISIONS OF TP AND EXAMINED FOR TH EIR REASONABLENESS. HENCE, WE ARE OF THE OPINION THAT T HIS CONCLUSION OF THE TPO IS NOT CORRECT. STILL IT IS A NOVEL ISSUE INVOLVING CORRECT INTERPR ETATION OF THE LEGAL PROVISIONS. IT IS THE STAND OF THE TPO THAT S UBSECTION (2) OF S. 928 EXPANDS THE SCOPE OF DEFINITION OF INTERNATI ONAL TRANSACTION. THE POSITION TO BE ADOPTED IS AMENABLE TO DIFFERENT INTERPRETATIONS. FOR ANY DECISION TAKEN A T THIS LEVEL, THE DEPARTMENT DOES NOT HAVE RECOURSE TO ANY REMEDY . HENCE, TO KEEP THE ISSUE ALIVE, WE DON'T INTERFERE WITH TH E DETERMINATION OF THE TPO'. 24.20 THE AR SUBMITTED THAT THE LEARNED TPO HAS ERRONEOUS LY EXERCISED JURISDICTION AND EXAMINED THE TRANSACTIONS BETWEEN THE ASSESSEE AND IJMII UNDER TRANSFER PRICING REGULATIONS. THE TRANSACTION S BETWEEN THE ASSESSEE AND IJMII ARE DOMESTIC TRANSACTIONS AND NOT INTERNA TIONAL TRANSACTIONS. 24.21 HE SUBMITTED THAT IN THE CASE OF DIT (INTERNATIONAL TAXATION) VS MORGAN STANLEY (292 ITR 416), THE HONOURABLE SUPREM E COURT OBSERVED THAT 'THE OBJECT BEHIND ENACTMENT OF TRANSFER PRICING RE GULATIONS IS TO PREVENT SHIFTING OF PROFITS OUTSIDE INDIA'. THE EXPLANATORY CIRCULAR NO.14 TO THE FINANCE ACT 2001 HAS STATED THAT THE BASIC INTENTION OF THE TRANSFER PRICING IT A NO. 2072/HYD/2011 M/S. SWARNANDHRA IJMII INTEGRATED TOWNSHIP DEVELOPMENT COMPANY PVT. LTD. ================================== 65 REGULATIONS IS TO PREVENT SHIFTING PROFITS OUT OF I NDIA BY MANIPULATING PRICES CHARGED OR PAID IN INTERNATIONAL TRANSACTIONS, THER EBY ERODING THE COUNTRY'S TAX BASE. THE RELEVANT EXTRACTS OF THE SAID CIRCULA R ARE AS BELOW: 'THE NEW PROVISION IS INTENDED TO ENSURE THAT PROFI TS TAXABLE IN INDIA ARE NOT UNDERSTATED (OR LOSSES ARE NOT OVERST ATED) BY DECLARING LOWER RECEIPTS OR HIGHER OUTGOINGS THAN T HOSE WHICH WOULD HAVE BEEN DECLARED BY PERSONS ENTERING INTO S IMILAR TRANSACTIONS WITH UNRELATED PARTIES IN THE SAME OR SIMILAR CIRCUMSTANCES. THE BASIC INTENTION UNDERLYING THE N EW TRANSFER PRICING REGULATIONS IS TO PREVENT SHIFTING OUT OF P ROFITS BY MANIPULATING PRICES CHARGED OR PAID IN INTERNATIONA L TRANSACTIONS, HEREBY ERODING THE COUNTRY'S TAX BASE . THE NEW SECTION 92 IS, THEREFORE, NOT INTENDED TO BE APPLIE D IN CASES WHERE THE ADOPTION OF THE ARM'S LENGTH PRICE DETERM INED UNDER THE REGULATIONS WOULD RESULT IN A DECREASE IN THE O VERALL TAX INCIDENCE IN INDIA IN RESPECT OF THE PARTIES INVOLV ED IN THE INTERNATIONAL TRANSACTION'. 24.22 THE AR SUBMITTED THAT IN THE PRESENT CASE THE TRANS ACTIONS ARE BETWEEN TWO RESIDENT COMPANIES. THERE IS NO POSSIBI LITY OF SHIFTING OF PROFITS OUTSIDE INDIA OR EROSION OF COUNTRY'S TAX BASE. THE REFORE ITS TRANSACTIONS WITH IJMII ARE OUTSIDE THE PURVIEW OF THE TRANSFER PRICI NG REGULATIONS. 24.23 THE AR REITERATES THAT TRANSFER PRICING PROVISIONS ARE NOT APPLICABLE TO TRANSACTIONS BETWEEN TWO DOMESTIC RELATED PARTIES. THE TRANSFER PRICING REGULATIONS HAVE BEEN SPECIFICALLY BEEN MADE APPLIC ABLE TO TRANSACTIONS BETWEEN TWO DOMESTIC RELATED PARTIES BY VIRTUE OF T HE AMENDMENT THROUGH FINANCE ACT, 2012. IN CASE, THE EXISTING PROVISIONS WERE APPLICABLE TO DOMESTIC TRANSACTIONS THEN THERE WAS NO NEED TO BRI NG ABOUT THE FOR THE ABOVE AMENDMENT. 24.24 BASED ON ALL THE ABOVE THE AR SUBMITTED THAT THE TP O HAS ERRED IN REGARDING THE TRANSACTIONS BETWEEN THE ASSESSEE AND ITS HOLDING COMPANY IJMII, AS INTERNATIONAL TRANSACTION AND APPLYING TR ANSFER PRICING REGULATIONS. THE ADDITION BEING BAD IN LAW IS LIABLE TO BE REJEC TED. IT A NO. 2072/HYD/2011 M/S. SWARNANDHRA IJMII INTEGRATED TOWNSHIP DEVELOPMENT COMPANY PVT. LTD. ================================== 66 24.25 WITHOUT PREJUDICE TO THE ABOVE, THE AR SUBMITTED TH AT THE LEARNED TPO HAS ERRED IN REJECTING CERTAIN COMPARABLES SELECTED BY IT AND INSTEAD SELECTING INAPPROPRIATE COMPARABLES. 24.26 THE SEARCH PROCESS ADOPTED BY THE LEARNED TPO FOR S ELECTING COMPARABLE COMPANIES IS AS FOLLOWS (PAGE 16 AND 17 OF THE TP ORDER): - COMPANIES WHOSE DATA IS NOT AVAILABLE FOR THE FY 200 6-07 WERE EXCLUDED. - COMPANIES HAVING DIFFERENT FINANCIAL YEAR ENDING (I .E., NOT MARCH, 2007) OR DATA OF THE COMPANIES DOES NOT FALL WITHIN TWELVE MONTHS PERIOD I.E 01.04.2006 TO 31.03.2007 WERE REJECTED - COMPANIES HAVING SALES LESS THAN RS 1. CRORE WERE R EJECTED - COMPANIES HAVING NO SEGMENTAL RESULTS WERE EXCLUDED - COMPANIES WHICH ARE FUNCTIONALLY DIFFERENT WERE EXC LUDED - COMPANIES HAVING RELATED PARTY TRANSACTIONS MORE TH AN 25% WERE EXCLUDED 24.27 AFTER APPLYING THE ABOVE FILTERS, THE LEARNED TPO S ELECTED 25 COMPANIES AS COMPARABLES. THE ARITHMETIC MEAN OF TH E MARGINS OF THE COMPARABLES WAS DETERMINED AT 20.35% ON COST. 24.28 THE AR SUBMITTED THAT THE FOLLOWING COMPARABLES SEL ECTED BY THE TPO DESERVES BE REJECTED: SL. NO. NAME OF THE COMPANY FILTER UNDER WHICH COMPANY SHOULD BE REJECTED REASONS FOR REJECTION 1. RADHE DEVELOPERS LTD. FUNCTIONALLY DIFFERENT THE ASSESSEE SUBMITS THAT THIS COMPANY IS ENGAGED IN THE DEVELOPMENT ACTIVITY (ON BEHALF OF OTHERS) BASED ON CONTRACT FOR EACH OF THE PROJECTS AS AGAINST THE ASSESSEE WHICH IS ENGAGED IN DEVELOPMENT AS WELL AS SALE OF RESIDENTIAL AND COMMERCIAL UNITS. THUS THIS COMPANY DESERVES TO BE REJECTED AS A COMPARABLE. 2. INDEGRANITI - INDS. LTD. NO SEGMENTAL RESULTS AVAILABLE. AS PER THE PROWESS DATABASE, DURING THE YEAR UNDER CONSIDERATION THE TOTAL SALES OF THIS COMPANY IS RS. 3.56 CRORES. OUT OF THIS REVENUE FROM SALE OF FLATS WAS RS. IT A NO. 2072/HYD/2011 M/S. SWARNANDHRA IJMII INTEGRATED TOWNSHIP DEVELOPMENT COMPANY PVT. LTD. ================================== 67 1.27 CRORES. SEGMENTAL DETAILS OF CONSTRUCTION AND SALE OF FLATS IS NOT AVAILABLE AND THUS THIS COMPANY SHOULD BE REJECTED AS COMPARABLE. 3. MARG CONSTRUCTIONS LTD. RELATED PARTY TRANSACTIONS MORE THAN 25% AS PER ANNUAL REPORT OF THE COMPANY FOR FY 2006-07, TOTAL REVENUE DURING THE YEAR IS RS. 1418.45 MILLION. OUT OF THIS, REVENUE FROM THE RELATED PARTIES AMOUNTS TO RS. 1,348 MILLION. THE REVENUE FROM RELATED PARTIES AMOUNTS TO 95% OF TOTAL REVENUES OF THE COMPANY AND, THEREFORE, THIS COMPANY SHOULD BE REJECTED AS COMPARABLE. 24.29 THE AR FURTHER SUBMITTED THAT THERE IS ERROR IN MAR GIN COMPUTATION OF K RAHEJA PVT LTD. THE LEARNED TPO HAS COMPUTED THE MARGIN OF THIS COM PANY AT 47.76%. AS PER SEGMENTAL INFORMATION AVAILABLE U NDER NOTES TO ACCOUNTS OF THE COMPANY, THIS COMPANY OPERATES IN THREE SEGM ENTS NAMELY I) REAL ESTATE; II) HOTELS; AND III) OTHERS. BASED ON THE S EGMENTAL RESULTS OF REAL ESTATE SEGMENT, THE MARGIN OF THIS COMPANY IS 29.30 %. THE MARGIN COMPUTATION IS AS BELOW:- PARTICULARS AMOUNT (R S. ) TOTAL REVENUE 5,405,405,135 OPERATING PROFITS 1,584,016,817 OPERATING PROFITS/ SALES 29.30% THE AR SUBMITTED THAT MARGIN OF 29.30% SHOULD BE CO NSIDERED FOR COMPUTATION OF ARM'S LENGTH PRICE. 24.30 BASED ON ALL THE ABOVE, THE AR HAS TABULATED BELOW , A LIST OF COMPARABLES AND THEIR OPERATING MARGIN, OUT OF THE TPO'S COMPARABLES. SI NO NAME OF THE COMPARABLE OP/SALES(%) 1 PATEL PROJECTS LTD 1.41 2 JOGANI CONSTRUCTIONS 8.22 3 MARUTI INFRA 5.66 4 RAJESHWARI FOUNDATIONS 12.96 5 RAINBOW FOUNDATIONS (SEG) 10.34 6 RAJESHWARI INFRA 7.92 7 EAST BUILDTECH LTD 16.90 8 RAGHAVA ESTATES 12.13 9 MANJEERA CONSTRUCTIONS LTD 25.42 10 ISRAHEJA PVT LTD 29.30 IT A NO. 2072/HYD/2011 M/S. SWARNANDHRA IJMII INTEGRATED TOWNSHIP DEVELOPMENT COMPANY PVT. LTD. ================================== 68 11 TIRUPATISARJAN 4.62 12 LUXMI TOWNSHIP 8.55 13 SAB INDUSTRIES (SEG) 16.10 14 CHD DEVELOPERS (SEG) 27.20 15 ALPINE HOUSING 20.27 16 PRINCE FOUND 30.75 17 ARISTO REALTY DEVELOPERS 38.53 18 VIJAY SHANTHIBUILERS LTD 14.44 19 ANSAL HOUSING 33.67 20 PARSHVNATH LAND 20.18 21 PARSHVANATH LANDMARK DEVELOPERS LTD. 24.00 22 HDIL 33.91 ARITHMETIC MEAN 18.29 24.31 TO BENCHMARK THE INTERNATIONAL TRANSACTIONS, THE AS SESSEE HAD PERFORMED THE TRANSFER PRICING STUDY. IN THE TRANSF ER PRICING STUDY, THE ASSESSEE HAD ADOPTED 18 COMPANIES AS COMPARABLES. T HE LEARNED TPO HAS REJECTED CERTAIN COMPARABLES SELECTED BY THE ASSESS EE. THE AR SUBMITTED THAT SUCH A REJECTION IS BAD IN LAW FOR THE REASONS STATED BELOW:- SL. NO. NAME OF THE COMPANY REASON FOR REJECTION BY TPO ARGUMENTS OF THE ASSESSEE 1. ANSAL BUILDWELL LTD. NO SEGMENTAL RESULTS. AS PER DATA AVAILABLE NO CAPITALINE DATABASE, THIS COMPANY HAS ONLY ONE SEGMENT I.E., REAL ESTATE AND CONSTRUCTION BUSINESS. 