Bajaj Allianz General Insurance Company Ltd., Pune V. DCIT, Circle 1(1), Pune

ITA 2560/PUN/2012

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 2764 (ITAT-PUNE)
• Duration Of Justice: 3 year(s) 1 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-02-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 09-07-2015
• Assessment Year: 2008-2009
• Appeal Filed On: 27-12-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: VERMA
• Assessee Lawyers: NIKHIL VASANTI PATEL
• Keywords: Gift; Business income; Transfer pricing; Loose papers; Double taxation relief; International transaction; Earning of tax free income; Deemed to accrue or arise in india; Retrospective amendment; Additional evidence; Permanent establishment; Question of law; Accommodation entries; Revised return; Documents seized
• Section: 43B; 143(3); 133A; 14A; 201(1); 263; 132; 28; 154; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH A, PUNE , . . , BEFORE MS. SUSHMA CHOWLA, JM AND SHRI R.K. PANDA, AM . / ITA NO. 2560 /PN/201 2 / ASSESSMENT YEAR : 200 8 - 09 BAJAJ ALLIANZ GENERAL INSURANCE CO. LTD., 1 ST FLOOR, GE PLAZA, AIRPORT ROAD, PUNE 4110 0 6 . / APPELLANT PAN: AA BCB5730G VS. THE DY . COMMISSIONER OF INCOME TAX, CIRCLE 1( 1) , PUNE . / RESPONDENT / APPELLANT BY : S/ SHRI PER E Y J. PARDIWALA VASANTI PATEL AND NIKHIL VASANTI PATEL AND NIKHIL MUTHA / RESPOND ENT BY : S MT. M.S. VERMA , CIT / DATE OF HEARING : 0 4 . 11 .2015 / DATE OF PRONOUNCEMENT: 03 . 02 .201 6 / ORDER PER SUSHMA CHOWLA, J M : TH IS APPEAL FILED BY THE ASSESSEE IS AGAINST THE ORDER OF DEPUTY CIT , CIRCLE - 1(1) , PUNE DATED 29 . 1 0 .20 1 2 RELATING TO ASSESSMENT YEAR 20 0 8 - 09 AGAINST ORDER PASSED UND ER SECTION 143(3) R.W.S. 144C(13) OF THE INCOME - TAX ACT , 1961 (IN SHORT THE ACT) . 2. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: - ITA NO. 2560 /PN/20 1 2 BAJAJ ALLIANZ GENERAL INSURANCE CO. LTD. 2 ON THE F ACTS OF THE CIRCUMSTANCES OF THE CASE AND IN L AW, THE AO AND THE DRP HAVE : GROUND NO 1 1 . 1 E RRED IN TRE ATING PROFITS ON SALE / REDEMPTION OF I NVESTMENTS (INCLUDING AMORTIZATION OF SECURI T IES) OF RS.53,11 , 07 , 601 AS TAXABLE. GROUND NO 2 2 . 1 ERRED IN I NVOKING DISALLOWANCE UNDER SECTION 14A OF THE ACT READ WITH RULE 8 D OF THE INCOME - TAX RULES , 1962 IN RESPECT OF PROFITS ON SALE/ R EDEMPTION OF INVESTMENTS CLAIMED AS NON - TAXABLE BY T HE APPELLANT . 2 . 2 ERRED IN I NVOKING DISALLOWANCE UNDER SECTION 14A OF THE ACT READ WITH RULE 8 D OF T HE INCOME - TAX RULES, 1962 IN RESPECT OF EXEMPT DIVIDEND INCOME . GROUND NO 3 3 . 1 ERRED IN INVO KING DISALLOWANCE OF RS . 62,67,76,979 UNDER SECTION 40(A)(I) OF THE ACT IN RE S P ECT OF R E IN S U RA NCE PR E MIUM PA I D TO ALLIANZ REINSURANCE ASIA PACIFIC BRANCH, SINGAPORE (ARAP) GROUND NO 4 4 . 1 ERRED IN DISALLOWING RISK INSPECTION CHARGES OF RS.11 , 91 , 11,201 FOR W ANT OF PU R CHASE ORDERS. 4 . 2 WITHOUT PRE J UDICE TO THE ABOVE, THE DRP ERRED IN NOT ADMITTING AND ALLOWING RELIEF IN RESPECT OF ADDITIONAL PURCHASE ORDERS OF RS.68 , 07 , 042 FILED DURING THE COURSE OF DRP PROCEEDINGS . GROUND NO 5 5 . 1 ERRED IN MAKING ADDIT I ON OF I NCOME FROM SOFTWARE CONSULTANCY CHARGES OF RS. 3,01 , 25,934 OFFERED TO TAX IN AY 2009 - 10 5 . 2 WITHOUT PREJUDICE TO THE ABOVE, THE LEARNED AO ERRED IN NOT A L LOWING FOREIGN TAX CREDIT OF RS.11,97,670 RELATING TO AFORESAID SOFTWARE CONSULTANCY CHARGES . GROUND NO 6 6 . 1 ER RED IN DISALLOWING AMOUNT COLLECTED TOWARDS ENVIRONMENTAL RELIEF FUND OF RS . 74 , 03,321 UNDER SECTION 43 B OF ACT . RS . 74 , 03,321 UNDER SECTION 43 B OF ACT . GROUND NO 7 7 . 1 ERRED IN INVOKING DISALLOWANCE OF R S. .60,167 UNDER SECTION 40(A)(I) OF THE ACT IN RESPECT OF SURVEY FEES PAID TO NON - RESIDENT SURV EYORS. GROUND NO 8 8 . 1 ERRED IN NOT GRANTING CREDIT FOR SELF - ASSESSMENT TAX PAID BY THE APPELLANT OF R S. 1 2 , 00 , 803 FOR AY 2008 - 09. GROUND NO 9 9 . 1 ERR ED IN GRANTING CREDIT FOR TAX DEDUCTED AT SOURCE ( ' TDS ' ) AT RS.11,73 , 785 I NSTEAD OF RS.18 , 53,689 AS C L AIMED BY THE APPELLANT IN THE RETURN OF I NCOME. ITA NO. 2560 /PN/20 1 2 BAJAJ ALLIANZ GENERAL INSURANCE CO. LTD. 3 T HE APPELLANT PRAYS THAT THE GROUNDS OF APPEAL RAISED AS ABOVE BE ACCEPTED AND THE ADDI T IONS / DISALLOWANCES MADE BY AO BE DELETED . T HE APPE L LANT CRAVES LEAVE TO ADD , ALTER , VARY, OMIT , SUBSTITUTE , AMEND OR DELE T E O NE OR MORE OF T HE ABOVE GROUNDS OF APPEAL ON OR BEFORE OR AT THE T IME DELE T E O NE OR MORE OF T HE ABOVE GROUNDS OF APPEAL ON OR BEFORE OR AT THE T IME OF HEARING OF THE APPEA L, SO AS TO ENABLE THE HONORABLE INCOME TAX APPELLA T E T R IBUNAL TO DISPOSE OFF TH E APPEAL ACCORDING T O LAW. 3. BRIEFLY, IN THE FACTS OF THE PRESENT CASE, THE ASSES SEE IS A COMPANY INCORPORATED IN INDIA UNDER THE PROVISIONS OF THE COMPANIES ACT, 1956 AND IS A JOINT VENTURE BETWEEN BAJAJ AUTO LTD., AND ALLIANZ SE, GERMANY . THE ASSESSEE HA D BEEN GRANTED REGISTRATION AND APPROVAL TO CARRY ON THE GENERAL INSURANCE BUSIN ESS AS PER THE INSURANCE REGULATORY AND DEVELOPMENT INSURANCE BUSIN ESS AS PER THE INSURANCE REGULATORY AND DEVELOPMENT AUTHORITY (IRDA) IN MAY, 2001. THE ASSESSEE AS SUCH, WAS ENGAGED IN THE BUSINESS OF GENERAL INSURANCE IN THE YEAR UNDER CONSIDERATION. FOR THE YEAR UNDER CONSIDERATION, THE ASSESSEE HAD FILED RETURN OF INCOME DECLARING TOTAL INCOME OF RS. 98,41,65,289/ - . SUBSEQUENTLY, THE ASSESSEE FURNISHED REVISED RETURN OF INCOME ON 2 5 .08.2009 DECLARING TOTAL INCOME OF RS. 98,74,32,790/ - . THE REASON FOR FILING THE REVISED RETURN WAS WITHDRAWAL OF CLAIM OF DEDUCTION OF THE REASON FOR FILING THE REVISED RETURN WAS WITHDRAWAL OF CLAIM OF DEDUCTION OF RS. 32,67,497/ - BEING RISK INSPECTION CHARGES PAID TO VARIOUS PARTIES. THE ASSESSING OFFICER MADE A REFERENCE UNDER SECTION 92CA(1) OF THE ACT FOR COMPUTATION OF ARM'S LENGTH PRICE IN RELATION TO THE INTERNATIONAL TRANSACTIONS DETAILED IN THE AUDIT REPORT IN FORM NO.3CEB . 4. THE TRANSFER PRICING OFFICER (TPO) NOTED THAT THE ASSESSEE HAD ENTERED 4. THE TRANSFER PRICING OFFICER (TPO) NOTED THAT THE ASSESSEE HAD ENTERED INTO VARIOUS INTERNATIONAL TRANSACTIONS WHICH ARE ENLISTED UNDER PARA 4 AT PAGES 2 AND 3 OF THE TPOS ORDER PASSED UNDER SECTION 92CA(3) OF THE ACT. AFTER CONSID ERING THE SUBMISSIONS AND THE DOCUMENTS FURNISHED BY THE ASSESSEE, THE TPO MADE AN ADJUSTMENT IN THE PROVISION OF SOFTWARE CONSULTANCY SERVICES . THE TPO NOTED THAT THE ASSESSEE HAD RENDERED CERTAIN SOFTWARE DEVELOPMENT SERVICES TO ITS ASSOCIATED ENTERPRIS ES WHICH WERE NOT SOFTWARE DEVELOPMENT SERVICES TO ITS ASSOCIATED ENTERPRIS ES WHICH WERE NOT SIGNIFICANT IN THE CONTEXT OF OVERALL BUSINESS ACTIVITY OF BA GENERAL . THE TPO FURTHER NOTED THAT THE ASSESSEE OPERATED AS A ROUTINE SERVICE PROVIDER WITHOUT ITA NO. 2560 /PN/20 1 2 BAJAJ ALLIANZ GENERAL INSURANCE CO. LTD. 4 UNDERTAKING ANY SIGNIFICANT RISKS. AS PER THE TP STUDY, THE COST PLUS METHOD ( CPM) HAD BEEN CONSIDERED TO BE MOST APPROPRIATE METHOD FOR ANALYSING THE ARM'S LENGTH NATURE OF INTERNATIONAL TRANSACTIONS. THE TPO FURTHER NOTED THAT BA GENERAL HAS EARNED GROSS PROFIT MARGIN OF 169% FROM THE ACTIVITY OF RENDERING SOFTWARE CONSULTANCY SE RVICES TO ITS ASSOCIATED ENTERPRISES. THE WEIGHTED AVERAGE GROSS PROFIT MARGI N (AS A PERCENTAGE OF SALES) OF BROADLY COMPARABLE 25 COMPANIES RANGE FROM 0.05% TO 255.16% WITH AN ARITHMETICAL MEAN OF 49.93% . THE TPO ISSUED SHOW CAUSE NOTICE TO THE ASSESSEE THAT IN RESPECT OF SOFTWARE SEGMENT, IT HAD ADOPTED CPM METHOD AND HAD SHOWN GP RATE OF 169% AS COMPARED WITH AVERAGE OF 50% . THE TPO FURTHER NOTED THAT THE SEGMENT OPERATING INCOME OF RS. 3.29 CRORES INCLUDED RS.3.01 CRORES OF INCOME APPEARING IN THE PL I OF NEXT YEAR , FOR WHICH IT WAS EXPLAINED THAT THE PROJECT GOT COMPLETED AND DELIVERED IN THE NEXT YEAR, AS AGAINST THIS, THE COST WAS SHOWN AT RS. 1.22 CRORES AND WHICH WAS COST OF CURRENT YEAR. THE TP O WAS OF THE VIEW THAT THE SAME WAS I NCORRECT COMPUTAT ION OF MARGIN IN CURRENT WAS OF THE VIEW THAT THE SAME WAS I NCORRECT COMPUTAT ION OF MARGIN IN CURRENT YEAR AND IF THE OPERATING INCOME OF THE CURRENT YEAR ONLY WAS TAKEN AT RS. 27,91,816/ - , THERE WAS LOSS. THE TPO WAS OF THE VIEW THAT THE CORRECT BASIS WOULD BE TO APPLY THE MARGIN ON COST AND THE REVENUE SHOULD BE RS. 1,22,50,623/ - , SINCE THE MARGIN WAS SHOWN FOR COMPARABLES AT 50% RESULTING IN ADJUSTMENT OF RS. 94,58,807/ - TO THE INTERNATIONAL TRANSACTIONS. IN REPLY, THE ASSESSEE EXPLA INED THAT THE UPDATED MARGINS OF COMPARABLES FOR SINGLE YEAR 2007 - 08 WAS 42.30% AND IF RS. 3.01 CROR ES WAS NOT CONSIDERED AS PART OF OPERATING REVENUE, THE CORRESPONDING COST SHOULD ALSO BE EXCLUDED. THUS, RS.1.12 CRORES SHOULD BE EXCLUDED. THE TPO REJECTED THE CONTENTION OF THE ASSESSEE ON FOLLOWING GROUNDS : - I) THERE IS NOTHING SUBMITTED TO INDICATE OR ESTABLISH THAT THE ACCOUNTING NORMS IN THE CASE OF ANY COMPARABLE SELECTED BY ASSESSEE ARE IN ANYWAY DIFFERENT FROM THE NORMS FOLLOWED BY THE ASSESSEE. II) THE RULE ALLOWS ADJUSTMENT TO THE NORMAL GROSS PROFIT MARKUP OF COMPARABLES FOR FUNCTIONAL OR O THER DIFFERENCES, IF ANY, BETWEEN THE CONCERNED INTERNATIONAL TRANSACTION AND COMPARABLE UNCONTROLLED ITA NO. 2560 /PN/20 1 2 BAJAJ ALLIANZ GENERAL INSURANCE CO. LTD. 5 TRANSACTION. NO FUNCTIONAL DIFFERENCE H AS BEEN INDICATED IN THE REPLY WARRANTING ANY ADJUSTMENT. III) IT IS CLAIMED THAT RS.112,11,625/ - OF EXPENDITURE IN CURRENT YEAR IS RELATED TO INCOME RECOGNIZED IN NEXT YEAR OF RS.301,25,934/ - . HOWEVER, THERE IS NOTHING TO INDICATE THIS IN THE AUDITED ACCOUNTS. THERE IS NEITHER ANY NOTES TO ACCOUNTS INDICATING THIS CLAIM OF DEFERRED EXPENDITURE NOR THE EXPENDITURE IS SHOWN AS WIP. FURTHER, THE AMOUNT OF RS.112,11,625/ - IS NOT BASED ON ANY ACTUAL RECORD, INSTEAD IT IS ONLY AN ADHOC AMOUNT COMPUTED ON PROPORTIONATE BASIS AS IS NOTED FROM FOOTNOTE OF ATTACHMENT 3 OF THE SUBMISSION. IV) WITHOUT PREJUDICE, EVEN IF ASSE SSEES CONTENTION IS CONSIDERED TO BE TRUE, THERE WILL BE EXPENDITURE INCURRED IN AY 2009 - 10 ALSO WHICH HAS NOT BEEN CONSIDERED IN THE COMPUTATION MADE BY ASSESSEE. V) LASTLY, IF EXPENDITURE IS INCURRED, THEN THE REVENUE SHOULD HAVE BEEN CLAIMED AT A MARK UP THAT IS AT ARMS LENGTH. 5. THE TPO THUS, PROPOSED AN ADJUSTMENT OF RS. 94,58,807/ - ON ACCOUNT OF ARM'S LENGTH PRICE MARGIN OF INTERNATIONAL TRANSACTION. 6. THE SECOND OBJECTION RAISED BY THE ASSESSEE BEFORE THE TPO WAS THAT SECTION 92 CA OF THE ACT WAS INAPPLICABLE TO THE INSURANCE BUSINESS SI NCE THE PROFITS AND GAINS OF INSURANCE WERE COMPUTED IN ACCORDANCE WITH SECTION 44 PROFITS AND GAINS OF INSURANCE WERE COMPUTED IN ACCORDANCE WITH SECTION 44 READ WITH FIRST SCHEDULE TO THE ACT AND AS PER RULE 5 OF THE FIRST SCHEDULE. I T WAS FURTHER PROPOSED THAT SECTION 44 OVERRIDES SECTION 92 CA OF THE ACT AND NO ADJUSTMENT TO INCOME COULD BE MADE OTHER THAN PERMITTED AS PER RULE 5 OF SCHEDULE OF INCOME TAX ACT. THE TPO WAS OF THE VIEW THAT THE RULE ONLY LAYS DOWN THE STARTING POINT FOR THE PROFIT I.E. THE PROFIT AS PER THE PROFIT & LOSS ACCOUNT SUBMITTED TO CONTROLLER OF INSURANCE (NOW IRDA) AND ONLY SPECIFIC SECTIONS WERE EXCLUDED FROM THE OPERATION. AS PER THE TPO, SECTION 92 CA OF THE ACT WAS NOT EXCLUDED AND THE SAME APPLIES TO PROFIT FROM SPECIFIED INTERNATIONAL TRANSACTIONS. T HE TPO FURTHER OBSERVED THAT THE INCOME FROM PART OF SOFTWARE CONSULTANCY SERVICES WAS NOT INSURANCE BUSINESS. HE FURTHER OBSERVED THAT THE SPECIAL PROVISIONS RELATING TO THE INSURANCE BUSINESS FOR THE DETERMINATION OF TAXABLE INCOME HAD TO BE LOOKED AT B Y THE ASSESSING OFFICER AND NOT BY THE TPO. THUS, HE PROPOSED AN ADJUSTMENT OF RS. 94,58,807/ - TO BE MADE TO THE INTERNATIONAL TRANSACTION. THE SAID ADJUSTMENT PROPOSED WAS ITA NO. 2560 /PN/20 1 2 BAJAJ ALLIANZ GENERAL INSURANCE CO. LTD. 6 ADOPTED BY THE ASSESSING OFFICER IN THE DRAFT ASSESSMENT ORDER PASSED UNDER SECTIO N 143(3) R.W.S. 144C(1) OF THE ACT. 7. THE ASSESSING OFFICER FURTHER NOTED THAT THE ASSESSEE HAD CLAIMED PROFIT/LOSS ON SALE / REDEMPTION OF SECURITIES ( INVEST MENT) AMOUNTING TO RS.50,00,81,160/ - AS NON - TAXABLE AND AMORTIZATION OF SECURITIES OF RS. 3,10, 26,441/ - WERE REDUCED FROM THE TAXABLE INCOME OF THE YEAR. AS A RESULT, RESIDUAL INCOME OF RS. 53,11,07,601/ - WAS CLAIMED AS EXEMPT AND NOT TAXABLE IN THE HANDS OF ASSESSEE, BEING ENGAGED IN NON - LIFE INSURANCE BUSINESS. ANOTHER PLEA RAISED BY THE ASSESSEE BEFORE THE ASSESSING OFFICER WAS THAT THE DISALLOWANCE OF RS. 49,42,631/ - MADE UNDER SECTION 14A OF THE ACT, WHILE FILING THE RETURN OF INCOME, SHOULD BE EXCLUDED, WHILE COMPUTING ASSESSED INCOME, IN VIEW OF THE DECISION OF PUNE BENCH OF TRIBUNAL IN ASSESS EES OWN CASE IN ITA NO. 1447/PN/2007 , RELATING TO ASSESSMENT YEAR 2003 - 04, ORDER DATED 31.08.2009 . RELIANCE WAS ALSO PLACED ON SERIES OF OTHER 2003 - 04, ORDER DATED 31.08.2009 . RELIANCE WAS ALSO PLACED ON SERIES OF OTHER DECISIONS FOR THE PROPOSITION THAT SECTION 44 OF THE ACT CREATES A SPECIAL PROVISION IN THE CASE OF ASSESSMENT O F INSURANCE COMPANIES AND THEREFORE, THE PROVISIONS OF SECTION 14A OF THE ACT WOULD NOT APPLY TO INSURANCE COMPANY. FURTHER, THE ASSESSEE MADE REFERENCE TO THE RULE 5 OF THE FIRST SCHEDULE WHICH PRESCRIBED THE MANNER IN WHICH THE PROFITS AND GAINS OF INSU RANCE BUSINESS, OTHER THAN LIFE INSURANCE, HAD TO BE COMPUTED AND ATTENTION WAS DRAWN TO THE A MENDMENT IN RULE 5 OF THE FIRST SCHEDULE BY THE FINANCE ACT, 2009 , WHEREIN THE PROVISIONS OF RULE 5(B) HAS BEEN RESTORED W.E.F. ASSESSMENT YEAR 2011 - 12 . ANOTHER CONTENTION RAISED BY THE ASSESSEE WAS THAT AS PER RBI GUIDELINES, THE PROFIT EARNED IN RESPECT OF INVESTMENTS SHOULD BE TREATED AS INCOME EARNED BY THE PUBLIC FINANCE COMPANY OR A BANK, WERE NOT APPLICABLE TO THE INSURANCE COMPANY, FOR WHICH THE IRDA GUIDE LINES AND SECTION 44 OF THE ACT WERE RELEVANT FOR THE PURPOSE OF COMPUTATION OF INCOME. IN VIEW THEREOF, THE ASSESSEE MADE A CLAIM THAT THE NET PROFIT ON ITA NO. 2560 /PN/20 1 2 BAJAJ ALLIANZ GENERAL INSURANCE CO. LTD. 7 SALE/REDEMPTION ON INVESTMENTS OF ABOUT RS.50 CRORES, NET ON LOSSES / AMORTIZATION OF RS.3.10 CRORES BE CONSIDERED AS NOT TAXABLE IN COMPUTING THE TAXABLE INCOME OF BA GENERAL FOR ASSESSMENT YEAR 2008 - 09. THE ASSESSING OFFICER VIDE PARA 4.4 OF THE DRAFT ASSESSMENT ORDER OBSERVED THAT THE SUBMISSIONS OF ASSESSEE COMPANY COULD NOT BE ACCEPTED. THE ASSESSI NG OFFICER OBSERVED THAT WHERE THE ASSESSEE WAS ENGAGED IN THE BUSINESS OF GENERAL INSURANCE, THE PROFIT EARNED BY IT ON ACCOUNT OF SALE OF INVESTMENTS IN SHARES OF THE COMPANY, WAS TAXABLE BY VIRTUE OF STATUTORY PROVISIONS. THE ASSESSING OFFICER FURTHER OBSERVED THAT THE FUNCTIONS OF THE COMPANY WERE BIFURCATED INTO TWO DISTINCT ACTIVITIES I.E. ONE OF THE INSURANCE BUSINESS AND THE OTHER AS PUBLIC FINANCIAL INSTITUTION. AS PER THE RBI GUIDELINES, THE INCOME FROM NON - BANKING ACTIVITIES OF A FINANCIAL INST ITUTION HAD TO BE RECOGNIZED AS INCOME. THE ASSESSING OFFICER THUS, OF THE VIEW THAT THE PROFIT REALIZED ON SALE OF INVESTMENT SHOULD BE CONSIDERED AS BUSINESS INCOME OF THE PUBLIC FINANCIAL INSTITUTION AND NOT THAT OF THE INSURANCE BUSINESS TO WARRANT EX EMPTION ON THE INSTITUTION AND NOT THAT OF THE INSURANCE BUSINESS TO WARRANT EX EMPTION ON THE GROUND OF RULE 5 OF FIRST SCHEDULE, WHICH IN TURN, DEALS WITH DETERMINATION OF INCOME OF INSURANCE BUSINESS. THE ASSESSING OFFICER THUS, PROPOSED THAT FOR THE YEAR UNDER CONSIDERATION, THE ASSESSEE WAS NOT ENTITLED TO THE CLAIM OF EXEMPTION TO THE TUNE OF ABOUT RS.50 CRORES ON ACCOUNT OF SALE OF INVESTMENTS AND AMORTIZATION OF SECURITIES OF RS.3.10 CRORES, AS DEDUCTIBLE FROM THE TAXABLE INCOME OF THE YEAR . THE ASSESSING OFFICER WAS OF THE VIEW THAT THE AFORESAID PROFIT IS TO BE CONSIDERED A S BUSINESS INCOME OF THE PUBLIC FINANCIAL INSTITUTION AND NOT THAT OF INSURANCE BUSINESS TO WARRANT EXEMPTION ON THE GROUND THAT RULE 5(B) OF THE FIRST SCHEDULE HAD BEEN DELETED BY THE STATUTE W.E.F. 1 ST APRIL, 1988. THE ASSESSING OFFICER VIDE PARA 4.5 NO TED THAT IN THE EARLIER YEAR S I.E. ASSESSMENT YEAR S 2003 - 04 TO 2006 - 07 , SIMILAR ADDITION HAS BEEN MADE IN THE HANDS OF THE ASSESSEE. THE ASSESSING OFFICER TOOK NOTE OF THE FACT THAT THE TRIBUNAL IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2003 - 04 HAD HELD THAT THE INCOME ON SALE / REDEMPTION OF INVESTMENT WAS EXEMPT, BUT THAT ITA NO. 2560 /PN/20 1 2 BAJAJ ALLIANZ GENERAL INSURANCE CO. LTD. 8 PROPOSITION WAS NOT ACCEPTED SINCE THE DEPARTMENT WAS IN APPEAL BEFORE THE HONBLE HIGH COURT. THUS, THE PROFIT ON SALE / REDEMPTION OF INVESTMENTS OF ABOUT RS.50 CRORES CLAIMED AS EX EMPT WAS TAXED AS INCOME OF THE ASSESSEE. FURTHER, THE DEDUCTION CLAIMED ON ACCOUNT OF AMORTIZATION OF SECURITIES OF RS.3.10 CRORES WAS ADDED BACK TO THE INCOME OF THE ASSESSEE IN THE ABSENCE OF ANY SPECIFIC PROVISION UNDER RULE 5 OF THE FIRST SCHEDULE. 