M/s, Essilor India Pvt Ltd, Bengaluru V. Deputy Commissioner of Income Tax, Circle-2(1)(2), Bengaluru

ITA 2905/BANG/2017

• Counselvise Citation: [2020] 111 COUNSELVISE.COM (IT) 6989 (ITAT-BANGALORE)
• Duration Of Justice: 2 year(s) 1 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-02-2020
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Next Hearing Date: 27-01-2020
• Assessment Year: 2013-2014
• Appeal Filed On: 28-12-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: S RAMASUBRAMANIAN
• Keywords: Gift; Transfer pricing; Opportunity of being heard; International transaction; Earning of tax free income; Retrospective amendment; Wholly owned subsidiary; Tangible material; Corroborative evidences; Revenue expenditure; Capital expenditure; TDS; Rule 8D; Set aside
• Section: 43B; 143(3); 92B; 14A; 37(1); 64; 13; 22; 6

Judgement Text

IT(TP)A NO190,176(B)/2014 & C.O NO.39(B)/2016 IN IT(TP)A NO190(B) /2014. 1 IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCHES : C , BANGALORE BEFORE SHRI N.V.V A SUDEVAN, VICE PRESIDENT AND SHRI B.R.BASKARAN , ACCOUNTANT MEMBER SL. NO. IT(TP)A NO S . ASS T. YEAR APPELLANT RESPONDENT 1 NO. 2905 (B)/201 7 20 13 - 14 M/S ESSILOR INDIA PVT.LTD., NO.71/1, BRIGADE PLAZA, 6 TH FLOOR, SC ROAD, GANDHINAGAR BANGALORE - 560 00 9 PANNO.AAAGE4623J DCIT, CIRCLE - 2(1)(2), BANGALORE 2 3328(B) /201 8 2014 - 15 - DO - ACIT . CIRCLE - 2(1)(3), BANGALORE 3 358(B)/2017 2012 - 13 - DO - DCIT, CIRCLE - 3(1)(2) , BANGALORE 4 542(B)/2016 2011 - 12 - DO - - DO - 5 551(B)/2016 2011 - 12 DCIT, CIRCLE - 2(1)(2), BANGALORE M/S ESSILOR INDIA PVT.LTD.,NO.71/1, BRIGADE PLAZA, 6 TH FLOOR, SC ROAD, GANDHINAGAR BANGALORE - 560 00 9 PANNO.AAAGE4623J APPELLANT BY : SHRI S. RAMASUBRAMANIAN, CA REVENUE BY : SHRI PRADEEP KUMAR, CIT DATE OF HEARING : 2 7 - 0 1 - 20 20 DATE OF PRONOUNCEMENT : 06 - 02 - 2020 IT(TP)A NO190,176(B)/2014 & C.O NO.39(B)/2016 IN IT(TP)A NO190(B) /2014. 2 O R D E R PE R SHRI N.V.VASUDEVAN, VICE PRESIDENT : A PPEAL IN IT(TP)A NO.542(B)/2016 IS BY THE REVENUE AND IT(TP)A NO.54(B)/2016 IS BY THE ASSESSEE. BOTH THESE APPEALS ARE DIRECTED AGAINST THE FINAL ORDER OF ASSESSMENT DATED 29 - 01 - 2016 PASSED BY THE DCIT, CIRCLE2(1)(2), BANGALORE U/S 143(3) R.W.S.144C OF THE I NCOME TAX ACT, 1961 ( ACT ) IN RELATION TO ASSESSMENT YEAR 2011 - 12. IT ( TP) N O .358(B)/2017 IS AN APPEAL BY THE ASSESSEE AGAINST THE FINAL ORDER OF ASSESSMENT DATED 20 - 01 - 2017 PASSED BY THE ACIT, CIRCLE - 2(1)(2), B A NGALORE U/S 143(3) R.W.S.144C OF THE ACT IN REL A TION TO ASSESSMENT YEAR 2012 - 13. IT(TP)A NO.2905(B)/2017 IS AN APPEAL BY THE ASSESSEE A GAINST THE FINAL ASSESSMENT ORDER DATE D 06 - 10 - 2017 PASSED BY THE ACIT, CIRCLE - 2(1)(1), BANGALORE, U/S.143(3) READ WITH SEC.144C OF THE ACT RELATING TO ASSESSMENT YEAR 2013 - 14. IT(TP)A N O .3328(B)/2018 IS AN APPEAL BY THE ASSESSEE AGAINST THE FINAL ASSESSMENT OR D ER DATED 30 - 08 - 2018 PASSED BY THE ACIT, CIRCLE - 2(1)(1), BANGALORE U/S.143(3) READ WITH SEC.144C OF THE ACT, RELATING TO ASSESSMENT YEAR 2014 - 15. 