2 ANSAL PROPERTIES AND INFRASTRUCTURE LTD. NO SEGMENTAL RESULTS AS PER DATA AVAILABLE IN CAPITAL INE DATABASE THIS COMPANY HAS ONLY ONE SEGMENT I.E., REAL ESTATE DEVELOPMENT 3 ASHIANA HOUSING & FINANCE (INDIA) LTD NO SEGMENTAL RESULTS AND FOREIGN EXCHANGE REVENUE IS ZERO IN THE FACTS OF THE CASE, FOREIGN EXCHANGE REVENUE FILTER IS NOT APPLICABLE. EVEN TPO HAS NOT APPLIED FOREX REVENUE FILTER IN HIS TP ANALYSIS. AS PER DATA AVAILABLE IN PROWESS DATABASE, 97% OF THE REVENUE OF THE COMPANY IS FROM CONSTRUCTION AND SALE OF RESIDENTIAL BUILDINGS. 4 CONART ENGINEERS LTD NO SEGMENTAL RESULTS AND FOREIGN EXCHANGE REVENUE IS ZERO IN THE FACTS OF THE CASE, FOREIGN EXCHANGE REVENUE FILTER IS NOT APPLICABLE. EVEN TPO HAS NOT APPLIED FOREX REVENUE FILTER IN HIS TP ANALYSIS. AS PER DATA AVAILABLE IN PROWESS DATABASE 100% OF THE REVENUE OF THE COMPANY IS FROM CONSTRUCTION AND SALE OF RESIDENTIAL BUILDINGS. 5 KAMWALA HOUSING CONSTRUCTIONS LTD FOREIGN EXCHANGE REVENUE IS ZERO IN THE FACTS OF THE CASE, FOREIGN EXCHANGE REVENUE FILTER IS NOT APPLICABLE. EVEN TPO HAS NOT APPLIED FOREX REVENUE FILTER IN HIS TP ANALYSIS. 6 MARTIN BURN LTD FOREIGN EXCHANGE REVENUE IS ZERO IN THE FACTS OF THE CASE, FOREIGN EXCHANGE REVENUE FILTER IS NOT APPLICABLE. EVEN TPO HAS NOT APPLIED FOREX REVENUE FILTER IN HIS TP ANALYSIS. IT A NO. 2072/HYD/2011 M/S. SWARNANDHRA IJMII INTEGRATED TOWNSHIP DEVELOPMENT COMPANY PVT. LTD. ================================== 69 7 TRIBHUVAN HOUSING LTD FOREIGN EXCHANGE REVENUE IS ZERO IN THE FACTS OF THE CASE, FOREIGN EXCHANGE REVENUE FILTER IS NOT APPLICABLE. EVEN TPO HAS NOT APPLIED FOREX REVENUE FILTER IN HIS TP ANALYSIS. 8 VIPUL LTD RELATED PART TRANSACTIONS AS PER DATA AVAILABLE IN CAPITALINE DATABASE RELATED PARTY TRANSACTIONS ARE LESS THAN 25% OF SALES. 9 SOBHA DEVELOPERS LTD FOREIGN EXCHANGE REVENUE IS ZERO AND NO SEGMENTAL RESULTS. IN THE FACTS OF THE CASE, FOREIGN EXCHANGE REVENUE FILTER IS NOT APPLICABLE. EVEN TPO HAS NOT APPLIED FOREX REVENUE FILTER IN HIS TP ANALYSIS. FURTHER AS PER PAGE 65 OF THE ANNUAL REPORT OF THE COMPANY IT HAS ONLY ONE SEGMENT. IT IS MAINLY ENGAGED IN THE BUSINESS OF DEVELOPMENT AND CONSTRUCTION OF PROPERTIES. 24.32 THE AR SUBMITTED THAT ABOVE 9 COMPANIES SHOULD BE R ETAINED AS COMPARABLES WHILE COMPUTING ARMS LENGTH PRICE. 24.33 BASED ON ALL THE ABOVE, THE AR HAS TABULATED BELOW, A LIST OF COMPARABLES AND THEIR OPERATING MARGIN, OUT OF THE TPOS COMPARABLES AND AFTER INCLUDING THE ASSESSEES COMPARABLE AS ABOVE. SL NO SL NO SL NO SL NO NAME OF THE COMPARABLE NAME OF THE COMPARABLE NAME OF THE COMPARABLE NAME OF THE COMPARABLE OP/SALES (%) OP/SALES (%) OP/SALES (%) OP/SALES (%) 1 ANSAL BUILDWELL LTD 7.00 2 ANSAL PROPERTIES AND INFRASTRUCTURE LTD 15.00 3 ASHIANA HOUSING AND FINANCE (INDIA) LTD 3.00 4 CONART ENGINEERS LTD 6.00 5 KAMWALA HOUSING CONSTRUCTION LTD 8.00 6 MARTIN BURN LTD 8.00 7 TRIBHUVAN HOUSING LTD 2.00 8 VIPUL LTD 8.00 9 SOBHA DEVELOPERS LTD 14.00 10 PATEL PROJECTS LTD 1.41 11 JOGANI CONSTRUCTIONS 8.22 12 MARUTI INFRA 5.66 13 RAJESHWARI FOUNDATIONS 12.96 14 RAINBOW FOUNDATIONS (SEG) 10.34 15 RAJESHWARI INFRA 7.92 16 EAST BUILDTECH LTD 16.90 17 RAGHAVA ESTATES 12.13 18 MANJEERA CONSTRUCTIONS LTD 25.42 19 K. RAHEJA PVT LTD 29.30 20 TIRUPATISARJAN 4.62 21 LUXMI TOWNSHIP 8.55 22 SAB INDUSTRIES (SEG) 16.10 23 CHD DEVELOPERS (SEG) 27.20 24 ALPINE HOUSING 20.27 25 PRINCE FOUND 30.75 26 ARISTO REALTY DEVELOPERS 38.53 IT A NO. 2072/HYD/2011 M/S. SWARNANDHRA IJMII INTEGRATED TOWNSHIP DEVELOPMENT COMPANY PVT. LTD. ================================== 70 27 VIJAY SHANTHI BUILERS LTD 14.44 28 ANSAL HOUSING 33.67 29 PARSHVNATH LAND 20.18 30 PARSHVANATH LANDMARK DEVELOPERS LTD 24.00 31 HDIL 33.91 ARITHMETIC MEAN ARITHMETIC MEAN ARITHMETIC MEAN ARITHMETIC MEAN 15.27 15.27 15.27 15.27 24.34 THE LEARNED TPO HAS DETERMINED THE TP ADJUSTMENT AT RS. 34,86,00,000. WHILE DETERMINING THE TP ADJUSTMENT, THE LEARNED TPO HAS CONSIDERED AN OPERATING COST AT RS. 1,86,35,01,499/ -. THE OPERATING REVENUE HAS BEEN CONSIDERED AT RS. 1,90,20,00,000/-. 24.35 IN THE ORDER PASSED U/S 92CA, THE TPO HAS DETERMINE D THE ARMS LENGTH PRICE OF THE FOLLOWING TRANSACTIONS AS NIL. SL NO. NATURE OF PAYMENT DISALLOWED AMT (R S. ) 1 FEE FOR TECHNICAL SERVICES 2,32,72,451 2 REIMBURSEMENT OF BANK GUARANTEE CHARGES 1,15,67,035 TOTAL 3,48,39,486 24.36 FURTHER, DURING THE COURSE OF PROCEEDINGS UNDER SEC TION 143(3) OF THE ACT, THE LEARNED ASSESSING OFFICER HAS DISALLOWED F OLLOWING PAYMENTS:- SL. NO. NATURE OF PAYMENT DISALLOWED AMT. (RS.) 1 DISALLOWANCE ON ACCOUNT OF RE - COMPUTATION OF COST OF LAND TRANSFERRED 13,43,96,800 2 DISALLOWANCE OF INCENTIVE PAID 18,59,85,000 3 DISALLOWANCE OF INTEREST PAYMENT 55,77,852 4 DISALLOWANCE OF DELAY IN HANDLING OVER CHARGBES 7,74,36,597 5 DISALLOWANCE OF LAND COST ATTRIBUTABLE TO LAND SOLD BY APHB ON 500 LIG HOUSES 1,92,19,200 6 DISALLOWANCE OF COST OF CONSTRUCTION 18,06,75,000 7 DISALLOWANCE OF INTEREST TO IJM 2,2 1 ,95,301 TOTAL 62,54,85,750 24.37 WITHOUT PREJUDICE TO THE AR CONTENTION THAT THE DETERMINATION OF ALP AT NIL BY THE TPO AND DISALLOWANCE OF ABOVE P AYMENTS BY THE AO ARE BAD IN LAW AND WITHOUT BASIS, THE AR SUBMITTED TH AT IF THE ABOVE PAYMENTS ARE DISALLOWED, THEN THESE AMOUNTS SHO ULD BE REDUCED FROM IT A NO. 2072/HYD/2011 M/S. SWARNANDHRA IJMII INTEGRATED TOWNSHIP DEVELOPMENT COMPANY PVT. LTD. ================================== 71 THE OPERATING COST OF THE ASSESSEE WHILE MAKING TP ADJUSTMENT U/S 92C OF THE ACT. 24.38 IN THIS REGARD, THE AR RELIED ON THE DECISION OF TR IBUNAL, DELHI BENCH IN THE CASE OF HAWARTH (INDIA) PVT LTD V DCIT (2011) 11 TAXMANN.COM 76(DELHI). IN THIS CASE, THE ASSESSEE HAD SUO MOTO DISALLOWED COMMISSION PAYMENT OF RS. 1,32,09,105/- MADE TO LOCAL DEALERS FOR ASSISTANCE IN PROCURING ORDER FOR THE PRODUCTS OF ASSESSEES ASSO CIATED ENTERPRISES FROM THE INDIAN CUSTOMERS. THE DISALLOWANCE WAS ALSO CON FIRMED BY THE AO. HOWEVER, WHILE COMPUTING THE OPERATING COST OF THE ASSESSEE THE LEARNED TPO ALSO CONSIDERED COMMISSION PAYMENT OF RS. 1,32,09,1 05/-. THE AR CONTENDED THAT AS THE COMMISSION PAYMENT HAS BEEN D ISALLOWED THE SAME SHOULD BE EXCLUDED FROM THE OPERATING COST TO AVOID DOUBLE TAXATION. ON APPEAL THE TRIBUNAL UPHELD THE CLAIM OF THE ASSESSE E. THE RELEVANT OBSERVATIONS OF THE TRIBUNAL ARE AS UNDER:- 66. IT CAN BE SEEN FROM THE ABOVE TABLE THAT THE M AJOR COMPONENT OF RECEIPT OF INTERNATIONAL TRANSACTION O F THE ASSESSEE IS COMMISSION INCOME AS IT CONSTITUTE RS. 15,39,33,769 OF THE TOTAL OPERATING INCOME OF RS. 17,73,98,197. THEREFORE, IT CANNOT BE SAID THAT COM MISSION EXPENSES WHICH HAVE BEEN SUO MOTO DISALLOWED BY THE ASSESSEE WERE NOT CLAIMED AS OPERATING EXPENSES WHI LE COMPUTING THE ARM LENGTH PRICE. IF THEY ARE SUBSEQU ENTLY DISALLOWED SUO MOTO BY THE ASSESSEE IN THE REVISED RETURN, THEY ARE REQUIRED TO BE EXCLUDED FROM THE OPERATING COST AND THE CALCULATION OF THE ASSESSEE SHOULD HAVE BEEN ACCEPT ED THAT ITS PROFIT MARGIN SHOULD HAVE BEEN TAKEN ACCORDING TO THE INCOME COMPUTED IN THE REVISE RETURN FOR WHICH THE ASSESSE E HAS ALSO PAID THE DUE TAXES. IN THIS MANNER, FINDING FORCE I N THE CONTENTIONS OF ID. AR, WE ARE OF THE OPINION THAT G ROUND NO. 2 OF THE ASSESSEE IS TO BE ALLOWED AND ACCORDINGLY AL LOWED. GROUND NO. 3 IS THE ALTERNATIVE ARGUMENT AND AS THE MAIN ARGUMENT OF THE ASSESSEE IS ACCEPTED WE NEED NOT RE QUIRED TO GO IN THE ALTERNATIVE CLAIM MADE BY THE ASSESSEE. 