Mobis India Limited, Kancheepuram V. DCIT, CHENNAI

ITA 2112/CHNY/2011

• Counselvise Citation: 211221714 RSA 2011
• Duration Of Justice: 1 year(s) 7 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-08-2013
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 29-07-2013
• Assessment Year: 2007-2008
• Appeal Filed On: 23-12-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: K R GIRISH
• Keywords: Related party transaction; Business income; Depreciation; Transfer pricing; International transaction; Retrospective amendment; Wholly owned subsidiary
• Section: 92C; 92D; 10B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH, CHENNAI BEFORE SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER AND SHRI S.S. GODARA, JUDICIAL MEMBER I.T.A. NO. 2112/MDS/2011 (ASSESSMENT YEAR : 2007-08) M/S MOBIS INDIA LIMITED, G-1, SIPCOT INDUSTRIAL PARK, IRRUNGATTUKOTTAI, SRIPERUMBUDUR TALUK, KANCHEEPURAM DISTRICT, TAMIL NADU 602 105. PAN : AAECM 3018 M (APPELLANT) V. THE DEPUTY COMMISSIONER OF INCOME TAX, LARGE TAXPAYER UNIT, CHENNAI. (RESPONDENT) APPELLANT BY : SHRI K.R. GIRISH, FCA RESPONDENT BY : SHRI GURU BASHYAM, JCIT DATE OF HEARING : 29.07.2013 DATE OF PRONOUNCEMENT : 14.08.2013 O R D E R PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER : IN THIS APPEAL FILED BY THE ASSESSEE, IT ASSAILS THE DIRECTIONS GIVEN BY THE DRP AND THE PURSUANT ADJUSTMENTS CARRI ED OUT IN ITS INCOME BY THE ASSESSING OFFICER, BASED ON THE ORDER OF THE TRANSFER PRICING OFFICER. APART FROM THIS, ASSESSEE HAS ALS O RAISED A FEW GROUNDS ON ISSUES OTHER THAN TRANSFER PRICING. I.T.A. NO. 2112/MDS/11 2 2. FACTS APROPOS ARE THAT ASSESSEE, A COMPANY ENGAG ED IN SUPPLY OF ASSEMBLY, FRONT-END MODULE, COCKPIT, REAR CHASSIS, FRONT CHASSIS, ETC., IS 100% SUBSIDIARY OF ONE M/S HYUNDA I MOBIS, KOREA, ALSO REFERRED AS MOBIS KOREA. IT WAS INCORPORATE D IN INDIA IN JULY, 2005. AS PER THE ASSESSEE, ITS COMMERCIAL PRODUCTI ON STARTED ONLY ON 27 TH JANUARY, 2007. ASSESSEE HAD INTERNATIONAL TRANSAC TIONS WITH M/S MOBIS KOREA ON ACCOUNT OF PURCHASE OF RAW MATERIALS , PURCHASE OF CAPITAL EQUIPMENT, PAYMENT OF ROYALTY, PAYMENT OF T ECHNICAL SERVICES FEE AND PAYMENT OF GUARANTEE FEE. ASSESSEE HAD FIL ED RETURN FOR IMPUGNED ASSESSMENT YEAR ON 31.10.2007 DECLARING A TOTAL INCOME OF ` 12,17,671/-. SINCE ASSESSEE HAD INTERNATIONAL TRA NSACTIONS OF VALUE EXCEEDING THE PRESCRIBED LIMIT, ASSESSING OFFICER M ADE A REFERENCE TO TRANSFER PRICING OFFICER (TPO). 3. FOR THE TRANSACTIONS IN THE NATURE OF PURCHASE O F RAW MATERIALS FROM ITS ASSOCIATE ENTERPRISE, ASSESSEE HAD ADOPTED TRANSACTION NET MARGIN METHOD (TNMM) FOR EVALUATING THE PRICING, WH EREAS, FOR PURCHASE OF CAPITAL EQUIPMENTS, PAYMENT OF ROYALTY, REIMBURSEMENT OF TRAVEL AND ACCOMMODATION EXPENSES AND PAYMENT OF GUARANTEE FEE, ASSESSEE HAD ADOPTED COMPARABLE UNCONTROLLED P RICE (CUP) METHOD. TNMM WAS ALSO FOLLOWED FOR EVALUATING THE TECHNICAL I.T.A. NO. 2112/MDS/11 3 SERVICES FEE PAID. THE DISPUTE BEFORE US, INSOFAR IT RELATES TO TRANSFER PRICING IS CONFINED TO DETERMINATION OF ARM'S LENGT H PRICE OF RAW MATERIALS AND MATERIAL PARTS PURCHASED FROM ASSOCIA TE ENTERPRISE, FOR WHICH TNMM WAS ADOPTED. 4. ASSESSEE HAD FILED A TP STUDY BASED ON A SET OF COMPARABLES IDENTIFIED ON A SEARCH CONDUCTED ON 15.2.2007 IN PR OWESS & CAPITAL LINE DATA BASES. SINCE THE SEARCH FOR THE COMPARAB LES ITSELF WAS CONDUCTED DURING THE CURRENCY OF THE RELEVANT PREVI OUS YEAR, OBVIOUSLY THE DATA USED FOR ALP ANALYSIS WAS NOT CO NTEMPORANEOUS. BENCHMARKING WAS DONE BASED ON RESULTS OF EIGHT COM PARABLE COMPANIES FOR VARIOUS FINANCIAL YEARS ENDING 1 ST APRIL, 2004 TO 15 TH FEBRUARY, 2007. TPO AT THE OUTSET ITSELF REJECTED THIS DATA FOR A REASON THAT IT WAS NOT IN ACCORDANCE WITH RULE 10B( 4) OF INCOME-TAX RULES, 1962. CERTAIN ADJUSTMENTS CARRIED OUT BY TH E ASSESSEE FOR NEGATIVE WORKING CAPITAL AND DISABILITIES DUE TO FI RST YEAR OF ITS OPERATION, WERE ALSO NOT ACCEPTED BY THE TPO. THE TPO THEREAFTER PROCEEDED TO MAKE A SEARCH BY HERSELF IN THE PROWES S AND CAPITAL LINE DATA BASE. SHE IDENTIFIED FOURTEEN NUMBER OF COMPARABLES BASED ON CERTAIN FILTERS WHICH, ACCORDING TO HER, W ERE NECESSARY TO SELECT COMPANIES, IN A SIMILAR BUSINESS SITUATION A S THAT OF THE ASSESSEE. IN THE PROCESS, SHE REJECTED COMPANIES H AVING SALES MORE I.T.A. NO. 2112/MDS/11 4 THAN ` 1 CRORE, COMPANIES WHICH HAD SUFFERED LOSS, COMPAN IES WITH DISSIMILAR PRODUCTS AND COMPANIES HAVING RELATED PA RTY TRANSACTIONS. 5. ASSESSEES MAIN ARGUMENT BEFORE TPO WAS THAT ITS CAPACITY UTILIZATION WAS ONLY 5.47% SINCE IT STARTED COMMERC IAL OPERATION ONLY ON 26.1.2007. AS PER THE ASSESSEE, THIS CALLED FOR AN ADJUSTMENT ON THE OPERATING MARGIN. AS PER THE TPO, NO ADJUSTMEN T COULD BE MADE ON THE MARGINS OF THE TESTED PARTY. ASSESSEE HAD A LSO REQUIRED A 5% ADJUSTMENT FOR ITS NEGATIVE WORKING CAPITAL, WHEN C OMPARED TO THE SUBSTANTIAL POSITIVE WORKING CAPITAL OF THE COMPARA BLES. BUT, THE TPO WAS OF THE OPINION THAT NO DATA WAS PROVIDED BY THE ASSESSEE FOR ARRIVING AT THE 5% ADJUSTMENT SOUGHT BY IT. AS PER THE TPO, JUST BECAUSE ASSESSEE WAS IN ITS FIRST YEAR OF OPERATION , DID NOT MEAN THAT IT WAS NECESSARY TO INCUR A LOSS. TPO ALSO NOTED T HAT ASSESSEES EXPENDITURES WERE MOSTLY ON VARIABLE COSTS AND HENC E, UTILIZATION OF CAPACITY DID NOT HAVE ANY MATERIAL EFFECT. SHE COM PUTED THE ARITHMETIC MEAN OF PLI OF COMPARABLE COMPANIES AT 5 .18% OF SALES. ADOPTING SUCH PLI TO THE SALES EFFECTED BY THE ASSE SSEE, THE TPO ARRIVED AT THE ALP OF THE OPERATING COST. THEREFRO M SHE DEDUCTED THE ACTUAL NON-AE COST OF RAW MATERIALS AND ARRIVED AT ALP VALUE OF THE AE PURCHASES. DIFFERENCE WAS DETERMINED AT ` 9,58,60,522/- AND RECOMMENDATIONS TO THIS EFFECT WAS GIVEN TO THE ASS ESSING OFFICER. I.T.A. NO. 2112/MDS/11 5 6. ASSESSING OFFICER PROCEEDED TO FRAME A DRAFT ASS ESSMENT ORDER BASED ON THE RECOMMENDATIONS OF THE TPO. IN SUCH D RAFT ASSESSMENT ORDER, ASSESSING OFFICER PROPOSED AN ADD ITION OF ` 9,58,60,522/- FOR THE ARM'S LENGTH PRICE ADJUSTMENT . IN ADDITION TO THIS, THERE WERE CERTAIN OTHER ADDITIONS AS WELL. THESE WERE FOR INCOME ARISING OUT OF AN INVOICE RAISED SUBSEQUENT TO THE END OF RELEVANT PREVIOUS YEAR, DISALLOWANCE OF AMORTIZATIO N COST OF LEASE HOLD LAND, DISALLOWANCE OF PAYMENT MADE FOR ACQUIRI NG SOFTWARE LICENCE AND REIMBURSEMENT OF EXPENSES FOR NON-DEDUC TION OF TAX AT SOURCE. 