VINCA DEVELOPER P.LTD, MUMBAI V. ASST CIT CIR 11(3)(2), MUMBAI

ITA 2087/MUM/2017

• Counselvise Citation: [2018] 121 COUNSELVISE.COM (IT) 7113 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 2 month(s) 29 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-06-2018
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: Not Allotted
• Assessment Year: 2012-2013
• Appeal Filed On: 24-03-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: V JENARDHANAN
• Keywords: Transfer pricing; Double taxation relief
• Section: 92A; 10; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH K, MUMBAI BEFORE SHRI MAHAVIR SINGH, JUDICIAL MEMBER AND SHRI RAJESH KUMAR, ACCOUNTANT MEMBER ITA NO.2087/M/2017 ASSESSMENT YEAR: 2012-13 M/S. VINCA DEVELOPER PVT. LTD., UNIT NO.116, FIRST FLOOR, REHAB BUILDING NO.4, AKRUTI ANNEX, ROAD NO.7, MAROL MIDC, ANDHERI (EAST), MUMBAI 400 093 PAN: AACCV 8042J VS. ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE 11(3)(2), MUMBAI 400 093 (APPELLANT) (RE SPONDENT) PRESENT FOR: ASSESSEE BY : SHRI ANUJ KISNADWALA, A.R. REVENUE BY : SHRI V. JENARDHANAN, D.R. DATE OF HEARING : 13.06.2018 DATE OF PRONOUNCEMENT : 22.06.2018 O R D E R PER RAJESH KUMAR, ACCOUNTANT MEMBER: THE PRESENT APPEAL HAS BEEN PREFERRED BY THE ASSES SEE AGAINST THE ORDER DATED 23.11.2016 OF THE DISPUTE R ESOLUTION PANEL (DRP) RELEVANT TO ASSESSMENT YEAR 2012-13. 2. THE GROUNDS RAISED BY THE ASSESSEE ARE AS UNDER: FOLLOWING GROUNDS ARE WITHOUT PREJUDICE TO EACH OT HER: TRANSFER PRICING GROUNDS 1. GROUND NO. 1: RELATING TO NON-APPLICABILITY OF TRAN SFER PRICING PROVISIONS : 1.1. THE HON'BLE DRP ERRED ON FACTS AND IN LAW BY CONCURRING WITH THE LEARNED AO / TPO'S VIEW THAT APPELLANT AND NEDERLAN DSE FINANCIERINNGS- MAATSCHAPPIJ VOOR ONTWIKKELINGSLANDERN N.V. ('FMO)' ) ARE ASSOCIATED ENTERPRISES AS PER SECTION 92 OF THE ACT AND THEREF ORE TRANSFER PRICING ITA NO.2087/M/2017 M/S. VINCA DEVELOPER PVT. LTD. 2 PROVISIONS ARE APPLICABLE TO IT. THE APPELLANT CONT ENDS THAT FMO IS NOT AN ASSOCIATED ENTERPRISE AS PER THE PROVISIONS OF ACT AND DTAA BETWEEN INDIA AND NETHERLANDS AND HENCE TRANSFER PRICING PROVISIO NS ARE NOT APPLICABLE TO IT. 1.2. THE HON'BLE DRP ERRED ON FACTS AND IN LAW BY C ONCURRING WITH THE LEARNED AO / TPO'S VIEW THAT THE COMPULSORY CONVERTIBLE DEB ENTURES (CCDS) ARE IN THE NATURE OF LOAN AND THEREFORE COVERED UNDER THE DEEM ING PROVISION UNDER SECTION 92A(2)(C). 1.3. THE HON'BLE DRP ERRED ON FACTS AND IN LAW BY C ONCURRING WITH THE LEARNED AO / TPO'S VIEW THAT SECTION 92A(2) OVERRIDES SECTI ON 92A(1) IGNORING THE FACT THAT SECTION 92A(2) ONLY SUPPLEMENTS THE PRIMA RY DEFINITION OF ASSOCIATED ENTERPRISES UNDER SUB-SECTION (1). 1.4. THE HON'BLE DRP ERRED ON FACTS AND IN LAW BY C ONCURRING WITH THE LEARNED AO / TPO'S VIEW THAT SINCE THE APPELLANT HAS COMPLI ED WITH TP PROVISIONS IN THIS YEAR AND EARLIER YEARS, TRANSFER PRICING PROVI SIONS ARE APPLICABLE WITHOUT APPRECIATING THE FACT THAT COMPLIANCE WAS DONE ON W ITHOUT PREJUDICE BASIS. 2. GROUND NO. 2: RELATING TO BENCHMARKING ANALYSIS UNDERTAKEN BY APPELLANT: 2.1. THE HON'BLE DRP ERRED ON FACTS AND IN LAW BY U PHOLDING REJECTION OF THE TRANSFER PRICING STUDY REPORT AND THE BENCHMARKING ANALYSIS ADOPTED BY THE APPELLANT WHILE ARRIVING AT THE ARM'S LENGTH INTERE ST RATE AT WHICH INTEREST IS PAID TO EMO ON THE CCD'S WITHOUT ANY COGENT REASON. 