24.39 BASED ON THE ABOVE, THE AR SUBMITTED THAT THE ABOVE AMOUNTS SHOULD BE EXCLUDED FROM THE OPERATING COST OF THE ASSESSEE . THE REVISED OPERATING COST OF THE ASSESSEE WOULD BE AS FOLLOWS :- IT A NO. 2072/HYD/2011 M/S. SWARNANDHRA IJMII INTEGRATED TOWNSHIP DEVELOPMENT COMPANY PVT. LTD. ================================== 72 PARTICULARS AMOUNT IN INR OPERATING COST AS CONSIDERED BY THE TPO 186,35,01,4 99 LESS: PAYMENTS DISALLOWED BY THE TPO 3,48,39,486 LESS: PAYMENTS DISALLOWED BY THE AO 62,54,85,750 REVISED OPERATING COST 120,31,76,263 24.40 THE REVISED OPERATING MARGINS OF THE ASSESSEE AFTER CONSIDERING THE ABOVE OPERATING COST WOULD BE AS UNDER: PARTICULARS AMOUNT IN INR OPERATING REVENUES 1,90,20,00,000 OPERATING EXPENSES 1,20,31,76,263 NET PROFIT 69,88,23,737 OPERATING PROFIT/OPERATING COST 36.74% 24.41 BASED ON THE ABOVE, THE AR SUBMITTED THAT ITS OPERA TING MARGIN OF 36.74% IS MORE THAN THE ARITHMETIC MEAN OF COMPARAB LE COMPANIES UNDER BOTH THE ABOVE TABLES. THEREFORE NO ADJUSTMENT IS R EQUIRED TO BE MADE TO THE REPORTED VALUES OF THE ASSESSEES TRANSACTIONS WITH ITS ASSOCIATED ENTERPRISES. 24.42 WITHOUT PREJUDICE TO THE ABOVE SUBMISSIONS, THE AR SUBMITTED THAT TP ADJUSTMENT, IF ANY SHOULD BE RESTRICTED TO AE TRANS ACTIONS ONLY. DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE HAD TRANSACT IONS WITH BOTH AE AS WELL AS NON-AE. THE TOTAL COST DEBITED TO PROFIT AND LOS S ACCOUNT WAS RS. 1,906,260,711/-. OUT OF THIS COST RELATED TO TRANSA CTIONS WITH AE IS RS. 1,075,205,036/- (RS. 1,051,932,585+23,272,451) WHIC H CONSTITUTES 56.40% OF TOTAL COST. ACCORDINGLY, THESE TRANSACTIO NS ALONE ARE THE SUBJECT MATTER OF TRANSFER PRICING ASSESSMENT UNDER CHAPTER X OF THE INCOME TAX ACT. THE TPO CANNOT MAKE AN ADJUSTMENT TO THE PRICE OR M ARGIN OF THE TRANSACTIONS WITH NON-ASSOCIATED ENTERPRISES. THE L EARNED TPO IN THE ORDER PASSED HAS NOT RESTRICTED THE TRANSFER PRICING ADJU STMENT ONLY TO TRANSACTIONS WITH ASSOCIATED ENTERPRISES. IT A NO. 2072/HYD/2011 M/S. SWARNANDHRA IJMII INTEGRATED TOWNSHIP DEVELOPMENT COMPANY PVT. LTD. ================================== 73 24.43 THE AR SUBMITTED THAT THE TP ADJUSTMENT, IF ANY SHO ULD BE RESTRICTED TO AE TRANSACTIONS ALONE. THE TRANSACTIONS WITH NON -AE ARE NOT INTERNATIONAL TRANSACTIONS. IT IS ONLY WITH REFERENCE TO THE TRAN SACTIONS WITH RELATED PARTIES (AE) IT COULD BE ALLEGED THAT THE PRICES ARE MANIP ULATED TO RESULT IN A FIGHT OF PROFIT FROM INDIA. IT IS SONLY SUCH FIGHT OF PROF ITS THAT NEEDS CORRECTION. 24.44 THE AR CONTENDED THAT THE TP ADJUSTMENT SHOULD BE R ESTRICTED TO ONLY TRANSACTIONS WITH THE AE IS SUPPORTED BY VARIOUS JU DICIAL PRECEDENTS. HE SUBMITTED THAT THE MUMBAI TRIBUNAL IN THE CASE OF D CIT V STERLITE ITA NO. 2279/MUM/06 HAS OBSERVED AS FOLLOWS: WE ALSO AGREE WITH THE ARGUMENTS OF LEARNED COUNSEL FOR THE ASSESSEE THAT ADJUSTMENTS, IF ANY, ARISING DUE TO C OMPUTATION OF ALP SHOULD BE RESTRICTED ONLY TO THE INTERNATION AL TRANSACTIONS AND NOT TO THE ENTIRE TURNOVER OF THE ASSESSEE COMPANY. NO ADDITION CAN BE MADE TO LOCAL TRANSACTI ONS UNDER CHAPTER X OF THE ACT. 24.45 HE SUBMITTED THAT A SIMILAR CONCLUSION WAS ARRIVED AT BY THE MUMBAI TRIBUNAL IN CASE OF IL JIN ELECTRONICS (L) PVT LTD V ACIT 2010-TIOL-151-ITAT- MUM. IN THIS CASE, THE ASSESSEE WAS ENGAGED IN THE MANUFACTURE OF PRINTED CIRCUIT BOARDS. OUT OF THE TOTAL PURCHASE, 45.51% W AS FROM ASSOCIATED ENTERPRISES. ON THESE FACTS, THE TRIBUNAL HELD THAT ADJUSTMENT CAN BE MADE ONLY TO THE EXTENT OF 45.51% OF THE TURNOVER. THE R ELEVANT OBSERVATION OF THE TRIBUNAL IN PARA 15 OF THE JUDGMENT IS AS FOLLOWS: AFTER CONSIDERING THE FACTS OF THE CASE, WE DO NOT FIND ANY DIFFICULTY IN ACCEPTING THIS CONTENTION OF THE ASSE SSEE THAT AT BEST ONLY 45.51% OF THE OPERATING PROFIT CAN BE ATT RIBUTED TO IMPORTED RAW MATERIAL ACQUIRED FROM ASSESSEES ASSO CIATE CONCERNS. 24.46 HE ALSO SUBMITTED THAT A SIMILAR CONCLUSION HAS BEE N REACHED BY THE MUMBAI TRIBUNAL IN THE CASE OF ACIT V T TWO INTERNATIONAL PRIVATE LIMITED 2010-TOIL-166-ITAT-MUM. IN THIS CASE, ASSESSEE HAD CONTROLLED SALES OF RS. 25.02 CRORES AND UNCONTROLLED SALES OF RS. 64.49 CR ORES. THE TPO MADE ADJUSTMENT FOR ALL THE TRANSACTIONS. THE CIT(A) UPH ELD THE ASSESSEES IT A NO. 2072/HYD/2011 M/S. SWARNANDHRA IJMII INTEGRATED TOWNSHIP DEVELOPMENT COMPANY PVT. LTD. ================================== 74 CONTENTION THAT ADJUSTMENT SHOULD ONLY BE WITH RESP ECT TO AE TRANSACTIONS. ON THIS MATTER, ITAT OBSERVED AS FOLLOWS: WE HAVE CONSIDERED THE RIVAL SUBMISSIONS CAREFULLY . WE PARTIALLY AGREE WITH THE SUBMISSIONS OF THE ID. COU NSEL FOR THE ASSESSEE THAT ORIGINAL TPOS ORDER IF DEFINITELY ER RONEOUS BECAUSE HE HAS APPLIED THE NET PROFIT MARGIN OF 7.2 5% ON THE GROSS SALES AND FOLLOWED A COMPLICATED PROCEDURE TO ARRIVE AT THE AMOUNT OF ADJUSTMENT. IN SIMPLE TERMS IF THE SA LES TO ASSOCIATED ENTERPRISES IS TAKEN AT RS. 25 CRORES AN D STRAIGHTWAY 7.25% MARGIN IS APPLIED THEN APPROXIMAT ELY TOTAL MARGIN WOULD BE RS. 1.81 CRORES, WHEREAS ADJUSTMENT HAS BEEN MADE AT RS. 2,57,26,138/- 24.47 HE ALSO SUBMITTED THAT THE DELHI TRIBUNAL IN THE CA SE OF GLOBAL VANTEDGE PRIVATE LIMITED (2010-TOIL-24-ITAT-DEL) UP HELD THE FOLLOWING OBSERVATIONS MADE IN THE CIT(A) ORDER: IN VIEW OF THE ABOVE DISCUSSIONS, I HOLD THAT WHILE APPLYING THE TNMM TO DETERMINE ALP, THE REVENUE EARNED BY THE AS SESSEE FROM SERVICING THE INDEPENDENT CLIENTS, WITHOUT ANY INVOLVEMENT OF RCS SHOULD NOT BE BENCHMARKED. THE PROPORTIONATE (18.14%) ATTRIBUTABLE TO SUCH REVENUE SHOULD BE IGNORED WHILE COMPUTING ALP OF THE INTERNATIONAL TR ANSACTIONS. 24.48 FURTHER HE PLACED RELIANCE ON THE FOLLOWING DECISIO NS OF THE TRIBUNAL: 1. DCIT V STARTEX NETWORKS (INDIA) PVT LTD 2010-TIL-13 -ITAT-DEL-TP; 2. ACIT V WOCKHARDT LTD (6 TAXMAN.COM 78 (MUM ITAT)) ; 3. AD. CIT V TEJDIAM (2010-TIL-27-ITAT-MUM-TP); 4. ABHISHEK AUTO INDUSTRIES LIMITED (2010-TIL-54-ITAT- DEL-TP); AND 5. ANKIT DIAMONDS 43 SOT 523 (MUM) 6. M/S GENISYS INTEGRATED SYSTEMS (INDIA) PVT. LTD V D CIT ITA NO. 1231/BANG/2010 24.49 BASED ON ALL THE ABOVE, THE AR SUBMITTED THAT THE TP ADJUSTMENT, IF AT ALL SHOULD BE RESTRICTED TO TRANSACTIONS WITH THE A E ONLY. 25. REGARDING THE ISSUE ON FEES FOR TECHNICAL SERVICES, THE LEARNED AR SUBMITTED AS FOLLOWS: 25.1 DURING THE YEAR UNDER CONSIDERATION, THE AE RENDERE D TECHNICAL SERVICES TO THE ASSESSEE. THESE SERVICES WERE RENDE RED BASED ON TECHNICAL IT A NO. 2072/HYD/2011 M/S. SWARNANDHRA IJMII INTEGRATED TOWNSHIP DEVELOPMENT COMPANY PVT. LTD. ================================== 75 SERVICES AGREEMENT BETWEEN THE ASSESSEE AND ITS AE. THE ASSESSEES AE RENDERED PROJECT MANAGEMENT SERVICES AND DESIGN AND TECHNICAL SERVICES TO THE ASSESSEE. THE ASSESSEE PAID TECHNICAL SERVICES FEE OF RS. 2,32,72,451/- FOR SERVICES RENDERED BY ITS AE. 25.2 THE ASSESSEE ADOPTED TNMM TO JUSTIFY THE PRICE CHAR GED IN THE INTERNATIONAL TRANSACTIONS. AFTER CARRYING OUT A ME THODICAL SEARCH PROCESS ON PROWESS AND CAPITALINE DATABASE, THE ASSESSEE SELECTED 18 COMPA NIES AS COMPARABLES. ADOPTING OPERATING PROFITS TO SALES AS THE PROFIT LEVEL INDICATOR (PLI), THE ARITHMETIC MEAN OF COMPARABLES WAS COMPU TED AT 8%. THE BUDGETED PLI OF THE ASSESSEE WAS COMPUTED AT 20%. S INCE THE ASSESSEES OPERATING MARGIN ON SALES WAS MORE THAT THE ARITHME TIC MEAN OF COMPARABLES, THE ASSESSEE CONCLUDED THAT ITS INTERN ATIONAL TRANSACTIONS ARE AT ARMS LENGTH. 