8. THE NEXT ITEM OF DISALLOWANCE PROPOSED BY THE ASSESSING OFFICER WAS DISALLOWANCE UNDER SECTION 14A OF THE ACT. SINCE THE ASSESSEE HAD NOT SHOWN ANY EXPENDITURE RELATING DIR ECTLY OR INDIRECTLY TO THE EXEMPT INCOME, THE ASSESSEE WAS SHOW CAUSED TO EXPLAI N AS TO WHY THE DISALLOWANCE UNDER SECTION 14A OF THE ACT SHOULD NOT BE MADE ON THE SAID ISSUE. IN REPLY, THE ASSESSEE PLACED RELIANCE ON THE ORDER OF TRIBUNAL IN ASSESSEES OWN CASE RELATING TO ASSESSMENT YEAR 2003 - 04 , WHEREIN IT WAS HELD THAT SECTION 14 A OF THE ACT WAS NOT APPLICABLE IN ASSESSEES CASE, WHERE INCOME HAS TO BE THE ACT WAS NOT APPLICABLE IN ASSESSEES CASE, WHERE INCOME HAS TO BE COMPUTED UNDER SECTION 44 OF THE ACT. THE ASSESSING OFFICER WAS OF THE VIEW THAT THE EXPENSES ATTRIBUTABLE TO INVESTMENT ACTIVITY SHOULD BE APPORTIONED BETWEEN TAXABLE AND NON - TAXA BLE INCOME. FURTHER, THE ASSESSEE ITSELF HAD WORKED OUT THE EXPENSES DISALLOWABLE UNDER SECTION 14A OF THE ACT AT RS. 49,42,631/ - IN THE REVISED RETURN AND ALSO REVISED COMPUTATION FILED ON 19.08.2009 AND ADDED BACK. THE ASSESSING OFFICER COMPUTED THE DIS ALLOWANCE UNDER SECTION 14A OF THE ACT READ WITH RULE 8D OF THE INCOME TAX RULES, 1962 (RULES) AT RS. 7,98,28,536/ - AND ALLOWING THE CREDIT OF DISALLOWANCE MADE BY THE ASSESSEE AT RS.49,42,631/ - + RS. 41,101/ - , THE ASSESSING OFFICER PROPOSED AN ADDITION OF R S. 7,48,44,804/ - . 9. ANOTHER ADDITION MADE IN THE HANDS OF THE ASSESSEE WAS ON ACCOUNT OF AMOUNT COLLECTED BY THE ASSESSEE ON ACCOUNT OF ENVIRONMENT FUND TOTALLING RS. 74,03,321/ - . SINCE THE ASSESSEE HAD NOT SHOWN AS TO WHEN AND HOW THE ITA NO. 2560 /PN/20 1 2 BAJAJ ALLIANZ GENERAL INSURANCE CO. LTD. 9 AMOUNT COLLECTED WAS ULTIMATELY PAID OUT, THE SAME HAVING BEEN RECEIVED IN THE COURSE OF CARRYING ON OF INSURANCE BUSINESS, AND MERELY BECAUSE IT WAS CREDITED TO A SPECIFIC FUND AS PER LAW, THE ASSESSING OFFICER WAS OF THE VIEW THAT THE RECEIPT DID NOT LOSE ITS CHARACTER O F INCOME. ACCORDINGLY, ADDITION OF RS.74,03,321/ - WAS PROPOSED BY THE ASSESSING OFFICER IN THE DRAFT ASSESSMENT ORDER. 10. ANOTHER POINT NOTED BY THE ASSESSING OFFICER DURING THE COURSE OF ASSESSMENT PROCEEDINGS WAS THAT THE ASSESSEE HAD MADE PAYMENT ON ACCOUNT OF REINSURANCE PREMIUM OF RS.62,67,76,979/ - TO ALLIANZ REINSURANCE ASIA PACIFIC BRANCH SINGAPORE (ARAP). THE ASSESSEE HAD ALSO MADE PAYMENT OF SURVEY FEES TO NON - RESIDENT SURVEYORS FOR RS.70,69,050/ - DURING THE YEAR. THE ASSESSEE WAS ASKED TO FIL E DETAILS OF TDS MADE ON THESE PAYMENTS TO NON - RESIDENTS. THE ASSESSEE EXPLAINED THAT NO TDS WAS REQUIRED TO BE MADE ON THE SAID PAYMENTS TO NON - RESIDENTS AS THE NON - REQUIRED TO BE MADE ON THE SAID PAYMENTS TO NON - RESIDENTS AS THE NON - RESIDENTS RECEIVING THESE PAYMENTS DID NOT HAVE A PERMANENT ESTABLISHMENT IN THE COUNTRY AND DUE TO THIS FACT THAT SUCH RECEIPTS WERE NOT TAXABLE IN INDIA UNDER DTAA. FURTHER, IT WAS POINTED OUT THAT THE PAYMENT OF SURVEY FEE S D ID NOT FALL IN THE CATEGORY OF FEES FOR TECHNICAL SERVICES . I N RESPECT OF REINSURANCE PREMIUM , I T WAS CLAIMED THAT THE SAME WAS PAID TO ARAP IS NOT TAXABLE IN INDIA BECAUSE ARAP H AS NO BUSINESS IN INDIA AND NO INCOME IS TAXABLE IN INDIA IN THE ABSENCE OF ANY OPERATIONS CARRIED ON IN INDIA. THE ASSESSING OFFICER WAS OF THE VIEW THAT THE PROVISIONS OF SECTION 195 OF THE ACT WERE APPLICABLE, WHICH CAST RESPONSIBILITY UPON THE ASSESSEE TO DEDUCT TAX ON SUMS PAID TO NON - RESIDENTS AT THE TIME OF MAKING SUCH PAYMENTS. SINCE THE ASSESSEE HAD FAILED TO DEDUCT THE SAME, THE ASSESSING OFFICER FURTHER OBSERVED THAT THE SECTION IT SELF PROVIDED A PATH TO THE ASSESSEE UNDER SECTION 195(2) OF THE ACT , WHEREIN IT WAS PROVIDED THAT IF THE PERSON RESPONSIBLE FOR MAKING PAYMENT TO NON - RESIDENTS CONSIDERS THAT THE WHOLE OF SUCH PAYMENT ITA NO. 2560 /PN/20 1 2 BAJAJ ALLIANZ GENERAL INSURANCE CO. LTD. 10 WOULD NOT BE INCOME CHARGEABLE TO TAX IN THE CASE OF R ECIPIENT, THEN HE WAS TO MAKE AN APPLICATION TO THE ASSESSING OFFICER TO DETERMINE THE APPROPRIATE PROPORTION OF SUCH SUM SO CHARGEABLE TO TAX AND TAX IS REQUIRED TO BE DEDUCTED ON SUCH PROPORTION DETERMINED BY THE ASSESSING OFFICER. THE ASSESSEE HAD NOT MADE ANY SUCH APPLICATION UNDER SECTION 195(2) OF THE ACT AND HAD ALSO NOT DEDUCTED TAX AT SOURCE AND HENCE, THE PROVISIONS OF SECTION 40(A)(IA) OF THE ACT WERE APPLICABLE. ACCORDINGLY, THE PAYMENTS MADE BY THE ASSESSEE TO THE NON - RESIDENTS TOTALLING RS.6 3,38,46,029/ - WAS DISALLOWED AND ADDED BACK TO THE INCOME OF THE ASSESSEE. 11. ANOTHER ASPECT NOTED BY THE ASSESSING OFFICER WAS THE BOGUS RISK INSPECTION SURVEY EXPENSES. THE ASSESSING OFFICER HAD RECEIVED A LETTER DATED 30.06.2009 FROM DDIT(INV) UNIT VI II(1) , MUMBAI INFORMING THAT ON 22.06.2008, SEARCH PROCEEDINGS UNDER SECTION 132 OF THE ACT WERE CONDUCTED IN THE CASE OF SHRI SANDEEP SITANI, CA AT MUMBAI RESIDENCE AND SURVEY PROCEEDINGS OF SHRI SANDEEP SITANI, CA AT MUMBAI RESIDENCE AND SURVEY PROCEEDINGS UNDER SECTION 133A OF THE ACT AT HIS OFFICE. IN HIS STATEMENT RECOR DED UNDER SECTION 132(4) OF THE ACT ON 24.06.2008 , HE WAS CONFRONTED WITH THE INCRIMINATING DOCUMENTS SEIZED / IMPOUNDED IN THE FORM OF LOOSE PAPERS CONSISTING OF LETTER HEADS, BOGUS BILLS RAISED IN THE NAME OF VARIOUS COMPANIES/FIRMS. HE WAS ALSO CONFRON TED WITH THE STATEMENT RECORDED OF SHRI DINANATH YADAV, SHRI PRADEEP PRAJAPATI, HIS EMPLOYEES ON 24.06.2008 . SHRI SITANI ADMITTED THAT HE WAS CONTROLLING THE BANK TRANSACTIONS OF MORE THAN 25 COMPANIES, IN WHICH BOTH OF HIS EMPLOYEES WERE SHOWN AS DIRECTO RS FOR THE PURPOSE OF ISSUING BOGUS BILLS ON COMMISSION BASIS. IN REPLY TO QUESTION NO.8 AND THEN QUESTION NO.9, SHRI SITANI ADMITTED THAT NO BOOKS OF ACCOUNT OR COPY OF BILLS WERE KEPT BY HIM AND NORMALLY THE BILLS WERE RAISED BY THE CONCERNED PARTY THEMS ELVES SUO MOTO , IN THE NAME OF COMPANIES CONTROLLED BY HIM. THE BILLS WERE GIVEN TO SUCH PARTIES, WHO DESIRE D THE SAME. THE RATE OF COMMISSION WAS ALSO SPECIFIED BY HIM. IN REPLY TO QUESTION NO.15, SHRI SITANI ITA NO. 2560 /PN/20 1 2 BAJAJ ALLIANZ GENERAL INSURANCE CO. LTD. 11 ADMITTED THAT THE RECEIPTS AND EXPENSES SHOWN IN HIS R ETURNS WERE NOT GENUINE. IN REPLY TO QUESTION NOS.16 TO 23, THE MODUS OPER A NDI OF THE ENTIRE TRANSACTIONS WERE EXPLAINED. FURTHER EXAMINATION OF SHRI SANDEEP SITANI WAS DONE BY ACIT, CIRCLE - 2, THANE . FROM THE DETAILS GIVEN IN THE STATEMENT AND ACCOUNTS OF THE ASSESSEE, THE BANK ACCOUNTS OF THE COMPANIES REFLECTED CERTAIN PAYMENTS HAVE BEEN RECEIVED FROM THE ASSESSEE. THE SAID COMPANIES WERE THOSE CONTROLLED BY SHRI SITANI . TOTAL OF THE TRANSACTIONS WAS RS.108,31,171/ - AND THE DETAILS ARE TABUL ATED AT PAGE 14 OF THE DRAFT ASSESSMENT ORDER. THE ASSESSEE WAS ASKED TO PRODUCE ALL THE INVOICES ALONG WITH PURCHASE ORDERS FOR ESTABLISHING THE GENUINENESS OF THE CLAIMS. THE ASSESSEE IN REPLY, WAS A BLE TO PRODUCE EVIDENCE IN THE FORM OF PURCHASE ORDER S IN SUPPORT OF PAYMENTS MADE FOR RISK INSPECTION CHARGES OF RS.2.71 CRORES ONLY AND FOR THE BALANCE AMOUNT, NO DETAILS WERE PRODU CED FOR VERIFICATION. THE ASSESSING OFFICER NOTED THAT THE ASSESSEE AGAINST THE TOTAL CLAIM OF RISK INSPECTION CHARGES OF RS. 14.62 CRORES HAD SUBSTANTIATED WITH CLAIM OF RISK INSPECTION CHARGES OF RS. 14.62 CRORES HAD SUBSTANTIATED WITH EVIDENCE , GENUINENESS OF PAYMENT OF RS.2.71 CRORES ONLY . SINCE NO EVIDENCE WAS PRODUCED IN RESPECT OF BALANCE AMOUNT OF EXPENDITURE OF RS.11.91 CRORES, THE SAME WAS DISALLOWED AND ADDED TO THE INCOME OF THE ASSESSEE. 12. AGAINST THE DRAFT ASSESSMENT ORDER PROPOSED BY THE ASSESSING OFFICER, THE ASSESSEE FURNISHED THE OBJECTIONS BEFORE THE D ISPUTE RESOLUTION PANEL (D RP ) , COPY OF WHICH IS PLACED ON RECORD. THE DRP UPHELD THE FINDINGS OF ASSESSING OFFICER IN RESPECT OF P ROFIT ON SALE / REDEMPTION OF INVESTMENTS OF RS.53.11 CRORES TO BE TREATED AS TAXABLE AND ALSO UPHELD THE DISALLOWANCE WORKED OUT BY THE ASSESSING OFFICER. THE DRP UPHELD THE ADDITIONS PROPOSED BY THE ASSESSING OFFICER ON ACCOUNT OF DISALLOWANCE UNDER SEC TION 14A OF THE ACT, ENVIRONMENT RELIEF FUND LIABILITY, BOGUS RISK INSPECTION SURVEY EXPENSES AND REINSURANCE CHARGES PAID TO NON - RESIDENT EXCEPT, THE DISALLOWANCE OF SURVEYOR FEES AND ENHANCED INCOME FROM SOFTWARE CONSULTANCY CHARGES FROM ITA NO. 2560 /PN/20 1 2 BAJAJ ALLIANZ GENERAL INSURANCE CO. LTD. 12 RS. 94,58,807/ - T O RS.3,01,25,934/ - . THE ASSESSING OFFICER THEREAFTER, PASSED THE ASSESSMENT ORDER UNDER SECTION 143(3) R.W.S. 144C(13) OF THE ACT AND MADE THE FOLLOWING ADDITIONS: - SR. NO. ADJUSTMENT ON ACCOUNT OF AMOUNT 1 PROFIT ON SALE / REDEMPTION OF INVESTMENT CLA IMED EXEMPT BY ASSESSEE RS.50,00,81,160/ - 2 AMORTIZATION OF SECURITY CHARGES RS.3,10,26,441/ - 3 DISALLOWANCE U/S.14A WITH RESPECT TO DIVIDEND INCOME RS.7,48,44,804/ - 4 ENVIRONMENT RELIEF FUND LIABILITY RS.74,03,321/ - 5 DISALLOWANCE U/S40A(IA) AS DIREC TED BY DRP RS.60,167/ - 6 BOGUS RISK INSPECTION SURVEY EXPENSES RS.11,91,11,201/ - 7 INCOME FROM SOFTWARE CONSULTANCY CHARGES AS DIRECTED BY DRP RS.3,01,25,934/ - TOTAL RS.76,26,53,028/ - 13. THE ASSESSEE IS IN APPEAL AGAINST THE AFORESAID ADDITIONS MADE IN THE HANDS OF THE ASSESSEE. 14. THE GROUND OF APPEAL NO.1 RAISED BY THE ASSESSEE IS AGAINST THE TAXABILITY OF PROFITS ARISING ON SALE / REDEMPTION OF INVESTMENTS INCLUDING AMORTIZATION OF SECURITIES TOTALLING RS.53,11,07,601/ - . AMORTIZATION OF SECURITIES TOTALLING RS.53,11,07,601/ - . 1 5 . THE LEARNED AUTHO RIZED REPRESENTATIVE FOR THE ASSESSEE AT THE OUTSET POINTED OUT THAT WHERE THE ASSESSEE WAS ENGAGED IN INSURANCE BUSINESS, WHEREIN INCOME WAS TO BE COMPUTED AS PER SECTION 44 READ WITH FIRST SCHEDULE, THEN ALL OTHER PRO VISIONS WERE TO BE GIVEN AGO BY. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE FURTHER POINTED OUT THAT THE TRIBUNAL IN ASSESSEES OWN CASE HAS ALLOWED SIMILAR CLAIM IN THE EARLIER YEARS AND ADMITTEDLY, AGAINST THE ORDER OF TRIBUNAL, THE APPEALS WERE PENDING BEFORE THE HONBLE HIGH COURT. 1 6 . THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE PLACED RELIANCE ON THE ORDER OF ASSESSING OFFICER. ITA NO. 2560 /PN/20 1 2 BAJAJ ALLIANZ GENERAL INSURANCE CO. LTD. 13 1 7 . WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. THE FIRST ISSUE RAISED VIDE GROUND OF APPEAL NO.1 BEFORE US IS IN RELA TION TO THE TAXABILITY OF PROFITS ARISING ON SALE AND RED EMPTION OF INVESTMENTS CLAIMED AS EXEMPT BY THE ASSESSEE TOTALLING RS. 50,00,81,160/ - AND AMORTIZATION OF SECURITIES CHARGES TOTALLING RS. 3,10,26,441/ - . THE ASSESSEE BEFORE US IS A JOINT VENTURE BETW EEN BAJAJ AUTO LTD., AND ALLIANZ SE, GERMANY . THE ASSESSEE WAS GRANTED APPROVAL TO CARRY ON GENERAL INSURANCE BUSINESS AS PER IRDA AUTHORITY. THE ASSESSEE WAS ENGAGED IN THE BUSINESS OF GENERAL INSURANCE FOR THE YEAR UNDER CONSIDERATION. IN ADDITION TO ITS INCOME FROM INSURANCE, THE ASSESSEE HAD SHOWN PROFIT ON SALE / REDEMPTION OF SECURITIES AT RS. 50,00,81,160/ - AND ALSO AMORTIZATION OF SECURITIES OF RS.3,10,26,441/ - . THE SAID CLAIM OF THE ASSESSEE WAS REJECTED BY THE ASSESSING OFFICER OBSERVING THAT T HE FUNCTIONS OF THE ASSESSEE COMPANY WERE DISTINCT I.E. IT WAS ENGAGED IN THE ACTIVITY OF INSURANCE BUSINESS AND THE SECOND ACTIVITY WAS PUBLIC FINANCE INSTITUTION. THE ASSESSING OFFICER WAS ALSO OF THE VIEW THAT THE INCOME FROM INSTITUTION. THE ASSESSING OFFICER WAS ALSO OF THE VIEW THAT THE INCOME FROM NON - BANKING ACTIVITY OF FI NANCIAL INSTITUTION HAD TO BE RECOGNIZED AS INCOME IN VIEW OF THE RBI GUIDELINES. THE CASE OF THE ASSESSEE ON THE OTHER HAND, WAS THAT UNDER RULE 5 OF FIRST SCHEDULE, THE MANNER WAS PRESCRIBED, UNDER WHICH PROFITS AND GAINS OF INSURANCE BUSINESS, OTHER TH AN THE LIFE INSURANCE BUSINESS, HAD TO BE COMPUTED. THE ASSESSEE FURTHER POINTED OUT THAT IN VIEW OF THE AMENDMENT IN RULE 5 OF FIRST SCHEDULE, BY WHICH THE SAID RULE WAS OMITTED, THE PROFIT EARNED IN RESPECT OF THE INVESTMENTS IS NOT TAXABLE IN THE HANDS OF ASSESSEE. THE ASSESSEE THUS, DID NOT INCLUDE /REDUCE THE PROFIT ON SALE / REDEMPTION OF INVESTMENT OF ABOUT RS.50 CRORES AND NET L O SS ON AMORTIZATION OF RS.3.10 CRORES IN THE COMPUTATION OF INCOME FILED FOR THE YEAR UNDER CONSIDERATION. THE SAID RULE 5 (B) OF FIRST SCHEDULE HAS BEEN RE - INSERTED BY THE FINANCE (NO.2) ACT, 2009 W.E.F. 01.04.2011, WHICH WAS FURTHER SUBSTITUTED BY THE FINANCE ACT, 2010 W.E.F. 01.04.2011 . PRIOR TO ITS SUBSTITUTION, CLAUSE (B) WAS OMITTED BY THE FINANCE ACT, 1988 W.E.F. 01.0 4.1989 . THE YEAR UNDER ITA NO. 2560 /PN/20 1 2 BAJAJ ALLIANZ GENERAL INSURANCE CO. LTD. 14 APPEAL BEFORE US IS ASSESSMENT YEAR 2008 - 09 I.E. THE YEAR IN WHICH THE SAID PROVISIONS OF RULE 5 OF FIRST SCHEDULE WERE NOT O N STATUTE. SIMILAR CLAIM WAS MADE BY THE ASSESSEE THAT THE PROFIT / LOSS ARISING ON SALE / REDEMPTION OF S ECURITIES, INVESTMENT WAS NOT TAXABLE AND EVEN THE LOSS ON ACCOUNT OF AMORTIZATION OF SECURITIES WAS TO BE REDUCED FROM THE TAXABLE INCOME OF THE YEAR, AROSE BEFORE THE TRIBUNAL IN ASSESSEES OWN CASE IN ASSESSMENT YEAR 2003 - 04 . THE TRIBUNAL IN ITA NO.144 7/PN/2007 RELATING TO ASSESSMENT YEAR 2003 - 04 ALONG WITH CO NO.52/PN/2007 , REPORTED IN 130 TTJ (PUNE) 398 HAD CONSIDERED THE AFORESAID ISSUE AND HAD HELD AS UNDER: - 8. A CONCLUSION CAN BE DRAWN ON THE BASIS OF THE ABOVE ELABORATE DISCUSSION THAT THE DELE TION OF SUB RULE (B) FROM RULE 5 OF THE FIRST SCHEDULE WAS WITH A SPECIFIC PURPOSE. THIS SCHEDULE NOT ONLY PRESCRIBE THE METHOD OF COMPUTATION OF INCOME OF INSURANCE BUSINESS IN PART (A) BUT ALSO PRESCRIBE THE METHOD OF COMPUTATION OF OTHER INSURANCE BUSI NESS IN PART (B). RULE 5 IS WITHIN PART (B) AND EARLIER IT HAS PRESCRIBED THE METHOD OF TAXATION OF PROFIT ON SALE OF INVESTMENTS WHICH WAS LATER ON SCRAPPED. EVEN BY APPLYING A REVERSE LOGIC WE MUST ARRIVE AT THE SAME CONCLUSION THAT HAD THE IMPUGNED IN COME WAS EARLIER TAXABLE UNDER ONE SPECIFIC CLAUSE BUT EVEN ON ITS DELETION NO CLAUSE WAS INTRODUCED OR REPLACED TO PRESCRIBE THE METHOD OF TAXATION OF SUCH INCOME; THEREFORE THE REVENUE DEPARTMENT HAS NO RIGHT TO TAX SUCH AN INCOME; THEREFORE THE REVENUE DEPARTMENT HAS NO RIGHT TO TAX SUCH AN INCOME IN THE ABSENCE OF ANY E NABLING PROVISION. NATURALLY, SUCH A DELETION CANNOT BE TREATED A SUPERFLUOUS ACTION BUT THIS CHANGE HAD TO GIVE A DEFINITE JUDICIAL MEANING. WE HAVE TO ASCRIBE A LOGICAL CONCLUSION TO THE SAID DELETION OF SUB RULE (B) FROM RULE 5 AND THE NATURAL MEANING IS THAT AFTER THE DELETION THE INCOME DESCRIBED THEREIN IS OUT OF THE PURVIEW OF COMPUTATION OF INSURANCE BUSINESS FROM THE FIRST SCHEDULE THEREFORE CONSEQUENTLY CANNOT BE TAXED U/S 44 OF I.T. ACT. AFTER EXPRESSING THIS VIEW WE HEREBY DISMISS THE CROSS O BJECTION OF THE REVENUE. 