2.2. THE HON'BLE DRP ERRED ON FACTS AND IN LAW IN REJECTING COMPARABLE DEBENTURES IDENTIFIED BY THE APPELLANT HAVING SIMIL AR PARAMETER AS THAT OF CCD'S ISSUED BY IT TO FMO WITHOUT GIVING ANY COGENT REASO NS. 2.3. THE HON'BLE DRP FURTHER ERRED ON FACTS AND IN LAW BY DISREGARDING THE CREDIT RATING ANALYSIS DONE BY THE APPELLANT BASED ON THE SCIENTIFIC PROCEDURE LAID DOWN BY THE SECURITIES AND EXCHANGE BOARD OF I NDIA ('SEBI') AND UPHOLDING THE LEARNED AO'S /TPO'S APPROACH AND NOT EXAMINING THE DETAILED SUBMISSIONS MADE BY THE APPELLANT. 3. GROUND NO. 3: RELATING TO OF USE OF SBI PLR AS ALP: 3.1 THE HON'BLE DRP ERRED ON FACTS AND IN LAW BY ME RELY ACCEPTING THE STATE BANK OF INDIA'S ('SBI') PRIME LENDING RATE ('PLR') AS COMPUTED BY THE LEARNED AO/TPO WHILE DETERMINING THE ARM'S LENGTH NATURE OF INTEREST PAID BY THE APPELLANT ON CCD'S ISSUED TO FMO WITHOUT CARRYING O UT DETAILED ANALYSIS OR MAKING ANY ADJUSTMENT FOR THE DIFFERENCES IN TERMS AND NATURE OF CCD'S AND PLR RATES. 3.2 THE HON'BLE DRP ERRED BY IGNORING THE FACT THAT SAME INTEREST RATE ON DEBENTURES THAT WERE ISSUED IN THE EARLIER YEAR REL EVANT TO ASSESSMENT YEAR 2010-11 HAS BEEN ACCEPTED AT ALP BY THE TPO ITSELF AND THEREBY IGNORING THE PRINCIPLE OF RES JUDICATA. ITA NO.2087/M/2017 M/S. VINCA DEVELOPER PVT. LTD. 3 CORPORATE TAX GROUNDS 4. GROUND NO. 4: PENALTY PROCEEDINGS: 4.1 THE HON'BLE DRP / LEARNED TPO / AO ERRED, IN LA W AND IN INITIATING PENALTY PROCEEDINGS UNDER SECTION 271( 1)(C). THE APPELLANT CRAVES THE LEAVE TO AMEND OR ALTER AN Y GROUND OR ADD A NEW GROUND WHICH MAY BE NECESSARY. 3. THE ISSUE RAISED IN GROUND NO.1 IS AGAINST THE DI RECTION OF DRP HOLDING THAT THE ASSESSEE AND NEDERLANDSE FINANCIERINNGS-MAATSCHAPPIJ VOOR ONTWIKKELINGSLANDE RN N.V. (HEREINAFTER CALLED AS FMO) ARE ASSOCIATED ENTERPRI SE AS PER SECTION 92 OF THE ACT AND THEREFORE TRANSFER PRICIN G PROVISIONS ARE APPLICABLE TO IT. WHEREAS ACCORDING TO THE ASSESSEE, THE FMO IS NOT AN ASSOCIATED ENTERPRISE AS PER THE PRO VISIONS OF ACT AND DTAA BETWEEN INDIA AND NETHERLANDS AND HENC E TRANSFER PRICING PROVISIONS ARE NOT APPLICABLE TO I T. THE OTHER ISSUE RAISED IN GROUND NO.1 IS AGAINST THE DECISION OF DRP HOLDING THAT THE COMPULSORY CONVERTIBLE DEBENTURES (CCDS) ARE IN THE NATURE OF LOAN AND THEREFORE COVERED UND ER THE DEEMING PROVISION UNDER SECTION 92A(2)(C) OF THE AC T. 4. AT THE OUTSET, THE LD. COUNSEL OF THE ASSESSEE POI NTED OUT THAT ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE IN ITS OWN CASE IN ITA NO.649/M/2016 FOR A.Y. 2011-12 (WRONGLY MENTIONED AS A.Y. 2010-11 IN THE ORDER) VIDE ORDER D ATED 30.05.2018 IN WHICH THE CO-ORDINATE BENCH OF THE TRI BUNAL HAS HELD THAT FMO IS NOT AN ASSOCIATE ENTERPRISE OF THE ASSESSEE AND THEREFORE THERE IS NO NEED FOR COMPUTATION OF A LP. THE LD. A.R. ACCORDINGLY SUBMITTED THAT THE CURRENT YEAR APPEAL SHOULD BE DECIDED FOLLOWING THE SAME ANALOGY. ITA NO.2087/M/2017 M/S. VINCA DEVELOPER PVT. LTD. 4 5. THE LD. D.R., ON THE OTHER HAND, APPEARED TO BE FAI RLY AGREED TO THE CONTENTION OF THE ASSESSEE THAT THE I SSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION O F THE CO- ORDINATE BENCH OF THE TRIBUNAL. 6. WE HAVE HEARD THE RIVAL SUBMISSIONS OF BOTH THE P ARTIES AND PERUSED THE MATERIAL ON RECORD. A PERUSAL OF T HE SAID DECISION IN ITA NO.649/M/2011 FOR A.Y. 2011-12 (SUPR A) REVEALS THAT THE ISSUE IS DECIDED IN FAVOUR OF THE ASSESSEE BY THE COORDINATE BENCH HOLDING THAT FMO IS NOT AN AS SOCIATE ENTERPRISE OF THE ASSESSEE AND THEREFORE THE TRANSF ER PRICING PROVISIONS ARE NOT APPLICABLE. THE RELEVANT OPERATI VE PORTION OF THE ORDER IS EXTRACTED BELOW: 11. A CAREFUL READING OF SECTION 92A MAKES IT CLEA R THAT BASIC RULE FOR TREATING THE ENTERPRISES AS AE IS SET OUT IN SECTION 92A(1). SECTION 92A(1) LAYS DOWN THE BASIC RULE THAT IN ORDER TO TREAT AN ENTITY AS AS