2. IN ALL T HESE APPEAL COMMON IS S UES ARISE FOR CONSIDERATION UNDER IDENTICAL FACTS AND CIRCUMST AN CES. THESE APPEALS WERE HEARD T OGETHER AND WE DEEM IT CONVENIENT TO PASS A COMMON OR D ER. IT(TP)A NO190,176(B)/2014 & C.O NO.39(B)/2016 IN IT(TP)A NO190(B) /2014. 3 3. THE FIRST COMMON ISSUE THAT A RISE S FOR CONSIDERATION IN TH E APPEAL S BY THE ASSESSEE FOR AY 2012 - 13 TO 2014 - 15 AND THE APPEAL BY THE REVENUE IN AY 2010 - 11 IS TH E ADDITION MADE IN THE TOTAL INCOME OF THE AS SESSEE BY THE REV ENUE AUTHORITIES , CONSEQUENT TO THE CONCLUSION OF REVENUE AUTHORITIES THAT THE A DVERTISING A ND M ARKET P ROMOTION EXPEN DITURE ( A MP EXPENDITURE) INCURRED BY THE ASSESSEE WAS TO PROMOTE THE BRAND NAM E OF FOREIGN ASSOCIATED ENTERPRISE (AE) AND THEREFORE, TO THE EXTENT THE EXPENSES SO PROMOTED T HE BRAND NAME OF THE AE THERE WAS AN INTERNATION AL TRANSACTION A ND TH E ARMS LENGTH PRICE ( ALP ) OF THE SA ID TRANSACTION HAD TO BE DETERMINED AND ADDITION M A DE TO T H E TOT A L INCOME OF THE ASSESSEE BY A DDING A M A RK - UP ON SUCH EXPENSE . INDIAN COMPANIES WHICH ARE SUBSIDIARIES OF MULTI NATIONAL CORPORATION ACT AS DISTRIBUTOR/PROVIDER OF GOODS/SERVICES TO THEIR PARENT COMPANIES. THEY INCUR AMP EXPENSES FOR THE PROMOTION OF ITS PRODUCTS OR SERVICES. THE INDIAN SUBSIDIARY CONTEND THAT THE AMP EXPENSE IS INCURRED NECESSARILY FOR THE PURPOSE OF SELLING ITS PRODUCTS/SERVICES IN THE INDIAN MARKET. THE REVENUE HOWEVER IS OF THE VIEW THAT SUCH EXPENSES PROMOTE THE BRAND OF THE FOREIGN ASSOCIATED ENTERPRISE (AE) IN INDIA AND RESULTANTLY THE EXPENSES BENEFIT THE FOREIGN AE AND RESULTS IN CREATION OF MARKETING INTANGIBLES WHICH BELONG TO THE AE AND APPROPRIATE COMPENSATION FOR SUCH ADVERTISEMENT AND BRAND PROMOTION EXPENSES WAS R EQUIRED TO BE MADE BY THE FOREIGN AE. THE REVENUE HAS BEEN APPLYING THE BRIGHT LINE TEST WHEREBY EXPENDITURE ON ADVERTISEMENT AND BRAND PROMOTION EXPENSES WHICH EXCEED THE AVERAGE OF AMP EXPENSES INCURRED BY THE COMPARABLE COMPANIES IN INDIA, IS REQUIRE D TO BE REIMBURSED/ COMPENSATED BY THE OVERSEAS ASSOCIATED ENTERPRISE. IT IS THE STAND OF THE REVENUE THAT THE EXCESS AMP EXPENDITURE INCURRED BY THE INDIAN AE CONTRIBUTES TOWARDS THE DEVELOPMENT AND ENHANCEMENT OF THE BRAND OWNED BY THE PARENT OF THE MULT INATIONAL GROUP (THE FOREIGN AE). 