7. ASSESSEE ELECTED TO MOVE THE DRP AGAINST PROPOSE D DRAFT ASSESSMENT. OBJECTIONS OF THE ASSESSEE ON THE TP A DJUSTMENT PROPOSED COULD BE SUMMARIZED AS UNDER:- (I) TPO HAD CONDUCTED A FRESH ANALYSIS AND IN THE PROCE SS, ADOPTED A NEW SET OF COMPARABLES WITHOUT COGENT REA SONS AND WITHOUT REJECTING THE TRANSFER PRICE DOCUMENTAT ION OF THE ASSESSEE. (II) TPO CONSIDERED COMPANIES WITH CONTROLLED TRANSACTIO NS ALSO AS COMPARABLES. (III) TPO ADOPTED DATA WHICH WERE NOT CONTEMPORANEOUS. I.T.A. NO. 2112/MDS/11 6 (IV) TPO DID NOT MAKE REQUIRED ADJUSTMENTS UNDER RULE 10 B FOR DIFFERENCE IN START-UP EXPENSES, DEPRECIATION, CUST OMS DUTY AND CAPACITY UTILIZATION. (V) TPO DID NOT GRANT 5% SAFE HARBOUR RANGE AVAILABLE T O IT UNDER PROVISO TO SECTION 92C(2) OF THE ACT. (VI) TPO FAILED TO CONSIDER THE VALUATION MADE BY THE CU STOMS AUTHORITY AS A PROPERLY COMPARABLE VALUE FOR ACCEPT ING THE ARM'S LENGTH PRICE OF THE INTERNATIONAL TRANSACTION OF THE ASSESSEE. (VII) TPO DID NOT MAKE THE REQUIRED ADJUSTMENTS TO THE RE SULTS OF THE COMPARABLE CASES BEFORE MAKING A COMPARISON WITH ASSESSEES RESULTS. (VIII) TPO FAILED TO CONSIDER FUNCTIONAL DIFFERENCES LIKE THE START-UP EXPENSES INCURRED BY THE ASSESSEE AND HUGE IMPORT CONTENT OF 98.55%. (IX) TPO HAD SELECTED AS COMPARABLES, COMPANIES WHICH WE RE ALREADY IN EXISTENCE AND RUNNING FOR MORE THAN A DE CADE. (X) TPO CHERRY-PICKED FOURTEEN NUMBER OF COMPANIES AS COMPARABLES IN A PRE-DETERMINED MANNER WITHOUT MAKI NG A DETAILED ANALYSIS AS REQUIRED UNDER RULE 10B(2) OF THE ACT. (XI) OUT OF THE COMPARABLES SELECTED BY THE ASSESSING OFFICER, M/S JBM AUTO LTD., M/S JAYA BHARAT MARUTI LTD. AND M/S SANDEN VIKAS (INDIA) LTD. HAD SUBSTANTIAL R ELATED PARTY TRANSACTIONS EXCEEDING 25%. (XII) TPO SELECTED COMPANIES LIKE AUTOMOTIVE COACHES AND COMPONENTS LTD., ENDURANCE SYSTEMS (INDIA) PVT. LTD ., NEEL METALS PRODUCTS LTD., WHICH WERE NOT MANUFACTU RING PRODUCTS COMPARABLE TO THAT OF THE ASSESSEE. (XIII) TPO DID NOT CONFINE THE ADJUSTMENT ON ACCOUNT OF AL LEGED DIFFERENCE IN ARM'S LENGTH OPERATING PROFIT, TO THE PROPORTIONATE AE TRANSACTIONS. I.T.A. NO. 2112/MDS/11 7 (XIV) TPO DID NOT RECOGNIZE NEED FOR CONSIDERING MULTIPLE YEAR DATA FOR ARRIVING AT THE PROFIT LEVEL INDICATOR. 8. ON THE ADDITIONS PROPOSED BY THE A.O. FOR ITEMS OTHER THAN INTERNATIONAL TRANSACTIONS, OBJECTIONS OF THE ASSES SEE BEFORE DRP WERE AS UNDER:- (I) A.O. INCLUDED INCOME OF ` 5.34 CRORES ARISING OUT OF AN INVOICE RAISED IN SUBSEQUENT YEAR, IGNORING THAT AS SESSEE HAD ACCOUNTED SUCH INCOME IN THE SUBSEQUENT ASSESSM ENT YEAR. A.O. MADE THE ABOVE ADDITION THOUGH A RIGHT TO CLAIM SUCH INCOME CAME TO BE VESTED ON THE ASSESSEE ONLY ON ISSUING THE INVOICE. (II) TPO HAD WRONGLY PRESUMED THAT ASSESSEE HAD AMORTIZE D COST OF LEASE HOLD LAND, AND INCURRED AN EXPENDITUR E OF ` 3,26,500/-. (III) TPO FAILED TO APPRECIATE THAT ASSESSEE HAD NOT PURC HASED ANY RIGHT IN THE SOFTWARE ACQUIRED FROM M/S AUTOEVE R SYSTEMS CORPORATION, KOREA, AND M/S WIPRO INDIA LTD . BUT HAD ONLY MADE PURCHASE OF SHRINK-WRAPPED SOFTWARE AND THUS THERE WAS NO NECESSITY FOR DEDUCTION OF TAX OF THE PAYMENTS. (IV) A.O. ERRED IN PROPOSING DISALLOWANCE OF ` 6,50,000/-, WHICH WAS REIMBURSEMENT OF EXPENSES, ON WHICH THERE WAS N O NECESSITY TO DEDUCT TAX AT SOURCE. (V) A.O. ERRED IN HOLDING THAT ASSESSEE HAD EXCESS DEPRECIATION ON ACCOUNT OF ADJUSTMENT ON NOTIONAL G AINS ON EXCHANGE FLUCTUATION WITH THE COST OF THE ASSETS. I.T.A. NO. 2112/MDS/11 8 9. THE DRP, AFTER CONSIDERING THE ABOVE OBJECTIONS OF THE ASSESSEE, HELD AS UNDER, WITH REGARD TO TRANSFER PR ICING ADJUSTMENTS PROPOSED BY THE A.O.:- (I) TP STUDY DONE BY THE ASSESSEE WAS CORRECTLY REJECTE D BY THE TPO. TP STUDY WAS DONE MUCH BEFORE THE END OF THE YEAR AND THE DATA COLLATED BY THE ASSESSEE WAS FOR PERIOD PRECEDING TO THE RELEVANT PREVIOUS YEAR. (II) MULTIPLE YEAR DATA COULD NOT BE CONSIDERED UNLESS D ATA FOR CONTEMPORANEOUS YEAR WAS FOUND TO BE UNRELIABLE FOR SOME VALID REASONS. (III) AGAINST EIGHT COMPANIES CONSIDERED AS COMPARABLES B Y THE ASSESSEE, TPO HAD CONSIDERED 14 COMPANIES AND ASSES SEE HAD NOT PER SE OBJECTED TO ANY OF THE SELECTIONS MA DE BY THE TPO. (IV) ASSESSEE SHOULD HAVE CONDUCTED THE SEARCH AFTER THE END OF THE RELEVANT PREVIOUS YEAR AND NOT IN FEBRUARY, 2007 AND BY DOING SO, IT HAD ITSELF PLACED IN A POSITION WHEREBY THE DATA SELECTED BY IT WERE OUT OF TIME. (V) ASSESSEES ARGUMENT THAT ADJUSTMENT WAS REQUIRED FO R IDLE CAPACITY WAS ACCEPTABLE AND IDLE CAPACITY ADJUSTMEN T OF 30% WAS TO BE DONE BY THE A.O. (VI) ASSESSEES CLAIM FOR ADJUSTMENT FOR NEGATIVE WORKIN G CAPITAL ON ITS RESULTS COULD NOT BE DEMONSTRATED AN D HENCE, NO ADJUSTMENT WAS REQUIRED FOR THIS. (VII) ASSESSEES CLAIM THAT THERE WAS SIGNIFICANT IMPORT CONTENT IN ITS PURCHASES, MUCH HIGHER THAN THAT OF COMPARAB LES, COULD NOT BE CONSIDERED AS A UNIQUE PHENOMENON. IF IMPORTS REQUIRED PAYMENT OF CUSTOMS DUTY, INDIGENOU S PURCHASES ATTRACTED VARIOUS DOMESTIC TAXES. I.T.A. NO. 2112/MDS/11 9 (VIII) ASSESSEES CLAIM THAT ADJUSTMENT FOR START-UP EXPEN SES WERE REQUIRED, WAS NOT DEMONSTRATED BY IT. (IX) THERE WAS NO REQUIREMENT FOR ANY ADJUSTMENT WITH RE GARD TO FIXED OVERHEADS, SINCE ADJUSTMENT RECOMMENDED FO R IDLE CAPACITY WOULD TAKE CARE OF THIS. (X) ASSESSEES CLAIM THAT CUSTOMS VALUATION SHOULD BE T AKEN AS ARM'S LENGTH PRICE, COULD NOT BE ACCEPTED SINCE CUS TOM AUTHORITIES SCRUTINIZED THE VALUE OF GOODS FOR SUSP ECTED UNDERVALUATION, WHEREAS, TPOS ENDEAVOUR WAS TO FIN D WHETHER THERE WAS ANY OVERVALUATION. CUSTOMS VALUA TIONS RULES WERE VERY DIFFERENT FROM TRANSFER PRICING RUL ES AND HENCE, WOULD NOT BE AMENABLE FOR A COMPARISON. (XI) SAFE HARBOUR AS CLAIMED BY THE ASSESSEE AT 5% UNDER PROVISO TO SECTION 92C(2) COULD NOT BE GIVEN, SINCE AMENDMENT INTRODUCED BY THE FINANCE (NO.2) ACT, 200 9 HAD COME INTO EFFECT FROM 1.10.12009 AND ASSESSEES ASSESSMENT WAS COMPLETED AFTER THE SAID DATE. AS P ER THE DRP, POSITION WAS EXPLAINED IN CORRIGENDUM TO CIRCU LAR NO.5 OF 2010 DATED 30.9.2011 ISSUED BY CBDT. (XII) ASSESSEES CLAIM THAT TPO HAD ATTRIBUTED THE SHORTF ALL IN PROFITS ENTIRELY TO ITS INTERNATIONAL TRANSACTION W ITHOUT TAKING THE PROPORTIONATE TURNOVER RELATABLE TO RAW MATERIAL IMPORTED FROM ASSOCIATE ENTERPRISE, COULD NOT BE ACCEPTED, SINCE COST VARIATION RELATING TO NON-AE TRANSACTION WERE PASSED ON TO UNRELATED PARTIES. 