SOCIATED ENTERPRISE, ONE ENTERPRISE, IN RELATION TO ANOTHER ENTERPRISE, PARTICIPATE, DIR ECTLY OR INDIRECTLY, OR THROUGH ONE OR MORE INTERMEDIARIES, 'IN THE MANAGEMENT OR CONTR OL OR CAPITAL OF THE OTHER ENTERPRISE' OR WHEN 'ONE OR MORE PERSONS WHO PARTIC IPATE, DIRECTLY OR INDIRECTLY, OR THROUGH ONE OR MORE INTERMEDIARIES, IN ITS MANAGEME NT OR CONTROL OR CAPITAL, ARE THE SAME PERSONS WHO PARTICIPATE, DIRECTLY OR INDIR ECTLY, OR THROUGH ONE OR MORE INTERMEDIARIES, IN THE MANAGEMENT OR CONTROL OR CAP ITAL OF THE OTHER ENTERPRISE'. FURTHER, CAREFUL READING OF SECTION 92(A)(2) ONLY P RESCRIBED THE ILLUSTRATIONS OF THE CASES IN WHICH SUCH AN ENTERPRISE PARTICIPATES IN M ANAGEMENT, CAPITAL OR CONTROL OF ANOTHER ENTERPRISE. WHICH MEANS THAT SECTION 92A (1 ) DECIDES IS THE PRINCIPLE ON THE BASIS OF WHICH ONE HAS TO EXAMINE WHETHER OR NO T TWO OR MORE ENTERPRISE ARE ASSOCIATED ENTERPRISE OR NOT. THE PRINCIPLE IS, AS WE HAVE NOTED ABOVE, THAT ONE OF THE ENTERPRISE, IN RELATION TO OTHER ENTERPRISE, PA RTICIPATE, DIRECTLY OR INDIRECTLY, IN THE MANAGEMENT OR CONTROL OR CAPITAL OF THE OTHER E NTERPRISE AND THAT PERSONS WHO PARTICIPATE IN SUCH MANAGEMENT, CONTROL OR CAPITAL OF BOTH THE ENTERPRISES ARE COMMON. AS LONG AS AN ENTERPRISE PARTICIPATES IN AN Y OF THE THREE ASPECTS OF THE OTHER ENTERPRISE, I.E. (A) MANAGEMENT; (B) CAPITAL; OR (C) CONTROL. 12. HONBLE SUPREME COURT IN NARENDRA KUMAR VS UOI (AIR 1989 SC 2138) WHILE CONSIDERING THE MEANING OF COMPULSORY CONVERTIBLE D EBENTURE(CCD) HELD THAT CCD DOES NOT POSTULATES ANY REPAYMENT OF PRINCIPAL. THEREFORE, IT DOES NOT CONSTITUTE A DEBENTURE IN ITS CLASSICAL SENSE. TH E HONBLE APEX COURT ALSO REFERRED AND RELIED THE GUIDELINES FOR THE PROTECTION OF DE BENTURE HOLDERS ISSUED ON 14 TH JANUARY 1987, WHICH RECOGNISED THE BASIC DISTINCTIO N BETWEEN CONVERTIBLE AND NON CONVERTIBLE DEBENTURE. ON THE BASIS OF SAID GUIDELI NE IT WAS HELD THAT INSTRUMENT ITA NO.2087/M/2017 M/S. VINCA DEVELOPER PVT. LTD. 5 WHICH IS COMPULSORILY CONVERTIBLE IN TO SHARES, IS REGARDED AS EQUITY AND NOT AS A LOAN OR DEBT. THEREFORE, WE MAY CONCLUDE THAT T HE CCD IS NOT A LOAN AND HENCE FMO WOULD NOT FALL WITHIN THE DEFINITION OF AE AS PROVIDED IN SECTION 92A(2)(C) OF THE ACT. 13. THE COORDINATE BENCH OF HYDERABAD TRIBUNAL IN A DAMA INDIA (P) LTD VS CIT [78TAXMANN.COM 75 (HYD)] HELD THAT CCD ARE NOT LOAN WITH THE FOLLOWING OBSERVATION: 8. WE HAVE CONSIDERED THE ISSUE AND EXAMINED THE RIVA L CONTENTIONS. THERE IS NO DISPUTE WITH REFERENCE TO THE FACT THAT THE C CDS WERE ISSUED IN INDIAN RUPEES. ACCORDINGLY, FOLLOWING THE PRINCIPLES LAID DOWN BY THE CO-ORDINATE BENCHES AND THE HON'BLE HIGH COURT AS RELIED ON BY THE ASSESSEE IN THE SUBMISSIONS, WE HAVE TO HOLD THAT TPO HAS WRONGLY T REATED THE ISSUANCE OF CCDS AS A LOAN, BY TREATING IT AS AN EXTERNAL COMME RCIAL BORROWING, IGNORING THE FACT THAT LOAN IS A DEBT, WHEREAS CCD IS HYBRID INSTRUMENT IN NATURE BASICALLY CATEGORISED AS EQUITY IN NATURE. IT WAS A CCEPTED BY THE HON'BLE SUPREME COURT IN THE CASE OF SAHARA INDIA REAL ESTATE CORPN. LTD. ( SUPRA ) WHILE ASSIGNING THE JURISDICTION TO SEBI AS AN 'EQU ITY INSTRUMENT'. FURTHER, THE POLICY OF GOVT. OF INDIA AND ALSO RBI EFFECTIVE FROM 01- 04-2010 ALSO INDICATE THAT ISSUANCE OF CCD IS PART OF FDI BEING QUASI-EQUITY IN NATURE AND CONSIDERING THE SAME AS A LOAN WOULD BE COMPLETELY AGAINST REGULATIONS LAID BY DIPB, RBI AND FEMA. 14. THE COORDINATE BENCH OF CHENNAI TRIBUNAL IN ORC HID PHARMA LTD. VS DCIT WHILE CONSIDERING THE DEFINITION OF AE AS PRESCRIBE D UNDER SECTION 92A(1) HELD AS UNDER; 14. AS EVIDENT FROM THE LIMITED