4. IN ASSESSMENT YEAR 2011 - 12 THE ISSUE ARISE S FOR CONSIDERATION IN ASSESSEES CASE UNDER THE FOLLOWING FACTS AND CIRCUM S T A NCES. THE ASSESSEE IS IT(TP)A NO190,176(B)/2014 & C.O NO.39(B)/2016 IN IT(TP)A NO190(B) /2014. 4 ENGAGED IN THE BUSINESS OF BUYING AND SELLING OF OPHTHALMIC LENSES AND I T ALSO PROCES S LENSES . T HE ASSES S EE IS A WHOLLY OWNED SUBSIDIARY OF M/S ESSILOR INTERNATION AL SA, FRANC E AND WAS THEREFORE AN ASSOCIATED ENTERPRISE(AE). THERE IS NO D ISPUTE THAT IN SO FAR AS THE BUSINESS OF TRADING IN OPHTHALMIC LENSES OF THE AE PRODUCT BY THE ASSESSEE IN INDIA IT W A S AN INT E RNATION AL TRANSACTION. AS PER THE PROVISIONS OF SEC.92 OF THE ACT, INCOME FROM SUCH TRANSACTIONS HAD TO BE DETERMINED HAVING REGARD TO ALP. THE TRANSFER PRICING OFFICER (TP O )/ASSESSING OFFICER (AO ) ACCEPTED THE PURCHASE PRICE FROM THE AE TO BE AT ARM S LENGTH (ALP) . IN THE COURSE OF PROCEEDINGS BEFORE THE TPO, TH E TPO NOTICED THAT THE ASSESSEE HAD INCURRED EXPENDITURE ON ACCOUNT O F ADVERTISEMENT AND SALES PROMOTION TO THE TUNE OF RS. 21,47,74,504/ - WHICH WAS ABOUT 10.12% OF IT S R E VENUE OF RS.212 ,2 9 , 27,069/ - . HE WAS OF THE VIEW THAT INCURRING OF SUCH HIGH QUANTUM OF EXPENDITURE COMPARED TO OTHER TRADE R S IN OPHTHALMIC LENSES WAS UNUSUAL . THE TPO FOUND THAT O NE C OMPANY BY NAME M/S TECHTRAN POLYLENSES LTD., WHICH WAS ALSO IN THE BUSINESS OF TRADING IN LENSES, HAD INCURRED ONLY 1.93% OF ITS TURNOVER AS SALES PROMOTION AND ADVERTISEMENT EXPENDITURE. THE TPO WAS OF THE VIEW THAT THE ASSESSEE HAD INCURRED HIGHER AMP EXPENDITURE BY 8.19% COMPARED TO M/S TE CHTRAN POLYLENSES LTD. ACCORDING TO THE TPO THE ASSESSEE OUGHT TO HAVE GOT REIMBURSEMENT OF EXPENDITURE FROM ITS AE FOR PROMOTING ITS BRAND AND ALSO PERCENTAGE OF SUCH EXCESS EXPENDITURE AS REMUNERATION FOR ITS SERVICES IN PROMOTING THE BRAND NAME OF THE AE. THE TPO ISSUED SHOW CAUSE NOTICE TO THE ASSESSEE . 5. IN REPLY TO THE ABOVE SHOW CAUSE NOTICE, THE ASSESSEE POINTED OUT THAT THE ADVERTISEMENT AND SALES PROMOTION EXPENSES DEBITED IN THE P ROFIT &L OSS ACCOUNT INCLUDE D SELLING EXPENSES ALSO AND THE ADVERTISEMENT, AND MARKETING EXP ENSES WAS ONLY 18,37,38,482/ - . THE ASSESSEE SUBMITTED THAT THE EXPENSES SO INCURRED DID NOT PROMOTE ANY BRAND OF THE AE AND WERE PURELY TO IT(TP)A NO190,176(B)/2014 & C.O NO.39(B)/2016 IN IT(TP)A NO190(B) /2014. 5 ENABLE THE ASSESSEE TO SELL PRODUCTS. THE ASSESSEE G AVE THE DETAILS OF THE EXPENSES AND PLEADED THAT THERE IS NO INTERNATIONAL TRANSACTION AND THERE IS NO QUESTION OF INVOKING THE PR OVISIONS OF SEC.92 OF THE ACT. THE ASSESSEE ALSO G AVE SUBMISSIONS WITH REGARD TO THE ME R ITS OF THE ADDITION PROPOSED BY THE TP O AND THE METHOD OF COMPUTATION OF ALP . THE TPO HOWEVER, REJECTED THE CONTENTION OF THE ASSESSEE AND GAVE HIS CONCLUSION AS TO WHY HE CONSIDERS THE EXPENSES INCURRED BY THE ASSESSEE TO BE EXPENSES TO PROM OTE THE BRAND OF THE FOREIGN AE, A S FOLLOWS; 8.1 EXAMINATION OF EXPENSES INCURRED UNDER THE HEAD ADVERTISEMENT AND MARKET PROMOTION EXPENDITURE AND IDENTIFICATION OF AMOUNT OF AMP EXPENDITURE. 