1 8 . FOLLOWING THE SAME PARITY OF REASONING, WE HOLD THAT WHILE COMPUTING THE INCOME FROM INSURANCE BUSINESS UNDER SECTION 44 AND FIRST SCHEDULE OF THE ACT , THERE IS NO MERIT IN HOLDING THE PROFIT / LOSS ON SALE / REDEMPTION OF SE CURITIES / INVESTMENTS AMOUNTING TO ABOUT RS.50 CRORES AS TAXABLE AND THE LOSS ON AMORTIZATION OF SECURITIES OF RS.3.10 CRORES IS TO BE REDUCED FROM THE TAXABLE INCOME OF THE ASSESSEE. THE ORDER OF TRIBUNAL IN ASSESSMENT YEAR 2003 - 04 HAS BEEN SUBSEQUENTLY FOLLOWED BY THE TRIBUNAL IN ASSESSMENT YEAR 2004 - 05 IN ITA NO.600/PN/2008, ORDER DATED 10.12.2010 , IN ASSESSMENT YEAR 2002 - 03 IN ITA NO.1579/PN/2008, ORDER DATED 31.01.2011, IN ASSESSMENT YEAR 2005 - 06 IN ITA NO. 1508/PN/2012, ITA NO.1406/PN/2012 AND CO ITA NO. 2560 /PN/20 1 2 BAJAJ ALLIANZ GENERAL INSURANCE CO. LTD. 15 NO. 42/PN/2013 , ORDER DATED 23.10.2013 AND IN ASSESSMENT YEAR 2006 - 07 IN ITA NO.119/PN/2011, ORDER DATED 06.05.2013. IN VIEW OF THE ISSUE BEING DECIDED IN FAVOUR OF THE ASSESSEE IN VARIOUS ASSESSMENT YEARS AND FOLLOWING THE SAME PARITY OF REASONING, WE ALLOW THE G ROUND OF APPEAL NO.1 RAISED BY THE ASSESSEE . 1 9 . NOW, COMING TO THE ISSUE IN GROUND OF APPEAL NO.2 I.E. AGAINST DISALLOWANCE COMPUTED UNDER SECTION 14A OF THE ACT READ WITH RULE 8D OF THE INCOME TAX RULES, 1962 (IN SHORT THE RULES) . 20 . THE ASS ESSING OFFICER IN THE DRAFT ASSESSMENT ORDER PASSED UNDER SECTION 143(3) R.W.S. 144C(1) OF THE ACT HAD PROPOSED WITHOUT PREJUDICE TO THE FINDING THAT THE INCOME ARISING FROM SALE / REDEMPTION OF INVESTMENT WAS TAXABLE IN THE HANDS OF ASSESSEE, THE ALTERNAT E ISSUE WAS AS TO WHY DISALLOWANCE UNDER SECTION 14A OF THE ACT SHOULD NOT BE MADE KEEPING IN VIEW DISALLOWANCE UNDER SECTION 14A OF THE ACT SHOULD NOT BE MADE KEEPING IN VIEW THE FINDINGS IN THE EARLIER ASSESSMENT YEARS. THE CONTENTION OF THE ASSESSEE IN THIS REGARD WAS THA T IT WAS HOLDING THE INVESTMENTS WHICH RESULTED INTO TAXA BLE AS WELL AS NON - TAXABLE INCOME, HENCE, THE EXPENSES ATTRIBUTABLE TO THE INVESTMENT ACTIVITY SHOULD BE APPORTIONED BETWEEN TAXABLE AND NON - TAXABLE INCOME. THE ASSESSING OFFICER ALSO NOTED THAT THE ASSESSEE ITSELF HAD WORKED OUT THE EXPENSES DISALLOWABLE UNDER SECTION 14A OF THE ACT AT RS.49,42,631/ - . THE ASSESSING OFFICER REJECTING THE CLAIM OF THE ASSESSEE WORKED OUT THE DISALLOWANCE UNDER SECTION 14A OF THE ACT READ WITH RULE 8D OF THE RULES IN VIEW OF THE RATIO LAID DOWN BY THE HONBLE BOMBAY HIGH CO URT IN GODS... (2010) 324 ITR 1 (BOM) AND COMPUTED THE DISALLOWANCE UNDER SECTION 14A OF THE ACT AT RS.7,98,28,536/ - AND AFTER ALLOWING CREDIT OF DISALLOWANCE MADE BY THE ASSESSEE, BALANCE ADDITION IN THE HANDS OF ASSESSEE WAS MADE AT RS. 7,48,44,804/ - . ITA NO. 2560 /PN/20 1 2 BAJAJ ALLIANZ GENERAL INSURANCE CO. LTD. 16 2 1 . THE DRP HAD UPHELD THE ORDER OF ASSESSING OFFICER ONLY TO KEEP THE ISSUE ALIVE BEFORE THE HIGHER JUDICIAL FORUMS. 2 2 . THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE BEFORE US POINTED OUT THAT THE PROVISIONS OF SECTION 14A OF THE ACT ARE NOT APPLICABLE TO THE COMPUTATION OF INCOME IN THE HANDS OF ASSESSEE, WHERE SUCH COMPUTATION WAS MADE UNDER SECTION 44 OF THE ACT. OUR ATTENTION WAS DRAWN TO THE ORDER OF TRIBUNAL RELATING TO ASSESSMENT YEAR 2003 - 04 (SUPRA), WHEREIN VIDE PARA 13 ONWARDS THE S AID ISSUE HAS BEEN DECIDED IN FAVOUR OF THE ASSESSEE. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE FURTHER POINTED OUT THAT SIMILAR ISSUE ALSO AROSE BEFORE THE TRIBUNAL IN ITA NO.119/PN/2011, RELATING TO ASSESSMENT YEAR 2006 - 07 AND ITA NO.829/PN /2011, RELATING TO ASSESSMENT YEAR 2005 - 06, VIDE ORDER DATED 06.05.2013 WHILE DECIDING THE APPEAL OF THE ASSESSEE AGAINST THE ORDER PASSED UNDER SECTION 263 OF THE ACT, THE TRIBUNAL HELD THAT NO DISALLOWANCE WAS WARRANTED UNDER SECTION 14A OF THE ACT. HELD THAT NO DISALLOWANCE WAS WARRANTED UNDER SECTION 14A OF THE ACT. 2 3 . WE FIND SIMILAR ISSUE AS ARISING BEFORE US HAS BEEN ADJUDICATED BY THE TRIBUNAL WHILE DECIDING THE APPEAL RELATING TO ASSESSMENT YEAR 2003 - 04 AND IT WAS HELD AS UNDER: - 13. WE HAVE HEARD BOTH THE SIDES AT LENGTH AND ALSO CAREFULLY PERUSED THE MATERIAL PLACED BEFORE US. THE LD. CIT(A) HAS BIFURCATED CERTAIN EXPENDITURE AND ADJUSTED THE SAME AGAINST THE NON TAXABLE INCOME EARNED ON REALIZATION OF INVESTMENT. SINCE THE AMOUNT OF EXPENDITURE WAS MORE THAN THE AMOUNT OF INCOME THEREFORE THE RESULTANT FIGURE WAS A NEGATIVE AMOUNT AND THE LOSS WAS NOT ALLOWED TO BE ADJUSTED AGAINST THE INSURANCE BUSINESS INCOME. AT THE OUTSET IT IS WORTH TO MENTION, AS POINTED OUT DURING THE COURSE OF HEARING, THAT THE LD. CIT(A) HAS TAKEN A WRONG FIGURE OF INTEREST AND BANK C HARGES AS NOTED IN SCHEDULE IV OF OPERATING EXPENSES RELATED TO INSURANCE BUSINESS FOR THE YEAR ENDED 31 ST MARCH 2003. IT WAS POINTED OUT THAT THE TOTAL AMOUNT OF INT EREST AND BANK CHARGES WERE RS. 22,41,119/ - HOWEVER, LD. CIT(A) HAS WRONGLY TAKEN THE FI GURE OF SERVICE CHARG ES WHICH WAS RS. 23,81,85,483/ - . IT WAS STATED THAT THIS FIGURE IS SUBSTITUTED THEN THE ENTIRE APPROACH OF THE AMOUNT OF DISALLOWANCE SHOULD GET ALTERED. WE FIND FORCE IN THIS ARGUMENT. SINCE THE GRIEVANCE RELATED TO THE ASCERTAINMENT OF CERTAIN FIGURES OF EXPENSES; AS APPEARED IN THE BOOKS OF ACCOUNTS, THEREFORE WE CAN TAKE THE RECOURSE OF DIRECTING THE LD. CIT(A) TO VERIFY THE SAME AND IF FOUND CORRECT MUST RECTIFY THIS MISTAKE, HOWEVER IT IS ALSO PERTINENT TO OBSERVE AT THIS JUNCTUR E THAT THIS DIRECTION OF OURS SHALL NOT PREJUDICE IN ANY MANNER THE MAIN GRIEVANCE OF THE ITA NO. 2560 /PN/20 1 2 BAJAJ ALLIANZ GENERAL INSURANCE CO. LTD. 17 ASSESSEE ABOUT THE APPLICABILITY OF THE PROVISIONS OF SEC. 14A OF I.T. ACT IN THE PRESENT SITUATION. 14. REVERTING BACK TO THE GRIEVANCE, THE ISSUE OF THE APPLICAB ILITY OF SEC. 44 HAS ALREADY BEEN SETTLED BY THE HONBLE APEX COURT IN THE CASE OF GENERAL INSURANCE CORPORATION OF INDIA VS. CIT 240 ITR 139 WHICH SAYS IN CLEAR TERMS THAT SEC. 44 IS A SPECIAL PROVISION GOVERNING COMPUTATION OF TAXABLE INCOME EARNED FROM BUSINESS OF INSURANCE. FOR READY REFERENCE RELEVANT HELD PORTION IS REPRODUCED BELOW: - SECTION 44 OF THE INCOME - TAX ACT, 1961, IS A SPECIAL PROVISION GOVERNING COMPUTATION OF TAXABLE INCOME EARNED FROM BUSINESS OF INSURANCE. IT OPENS WITH A NON - OBSTANTE CLAUSE AND THUS HAS AN OVERRIDING EFFECT OVER OTHER PROVISIONS CONTAINED IN THE ACT. IT MANDATES THE ASSESSING AUTHORITIES TO COMPUTE THE TAXABLE INCOME FOR BUSINESS OF INSURANCE IN ACCORDANCE WITH THE PROVISIONS OF THE FIRST SCHEDULE. A PLAIN READING OF R ULE 5(1) OF THE FIRST SCHEDULE. THERE IS ANOTHER APPROACH TO THE SAME ISSUE. SECTION 44 OF THE INCOME - TAX ACT READ WITH THE RULES CONTAINED IN THE FIRST SCHEDULE TO THE ACT LAYS DOWN AN ARTIFICIAL MODE OF COMPUTING THE PROFITS AND GAINS OF INSURANCE BUSI NESS. FOR THE PURPOSE OF INCOME - TAX, THE FIGURES IN THE ACCOUNTS OF THE ASSESSEE DRAWN UP IN ACCORDANCE WITH THE PROVISIONS OF THE FIRST SCHEDULE TO THE INCOME - TAX ACT AND SATISFYING THE REQUIREMENTS OF THE INSURANCE ACT ARE BINDING ON THE ASSESSING OFFICE R UNDER THE INCOME - TAX ACT AND HE HAS NO GENERAL POWER TO CORRECT THE ERRORS IN THE ACCOUNTS OF AN INSURANCE BUSINESS AND UNDO THE ENTRIES MADE THEREIN. AND UNDO THE ENTRIES MADE THEREIN. THE AMOUNT SET APART BY THE GENERAL INSURANCE CORPORATION FOR REDEMPTION OF PREFERENCE SHARES AND TR EATED AS EXPENDITURE UNDER RULE 2(2)(A) OF THE GENERAL INSURANCE BUSINESS (NATIONALISATION) RULES IS SO TREATED FOR THE PURPOSE OF THE INSURANCE ACT, 1938. THE RESERVE IS NOT AN EXPENDITURE IN THE ORDINARY COMMERCIAL SENSE OF THE TERM. IT CANNOT BE ADDED B ACK FOR COMPUTING THE PROFITS AND GAINS OF BUSINESS BY INCLUDING IT IN EXPENDITURE NOT ADMISSIBLE UNDER THE PROVISIONS OF SECTIONS 30 TO 43A OF THE INCOME - TAX ACT BY REFERENCE TO RULE 5(A) OF THE FIRST SCHEDULE TO THE INCOME - TAX ACT. 15. ON READING THE AFOREMENTIONED JUDGMENT THERE SHOULD NOT BE ANY DOUBT AND THEREUPON UP TO THIS EXTENT WE ENDORSE THE ARGUMENT OF LD. AR THAT THE PROVISIONS OF SEC. 44 BEING STARTED WITH A NON - OBSTANTE CLAUSE THEREFORE THE METHOD PRESCRIBED THERE IN ARE SPECIAL PROVISI ONS FOR THE PURPOSE OF GOVERNING THE COMPUTATION OF TAXABLE INCOME OF INSURANCE BUSINESS. STILL THE QUESTION IS VERY MUCH ALIVE THAT WHETHER A PART OF INSURANCE BUSINESS WHICH IS OTHERWISE NOT TAXABLE BEING AN INCOME NOT FORMING PART OF THE TOTAL INCOME S O THE EXPENDITURE RELATED TO SUCH AN EXEMPTED INCOME BE DISALLOWED BY INVOKING THE PROVISIONS OF SEC. 14A OF I.T. ACT. 16. ON PLAIN READING OF SEC. 14A IT IS EXPLICIT THAT AN EXPENDITURE CLAIMED BY THE ASSESSEE AS DEDUCTION AGAINST INCOME WHICH IS NOT CHA RGEABLE TO TAX THEN THE EXPENDITURE CLAIMED HAS TO BE DISALLOWED TO THAT EXTENT. AN INTERESTING ARGUMENT WAS RAISED THAT PROVISIONS OF SEC. 14A APPLY ONLY TO INCOME WHICH ARE NOT INCLUDIBLE IN TOTAL INCOME IN TERMS OF CHAPTER III OF I.T. ACT. IT IS MORE IN TERESTING THAT FOR THIS PROPOSITION LD. AR HAS PLACED RELIANCE ON WALLFORT SHARES & STOCK BROKERS LTD. 96 TTJ 673. STRANGE ENOUGH, THE VERDICT OF THE ITA NO. 2560 /PN/20 1 2 BAJAJ ALLIANZ GENERAL INSURANCE CO. LTD. 18 RESPECTED SPECIAL BENCH WAS NOT CORRECTLY INTERPRETED BECAUSE IN PARA 108, AS QUOTED TO US, THE RESPECTED BENCH HAS CLEARLY EXPRESSED ITS DISAGREEMENT WITH THE ARGUMENT OF THE ASSESSEE THAT PROVISIONS OF SEC. 14A APPLIES TO THE INCOME CONTAINED IN CHAPTER III OF I.T. ACT. THE CONFUSION HAD CROPPED UP ONLY BECAUSE OF THE WAY A QUOTATION WAS MADE WITHIN INVERTE D COMAS BUT IN THE VERY NEXT LINES THAT WAS NOT CONFIRMED. THE FACTUAL POSITION IS THAT WHILE DEALING WITH THIS ISSUE THE RESPECTED CO ORDINATE BENCH HAS STATED THAT THEY HAD NOT ACCEPTED THE ARGUMENT OF APPLICABILITY OF CHAPTER III OF THE ACT. RATHER THE RESPECTED BENCH HAS SAID THAT THERE WAS NO CONFLICT BETWEEN CHAPTER III AND SEC. 14A. IT WAS FURTHER CLARIFIED THAT THE PROVISIONS OF SEC. 14A CANNOT BE CONSIDERED DEFUNCT OR REDUNDANT FOR THE REASON ONLY THAT THESE PROVISIONS SHOULD HAVE BEEN INSERTED I N CHAPTER III AND NOT IN CHAPTER IV, AFTER ALL BOTH CHAPTER III AND CHAPTER IV ARE INTEGRAL PART OF THE SAME ENACTMENT. FOR READY REFERENCE PARA 108 IS REPRODUCED VERBATIM BELOW: - 108. THE MAIN PROVISION OF S. 14A INSERTED BY THE FINANCE ACT, 2001, WITH RETROSPECTIVE EFFECT FROM 1 ST APRIL 1962 READS AS UNDER: 14A FOR THE PURPOSES OF COMPUTING THE TOTAL INCOME UNDER THIS CHAPTER, NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PAR T OF THE TOTAL INCOME UNDER THIS ACT: ON A PLAIN READING OF THE ABOVE QUOTED PROVISIONS, WE FIND THAT IF ANY PART OF THE EXPENDITURE CLAIMED BY THE ASSESSEE AS DEDUCTION AGAINST HIS INCOME CHARGEABLE TO TAX IS FOUND OR DETERMINED TO HAVE BEEN INCURRED B Y THE ASSESSEE IN RELATION TO INCOME RECEIVED BY THE ASSESSEE FROM THE MUTUAL FUNDS, THE EXPENDITURE CLAIMED BY THE ASSESSEE AS DEDUCTION AGAINST HIS INCOME CHARGEABLE TO TAX HAS TO BE DISALLOWED DEDUCTION AGAINST HIS INCOME CHARGEABLE TO TAX HAS TO BE DISALLOWED TO THAT EXTENT. WE DO NOT SEE MUCH FORCE IN THE CONTENTION O F THE ASSESSEE THAT WHILE THE PROVISIONS OF S. 10(33) EXEMPTING THE ASSESSEES INCOME ON UNITS OF MUTUAL FUNDS FALL UNDER CHAPTER III, THE PROVISIONS OF S. 14A HAVE BEEN INSERTED IN CHAPTER IV ONLY. THE IMPORT OF THE WORDS INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT UNMISTAKABLY TAKES US TO CHAPTER III TITLED AS INCOMES WHICH DO NOT FORM PART OF TOTAL INCOME. ONE MAY AS WELL READ THE PROVISIONS OF S. 14A IN THE FOLLOWING MANNER: FOR THE PURPOSE OF COMPUTING THE TOTAL INCOME UNDE R THIS CHAPTER, NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME EXCLUDED FROM TOTAL INCOME UNDER THE PROVISIONS OF CHAPTER III OF THE ACT. IT DOES NOT APPEAR CORRECT TO SAY THAT PROVISIONS OF S. 14A IMPINGE ON THE PROVISIONS OF S. 10(33) . THESE PROVISIONS OPERATE IN RELATION TO THE EXPENDITURE AN ASSESSE CLAIM IN THE COMPUTATION OF HIS INCOME CHARGEABLE TO TAX. SUCH EXPENDITURE IF FOUND TO HAVE BEEN INCURRED IN RELATION TO INCOME EXEMPT UNDER CHAPT ER III SHALL BE DISALLOWED BY VIRTUE OF THE PROVISIONS OF S. 14A. IN THE INSTANT CASE, THE ASSESSEE HAS CLAIMED EXPENDITURE ON PURCHASE OF THE UNITS OF CHOLA MUTUAL FUND AND SUN F & C FUND AGAINST SUBSEQUENT SALE OF THOSE UNITS. THOSE SALE PROCEEDS ARE INC OME CHARGEABLE TO TAX UNDER CHAPTER IV AND ARE NOT EXEMPT UNDER ANY PROVISION OF CHAPTER III. PURCHASE PRICE OF UNITS IS AN EXPENDITURE TO WHICH DISALLOWANCE PROVISION OF CHAPTER IV WOULD SQUARELY APPLY. REFERENCE IN THIS RESPECT MAY BE MADE TO THE JUDGMEN T OF HONBLE SUPREME COURT IN THE CASE OF ATTAR SINGH GURMUKH SINGH, ETC. VS. ITO (1991) 97 CTR (SC) 251 : (1991) 191 ITR 667 (SC). WE, THEREFORE, DO NOT ACCEPT THE ARGUMENTS BASED ON ITA NO. 2560 /PN/20 1 2 BAJAJ ALLIANZ GENERAL INSURANCE CO. LTD. 19 CHAPTER III. WE DO NOT SEE ANY CONFLICT BETWEEN CHAPTER III AND S. 14A A ND EVEN IF THERE IS ONE, THE MEANING OF THE PROVISIONS OF S. 14A BEING UNMISTAKABLY CLEAR, THE PROVISIONS HAVE TO BE GIVEN EFFECT TO BY WAY OF HARMONIOUS CONSTRUCTION. PROVISIONS OF S. 14A CANNOT BE CONSIDERED DEFUNCT OR REDUNDANT FOR THE REASON ONLY THAT THESE PROVISIONS SHOULD HAVE BEEN INSERTED IN CHAPTER III AND NOT CHAPTER IV. AFTER ALL BOTH CHAPTER III AND CHAPTER IV ARE INTEGRAL PART OF THE SAME ENACTMENT. WE ALSO DO NOT AGREE WITH THE ARGUMENTS OF THE ASSESSEE THAT IT AMOUNTS TO ARTIFICIAL ENHANCEM ENT OF SALE PRICE BY THE AMOUNT OF DIVIDEND. THE CASE OF REVENUE IS BASED ON DISALLOWANCE OF EXPENDITURE (PURCHASE PRICE), NOT ENHANCEMENT OF SALE PROCEEDS. WE ALSO DO NOT SEE PROVISO TO S. 14A HAVING ANY APPLICATION. IT IS NOT THE CASE OF REOPENING ANY CL OSED MATTER. IT IS, THEREFORE, OPEN TO US TO TAKE NOTE OF THE RETROSPECT PROVISIONS OF S. 14A. RESPECTFULLY FOLLOWING THE VERDICT OF