25.3 THE TPO PROPOSED TO PERFORM A SEPARATE TRANSFER PRI CING ANALYSIS IN RELATION TO FEES FOR TECHNICAL SERVICES PAID BY THE ASSESSEE TO ITS ASSOCIATED ENTERPRISES. THE TPO ADOPTED THE CUP METHOD AS MOST APPROPRIATE METHOD INSTEAD OF TNMM. THE LEARNED TPO HELD THAT THESE TR ANSACTIONS CONSTITUTE A SEPARATE CLASS OF TRANSACTIONS AND THE ACT DOES NOT PRECLUDE THE TPO FROM APPLYING AN APPROPRIATE METHOD FOR EACH CLASS OF TR ANSACTIONS LIKE TECHNICAL SERVICES FEE AND APART FROM APPLYING TNMM AT THE EN TERPRISE LEVEL. THE TPO HAS DETERMINED ARMS LENGTH PRICE OF TECHNICAL SERV ICES FEES PAID BY THE ASSESSEE TO ITS ASSOCIATED ENTERPRISES AT NIL. ACCO RDINGLY THE TPO, HAS MADE TRANSFER PRICING ADJUSTMENT OF RS. 2,32,72,452/-. 25.4 THE LEARNED TPO HAS MADE FOLLOWING ARGUMENTS IN DET ERMINING THE ARMS LENGTH PRICE OF THE TECHNICAL SERVICES AS NIL : - THE ASSESSEE HAS NOT PRODUCED ANY EVIDENCE IN SUPP ORT OF TECHNICAL SERVICES FOR WHICH PAYMENT IS MADE; - THE ASSESSEE HAS NOT BEEN ABLE TO SHOW THAT IT DER IVED ANY ECONOMIC BENEFIT FROM THE TECHNICAL SERVICES RENDERED BY ITS AE. IT A NO. 2072/HYD/2011 M/S. SWARNANDHRA IJMII INTEGRATED TOWNSHIP DEVELOPMENT COMPANY PVT. LTD. ================================== 76 25.5 THE AR SUBMITTED THAT UNDER THE TRANSFER PRICING ME THODOLOGY, EITHER A PRICE OR MARGIN IS TESTED. PRICE IS TESTED IN CASE OF CUP METHOD. MARGIN IS TESTED IN CASE OF OTHER METHODS. ONCE THE MARGIN IS TESTED AND HELD TO BE AT ARMS LENGTH, IT PRE-SUPPOSES THAT THE VARIOUS COMP ONENTS OF INCOME AND EXPENDITURE THAT HAVE BEEN CONSIDERED IN THE PROCES S OF ARRIVING AT THE NET PROFIT ARE ALSO AT ARMS LENGTH. A SATISFACTION OF M ARGINS BEING AT ARMS LENGTH CANNOT BE RE-EVALUATED / RE-EXAMINED. PRICE OR MARG INS ARE ALTERNATIVE. THEY ARE NOT TO BE CUMULATIVELY SATISFIED. THE LAW DOES NOT ENVISAGE A SUCCESSIVE APPLICATION OF THE PRICE OR MARGIN THEORY WITH THE OBJECTIVE OF FINALLY SETTLING DOWN AT A REVENUE FAVOURING RESULT. ON THE CONTRARY , IF ON EITHER PARAMETER, AN ASSESSEE FAVOURING RESULT EMERGES, IT WOULD PREC LUDE THE TPO FROM PROPOSING AN ADJUSTMENT TO THE RESULTS AS DISCLOSED BY THE ASSESSEE. 25.6 IN THE PROCESS OF ADOPTING THE TNMM, THE ASSESSEE A DOPTED THE NET PROFIT AS THE STARTING POINT. IN ARRIVING AT THIS N ET PROFIT, THE ASSESSEE HAD FACTORED THE FEES FOR TECHNICAL SERVICES PAID TO AE . ONCE THE NET PROFIT MARGIN IS DEMONSTRATED TO BE AT ARMS LENGTH, IT PRE-SUPPOS ES THAT THE VARIOUS COMPONENTS OF INCOME AND EXPENDITURE THAT HAVE BEEN CONSIDERED IN THE PROCESS OF ARRIVING AT THE NET PROFIT ARE ALSO AT A RMS LENGTH. THE OPERATING MARGINS AS COMPUTED BY THE ASSESSEE WERE DEMONSTRAT ED TO BE AT ARMS LENGTH AND THEREFORE FEES FOR TECHNICAL SERVICES PA ID BY THE ASSESSEE CANNOT BE SEPARATELY TESTED. 25.7 THE AR SUBMITTED THAT THE ABOVE IS ALSO SUPPORTED B Y THE DECISION OF THE TRIBUNAL, DELHI BENCH IN THE CASE OF MCCANN ERI KSON INDIA PVT LTD VS. ACIT ITA NO.5871/DEL/2011. 25.8 IN THIS CASE THE ASSESSEE COMPANY WAS ENGAGED IN TH E BUSINESS OF ADVERTISING AND ALLIED SERVICES. DURING THE YEAR, T HE ASSESSEE HAD SEVERAL INTERNATIONAL TRANSACTIONS INCLUDING PAYMENT OF MAN AGEMENT FEES (RS.36,293,148) AND COORDINATION COST (3,958,838) T O ITS AE. THE ASSESSEE APPLIED THE TRANSACTIONAL NET MARGIN METHOD (TNMM ) TO CONFIRM THE ARMS LENGTH PRICING OF ALL ITS INTERNATIONAL TRANSACTION S. HOWEVER THE TPO HELD THAT THE ASSESSEE HAS NOT DEMONSTRATED THAT IT HAS DERIV ED ANY ECONOMIC BENEFIT IT A NO. 2072/HYD/2011 M/S. SWARNANDHRA IJMII INTEGRATED TOWNSHIP DEVELOPMENT COMPANY PVT. LTD. ================================== 77 FROM PAYMENT OF MANAGEMENT FEES AND COORDINATION CO ST. ACCORDINGLY ALP OF THESE PAYMENTS WERE COMPUTED AS NIL BY ADOPTING C UP METHOD. THE ASSESSEE FILED OBJECTIONS BEFORE DRP WHO ALLOWED PA RTIAL RELIEF TO THE ASSESSEE. ON APPEAL TO THE TRIBUNAL, THE ISSUE WAS DECIDED IN THE FAVOUR OF THE ASSESSEE. THE RELEVANT OBSERVATIONS OF THE TRIB UNAL EXTRACTED BELOW:- 9. WE HAVE HEARD BOTH SIDES AND HAVE ALSO GONE THR OUGH THE ORDERS OF THE AO, TPO AND DRP. WE HAVE ALSO PERUSED THE RELEVANT EVIDENCES FILED BEFORE THE AUTHORITIES BEL OW. THE DRP HAS ALLOWED PART RELIEF TO THE ASSESSEE. THE ASSESS EE HAD PLACED EVIDENCES IN RESPECT OF THE MANAGEMENT SERVI CE CHARGES AND CLIENT COORDINATION FEE ON RECORD. THE CHART AT PAGES 18 TO 26 OF THIS ORDER WHICH IS PART OF ASSES SEES ARGUMENT ESTABLISHES THE NATURE OF SERVICE PROVIDED BY AE AND RECEIVED BY ASSESSEE. BENEFITS DERIVED BY THE ASSES SEE ARE ALSO NARRATED TO THIS CHART. IN OUR CONSIDERED VIEW , THE REVENUE HAD NOT BROUGHT OUT ANYTHING FOR NEGATING A NY CONTENT OF THIS CHART OF SERVICES AND BENEFITS DERI VED THEREOF. THE ASSESSEE COMPANY HAS DISCLOSED NET MARGIN FOR 2 6% AS AGAINST 8% AVERAGE OF THE COMPARABLE OTHER COMPANIE S AT ENTITY LEVEL. THE ASSESSEE IS ENGAGED IN ONE CLASS OF BUSINESS THAT IS ADVERTISING AND ITS ALLIED SERVICES. IN THE BUSINESS OF THE ASSESSEE, THERE ARE NO SEGMENTS OR DIFFERENT ACTIVI TIES WHICH CAN BE SAID INDEPENDENT OF EACH OTHER. IN OUR CONSI DERED VIEW, THE ENTITY LEVEL BENCHMARKING ON TNMM METHOD SHALL BE MOST APPROPRIATE FOR ALL INTERNATIONAL TRANSACTIONS WITH AE. ...... 25.9 HE SUBMITTED THAT EVEN THE DRP HAS AGREED THAT ONCE ENTERPRISE LEVEL MARGIN IS DETERMINED USING TNMM METHOD, MAKING ADDI TIONAL ADJUSTMENTS FOR INDIVIDUAL INTERNATIONAL TRANSACTIONS WOULD LEA D TO DOUBLE ADJUSTMENT TO THE INCOME OF THE ASSESSEE AND HENCE NOT JUSTIFIED. THE RELEVANT OBSERVATIONS OF THE DRP ON PAGE 31 OF THE ORDER IS ARE AS FOLLOWS: BESIDE THE TEST OF BENEFITS RECEIVED, THE ISSUE IS RAISING THE QUESTION WHETHER ADDITIONAL ADJUSTMENTS FOR INDIVID UAL INTERNATIONAL TRANSACTIONS CAN BE CARRIED OUT ONCE THE ENTERPRISE LEVEL PROFIT ADJUSTMENT IS MADE USING TN MM METHOD. WHILE THE TPO BELIEVES IT CAN BE DONE, WE A RE OF THE OPINION THAT IT WOULD LEAD TO DOUBLE ADJUSTMENTS TO THE INCOME OF THE ASSESSEE AND HENCE, NOT JUSTIFIED. THE POSIT ION TO BE ADOPTED IS AMENABLE TO DIFFERENT INTERPRETATIONS. F OR ANY DECISION TAKEN AT THIS LEVEL, THE DEPARTMENT DOES N OT HAVE RECOURSE TO ANY REMEDY. HENCE, TO KEEP THE ISSUE AL IVE, WE DO NOT INTERFERE WITH THE DETERMINATION OF THE TPO; IT A NO. 2072/HYD/2011 M/S. SWARNANDHRA IJMII INTEGRATED TOWNSHIP DEVELOPMENT COMPANY PVT. LTD. ================================== 78 25.10 THE ADDITION PROPOSED BY THE TPO AND GIVEN EFFECT B Y THE AO ON THIS COUNT IS THEREFORE TO BE DELETED. 25.11 THE LEARNED TPO HAD ALLEGED THAT THE ASSESSEE HAS N OT PRODUCED ANY EVIDENCE TO SHOW ANY ECONOMIC BENEFIT RECEIVED BY I T. FURTHER, THE LEARNED TPO HAS STATED THAT THERE IS NO EVIDENCE TO SHOW TH AT THE ASSESSEE HAS ACTUALLY RECEIVED ANY TECHNICAL SERVICES DURING THE YEAR. THEREFORE HE HAS DETERMINED THE ARMS LENGTH PRICE OF TECHNICAL SERV ICES FEE PAID BY THE ASSESSEE AT NIL. 25.12 THE AR SUBMITTED THAT THE TPOS CONTENTION THAT IT HAS NOT RECEIVED ANY TECHNICAL SERVICES IS WITHOUT BASIS. THE ASSESS EE SUBMITS THAT IT HAS ENTERED IN TO TECHNICAL SERVICES AGREEMENT WITH ITS AE FOR RECEIPT OF TECHNICAL SERVICES WHICH WILL ASSIST THE ASSESSEE IN DEVELOPM ENT OF RAIN TREE PARK. AS PER THE AGREEMENT THE AE HAS TO PROVIDE THE FOLLOWI NG TECHNICAL SERVICES TO THE ASSESSEE: A) ENGINEERING AND CONSTRUCTION TECHNOLOGY SERVICES IN RESPECT OF DRAWINGS, DESIGNS, MAPS, SKETCHES, AND FOR ALL CIVI L/CONSTRUCTION RELATED METHODS PRACTICES AND MATTERS. B) TO RENDER ALL THE REQUIRED TECHNICAL AND ENGINEERIN G ASSISTANCE AND ADVICE IN THE EXECUTION OF THE PROJECT ACCORDING TO THE STANDARDS SPECIFICATIONS AND TECHNOLOGY IN ACCORDANCE WITH EX ISTING BUILDING BY LAWS AND ANY OTHER STANDARDS. C) TO ADVICE ON QUALITY CONTROL ASPECTS WITH A VIEW TO