NARRATION OF FACTS IN THE SAID DECISION, THE ASSESSEE-COMPANY (I.E. PAGE INDUSTRIES LTD; PIL IN SHORT) WAS 'A LICENSEE OF THE BRAND- NAME 'JOCKEY' FOR EXCLUSIVE MANUFACTURE AND MARKETING OF GOODS UNDER LICENSE AGREEMENT' BUT 'THE ASSESSEE-COMPANY OWNS ENTIRE MANUFACTURING FACILITY, CAPITAL INVESTMENT OF RS.10 0 CRORES AND 15000 EMPLOYEES' AND 'THERE IS NO PARTICIPATION OF JII (I .E. JOCKEY INTERNATIONAL INC., USA) IN THE CAPITAL AND MANAGEMENT OF THE ASS ESSEE-COMPANY'. ON THESE FACTS, THE COORDINATE BENCH HAS HELD THAT JII AND PIL ARE NOT ASSOCIATED ENTERPRISES AS THERE IS NO PARTICIPATION BY JII IN 'MANAGEMENT OR CAPITAL OF PIL(EMPHASIS SUPPLIED BY US)'. WE HAVE OUR RESERVAT ION, WHATEVER BE IT'S WORTH, ON THE CONCLUSIONS ARRIVED AT IN THIS CASE B UT THAT DOES NOT DILUTE OUR HIGHEST RESPECT FOR AN IMPORTANT PRINCIPLES OF LAW LAID DOWN BY THE COORDINATE BENCH. THE REASONS FOR THIS APPROACH ARE AS FOLLOWS. THE EXPRESSION 'CONTROL' APPEARING IN SECTION 92A(1) IS VERY CRUCIAL AND THE MANNER IN WHICH CONTROL IS EXERCISED COULD GO WELL BEYOND CAPITAL AND MANAGEMENT, BUT THE COORDINATE BENCH HAD NO OCCASIO N TO DEAL WITH THE 'CONTROL' ASPECT AT ALL. AS HELD IN THE CASE OF DIAGCO INDIA (P.) LTD. V. DY. CIT [2011] 47 SOT 252/13 TAXMANN.COM 62 (MUM.) , EVEN WHEN AN ENTERPRISE EXERCISE CONTROL OVER THE OTHER ENTERPRI SES BY WAY OF CONTROLLING THE SUPPLY OF RAW MATERIAL OR USE OF TRADE MARKS, T HIS ALSO CONSTITUTES 'PARTICIPATION IN CONTROL' LEADING TO THE STATUS OF ASSOCIATED ENTERPRISES UNDER SECTION 92A(1). IT APPEARS THAT THIS ASPECT O F THE MATTER HAS NOT BEEN ITA NO.2087/M/2017 M/S. VINCA DEVELOPER PVT. LTD. 6 BROUGHT TO THE NOTICE OF, OR PLEADED BEFORE, THE BE NCH. WHILE THE CONCLUSION ARRIVED AT BY THE BENCH CLEARLY OVERLOOKS THE SPECI FIC MENTION OF THE WORD 'CONTROL' IN BOTH LIMBS OF THE BASIC RULE UNDER SEC TION 92A(1) (I) AS ALSO UNDER SECTION 92A(1)(II), AND TO THAT EXTENT WE ARE UNABLE TO CONCUR THAT IN THE ABSENCE OF PARTICIPATION IN CAPITAL OR MANAGEME NT, TWO ENTERPRISES CANNOT BE 'ASSOCIATED ENTERPRISES' UNDER SECTION 92 A, WHAT IS IMPORTANT TO US IS THAT THE COORDINATE BENCH HAS, INTER ALIA, AL SO HELD THAT, '....IN ORDER TO CONSTITUTE RELATIONSHIP OF AN AE, THE PARAMETERS LA ID DOWN IN BOTH SUB- SECTIONS (1) AND (2) SHOULD BE FULFILLED' AND JUSTI FIED THIS APPROACH BY OBSERVING THAT 'IF WE WERE TO HOLD THAT THERE IS A RELATIONSHIP OF AE, ONCE THE REQUIREMENTS OF SUB-SEC.(2) ARE FULFILLED, THEN THE PROVISIONS OF SUB- SEC.(1) RENDERS OTIOSE OR SUPERFLUOUS' AND THAT 'IT IS WELL SETTLED CANON INTERPRETATION OF STATUTES THAT WHILE INTERPRETING THE TAXING STATUTE, CONSTRUCTION SHALL NOT BE ADOPTED WHICH RENDERS PAR TICULAR PROVISION OTIOSE'. THE COORDINATE BENCH THEN FURTHER OBSERVED THAT 'WHEN INTERPRETING A PROVISION IN A TAXING STATUTE, A CON STRUCTION, WHICH WOULD PRESERVE THE PURPOSE OF THE PROVISION, MUST BE ADOP TED'. THE LEGAL POSITION THUS SUMMED UP BY THE COORDINATE BENCH IS THAT IN A SITUATION IN WHICH THE CONDITIONS, WITH RESPECT TO A SET OF ENTERPRISES, S ET OUT IN SECTION 92A(1) ARE CLEARLY NOT FULFILLED, EVEN IF THE CONDITIONS UNDER ONE OF THE CLAUSES OF SECTION 92A(2) ARE FULFILLED, SUCH ENTERPRISES CANN OT BE TREATED AS ASSOCIATED ENTERPRISE UNDER SECTION 92A. TO THE LIMITED EXTENT OF THE PRINCIPLE SO LAID DOWN BY THE COORDINATE BENCH, WE ARE IN CONSIDERED AGREEMENT WITH THE VIEWS OF THE COORDINATE BENCH, AND IT IS THIS PRINC IPLE WHICH IS RELEVANT FOR THE PURPOSES OF OUR ADJUDICATION. IT DOES DIRECTLY AFFECT THE ISSUE IN APPEAL BEFORE US INASMUCH AS WE ARE ALSO DEALING WITH A SI TUATION IN WHICH ADMITTEDLY WORDS OF SECTION 92A(2)(I) ARE CLEARLY S ATISFIED ON THE FACTS OF THIS CASE, THE SCALE OF COMMERCIAL RELATIONSHIP IS SO IN SIGNIFICANT VIS--VIS TOTAL BUSINESS OPERATIONS OF THE ASSESSEE THAT THERE IS A DMITTEDLY NO PARTICIPATION IN CONTROL BY ONE OF THE ENTERPRISE OVER THE OTHER ENTERPRISE SO AS TO SATISFY THE MANDATE OF SECTION 92A(1). 