THE RESPECTED FIVE MEMBER SPECIAL BENCH WE HEREBY DISAPPROVE THE ARGUMENT OF LD. AR THAT THE PROVISIONS OF SEC. 14A ARE APPLICABLE ONLY IN RESPECT OF INCOME FALL WITHIN THE PURVIEW OF CHAPTER III OF I. T. ACT. 17. FINALLY THE QUESTION TO BE ANSWERED IS ABOUT THE APPLICABILITY OF SEC. 14A IN RESPECT OF SALE OF INVESTMENT WHICH IS NOT TAXED UNDER THE SPECIAL CIRCUMSTANCES O F DELETION OF A SUB RULE FROM THE STATUTE. IT IS NOT QUESTIONED THAT THE IMPUGNED PROFIT WAS NON - TAXABLE PER - SE, RATHER THE ACCEPTED LEGAL POSITION IS THAT THE IMPUGNED PROFIT WAS VERY MUCH TAXABLE IN THE PAST. NOW IT HAS BEEN INFORMED THAT THIS CONTROVERS Y IN RESPECT OF INSURANCE COMPANY SET AT REST BY A DECISION OF ITAT DELHI BENCH VERDICT IN THE CASE OF ORIENTAL INSURANCE COMPANY LIMITED (ITA NO. 5462 & 5463/DEL/03) A.Y. 2000 - 01 AND INSURANCE COMPANY LIMITED (ITA NO. 5462 & 5463/DEL/03) A.Y. 2000 - 01 AND 2001 - 02 ORDER DATED 27 TH FEBRUARY 2009.THEREFORE CONSIDERING THE VEHEMEN T RELIANCE OF LD. AR IT IS WORTH TO MENTION AT THE OUTSET ITSELF THAT THE ISSUE NOW STOOD RESOLVED BY THIS LATEST DECISION OF DELHI TRIBUNAL IN THE CASE OF M/S. ORIENTAL INSURANCE CO LTD. (SUPRA), THE RELEVANT PORTION REPRODUCED BELOW: - 17. WE HAVE HEARD RIVAL SUBMISSIONS OF THE PARTIES AND HAVE GONE THROUGH THE MATERIAL AVAILABLE ON RECORD. IDENTICAL ISSUE AROSE IN ASSESSEES OWN CASE FOR A.Y 1985 - 86. THE TRIBUNAL ACCEPTED THE PICA OF THE ASSESSEE AND IN FACT THE ISSUE WENT UP TO THE HONBLE DELHI HIGH C OURT IN AY 1986 - 87 TO 1988 - 89, WHICH IS REPORTED AS 125 TAXMAN 1094 (DEL.), DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE BY HOLDING THAT SECTION 44 OF THE ACT IS A SPECIAL PROVISION DEALING WITH THE COMPUTATION OF PROFITS AND GIFTS OF BUSINESS OF INSURANCE. IT BEING A NON OBSTINATE PROVISION, HAS TO PREVAIL OVER OTHER PROVISIONS IN THE ACT. IT CLEARLY PROVIDES THAT INCOME FROM INSURANCE BUSINESS HAS TO BE COMPUTED IN ACCORDANCE WITH THE RULE CONTAINED IN THE FIRST SCHEDULE. IT IS NOT THE CASE OF THE REVENUE THAT THE ASSESSEE HAS NOT COMPUTED THE PROFITS AND GAINS OF ITS INSURANCE BUSINESS IN ACCORDANCE WITH THE SAID RULES. RELIANCE WAS PLACED ON THE SCOPE OF SECTION 144, AS HELD IN THE CASE OF GENERAL INSURANCE CORPN. OF INDIA VS. CIT (1999) 240 ITR 139 (SC), WHEREIN THEIR LORDSHIPS OF THE APEX COURT HAVE CATEGORICALLY HELD THAT THE PROVISIONS OF SECTION 44 BEING A SPECIAL PROVISION GOVERN COMPUTATION OF TAXABLE INCOME EARNED FROM BUSINESS OF INSURANCE. IT MANDATES THE TAX AUTHORITIES TO COMPUTE THE TAXABLE IN COME IN RESPECT OF INSURANCE BUSINESS IN ACCORDANCE WITH THE PROVISIONS OF THE FIRST SCHEDULE TO THE ACT. IN THE LIGHT OF THESE, THEIR LORDSHIPS OF DELHI HIGH COURT HAVE HELD THAT NO QUESTION OF LAW, MUCH LESS A SUBSTANTIAL QUESTION OF LAW SURVIVES FOR THE IR CONSIDERATION. IN OTHER WORDS, ORDER OF THE TRIBUNAL HAS ITA NO. 2560 /PN/20 1 2 BAJAJ ALLIANZ GENERAL INSURANCE CO. LTD. 20 BEEN AFFIRMED. FOLLOWING THE SAME REASONING, ADDITION MADE BY THE AO IS DELETED. 18. THE NEXT COMMON DISPUTE RELATES TO THE ORDER OF THE CIT(A) IN SUSTAINING THE ACTION OF AO IN ALLOWING ONLY 5 0% OF THE MANAGEMENT EXPENSES BY INVOKING THE PROVISIONS OF SEC. 14A OF THE ACT. THE ADDITION IS MADE BY THE AO ON THE PLEA THAT THE PROVISIONS OF SECTION 14A WAS INSERTED BY FINANCE ACT 2001 WITH EFFECT FROM 1 - 4 - 1962. IT IS STATED THAT THE INVESTMENTS MAD E BY THE ASSESSEE ARE BOTH TAXABLE AS WELL AS TAX FREE. AN ESTIMATED DISALLOWANCE OF 50% OUT OF THE MANAGEMENT EXPENSES INCURRED AND AS CLAIMED IN THE P & L A/C IS TREATED AS EXPENSES INCURRED IN CONNECTION WITH THE LOOKING AFTER TAX FREE INVESTMENT. 19. THE LEARNED COUNSEL FOR THE ASSESSEE VEHEMENTLY ARGUED THAT THE INCOME OF THE ASSESSEE IS TO BE COMPUTED U/S 44 READ WITH RULE 5 OF SCHEDULE 1 OF THE IT. ACT SECTION 44 IS A NON - OBSTANTE CLAUSE AND APPLIES NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINE D WITHIN THE PROVISIONS OF THE INCOME - TAX ACT RELATING TO COMPUTATION OF INCOME CHARGEABLE UNDER DIFFERENT HEADS, OTHER THAN THE INCOME TO BE COMPUTED UNDER THE HEAD PROFIT AND GAINS OF BUSINESS OR PROFESSION. FOR COMPUTATION OF PROFITS AND GAINS OF BUSI NESS OR PROFESSION THE MANDATE TO THE AO IS TO COMPUTE THE SAID INCOME IN ACCORDANCE WITH THE PROVISIONS OF SECTION 28 TO 43B OF THE ACT. IN THE CASE OF THE COMPUTATION OF PROFITS AND GAIN OF ANY BUSINESS OF INSURANCE, THE SAME SHALL BE DONE IN ACCORDANCE WITH THE RULES PRESCRIBED IN FIRST SCHEDULE OF THE ACT, MEANING THEREBY SECTION 28 TO 43B SHALL NOT APPLY. NO OTHER PROVISION PERTAINING TO COMPUTATION OF INCOME WILL BECOME RELEVANT. ACCORDING TO THE LEARNED COUNSEL, TWO INCOME WILL BECOME RELEVANT. ACCORDING TO THE LEARNED COUNSEL, TWO PRESUMPTIONS THAT FOLLOW ON A COMB INED READING OF SECTION 14, 14A, 44 AND RULE 5 OF THE FIRST SCHEDULE ARE: (A) THAT NO HEAD - WISE BIFURCATION IS CALLED FOR. THE INCOME, INTER ALIA, OF THE BUSINESS OF INSURANCE IS ESSENTIALLY TO BE AT THE AMOUNT OF THE BALANCE OF PROFITS DISCLOSED BY THE A NNUAL ACCOUNTS AS FURNISHED TO THE CONTROLLER OF INSURANCE UNDER THE INSURANCE ACT, 1938. THE SAID BALANCE OF PROFITS IS SUBJECT ONLY TO ADJUSTMENTS THEREUNDER. THE ADJUSTMENTS DO NOT REFER TO DISALLOWANCE UNDER SECTION 14A. OF THE ACT. (B) PROFITS AND G AINS OF BUSINESS AS REFERRED TO IN (A) ABOVE HAVE ONLY TO BE COMPUTED IN ACCORDANCE WITH RULE 5 OF THE FIRST SCHEDULE. 22. SECTION 44 CREATES A SPECIFIC EXCEPTION TO THE APPLICABILITY OF SECTIONS 28 TO 43B. THEREFORE, THE PURPOSE, OBJECT AND PURVIEW OF S ECTION 14A HAS NO APPLICABILITY TO THE PROFITS AND GAINS OF AN INSURANCE BUSINESS. 21. THE LEARNED DR STRONGLY JUSTIFIED THE ACT ION OF THE AO AND THAT OF THE CI T(A) IN THE LIGHT OF THE CLEAR PROVISIONS OF SECTION 14A OF THE ACT. 22. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND GONE THROUGH THE RECORDS. THE PROVISIONS OF SECTION 44 READ AS UNDER: INSURANCE BUSINESS. 44, NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN THE PROVISIONS OF THIS ACT RELATING TO THE COMPUTATION OF INCOME ITA NO. 2560 /PN/20 1 2 BAJAJ ALLIANZ GENERAL INSURANCE CO. LTD. 21 CHARGEABLE UNDE R THE HEAD INTEREST ON SECURITIES. INCOME FROM HOUSE PROPERTY, CAPITAL GAINS OR INCOME FROM OTHER SOURCES, OR IN SECTION 199 OR IN SECTIONS 28 TO 43B, THE PROFITS AND GAINS OF ANY BUSINESS OF INSURANCE, INCLUDING ANY SUCH BUSINESS CARRIED ON BY A M UTUAL INSURANCE COMPANY OR BY A CO - OPERATIVE SOCIETY, SHALL BE COMPUTED IN ACCORDANCE WITH THE RULES CONTAINED IN THE FIRST SCHEDULE. 23. THE ABOVE PROVISION MAKES IT VERY CLEAR THAT SECTION 44 APPLIES NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED W ITHIN THE PROVISIONS OF THE INCOME - TAX ACT RELATING TO COMPUTATION OF INCOME CHARGEABLE UNDER DIFFERENT HEADS. WE AGREE WITH THE LEARNED COUNSEL THAT THERE IS NO REQUIREMENT OF HEAD - WISE BIFURCATION CALLED FOR WHILE COMPUTING THE INCOME U/S 44 OF THE ACT I N THE CASE OF A INSURANCE COMPANY. THE INCOME OF THE BUSINESS OF INSURANCE IS ESSENTIALLY TO BE AT THE AMOUNT OF THE BALANCE OF PROFITS DISCLOSED BY THE ANNUAL ACCOUNTS AS FURNISHED IN THE CONTROLLER OF INSURANCE, THE ACTUAL COMPUTATION OF PROFITS AND GAIN S OF INSURANCE BUSINESS WILL HAVE TO BE COMPUTED IN ACCORDANCE WITH RULE 5 OF THE FIRST SCHEDULE. IN THE LIGHT OF THESE SPECIAL PROVISIONS COUPLED WITH NOT OBSTANTE CLAUSE THE AO IS NOT PERMITTED TO TRAVEL BEYOND THESE PROVISIONS. 24. SECTION 14A CONTEM PLATES AN EXCEPTION FOR DEDUCTIONS AS ALLOWABLE UNDER THE ACT ARE THOSE CONTAINED U/S 28 TO 43B OF THE ACT. SECTION 44 CREATES SPECIAL APPLICATION OF THESE PROVISIONS IN THE CASES OF INSURANCE COMPANIES. WE THEREFORE, AGREE WITH THE ASSESSEE AND DELETE THE ACT AS ACCORDING TO US, IT IS NOT PERMISSIBLE TO THE AO TO TRAVEL BEYOND SECTION 44 AND FIRST SCHEDULE OF THE INCOME - TAX ACT. 18. IT MAY NOT BE OUT OF PLACE TO MENTION THAT THE RESPECTED CO ORDINATE BENCH HAS DULY TAKEN THE NOTE OF AN EARLIER DECISIO N OF THAT VERY BENCH DECIDED IN THE CASE OF THAT VERY ASSESSEE VIDE ORDER DATED 29 TH SEPTEMBER 2004 BEARING ITA NOS. 7815/DEL/1989; 3607 TO 3609/DEL/1990; 5035/DEL/1998 & 3910/DEL/2000 NAMED AS DCIT VS. ORIENTAL GENERAL INSURANCE CO. LTD. REPORTED IN 92 TT J 300 (DEL). AS SEEN FROM THE PARAS REPRODUCED ABOVE ON DUE CONSIDERATION OF THE RELEVANT PROVISIONS AS APPLICABLE TO RESOLVE THIS ISSUE A CONCLUSION WAS DRAWN THAT SINCE THE COURTS HAVE HELD, SEC. 44 CREATES A SPECIAL PROVISION IN THE CASES OF ASSESSMENT OF INSURANCE COMPANIES THEREFORE IT WAS NOT PERMISSIBLE TO THE A.O TO TRAVEL BEYOND SEC. 44 OF FIRST SCHEDULE OF I. T. ACT. SINCE THE VIEW HAS ALREADY BEEN EXPRESSED BY RESPECTED CO ORDINATE BENCH THEREFORE WE HAVE NO REASON TO TAKE ANY OTHER VIEW EXCEPT T O FOLLOW THE SAME. WITH THE RESULT WE HEREBY ACCEPT THE ARGUMENT OF LD. AR TO THE EXTENT THAT IN THE PRESENT SITUATION THE PROVISIONS OF SEC. 14A NEED NOT TO APPLY WHILE GRANTING EXEMPTION TO AN INCOME EARNED ON SALE OF INVESTMENT PRIMARILY BECAUSE OF THE REASON OF THE WITHDRAWAL OR DELETION OF SUB RULE 5(B) TO SCHEDULE FIRST OF SEC. 44 OF I.T. ACT. ONCE WE HAVE TAKEN THIS VIEW THEREFORE THE ENHANCEMENT AS PROPOSED BY LD. CIT(A) IS REVERSED AND THE DIRECTIONS IN THIS REGARD ARE SET ASIDE. RESULTANTLY GROUN D NO. 1 IS ALLOWED CONSEQUENT THEREUPON GROUND NO. 2 AUTOMATICALLY GOES IN FAVOUR OF THE ASSESSEE. 2 4 . THE ISSUE ARISING BEFORE US IS IDENTICAL TO THE ISSUE BEFORE THE TRIBUNAL AND IN THE ABSENCE OF ANY CONTRARY MATERIAL BROUGHT TO OUR KNOWLEDGE BY THE L EARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE, WE FIND NO MERIT IN THE ITA NO. 2560 /PN/20 1 2 BAJAJ ALLIANZ GENERAL INSURANCE CO. LTD. 22 ORDERS OF AUTHORITIES BELOW. THE DISALLOWANCE AS MADE BY THE ASSESSEE UNDER SECTION 14A OF THE ACT AT RS. 49,42,631/ - IS UPHELD AND THE BALANCE DISALLOWANCE WORKED OUT BY THE ASSES SING OFFICER AND DRP IS THUS, DELETED. THE GROUND OF APPEAL NO.2 RAISED BY THE ASSESSEE IS THUS, ALLOWED. 2 5 . THE ASSESSEE HAS MADE A REQUEST FOR THE ADMISSION OF ADDITIONAL GROUND OF APPEAL NO.2.3 WHICH IS WITHOUT PREJUDICE TO GROUNDS OF APPEAL NO.2.1 A ND 2.2 RAISED BY THE ASSESSEE I.E. COMPUTATION OF DISALLOWANCE UNDER SECTION 14A OF THE ACT. IN VIEW OF OUR ALLOWING THE CLAIM OF ASSESSEE, THE ADDITIONAL GROUND OF APPEAL NO.2.3 RAISED BY THE ASSESSEE IS OF ACADEMIC NATURE SINCE THE ISSUE HAS BEEN DECIDE D IN FAVOUR OF THE ASSESSEE. HENCE, THE ADDITIONAL GROUND OF APPEAL NO.2.3 RAISED BY THE ASSESSEE IS DISMISSED. 2 6 . THE ISSUE VIDE GROUND OF APPEAL NO.3 IS WITH REGARD TO DISALLOWANCE COMPUTED BY INVOKING THE PROVISIONS OF SECTION 40(A)(I) OF THE ACT. COMPUTED BY INVOKING THE PROVISIONS OF SECTION 40(A)(I) OF THE ACT. 2 7 . THE ASSESSING OFFICER AND DRP HAD MADE THE DISALLOWANCE ON ACCOUNT OF PAYMENT MADE TO ALLIANZ REINSURANCE ASIA PACIFIC BRANCH SINGAPORE (ARAP) ON ACCOUNT OF RE - INSURANCE PREMIUM OF RS.62,67,76,979/ - . ANOTHER PAYMENT OF SURVEY FEES WAS ALSO PAID TO NON - RESIDENT SURVEYORS OF RS.70,69,050/ - DURING THE YEAR. SINCE THE ASSESSEE HAD FAILED TO DEDUCT THE TAX AT SOURCE FROM THE AFORESAID PAYMENTS, THE ASSESSING OFFICER IN VIEW OF THE PROVISIONS OF SECTION 195(2) OF THE ACT , WAS OF THE VIEW THAT THE OBLIGATION WAS UPON THE ASSESSEE TO DEDUCT TAX AT SOURCE AND IN THE ABSENCE OF THE SAME, THE PROVISIONS OF SECTION 40(A)(I) OF THE ACT WERE ATTRACTED AND THE SAID PAYMENTS MADE TO NON - RESIDENT TOTALLING RS. 63.38 CRORES WERE NOT TO BE ALLOWED IN THE HANDS OF ASSESSEE. ITA NO. 2560 /PN/20 1 2 BAJAJ ALLIANZ GENERAL INSURANCE CO. LTD. 23 2 8 . THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE IN THIS REGARD POINTED OUT THAT THE ASSESSEE HAD PAID RE - INSURANCE CHARGES TO ALLIANZ S E , ON WHICH NO TAX WAS DEDUCTIBLE AND HENCE, THERE WAS NO VIOLATION OF SECTION 40(A)(I) OF THE ACT. OUR A TTENTION WAS DRAWN TO THE OBSERVATIONS OF ASSESSING OFFICER AT PAGES 11 TO 13 AND OBSERVATIONS OF DRP AT PAGE 18 IN PARAS 2.4.15 AND 2.4.16 AND IT WAS POINTED OUT THAT THE DISALLOWANCE WAS UPHELD BY THE DRP ON SEPARATE REASONING. THE CLAIM OF THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE BEFORE US WAS THAT IN THE ABSENCE OF ANY PERMANENT ESTABLISHMENT (PE) OF SUCH NON - RESIDENT COMPANY , NO INCOME WAS CHARGEABLE IN INDIA AND HENCE, NO REQUIREMENT TO DEDUCT TAX AT SOURCE. OUR ATTENTION WAS DRAWN TO THE SUBMISSIONS MADE BEFORE THE ASSESSING OFFICER AS TO THE MEANING OF RE - INSURANCE AND WHY THE SAME IS NOT TAXABLE IN THE HANDS OF NON - RESIDENT COMPANY I.E. ALLIANZ S E . THE SAID SUBMISSIONS WERE MADE DURING THE COURSE OF ASSESSMENT PROCEEDINGS OF ALLIANZ S E , COPY OF WHICH IS PLACED AT PAGES 156 TO 159 OF THE PAPER BOOK. FURTHER, OUR ATTENTION WAS PLACED AT PAGES 156 TO 159 OF THE PAPER BOOK. FURTHER, OUR ATTENTION WAS DRAWN TO THE DRAFT ASSESSMENT ORDER PASSED IN THE CASE OF ALLIANZ S E UNDER SECTION 144C R.W.S. 143(3) OF THE ACT, WHEREIN THE INCOME WAS ASSESSED IN THE HANDS O F ASSESSEE ON ACCOUNT OF ROYALTY AND SOFTWARE LICENCE FEES TOTALLING RS.3.26 CRORES. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT NO ADDITION WAS MADE IN THE HANDS OF ASSESSEE ON ACCOUNT OF RE - INSURANCE CHARGES PAID TO ALLIANZ S E BY THE ASSESSEE. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE FURTHER REFERRED TO THE ORDER PASSED UNDER SECTION 143(3) R.W.S. 144C(13) OF THE ACT RELATING TO ASSESSMENT YEAR 2008 - 09 PASSED IN THE CASE OF ALLIANZ SE , COPY OF THE SAID ORDER IS PLACED AT PAGES 150 TO 155 OF THE PAPER BOOK. OUR ATTENTION FURTHER WAS DRAWN TO THE ASSESSMENT ORDER PASSED IN THE CASE OF ALLIANZ SE , RELATING TO ASSESSMENT YEAR 2009 - 10 UNDER SECTION 143(3) R.W.S. 144C(13) OF THE ACT, WHEREIN THE ASSESSEE HAD DECLARED TOTAL INCOME AT RS.1.85 CRORES ON ACCOUNT OF ROYALTY INCOME AND THE ASSESSING OFFICER NOTED THAT THE ALLIANZ SE HAD ITA NO. 2560 /PN/20 1 2 BAJAJ ALLIANZ GENERAL INSURANCE CO. LTD. 24 RECEIVED PAYMENTS FROM BA LIFE AND BA GENERAL IN RESPECT OF RE - INSURANCE TRANSACTIONS AND TRANSACTIONS UNDER SOFTWARE LICENCE AGREEMENT. TH OUGH THE RECEIPTS ON ACCOUNT OF TWO TRANSACTIONS WERE CONSIDERED BY THE ASSESSING OFFICER, BUT FINALLY THE ADDITION WAS MADE IN THE HANDS OF ASSESSEE ON ACCOUNT OF LICENCE CHARGES OF RS. 4.27 CRORES ONLY AND IN OTHER WORDS, THE TOTAL TAXABLE INCOME WAS DETE RMINED AT RS.6.12 CRORES. THE COPY OF THE SAID ORDER IS PLACED AT PAGES 160 TO 162 OF THE PAPER BOOK. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT THE ASSESSING OFFICER HAD MADE THE SAID DISALLOWANCE UNDER SECTION 40(A)(I) OF T HE ACT MERELY BECAUSE NO APPLICATION WAS FILED UNDER SECTION 195(2) OF THE ACT. HE PLACED RELIANCE ON THE RATIO LAID DOWN BY THE HONBLE SUPREME COURT IN GE INDIA TECHNOLOGY CENTRE P. LTD. VS. CIT AND ANOTHER (2010) 327 ITR 456 (SC) . 