ASSISTING THE COMPANY TO EXECUTE THE PROJECT IN ACCORDANCE WITH S PECIFICATIONS, STANDARDS AND QUALITY, AS STIPULATED UNDER THE MAIN CONTRACT AGREEMENT. D) TO ADVICE ON MATTERS CONCERNING PROCUREMENT OF SUPE RIOR QUALITY CONSTRUCTION MATERIALS, AGGREGATES AND CONSTRUCTION PLANT, MACHINERY AND EQUIPMENT TO BE USED IN OR ENGAGED FO R THE PROJECT. E) TO RENDER TECHNICAL ASSISTANCE AND ADVICES IN CONNE CTION WITH OPERATION AND MAINTENANCE OF CONSTRUCTION PLANT, MA CHINERY AND EQUIPMENT USED IN THE EXECUTION OF PROJECT AS WELL AS ON SYSTEMS AND PROCEDURES FOR SAFE, EFFICIENT AND OPTIMUM USE THEREOF. F) TO ADVICE ON STRATEGIES, PLANS AND SCHEDULES FOR PR OPER EXECUTION OF IT A NO. 2072/HYD/2011 M/S. SWARNANDHRA IJMII INTEGRATED TOWNSHIP DEVELOPMENT COMPANY PVT. LTD. ================================== 79 PROJECT IN ACCORDANCE WITH THE TIME SCHEDULES AS SP ECIFIED BY THE COMPANY. G) TO ADVICE ON APPROPRIATE SAFELY MEASURES TO BE IMPL EMENTED WHILE EXECUTING THE PROJECT. H) TO ADVICE ON THE COST AND BUDGETARY CONTROL ASPECT OF EXECUTION OF THE PROJECT. I) TO GENERALLY ACT AS TECHNICAL CONSULTS AND ADVISORS TO THE PROJECT, FROM TIME TO TIME, INCLUDING RENDERING OF TECHNICAL ADVICES, OPINIONS INTERPRETATION OF TECHNICAL AND ENGINEERING DATA, P LANNING AND REVIEW OF WORK SCHEDULES, PROGRAMMES AND FORMULATIN G STRATEGIES. 25.13 THE AR SUBMITTED THAT IT HAS RECEIVED THE ABOVE TEC HNICAL SERVICES DURING THE YEAR AND HAS DERIVED ADEQUATE BENEFIT FR OM IT. THIS IS DEMONSTRATED BY THE FOLLOWING: THE ASSESSEE IS ENGAGED IN DEVELOPMENT AND CONSTRUC TION OF INTEGRATED TOWNSHIP. THE DESIGN FOR THE TOWNSHIP WA S PREPARED BY THE ARCHITECTS FROM SINGAPORE. WITHOUT THEIR SUPPOR T, THE ASSESSEE COULD NOT HAVE COMPLETED THE PROJECT. THE GOVERNMENT OF ANDHRA PRADESH ACTIVELY PARTICIPA TES IN FUNCTIONING OF THE ASSESSEE. IN VIEW OF ACTIVE PART ICIPATION OF GOVERNMENT OF ANDHRA PRADESH IT CANNOT BE SAID THAT THE ASSESSEE WOULD HAVE PAID THE FEES TO AE WITHOUT RECEIVING SE RVICES. DOCUMENTS DESIGNED AND DRAFTED BY THE AE IS AN EVID ENCE TO THE FACT THAT THE AE HAS PROVIDED SERVICES TO THE ASSES SEE. REFERENCE IS MADE TO PAGE NO.43 TO 112 OF PAPER BOOK VOLUME A WHEREIN SAMPLE DOCUMENTS DESIGNED AND DRAFTED BY THE AE IS ATTACHED. 25.14 BASED ON THE ABOVE, THE AR SUBMITTED THAT IT HAS RE CEIVED THE SERVICES AND HAS DERIVED ADEQUATE BENEFIT FROM IT. 25.15 THE AR SUBMITTED THAT THE TPO CANNOT IGNORE THE AGR EEMENT ENTERED BY IT AND CANNOT QUESTION ITS COMMERCIAL DECISION. THE AR INVITED OUR ATTENTION TO THE DECISION OF TRIBUNAL, MUMBAI BENCH IN THE CASE OF DRESSER- RAND INDIA PVT. LTD V ACIT ITA NO.8753/MUM/2010, WH EREIN THE TRIBUNAL WAS CONCERNED WITH PAYMENT OF RS. 10.055 CRORES TO THE ASSOCIATED ENTERPRISE TOWARDS COST CONTRIBUTION AGREEMENT. THE ASSESSEE H AD RECEIVED VARIOUS SERVICES LIKE LEGAL SERVICES, TREASURY SERVICES, TE CHNICAL SUPPORT SERVICES ETC. IT A NO. 2072/HYD/2011 M/S. SWARNANDHRA IJMII INTEGRATED TOWNSHIP DEVELOPMENT COMPANY PVT. LTD. ================================== 80 THE TPO COMPUTED THE ALP FOR THESE SERVICES AT NIL ON THE GROUND THAT NO REAL SERVICES WERE RECEIVED BY THE ASSESSEE AND IT HAD NOT RECEIVED ANY BENEFIT UNDER THE COST CONTRIBUTION ARRANGEMENT. O N APPEAL, THE TRIBUNAL DELETED THE ABOVE ADDITION MADE BY TPO. THE RELEVAN T OBSERVATIONS OF THE TRIBUNAL IN THIS CONNECTION ARE AS FOLLOWS: 8. WE FIND THAT THE BASIC REASON OF THE TRANSFER P RICING OFFICERS DETERMINATION OF ALP OF THE SERVICES RECE IVED UNDER COST CONTRIBUTION ARRANGEMENT AS NIL IS HIS PERCE PTION THAT THE ASSESSEE DID NOT NEED THESE SERVICES AT ALL, AS THE ASSESSEE HAD SUFFICIENT EXPERTS OF HIS OWN WHO WERE COMPETENT ENOUGH TO DO THIS WORK. FOR EXAMPLE, THE TRANSFER PRICING OFFICER HAD POINTED OUT THAT THE ASSESSEE H AS QUALIFIED ACCOUNTING STAFF WHICH COULD HAVE HANDLES THE AUDIT WORK AND IN ANY CASE THE ASSESSEE HAD PAID AUDIT FEES TO EXT ERNAL FIRM. SIMILARLY, THE TRANSFER PRICING OFFICER WAS OF THE VIEW THAT THE ASSESSEE HAD MANAGEMENT EXPERTS ON ITS ROLLS, AND, THEREFORE, GLOBAL BUSINESS OVERSIGHT SERVICES WERE NOT NEEDED. IT IS DIFFICULT TO UNDERSTAND, MUCH LESS APPROVE, THIS LI NE OF REASONING. IT IS ONLY ELEMENTARY THAT HOW AN ASSES SEE CONDUCTS HIS BUSINESS IS ENTIRELY HIS PREROGATIVE A ND IT IS NOT FOR THE REVENUE AUTHORITIES TO DECIDE WHAT IS NECES SARY FOR AN ASSESSEE AND WHAT IS NOT. AN ASSESSEE MAY HAVE ANY NUMBER OF QUALIFIED ACCOUNTANTS AND MANAGEMENT EXPERTS ON HIS ROLLS, AND YET HE MAY DECIDE TO ENGAGE SERVICES OF OUTSIDE EXPERTS FOR AUDITING AND MANAGEMENT CONSULTANCY; IT IS NOT FOR THE REVENUE OFFICERS TO QUESTION ASSESSEES WISDOM IN D OING SO. THE TRANSFER PRICING OFFICER WAS NOT ONLY GOING MUC H BEYOND HIS POWERS IN QUESTIONING COMMERCIAL WISDOM OF ASSE SSEES DECISION TO TAKE BENEFIT OF EXPERTISE OF DRESSER RA ND US, BUT ALSO BEYOND THE POWERS OF THE ASSESSING OFFICER. WE DO NOT APPROVE THIS APPROACH OF THE REVENUE AUTHORITIES. W E HAVE FURTHER NOTICED THAT THE TRANSFER PRICING OFFICER H AS MADE SEVERAL OBSERVATIONS TO THE EFFECT THAT, AS EVIDENT FROM THE ANALYSIS OF FINANCIAL PERFORMANCE, THE ASSESSEE DID NOT BENEFIT, IN TERMS OF FINANCIAL RESULTS, FROM THESE SERVICES. THIS ANALYSIS IS ALSO COMPLETELY IRRELEVANT, BECAUSE WHETHER A PA RTICULAR EXPENSE ON SERVICES RECEIVED ACTUALLY BENEFITS AN A SSESSEE IN MONETARY TERMS OR NOT EVEN A CONSIDERATION FOR ITS BEING ALLOWED AS A DEDUCTION IN COMPUTATION OF INCOME, AN D, BY NO STRETCH OF LOGIC, IT CAN HAVE ANY ROLE IN DETERMINI NG ARMS LENGTH PRICE OF THAT SERVICE. WHEN EVALUATING THE A RMS LENGTH PRICE OF A SERVICE, IT IS WHOLLY IRRELEVANT AS TO W HETHER THE ASSESSEE BENEFITS FROM IT OR NOT; THE REAL QUESTION WHICH IS TO BE DETERMINED IN SUCH CASES IS WHETHER THE PRICE OF THIS SERVICE IS WHAT AN INDEPENDENT ENTERPRISE WOULD HAV E PAID FOR IT A NO. 2072/HYD/2011 M/S. SWARNANDHRA IJMII INTEGRATED TOWNSHIP DEVELOPMENT COMPANY PVT. LTD. ================================== 81 THE SAME. SIMILARLY, WHETHER THE AE GAVE THE SAME S ERVICES TO THE ASSESSEE IN THE PRECEDING YEARS WITHOUT ANY CON SIDERATION OR NOT IS ALSO IRRELEVANT. THE AE MAY HAVE GIVEN TH E SAME SERVICE ON GRATUITOUS BASIS IN THE EARLIER PERIOD, BUT THAT DOES NOT MEAN THAT ARMS LENGTH PRICE OF THESE SERVICES IS NIL. THE AUTHORITIES BELOW HAVE BEEN SWAYED BY THE CONSIDERA TIONS WHICH ARE NOT AT ALL RELEVANT IN THE CONTEXT OF DET ERMINING THE ARMS LENGTH PRICE OF THE COSTS INCURRED BY THE ASS ESSEE IN COST CONTRIBUTION ARRANGEMENT. 25.16 THE TRIBUNAL, AFTER GOING THROUGH THE DOCUMENTS FIL ED BY THE ASSESSEE, CONCLUDED THAT THE ASSESSEE HAS RECEIVED THE SERVIC ES AND DELETED THE ADDITION. IN THE ASSESSEES CASE ALSO, IT HAS DEMON STRATED THAT IT HAS RECEIVED SERVICES AND THEREFORE THE ADDITION MADE BY THE TPO IS TO BE DELETED. 25.17 THE AR ALSO INVITED OUR ATTENTION TO TRIBUNAL DECIS ION IN THE CASE OF DVIT V EKLA APPLIANCES ITA NO. 3895, 421 & 4333/DEL /2010. IN THIS CASE, THE LEARNED TPO ASSESSED THE ARMS LENGTH PRICE OF ROYALTY PAYMENT NIL ON THE GROUND THAT ASSESSEE HAS NOT BENEFITED FROM THE TECHNICAL KNOW-HOW RECEIVED FROM AE. ON APPEAL, THE CIT(A) HELD THAT R OYALTY PAYMENT WAS INCURRED FROM GENUINE BUSINESS PURPOSE AND DELETED THE ADDITION ON THE FOLLOWING GROUNDS: THE ROYALTY PAYMENT WAS APPROVED BY THE GOVERNMENT OF INDIA. THE LOSSES INCURRED BY THE ASSESSEE WERE DUE TO VA RIOUS INTERNAL AND EXTERNAL FACTORS. THE TURNOVER INCREASED AND LOSSES CAME DOWN AFTER ACQUISITION OF THE TECHNOLOGY. THE TPO HAD COMPLETELY DISREGARDED BUSINESS AND CO MMERCIAL STRATEGY/REALITIES BEHIND THE TRANSACTION AND ACTED IN A COMPLETELY MECHANICAL MANNER WITHOUT REGARD TO THE ECONOMIC CI RCUMSTANCES SURROUNDING THE TRANSACTION AND BUSINESS DECISION T AKEN BY THE ASSESSEE. 