15. WHILE DEALING WITH THIS, WE MAY ALSO REFER TO SOME OBSERVATIONS MADE BY DR RAMON DWARKASING, AN ASSOCIATE PROFESSOR IN T RANSFER PRICING AT MAASTRICHT UNIVERSITY, THE NETHERLANDS, IN HIS BOOK 'ASSOCIATED ENTERPRISES- A CONCEPT ESSENTIAL FOR APPLICATION OF THE ARM'S LE NGTH PRINCIPLE' [ ISBN: 978-90-81724-0-1, PUBLISHED BY WOLF LEGAL PUBLISHER S, THE NETHERLANDS @ PAGE 6], AS FOLLOWS: '....IN VARIOUS COUNTRIES, THE CONCEPT OF ASSOCIATE D ENTERPRISES MAY EVEN COVER RELATIONSHIPS BETWEEN INDEPENDENT ENTERPRISES , FOR INSTANCE, WHERE A FOREIGN BUYER HAS A STRONG NEGOTIATING POWE R. FOR EXAMPLE, AN INDIAN SOFTWARE COMPANY HAS A CUSTOMER IN NETHERLAN DS WHICH IS RESPONSIBLE FOR MORE THAN 90% OF TURNOVER OF INDIAN SOFTWARE DEVELOPER. THE DUTCH CUSTOMER IS ABLE TO DICTATE TH E PRICES TO INDIAN SOFTWARE DEVELOPER. THE INDIAN SOFTWARE COMPANY IS, THEREFORE, ABLE TO CHARGE A PRICE WITH 1% MARGIN/MARK UP, WHICH IS VER Y LOW COMPARED TO HIS INDIAN COUNTERPARTS (WHICH APPLY, FOR INSTANCE, 6% MARK UP). ACCORDING TO THE INDIAN TRANSFER PRICING LAW, IF TH E GODS OR ARTICLES MANUFACTURED OR PROCESSED BY ONE ENTERPRISES, ARE S OLD TO OTHER ITA NO.2087/M/2017 M/S. VINCA DEVELOPER PVT. LTD. 7 ENTERPRISE ABROAD OR TO PERSON SPECIFIED BY SUCH OT HER ENTERPRISE, AND THE PRICES AND OTHER CONDITIONS RELATING THERETO AR E INFLUENCED BY SUCH OTHER ENTERPRISES, THE TWO ENTERPRISES SHALL BE DEE MED TO BE ASSOCIATED ENTERPRISES [SEE SECTION 92A(2)(I) OF THE INDIAN IN COME TAX ACT, 1961] THE INDIAN TAX AUTHORITIES CONSIDER THE INDIAN SOFT WARE DEVELOPER AND ITS DUTCH CUSTOMER TO BE ASSOCIATED. THEY MAY ADJUS T THE PRICES AND TAX AN UNREALIZED PROFIT, I.E. DIFFERENCE BETWEEN REAL RESULTS AND RESULTS BASED ON PRICES DERIVED FROM OTHER SOFTWARE DEVELOP ERS IN INDIA. THE NETHERLANDS DOES NOT CONSIDER THE COMPANIES TO BE A SSOCIATED AS IT APPLIES A NARROW CONCEPT THAT DOES NOT INCLUDE 'DE FACTO CONTROL' AS A CRITERION FOR ASSOCIATION. 'CONTROL' IN THE ABSENCE OF COMPANY LAW BASED RELATIONSHIP OR IN THE ABSENCE OF ANY FORMAL RIGHT TO EXERCISE CONTROL CAN BE DESCRIBED AS 'DE FACTO' CONTROL. PARTICIPATION I N CAPITAL AND MANAGEMENT CAN BE CHARACTERIZED AS 'DE JURE' CONCEP TS; CONCEPTS COVERED BY COMPANY LAW.' [EMPHASIS, BY UNDERLINING, SUPPLIED BY US] 16. WHILE THE ABOVE OBSERVATIONS DO SEEM TO BE AT VARI ANCE WITH THE PLAIN WORDS OF THE STATUTORY PROVISION INASMUCH AS IT REFERS TO INFLUENCE BY WAY OF 'STRONG NEGOTIATING POWER' RATHER THAN AN INFLUENCE SIMPLICTOR- AS IS THE APPARENT SCHEME OF THE STATUT ORY PROVISION, WHAT IS IMMEDIATELY DISCERNIBLE FROM THE ABOVE EXTRACTS IS THAT THE 'DE FACTO' CONTROL IS THE FOUNDATION OF THE WIDER APPROACH TO THE CONCEPT OF 'ASSOCIATED ENTERPRISES, AND, OF COURSE, THE IMPRES SION THAT ONE OF THE WAYS IN WHICH USE OF EXPRESSION 'INFLUENCE', IN CON CEPT OF ASSOCIATED ENTERPRISES UNDER THE TRANSFER PRICING, CAN BE RATI ONALIZED IS AS DOMINANT INFLUENCE IN THE NATURE OF DE FACTO CONTRO L. THE DEFINITION OF 'ASSOCIATED ENTERPRISE', AS THE ABOVE ACADEMIC ANAL YSIS SHOWS, HAS TWO APPROACHES- WIDER APPROACH AND NARROW APPROACH. A N ARROW APPROACH TO THE CONCEPT OF ASSOCIATED ENTERPRISES TAKES INTO ACCOUNT ONLY 'DE JURE' ASSOCIATION I.E. THOUGH FORMAL PARTICIPATION IN THE CAPITAL