2 9 . THE SECOND ASPEC T POINTED OUT BY THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE WAS THAT THE ASSESSING OFFICER HAD MADE REPRESENTATIVE FOR THE ASSESSEE WAS THAT THE ASSESSING OFFICER HAD MADE REFERENCE TO SECTION 195(2) OF THE ACT. 30 . THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE FURTHER REFERRED TO THE OBSERVATIONS OF DRP IN PARA 2.4.15, WHEREIN IT WAS POINTED OUT BY THE ASSESSEE THAT ALL THE FOREIGN REMITTANCES INCLUDING RE - INSURANCE PREMIUM PAYMENTS WERE SUBJECT TO ASSESSMENT UNDER SECTION 201(1) OF THE ACT DATED 31.12.2008 AND AFTER EVALUATING THE SAID TRANSACTIONS, THE ASST. DIRECTOR OF INCOME TAX (INTERNATIONAL TAXATION) II, HAD PASSED THE CONSOLIDATED ORDER F OR ASSESSMENT YEARS 2005 - 06 TO 2009 - 10, WHEREIN IT HAS BEEN CONCLUDED THAT THE TAXES WERE REQUIRED TO BE WITHHELD ONLY ON PAYMENT OF CERTAIN SURVEY FEES PAID TO THE NON - RESIDENTS. THE DRP HAD HELD THE AMOUNTS TO BE TAXABLE IN THE HANDS OF ASSESSEE BY ADOPTING LOOK THROUGH APPROACH, SINCE THE SINGAPORE BRANCH HAS BUSINESS CONNECTION IN INDIA AND THE ASSESSEE COMPANY WAS DEPENDENT AGENT PE OF THE GERMAN COMPANY A ND ITA NO. 2560 /PN/20 1 2 BAJAJ ALLIANZ GENERAL INSURANCE CO. LTD. 25 THEREFORE, THE ASSESSING OFFICER WAS CORRECT IN HOLDING THAT THE PAYMENTS WERE TAXABLE AND THE ASSESSEE OUGHT TO HAVE DEDUCT TAX ON IT. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT TO MAKE DEPENDENT AGENT TAXABLE, THERE WE RE CERTAIN ASPECTS TO BE CONSIDERED I.E. THE ASSESSEE SHOULD BE AGENT OF FOREIGN COMPANY, FURTHER THE ASSESSEE SHOULD BE DEPENDENT ON THE PRINCIPAL COMPANY AND SHOULD HAVE AUTHORITY TO CONCLUDE CONTRACT ON BEHALF OF THE PRINCIPAL. OUR ATTENTION WAS DRAWN TO THE TAX TREATY BETWEEN INDIA AND GERMANY I.E. AGREEMENT ON DOUBLE AVOIDANCE TAXATION (DTAA) AND WITH REFERENCE TO THE ARTICLE 5, PARA 5 AND IT WAS POINTED OUT THAT NONE OF THESE TESTS WERE FULFILLED. HE VEHEMENTLY STRESSED THAT THE REVENUE AUTHORITIES HA D LEAD NO EVIDENCE TO SHOW THAT THE ASSESSEE WAS ACTING ON BEHALF OF ALLIANZ SE OR THAT THE ASSESSEE WAS DEPENDENT ON ALLIANZ SE AND THAT THE ASSESSEE HAD ANY AUTHORITY TO CONCLUDE ON BEHALF OF ALLIANZ SE . THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSE SSEE IN THIS REGARD PLACED RELIANCE ON THE RATIO S LAID DOWN BY MUMBAI BENCH OF TRIBUNAL IN SWISS RE - RELIANCE ON THE RATIO S LAID DOWN BY MUMBAI BENCH OF TRIBUNAL IN SWISS RE - INSURANCE CO. LTD. VS. DDIT (2015) 55 TAXMANN.COM 520 (MUMBAI TRIB.) AND IN ICICI LUMB A RD GENERAL INSURANCE CO. LTD. VS. ACIT (2015) 152 ITD 855 (MUMBAI TRIB.) . WITH REGARD TO DRP APPROACH OF LOOK THROUGH, THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT HONBLE SUPREME COURT IN VODAFONE INTERNATIONAL HOLDINGS B.V. VS. UNION OF INDIA AND ANOTHER (2012) 341 ITR 1 (SC) HAS STRESSED THAT SAME SHOULD BE PROVIDED IN THE STATUTE ITSELF. 3 1 . THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE PLACING RELIANCE ON THE ORDER OF ASSESSING OFFICER AND DRP, POINTED OUT THAT THERE WAS AN ASSUMPTION BY THE DRP THAT ALLIANZ SE HAD PE IN IN DIA. 3 2 . WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. THE ISSUE RAISED VIDE GROUND OF APPEAL NO.3 IS IN RESPECT OF RE - INSURANCE TRANSACTION ITA NO. 2560 /PN/20 1 2 BAJAJ ALLIANZ GENERAL INSURANCE CO. LTD. 26 ENTERED INTO BY ALLIANZ SE THROUGH ITS SINGAPORE RE - INSURANCE BRANCH ALLIANZ REINSURANCE ASIA PAC IFIC BRANCH SINGAPORE (ARAP) WITH THE ASSESSEE BEFORE US. DURING THE FINANCIAL YEAR 2007 - 08, ALLIANZ SE THROUGH AR A P HAD ENTERED INTO SEPARATE RE - INSURANCE ARRANGEMENT WITH BAJAJ ALLIANZ LIFE INSURANCE COMPANY LTD. AND WITH THE ASSESSEE BAJAJ GENERAL. AS PER EXPLANATION FILED BY ALLIANZ SE DURING THE COURSE OF ASSESSMENT PROCEEDINGS RELATING TO ASSESSMENT YEAR 2008 - 09, DATED 26.12.2011, BEFORE THE DDIT (INTERNATIONAL TAXATION) - I, PUNE, IT WAS POINTED OUT THAT ALLIANZ GROUP WAS PRIMARILY ENGAGED IN INSURAN CE BUSINESS WORLDWIDE AND ALLIANZ SE WAS HOLDING COMPANY OF THE GROUP, WHICH ALSO PROVIDE RE - INSURANCE SERVICES. THE TERM RE - INSURANCE H AS NOT BEEN DEFINED UNDER THE ACT AS WELL AS UNDER THE INSURANCE ACT, 1938. THE EXPLANATION OF NON - RESIDENT COMPANY VIS - A - VIS TERM RE - INSURANCE WAS AS UNDER: - THE TERM REINSURANCE STANDS FOR THE PRACTICE WHEREBY A RE - INSURER, IN RETURN OF A PREMIUM PAID TO IT, INDEMNIFIES ANOTHER COMPANY FOR A PORTION OR ALL OF THE LIABILITY TAKEN UP BY THE LATTER DUE TO A POLICY O F INSURANCE THAT IT HAS ISSUED. REINSURANCE IS A TYPE OF RISK MANAGEMENT INVOLVING TRANSFER OF RISK FROM REINSURANCE IS A TYPE OF RISK MANAGEMENT INVOLVING TRANSFER OF RISK FROM INSURER TO RE - INSURER. THE RE - INSURER PROVIDES INSURANCE FOR THE INSURERS ON THE BASIS OF A CONTRACT OF INDEMNITY. IN THIS PROCESS, THE INSURER GIVE S THE RE - INSURER A PORTION OF THE PREMIUM IT COLLECTS FROM THE INSURED AND IN RETURN IS COVERED FOR LOSSES ABOVE A PARTICULAR LIMIT. CONCEPTUALLY, UNDER A REINSURANCE TRANSACTION, THE PREMIUM RELATING TO THE REINSURED BUSINESS IS RELINQUISHED OR IN OTHER WORD, PASSED ON AS IS, TO THE REINSURER. HENCE FOR EXAMPLE, IF THEORETICALLY A POLICY IS REINSURED TO THE EXTENT OF 60 PERCENT, THEN 60 PER CENT OF THE PREMIUM EARNED ON THE POLICY IS PASSED ON TO THE REINSURER SINCE 60 PERCENT OF THE RISK ARISING FROM TH IS POLICY IS BORNE BY THE REINSURER. 3 3 . UNDER THE RE - INSURANCE ARRANGEMENT, THE RE - INSURER ENTERS INTO A RE - INSURANCE AGREEMENT FOR A SPECIFIC REASON AND THE SAME WAS CLAIMED TO BE AN INDEPENDENT CONTRACT BETWEEN RE - INSURER AND THE IN SURER AND THE ORIG INAL INSURANCE WAS NOT PART OF THE CONTRACT. SINCE THE SINGLE INSUR ER WOULD NOT BE ABLE TO BEAR THE DAMAGING FINAN CIAL IMPORT OF SUCH LOSSES, THEREFORE, UNBEARABLE LOSSES WERE BROKEN DOWN INTO BEARABLE UNITS BY RISK TRANSFERS AND INSURANCE COMPANY, THUS L IMITS THE AMOU NT OF RISK IT TAKES, DEPENDING ON THE RE - INSURANCE TERMS ALONG WITH THE FACTORS LIKE THE WORTH OF ASSETS, TREND OF INFLATION IN THE ECONOMY, PRICE OF INSURANCE PRODUCTS AND THE TYPE OF RISKS. ITA NO. 2560 /PN/20 1 2 BAJAJ ALLIANZ GENERAL INSURANCE CO. LTD. 27 3 4 . WITH REGARD TO THE TAXABILITY OF RE - INSURAN CE TRANSACTIONS WITH ALLIANZ SE DURING THE COURSE OF ASSESSMENT PROCEEDINGS, IT WAS POINTED OUT BY NON - RESIDENT COMPANY THAT UNDER SECTION 5 OF THE ACT, A NON - RESIDENT WAS TAXABLE IN INDIA ONLY IN RESPECT OF THE INCOME RECEIVED OR DEEMED TO BE RECEIVED IN INDIA OR IN RESPECT OF THE INCOME ACCRUING OR ARISING OR DEEMED TO ACCRUE OR ARISE IN INDIA. FURTHER, SEC TION 9 OF THE ACT INCLUDE THE TAXABILITY OF INCOME EARNED BY NON - RESIDENT IN INDIA I.E. UNDER SECTION 9 OF THE ACT, A NON - RESIDENT WAS TAXED ON INCOME RECEIVED, ACCRUED, ARISING, DEEMED TO BE RECEIVED OR DEEMED TO ACCRUE OR DEEMED TO ARISE IN INDIA. SECTION 9 OF THE ACT, INTER - ALIA, PROVID ES THAT THE INCOME SHALL BE DEEMED TO ACCRUE OR ARISE IN INDIA IF IT ACCRUE OR ARISES, DIRECTLY OR INDIRECTLY FROM ANY BUSINESS CONNECTION IN INDIA. IN VIEW OF THE ABOVE SAID PROVISIONS OF THE ACT AND VARIOUS JUDICI AL PRECEDENTS, THE CLAIM OF ALLIANZ SE DURING THE COURSE OF ASSESSMENT PROCEEDINGS, WAS FIR ST THAT THE TRANSACTION BETWEEN BA LIFE AND BA GENERAL AND AR A P WERE THAT THE TRANSACTION BETWEEN BA LIFE AND BA GENERAL AND AR A P WERE UNDERTAKEN UNDER PRINCIPAL TO PRINCIPAL BASIS I.E. THE ACTIVITIES OF BA LIFE AND BA GENERAL DID NOT PART TAKE THE CHARACTER OF AGENT OR REPRESENTATIVE OF AR A P. FURTHER, IT WAS POINTED OUT THAT AR A P DOES NOT CARRY OUT ANY ACTIVITIES OR OPERATIONS IN I NDIA AND ALSO DID NOT HAVE ANY BUSINESS CONNECTION IN INDIA . AS PER PROVISIONS OF SECTION 9(1)(I) OF THE ACT, IT WAS ALSO POINTED OUT THAT IRDA DID NOT PERMIT A NON - RESIDENT COMPANY TO OPERATE IN INDIA ON STANDALONE BASIS. WHERE AR A P DID NOT HAVE ANY BUS INESS CONNECTION IN INDIA, IT WAS CLAIMED THAT RE - INSURANCE PREMIUM PAYMENT BY BA LIFE / BA GENERAL HAD NOT AC CRUED IN INDIA AND HENCE, WERE NOT TAXABLE IN INDIA. FURTHER, REFERENCE WAS MADE TO THE TREATY BETWEEN INDIA AND GERMANY AND IT WAS POINTED OUT T HAT SINCE AR A P WAS SINGAPORE BRANCH OF ALLIANZ SE IT WAS TAXED RESIDENT OF GERMANY. THE PROVISIONS OF INDIA GERMANY TAX TREATY WERE APPLICABLE AND UNDER THE SAID TAX TREATY, THERE WAS NO SPECIFIC ARTICLE WHICH COVERS THE TAXATION OF RE - INSURANCE PREMIUM A ND HENCE, RE - INSURANCE PREMIUM COULD NOT BE COVERED ITA NO. 2560 /PN/20 1 2 BAJAJ ALLIANZ GENERAL INSURANCE CO. LTD. 28 UNDER ARTICLE 7 : BUSINESS PROFITS. THE ARTICLE 7(1) OF INDIA GERMANY TAX TREATY LAYS DOWN TWO PRINCIPLES I.E. THE BUSINESS PROFIT OF AN ENTERPRISE OF A PERSON RESIDENT IN GERMANY SHOULD BE TAXED IN INDI A ONLY IF THE BUSINESS WAS CARRIED ON THROUGH PE SITUATED IN INDIA AND ONLY SUCH PROFITS SHOULD BE TAXED IN INDIA WHICH ARE ATTRIBUTABLE TO PE. THE NON - RESIDENT COMPANY I.E. ALLIANZ SE STRESSED THAT IT WAS ENGAGED IN INSURANCE BUSINESS AND IT DID NOT HAVE PE IN INDIA AND IN THE ABSENCE OF ANY PE , RE - INSURANCE PREMIUM PAID BY BA LIFE / BA GENERAL TO ALLIANZ SE WAS NOT LIABLE TO BE TAXED IN INDIA, AS PER THE PROVISIONS OF INDIA GERMANY TAX TREATY. THE ASSESSING OFFICER WHILE PASSING THE DRAFT ASSESSMENT ORD ER IN THE CASE OF ALLIANZ SE I.E. NON - RESIDENT COMPANY , FOR THE ASSESSMENT YEAR 2008 - 09 , NOTED THAT THE COMPANY HAD FILED RETURN OF INCOME DECLARING TOTAL INCOME OF RS. 3.26 CRORES. THE PERUSAL OF THE ASSESSMENT ORDER REFLECTS THAT THE ASSESSING OFFICER NO TED THAT ALLIANZ SE WAS HOLDING COMPANY OF ALLIANZ GROUP AND WAS INCORPORATED IN GERMANY. IT WAS ALSO NOTED THAT ALLIANZ SE HAS 26% OF SHAREHOLDING IN TWO INSURANCE ALSO NOTED THAT ALLIANZ SE HAS 26% OF SHAREHOLDING IN TWO INSURANCE COMPANIES I.E. BA LIFE AND BA GENERAL. VIDE PARA 2 , THE ASSESSING OFFICER NOTED THAT THE FOREIGN COMPANY HAD RECEIVED PAYMENTS FROM BA LIFE AND BA GENERAL, WHICH WERE IN RESPECT OF RE - INSURANCE TRANSACTIONS AND TRANSACTIONS UNDER THE SOFTWARE LICENCE AGREEMENT I.E. LICENCE CHARGES AND TECHNICAL SERVICE CHARGES. THE ASSESSEE HAD DECLARED INCOM E FROM ROYALTY OF RS.3 . 26 CRORES AND LICENCE CHARGES OF RS.8.43 CRORES WAS PROPOSED TO BE ADDED IN THE HANDS OF ASSESSEE, WHICH WAS CONFIRMED BY THE DRP AND THE TOTAL INCOME WAS ASSESSED UNDER SECTION 143(3) R.W.S. 144C(13) OF THE ACT AT RS.11.69 CRORES. THE COPIES OF BOTH THE ORDERS PASSED BY THE ASSESSING OFFICER ARE PLACED AT PAGES 150 TO 155 OF THE PAPER BOOK. THE PERUSAL OF THE SAID ORDERS REFLECT THAT THE INCOME ON ACCOUNT OF RE - INSURANCE BUSINESS WHICH HAS BEEN RECEIVED BY THE SAID FOREIGN COMPANY THOUGH CONSIDERED BY THE ASSESSING OFFICER, BUT HAS NOT BEEN ADDED AS INCOME ARISING IN INDIA , IN THE HANDS OF THE SAID FOREIGN COMPANY. FURTHER, THE ASSESSMENT ORDER FOR ASSESSMENT YEAR ITA NO. 2560 /PN/20 1 2 BAJAJ ALLIANZ GENERAL INSURANCE CO. LTD. 29 2009 - 10 HAS ALSO BEEN PASSED UNDER SECTION 144C R.W.S. 143(3) OF THE ACT AND IN WHICH, IT WAS NOTED THAT ALLIANZ SE HAD RECEIVED PAYMENTS FROM BA LIFE AND BA GENERAL I N RESPECT OF RE - INSURANCE TRANSACTIONS AND TRANSACTIONS UNDER SOFTWARE LICENCE AGREEMENT . T HE PAYMENTS WHICH WERE RECEIVED UNDER SOFTWARE LICENCE AGREEMENT WERE ADDED IN THE HANDS OF ASSESSEE AND THE TOTAL INCOME WAS COMPUTED IN THE HANDS OF ASSESSEE AT RS.6.12 CRORES AND TAXED @ 10% BEING ROYALTY / FEES FOR TECHNICAL SERVICES AS PER DTAA BETWEEN INDIA AND GERMANY, WAS CHARGED. 3 5 . THE FIRST ASPECT OF THE IS SUE ARISING BEFORE US IS IN RESPECT OF PAYMENT OF AFORESAID RE - INSURANCE PREMIUM BY THE ASSESSEE TO ALLIANZ SE . W HERE THE SAID RECEIPT WAS NOT TAXABLE IN THE HANDS OF RECIPIENT, WHETHER THE PERSON MAKING THE AFORESAID PAYMENT WAS LIABLE TO DEDUCT TAX AT S OURCE WHILE MAKING THE AFORESAID REMITTANCES. AS REFERRED TO BY US IN THE PARAS HEREINABOVE, THE ASSESSMENT OF INCOME CHARGEABLE UNDER THE PROVISIONS OF THE ACT IN INDIA IN ASSESSMENT OF INCOME CHARGEABLE UNDER THE PROVISIONS OF THE ACT IN INDIA IN THE HANDS OF ALLIANZ SE I.E. NON - RESIDENT COMPANY TO WHOM THE ASSESSEE HAD PAID RE - INSURANCE CHARGES, HAS BEEN DETERMINED BY THE REVENUE AUTHORITIES WHILE PASSING THE ASSESSMENT ORDER UNDER SECTION 143(3) R.W.S. 144C(13) OF THE ACT. THE ASSESSING OFFICER WHILE COMP UTING INCOME OF THE SAID NON - RESIDENT COMPANY IN INDIA FOR ASSESSMENT YE AR 2008 - 09 HAD COMPUTED INCOME ON ACCOUNT OF TRANSACTIONS UNDER THE SOFTWARE LICENCE AGREEMENT I.E. ON ACCOUNT OF ROYALTY AND SOFTWARE LICENCE FEES . T HE PAYMENTS RECEIVED ON ACCOUNT OF RE - INSURANCE TRANSACTIONS WERE NOT HELD TO BE CHARGEABLE TO INCOME TAX BY THE ASSESSING OFFICER WHILE COMPLETING ASSESSMENT IN THE HANDS OF NON - RESIDENT COMPANY AS INCOME ARISING IN INDIA . WHERE THE PAYMENT HAS BEEN MADE TO A NON - RESIDENT COMPANY AND THE SAME IS NOT LIABLE TO TAX IN INDIA, THEN THERE IS NO REQUIREMENT OF DE DUCTION OF TAX AT SOURCE BY THE PAYEE I.E. THE ASSESSEE BEFORE US. THE HONBLE SUPREME COURT IN GE INDIA TECHNOLOGY CENTRE P. LTD. VS. CIT AND ANOTHER (SUPRA) HAS CONSIDERED THE ISSUE OF ITA NO. 2560 /PN/20 1 2 BAJAJ ALLIANZ GENERAL INSURANCE CO. LTD. 30 REMITTANCES TO NON - RESIDENT AND THE DUTY TO DEDUCT TAX AT SOURCE AND HAS HELD THAT SUCH DUTY TO DEDUCT TAXES AT SOURCE DOES NOT ARISE UNLESS THE REMITTANCE CONTAINS WHOLLY OR PARTIALLY TAXABLE INCOME. THE FINDINGS OF THE HONBLE SUPREME COURT WERE AS UNDER: - THE MOST IMPORTANT EXPRESSION IN SECTION 195(1) OF THE INCOME - T AX ACT, 1961, DEALING WITH DEDUCTION OF TAX AT SOURCE CONSISTS OF THE WORDS CHARGEABLE UNDER THE PROVISIONS OF THE ACT. A PERSON PAYING INTEREST OR ANY OTHER SUM TO A NON - RESIDENT IS NOT LIABLE TO DEDUCT TAX IF SUCH SUM IS NOT CHARGEABLE TO TAX UNDER THE ACT. SECTION 195 CONTEMPLATES NOT MERELY AMOUNTS, THE WHOLE OF WHICH ARE PURE INCOME PAYMENTS ; IT ALSO COVERS COMPOSITE PAYMENTS WHICH HAVE AN ELEMENT OF INCOME IMBEDDED OR INCORPORATED IN THEM. THE OBLIGATION TO DEDUCT TAX AT SOURCE IS, HOWEVER, LIMITED TO APPROPRIATE PROPORTION OF INCOME CHARGEABLE UNDER THE ACT FORMING PART OF THE GROSS SUM OF MONEY PAYABLE TO THE NON - RESIDENT. IT IS FOR THIS REASON THAT THE CBDT HAS CLARIFIED IN CIRCULAR NO. 728 DATED OCTOBER 31, 1995, THAT THE TAX DEDUCTOR CAN TAKE I NTO CONSIDERATION THE EFFECT OF THE DTAA IN RESPECT OF PAYMENTS OF ROYALTIES AND TECHNICAL FEES WHILE DEDUCTING TAX AT SOURCE. THE EXPRESSION CHARGEABLE UNDER THE PROVISIONS OF THE ACT IN SECTION 195(1) SHOWS THAT THE REMITTANCE HAS GOT TO BE OF A TRADI NG RECEIPT, THE WHOLE OR PART OF WHICH IS LIABLE TO TAX IN INDIA. IF TAX IS NOT SO ASSESSABLE, THERE IS NO QUESTION OF TAX AT SOURCE BEING DEDUCTED. 3 6 . APPLYING THE S AID RATIO LAID DOWN BY THE HONBLE SUPREME COURT IN GE 3 6 . APPLYING THE S AID RATIO LAID DOWN BY THE HONBLE SUPREME COURT IN GE INDIA TECHNOLOGY CENTRE P. LTD. VS. CIT AND ANOTHER (SUPRA), WE HOLD THAT MERELY BECAUSE REMITTANCE HAS BEEN MADE TO A FOREIGN COMPANY, THE SAME W OULD NOT BE LIABLE TO TAX DEDUCTION AT SOURCE , WHERE THE WHOLE OR PART OF THE SAID PAYMENT IS NOT LIABLE TO BE TAX ED IN INDIA IN THE HANDS OF RECIPIENT NON - RESIDENT COMPANY. THE PROVISIONS OF SECTION 195(1) OF THE ACT POSTULATES THAT THE REMITTANCE SHOULD BE CHARGEABLE UNDER THE PROVISIONS OF THE ACT AND WHERE THE SAME IS NOT LIABLE TO TAX IN INDIA, THERE IS NO REQUIREMENT FOR TAX DEDUCTION AT SOURCE AND THE PROVISIONS OF SECTION 195(1) OF THE ACT ARE NOT ATTRACTED AND FURTHER THE PROVISIONS OF SECTION 40(A)(I) OF THE ACT ARE NOT TO BE APPLIED. 