10. ON ISSUES OTHER THAN TRANSFER PRICING, THE DRP HELD AS UNDER:- (I) INVOICE RAISED IN THE SUBSEQUENT YEAR WAS ONLY FOR DIFFERENCE BETWEEN ESTIMATED PRICE AND FINAL PRICE, FOR SALES ALREADY EFFECTED TO M/S HMI. UNDER THE MATCH ING PRINCIPLES OF MERCANTILE SYSTEM OF ACCOUNTING, INCO ME STOOD ACCRUED TO THE ASSESSEE. I.T.A. NO. 2112/MDS/11 10 (II) THOUGH DEDUCTION OF TAX FOR ROYALTY PAYMENT WOULD N OT APPLY TO OFF-THE-SHELF SOFTWARE, THE AGREEMENT ENTE RED BY THE ASSESSEE WITH M/S AUTOEVER SYSTEMS CORPORATI ON, KOREA AND M/S WIPRO LTD. WOULD SHOW THAT WHAT WAS ACQUIRED WERE CUSTOMIZED SOFTWARES, SPECIALLY DESIG NED FOR ASSESSEE. HENCE, TAX WAS REQUIRED TO BE DEDUCT ED AT SOURCE. (III) DISALLOWANCE OF ` 3,26,500/- PROPOSED ON AMORTIZATION OF LEASEHOLD LAND WAS JUSTIFIED IN THE FACTS AND CIRCU MSTANCES OF THE CASE. (IV) ASSESSEES ARGUMENT THAT THERE WAS NO EXCESS CLAIM OF DEPRECIATION OF ASSETS, WAS TO BE ACCEPTED. BASED ON THE ABOVE DIRECTIONS, A FINAL ASSESSMENT O RDER WAS FRAMED BY THE ASSESSING OFFICER. 11. BEFORE US, ASSESSEE HAS TAKEN EIGHT GROUNDS ON TRANSFER PRICING ADJUSTMENT. THESE GROUNDS ARE REPRODUCED HEREUNDER :- (1) ERRED ON FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW BY CONFIRMING THE PROPOSED ADDITION OF ` 14,39,29,461 [I.E. ` 7,68,97,012 BASED ON THE PROVISIONS OF CHAPTER X O F THE INCOME-TAX ACT, (THE ACT) AND ` 6,70,32,449 BASED ON THE OTHER PROVISIONS OF THE ACT] TO APPELLANTS TOTAL INCOME. (2) ERRED IN LAW BY UPHOLDING / CONFIRMING THE ACTION O F THE TPO IN NOT SATISFYING ANY OF THE CONDITIONS PRESCRI BED UNDER SECTION 92C(3) OF THE ACT BEFORE MAKING AN ADJUSTMENT TO THE INCOME OF THE APPELLANT. (3) ERRED IN LAW IN UPHOLDING / CONFIRMING THE ACTION O F THE TPO IN DENYING THE BENEFIT OF VARIANCE OF 5 PERCENT FROM THE ARITHMETIC MEAN AS PROVIDED IN PROVISO TO SECTI ON I.T.A. NO. 2112/MDS/11 11 92C(2) OF THE ACT, WHILE COMPUTING THE ADJUSTMENT T O THE TOTAL INCOME OF THE APPELLANT. (4) ERRED ON FACTS AND IN THE CIRCUMSTANCES OF THE CASE IN UPHOLDING / CONFIRMING THE ACTION OF THE TPO IN FAI LING TO TAKE DUE COGNIZANCE OF THE ORDER OF THE CUSTOMS AUT HORITY ACCEPTING THE ARM'S LENGTH NATURE OF THE INTERNATIO NAL TRANSACTIONS OF APPELLANT WITHIN ITS AFFILITATES. (5.1) ERRED ON FACTS AND IN THE CIRCUMSTANCES OF TH E CASE AND IN LAW IN UPHOLDING / CONFIRMING THE ACTION OF THE TPO IN DISREGARDING THE BENCHMARKING ANALYSIS AND COMPARAB LE COMPANIES SELECTED BY THE APPELLANT BASED ON THE CONTEMPORANEOUS DATA IN THE TRANSFER PRICING DOCUMENTATION MAINTAINED AS PER SECTION 92D OF THE ACT READ WITH RULE 10D OF INCOME-TAX RULES, 1962 (THE RULES). (5.2) ERRED ON FACTS AND IN THE CIRCUMSTANCES OF TH E CASE AND IN LAW IN UPHOLDING / CONFIRMING THE ACTION OF THE TPO OF CONDUCTING A FRESH BENCHMARKING ANALYSIS USING NON CONTEMPORANEOUS DATA TO SUBSTITUTE THE ANALYSIS PERFORMED BY THE APPELLANT. FURTHER, ERRED IN LAW IN SELECTING THE COMPARABLE COMPANIES HAVING CONTROLLE D TRANSACTIONS. (5.3) ERRED IN LAW IN UPHOLDING / CONFIRMING THE AC TION OF THE TPO IN COMPUTING THE ARM'S LENGTH PRICE USING SINGL E-YEAR MARGIN OF THE COMPARABLE COMPANIES AS AGAINST THREE -YEAR WEIGHTED AVERAGE MARGIN OF THE COMPARABLE COMPANIES AS ENUMERATED IN RULE 10B(4) OF THE RULES. (6.1) ERRED ON FACTS AND IN THE CIRCUMSTANCES OF TH E CASE AND IN LAW IN IGNORING THE ECONOMIC COMMERCIAL CIRCUMST ANCES PREVAILING IN THE APPELLANTS BUSINESS DURING THE Y EAR IN WHICH THE APPELLANTS BUSINESS WAS IN OPERATION ONL Y FOR TWO MONTHS AND WAS IN THE NATURE OF A START-UP. FURTHE R, ERRED IN ADOPTING A BIASED PREMEDITATED APPROACH TO MAKE A TRANSFER PRICING ADJUSTMENT BY COMPLETELY IGNORING THE TRANSFER PRICING APPROACH DOCUMENTED BY THE APPELLA NT. I.T.A. NO. 2112/MDS/11 12 (6.2) ERRED ON FACTS AND IN THE CIRCUMSTANCES OF TH E CASE AND IN LAW IN UPHOLDING / CONFIRMING THE ACTION OF THE TPO IN NOT ALLOWING SUITABLE ECONOMIC ADJUSTMENT AS PROVID ED UNDER RULE 10B OF THE RULES, TO ACCOUNT FOR THE DIF FERENCE BETWEEN INTERNATIONAL TRANSACTIONS AND THE COMPARAB LE UNCONTROLLED TRANSACTIONS SELECTED BY THE LEARNED A.O./TPO. ERRED IN NOT ALLOWING ADJUSTMENT FOR THE FOLLOWING: WORKING CAPITAL, CUSTOMS DUTY AND, ONE-TIME START-UP EXPENSES. (7) ERRED ON FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW IN UPHOLDING / CONFIRMING THE ACTION OF THE TPO IN MAKING ADJUSTMENT ON THE SHORTFALL IN THE MARGIN OF THE APPELLANT ON TOTAL TRANSACTIONS (I.E. CONTROLLED AS WELL AS UNCONTROLLED) INSTEAD OF APPLYING THE SHORTFALL IN THE MARGIN ONLY TO CONTROLLED TRANSACTIONS. (8) ERRED ON FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW IN INITIATING PENALTY PROCEEDINGS UNDER SECT ION 271AA ON PRETEXT OF NON-COMPLIANCE OF SECTION 92D(1 ) READ WITH RULE 10D. 12. LEARNED A.R. ADMITTED THAT FIRST TWO GROUNDS RA ISED BY THE ASSESSEE WERE GENERAL IN NATURE. 13. IN SUPPORT OF GROUND NO.3, LEARNED A.R. SUBMITT ED THAT UNDER PROVISO TO SECTION 92C(2) ASSESSEE WAS ENTITLED TO THE BENEFIT OF 5% SAFE HARBOUR RANGE. 14. IN SUPPORT OF GROUND NO.4, LEARNED A.R. SUBMITT ED THAT VALUATIONS DONE BY THE CUSTOMS AUTHORITIES UNDER CU STOMS VALUATION I.T.A. NO. 2112/MDS/11 13 RULES, 2007 WERE GOOD COMPARISONS. ACCORDING TO HI M, CUSTOMS AUTHORITIES WOULD NOT HAVE ACCEPTED THE DECLARED VA LUE AS PER THE INVOICE, FOR THE RAW MATERIALS AND MATERIAL PARTS I MPORTED BY THE ASSESSEE FROM ITS ASSOCIATE ENTERPRISE, UNLESS THEY WERE SATISFIED THAT THE PRICES WERE NOT INFLUENCED BY THE RELATION SHIP. AS PER LEARNED A.R., RULE 3(3) OF CUSTOMS VALUATION RULES, 2007 WAS NOT CONSIDERED BY ANY OF THE AUTHORITIES BELOW. ACCORD ING TO HIM, A BENEFIT CONFERRED BY ONE DEPARTMENT OF GOVERNMENT C OULD NOT BE TAKEN AWAY BY ANOTHER DEPARTMENT OF THE GOVERNMENT, AS HELD BY HON'BLE JURISDICTIONAL HIGH COURT IN THE CASE OF PR P GRANITES (221 CTR 371). THEREFORE, AS PER LEARNED A.R., THE PRIC ES AT WHICH ASSESSEE PURCHASED RAW MATERIAL AND MATERIAL PARTS FROM ASSOCIATE ENTERPRISE WERE AT ARMS LENGTH. 