OR PARTICIPATION IN THE MANAGEMENT. A WIDER APPROACH T O THE CONCEPT OF 'ASSOCIATED ENTERPRISES' TAKES INTO ACCOUNT NOT ONL Y THE DE JURE RELATIONSHIPS BUT ALSO DE FACTO CONTROL, IN THE ABS ENCE OF PARTICIPATION IN CAPITAL OR PARTICIPATION IN MANAGEMENT, THROUGH OTH ER MODES OF CONTROL SUCH AS COMMERCIAL RELATIONSHIPS IN WHICH ONE HAS D OMINANT INFLUENCE OVER THE OTHER. THIS WIDER CONCEPT IS CLEARLY DISCE RNIBLE FROM THE PRINCIPLES UNDERLYING APPROACH TO THE DEFINITION OF 'ASSOCIATED ENTERPRISES' IN THE TAX TREATIES AND HAS ALSO BEEN ADOPTED BY THE TRANSFER PRICING LEGISLATION IN INDIA IN AN UNAMBIG UOUS MANNER. THERE IS NO OTHER JUSTIFICATION IN THE INDIAN TRANSFER PRICI NG LEGISLATION, EXCEPT THE PARTICIPATION IN CAPITAL OF AN ENTERPRISE, MANAGEME NT OF AN ENTERPRISE OR CONTROL OF AN ENTERPRISE, WHICH CAN LEAD TO THE REL ATIONSHIP BETWEEN ENTERPRISE BEING TREATED AS 'ASSOCIATED ENTERPRISES '. WHAT ESSENTIALLY FOLLOWS IS THAT CLAUSE (I) OF SECTION 92A(2) HAS, A T ITS CONCEPTUAL FOUNDATION, DE FACTO CONTROL BY ONE OF THE ENTERPRI SE OVER THE OTHER ENTERPRISE, ON ACCOUNT OF COMMERCIAL RELATIONSHIP O F ITS BUYING THE PRODUCTS, EITHER ON HIS OWN OR THROUGH ANY NOMINATE D ENTITIES, FROM SUCH OTHER ENTERPRISE AND IN A SITUATION IN WHICH I T CAN INFLUENCE THE PRICES AND OTHER RELATED CONDITIONS. THE WORDINGS O F CLAUSE (I), HOWEVER, DO NOT REFLECT THIS POSITION IN AN UNAMBIGUOUS MANN ER INASMUCH AS IT ITA NO.2087/M/2017 M/S. VINCA DEVELOPER PVT. LTD. 8 DOES NOT SET OUT A THRESHOLD OF ACTIVITY, GIVING DE FACTO CONTROL TO THE OTHER ENTERPRISE ENGAGED IN SUCH COMMERCIAL ACTIVIT Y, IN PERCENTAGE TERMS OR OTHERWISE- AS IS SET OUT IN CLAUSE (G) AND (H) OR, FOR THAT PURPOSE, IN ALL OTHER OPERATIVE CLAUSES OF SECTION 92A(2). IF THE WORDS OF THIS CLAUSE ARE TO BE INTERPRETED LITERALLY, AS THE AUTHORITIES BELOW HAVE READ, EVEN IF THERE IS ONE ISOLATED TRANSACTION WIT H AN ENTERPRISE IN SUCH AN ENTERPRISE CAN INFLUENCE THE PRICES, SUCH AN ENT ERPRISE IS TO BE TREATED AS AN ASSOCIATED ENTERPRISE- WHETHER OR NOT THIS COMMERCIAL RELATIONSHIP AMOUNTS TO CONTROL ON THE OTHER ENTERP RISE. THAT WILL CLEARLY BE AN INCONGRUOUS RESULT. HOWEVER, AS SECTION 92A(2 )(I) IS TO BE READ ALONG WITH SECTION 92(A)(1), IN SUCH A SITUATION IN WHICH AN ENTERPRISE DOES NOT PARTICIPATE IN (A) CAPITAL, (B) MANAGEMENT , OR (C) CONTROL OF OTHER ENTERPRISE, AND THUS DOES NOT FULFIL THE BASI C RULE UNDER SECTION 92A(1), EVEN IF THE CONDITIONS OF SECTION 92A(2)(I) ARE FULFILLED, THESE ENTERPRISE CANNOT BE TREATED AS 'ASSOCIATED ENTERPR ISE'. IN THE CASE BEFORE US, IT IS NOT EVEN THE CASE OF THE REVENUE T HAT THE ASSESSEE HAS ANY PARTICIPATION IN MANAGEMENT OR CAPITAL OF THE O THER ENTERPRISE, NOR THERE IS ANYTHING TO EVEN REMOTELY INDICATE, MUCH L ESS ESTABLISH, THAT ONE OF THE ENTERPRISE, BY WAY OF THIS COMMERCIAL RE LATIONSHIP, PARTICIPATES IN CONTROL OVER THE OTHER ENTERPRISE. VIEWED THUS, NORTHSTAR, EVEN IF IT IS ASSUMED THAT IT CAN INFLUE NCE PRICES AND OTHER CONDITIONS RELATING TO SALE, CANNOT BE TREATED AS A SSOCIATED ENTERPRISE OF THE ASSESSEE BEFORE US. IT IS ALSO IMPORTANT TO BEA R IN MIND THE FACT THAT GIVEN THE CONTEXT IN WHICH THE EXPRESSION 'PRICES A ND OTHER CONDITIONS RELATING THERETO ARE INFLUENCED BY SUCH OTHER ENTER PRISE' APPEARS IN SECTION 92A(2)(I), THIS INFLUENCE HAS TO BE SOMETHI NG MORE THAN INFLUENCE IN THE ORDINARY COURSE OF BUSINESS AND IN THE PROCESS OF NEGOTIATION, BECAUSE, EVEN IN THE COURSE OF ORDINAR Y EVERY BUSINESS AND IN THE COURSE OF DAY TO DAY NEGOTIATION, SELLING PR ICES AS ALSO CONDITIONS OF SALE ARE INVARIABLY, IN A