37. THE SECOND ASPECT OF THE ISSUE IS THE OBSERVATION OF THE ASSESSING OFFICER THAT THE PAYMENT OF RE - INSURANCE PREMIUM TO AR A P IS NOT TO BE ALLOWED IN THE HANDS OF ASSESSEE AS THE ASSESSEE HAD NOT MADE ANY APPLICATION UNDER ITA NO. 2560 /PN/20 1 2 BAJAJ ALLIANZ GENERAL INSURANCE CO. LTD. 31 SECTION 195(2) OF THE ACT . UNDER SUB - SECTION (2) TO SECTION 195 OF THE ACT, IT IS PROVIDED THAT WHERE ANY PERSON IS RESPONSIBLE F OR PAYING ANY SUM CHARGEABLE UNDER THIS ACT TO A NON - RESIDENT COMPANY, CONSIDERS THAT THE WHOLE OF SUCH AMOUNT WOULD NOT BE INCOME CHARGEABLE IN THE CASE OF RECIPIENT, THEN HE MAY MAKE AN APPLICATION TO THE ASSESSING OFFICER TO DETERMINE THE APPROPRIATE PO RTION OF SUCH SUM WHICH IS SO CHARGEABLE AND UPON SUCH DETERMINATION, THE TAX SHALL BE DEDUCTED UNDER SUB - SECTION (1) ONLY. THE READING OF SUB - SECTION ITSELF SHOW THAT THE PROVISIONS OF THE SAID SUB - SECTION ARE APPLICABLE WHERE THE PERSON WHO IS RESPONSIB LE FOR MAKING THE PAYMENT TO A NON - RESIDENT IS SURE THAT SUCH SUM WAS CHARGEABLE UNDER THE ACT. THE FIRST STEP TO BE FULFILLED IS THAT THE PAYMENT PAID TO NON - RESIDENT COMP ANY IS CHARGEABLE UNDER THE ACT. WE HAVE ALREADY IN THE PARAS HEREINABOVE, HAVE CO ME TO A FINDING THAT SUM PAID BY THE ASSESSEE IS NOT CHARGEABLE IN THE HANDS OF NON - RESIDENT COMPANY , AS INCOME ARISING IN INDIA . IN VIEW THEREOF, WHERE THE AMOUNT IS NOT CHARGEABLE IN THE HANDS OF NON - RESIDENT COMPANY, THE PROVISIONS OF SUB - CHARGEABLE IN THE HANDS OF NON - RESIDENT COMPANY, THE PROVISIONS OF SUB - SECTION (2) T O SECTION 195 OF THE ACT CANNOT BE INVOKED AND WE FIND NO MERIT IN THE ORDER OF ASSESSING OFFICER IN THIS REGARD. 3 8 . ANOTHER ASPECT TO BE NOTED IN THIS REGARD IS THE PROCEEDINGS OF DETERMINATION OF TAX DEDUCTIBLE BY THE ASSESSEE IN RESPECT OF VARIOUS P AYMENTS MADE DURING THE YEAR UNDER CONSIDERATION. UNDER THE TDS PROVISIONS, IT IS PROVIDED THAT WHERE THE ASSESSEE HAS FAILED TO DEDUCT THE TAX AT SOURCE, WHICH HE WAS LIABLE TO DEDUCT UNDER VARIOUS PROVISIONS OF THE ACT, THEN HE SHALL BE DEEMED TO BE IN DEFAULT UNDER SECTION 201 OF THE ACT AND WOULD BE LIABLE TO PAY THE DEMAND AS RAISED UNDER SECTION 201(1) AND INTEREST, IF ANY, CHARGED UNDER SECTION 201(1A) OF THE ACT. BEFORE THE DRP, THE CASE OF ASSESSEE WAS THAT IN THE PROCEEDINGS UNDER SECTION 201 (1) OF THE ACT FOR THE PERIOD UP TO 31.12.2008 , ALL FOREIGN REMITTANCES INCLUDING RE - INSURANCE PREMIUM PAYMENTS WERE SUBJECTED TO ASSESSMENT AND AFTER EVALUATING THE ITA NO. 2560 /PN/20 1 2 BAJAJ ALLIANZ GENERAL INSURANCE CO. LTD. 32 TRANSACTIONS, THE ADIT (INTERNATIONAL TRANSACTION) - II, HAD PASSED CONSOLIDATED ORDER FROM ASS ESSMENT YEARS 2005 - 06 TO 2009 - 10, WHEREIN IT W AS CONCLUDED THAT THE TAXES WERE REQUIRED TO BE WITHHELD ONLY ON PAYMENT OF CERTAIN SURVEY FEES PAID TO THE NON - RESIDENTS. IN VIEW THEREOF, WHERE THE REVENUE AUTHORITIES HAVE GIVEN A FINDING THAT NO TAX WAS RE QUIRED TO BE DEDUCTED OUT OF RE - INSURANCE PREMIUM PAID BY THE ASSESSEE TO AR A P, WE FIND NO MERIT IN THE ORDER OF ASSESSING OFFICER IN HOLDING THAT THE ASSESSEE SHOULD HAVE MADE THE APPLICATION UNDER SECTION 195(2) OF THE ACT . 3 9 . NOW, COMING TO THE STAND OF THE DRP IN DISALLOWING THE CLAIM OF THE ASSESSEE ON THE PROPOSITION CONTAINED IN PARAS 2.4.15 AND 2.4.16 AT PAGE 18 OF THE ORDER, WHEREIN IT WAS OBSERVED VIDE PARA 2.4.17 , THAT IF LOOK THROUGH APPROACH IS ADOPTED, THE SINGAPORE BRANCH HAD BUSINESS CON NECTION IN INDIA AND THE ASSESSEE COMPANY WAS TO BE TREATED AS DEPENDENT AGENT PE OF GERMAN COMPANY, THEREFORE, THE AFORESAID PAYMENTS WERE TAXABLE IN INDIA GERMAN COMPANY, THEREFORE, THE AFORESAID PAYMENTS WERE TAXABLE IN INDIA AND THE ASSESSEE OUGHT TO HAVE DEDUCTED TAX ON IT. THE DTAA ENTERED INTO BETWEEN INDIA AND GERMANY LAYS DOWN THE CONDITIONS FOR AVOIDANCE OF DOUBLE TAXATION WITH RESPECT TO TAXES ON INCOME. ARTICLE 5 DEALING WITH PERMANENT ESTABLISHMENT AND UNDER PARA 5 LAYS DOWN AS UNDER: - 5. NOTWITHSTANDING THE PROVISIONS OF PARAGRAPHS 1 AND 2, WHERE A PERSON OTH ER THAN AN AGENT OF AN INDEPENDENT STATUS TO WHOM PARAGRAPH 6 APPLIES IS ACTING IN A CONTRACTING STATE ON BEHALF OF AN ENTERPRISE OF THE OTHER CONTRACTING STATE THAT ENTERPRISE SHALL BE DEEMED TO HAVE A PERMANENT ESTABLISHMENT IN THE FIRST - MENTIONED STAT E, IF THIS PERSON, - ] ( A ) H AS AND HABITUALLY EXERCISES IN THAT STATE AN AUTHORITY TO CONCLUDE CONTRACTS ON BEHALF OF THE ENTERPRISE, UNLESS HIS ACTIVITIES ARE LIMITED TO THE PURCHASE OF GOODS OR MERCHANDISE FOR THE ENTERPRISE; ( B ) HAS NO SUCH AUTHORITY, BUT HABI TUALLY MAINTAINS IN THE FIRST - MENTIONED STATE A STOCK OF GOODS OR MERCHANDISE FROM WHICH HE REGULARLY DELIVERS GOODS OR MERCHANDISE ON BEHALF OF THE ENTERPRISE; OR ( C ) HABITUALLY SECURES ORDERS IN THE FIRST - MENTIONED STATE, WHOLLY OR ALMOST WHOLLY FOR THE ENT ERPRISE ITSELF OR FOR THE ENTERPRISE AND OTHER ENTERPRISES CONTROLLING, CONTROLLED BY, OR SUBJECT TO THE SAME COMMON CONTROL, AS THAT ENTERPRISE. ITA NO. 2560 /PN/20 1 2 BAJAJ ALLIANZ GENERAL INSURANCE CO. LTD. 33 40 . IN ORDER TO FULFIL THE CONDITIONS OF HAVING PE BY AN AGENT ACTING ON BEHALF OF AN ENTERPRISE OF OTHER C ONTRACTING STATE, IT IS PROVIDED THAT SUCH AN ENTERPRISE WOUL D DEEMED TO HAVE PE IN THE FIRST MENTIONED STATE , IF THIS PERSON HAS HABITUALLY EXERCISED AN AUTHORITY TO CONCLUDE THE CONTRACTS ON BEHALF OF THE ENTERPRISE AND / OR MAINTAINS STOCK OF GOODS ON M ERC HANDISE , WHI CH HE REGULARLY DELIVERS ON BEHALF OF THE ENTERPRISE, IN THE FIRST MENTIONED STATE OR HABITUALLY SECURES ORDERS WHOLLY OR ALMOST WHOLLY FOR THE ENTERPRISE ITSELF OR FOR OTHER ENTERPRISES , ETC. THE ASSESSEE CLAIMS THAT IT WAS NOT ACTING ON B EHALF OF THE FOREIGN COMPANY. FURTHER, IT WAS NOT DEPENDENT ON THE FOREIGN COMPANY AND HAD NO AUTHORITY TO CONCLUDE ANY CONTRACT ON BEHALF OF THE FOREIGN COMPANY. WHERE I N SUCH CIRCUMSTANCES, THERE WAS NO MERIT IN THE ORDER OF DRP IN APPLYING THE APPROAC H OF LOOK THROUGH . 4 1 . WE FIND THAT SIMILAR ISSUE OF PROVIDING RE - INSURANCE IN INDIA AND WHETHER IN THE ABSENCE OF ANY PE IN INDIA, THE ENTIRE BUSINESS INCOME WAS NOT TAXABLE IN THE ABSENCE OF ANY PE IN INDIA, THE ENTIRE BUSINESS INCOME WAS NOT TAXABLE IN INDIA, AROSE BEFORE MUMBAI BENCH OF TRIBUNAL IN SWISS RE - INSURANCE CO. LT D. VS. DDIT ( SUPRA). THE TRIBUNAL CONSIDERED THE ASPECT OF PE OF THE SAID COMPANY WITHIN PURVIEW OF ARTICLE 5 OF SWISS TREATY AND HELD THAT THE CONDITIONS LAID DOWN IN ARTICLE 5 WERE NOT FULFILLED TO TREAT THE INDIAN ENTITY AS PE. FURTHER, REFERENCE WA S MADE TO THE OECD GUIDELINES. IT WAS OBSERVED THAT IN THE ABSENCE OF ANY BUSINESS CONNECTION AND IN THE ABSENCE OF ANY AGENCY, IT WAS HELD THAT THE SAID FOREIGN ENT ITY HAD NO PE IN INDIA. THE RELEVANT OBSERVATIONS OF THE TRIBUNAL VIDE PARA 5.5 ARE AS UNDE R: - 5.5 CONSIDERING THE SERVICES RENDERED BY SRSIPL IN THE LIGHT OF THE OECD COMMENTARY, SRSIPL CANNOT BE CONSIDERED AS PE OF THE ASSESSEE. THE DECISION RELIED UPON BY LD. DR DO NOT SUPPORT THE REVENUE ON THE FACTS OF THE PRESENT CASE, LIKE IN THE CASE O F DELHI BENCH OF THE TRIBUNAL IN THE CASE OF MOTOROLA INCH. VS. DCIT (2005) 95 ITD 269 (DEL HI TRIB. ) , THE FACTS WERE THAT THE EMPLOYEES OF THE ASSESSEE HAD WORKED BOTH FOR THE ASSESSEE AS WELL AS ITS INDIAN SUBSIDIARY. THE EMPLOYEES ALSO HAD THE RIGHT TO ENTER THE OFFICE OF THE INDIAN SUBSIDIARY EITHER FOR THE PURPOSE OF WORKING FOR INDIAN SUBSIDIARY OR FOR THE PURPOSE OF WORKING FOR THE ASSESSEE AND THE INDIAN SUBSIDIARY PROVIDED PERQUISITE TO THE EMPLOYEES OF THE ASSESSEE AND THE ASSESSEE PAID SALARIES T O THE EMPLOYEES, ON THESE FACTS THE INDIAN SUBSIDIARY WAS CONSIDERED AS PLACE OF BUSINESS. HOWEVER, FACTS OF THE CASE IN HAND CLEARLY SHOW THAT THE EMPLOYEES OF THE SRSIPL HAS ONLY PROVIDED SERVICES TO SRSIPL AND THERE IS ITA NO. 2560 /PN/20 1 2 BAJAJ ALLIANZ GENERAL INSURANCE CO. LTD. 34 NO NOTING ON RECORD TO PROVE THAT THE EMPLOYEES HAD PROVIDED SERVICES TO THE ASSESSEE OR THE ASSESSEE IS PAYING THEIR SALARIES OR PERQUISITES. THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF DIT(IT) VS. MORGAN STANLEY & CO. (2007) 292 ITR 416 (SC) HAS BEEN DULY CONSIDERED BY THE HONBLE DELHI HIGH COURT IN THE CASE OF DIT VS. E - FUNDS IT SOLUTIONS (2014) 42 TAXMANN.COM 50 (DELHI) . THE DECISION IN THE CASE OF JEBON CORPORATION OF INDIA VS. CIT (INT. TAX) (2012) 206 TAXMAN 7 (KAR) IS NOT AT ALL RELEVANT ON THE FACTS OF THE CASE IN HAND. 4 2 . FURTHER, MUMBAI BENCH OF TRIBUNAL IN ICICI LUMBARD GENERAL INSURANCE CO. LTD. VS. ACIT (SUPRA) HAD LAID DOWN THE SIMILAR PROPOSITION. WHERE T HE CONDITIONS LAID DOWN IN ARTICLE 5 OF GERMAN TREATY ARE NOT FULFILLED, THE INDIAN ENTITY I.E. ASSESS EE BEFORE US, IS NOT THE PE OF FOREIGN COMPANY IN INDIA. 4 3 . IN THE ENTIRETY OF THE ABOVE SAID FACTS AND CIRCUMSTANCES, WE FIND NO MERIT IN THE APPROACH OF DRP OF LOOK THROUGH TO HOLD THAT ALLIANZ SE HAD A PE IN INDIA AND ACCORDINGLY, WE REVERSE THE ORD ER OF ASSESSING OFFICER AND DRP AND DIRECT THE ASSESSING OFFICER TO ALLOW THE CLAIM OF ASSESSEE WITH REGARD TO RE - INSURANCE PREMIUM OF RS. 62.7 CRORES PAID TO GERMAN COMPANY. THE PERUSAL OF THE ORDER PASSED UNDER SECTION 143(3) R.W.S. 144C(13) OF THE ACT R EFLECTS THAT THE ASSESSING OFFICER HAD CONSIDERED THE DETAILS OF ADDITIONS PROPOSED IN THE DRAFT ASSESSMENT ORDER AND IN RESPECT OF THE DISALLOWANCE UNDER SECTION 40(A)(I) OF THE ACT, THE AMOUNT WAS MENTIONED AS RS.63,38,46,029/ - , WHICH INCLUDED THE DISALL OWANCE UNDER SECTION 40(A)(I) OF THE ACT ON ACCOUNT OF RE - INSURANCE PREMIUM PAID AND SURVEYOR FEES. THE ASSESSING OFFICER VIDE PARA 6 OF THE FINAL ASSESSMENT ORDER NOTED THAT THE DRP HAD REJECTED THE OBJECTIONS RAISED BY THE ASSESSEE AND UPHELD THE DRAFT ASSESSMENT ORDER PASSED BY THE ASSESSING OFFICER EXCEPT THE FOLLOWING I.E. WITH REGARD TO SURVEYOR FEES PAYMENTS. THE RELEVANT FINDING OF THE ASSESSING OFFICER VIDE PARA 6 AT PAGES 3 AND 4 OF THE ASSESSMENT ORDER. THEREAFTER, WHILE COMPLETING ASSESSMENT ON ACCOUNT OF VARIOUS ADDITIONS , AS PER SERIAL NO.5, DISALLOWANCE UNDER SECTION 40(A)(I) OF THE ACT AS DIRECTED BY DRP WAS RESTRICTED TO RS.60,167/ - . HOWEVER, THE SAID ADDITION HAS BEEN MADE BY THE ITA NO. 2560 /PN/20 1 2 BAJAJ ALLIANZ GENERAL INSURANCE CO. LTD. 35 ASSESSING OFFICER BY PASSING ORDER UNDER SECTION 154 OF T HE ACT, DATED 20.11.2012 RECTIFYING A DDITION OF RS.62,67,76,979/ - . IN VIEW THEREOF, WE DIRECT THE ASSESSING OFFICER TO DELETE ADDITION OF RS.62.67 CRORES. THE GROUND OF APPEAL NO.3 RAISED BY THE ASSESSEE IS THUS, ALLOWED. 4 4 . THE ISSUE IN GROUND OF APPEAL NO. 4 RAISED BY THE ASSESSEE IS DISALLOW ANCE MADE OF RS.11.91 CRORES CLAIMED ON ACCOUNT OF RISK INSPECTION CHARGES. 4 5 . THE ASSESSING OFFICER HAD TREATED THE CLAIM OF THE ASSESSEE AS BOGUS. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, A LETTER DA TED 30.06.2009 WAS RECEIVED FROM DDI T(INV) UNIT VIII(1), MUMBAI INFORMING THAT SEARCH PROCEEDINGS UNDER SECTION 132 OF THE ACT WERE CONDUCTED IN THE CASE OF SHRI SANDEEP SITANI, CA AT HIS MUMBAI RESIDENCE AND SURVEY PROCEEDINGS UNDER SECTION 133A OF THE AC T AT HIS OFFICE. IN THE STATEMENT RECORDED UNDER SECTION SECTION 133A OF THE AC T AT HIS OFFICE. IN THE STATEMENT RECORDED UNDER SECTION 132(4) OF THE ACT, HE WAS CONFRONTED WITH THE INCRIMINATING DOCUMENTS SEIZED / IMPOUNDED IN THE FORM OF LOOSE PAPERS, LETTER HEADS, BOGUS BILLS RAISED IN THE NAMES OF VARIOUS COMPANIES / FIRMS AND T HE STATEMENTS OF HIS EMPLOYEES RECORDED ON 24.06.2008 . HE ADMITTED THAT HE WAS CONTROLLING THE BANK TRANSACTIONS OF MORE THAN 25 COMPANIES FOR THE PURPOSE OF ISSUING BOGUS BILLS ON COMMISSION BASIS. THE SAID PERSON ADMITTED THAT HE DID NOT MAINTAIN ANY B OOKS OF ACCOUNT OR COPIES OF BILLS AND HE CLAIMED THAT THE BILLS WERE RAISED BY THE CONCERNED PARTIES IN THE NAME OF THE COMPANIES CONTROLLED BY HIM, THEMSELVES. HE ALSO EXPLAINED THE MODUS OPERANDI OF ENT IRE TRANSACTIONS. FROM THE DETAILS GIVEN IN THE S TATEMENT AND THE ACCOUNTS OF THE ASSESSEE, THE BANK ACCOUNTS WITH CORPORATION BANK, BHAYANDER BRANCH, MUMBAI , OF THE COMPANIES REFLECTED CERTAIN PAYMENTS RECEIVED FROM ASSESSEE. THE TABULATED DETAILS OF THE PAYMENTS TOTALLING RS. 1,08,31,171/ - ARE PROVIDED UNDER PARA 8.1 AT PAGE 14 OF THE DRAFT ASSESSMENT ORDER PASSED UNDER SECTION 143(3) R.W.S. ITA NO. 2560 /PN/20 1 2 BAJAJ ALLIANZ GENERAL INSURANCE CO. LTD. 36 144C(1) OF THE ACT. THEREAFTER, MR. SANDEEP SITANI WAS ALSO EXAMINED ON 15.10.2008 BY THE ACIT, CIRCLE - 2, THANE. DURING THE COURSE OF ASSESSMENT PROCEEDINGS OF TW O COMPANIES IN THE NAME OF WHICH ACCOMMODATION ENTRIES WERE BEING ISSUED TO BENEFICIARIES TO INFLATE THEIR EXPENSES, INCLUDING THE ASSESSEE. HE CONFIRMED THAT THE COMPANIES WERE ISSUING BOGUS BILLS FOR SERVICES, CONTRACTS, MATERIAL PURCHASED AND AFTER ISS UING THE BILLS , THE COMPANIES RECEIVE D THE CHEQUES AND ON REALIZATION, CASH WAS WITHDR AWN FROM THE BANK AND THE SAME WAS RETURNED TO THE BENEFICIARIES THROUGH BROKERS AFTER DEDUCTING COMMISSION. THE ASSESSEE WAS ASKED TO PRODUCE ALL THE INVOICES ALONG WIT H PURCHASE ORDERS FOR ESTABLISHING THE GENUINENESS OF THE CLAIMS. THE ASSESSEE DURING THE COURSE OF ASSESSMENT PROCEEDINGS PRODUCED EVIDENCE IN THE FORM OF PURCHASE ORDERS IN SUPPORT OF PAYMENTS MADE FOR RISK INSPECTION CHARGES OF RS. 2,71,49,800/ - ONLY AN D FOR THE BALANCE AMOUNT, NO DETAILS WERE PRODUCED FOR VERIFICATION. THE ASSESSING OFFICER NOTED THAT OUT OF TOTAL CLAIM OF RISK INSPECTION CHARGES OF RS. 14,62,61,001/ - , THE ASSESSEE WAS TOTAL CLAIM OF RISK INSPECTION CHARGES OF RS. 14,62,61,001/ - , THE ASSESSEE WAS ABLE TO SUBSTANTIATE WITH CREDIBLE EVIDENCE GENUINENESS OF PAYMENTS OF RS. 2.71 CRORES ONLY AS NO EVIDENCE WAS FILED FOR THE BALANCE AMOUNT OF EXPENDITURE OF RS.11.91 CRORES ; THE SAME WAS DISALLOWED AND ADDED TO THE INCOME OF THE ASSESSEE . 4 6 . BEFORE THE DRP, THE CLAIM OF THE ASSESSEE WAS THAT IT HAD SUBMITTED THE RISK I NSPECTION REPORT ALONG WITH COPIES OF INVOICES AND THE FACT THAT THE ASSESSEE HAD ENTERED INTO INSURANCE AGREEMENTS WITH THE PARTIES, WHO WERE INTERESTE D, WERE PRIMARY EVIDENCE TO PROVE THE GENUINENESS AND BUSINESS EXIGENCY OF INCURRING THE RISK INSPECTION CHARGES. FURTHER, THE CLAIM OF THE ASSESSEE WAS THAT THE RISK INSPECTION REPORTS OBTAINED FROM EXTERNAL PARTIES WERE MORE RELIABLE THAN THE INTERNAL DOCUMENTS INCLUDING THE PURCHASE ORDERS, GENERATED DURING THE COURSE OF ENTERING INTO TRANSACTIONS OR AVA ILING ANY SERVICES. THE CLAIM OF THE ASSESSEE WAS THAT THE PURCHASE ORDERS COULD NOT ITA NO. 2560 /PN/20 1 2 BAJAJ ALLIANZ GENERAL INSURANCE CO. LTD. 37 CONSTITUTE AS THE ONLY CONCLUSIVE EVIDENCE FOR DETERMINING THE ALLOWABILITY OF EXPEN SES. WITHOUT ADMITTING TO THE DISALLOWANCE, THE ASSESSEE FURNISHED ADDITIONAL SUBMISS IONS BEFORE THE DRP I.E. EVIDENCE OF PURCHASE ORDERS AMOUNTING TO RS. 68,07,042/ - AND CLAIMED THAT THE SAME SHOULD BE ALLOWED. THE DRP NOTED THAT THE ADDITIONAL EVIDENCE WAS FILED ON 27.08.2012 AND THE DRP ORDER WAS GETTING TIME BARRED BY 30.09.2012 AND IN THE ABSENCE OF SUFFICIENT TIME AVAILABLE FOR VERIFICATION, THE SAME WAS NOT ADMITTED. WITH REGARD TO THE CLAIM OF ASSESSEE, THE DRP OBSERVED THAT THE PURCHASE ORDERS AND THE SURVEYORS INSPECTION REPORT WERE NECESSARY FOR FINALIZING THE INSURANCE POLICY A ND FOR PAYMENT OF INSURANCE CLAIMS AS AND WHEN THEY ARISE. SINCE THE ASSESSEE HAD FAILED TO FURNISH PURCHASE ORDERS AND THE ASSESSEE HAVING FAILED TO FULLY DISCHARGE THE ONUS TO SUBSTANTIATE THE EXPENDITURE CLAIMED BY IT, THE ORDER OF ASSESSING OFFICER WA S UPHELD. 