15. IN SUPPORT OF GROUND NO.5, LEARNED A.R. SUBMITT ED THAT COMPARABLE COMPANIES SELECTED BY THE ASSESSEE WERE BASED ON BEST AVAILABLE CONTEMPORANEOUS DATA, BUT, STILL REJECTED BY THE TPO. TPO WITHOUT GIVING ADEQUATE REASONS FOR REJECTING SUCH CONTEMPORANEOUS DATA, RESORTED TO A FRESH BENCHMARKING ANALYSIS. A SSESSEE HAD APPROPRIATELY CONSIDERED THREE-YEAR WEIGHTED AVERAG E MARGIN OF COMPARABLE COMPANIES WHICH GAVE A MORE REPRESENTATI VE RESULT THAN SINGLE-YEAR MARGIN. ASSESSEE HAD ONLY VERY SMALL V ALUE ADDITION ON I.T.A. NO. 2112/MDS/11 14 THE RAW MATERIAL PURCHASED. ASSESSEE COULD NOT BE COMPARED WITH OTHER COMPANIES, WHICH WERE HAVING SUBSTANTIAL VALU E ADDITION ON THE MATERIAL PURCHASED. 16. IN SUPPORT OF GROUND NO.6, LEARNED A.R. SUBMITT ED THAT LOWER AUTHORITIES IGNORED THE DATE ON WHICH ASSESSEE HAD COMMENCED ITS COMMERCIAL OPERATION. IT WAS ONLY ON 26.1.2007 AND THEREFORE, ASSESSEE WAS A START-UP CONCERN. ASSESSEE HAD OPER ATIONS FOR TWO MONTHS ALONE. COMPARING THE RESULT OF A TWO MONTHS OLD COMPANY WITH OTHER WELL-ENTRENCHED COMPANIES, WAS NOT LOGIC AL. COMPARABLES CHOSEN BY THE ASSESSEE WERE UNJUSTLY REJECTED. DRP ITSELF HAD ADMITTED THAT PRODUCT-TO-PRODUCT COMPARABILITY WAS NOT REQUIRED IN TNMM. IN THE COMPANIES SELECTED BY THE TPO, ATLEAS T THREE WERE HAVING RELATED PARTY TRANSACTIONS EXCEEDING 20%. F URTHER, ACCORDING TO LEARNED A.R., ADJUSTMENTS WERE REQUIRED TO BE MA DE TO THE MARGIN SINCE ASSESSEE WAS HAVING NEGATIVE WORKING CAPITAL. SUBSTANTIAL CUSTOMS DUTY WAS PAID BY THE ASSESSEE. IMPORTED RA W MATERIAL CONSUMED BY THE ASSESSEE RELATABLE TO THE AE ITSELF CAME TO 27% OF ITS TOTAL COST. AS PER THE LEARNED A.R., ADJUSTMEN TS WERE REQUIRED TO BE CARRIED OUT FOR OFF-SETTING EXCESS EXPENDITURE I NCURRED BY THE ASSESSEE FOR STARTING ITS OPERATIONS, BEFORE MAKING A COMPARISON. IN ANY CASE, ACCORDING TO HIM, ASSESSING OFFICER HAVIN G MADE AN I.T.A. NO. 2112/MDS/11 15 INCOME ADDITION OF ` 5.34 CRORES FOR AN INVOICE RAISED IN SUBSEQUENT YEAR, IT OUGHT HAVE BEEN CONSIDERED WHILE WORKING O UT THE PROFIT MARGIN, BEFORE ATTEMPTING A COMPARISON. 17. IN SUPPORT OF GROUND NO.7, LEARNED A.R. SUBMITT ED THAT THE DIFFERENCE ON ACCOUNT OF PLI SHOULD NOT HAVE BEEN A PPLIED DIRECTLY TO THE TOTAL TRANSACTIONS OF THE ASSESSEE. THE SHORTF ALL IN MARGIN, IF ANY, OUGHT HAVE BEEN RESTRICTED TO THE CONTROLLED TRANSA CTIONS. ACCORDING TO HIM, THE ARM'S LENGTH PRICES OF THE AE PURCHASES WERE WORKED OUT BY THE TPO BY APPLYING THE PLI ON THE TOTAL SALE, F OR ARRIVING AT THE ARM'S LENGTH OPERATING COST AND THEREAFTER DEDUCTIN G THE NON-AE COST. 18. LEARNED A.R. DID NOT PRESS GROUND NO.8. 19. IN SUPPORT OF HIS CONTENTION THAT FILTERING PRO CESS ADOPTED FOR SELECTING THE COMPARABLE SHOULD TAKE CARE OF ALL ES SENTIAL FACTORS, LEARNED A.R. RELIED ON THE DECISION OF CO-ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF M/S CALIFORNIA SOFTWARE CO. LTD. V. ACIT IN I.T.A. NO. 1842/MDS/2011 DATED 27 TH AUGUST, 2012. 20. IN SUPPORT OF HIS CONTENTION THAT WORKING CAPIT AL WAS A FACTOR TO BE CONSIDERED FOR TRANSFER PRICING ANALYSIS, LEARNE D A.R. RELIED ON THE I.T.A. NO. 2112/MDS/11 16 DECISION OF PUNE BENCH OF THIS TRIBUNAL IN THE CASE OF DEMAG CRANES & COMPONENTS (INDIA) (P) LTD. V. DCIT (2012) 144 TT J 320. 21. IN SUPPORT OF HIS CONTENTION THAT WHERE IMPORTE D RAW MATERIALS WERE SUBSTANTIAL, ADJUSTMENT FOR CUSTOMS DUTY HAD T O BE DONE, WHILE MAKING A COMPARISON, LEARNED A.R. RELIED ON THE DEC ISION OF PUNE BENCH OF THIS TRIBUNAL IN THE CASE OF SKODA AUTO IN DIA (P) LTD. V. ACIT (2009) 122 TTJ 699. 22. IN SUPPORT OF HIS CONTENTION THAT ADJUSTMENT WH ILE APPLYING TNMM COULD BE CARRIED OUT ONLY ON TURNOVER RELATABL E TO THE PURCHASES FROM AN ASSOCIATE ENTERPRISE, LEARNED A.R . RELIED ON THE DECISION OF DELHI BENCH OF THIS TRIBUNAL IN THE CAS E OF IL JIN ELECTRONICS (I) (P.) LTD. V. ACIT (2010) 36 SOT 227 . 23. IN REPLY, LEARNED D.R., AT THE OUTSET, SUBMITTE D THAT ASSESSEE HAD ENDEAVOURED TO MAKE A COMPARISON WITH RESULTS O F EIGHT COMPANIES BASED ON A SEARCH CONDUCTED ON 15.2.2007. DATA OF COMPARABLE COMPANIES RELATED TO A FINANCIAL YEAR AS EARLY AS 2004- 05. CONTEMPORANEOUS DATA OF SELECTED COMPARABLES W AS NEVER CONSIDERED BY THE ASSESSEE. THEREFORE, THE A.O. WA S JUSTIFIED IN APPLYING RULE 10B(4) AND SELECTING A SET OF COMPARA BLES BY SEARCHING THE PROWESS AND CAPITAL LINE DATA BASE. IN ANY CASE, AS I.T.A. NO. 2112/MDS/11 17 PER LEARNED D.R., ASSESSEE HAD AT NO POINT OF TIME OBJECTED TO THE COMPARABLES SELECTED BY THE DRP. TPO HAD SELECTED 14 COMPARABLES HAVING SIMILAR MANUFACTURING LINE AND O UT OF THESE, ATLEAST THREE COMPANIES, NAMELY, AUTOMOTIVE STAMPIN GS & ASSEMBLIES LTD., AXLES INDIA LTD. AND SUBROS LTD. W ERE COMMON IN THE LIST CONSIDERED BY BOTH THE PARTIES. ASSESSEE SELECTED EIGHT COMPANIES UNDER PROWESS SEARCH AND NIL COMPANIES FROM CAPITAL LINE DATABASE. ONE OF THE FILTERS ADOPTED BY THE A SSESSEE, WHILE ARRIVING EIGHT COMPARABLES, WAS EXCLUSION OF START- UP COMPANIES. BY THIS FILTER, ASSESSEE ITSELF HAD EXCLUDED 61 COMPAN IES. HAVING ITSELF EXCLUDED THE START-UP COMPANIES FROM THE LIST OF PO SSIBLE COMPARABLES, ASSESSEE COULD NOT NOW TURN BACK AND S AY THAT IT SHOULD BE GIVEN ADJUSTMENT FOR BEING A START-UP. F URTHER, AS PER LEARNED D.R., ASSESSEE COULD NEVER DEMONSTRATE THAT THREE COMPANIES OUT OF FOURTEEN SELECTED BY THE TPO HAD R ELATED PARTY TRANSACTION EXCEEDING 26%. THE IMPACT OF NEGATIVE WORKING CAPITAL ON THE PROFITABILITY, IF ANY, REQUIRING AN ADJUSTME NT, WAS NEVER DEMONSTRATED BY THE ASSESSEE. ASSESSEE HAD SIMPLY MADE 5% ADJUSTMENT CITING IDLE CAPACITY, NEGATIVE WORKING C APITAL AND START-UP DIFFICULTIES. OF THIS, DRP HAD GIVEN CONSIDERABLE RELIEF FOR IDLE CAPACITY, AND ASSESSEE COULD NOT BE AGGRIEVED ANY F URTHER. I.T.A. NO. 2112/MDS/11 18 24. VIS--VIS THE CUSTOMS DUTY ADJUSTMENT, LEARNED D.R. SUBMITTED THAT ASSESSEE COULD NOT DEMONSTRATE THAT COMPARABLE S WERE NOT HAVING SIMILAR IMPORTS. EVEN OTHERWISE, IF THE PUR CHASES WERE MADE WITHIN INDIA, ASSESSEE WOULD HAVE HAD TO PAY EXCISE AND OTHER TAXES. 