WAY, INFLUENCED BY THE BUYER. THEREFORE, EVEN WHEN A CUSTOMER OFFERS TERMS TO SOMEONE WITH A 'TAK E IT OR LEAVE IT' MESSAGE, SUCH AN APPROACH, BY ITSELF, CANNOT BE TER MED AS 'INFLUENCE', FOR OUR PURPOSES, UNLESS THE SELLER IS IN SUCH A PO SITION AND UNDER SUCH AN INFLUENCE THAT HE HAS TO SIMPLY ACCEPT THE DICTA TED TERMS. ANY OTHER VIEW OF THE MATTER WILL RESULT IN ALL THE ENTERPRIS ES DEALING WITH EACH OTHER AS EVERY PARTY TO A TRANSACTION HAS AN INFLUE NCE OVER THE PRICE AND CONDITIONS RELATING TO THE SALE, AND WILL LEAD TO A SITUATION IN WHICH ALL THE ENTERPRISES DEALING WITH EACH OTHER ON NEGOTIAT ED PRICES WILL HAVE TO BE AS ASSOCIATED ENTERPRISES. THAT AGAIN IS A CLEAR LY ABSURD AND UNINTENDED RESULT, AND IT IS ONLY ELEMENTARY THAT L AW IS TO BE INTERPRETED IN SUCH A MANNER AS TO MAKE IT WORKABLE RATHER THAN REDUNDANT. THIS PRINCIPLE IS EXPRESSED IN THE LATIN MAXIM 'UT RES M AGIS VALEAT QUAM PEREAT. EXPLAINING THIS PRINCIPLE, HON'BLE SUPREME COURT HAS, IN THE CASE OF CIT V. HINDUSTAN BULK CARRIERS [2003] 259 ITR 449/126 TAXMAN 321 (SC) , HAS OBSERVED THAT 'A CONSTRUCTION WHICH REDUCES T HE STATUTE TO A FUTILITY HAS TO BE AVOIDED' AND THAT 'A STATUTE OR ANY ENACTING PROVISION THEREIN MUST BE SO CONSTRUED AS TO MAKE IT EFFECTIV E AND OPERATIVE ON THE PRINCIPLE EXPRESSED IN MAXIM UTRES MAGIS VALEAT QUAM PEREAT I.E., A LIBERAL CONSTRUCTION SHOULD BE PUT UPON WRITTEN INS TRUMENTS, SO AS TO UPHOLD THEM, IF POSSIBLE, AND CARRY INTO EFFECT THE INTENTION OF THE ITA NO.2087/M/2017 M/S. VINCA DEVELOPER PVT. LTD. 9 PARTIES. [SEE BROOM'S LEGAL MAXIMS (10TH EDITION), P. 361, CRAIES ON STATUTES (7TH EDITION) P. 95 AND MAXWELL ON STATUTE S (11TH EDITION) P. 221.]' IT IS, THEREFORE, IMPORTANT THAT THE EXPRESS ION 'INFLUENCE' IS GIVEN A SENSIBLE MEANING SO AS TO MAKE THE PROVISIONS OF SECTION 92A(2)(I) WORKABLE RATHER THAN ADOPTING A LITERAL MEANING WHI CH WILL LEAD TO WHOLLY INCONGRUOUS RESULTS. 17. VIEWED IN THIS PERSPECTIVE, WE MUST ADOPT A SENSIB LE MEANING OF EXPRESSION 'INFLUENCE' WHICH ADVANCES THE SCHEME OF THE TRANSFER PRICING PROVISIONS RATHER THAN MAKING THESE PROVISIONS UNWO RKABLE. THAT MEANING HAD TO BE A DOMINANT INFLUENCE WHICH LEADS TO DE FACTO CONTROL OVER THE OTHER ENTERPRISE RATHER THAN AN INFLUENCE SIMPLICTOR. IF WE ARE TO ADOPT LITERAL MEANING OF INFLUENCE, AS HAS BEEN ADOPTED BY THE AUTHORITIES BELOW, ALL THE TRANSACTIONS ON NEGOTIAT ED PRICES WILL BE HIT BY THE PROVISIONS OF SECTION 92A(2)(I). IN THE LIGHT O F THE DISCUSSIONS ABOVE, THE EXPRESSION 'INFLUENCE', IN THE PRESENT CONTEXT, MUST REMAIN CONFINED TO DOMINANT INFLUENCE WHICH AMOUNTS TO DE FACTO CON TROL. ACCEPTANCE OF TERMS OF THE BUYER ON COMMERCIAL CONSIDERATIONS, AS IN THIS CASE, CANNOT BE TREATED AS INFLUENCE OF THE BUYER. IT IS A COMME RCIAL DECISION WHETHER TO ACCEPT THE TERMS OF THE BUYER, WITH RESPECT TO T HE PRICE OR RELATED CONDITIONS, OR NOT. IT BECOMES INFLUENCE, FOR THE P URPOSE OF SECTION 92A(2)(I), WHEN THE SELLER IS PLACED IN SUCH A SITU ATION THAT HE HAS NO CHOICE, BECAUSE OF BUYER'S DOMINANT INFLUENCE, BUT TO ACCEPT IT. IT IS THUS CLEAR THAT CONTEXT IN WHICH A REFERENCE IS MADE TO THE EXPRESSION 'INFLUENCE' IN SECTION 92A(2)(I) REQUIRES THIS EXPR ESSION TO BE READ AS A DOMINANT INFLUENCE IN THE SENSE OF CONTROL BY ONE E NTERPRISE OVER THE OTHER. GIVEN THE FACT THAT THE ASSESSEE'S EXPORTS T HROUGH THE DISTRIBUTION PART CONSTITUTES LESS THAN 5% OF ITS E NTIRE EXPORTS, AND LESS THAN 6% OF ITS ENTIRE SALES, NORTHSTAR IS CERTAINLY NOT IN A POSITION TO EXERCISE ANY DOMINANT INFLUENCE, OVER THE ASSESSEE. THE ASSESSEE'S DECISION TO ACCEPT THE