4 7 . THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE BEFORE US 4 7 . THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE BEFORE US POINTED OUT THAT THE ASSESSEE HAD INCURRED COST TOTALLING RS.14.62 CRORES, DETAILS OF WHICH ARE AVAILABLE AT PAGE 188 OF THE PAPER BOOK. THE LEARNED AUTHORIZED REPRESENTATIV E FOR THE ASSESSEE FURTHER POINTED OUT THAT IT HAD REVISED ITS CLAIM BY WITHDRAWING SUM OF RS. 32,67,497/ - . OUR ATTENTION WAS DRAWN TO THE DOCUMENTS FILED IN THIS REGARD I.E. DEBIT NOTE AND RISK INSPECTION REPORT PLACED AT PAGES 247 TO 249 OF THE PAPER BOO K AND IT WAS POINTED OUT BY THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE THAT THE TEST APPLIED BY DRP WAS WRONG . T HE OBSERVATION MADE BY THE DRP WAS HELD TO BE NOT RELEVANT TO THE RISK INSPECTION CHARGES. IT WAS POINTED OUT THAT THE CHARGES MAY BE PAID WHEN THE POLICY WAS BEING FINALIZED AS THE INSURER WAS NOT BOTHERED WHETHER THE ASSESSEE HAD CARRIED ON RISK INSPECTION , SINCE THE SAID INSPECTION WAS FOR THE SATISFACTION OF THE ASSESSEE, THERE WAS NO MERIT IN SAYING THAT THE PURCHASE ORDER WAS R ELEVANT. HE STRESSED THAT MANY PERSONS HAD CARRIED ON THE INSPECTION AND SOMETIME, THE ASSESSEE ALSO CARRIES OUT THE ITA NO. 2560 /PN/20 1 2 BAJAJ ALLIANZ GENERAL INSURANCE CO. LTD. 38 INSPECTION WITHOUT BEING ANY PURCHASE ORDERS. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE FURTHER POINTED OUT THAT AS AGAINST THE RECEIPTS OF RS.1415 CRORES, THE CLAIM OF RISK INSPECTION CHARGES WAS ONLY RS. 14 CRORES , OUT OF WHICH RS.2.71 CRORES WAS ALLOWED IN THE HANDS OF ASSESSEE AND THE CLAIM OF ABOUT RS.32 LAKHS, WHICH WAS WITHDRAWN BY THE ASSESSEE IS TO BE DISALLOWED IN THE HANDS OF ASSESSEE. HOWEVER, THE BALANCE EXPENDITURE IS TO BE ALLOWED IN THE HANDS OF ASSESSEE. FURTHER, WITHOUT PREJUDICE, IT WAS POINTED OUT THAT ADDITIONAL EVIDENCE IN RESPECT OF THE PURCHASE ORDERS TO THE E XTENT OF RS.68,07,042/ - WAS FILED ON THE FIRS T DAY OF HEARING, BUT THE SAME HAS NOT BEEN CONSIDERED AND IN THE END, THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT AGAINST PAYMENT , TAX WAS DEDUCTED AT SOURCE. 4 8 . THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE ON THE OTHER HAND, POINTED OUT THAT THE CLAIM MADE BY THE ASSESSEE WAS QUESTIONABLE IN HAND, POINTED OUT THAT THE CLAIM MADE BY THE ASSESSEE WAS QUESTIONABLE IN THE ABSENCE OF ANY DETAILS BEING FILED. OUR ATTENTION WAS DRAWN TO THE SEQUENCE OF EVENTS I.E. THE SEARCH ON SHRI SANDEEP SITANI ON 22.06.2008 AND THE ASSESSEE HAVING FILED RE TURN OF INCOME ON 29.09.2008 AND REVISING THE CLAIM OF COMMISSION ON 25.08.200 9 WHERE THE NOTICE UNDER SECTION 143(2) OF THE ACT WAS ISSUED ON 19.08.2009 . T HE ADDITIONAL EVIDENCE WAS FILED ON 27.08.2012 AND IT DOES NOT EMANATE FROM THE RECORD THAT IT WAS FILED ON FIRST HEARING. THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE STRESSED THAT THE EVIDENCE FILED BY THE ASSESSEE WAS ADDITIONAL EVIDENCE AND RECOURSE HAD TO BE MADE TO RULES 29, 30 AND 31 OF ITAT RULES. 4 9 . WE HAVE HEARD THE RIVAL CONTENT IONS AND PERUSED THE RECORD. IN THE FACTS RELATING TO THE ISSUE , DURING THE COURSE OF SEARCH ON ONE SHRI SANDEEP SITANI, CA CARRIED OUT ON 22.06.2008 AND SURVEY UNDER SECTION 133A OF THE ACT CARRIED OUT ON HIS OFFICIAL PREMISES, VARIOUS DOCUMENTS INCLUDIN G BILLS, ETC. ITA NO. 2560 /PN/20 1 2 BAJAJ ALLIANZ GENERAL INSURANCE CO. LTD. 39 WERE FOUND FROM HIS PREMISES. WHEN HE WAS CONSIDERED THE SAID DOCUMENTS, HE EXPLAINED THE MODUS OPERANDI OF THE TRANSACTIONS, UNDER WHICH HE ADMITTED THAT HE WAS CONTROLLING THE TRANSACTIONS OF MORE THAN 25 COMPANIES FOR THE PURPOSE OF ISSUI NG BOGUS BILLS O N COMMISSION. FROM THE DETAILS GIVEN IN THE STATEMENT AND THE ACCOUNTS OF THE ASSESSEE AND BANK ACCOUNT WITH CORPORATION BANK, BHAYANDER BRANCH, MUMBAI, OF THE SAID COMPANIES REFLECTED VARIOUS PAYMENTS RECEIVED FROM ASSESSEE, ON DIFFERENT DATES AS TABULATED AT PAGE 14 OF THE DRAFT ASSESSMENT ORDER, TOTALLING RS.1,08,31,179/ - . THE ASSESSEE WAS GIVEN AN OPPORTUNITY TO PRODUCE THE DOCUMENTS TO ESTABLISH ITS CLAIM OF RISK INSPECTION CHARGES OF RS. 14,62,61,001/ - . BEFORE THE ASSESSING OFFICER, THE ASSESSEE FURNISHED EVIDENCE OF PAYMENT OF RS. 2,71,49,800/ - ONLY. HOWEVER, NO EVIDENCE WITH REGARD TO BALANCE AMOUNT OF EXPENDITURE OF RS.11.91 CRORES WAS PRODUCED. HOWEVER, THE ASSESSEE BY WAY OF REVISED RETURN HAD WITHDRAWN THE CLAIM TO THE EXTENT O F RS.32,67,497/ - . BEFORE THE DRP, THE ASSESSEE FURTHER FURNISHED ADDITIONAL EVIDENCE OF PURCHASE ORDERS DRP, THE ASSESSEE FURTHER FURNISHED ADDITIONAL EVIDENCE OF PURCHASE ORDERS TOTALLING RS.68,07,042/ - AND CLAIMED THAT THE SAME SHOULD BE ALLOWED AS DEDUCTION. BEFORE US, THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE H AS REFERRED TO THE SAMPLE COPIES OF RISK INSPECTION INVOICES ALONG WITH PURCHASE ORDERS FILED BEFORE THE LOWER AUTHORITIES PLACED AT PAGES 225 TO 248 OF THE PAPER BOOK. THE LIST OF PARTIES FOR WHOM ADDITIONAL PURCHASE ORDERS WERE FILED BEFORE THE DRP ALON G WITH SAMPLE COPIES OF PURCHASE ORDERS PLACED AT PAGES 382 TO 410 OF THE PAPER BOOK. THE CLAIM OF THE ASSESSEE BEFORE US IS TWO - FOLD THAT THE RISK INSPECTION CHARGES WERE INCURRED AS NON - ROUTINE EXPENSES AND HAD RECEIVED SERVICES FROM VARIOUS RISK INSPEC TION CHARGES, WHO HAD CARRIED OUT THE AFORESAID RISK INSPECTION ON BEHALF OF THE ASSESSEE. IN THIS REGARD, IT WAS FURTHER POINTED OUT BY THE ASSESSEE THAT IT WAS NOT NECESSARY THAT PROSPECTIVE CLIENTS WH O HAD BEEN SURVEYED OR FOR WHOM RISK INSPECTION REPO RTS WERE P REPARED WAS NECESSARILY INSURED BY THE ASSESSEE. THE SAID INSPECTION REPORTS WERE USED FOR PRIMARY ASSESSMENTS OF WHETHER TO CHANNEL ITA NO. 2560 /PN/20 1 2 BAJAJ ALLIANZ GENERAL INSURANCE CO. LTD. 40 ITS SALES EFFORTS VIS - A - VIS SUCH CLIENTS. FURTHER THE CASE OF THE ASSESSEE BEFORE US WAS THAT AS AGAINST INSURA NCE RECEIPTS OF RS.1415 CRORES, TOTAL CLAIM OF RISK INSPECTION CHARGES WAS ONLY TO THE EXTENT OF RS.14 CRORES, OUT OF WHICH RS.2.71 CRORES HAVE ALREADY BEEN ALLOWED IN THE HANDS OF ASSESSEE. FURTHER, THE CLAIM OF ABOUT RS.32 LAKHS WAS WITHDRAWN BY THE ASS ESSEE AND IN RESPECT OF ABOUT RS.68 LAKHS, THE ASSESSEE FURNISHED ADDITIONAL EVIDENCE AND THE CLAIM OF THE ASSESSEE BEFORE US IS THAT THE SAID EXPENDITURE HAVING BEEN INCURRED DURING THE COURSE OF ITS BUSINESS OF INSURANCE, IS ALLOWABLE IN THE HANDS OF ASS ESSEE. THE RISK INSPECTION REPORTS ARE CLAIMED TO HAVE BEEN PROCURED FROM INDEPENDENT PARTIES, WHO ARE NOT RELATABLE TO THE ASSESSEE AND WERE NECESS AR Y PART OF CARRYING ON THE BUSINESS OF INSURANCE. THE ASSESSING OFFICER HAD RECEIVED INFORMATION IN RESPE CT OF PAYMENTS TOTALLING RS.1.08 CRORES. HOWEVER, NO OTHER INFORMATION WAS RECEIVED BY THE ASSESSING OFFICER AND ON THE BASIS OF THE SAID INFORMATION OF RS.1.08 CRORES, BALANCE CLAIM WAS DISALLOWED IN THE HANDS OF ASSESSEE ON THE PREMISE THAT THE ASSESSEE HAS NOT DISALLOWED IN THE HANDS OF ASSESSEE ON THE PREMISE THAT THE ASSESSEE HAS NOT PRODUCED THE PURCHASE ORDERS. AFTER CONSIDERING THE EXPLANATION OF THE ASSESSEE, WE ARE OF THE VIEW THAT THERE IS MERIT IN THE PLEA OF THE ASSESSEE TO THE EXTENT THAT EACH OF THE RISK INSPECTION REPORTS RECEIVED BY THE ASSESSEE MAY NOT HAVE RESUL TED IN THE BUSINESS BEING ALLOTTED TO THE ASSESSEE OR AFTER CONSIDERING THE PROFILE OF THE COMPANIES AGAINST WHOM THE ASSESSEE HAS RECEIVED RISK INSPECTION REPORTS, THE ASSESSEE ITSELF TAKES A VIEW THAT IT WAS NOT WORTHWHILE TO OFFER INSURANCE SERVICES TO SUCH COMPANIES WHOSE RISK INSPECTION REPORTS WERE RECEIVED BY IT. ADMITTEDLY, THE ONUS WAS HIGHER UPON THE ASSESSEE TO ESTABLISH ITS CLAIM IN VIEW OF THE INFORMATION RECEIVED BY THE ASSESSING OFFICER PURSUANT TO THE SEARCH CONDUCTED UPON SHRI SANDEEP SITA NI , CA. HOWEVER, THE INFORMATION RECEIVED BY THE ASSESSING OFFICER WAS LIMITED TO THE EXTENT OF PART OF THE RISK INSPECTION CHARGES PAID BY THE ASSESSEE. NO FURTHER INFORMATION WAS COLLECTED BY THE AUTHORITIES BELOW TO DISPROVE THE CLAIM OF THE ASSESSEE. IN THE TOTALITY OF THE ABOVE SAID FACTS AND ITA NO. 2560 /PN/20 1 2 BAJAJ ALLIANZ GENERAL INSURANCE CO. LTD. 41 CIRCUMSTANCES AND CONSIDERING THE EXPLANATION OF THE ASSESSEE, WE FIND NO MERIT IN REJECTION OF THE CLAIM OF THE ASSESSEE ON THE GROUND THAT THE ASSESSEE HAD FAILED TO PRODUCE THE EVIDENCE IN THE FORM OF PURCHASE ORDERS WITH RESPECT TO THE RISK INSPECTION CHARGES TOTALLING RS.14.62 CRORES. THE ASSESSEE HAS EXPLAINED AND IT IS AN ADMITTED POSITION THAT THE RISK INSPECTION ITSELF WOULD NOT RESULT IN POLICY BEING ISSUED BY THE ASSESSEE FOR INSURING THE CO MPANIES BUSINESSES. HOWEVER, THE CARRYING ON OF SUCH RISK INSPECTION BY THE ASSESSEE WAS NECESSARY AS IT WAS IN THE BUSINESS OF PROVIDING GENERAL INSURANCE TO ITS CLIENTS AND IT HAD TO BE SURE THAT THE COMPANIES TO WHOM IT WAS PROVIDING THE SERVICES WAS T HE CORRECT DECISION OF ITS BUSINESS. AS WE ARE AWARE THAT AS AGAINST THE INSURANCE CHARGES PAID BY THE RESPECTIVE INSURER IN CASE OF THE DAMAGES BEING COM PENSATED BY THE INSURANCE COMPANY, THE VOLUMES ARE VERY HIGH. IN SUCH CIRCUMSTANCES, IT WAS THE RESP ONSIBILITY OF THE ASSESSEE TO TAKE THE REQUISITE STEPS TO PROTECT ITSELF FROM FUTURE LOSSES, IF ANY, IN THIS REGARD. THE RISK INSPECTION WAS THE NECESSARY TOOL IN THE HANDS OF THE REGARD. THE RISK INSPECTION WAS THE NECESSARY TOOL IN THE HANDS OF THE ASSESSEE. HOWEVER, IN VIEW OF THE EVIDENCE COLLECTED BY THE REVENUE DEPART MENT AND IN THE TOTALITY OF THE FACTS AND CIRCUMSTANCES, WE HOLD THAT THE ENTIRE EXPENDITURE IS NOT ALLOWABLE IN THE HANDS OF THE ASSESSEE. IT IS NOT CORRECT TO MAKE ESTIMATED DISALLOWANCE OF EXPENSES. HOWEVER, IN VIEW OF THE EVIDENCE FILED AGAINST THE A SSESSEE AND IN THE ABSENCE OF COMPLETE DETAILS AVAILABLE BEFORE US AND TO PREVENT LEAKAGE OF REVENUE, WE ARE CONSTRAINED TO DISALLOW 2 5 % OF THE SAID EXPENDITURE IN THE HANDS OF ASSESSEE . THE DISALLOWANCE WOULD BE WORKED OUT BY TAKING NET EXPENDITURE OF RS .11.91 CRORES I.E. TOTAL E XPENDITURE OF RS.14.62 CRORES MINUS RS.2.17 CRORES ALLOWED BY THE ASSESSING OFFICER. FURTHER, THE ASSESSEE HIMSELF HAD WITHDRAWN THE CLAIM OF EXPENDITURE OF RS. 32,67,497/ - AND HAS FURTHER FURNISHED EVIDENCE OF RS.68,07,042/ - . TH E ASSESSING OFFICER SHALL VERIFY THE ADDITIONAL EVIDENCE FILED BY THE ASSESSEE AND IF THE SAME IS FOUND TO BE IN ORDER , T HE SAID EXPENDITURE WOULD BE ALLOWED IN THE HANDS OF THE ASSESSEE . THEN OUT OF BALANCE ITA NO. 2560 /PN/20 1 2 BAJAJ ALLIANZ GENERAL INSURANCE CO. LTD. 42 REMAINING, THE ASSESSING OFFICER SHALL DISALLOW 2 5 % OF THE EXPENDITURE. THE GROUND OF APPEAL NO.4 RAISED BY THE ASSESSEE IS THUS, PARTLY ALLOWED. 50. THE ISSUE IN GROUND OF APPEAL NO.5 RAISED BY THE ASSESSEE IS AGAINST THE ADDITION ON ACCOUNT OF INCOME FROM SOFTWARE CONSULTANCY CHARGES OF RS. 3,01,25, 934/ - , WHICH WAS OFFERED BY THE ASSESSEE TO TAX IN ASSESSMENT YEAR 2009 - 10 . WITHOUT PREJUDICE TO THE SAID CLAIM, THE ASSESSEE HAS ALSO RAISED AN ALTERNATE PLEA THAT THE ASSESSING OFFICER HAS ERRED IN NOT ALLOWING FOREIGN TAX CREDIT OF RS. 11,97,670/ - RELAT ING TO THE AFORESAID SOFTWARE CONSULTANCY CHARGES. 51. AS REFERRED TO BY US IN THE PARAS HEREINABOVE, THE ASSESSEE DURING THE YEAR UNDER CONSIDERATION HAD ENTERED INTO AN INTERNATIONAL TRANSACTION WITH ITS ASSOCIATED ENTERPRISES AND THE ISSUE WAS REFERR ED TO THE TPO, WHO IN TURN, PROPOSED AN ADDITION OF RS. 94,58,807/ - ON ACCOUNT OF INTERNATIONAL TRANSACTION. PROPOSED AN ADDITION OF RS. 94,58,807/ - ON ACCOUNT OF INTERNATIONAL TRANSACTION. 52. BEFORE THE DRP, THE ASSESSEE CLAIMED THAT THE SOFTWARE CONSULTANCY SERVICES INCLUDED P ROJECTS WHICH HAD TO BE COMPLETED IN VARIOUS STAGES AND WHILE DOING SO, THE SUBSTANTIAL COST WAS INCURRED DURING INITIAL STAGES OF THE SAID PROJECTS. IT WAS FURTHER POINTED OUT BY THE ASSESSEE THAT THE TOTAL INCOME FROM SUCH PROJECTS WAS BOOKED IN THE YEAR OF SUBSTANTIAL COMPLETION. THE NEXT CONTENTION OF TH E ASSESSEE IN THIS REGARD WAS THAT ALTHOUGH THE INCOME IN RELATION TO THE ON - GOING PROJECTS WAS BOOKED IN THE SUBSEQUENT YEAR, BUT SUBSTANTIAL COST IN CONNECTION WITH SUCH PROJECTS WAS BOOKED AS PART OF OVERALL COST DURING THE ASSESSMENT YEAR 2008 - 09 . THE DRP VIDE PARA 2.8.4 TOOK NOTE OF THE FACT THAT THE ASSESSEE HA D SUBMITTED SEGMENTAL PROFITABILITY STATEMENT BEFORE THE ASSESSING OFFICER , IN WHICH THE ASSESSEE HAD ALSO CONSIDERED RS. 3,01,25,934/ - AS PART OF OPERATING REVENUE BASED ON MATCHING PRINCIPLE. THE SAID AMOUNT WAS REPORTED AS INCOME IN THE FINANCIAL STATEMENT OF THE ITA NO. 2560 /PN/20 1 2 BAJAJ ALLIANZ GENERAL INSURANCE CO. LTD. 43 SUBSEQUENT YEAR I.E. ASSESSMENT YEAR 2009 - 10 . IN VIEW OF THE REVISED PROFITABILITY, THE CONTENTION OF THE ASSESSEE WAS THAT THE OPERATING PROFIT EARNED BY THE ASSESSEE WAS 169% , WHE REAS ARITHMETIC MEAN OF THE COMPARABLE COMPANIES WAS 42.30% AND THUS, THE INTERNATIONAL TRANSACTION IN THE NATURE OF PROVISION OF SOFTWARE CONSULTANCY SERVICES WAS AT ARMS LENGTH. FURTHER, WITHOUT PREJUDICE TO THE ABOVE, THE ASSESSEE ALSO SUBMITTED BEFOR E THE TPO / ASSESSING OFFICER THAT IN CASE RS. 3,01,25,934/ - WAS NOT CONSIDERED AS PART OF OPERATING REVENUE, CORRESPONDING COST OF RS.1,12,11,625/ - SHOULD ALSO BE EXCLUDED IN VIEW OF MATCHING PRINCIPLE. THE TPO HOWEVER, HAD MADE THE ADDITION AS ACCORDING TO HIM, THERE WAS NOTHING TO ESTABLISH OR INDICATE THAT THE ACCOUNTING NORMS OF THE COMPARABLES AND THE ASSESSEE WERE DIFFERENT. SINCE THE ASSESSEE HAD NOT INDICATED ANY FUNCTIONAL DIFFERENCE, WHICH WOULD WARRANT THE ADJUSTMENT, THE TPO WAS OF THE VIEW TH AT THERE WAS NOTHING IN THE AUDITED ACCOUNTS, WHICH WOULD INDICATE CLAIM OF DEFERRAL OF EXPENDITURE NOR THE EXPENDITURE WAS SHOWN AS WORK - IN - PROGRESS. THE TPO FURTHER REJECTED THE EXPENDITURE WAS SHOWN AS WORK - IN - PROGRESS. THE TPO FURTHER REJECTED THE CLAIM OF THE ASSESSEE THAT ON ACCOUNT OF FACT THAT THE AMOUNT OF EXPENDITUR E WHICH WAS CLAIMED TO BE DEFERRED, WAS NOT BASED ON ACTUAL RECORD, BUT WAS COMPUTED ON PROPORTIONATE BASIS. THE TPO THUS, AFTER CONSIDERING THE OPERATING INCOME AND EXPENSES REPORTED IN THE FINANCIAL YEAR, PROPOSED AN ADJUSTMENT OF RS. 94,58,807/ - . 