25. AS FOR THE CLAIM OF THE ASSESSEE THAT ADDITION OF ` 534 LAKHS MADE ON ITS REVENUE FOR INVOICING DONE IN SUCCEEDIN G YEAR, IF UPHELD, THEN CORRESPONDING ADJUSTMENT WAS REQUIRED TO BE MA DE IN THE PROFIT MARGIN ALSO, LEARNED D.R. HAD NO SERIOUS OBJECTION. 26. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVAL SUBMISSIONS. THERE IS NO DISPUTE THAT ASSESSEE HAD STARTED ITS C OMMERCIAL PRODUCTION ONLY ON 26.1.2007. OR, IN OTHER WORDS, IT WAS IN OPERATION ONLY FOR TWO MONTHS DURING THE RELEVANT PREVIOUS YE AR. THERE IS ALSO NO DISPUTE THAT AGAINST THE INSTALLED CAPACITY OF 2 ,40,000 CARS PER ANNUM, THE ACTUAL PRODUCTION FOR THE RELEVANT PREVI OUS YEAR WAS 13,138. THIS IS CLEAR FROM SCHEDULE 18 OF AUDITED FINAL ACCOUNTS. THUS, CAPACITY UTILIZATION WAS ONLY 5.47% DURING TH E RELEVANT PREVIOUS YEAR. ARGUMENT OF THE ASSESSEE THAT THE COMPARABLE CASES SELECTED BY THE TPO WERE ALL COMPANIES HAVING A STANDING MOR E THAN 10-20 YEARS, APPEARS TRUE. BUT, ASSESSEE HAD BY ITSELF S ELECTED EIGHT COMPANIES FOR COMPARISON AND WHILE APPLYING FILTERS , THIS WAS ONE OF I.T.A. NO. 2112/MDS/11 19 THE CRITERIA ADOPTED BY IT. THE SEARCH PROCESS DON E BY THE ASSESSEE IS CLEAR FROM ITS OWN TRANSFER PRICING DOCUMENTATIO N PLACED AT PAPER- BOOK 58 AND 60, WHICH READS AS FOLLOWS:- SUMMARY OF SEARCH PROCESS - PROWESS CRITERIA AND REASON FOR USAGE NO. OF COMPANIES PASSING THE CRITERION TOTAL UNIVERSE OF COMPANIES AVAILABLE IN PROWESS AS OF FEBRUARY 15, 2007 9,801 SELECTED COMPANIES WITH SALES GREATER THAN ZERO & T HE RATIO OF SALES MANUFACTURING TO SALES MORE THAN 90% OVER THE AFORESAID TIME PERIOD SO AS TO CAPTURE ALL POSSIBLE MANUFACTURERS 1,758 SELECTED COMPANIES CLASSIFIED UNDER ECONOMIC ACTIVITY OF TRANSPORT EQUIPMENT INDUSTRY WITH A SUB-CLASSIFICAT ION OF AUTOMOBILE ANCILLARIES 112 COMPANIES WHOLLY OR PARTLY OWNED BY GOVERNMENT OF C O - OPERATIVE SOCIETY WERE REMOVED TO CONCENTRATE ON PR OFIT ORIENTED COMPANIES 111 COMPANIES HAVING R&D EXPENDITURE MORE THAN 3% OF SALES WERE REJECTED TO ELIMINATE FULL-FLEDGED MANUFACTURE RS 108 COMPANIES HAVING ADVERTISEMENT, MARKETING & DISTRIB UTION EXPENSES TO SALES MORE THAN 3% WERE ELIMINATED TO F OCUS ON COMPANIES NOT EARNING ON ACCOUNT OF PERFORMING SUCH FUNCTIONS 60 COMPANIES HAVING NET FIXED ASSETS UPON SALES MORE T HAN 50% WERE REJECTED TO ELIMINATE FULL-FLEDGED MANUFAC TURERS 54 COMPANIES WITH A POSITIVE NET WORTH WERE INCLUDED T O EXCLUDE COMPANIES WHOSE NET WORTH HAD ERODED 52 COMPANIES WI TH SALES TURNOVER LESSER THAN ` 1 CRORE WERE SELECTED TO EXCLUDE STARTUP COMPANIES 52 COMPANIES WHOSE VALUE ADDED EXPENDITURE AS A PERCEN TAGE OF TOTAL COST GREATER THAN 20% WERE REJECTED TO EXC LUDE HIGH VALUE ADDING COMPANIES 19 I.T.A. NO. 2112/MDS/11 20 QUALITATIVE COMPANIES THAT WERE FUNCTIONALLY COMPARABLE AND THAT DID NOT HAVE CONTROLLED TRANSACTIONS WERE SELECTED 8 SUMMARY OF SEARCH PROCESS CAPITALINEPLUS CRITERIA AND REASON FOR USAGE NO. OF COMPANIES PASSING THE CRITERION TOTAL UNIVERSE OF COMPANIES AVAILABLE IN CAPITALINEPLUS AS OF FEBRUARY 15, 2007 13,887 IDENTIFIED ADDITIONAL COMPANIES WITH POSITIVE SALES OVER THE TIME PERIOD UNDER CONSIDERATION WERE SELECTED I.E. COMPANIES FOR WHICH DATA WAS NOT AVAILABLE IN PROWESS 762 COMPANIES HAVING THE RATIO OF SALES MA NUFACTURING TO SALES MORE THAN 90% WERE SELECTED TO PRIMARILY FILTER FOR MANUFACTURING COMPANIES 258 SELECTED COMPANIES CLASSIFIED IN THE TRANSPORT EQUI PMENT INDUSTRY. 12 COMPANIES WHICH ARE NOT WHOLLY OR PARTLY OWNED BY GOVERNMENT OR CO-OPERATIVE SOCIETY WERE SELECTED TO CONCENTRATE ON PROFIT ORIENTED COMPANIES 11 COMPANIES HAVING R&D EXPENDITURE LESS THAN 3% OF SA LES WERE SELECTED TO ELIMINATE FULL-FLEDGED MANUFACTURE RS 11 COMPANIES HAVING NET FIXED ASSETS UPON SALES MORE T HAN 50% WERE REJECTED TO ELIMINATE FULL-FLEDGED MANUFAC TURERS 9 COMPANIES WITH A POSITIVE NET WORTH WERE INCLUDED T O EXCLUDE COMPANIES WHOSE NET WORTH HAD ERODED 9 COMPANIES WITH SALES TURNOVER MORE THAN ` 1 CRORE WERE SELECTED TO EXCLUDE STARTUP COMPANIES 9 COMPANIES WHOSE VALUE ADDED EXPENDITURE AS A PERCENTAGE OF TOTAL COST LESS THAN 20% WERE SELECTED TO EXCLUD E HIGH VALUE ADDING COMPANIES 2 QUALITATIVE COMPANIES THAT WERE NOT FUNCTIONALLY COMPARABLE AND THAT HAD RELATED PARTY TRANSACTIONS WERE ELIMINATED 0 I.T.A. NO. 2112/MDS/11 21 ASSESSEE ITSELF HAD EXCLUDED START-UP COMPANIES HAV ING TURNOVER LESS THAN ` 1 CRORE WHILE APPLYING THE FILTERS. HAVING ITSELF EXCLUDED START-UP COMPANIES WHILE DOING ITS OWN COMPARATIVE STUDY, IT CANNOT NOW TURN BACK AND SAY THAT ADJUSTMENT SHOULD BE MAD E FOR ITS START- UP NATURE. 27. ADJUSTMENTS CARRIED OUT BY THE TPO WERE ON PURC HASES MADE FROM ITS ASSOCIATE ENTERPRISE. THE VALUE OF PURCHA SES FROM AES CAME TO ` 217082589/-. TOTAL SALES OF THE ASSESSEE FOR THE RELEVANT PREVIOUS YEAR CAME TO ` 289794535/-. IN THE FACE OF THESE FIGURES, ASSESSEE CANNOT BE CONSIDERED AS A MERE START-UP CO MPANY, FACING BIRTH PANGS. 28. ASSESSEE AT NO POINT OF TIME HAD OBJECTED TO TH E COMPARABLES SELECTED BY THE TPO. CLAIM OF THE ASSESSEE THAT MU LTIPLE YEAR DATA SHOULD BE CONSIDERED FOR A MORE REPRESENTATIVE ANAL YSIS, COULD HAVE BEEN ACCEPTED IF IT WAS ABLE TO SHOW THAT CONTEMPOR ANEOUS DATA HAD SOME DEFICIENCY RENDERING IT NOT READILY COMPARABLE . THERE WAS NO SUCH ASPECT POINTED OUT. JUST BECAUSE THE SELECTED COMPANIES WERE OLD, WOULD NOT BY ITSELF BE A REASON TO REJECT THE SELECTION. THOUGH ASSESSEES COUNSEL SUBMITTED THAT LOSS MAKING COMPA NIES WERE UNJUSTLY EXCLUDED BY THE TPO, HE WAS UNABLE TO POIN T OUT WHICH WERE I.T.A. NO. 2112/MDS/11 22 THOSE COMPANIES WHICH WERE EXCLUDED AND WHAT WERE T HE MARGIN LEVELS INDICATED BY SUCH COMPANIES. HOWEVER, WE FI ND SUBSTANTIAL STRENGTH IN THE GRIEVANCE OF THE ASSESSEE THAT THRE E OF THE COMPANIES SELECTED BY THE TPO WERE HAVING RELATED PARTY TRANS ACTION IN EXCESS OF 26%. THIS FACTOR HAD NOT BEEN ADDRESSED BY ANY OF THE LOWER AUTHORITIES. COMPARISONS HAVE TO BE MADE WITH UNCO NTROLLED TRANSACTIONS AND IT IS ESSENTIAL THAT ENTITIES HAVI NG RELATED PARTY TRANSACTIONS ARE ELIMINATED, IN SUCH COMPARISON TO THE EXTENT POSSIBLE. IF THREE OUT OF THE 14 COMPANIES, WERE H AVING RELATED PARTY TRANSACTIONS IN EXCESS OF 25%, AS MENTIONED BY THE ASSESSEE, THESE HAD TO BE EXCLUDED. 