25.18 ON APPEAL BY INCOME TAX DEPARTMENT, THE TRIBUNAL UP HELD THE FINDINGS OF CIT(A). IT A NO. 2072/HYD/2011 M/S. SWARNANDHRA IJMII INTEGRATED TOWNSHIP DEVELOPMENT COMPANY PVT. LTD. ================================== 82 25.19 THE TRIBUNAL DECISION HAS BEEN CONFIRMED BY THE HON OURABLE HIGH COURT OF DELHI IN ITA NO. 1068/2011 & ITA NO. 1070/ 2011 . THE HONOURABLE HIGH COURT AFTER DISCUSSING THE APPLICABLE RULES, O ECD GUIDELINES AND DECISIONS OF VARIOUS COURTS MADE THE FOLLOWING OBSE RVATIONS: 21. THE POSITION EMERGING FROM THE ABOVE DECISIONS IS THAT IT IS NOT NECESSARY FOR THE ASSESSEE TO SHOW THAT ANY LEGITIMATE EXPENDITURE INCURRED BY HIM WAS ALSO INCURRED OUT O F NECESSITY. IT IS ALSO NOT NECESSARY FOR THE ASSESSEE TO SHOW T HAT ANY EXPENDITURE INCURRED BY HIM FOR THE PURPOSE OF BUSI NESS CARRIED ON BY HIM WAS ACTUALLY RESULTED IN PROFIT O R 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 THAT INTER A LIA FINDS EXPRESSION IN THE OECD GUIDELINES, IN THE PARAGRAPH S 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 NECESSARY OR PRUDENT FOR THE ASSESSEE TO HAVE INCURRED THE SAME OR THAT IN THE VIEW OF THE REVENUE THE EXPENDITURE WAS UNREMUN ERATIVE OR THAT IN VIEW OF THE CONTINUED LOSSES SUFFERED BY THE ASSESSEE IN HIS BUSINESS, HE COULD HAVE FEARED BETTER HAD HE NOT INCURRED SUCH EXPENDITURE. THESE ARE IRRELEVANT CON SIDERATIONS FOR THE PURPOSE OF RULE 10B. WHETHER OR NOT TO ENTE R INTO 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 DISALLOW THE ENTIRE EXPENDIT URE OR A PART 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 EXPENSE; THERE IS CERTAINLY NO AUTHORITY FOR THAT. WHAT THE TPO HAS D ONE IN THE PRESENT 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 DEMONSTRATED TO HAV E BEEN INCURRED OR LAID OUT FOR THE PURPOSES OF BUSINESS, IT IS NO CONCERN FOR THE TPO TO DISALLOW THE SAME ON ANY EXT RANEOUS REASONING. AS PROVIDED IN THE OECD GUIDELINES, HE I S EXPECTED TO EXAMINE THE INTERNATIONAL TRANSACTION AS HE ACTU ALLY FINDS THE SAME AND THEN MAKE SUITABLE ADJUSTMENT BUT A WH OLESALE DISALLOWANCE OF THE EXPENDITURE, PARTICULARLY ON TH E GROUNDS WHICH HAVE BEEN GIVEN BY THE TPO IS NOT CONTEMPLATE D OR AUTHORISED. IT A NO. 2072/HYD/2011 M/S. SWARNANDHRA IJMII INTEGRATED TOWNSHIP DEVELOPMENT COMPANY PVT. LTD. ================================== 83 23. APART FROM THE LEGAL POSITION STATED ABOVE, EVE N ON MERITS THE DISALLOWANCE OF THE ENTIRE BRAND FEE/ ROYALTY P AYMENT WAS NOT WARRANTED. THE ASSESSEE HAS FURNISHED COPIOUS M ATERIAL 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 HAS BE EN GIVEN TO DEMONSTRATE THAT THE INCREASE IN THE EMPLOYEES COST , FINANCE CHARGES, ADMINISTRATIVE EXPENSES, DEPRECIATION COST AND CAPACITY INCREASE HAVE CONTRIBUTED TO THE CONTINUOU S LOSSES. THE COMPARATIVE POSITION IS OVER A PERIOD OF 5 YEAR S FROM 1998 TO 2003 WITH RELEVANT FIGURES HAVE BEEN GIVEN BEFOR E THE CIT (APPEALS) AND THEY ARE REFERRED TO IN A TABULAR FOR M 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 (APPEA LS) OR BEFORE THE 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. 24. WE ARE, THEREFORE, UNABLE TO HOLD THAT THE TRIB UNAL COMMITTED ANY ERROR IN CONFIRMING THE ORDER OF THE CIT (APPEALS) FOR BOTH THE YEARS DELETING THE DISALLOWA NCE OF THE BRAND FEE/ ROYALTY PAYMENT WHILE DETERMINING THE AL P. ACCORDINGLY, THE SUBSTANTIAL QUESTIONS OF LAW ARE A NSWERED IN THE AFFIRMATIVE AND IN FAVOUR OF THE ASSESSEE AND A GAINST THE REVENUE. THE APPEALS ARE ACCORDINGLY DISMISSED WITH NO ORDER AS TO COSTS. 25.20 THE AR SUBMITTED THAT THE ABOVE DECISION SUPPORTS I TS CONTENTION THAT TPO CANNOT QUESTION THE COMMERCIAL DECISIONS MADE B Y THE ASSESSEE. THE MAIN ISSUE TO BE CONSIDERED IS WHETHER THE ASSESSEE RECEIVED THE SERVICES TOWARDS PAYMENTS. AS ALREADY DETAILED, THE ASSESSEE HAS RECEIVED TECHNICAL SERVICES AS PER AGREEMENT WITH ITS AE AND HAS DERIV ED ADEQUATE BENEFIT FROM SUCH SERVICES. 25.21 HE SUBMITTED THAT EVEN OTHERWISE, THE FEES FOR TECH NICAL SERVICES PAID BY THE ASSESSEE IS SOUGHT TO BE DISALLOWED ON THE B ASIS OF THE CUP METHOD. WHY AND HOW THE CUP METHOD WAS CHOSEN AS THE MOST A PPROPRIATE METHOD HAS NOT BEEN DEMONSTRATED. EVEN OTHERWISE, THE CONC LUSION HAS BEEN ARRIVED AT BY THE TPO WITHOUT CONSIDERING ANY COMPARABLE. T HE LAW OF TRANSFER PRICING IS BASED ON THE REST OF COMPARABILITY. UNDER THE CU P METHOD, COMPARABLE UNCONTROLLED TRANSACTIONS ARE IDENTIFIED. THE RESUL TS OF THE INTERNATIONAL IT A NO. 2072/HYD/2011 M/S. SWARNANDHRA IJMII INTEGRATED TOWNSHIP DEVELOPMENT COMPANY PVT. LTD. ================================== 84 TRANSACTION ARE BENCH MARKED AGAINST SUCH COMPARABL E UNCONTROLLED TRANSACTION AND APPROPRIATE CONCLUSIONS DRAWN. IF N O COMPARABLES ARE IDENTIFIED, IT CANNOT BE CONCLUDED THAT THE TRANSAC TION IS NOT AT ARMS LENGTH. IN THE ABSENCE OF ANY COMPARABLE TRANSACTIONS, THE ENTIRE EXERCISE OF THE TPO IS, NOT IN ACCORDANCE WITH THE LAW AND HENCE LIABLE TO BE IGNORED. 25.22 THE AR INVITED OUR ATTENTION TO RULE 10B(1)(A) WHIC H PROVIDES FOR COMPUTATION OF ARMS LENGTH PRICE UNDER THE CUP MET HOD. THE METHODOLOGY IS EXTRACTED AS BELOW: (A) COMPARABLE UNCONTROLLED PRICE METHOD, BY WHICH,- I. THE PRICE CHARGED OR PAID FOR PROPERTY TRANSFERRED OR SERVICES PROVIDED IN A COMPARABLE UNCONTROLLED TRANSACTION, OR A NUMBER OF SUCH TRANSACTIONS, IS IDENTIFIED: II. SUCH PRICE IS ADJUSTED TO ACCOUNT FOR DIFFERENCES, IF ANY, BETWEEN THE INTERNATIONAL TRANSACTION AND THE COMPARABLE UN CONTROLLED TRANSACTIONS OR BETWEEN THE ENTERPRISES ENTERING IN TO SUCH TRANSACTIONS, WHICH COULD MATERIALLY AFFECT THE PRI CE IN THE OPEN MARKET; III. THE ADJUSTED PRICE ARRIVED AT UNDER SUB-CLAUSE (II) IS TAKEN TO BE AN ARMS LENGTH PRICE IN RESPECT OF THE PROPERTY TRANS FERRED OR SERVICES PROVIDED IN THE INTERNATIONAL TRANSACTION; 25.23 AS HIGHLIGHTED ABOVE, THE FIRST STEP IN APPLYING CU P METHOD IS IDENTIFYING THE COMPARABLE UNCONTROLLED TRANSACTION . THE TPO HAS NOT IDENTIFIED ANY COMPARABLES. THEREFORE THE ASSESSEE SUBMITS THAT THE WHOLE METHODOLOGY PROPOSED BY THE TPO IS NOT IN ACCORDANC E WITH LAW AND IS THEREFORE LIABLE TO BE REJECTED. 25.24 AS PER THE PROVISIONS OF SECTION 92F ARMS LENGTH PRICE MEANS A PRICE WHICH IS APPLIED OR PROPOSED TO BE APPLIED IN A TRANSACTION BETWEEN PERSONS OTHER THAN ASSOCIATED ENTERPRISES, IN UNCON TROLLED CONDITIONS. THEREFORE TO DETERMINE ARMS LENGTH PRICE THERE SHO ULD BE UNCONTROLLED TRANSACTION. RULE 10A(A) DEFINES UNCONTROLLED TRAN SACTION MEANS A TRANSACTION BETWEEN ENTERPRISES OTHER THAN ASSOCIAT ED ENTERPRISES, WHETHER RESIDENT OR NON-RESIDENT. THEREFORE TO DETERMINE AR MS LENGTH PRICE WHAT IS IT A NO. 2072/HYD/2011 M/S. SWARNANDHRA IJMII INTEGRATED TOWNSHIP DEVELOPMENT COMPANY PVT. LTD. ================================== 85 IMPORTANT IS THAT THERE SHOULD BE UNCONTROLLED TRAN SACTIONS. THE LEARNED TPO HAS NOT IDENTIFIED ANY SUCH TRANSACTION. WITHOUT A COMPARABLE, THE PROCESS ADOPTED BY THE TPO IN PROPOSING AN ADJUSTMENT IS BA D IN LAW AND IS THEREFORE TO BE QUASHED. 26. REGARDING REIMBURSEMENT OF BANK GUARANTEE CHARGES, THE LEARNED AR SUBMITTED AS FOLLOWS: 26.1 DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEES AE PROVIDED BANK GUARANTEE FOR AN AMOUNT OF RS. 108 CRORES IN FAVOUR OF APHB FOR PURCHASE OF PHASE-II LAND. THE AE PAID BANK GUARANTEE CHARGES T O THE BANK, WHICH WAS REIMBURSED BY THE ASSESSEE. THE ASSESSEE MADE PAYME NT OF RS. 1,15,67,035/- TOWARDS REIMBURSEMENT OF BANK GUARANT EE CHARGES TO ITS AE. AS THE REIMBURSEMENTS WERE MADE AT COST WITHOUT ANY MARKUP, THE ASSESSEE CONCLUDED THAT THE SAME IS AT ARMS LENGTH. 