53. THE ASSESSEE BEFORE THE DRP OBJECTED TO THE OBSERVATIONS OF THE TPO AND POINTED OUT THAT THE SEGMENTAL PROFITABILITY WAS DRAWN IN VIEW OF THE FUNDAMENTAL ACCOUNTING PRINCIPLE OF MATCHING CONCEPT AS PER INDIAN ACCOUNTING STANDARDS. IT WAS ARGUED BY THE AS SESSEE THAT EITHER TH E REVENUE OF RS.3.01 CRORES REPORTED AS INCOME IN THE SUBSEQUENT YEAR SHOULD BE TAKEN AS OPERATING REVENUE FOR ASSESSMENT YEAR 2008 - 09 OR ALTERNATIVELY, THE COST OF RS.1.12 CRORES SHOULD BE EXCLUDED, WHICH WAS BEING REPORTED AS EXPENDI TURE IN ASSESSMENT YEAR 2008 - 09 . IN RESPECT OF THE OBSERVATIONS OF TPO, THE ITA NO. 2560 /PN/20 1 2 BAJAJ ALLIANZ GENERAL INSURANCE CO. LTD. 44 ASSESSEE FURTHER EXPLAINED THAT THERE WAS NOTHING IN THE AUDITED ACCOUNTS TO SUPPORT THE CLAIM THAT THE AMOUNT TO BE DEFERRED WAS NOT BASED ON ACTUAL RECORD, BUT WAS COMPUTED ON P ROPORTIONATE BASIS. THE ASSESSEE REITERATED THAT THE PROVISION OF SOFTWARE CONSULTANCY SEGMENT WAS INSIGNIFICANT ACTIVITY AS COMPARED TO THE INSURANCE BUSINESS OF THE ASSESSEE. FURTHER, THE ASSESSEE CLAIMED THAT THE ADJUSTMENT PERMISSIBLE UNDER RULE 10B( 1)(C) OF THE ACT , IN VIEW OF THE FACTS OF THE CASE, COULD NOT BE DENIED ONLY BECAUSE THE ASSESSEE HAD NOT RECORDED SPECIFICALLY IN ITS FINANCIAL, THE ACCOUNTING POLICY FOLLOWED FOR THE SOFTWARE SEGMENT. THE DRP OBSERVED THAT THE ASSESSEES C ONTENTION WAS THAT IT FOLLOWS PROJECT COMPLETION METHOD FOR ACCOUNTING, WAS ONLY THE CONVENIENCE EXPLANATION THAN WHAT IS BEING FOLLOWED IN THE INDUSTRY. THE DRP FURTHER OBSERVED THAT A PERSON IS REQUIRED TO RECOGNIZE THE INCOME WHEN IT ACCRUES AND NOT WHEN CHOOSES TO SHOW IT, I T IS ACCRUED TO IT, BY FOLLOWING CERTAIN METHOD OF ACCOUNTING. IT ALSO NOTED THAT IN ALL CONTRACTS, CERTAIN PERCENTAGE OF TOTAL PROJECT INCOME ACCRUES TO THE CONTRACTOR ON COMPLETION OF PERCENTAGE OF TOTAL PROJECT INCOME ACCRUES TO THE CONTRACTOR ON COMPLETION OF CERTAIN PROJECTS AND NO ENTERPRISE UNDERTAKING LONG DURATIO N PROJECTS COULD AFFORD TO HAMPER CASH FLOW AND INCREASE RISK OF REALIZATION TILL THE LAST INVOICES. THE DRP THUS, HELD THAT THE PROJECT COMPLETION METHOD WITHOUT PERIODICAL RECOGNITION OF REVENUE WAS AGAINST THE ACCOUNTING STANDARDS AS WELL AS AGAINST TH E BASIC PROV ISIONS OF INCOME RECOGNITION UNDER INCOME - TAX ACT. THE DRP THUS, ACCEPTED THE ALTERNATE PLEA AS ARGUED BY THE ASSESSEE AND AS SHOWN BY THE ASSESSEE IN TABLE IN PARA 2.8.5 OF THE ORDER OF DRP AND THE ASSESSING OFFICER WAS DIRECTED TO CONSIDER T HE REVENUE OF RS.3.01 CRORES AS INCOME OF ASSESSMENT YEAR 2008 - 09 , T HIS WOULD BE IN ADDITION TO RS. 27,91,816/ - ALREADY SHOWN BY THE ASSESSEE. THE DRP ALSO DIRECTED THE ASSESSING OFFICER TO GIVE RELIEF OF THE SAME AMOUNT IN ASSESSMENT YEAR 2009 - 10 AS THIS AMOUNT WAS TO BE CONSIDERED IN ASSESSMENT YEAR 2008 - 09 . THUS, THE TRANSFER PRICING ADJUSTMENT MADE BY THE TPO WAS DELETED . IN VIEW THEREOF, THE DRP OBSERVED THAT ENHANCEMENT NOTICE WAS NOT ISSUED AS THIS ADJUSTMENT ITA NO. 2560 /PN/20 1 2 BAJAJ ALLIANZ GENERAL INSURANCE CO. LTD. 45 DOES NOT ENHANCES THE ASSESSEES INCOME . THE ASSESSING OFFICER GIVING EFFECT TO DIRECTIONS OF DRP ENHANCED THE INCOME OF ASSESSEE BY RS.3.01 CRORES. 54. THE ASSESSEE IS IN APPEAL AGAINST THE SAID FINDINGS OF DRP. 55. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE REFERRED TO THE SUBM ISSIONS FILED BEFORE THE DRP, WHICH ARE PLACED AT PAGES 425 AND 426 OF THE PAPER BOOK. IT WAS POINTED OUT THAT EITHER THE AUTHORITIES SHOULD EXCLUDE THE OPERATING INCOME AND ALSO RELATABLE EXPENDITURE FOR ARRIVING AT TRUE PROFITS I.E. ADJUSTMENT SHOULD BE MADE TO THE INCOME OR THE ADVANCE THE REVENUE RECOGNITION. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE STRESSED THAT THE ASSESSEE WAS FOLLOWING PROJECT COMPLETION METHOD AND THE RESULTS OF THE ASSESSEE COMPANY WHE RE COMPARED WITH THE COMPANIES FOLLOWI NG PERCENTAGE COMPLETION METHOD . H E FAIRLY ADMITTED THAT THE ASSESSEE HAD NOT PERCENTAGE COMPLETION METHOD . H E FAIRLY ADMITTED THAT THE ASSESSEE HAD NOT RECOGNISED WORK - IN - PROGRESS IN ITS FINANCIAL. HE FURTHER SUBMITTED THAT THE DRP THOUGH SAYS NO ENHANCEMENT, BUT THE ASSESSING OFFICER IN FINAL ORDER ENHANCE D AND MA D E A N ADDITION OF RS.3.01 CRORES. HE FURTHER STRESSED THAT THE DETERMINATION BY THE DRP OR THE ADJUSTMENT AS SO MADE WAS FOR DETERMINING THE TP ADJUSTMENT FOR BOTH THE YEARS AND ONCE THE TRANSACTION OF THE ASSESSEE WAS ACCEPTED TO BE AT ARMS LENGTH, NO FURT HER ADDITION WAS TO BE MADE IN THE HANDS OF ASSESSEE. HE FURTHER STRESSED THAT IN ANY CASE, WHERE NO ENHANCEMENT NOTICE WAS GIVEN TO THE ASSESSEE, THERE WAS NO MERIT IN ANY ADDITION IN THE HANDS OF ASSESSEE. WITHOUT PREJUDICE TO THE ABOVE SAID ARGUMENTS, THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT THE ASSESSEE WAS PAYING TAXES OVERSEAS ON THE REVENUE RECEIPTS AND IN CASE THE SAME IS BROUGHT TO TAX IN THIS YEAR, CORRESPONDING TAX BENEFIT SHOULD BE GIVEN TO THE ASSESSEE. ITA NO. 2560 /PN/20 1 2 BAJAJ ALLIANZ GENERAL INSURANCE CO. LTD. 46 56. T HE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE POINTED OUT THAT THE PERUSAL OF THE ORDER OF DRP REFLECTS THAT SPIRIT WAS FOR ENHANCEMENT OF INCOME VIS - A - VIS SOFTWARE CONSULTANCY CHARGES THOUGH THERE ARE SOME CONTRASTS IN THE LAST TWO PA RAS IN THE O RDER OF DRP. 57. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. THE ISSUE BEFORE THE ASSESSING OFFICER WAS IN RESPECT OF INTERNATIONAL TRANSACTIONS UNDERTAKEN BY THE ASSESSEE. THE ASSESSEE HAD DURING THE YEAR SHOWN INTERNATIONAL TRANSACTION S WITH ITS ASSOCIATED ENTERPRISES ON ACCOUNT OF PROVISION OF SOFTWARE CONSULTANCY CHARGES. THE TPO WHILE BENCHMARKING THE INTERNATIONAL TRANSACTIONS OF THE ASSESSEE FOUND IT NOT TO BE AT ARMS LENGTH IN VIEW OF THE ARITHMETIC MEAN OF THE COMPARABLE COMPAN IES TAKEN AT 42.30% AND PROPOSED AN ADDITION OF RS.94,58,807/ - . WHILE EXPLAINING THE MODUS OF RECOGNITION OF REVENUE BY THE ASSESSEE VIS - A - VIS ITS INTERNATIONAL TRANSACTIONS OF PROVIDING SOFTWARE CONSULTANCY, THE ASSESSEE EXPLAINED THAT IT WAS FOLLOWING OF PROVIDING SOFTWARE CONSULTANCY, THE ASSESSEE EXPLAINED THAT IT WAS FOLLOWING P ROJECT COMPLETION METHOD AND THOUGH INCOME IN RELATION TO THE ON - GOING PROJECTS WAS BOOKED IN THE SUBSEQUENT YEAR, BUT THE COST IN CONNECTION WITH SUCH PROJECTS WAS BOOKED AS PART OF OVERALL COST DURING THE ASSESSMENT YEAR 2008 - 09. THE ASSESSEE CLAIMED TH AT IT HAD REPORTED THE INCOME IN THE SUBSEQUENT ASSESSMENT YEAR 2009 - 10 . HOWEVER, WHILE BENCHMARKING THE INTERNATIONAL TRANSACTIONS IN THE HANDS OF ASSESSEE, THE ASSESSEE POINTED OUT THE REVENUE RELATABLE TO THE SAID TRANSACTIONS TO THE EXTENT OF RS.3.01 CRORES SHOULD BE CONSIDERED AS PART OF OPERATING REVENUE FOR THE YEAR UNDER CONSIDERATION OR THE COST OF RS.1.12 CRORES SHOULD BE EXCLUDED IN VIEW OF THE MATCHING PRINCIPLE. THE DRP AFTER ANALYSING THE ISSUE AT LENGTH WAS OF THE VIEW THAT THE REVENUE OF RS.3.01 CRORES REPORTED AS RECEIPT IN THE SUBSEQUENT YEAR SHOULD BE TAKEN AS OPERATING REVENUE FOR ASSESSMENT YEAR 2008 - 09 . THIS PLEA OF THE ASSESSEE WAS ACCEPTED BY THE DRP ON ACCOUNT OF MATCHING PRINCIPLE. THE ASSESSING OFFICER WAS DIRECTED TO CONSIDER THE INCOME OF ITA NO. 2560 /PN/20 1 2 BAJAJ ALLIANZ GENERAL INSURANCE CO. LTD. 47 RS.3.01 CRORES AS INCOME OF ASSESSMENT YEAR 2008 - 09 AND THE ASSESSING OFFICER WAS ALSO DIRECTED TO GIVE THE RELIEF OF SAME AMOUNT IN ASSESSMENT YEAR 2009 - 10 AS INCOME OF ASSESSMENT YEAR 2008 - 09, IN ADDITION TO RS.27,91,816/ - ALREADY SHOWN BY THE ASSESSEE FROM BUSINESS. IT WAS FURTHER CLARIFIED BY THE DRP THAT THE TRANSFER PRICING ADJUSTMENT AS MADE BY THE TPO WAS DELETED. IT WAS ALSO FURTHER HELD BY THE DRP THAT THE SAID DECISION DOES NOT LEAD TO INCREASE THE ASSESSEES INCOME AND THE SAID INCOME WAS ONLY RE - ADJUSTED ACCORDING TO THE MATCHING PRINCIPLE AS ARGUED BY THE ASSESSEE. IT WAS FURTHER POINTED OUT THAT SINCE THE ADJUSTMENT DOES NOT ENHANCE THE ASSESSEES INCOME, NO ENHANCEMENT NOTICE WAS ISSUED BY THE DRP. THE ASSESSING OFFICER WHI LE PASSING THE ASSESSMENT ORDER UNDER SECTION 143(3) R.W.S. 144C(13) OF THE ACT, NOTED THAT THE DRP WHILE DISPOSING OF THE OBJECTION NO.8 HAD DELETED THE ADDITION MADE BY THE ASSESSING OFFICER AT RS.94,58,807/ - AND AT THE SAME TIME, DIRECTED THE ASSESSING OFFICER TO CONSIDER RS.3.01 CRORES AS INCOME FROM SOFTWARE CHARGES IN ADDITION TO INCOME SOWN BY THE ASSESSEE. INCOME FROM SOFTWARE CHARGES IN ADDITION TO INCOME SOWN BY THE ASSESSEE. CONSEQUENTLY, INCOME FROM SOFTWARE CONSULTANCY CHARGES WAS ADDED IN THE HANDS OF THE ASSESSEE BY THE ASSESSING OFFICER, OBSERVING AS DIRECTED B Y DRP. THE ASSESSEE HAS OBJECTED TO THE AFORESAID ADDITION, WHERE THE ASSESSEE WAS FOLLOWING THE PROJECT COMPLETION METHOD AND THE REVENUE IN RESPECT OF THE SAID PROJECTS WAS RECOGNIZED BY THE ASSESSEE IN THE SUCCEEDING YEAR. THE FIRST ISSUE RAISED BY T HE ASSESSEE BEFORE US IS THAT ONCE THE TRANSACTION OF THE ASSESSEE WAS ACCEPTED TO BE AT ARMS LENGTH, NO FURTHER ADDITION WAS TO BE MADE IN THE HANDS OF THE ASSESSEE ON THIS ACCOUNT. IF THESE RECEIPTS OF RS.3.01 CRORES WERE TO BE ADDED AS INCOME IN THE H ANDS OF THE ASSESSEE, THEN IN THE ABSENCE OF ANY ENHANCEMENT NOTICE , NO ADDITION COULD BE MADE IN ITS HANDS. FROM THE PERUSAL OF THE ORDERS OF AUTHORITIES BELOW AND AFTER CONSIDERING THE FACTS AND CIRCUMSTANCES IN ENTIRETY, WE FIND THAT THE START POINT OF THE ISSUE WAS THE REFERENCE MADE TO THE TPO TO DETERMINE WHETH ER THE INTERNATIONAL TRANSACTIONS UNDERTAKEN BY THE ASSESSEE ITA NO. 2560 /PN/20 1 2 BAJAJ ALLIANZ GENERAL INSURANCE CO. LTD. 48 WERE AT ARMS LENGTH. THOUGH THE TPO FOUND THE SAID TRANSACTIONS TO BE NOT ARMS LENGTH, BEFORE THE DRP, SUBMISSIONS WERE MADE TO E XPLAIN THE NATURE OF THE TRANSACTION, THE TIME OF RECOGNITION OF REVENUE BY THE ASSESSEE BY FOLLOWING PROJECT COMPLETION METHOD AND CORRESPONDING ALLOWANCE OF COST AGAINST THEM. THE DRP ACCEPTED THE PLEA OF THE ASSESSEE THAT THE RECEIPTS OF RS.3.01 CRORES WHICH HAVE BEEN REPORTED AS INCOME IN THE SUBSEQUENT YEAR IF CONSIDERED AGAINST THE INTERNATIONAL TRANSACTIONS UNDERTAKEN BY THE ASSESSEE FOR THE CAPTIONED ASSESSMENT YEAR, THEN NO ADJUSTMENT IS TO BE MADE IN THE HANDS OF ASSESSEE ON ACCOUNT OF AFORESAID INTERNATIONAL TRANSACTIONS. THE SAID TRANSACTIONS WERE FOUND TO BE AT ARMS LENGTH . THE ISSUE BEFORE US IS WHETHER THE ASSESSING OFFICER WHILE GIVING EFFECT TO THE DIRECTIONS OF DRP, WHEREIN IT WAS HELD THAT THE INTERNATIONAL TRANSACTIONS UNDERTAKEN BY T HE ASSESSEE WAS AT ARMS LENGTH, CAN MAKE THE ADDITION ON ACCOUNT OF RECOGNITION OF REVENUE OF RS.3.01 CRORES AS INCOME FROM SOFTWARE CHARGES. ADMITTEDLY, IN CASE THE SAID RECEIPTS ARE TAXED IN THE HANDS OF ASSESSEE FOR ADMITTEDLY, IN CASE THE SAID RECEIPTS ARE TAXED IN THE HANDS OF ASSESSEE FOR THE YEAR UNDER CONSIDERATION, THERE IS ENHANCEMENT OF INCOME, FOR WHICH THE REQUIREMENT OF LAW IS THAT ENHANCEMENT NOTICE SHOULD BE ISSUED TO THE ASSESSEE BEFORE SUCH AN ADDITION IS MADE IN THE HANDS OF THE ASSESSEE . FURTHER, IN THE CASE OF THE ASSESSEE, NO SUCH ENHANCEMENT NOTICE WAS ISSU ED TO THE ASSESSEE EITHER BY DRP OR BY ASSESSING OFFICER. FURTHER, THE PLEA OF THE ASSESSEE OF RECOGNITION OF REVENUE OF RS.3.01 CRORES WAS IN RESPECT OF DETERMINATION OF ARM'S LENGTH PRICE OF INTERNATIONAL TRANSACTIONS AND THE SAME WAS RECOGNIZED FOR WOR KING OUT THE MARGINS OF THE ASSESSEE AS COMPARED TO THE MARGINS OF COMPARABLES. THE DRP HAS DIRECTED THE ASSESSING OFFICER NOT TO CONSIDER THE SAID REVENUE OF RS.3.01 CRORES AS RECEIPTS OF ASSESSMENT YEAR 2009 - 10 FOR THE PURPOSE OF TP ADJUSTMENT, IF ANY, TO BE MADE IN ASSESSMENT YEAR 2009 - 10 . THE SAID AMOUNT DOES NOT RESULT IN ADDITION OF RS.3.01 CRORES AS INCOME IN THE HANDS OF ASSESSEE FOR THE CAPTIONED ASSESSMENT YEAR. ACCORDINGLY, WE FIND NO MERIT IN THE ORDER OF ASSESSING OFFICER IN THIS REGARD ITA NO. 2560 /PN/20 1 2 BAJAJ ALLIANZ GENERAL INSURANCE CO. LTD. 49 AND THE ADDITION OF RS.3.01 CRORES IS DELETED. BEFORE PARTING WITH THE ISSUE, WE MAY ALSO MENTION THAT THE SAID RECEIPTS HAVE BEEN SHOWN AS PART OF THE INCOME OF ASSESSEE IN ASSESSMENT YEAR 2009 - 10. THE GROUND OF APPEAL NO.5 RAISED BY THE ASSESSEE IS THUS, A LLOW E D. 58. THE ISSUE IN GROUND OF APPEAL N O .6 RAISED BY THE ASSESSEE IS AGAINST THE CLAIM OF DEDUCTION IN RESPECT OF AMOUNT COLLECTED TOWARDS ENVIRONMENTAL RELIEF FUND OF RS. 74, 03,321/ - , WHICH WAS DISALLOWED UNDER SECTION 43B OF THE ACT. 59. THE LEARN ED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE AFTER TAKING US THROUGH THE FACTUAL ASPECTS OF THE CASE AND REFERRING TO THE PROVISIONS OF THE PUBLIC LIABILITY INSURANCE ACT, 1991 , POINTED OUT THAT THE SAID AMOUNT WAS NOT COLLECTED BY THE ASSESSEE AND WAS AL SO NOT THE LIABILITY OF THE ASSESSEE. FURTHER, RELIANCE WAS PLACED ON DIFFERENT DECISIONS OF BENCHES OF TRIBUNAL AND FURTHER, RELIANCE WAS PLACED ON DIFFERENT DECISIONS OF BENCHES OF TRIBUNAL AND ON THE RATIO LAID DOWN BY THE HONBLE DELHI HIGH COURT, WHICH WERE CONTR O V E RTED BY THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE . HOWEVER, WE FIND AN IDENTICAL ISSUE AROSE BEF ORE THE TRIBUN A L IN ASSESSEE S OWN CASE IN ASSESSMENT YEAR 2006 - 07 IN ITA NO.119/PN/2012 , ORDER DATED 06.05.2013 AND VI D E PARA 4.8 AT PAGES 17 AND 18 , THE MATTER WAS SET - ASIDE TO THE FILE OF ASSESSING OFFICER WITH A DIRECTION TO DECIDE THE ISSUE AFRESH AND IN ACCORDANCE WITH LAW. THE ISSUE ARISING BEFORE US IS IDENTICAL TO THE ISSUE BEFORE THE TRIBUNAL AND IN VIEW THEREOF, WE REMIT THIS ISSUE BACK TO THE FILE OF ASSESSING OFFICER TO DECIDE THE SAME IN LINE WI TH THE DIRECTIONS OF THE TRIBUNAL IN EARLIER YEAR AFTER AFFORDING REASONABLE OPPORTUNITY OF THE HEARING TO THE ASSESSEE. THE GROUND OF APPEAL NO.6 RAISED BY THE ASSESSEE IS THUS, ALLOWED FOR STATISTICAL PURPOSES. ITA NO. 2560 /PN/20 1 2 BAJAJ ALLIANZ GENERAL INSURANCE CO. LTD. 50 60. THE GROUND OF APPEAL NO.7 RAISED BY THE ASSESSEE IS IN RESPECT OF DISALLOWANCE UNDER SECTION 40(A)(I) OF THE ACT ON ACCOUNT OF SURVEYORS FEES OF RS.60,167/ - , WHICH WAS UPHELD BY THE DRP AS AGAINST HIGHER DISALLOWANCE MADE BY THE ASSESSING OFFICER, IS NOT PRESSED BY THE LEARNED AUTHORIZED REP RESENTATIVE FOR THE ASSESSEE AND HENCE, THE SAME IS DISMISSED AS NOT PRESSED, 61. WITH REGARD TO THE ISSUE IN GROU NDS OF APPEAL NO.8 AND 9 I.E. NON - GRANTING OF CREDIT FOR SELF ASSESSMENT TAX PAID BY THE ASSESSEE AT RS. 12,00,803/ - AND NON - CREDIT OF TDS ALL OWED AT RS.11,73,785/ - AS AGAINST THE CLAIM OF ASSESSEE IN THE RETURN OF INCOME AT RS. 18,53,689/ - , THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT THE ASSESSEE HAS MADE AN APPLICATION FOR RECTIFICATION UNDER SECTION 154 OF THE ACT, WHICH TILL DATE HAS NOT BEEN DISPOSE D OF. ACCORDINGLY, WE DIRECT THE ASSESSING OFFICER TO DATE HAS NOT BEEN DISPOSE D OF. ACCORDINGLY, WE DIRECT THE ASSESSING OFFICER TO ALLOW THE CLAIM OF THE ASSESSEE IN ACCORDANCE WITH LAW AFTER VERIFYING THE CLAIM OF THE ASSESSEE WHILE COMPUTING INCOME AND TAX PAYABLE THEREON , PURSUANT TO THE ORDE R OF TRIBUNAL . THE GROUNDS OF APPEAL RAISED BY THE ASSESSEE ARE THUS, ALLOWED. 6 2 . IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALLOWED. ORDER P RONOUNCED ON THIS 3 RD DAY OF FEBRUARY , 201 6 . SD/ - SD/ - ( R.K. PANDA ) ( SUSHMA CHOWLA ) / ACCOUNTANT MEMBER / JUDICIAL MEMBER / PUNE ; DATED : 3 RD FEBRUARY , 201 6 . GCVSR ITA NO. 2560 /PN/20 1 2 BAJAJ ALLIANZ GENERAL INSURANCE CO. LTD. 51 / COPY OF THE ORDER IS FORWARDED TO : 1. THE APPELLANT ; 2. THE RESPONDENT; 3. THE DIT (INTL. TAXATION), PUNE ; 4. THE DRP , PUNE ; 5. THE DR A , ITAT, PUNE; 6. GUARD FILE . / BY ORDER , // // TR UE COPY // / SR. PRIVATE SECRETARY , / ITAT, PUNE RUE COPY//