29. COMING TO THE ASPECT OF ADJUSTMENT PLEADED BY T HE ASSESSEE FOR NEGATIVE WORKING CAPITAL, NO DOUBT, IN THE CASE OF DEMAG CRANES & COMPONENTS (INDIA) (P) LTD. (SUPRA), IT WAS HELD THAT ADJUSTMENT HAD TO BE GRANTED FOR ELIMINATING MATERIAL EFFECTS, IF ANY, ARISING OUT OF DIFFERENCE IN WORKING CAPITAL BETWEEN TESTED PARTY AND COMPARABLES. NEVERTHELESS, WE FIND FROM THE SAID DECISION THAT T HE PLEA REGARDING ADJUSTMENT FOR WORKING CAPITAL WAS FIRST RAISED BEF ORE DRP AND THE DRP HAD DECIDED THE ISSUE WITHOUT REALIZING THAT TH IS WAS NEVER ADJUDICATED BY THE TPO. AS PER THE ASSESSEE, IT WA S HAVING NEGATIVE WORKING CAPITAL AS AGAINST SUBSTANTIAL POSITIVE WOR KING CAPITAL ENJOYED I.T.A. NO. 2112/MDS/11 23 BY THE COMPARABLES. IF THE ASSESSEE IS ABLE TO DEM ONSTRATE THAT NEGATIVE WORKING CAPITAL HAD EFFECTED ITS MARGINS, ADJUSTMENT SHOULD HAVE BEEN MADE. ASSESSEE HAS INDEED FILED BEFORE T HE DRP, MARGINS OF COMPARABLES ADJUSTED FOR DIFFERENCE IN W ORKING CAPITAL, BUT AT NO POINT OF TIME IT HAD GIVEN ANY REASON WHY SUC H ADJUSTMENTS WERE REQUIRED. ASSESSEE HAD MADE ADJUSTMENT ON INV ENTORIES, DEBTORS AND CREDITORS, WHICH IN ITS OPINION, REFLEC TED THE DIFFERENCE IN WORKING CAPITAL, BASED ON OECD GUIDELINES. JUST BE CAUSE ASSESSEE RELIED ON OECD GUIDELINES, WOULD NOT MEAN THAT THE ADJUSTMENT MADE BY IT WERE REQUIRED, UNLESS THE IMPACT COULD B E DEMONSTRATED. SUCH A DEMONSTRATION WAS NEVER DONE BY THE ASSESSEE . HERE IT WILL BE RELEVANT TO HAVE A LOOK AT THE NARRATION GIVEN B Y THE ASSESSEE WITH REGARD TO THE ADJUSTMENT CARRIED OUT FOR WORKING CA PITAL, AS APPEARING IN ITS TRANSFER PRICING DOCUMENTATION. THIS READS AS FOLLOWS:- TO ELABORATE, THE ADJUSTMENT IS MADE BY ADDING THE DEBTOR ADJUSTMENT TO SALES AND BY ADDING CREDITOR ADJUSTME NT AND SUBTRACTING INVENTORY ADJUSTMENT FROM COST OF GOODS SOLD FOR EACH COMPARABLE COMPANY. HERE, THE PRIME-LENDING R ATE WAS USED AS THE APPROPRIATE COST OF CAPITAL BECAUSE IT CAN B E DETERMINED WITH REASONABLE ACCURACY AND IS THE BEST AVAILABLE ESTIMATE OF THE COST OF CAPITAL. FOR THIS PURPOSE, THE PRIME-L ENDING RATE OF 12.50% FOR THE YEAR 2007, 10,80% FOR THE YEAR 2006 AND 10.89% FOR THE YEAR 2005 PUBLISHED IN CMIE AND RESERVE BAN K OF INDIA PUBLICATIONS WERE CONSIDERED. I.T.A. NO. 2112/MDS/11 24 WHAT WERE THE DEBTOR ADJUSTMENT AND CREDITOR ADJUST MENT AND HOW THESE WERE RELEVANT HAVE NOT BEEN DEMONSTRATED BY T HE ASSESSEE. WE ARE THUS OF THE OPINION THAT THE ASSESSEE HAS NO T BEEN ABLE TO JUSTIFY THE ADJUSTMENTS THAT WERE REQUIRED TO BE MA DE ON ACCOUNT OF NEGATIVE WORKING CAPITAL. 30. COMING TO THE ADJUSTMENT FOR CUSTOMS DUTY, ASSE SSEE ITSELF HAS MENTIONED IN ITS OBJECTION BEFORE THE DRP THAT TOTA L RAW MATERIAL IMPORTED FROM THE ASSOCIATE CONCERN CONSTITUTED ONL Y 27% OF ITS TOTAL COST. AS PER THE ASSESSEE, COST OF COMPONENTS CONS UMED BY AE WAS 27% OF THE TOTAL COST OF ` 370633638/- INCURRED, WHEREAS, THE REMAINING COST RELATED TO UNRELATED DOMESTIC SUPPLI ERS. NO DOUBT, IN THE CASE OF SKODA AUTO INDIA (P) LTD. (SUPRA), IT W AS HELD BY PUNE BENCH THAT HIGHER IMPORT CONTENT OF RAW MATERIAL WA S A FACTOR TO BE CONSIDERED WHILE DOING THE ALP ANALYSIS. NEVERTHEL ESS, IT IS ALSO MENTIONED THEREIN THAT HIGHER IMPORT CONTENT OF RAW MATERIAL ITSELF DID NOT WARRANT AN ADJUSTMENT IN OPERATING MARGINS. FO R GETTING THE BENEFIT OF ANY SUCH ADJUSTMENT, ASSESSEE SHOULD BE ABLE TO DEMONSTRATE THAT HIGHER IMPORT CONTENT WAS NECESSIT ATED BY ANY EXTRAORDINARY CIRCUMSTANCE BEYOND ITS CONTROL. ASS ESSEE HAD ENDEAVOURED TO MAKE A 5% ADJUSTMENT TO ITS TOTAL CO ST FOR OFF-SETTING THE LEVERAGE DERIVED ON ACCOUNT OF NEGATIVE WORKING CAPITAL AND FOR I.T.A. NO. 2112/MDS/11 25 TAKING CARE OF UNDER UTILIZATION OF CAPACITY. NEV ERTHELESS, THERE WAS NO EMPIRICAL DATA EVER PROVIDED BY THE ASSESSEE TO SUPPORT THE FIGURE OF 5% ARRIVED BY IT. 31. AS TO THE CLAIM OF THE ASSESSEE THAT VALUATIONS MADE BY THE CUSTOMS AUTHORITY ON THE IMPORT OF RAW MATERIAL FOR THE PURPOSE OF LEVY OF CUSTOMS DUTY SHOULD BE TAKEN AS A PROPER CO MPARABLE, WE DO NOT FIND ANY MERIT. THIS IS FOR THE REASON THAT, A S POINTED OUT BY DRP, VALUATION BY THE CUSTOMS AUTHORITY IS AS PER CUSTOM S RULES, WHICH ARE NOT RELEVANT FOR THE PURPOSE OF TRANSFER PRICIN G UNDER INCOME-TAX RULES. FURTHER, THE PURPOSE OF VALUATION BY THE CU STOMS AUTHORITY IS TO DETERMINE UNDERVALUATION AND BY ITS VERY NATURE, THIS WOULD NOT FIT WITH THE SCHEME OF TRANSFER PRICING ANALYSIS UNDER THE INCOME-TAX ACT. DECISION OF HON'BLE JURISDICTIONAL HIGH COURT IN TH E CASE OF PRP GRANITES (SUPRA) STRONGLY RELIED ON BY THE LEARNED A.R., WAS IN RELATION TO A CLAIM FOR EXEMPTION UNDER SECTION 10B , BASED ON AN APPROVAL GRANTED BY MINISTRY OF COMMERCE UNDER SECT ION 14 OF THE INDUSTRIES (DEVELOPMENT AND REGULATION) ACT, 1951, TO WHICH CBDT WAS A PARTY. ON THE OTHER HAND, IN THE CASE BEFORE US, CBDT HAD NOTHING TO DO WITH THE VALUATIONS DONE UNDER CUSTOM S VALUATION RULES, 2007. I.T.A. NO. 2112/MDS/11 26 32. THE ASSOCIATE ENTERPRISE FROM WHICH ASSESSEE PU RCHASED THE RAW MATERIALS WAS M/S HYUNDAI MOBIS KOREA, WHEREAS, SALES EFFECTED WAS TO M/S HYUNDAI MOBIS INDIA. ASSESSEE, THEREFOR E, HAD A CAPTIVE BUYER OF ITS PRODUCT AND THERE WAS NO REASON FOR IT TO SHOW LOWER THAN THE INDUSTRIAL WORKING RESULTS. HOWEVER, THERE IS SUBSTANTIAL JUSTIFICATION IN THE ARGUMENT OF THE ASSESSEE THAT TP ADJUSTMENT SHOULD HAVE BEEN RESTRICTED TO CONTROLLED TRANSACTI ONS. IN THIS, ASSESSEE IS SUPPORTED BY THE DECISION OF CO-ORDINAT E BENCH OF THIS TRIBUNAL IN THE CASE OF IL JIN ELECTRONICS (I) (P.) LTD. (SUPRA). RELEVANT PARA 15 OF THE ORDER IS REPRODUCED HEREUND