26.2 THE LEARNED TPO HAS DETERMINED THE ARMS LENGTH PRI CE OF REIMBURSEMENT OF BANK GUARANTEE CHARGES AT NIL ON T HE GROUND THAT THE ASSESSEE HAS NOT FURNISHED ANY DOCUMENTS/AGREEMENTS , THE AE HAS FURNISHED TO THE BANK TO JUSTIFY THE PAYMENT OF BAN K GUARANTEE CHARGES. ACCORDINGLY, THE TPO HAS DETERMINED THE ALP AS NIL AND MADE AN ADJUSTMENT OF RS. 1,15,67,035/- 26.3 WITH RESPECT TO ABOVE, THE AR SUBMITTED THAT THE DE BIT NOTES RAISED BY THE AE WITH RESPECT TO THE CHARGES PAID TO THE BANK BY THEM AND THE BANK GUARANTEE CHARGES INVOICE ISSUED BY THE AES BANKE RS JUSTIFY THE PAYMENT OF BANK GUARANTEE CHARGES. REFERENCE MAY BE MADE TO PA GE NO. 113 TO 144 OF PAPER BOOK VOLUME A WHEREIN THE ABOVE DOCUMENTS A RE ATTACHED. ACCORDINGLY, THE ASSESSEE SUBMITS THAT THE PAYMENT OF BANK GUARANTEE CHARGES ARE AT COST AND ARE TO BE TREATED AS AT ARM S LENGTH. 26.4 IN THE GLOBAL BUSINESS ENVIRONMENT, OFTEN GROUP COM PANIES INCUR EXPENSES ON BEHALF OF OTHER COMPANIES IN THE GROUP. THESE AMOUNTS ARE RECOVERED BY THE EXPENDING ENTITIES FROM THE ENTITY ON BEHALF OF WHOM SUCH EXPENSES HAVE BEEN INCURRED. IT A NO. 2072/HYD/2011 M/S. SWARNANDHRA IJMII INTEGRATED TOWNSHIP DEVELOPMENT COMPANY PVT. LTD. ================================== 86 26.5 HE SUBMITTED THAT IN THE INSTANT CASE, THE ASSESSEE HAS REIMBURSED THE BAN GUARANTEE CHARGES TO THE AE, WHICH THE AE H AD PAID TO BANK. THE REIMBURSEMENT IS AT COST. THE ASSESSEE SUBMITS THAT SINCE THE REIMBURSEMENT IS AT COST, THE REIMBURSEMENT OF BANK GUARANTEE CHARGES ARE TO BE REGARDED AS AT ARMS LENGTH PRICE. 26.6 HE SUBMITTED THAT THIS VIEW IS ALSO SUPPORTED Y PAR A 7.36 OF THE OECD GUIDELINES. THE RELEVANT EXTRACTS ARE AS FOLLOWS: WHEN AN ASSOCIATED ENTERPRISE IS ACTING ONLY AS AN AGENT OR INTERMEDIARY IN THE PROVISION OF SERVICES, IT IS IM PORTANT IN APPLYING THE COST-PLUS METHOD THAT THE RETURN OR MA RK-UP IS APPROPRIATE FOR THE PERFORMANCE OF AN AGENCY FUNCTI ON RATHER THAN FOR THE PERFORMANCE OF THE SERVICES THEMSELVES . IN SUCH CASE, IT MAY NOT BE APPROPRIATE TO DETERMINE ARMS LENGTH PRICING AS A MARK-UP ON THE COST OF THE SERVICES BU T RATHER ON THE COSTS OF THE AGENCY FUNCTION ITSELF, OR ALTERNA TIVELY, DEPENDING ON THE TYPE OF COMPARABLE DATA BEING USED , THE MARK-UP ON THE COST OF SERVICES SHOULD BE LOWER THA N WOULD BE APPROPRIATE FOR THE PERFORMANCE OF THE SERVICE THEM SELVES. FOR EXAMPLE, AN ASSOCIATED ENTERPRISE MAY INCUR THE COS TS OF RENTED ADVERTISING SPACE ON BEHALF OF GROUP MEMBERS , COSTS THAT THE GROUP MEMBERS WOULD HAVE INCURRED DIRECTLY HAD THEY BEEN INDEPENDENT. IN SUCH A CASE, IT MAY WELL BE AP PROPRIATE TO PASS THESE COSTS TO THE GROUP RECIPIENTS WITHOUT A MARK-UP, AND TO APPLY A MARK-UP ONLY TO THE COSTS INCURRED Y THE INTERMEDIARY IN PERFORMING ITS AGENCY FUNCTION. 26.7 BASED ON THE ABOVE, THE AR SUBMITTED THAT PAYMENT O F BANK GUARANTEE CHARGES IS TO BE TREATED AS AT ARMS LENG TH AND ADDITION BY THE TPO IS TO BE DELETED. WITHOUT PREJUDICE TO THE ABOVE, HE SUBMITTED THAT WHEN A TP ADJUSTMENT IS TO BE MADE, IT SHOULD BE GIVEN A BENE FIT OF 5% RANGE AS PROVIDED UNDER PROVISO TO SECTION 92C(2) BEFORE MAK ING ADJUSTMENTS FOR THE TRANSFER PRICE. 27. THE DR RELIED ON THE ORDER OF THE ASSESSING OFFICER AND TPO. FINDINGS ON TRANSFER PRICING ISSUE FINDINGS ON TRANSFER PRICING ISSUE FINDINGS ON TRANSFER PRICING ISSUE FINDINGS ON TRANSFER PRICING ISSUE (GROUND NOS. 8.1 TO 8.10) (GROUND NOS. 8.1 TO 8.10) (GROUND NOS. 8.1 TO 8.10) (GROUND NOS. 8.1 TO 8.10): :: : 28. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATE RIAL ON RECORD. THE LEARNED COUNSEL FOR THE ASSESSEE MADE A LENGTHY ARGUMENT ON THE IT A NO. 2072/HYD/2011 M/S. SWARNANDHRA IJMII INTEGRATED TOWNSHIP DEVELOPMENT COMPANY PVT. LTD. ================================== 87 TRANSFER PRICING. AFTER CONSIDERING THE ENTIRE FAC TS AND CIRCUMSTANCES OF THE CASE AND THE FINDINGS OF THE DRP, WE ARE OF THE OPI NION THAT THE TRANSACTION TAKEN PLACE IS WITH DOMESTIC ENTERPRISES AND AT LEA ST ONE AMONG THE AES ARE NOT NON-RESIDENT. BOTH THE ASSESSEE AND IJMII ARE THE RESIDENTS FOR THE PURPOSE OF INDIAN TAXATION AS THEY ARE INDIAN COMPA NIES. ANY TRANSACTION BETWEEN THEM WILL NOT CONSTITUTE AN INTERNATIONAL T RANSACTION. THE PRIMARY CONDITION FOR ATTRACTING TRANSFER PRICING PROVISION S IS THAT THERE SHOULD BE A TRANSACTION BETWEEN TWO OR MORE ASSOCIATED ENTERPRI SES. SECTION 92A DEFINES THE TERM 'ASSOCIATED ENTERPRISE'. SECTION 92A(1) PR OVIDES THE BROAD PARAMETERS ON SATISFACTION OF WHICH TWO OR MORE ENT ERPRISES CONSTITUTE ASSOCIATED ENTERPRISES. THESE PARAMETERS ARE PARTIC IPATION IN THE MANAGEMENT OR CONTROL OR CAPITAL OF THE OTHER ENTER PRISE. SUB-SECTION (2) OF SECTION 92A ENLISTS SPECIFIC SITUATIONS WHICH MAKE TWO OR MORE ENTERPRISES ASSOCIATES OF EACH OTHER FOR THE PURPOSES OF SUB-SE CTION (1). 28.1 THE TERM ' INTERNATIONAL TRANSACTION' IS DEFINED IN SECTION 92B(1) AS FOLLOWS: 92B. (1) FOR THE PURPOSES OF THIS SECTION AND SECT IONS 92, 92C, 920 AND 92E, 'INTERNATIONAL TRANSACTION' MEANS A TRANSACTION BET WEEN TWO OR MORE ASSOCIATED ENTERPRISES, EITHER OR BOTH OF WHOM ARE NON- RESIDENTS, IN THE NATURE OF PURCHASE, SALE OR LEASE OF TANGIBLE OR INTANGIBLE PROPERTY, OR PROVISION OF SERVICES, O R LENDING OR BORROWING MONEY, OR ANY OTHER TRANSACTION HAVING A BEARING ON THE PROFITS, INCOME, LOSSES OR ASSETS OF SUCH ENTER PRISES, AND SHALL INCLUDE A MUTUAL AGREEMENT OR ARRANGEMENT BET WEEN TWO OR MORE ASSOCIATED ENTERPRISES FOR THE ALLOCATION O R APPORTIONMENT OF, OR ANY CONTRIBUTION TO, ANY COST OR EXPENSE INCURRED OR TO BE INCURRED IN CONNECTION WITH A BEN EFIT, SERVICE OR FACILITY PROVIDED OR TO BE PROVIDED TO ANYONE OR MORE OF SUCH ENTERPRISES. A TRANSACTION BETWEEN ASSOCIATED ENTERPRISES SATISF YING THE PRESCRIBED CRITERIA BECOMES AN INTERNATIONAL TRANSA CTION. 28.2 ONE OF THE ESSENTIAL LIMBS/CONSTITUENTS OF AN INTER NATIONAL TRANSACTION IS 'ASSOCIATED ENTERPRISE'. SECTION 92B(2) OUTLINES THE CIRCUMSTANCES UNDER WHICH A TRANSACTION BETWEEN TWO PERSONS WOULD BE DE EMED TO BE BETWEEN IT A NO. 2072/HYD/2011 M/S. SWARNANDHRA IJMII INTEGRATED TOWNSHIP DEVELOPMENT COMPANY PVT. LTD. ================================== 88 ASSOCIATED ENTERPRISES. SUCH DEEMING FICTION IS IN ADDITION TO THE ONE CREATED UNDER SECTION 92A(2). THE DEEMING FICTION UNDER SEC TION 92A(2) ARE LIMITED TO THE PARAMETERS OF MANAGEMENT, CONTROL OR CAPITAL. S ECTION 92B(2) TRAVELS BEYOND THESE PARAMETERS. 28.3 TRANSACTION BETWEEN AN ENTERPRISE AND A PERSON WHIC H IS NOT AN ASSOCIATED ENTERPRISE UNDER SECTION 92A, MAY BE DEE MED TO BE TRANSACTION BETWEEN ASSOCIATED ENTERPRISES FOR THE PURPOSES OF SECTION 92B{L) IF THE CONDITIONS CONTAINED IN SECTION 92B(2) ARE ATTRACTE D. SECTION 92B(2) PROVIDES: '(2) A TRANSACTION ENTERED INTO BY AN ENTERPRISE WI TH A PERSON OTHER THAN AN ASSOCIATED ENTERPRISE SHALL, FOR THE PURPOSES OF SUB-SECTION (1), BE DEEMED TO BE A TRANSACTION ENTE RED INTO BETWEEN TWO ASSOCIATED ENTERPRISES, IF THERE EXISTS A PRIOR AGREEMENT IN RELATION TO THE RELEVANT TRANSACTION B ETWEEN SUCH OTHER PERSON AND THE ASSOCIATED ENTERPRISE, OR THE TERMS OF THE RELEVANT TRANSACTION ARE DETERMINED IN SUBSTANCE BE TWEEN SUCH OTHER PERSON AND THE ASSOCIATED ENTERPRISE. 