TERMS SET OUT BY NORTHSTAR, EVEN IF THAT BE SO, MAY BE JUSTIFIED ON ACCOUNT OF COMMERCIAL EXPEDIENC IES OR WARRANTED BY BUSINESS EXIGENCIES OR MAY SIMPLY BE COMPULSION OF THIS SOMEWHAT UNIQUE AND COMPLEX BUSINESS MODEL, BUT IT CANNOT, B Y ANY STRETCH OF LOGIC, BE ON ACCOUNT OF DOMINANT INFLUENCE OF NORTH STAR AS A CUSTOMER. IT MAY EVEN BE A SOUND BUSINESS STRATEGY TO ACCEPT A R ATHER PASSIVE AND BACK SEAT ROLE, IF ONE CAN TERM IT THAT WAY, IN DAY TO DAY DECISION MAKING UNDER THIS BUSINESS MODEL, BUT CANNOT BE ON ACCOUNT OF DOMINANT INFLUENCE THAT NORTHSTAR EXERCISES ON BUYING OF PRO DUCTS FROM THE ASSESSEE. THE INFLUENCE OF NORTHSTAR, GIVEN THE SCA LE OF BUSINESS THROUGH NORRTHSTAR AS A DISTRIBUTION PART, IS TOO MODEST TO MAKE IT A DOMINANT INFLUENCE IN THE NATURE OF CONTROL. IN THIS VIEW OF THE MATTER, AS ALSO BEARING IN MIND THE EARLIER DISCUSSIONS ON THE ISSU E, THE ASSESSEE AND NORTHSTAR CAN NOT BE TREATED AS 'ASSOCIATED ENTERPR ISES' UNDER SECTION 92 A. WE UPHOLD THE PLEA OF THE ASSESSEE. 15. THEREFORE, IN VIEW OF ABOVE LEGAL AND FACTUAL D ISCUSSION, WE FIND FORCE IN THE SUBMISSIONS OF THE LD AR FOR THE ASSESSEE THAT THE CCD NOT A LOAN AND MOREOVER, THE FOREIGN ENTITY NAMELY NETHERLANDS DE VELOPMENT FINANCE COMPANY CALLED NEDERLANDSE FINANCIERINGSMAATSCHAP PIJ VOOR ONTWIKKELINGSLANDEN N.V. (FMO) WOULD NOT FALL WI THIN THE DEFINITION OF AE AS ITA NO.2087/M/2017 M/S. VINCA DEVELOPER PVT. LTD. 10 PROVIDED IN SECTION 92A(2)(C) OF THE ACT. AND THERE FORE, NO REFERENCE FOR COMPUTATION OF ALP BEFORE THE TPO WAS REQUIRED. 16. THE TPO HAS NOT BROUGHT ON RECORD ANY MATERIAL ON RECORD TO TREAT THE FMO AS AE OF ASSESSEE. THE TPO WITHOUT DISCUSSING T HE LEGAL ISSUES RAISED BY THE ASSESSEE CONCLUDED THAT ARTICLE 9 OF NETHERLAND S INDIA DOUBLE TAXATITION AVOIDANCE AGREEMENT (DTAA) IS UNFOUNDED AND THE TRA NSFER PRICING PROVISIONS ARE TO BE GOVERNED BY THE DOMESTIC LAW OF A COUNTRY . IN OUR VIEW THE CONCLUSION ARRIVED BY LD. TPO IS UNFOUNDED, WHEN THE FMO IS NO T AE OF THE ASSESSEE. 17. THEREFORE, IN VIEW OF OUR DETAILED DISCUSSION A S REFERRED ABOVE, WE ARE OF THE VIEW THAT THE FOREIGN ENTITY I.E. FMO IS NOT AE OF THE ASSESSEE AS THERE IN NO PARTICIPATION, DIRECTLY OR INDIRECTLY, IN THE MA NAGEMENT OR CONTROL OR IN CAPITAL OF THE EACH OTHER ENTERPRISE AND IN MANAGEM ENT, CONTROL OR CAPITAL ARE COMMON AND HENCE, NO REFERENCE FOR COMPUTATION OF A LP WAS WARRANTED. HENCE, THE GROUNDS NO. 1 OF THE APPEAL OF THE ASSE SSEE IS ALLOWED. AS WE HAVE ALLOWED GROUND NO.1 OF THE APPEAL AND HELD THAT FMO IS NOT AE OF ASSESSEE, THEREFORE, DISCUSSION ON MERIT RAISED IN GROUND NO. 2 AND 3 RELATED WITH THE ADJUSTMENT OF ALP HAS BECOME ACADEMIC. WE THEREFORE RESPECTFULLY FOLLOWING THE ORDER OF TR IBUNAL AND MAINTAINING CONSISTENCY THEREWITH ALLOW THE APP EAL OF THE ASSESSEE BY HOLDING THAT FMO IS NOT AN ASSOCIATE EN TERPRISE. THE GROUND NO 1 RAISED BY THE ASSESSEE IS ALLOWED. 7. SINCE WE HAVE DECIDED THE ISSUE IN GROUND NO 1 IN FAVOUR OF THE ASSESSEE BY HOLDING THAT FMO IS NOT AN ASSOC IATE ENTERPRISE OF THE ASSESSEE, THE OTHER ISSUES RAISED BY THE ASSESSEE ON MERITS ARE RENDERED ACADEMIC AND NEED N OT TO BE ADJUDICATED. 8. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 22.06.2018. SD/- SD/- (MAHAVIR SINGH) (RAJESH KUMAR) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI, DATED: 22.06.2018. * KISHORE, SR. P.S. ITA NO.2087/M/2017 M/S. VINCA DEVELOPER PVT. LTD. 11 COPY TO: THE APPELLANT THE RESPONDENT THE CIT, CONCERNED, MUMBAI THE CIT (A) CONCERNED, MUMBAI THE DR CONCERNED BENCH //TRUE COPY// [ BY ORD ER DY /ASSTT. REGISTRAR, ITAT, MUMBAI.