ER:- 15. THE ASSESSEE HAS ALSO TAKEN ONE ALTERNATIVE GRO UND OUT OF THE TOTAL RAW MATERIALS CONSUMED BY THE ASSESSEE FO R MANUFACTURING PRINT CIRCUIT BOARDS, ONLY 45.51 PER CENT OF THE TOTAL RAW MATERIALS WERE IMPORTED THROUGH ASSESSEE S ASSOCIATE CONCERNS, AND, THEREFORE, ANY ADJUSTMENT, IF ANY CA LLED FOR, CAN ONLY BE MADE TO THE 45.51 PER CENT OF THE TOTAL TUR NOVER, AND NOT TO THE TOTAL TURNOVER OF THE ASSESSEE. AFTER CONSI DERING THE FACTS OF THE CASE, WE DO NOT FIND ANY DIFFICULTY IN ACCEPTING THE CONTENTION OF THE ASSESSEE THAT AT BEST ONLY 45.51 PER CENT OF THE OPERATING PROFIT CAN BE ATTRIBUTED TO IMPORTED RAW MATERIAL ACQUIRED FROM ASSESSEES ASSOCIATE CONCERNS. IN TH E PRESENT CASE, THE ASSESSING OFFICER HAS CALCULATED THE OPER ATING PROFIT ON THE ENTIRE SALES OF THE ASSESSEE, WHICH IN OUR C ONSIDERED OPINION, IS NOT JUSTIFIED, WHEN IT IS ADMITTED POSI TION THAT ONLY 45.51 PER CENT OF RAW MATERIAL HAS BEEN ACQUIRED BY THE ASSESSEE FROM ITS ASSOCIATE CONCERNS FOR THE PURPOSE OF MANU FACTURING ITEMS. THE ASSESSEE HAS STATED THAT THE OPERATING PROFIT IF APPLIED TO 45.51 PER CENT OF THE TURNOVER WOULD COM E TO ` 35,52,573 AS AGAINST OPERATING PROFIT OF ` 24,35,175 BOOKED BY THE ASSESSEE, AND THE DIFFERENCE THEREOF WOULD ONLY BE CALLED FOR I.T.A. NO. 2112/MDS/11 27 TO BE MADE AS ADDITION TO THE PROFIT SHOWN BY THE A SSESSEE. WE, THEREFORE, DIRECT THE ASSESSING OFFICER TO MODIFY T HE ASSESSMENT AND MAKE THE ADJUSTMENT ONLY TO THE EXTE NT OF DIFFERENCE IN THE ARM'S LENGTH OPERATING PROFIT WIT H ADJUSTED PROFIT WITH REFERENCE TO THE 45.51 PER CENT OF THE TURNOVER, AND NOT TO THE TOTAL TURNOVER OF THE ASSESSEE. THEREFO RE, TO THIS EXTENT, THE ADDITION MADE BY THE ASSESSING OFFICER AND FURTHER CONFIRMED BY THE CIT(A) IS REDUCED. WE ORDER ACCOR DINGLY. THUS, IF ASSESSEES PURCHASE OF RAW MATERIAL FROM A SSOCIATE ENTERPRISE IS 27% OF THE TOTAL RAW MATERIAL PURCHAS E, THEN THE ADJUSTMENT FOR ALP HAS TO BE RESTRICTED TO 27% OF T HE TOTAL TURNOVER. 33. COMING TO THE ASPECT OF + 5% SAFE HARBOUR LIMIT S, THIS IS NO MORE RES INTEGRA, IN VIEW OF THE DECISION OF SPECIA L BENCH IN THE CASE OF M/S IHG IT SERVICES (INDIA) PVT. LTD. V. ITO (I. T.A. NO. 5890/DEL/2010 DATED 30.4.2013). THE SPECIAL BENCH WAS CONSTITUTED TO CONSIDER WHETHER PRIOR TO THE INSERTION OF THE S ECOND PROVISO TO SECTION 92C(2), THE BENEFIT OF 5% TOLERANCE MARGIN AS PRESCRIBED UNDER PROVISIO TO SECTION 92C(2) FOR THE PURPOSES O F DETERMINING THE ARM'S LENGTH PRICE OF AN INTERNATIONAL TRANSACTION IS ALLOWABLE AS A STANDARD DEDUCTION IN ALL CASES, OR IS ALLOWABLE ON LY IF THE DIFFERENCE IS LESS THAN 5%. IN THE MEANWHILE, THE SECOND PROVISO TO SECTION 92C(2) WAS AMENDED BY THE FINANCE ACT, 2012 WITH RE TROSPECTIVE EFFECT FROM 1.4.2002. THE ASSESSEE CLAIMED, RELYIN G ON PIAGIO VEHICLE P. LTD. V. DCIT THAT EVEN AFTER THE RETROSP ECTIVE AMENDMENT I.T.A. NO. 2112/MDS/11 28 BY THE FINANCE ACT, 2012, IT WAS ENTITLED TO THE BE NEFIT OF ADJUSTMENT OF + 5% VARIATION WHILE COMPUTING THE ALP. IT WAS ALSO ARGUED THAT THE AMENDMENT WAS UNCONSTITUTIONAL. THE SPECIAL BE NCH HELD THAT THERE WAS A CONTROVERSY ON WHETHER THE + 5% TOLERAN CE ADJUSTMENT WAS A STANDARD DEDUCTION OR NOT. AFTER THE RETROSP ECTIVE AMENDMENT TO THE SECOND PROVISO TO SECTION 92C BY THE FINANCE ACT, 2012 WITH RETROSPECTIVE EFFECT FROM 1.4.2002, IT IS EVIDENT T HAT IF THE VARIATION BETWEEN THE ARM'S LENGTH PRICE AND THE PRICE AT WHI CH INTERNATIONAL TRANSACTION WAS ACTUALLY UNDERTAKEN DOES NOT EXCEED THE SPECIFIED PERCENTAGE, THEN ONLY THE PRICE AT WHICH THE INTERN ATIONAL TRANSACTION HAS ACTUALLY BEEN UNDERTAKEN SHALL BE DEEMED TO BE ARM'S LENGTH PRICE. THUS, THE BENEFIT OF TOLERANCE MARGIN WOULD BE AVAILABLE ONLY IF THE VARIATION IS WITHIN THE TOLERANCE MARGIN. ONCE THE VARIATION EXCEEDED THE TOLERANCE MARGIN, THEN THERE WOULD BE NO BENEFIT EVEN UP TO TOLERANCE MARGIN. THEN, THE ALP AS WORKED OU T UNDER SECTION 92C(1) SHALL BE TAKEN AS ALP WITHOUT ANY BENEFIT OF TOLERANCE MARGIN. 34. BASED ON THE ABOVE DISCUSSION, GROUNDS RAISED B Y THE ASSESSEE ON TRANSFER PRICING ARE DISPOSED OF AS UND ER:- GROUND NOS.1&2 BEING GENERAL IN NATURE, ARE DISMIS SED. GROUND NOS.3, 4, 5.1, 5.3, 6.1 & 6.2 ARE DISMISSED . GROUND NO.5.2 IS PARTLY ALLOWED VIZ. INSOFAR AS IT CONCERNS EXCLUSION OF THREE COMPARABLES HAVING CONTROLLED T RANSACTIONS. GROUND NO.7 IS ALLOWED FOR STATISTICAL PURPOSES. GROUND NO.8 IS DISMISSED AS NOT PRESSED. I.T.A. NO. 2112/MDS/11 29 35. ACCORDINGLY, ASSESSING OFFICER SHALL RE-WORK TH E ADJUSTMENT REQUIRED TO THE PRICING OF THE INTERNATIONAL TRANSA CTIONS BY RESTRICTING SUCH ADJUSTMENT TO THE TURNOVER PROPORTIONATE TO PU RCHASE OF RAW MATERIALS FROM ASSOCIATE ENTERPRISE, AFTER EXCLUDIN G THE THREE COMPARABLES HAVING RELATED PARTY TRANSACTIONS EXCEE DING 25%. 36. NOW WE TAKE UP THE ASSESSEES GROUNDS WHICH ARE NOT RELATED TO TRANSFER PRICING. 37. VIDE GROUND NO.9, GRIEVANCE RAISED BY THE ASSES SEE IS THAT A SUM OF ` 5,34,00,000/- ADDED TO ITS INCOME DESPITE THE INVO ICE HAVING BEEN RAISED IN THE SUCCEEDING YEAR. 38. FACTS APROPOS ARE THAT RELATED PARTY TRANSACTIO NS REPORTED BY THE ASSESSEE SHOWED THAT IT HAD MADE SALES OF ` 34.31 CRORES TO M/S HUNDAI MOTOR INDIA LIMITED (HML). HOWEVER, THE PRO FIT & LOSS ACCOUNT REPORTED A FIGURE OF ` 28.97 CRORES ONLY. ASSESSEE WAS REQUIRED TO EXPLAIN WHY SUCH SUM SHOULD NOT BE ADDE D TO ITS INCOME BOTH FOR COMPUTING TOTAL INCOME AND BOOK PROFIT INC OME. REPLY OF THE ASSESSEE WAS THAT SUPPLEMENTARY INVOICE OF ` 5.34 CRORES WAS NOT RAISED ON HML DURING THE RELEVANT PREVIOUS YEAR AND HENCE COULD NOT BE CONSIDERED AS INCOME. HOWEVER, ASSESSING OFFICE R WAS NOT IMPRESSED. ACCORDING TO HIM, ANNUAL REPORT OF THE ASSESSEE CLEARLY I.T.A. NO. 2112/MDS/11 30 MENTIONED SALES TO M/S HML WAS ` 34.31 CRORES. ASSESSEE WAS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING AND HENCE THIS INCOME SHOULD HAVE BEEN ACCOUNTED IN THE RELEVANT PREVIOUS YEAR. HE, THEREFORE, PROPOSED AN ADDITION OF ` 5.34 CRORES, WHICH WAS CONFIRMED BY THE DRP. 39. NOW BEFORE US, LEARNED A.R. SUBMITTED THAT THE ANNUAL REPORT GAVE ONLY AN ANALYSIS OF CORPORATE MARGINS. ACCORD ING TO HIM, SUPPLEMENTARY INVOICE WAS RAISED ON 30 TH JUNE, 2007. IT WAS DULY ACCOUNTED IN FINANCIAL YEAR 2007-08 ALSO. UNLESS A ND UNTIL THE INVOICE WAS ISSUED, THE PARTY WOULD NOT HAVE PAID. RELATED PARTY TRANSACTIONS GIVEN IN THE AUDITED FINAL ACCOUNTS AT SCHEDULE 18, DID NOT SHOW SUCH AMOUNT AS INCOME OF THE RELEVANT PREV IOUS YEAR. 40. PER CONTRA, LEARNED D.R. SUPPORTED THE ORDERS O F AUTHORITIES BELOW. 41. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVAL SUBMISSIONS. IT IS NOT DISPUTED THAT THE INVOICE WAS RAISED BY T HE ASSESSEE ON THE PARTY, ONLY ON 30 TH JUNE, 2007. IRRESPECTIVE OF THE METHOD OF TREATMENT GIVEN IN THE BOOKS OF ACCOUNTS, UNLESS AN D UNTIL THE INVOICE IS RAISED, A CUSTOMER WILL NOT BE LEGALLY BOUND TO PAY. ASSESSEE WILL GET A LEGAL RIGHT TO CLAIM THE SUM ONLY AFTER RAISI NG THE INVOICE. EVEN I.T.A. NO. 2112/MDS/11 31 IF IT WAS PRICE DIFFERENCE FOR SALES MADE DURING TH E RELEVANT PREVIOUS YEAR, UNLESS AND UNTIL THE INVOICE WAS RAISED, ASSE SSEE COULD NOT MAKE ANY CLAIM FROM M/S HMIL. NO DOUBT, MERCANTILE SYSTEM OF ACCOUNTING REQUIRES MATCHING CONCEPTS TO BE SATISFI ED. BUT, MATCHING CONCEPTS CANNOT BE EXTENDED TO MEAN THAT ASSESSEE C OULD BE FASTENED WITH AN INCOME WHICH HAS NOT ACCRUED TO IT . IT HAS ALSO BEEN HELD BY HON'BLE APEX COURT AS EARLY AS IN 1954 IN E.D. SASSOON & COMPANY LTD. V. CIT (26 ITR 27) THAT THE POINT OF ACCRUAL OF INCOME HAS TO BE SEEN FROM THE DATE ON WHICH A LEGAL CLAIM COULD HAVE BEEN LEGITIMATELY MADE ON SUCH INCOME. ADMITTEDLY, HERE , THE INVOICE WAS RAISED ON 30 TH JUNE, 2007. LEGAL CLAIM FOR SUCH INCOME ACCRUED, AND WAS VESTED ON THE ASSESSEE ONLY ON THAT DATE. THE SAID AMOUNT COULD HAVE BEEN CONSIDERED AS INCOME ONLY FOR THE R ELEVANT PREVIOUS YEAR ENDING 31 ST MARCH, 2008. THE ADDITION, MADE FOR THE RELEVANT PREVIOUS YEAR, THEREFORE, STANDS DELETED. SINCE TH E ADDITION IS DELETED, NO ADJUSTMENT IS REQUIRED FOR THIS, WHILE MAKING THE TP ANALYSIS, TO ARRIVE AT ARM'S LENGTH PRICE OF THE RA W MATERIALS PURCHASED BY THE ASSESSEE FROM ITS ASSOCIATE ENTERP RISE. 42. GROUND NO.9 OF THE ASSESSEE STANDS ALLOWED. I.T.A. NO. 2112/MDS/11 32 43. WHEN GROUND NO.10 WAS TAKEN UP, LEARNED A.R. SU BMITTED THAT HE WAS NOT PRESSING THE SAME. HENCE, THIS GROUND I S DISMISSED AS NOT PRESSED. 44. VIDE GROUND NO.11, ASSESSEE IS AGGRIEVED ON DIS ALLOWANCE MADE UNDER SECTION 40(A)(I) AND 40(A)(IA) OF THE AC T FOR NON- DEDUCTION OF TAX AT SOURCE ON PAYMENTS MADE FOR ACQ UIRING CERTAIN SOFTWARE. 45. FACTS APROPOS ARE THAT ASSESSING OFFICER HAD FO UND THAT ASSESSEE HAD ACQUIRED A SOFTWARE LICENSE FROM M/S A UTOEVER SYSTEMS CORPORATION, KOREA FOR ` 80,71,622/- AND ANOTHER SOFTWARE LICENSE FOR ` 13,34,327/- FROM M/S WIPRO LTD., INDIA. ASSESSEE HAD NOT DEDUCTED TAX AT SOURCE ON BOTH THE ABOVE PAYMEN TS. ASSESSING OFFICER WAS OF THE OPINION THAT FORMER WAS COVERED UNDER SECTION 40(A)(I) AND THE LATTER WAS COVERED UNDER SECTION 4 0(A)(IA) OF THE ACT. DISALLOWANCE WAS PROPOSED FOR BOTH THESE AMOUNTS. THOUGH ASSESSEE SUBMITTED BEFORE THE DRP THAT THESE WERE SHRINK- WRAPPED OR COPYRIGHTED PACKAGED SOFTWARE. ACCORDI NG TO IT, WHILE PURCHASING SUCH SOFTWARE, THERE WERE NO ROYALTY WHA TSOEVER INVOLVED. THESE WERE OUTRIGHT PURCHASE OF SOFTWARE AND HENCE TAX DEDUCTION I.T.A. NO. 2112/MDS/11 33 UNDER SECTION 194J WAS NOT REQUIRED. THIS ARGUMENT DID NOT FIND ANY FAVOUR WITH DRP. 46. NOW BEFORE US, LEARNED A.R. SUBMITTED THAT SECT ION 40(A)(I) AND SECTION 40(A)(IA) BOTH MANDATED DEDUCTION OF TAX AT SOURCE ON ROYALTY PAYMENTS. HOWEVER, ACCORDING TO HIM, THE TERM ROY ALTY MENTIONED IN THESE SECTIONS HAD TO BE GIVEN THE SAME MEANING IN EXPLANATION 2 TO CLAUSE (VI) OF SUB-SECTION (1) OF SECTION 9 OF T HE ACT. RELYING ON THE SAID EXPLANATION, LEARNED A.R. SUBMITTED THAT T HE PAYMENTS MADE BY THE ASSESSEE DID NOT FALL WITHIN THE SAID EXPLAN ATION. ACCORDING TO HIM, EXPLANATION 4 INSERTED BY FINANCE ACT, 2012 WI TH RETROSPECTIVE EFFECT FROM 1.6.76 HAD NO EFFECT WHATSOEVER FOR CON STRUING THE MEANING OF THE TERM ROYALTY MENTIONED IN EXPLANAT ION 2. IN SUPPORT OF THIS, LEARNED A.R. RELIED ON THE DECISION OF MUM BAI BENCH OF THIS TRIBUNAL IN THE CASE OF SONATA INFORMATION TECHNOLO GY LTD. V. DCIT IN I.T.A. NO. 1507/MUM/2012 DATED 7.9.2012. 47. PER CONTRA, LEARNED D.R., STRONGLY SUPPORTING T HE ORDERS OF AUTHORITIES BELOW, SUBMITTED THAT EXPLANATION 4 WAS A CLARIFICATORY AMENDMENT FOR REMOVAL OF DOUBTS AND HENCE, IT APPLI ED TO EXPLANATION 2 AS WELL. I.T.A. NO. 2112/MDS/11 34 48. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVAL SUBMISSIONS. NO DOUBT, ROYALTY MENTIONED IN SECTION 40(A)(I) A ND 40(A)(IA) HAS TO BE ASSIGNED THE MEANING GIVEN IN EXPLANATION 2 TO C LAUSE (VI) OF SUB- SECTION (1) OF SECTION 9 OF THE ACT. NONE OF THE A UTHORITIES BELOW HAVE VERIFIED THIS ISSUE IN THE PROPER PERSPECTIVE. THEY WERE ALSO NOT HAVING THE BENEFIT OF THE ELUCIDATION OF THE LAW IN THIS REGARD BY HIGHER AUTHORITIES. THE A.O. HAD HELD THAT THE TAX HAD TO BE DEDUCTED BY THE ASSESSEE FOR PAYMENT MADE TO SOFTWARE PURCHASE, BUT , WAS NOT DONE. NEITHER HE, NOR THE DRP HAD LOOKED INTO THE ASPECT WHETHER THE PAYMENTS MADE WERE IN RESPECT OF SHRINK-WRAPPED S OFTWARE OR TOWARDS RIGHT TO USE SOFTWARE AND WHETHER SECTION 4 0(A)(I) AND 40(A)(IA) STOOD ATTRACTED. WE ARE, THEREFORE, OF T HE OPINION THAT THIS ISSUE REQUIRES A FRESH LOOK BY THE A.O. WE SET ASI DE THE ORDERS OF AUTHORITIES BELOW AND REMIT THIS ISSUE BACK TO THE FILE OF THE A.O. 49. GROUND NO.11 STANDS ALLOWED FOR STATISTICAL PUR POSES. 50. WHEN GROUND NO.12 IS TAKEN UP, LEARNED A.R. SUB MITTED THAT HE WAS NOT PRESSING THIS GROUND. 51. GROUND NO.12 IS DISMISSED AS NOT PRESSED. I.T.A. NO. 2112/MDS/11 35 52. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER WAS PRONOUNCED IN THE COURT ON WEDNESDAY, THE 14 TH OF AUGUST, 2013, AT CHENNAI. SD/- SD/- (S.S. GODARA) (ABRAHAM P. GEORGE) JUDICIAL MEMBER ACCOUNTANT MEMBER CHENNAI, DATED THE 14 TH AUGUST, 2013. KRI. COPY TO: (1) APPELLANT (2) RESPONDENT (3) SECRETARY, DRP, CHENNAI (4) TPO-V, CHENNAI-34 (5) D.R. (6) GUARD FILE