28.4 SECTION 92B(2) EMBODIES A LEGAL FICTION. IT DEEMS A TRANSACTION TO HAVE BEEN ENTERED INTO BETWEEN TWO ASSOCIATED ENTER PRISES. THOUGH SECTION 92B(2) IS A PART OF SECTION 92B WITH THE HEADING 'DEFINITION OF INTERNATIONAL TRANSACTION', IT IS TO BE READ AS AN EXTENSION OF SECTION 92A(2) AND NOT AS AN EXTENSION OF SECTION 92B(1). THIS IS FOR THE FOLLOW ING REASONS: (A) BOTH SECTION 92A(2) AND 92B(2) DEAL WITH SITUATIONS UNDER WHICH TWO OR MORE PERSONS CONSTITUTE ASSOCIATED ENT ERPRISES. (B) SECTION 92B(1) DOES NOT DEFINE THE TERM 'ASSOCIATED ENTERPRISE'. IT DEFINES THE TERM 'INTERNATIONAL TRA NSACTION'. THIS DEFINITION PROVIDES THAT THERE CAN BE AN INTERNATIO NAL TRANSACTION ONLY BETWEEN TWO OR MORE ASSOCIATED ENT ERPRISES AND NOT OTHERWISE. THEREFORE RECOURSE TO SECTION 92 A AND SECTION 92B(2} IS REQUIRED BEFORE REFERRING TO SECT ION 92B(1}. (C) SECTION 92B(2} ONLY DEEMS CERTAIN TRANSACTION TO BE 'TRANSACTION BETWEEN ASSOCIATED ENTERPRISES' AND NO T AS 'INTERNATIONAL TRANSACTION BETWEEN TWO ENTERPRISES' . IT A NO. 2072/HYD/2011 M/S. SWARNANDHRA IJMII INTEGRATED TOWNSHIP DEVELOPMENT COMPANY PVT. LTD. ================================== 89 28.5 THERE IS A DIFFERENCE BETWEEN ASSOCIATED ENTERPRI SES DEFINED UNDER SECTION 92A AND TRANSACTION DEEMED TO BE BETWEEN AS SOCIATED ENTERPRISES UNDER SECTION 92B(2}. UNDER SECTION 92A, TWO OR MOR E ENTERPRISES ONCE DETERMINED TO BE ASSOCIATED ENTERPRISES REMAIN SO F OR THE ENTIRE FINANCIAL YEAR. THEIR RELATIONSHIP WILL NOT CHANGE FOR DIFFER ENT TRANSACTIONS BETWEEN THEM. THEY WILL REMAIN ASSOCIATED ENTERPRISES EVEN IF THEY DO NOT HAVE ANY TRANSACTION DURING THE PREVIOUS YEAR. ON THE OTHER HAND, A TRANSACTION BETWEEN AN ENTERPRISE AND ANOTHER PERSON CAN BE DEE MED TO BE TRANSACTION BETWEEN ASSOCIATED UNDER SECTION 92B(2} ONLY IN RES PECT OF TRANSACTIONS SPECIFIED THEREIN AND NOT OTHERWISE. THIS FICTION I S TRANSACTION SPECIFIC AND DOES NOT APPLY TO ALL TRANSACTIONS BETWEEN THE ENTE RPRISE AND PERSON, ON THE BASIS THAT ONE TRANSACTION ATTRACTS SECTION 92B(2}. 28.6 SECTION 92B(2} WAS ENACTED TO HIT AT THOSE CASES WHERE TWO ASSOCIATED ENTERPRISES INTEND TO HAVE AN INTERNATIO NAL TRANSACTION BUT WANT TO AVOID TRANSFER PRICING PROVISIONS BY INTERPOSING A THIRD PARTY AS AN INTERMEDIARY. IN SUCH CASES, THE THIRD PARTY INTERM EDIARY WILL GENERALLY NOT BE THE ULTIMATE CONSUMER OF THE SERVICES OR GOODS. THE INTERMEDIARY WOULD FACILITATE THE TRANSFER OF SERVICES OR GOODS FROM O NE ENTERPRISE TO ITS ASSOCIATE ENTERPRISE WITH NO VALUE ADDITION OR INSIGNIFICANT VALUE ADDITION. THE INTERMEDIARY IS USED TO BREAK A TRANSACTION INTO TW O DIFFERENT PARTS, WHICH PARTS WHEN VIEWED IN ISOLATION WOULD NOT SATISFY TH E REQUIREMENTS OF SECTION 92A. THE LEGAL FORM OF THE TRANSACTION IN SUCH CIRC UMSTANCES IS IGNORED. THE SUBSTANCE OF THE TRANSACTION IS GIVEN EFFECT TO, NO T BY DISREGARDING THE EXISTENCE OF THE INTERMEDIARY BUT BY DEEMING THE TR ANSACTION WITH THE INTERMEDIARY ITSELF TO BE ONE WITH AN ASSOCIATED EN TERPRISE. 28.7 THE LEGAL FICTION CREATED IN RESPECT OF THE SPECIF IED TRANSACTION CAN BE USED ONLY FOR THE PURPOSE OF EXAMINING WHETHER SUCH TRANSACTION CONSTITUTES AN 'INTERNATIONAL TRANSACTION' UNDER SECTION 92B(1) . IN CASE SECTION 92B(1) IS NOT ATTRACTED, THE FICTION UNDER SECTION 92B(2) CEA SES TO OPERATE. IN OUR OPINION, THE IMPUGNED TRANSACTION BETWEEN THE ASSES SEE AND IJMII DOES NOT FALL UNDER SECTION 92B(2). THIS IS FOR THE FOLLOWIN G REASONS. IT A NO. 2072/HYD/2011 M/S. SWARNANDHRA IJMII INTEGRATED TOWNSHIP DEVELOPMENT COMPANY PVT. LTD. ================================== 90 (A) BOTH THE ASSESSEE AND IJMII ARE RESIDENTS OF INDIA FOR TAX PURPOSES. THEY PAY THEIR TAXES IN INDIA. TO FALL UNDER 92B(1) , THE INTERNATIONAL TRANSACTION HAS TO BE BETWEEN ASSOCIATED ENTERPRISE S, AT LEAST ONE OF WHOM IS A NON-RESIDENT. AS BOTH THE PARTIES ARE RES IDENTS, THE TRANSACTION BETWEEN THE ASSESSEE AND IJMII DO NOT C ONSTITUTE AN INTERNATIONAL TRANSACTION. THUS THE BASIC PREMISE F OR INVOKING THE DEEMING FICTION UNDER SECTION 92B(2) DOES NOT ARISE . (B) THE TRANSACTION IN QUESTION DID NOT INVOLVE TRANSFE R OF GOODS OR SERVICES FROM THE ASSESSEE TO IJM GROUP OR TO ANY O THER NON-RESIDENT ENTERPRISE, EITHER DIRECTLY OR INDIRECTLY, OR BY US ING IJMII AS AN INTERMEDIARY. THE TRANSACTION IN QUESTION INVOLVED DIRECT RENDERING OF SERVICES BY IJMII TO THE ASSESSEE. (C) THE APHB CAME INTO EXISTENCE UNDER THE A.P. HOUSING BOARD ACT, 1956. IT PERFORMS GOVERNMENTAL FUNCTIONS. ITS POLIC IES ARE DIRECTLY CONTROLLED BY THE ANDHRA PRADESH GOVERNMENT. IN VIE W OF THE ACTIVE PARTICIPATION OF THE GOVERNMENT OF AP IN THE FUNCTI ONING OF THE ASSESSEE, IT CANNOT BE SAID THAT IJM GROUP WOULD IN FLUENCE THE ASSESSEE EITHER IN ENTERING INTO CONTRACT WITH IJMI I OR IN DETERMINING THE TERMS AND CONDITIONS THERETO. A. THE TRANSACTIONS BETWEEN THE ASSESSEE AND IJMII FAL L UNDER ITEM 4 ABOVE. CONSEQUENTLY, THE TRANSACTION BETWEEN THE ASSESSEE AND IJMII DOES NOT CONSTITUTE AN INTERNATI ONAL TRANSACTION. THE TRANSFER PRICING PROVISIONS OF CHA PTER X ARE THEREFORE NOT ATTRACTED. B. THAT TRANSFER PRICING PROVISIONS ARE NOT APPLICABLE TO TRANSACTIONS BETWEEN TWO DOMESTIC RELATED PARTIES. THE TRANSFER PRICING REGULATIONS HAVE BEEN SPECIFICALLY BEEN MADE APPLICABLE TO TRANSACTIONS BETWEEN TWO DOMESTIC REL ATED PARTIES BY VIRTUE OF THE AMENDMENT THROUGH FINANCE ACT, 2012. IN CASE, THE EXISTING PROVISIONS WERE APPLICABLE TO DOMESTIC TRANSACTIONS THEN THERE WAS NO NEED TO BRING ABOUT THE FOR THE ABOVE AMENDMENT. 28.8 THE PRIMARY CONDITION FOR ATTRACTING TRANSFER PRICI NG PROVISIONS IS THAT THERE SHOULD BE A TRANSACTION BETWEEN TWO OR MORE A ES IN TERMS OF SECTION 92A(1) AND 92A(2) OF THE ACT. IN OUR OPINION, THE TRANSACTIONS BETWEEN THE ASSESSEE AND IJMII DO NOT FALL UNDER SECTION 92B(2) OF THE ACT. BEING SO, AS CONTENDED BY THE LEARNED AR IN HIS LENGTHY ARGUMENT S, IN OUR OPINION, THE DRP SIMPLY WANTS TO KEEP THE MATTER ALIVE, THOUGH T HEY AGREED WITH THE ASSESSEE'S COUNSEL, AND CONFIRMED THE ORDER OF THE TPO (AO). IN OUR OPINION, IT A NO. 2072/HYD/2011 M/S. SWARNANDHRA IJMII INTEGRATED TOWNSHIP DEVELOPMENT COMPANY PVT. LTD. ================================== 91 THE ARGUMENT OF THE DEPARTMENT IS DEVOID OF MERIT. ACCORDINGLY, WE AGREE WITH THE CONTENTION OF THE ASSESSEE'S COUNSEL ON LE GAL ISSUE. SINCE WE HAVE DECIDED ON LEGAL ISSUE ON APPLICABILITY OF TRANSFER PRICING ON THE ASSESSEE, WE REFRAIN FROM GOING INTO THE OTHER GROUNDS RAISED BY THE ASSESSEE ON THE ISSUE OF TRANSFER PRICING. THE ADDITION MADE TOWARDS TRA NSFER PRICING TRANSACTIONS IS DELETED IN ITS ENTIRETY. 29. WITH REGARD TO GROUND NO. 9.1 RELATING TO LEVY OF I NTEREST U/S. 234B AND 234D OF THE ACT, WE ARE INCLINED TO DIRECT THE ASSESSING OFFICER TO RECOMPUTE THE SAME WHILE PASSING GIVING EFFECT ORDE R TO THIS ORDER, AS THIS IS MANDATORY AND CONSEQUENTIAL IN NATURE. 30. NOW COMING TO THE ADDITIONAL GROUNDS RAISED BY THE ASSESSEE WITH REGARD SETTING OFF OF BROUGHT FORWARD BUSINESS LOSS AND UNABSORBED DEPRECIATION, WE ARE INCLINED TO REMIT THE SAME TO THE FILE OF THE ASSESSING OFFICER, AS THIS GROUND IS RAISED FOR THE FIRST TIM E BEFORE US AND THE LOWER AUTHORITIES HAVE NO OCCASION TO EXAMINE THE SAME. T HE ASSESSING OFFICER IS REQUIRED TO SEE WHETHER THESE LOSSES HAVE BEEN QUAN TIFIED BY THE ASSESSEE IN ITS RETURNS OF INCOME AND ALSO IF THE RETURNS HAVE BEEN FILED IN TIME IN RESPECT OF RELEVANT ASSESSMENT YEARS, THEN THE SAME IS TO B E ALLOWED IN TERMS OF SECTION 72 OF THE ACT. THE ASSESSING OFFICER IS DI RECTED TO EXAMINE THE ISSUE AFTER GIVING OPPORTUNITY TO THE ASSESSEE. 31. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALL OWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 31 ST DECEMBER, 2012. SD/ - (SAKTIJIT DEY) JUDICIAL MEMBER SD/ - (CHANDRA POOJARI) ACCOUNTANT MEMBER HYDERABAD, DATED THE 31 ST DECEMBER, 2012 IT A NO. 2072/HYD/2011 M/S. SWARNANDHRA IJMII INTEGRATED TOWNSHIP DEVELOPMENT COMPANY PVT. LTD. ================================== 92 COPY FORWARDED TO: 1. M/S. SWARNANDHRA IJMII INTEGRATED TOWNSHIP DEVELOPMENT COMPANY PVT. LTD., 1-90A, PLOT NOS. 20 & 21, RBI CO LONY, MADHAPUR, HYDERABAD - 500 081. 2. THE DEPUTY CIT, CIRCLE - 3(3), HYDERABAD. 3. THE DISPUTE RESOLUTION PANEL (DRP), HYDERABAD. 4. THE ADDL. CIT (TRANSFER PRICING) , HYDERABAD. 5. THE DR A BENCH, ITAT, HYDERABAD. TPRAO