9.1.1. THE TAX P A YER HA S FURNISHED THE DETAILS OF CLASSIFICATION OF EXP E NSES INCURRED UNDER ADVERTISEMENT AND MARKET PROMOTION EXPENDITURE VIDE REPLY DATED 05 - 12 - 2014. THE TPOS COMMENTS AGAINST THE EXPENSES ARE GIVEN BELOW : PARTICULARS AMOU NT IN RS. TPO'S COMMENTS TARGETED AT TRADE (SELLING EXPENSES) CONVENTION 13,147,739 NO ENTITY WHO IS JUST A BUYER AND SELLER OF PRODUCTS WOULD INCUR SUCH EXPENDITURE TO ORGANISE CONVENTIONS. THE TAXPAYER HAS NOT FURNISHED ANY SUPPORTING DETAILS NOT HAS GIVE ANY JUSTIFICATION FOR INCURRING SUCH EXPENDITURE.THEREFORE, THE TP O IS OF THE VIEW THAT SUCH EXPENDITURE CANNOT BE CONSIDERED TO BE OF THE NATURE OF SELLING EXPENSES AND HAS BEEN INCURRED BY THE TAXPAYER FOR ADVERTISEMENT AND MARKET P ROMOTION. CO - OPERATIVE ADVERTISEMENT 11,054,200 ACCEPTED AS SELLING EXPENSES. IT(TP)A NO190,176(B)/2014 & C.O NO.39(B)/2016 IN IT(TP)A NO190(B) /2014. 6 ENTERTAINMENT 556,301 NO ENTITY WHO IS JUST A BUYER AND SELLER OF PRODUCTS WOULD INCUR SUCH EXPENDITURE TO ORGANISE CONVENTIONS. THE TAXPAYER HAS NOT FURNISHED ANY SUPPORTING DETAILS NOT HAS GIVE ANY JUSTIFICATION FOR INCURRING SUCH EXPENDITURE. THEREFORE, THE TPO IS OF THE VIEW THAT SUCH EXPENDITURE CANNOT BE CONSIDERED TO BE OF THE NATURE OF SELLING EXPENSES AND HAS BEEN INCURRED BY THE TAXPAYER FOR ADVERTISEMENT AND MARKET PROMOTION. LOYALTY PROGRAMME FOR OPTICIANS 46,222,084 THE TAXPAYER HAS NOT FURNISHED ANY SUPPORTING EVIDENCES, BREAKUP OF THE HEADS OF EXPENSES A THEIR EXACT NATURE. THE TAXPAYER HAS ALSO NOT JUSTIFIED THE INCURRING OF SUCH EXPENDITURE WHEN IT IS MAINLY A TRADER. AT PARA 2.0 OF THE TP DOCUMENT, IT IS CLEARLY STATED THAT THE TAXPAYER IS ENGAGED IN BUYING AND SELLING OF LENSES. NO SIMPLE TRADER WOULD INCUR SUCH HUGE EXPENDITURE TO ORGANIZE LOYALTY PROGRAMME FOR OPTICIANS WHEN IT IS ONLY SELLING THE LENSES MANUFACTURED BY A DIFFERENT PARTY. TH EREFORE, THE TPO IS OF THE VIEW THAT SUC H EXPENDITURE CANNOT BE CONSIDERED TO BE OF THE NATURE OF SELLING EXPENSES AND HAS BEEN INCURRED BY THE TAXPAYE R FOR ADVERTISEMENT AND MARKET PROMOTION. IT(TP)A NO190,176(B)/2014 & C.O NO.39(B)/2016 IN IT(TP)A NO190(B) /2014. 7 MERCHANDISING AT OPTICIAN OUTLETS 24,632,655 NO ENTITY WHO IS JUST A BUYER AND SELLER OF PRODUCTS WOULD INCUR SUCH EXPENDITURE TO ORGANISE CONVENTIONS. THE TAXPAYER HAS NOT FURNISHED ANY SUPPORTING DETAILS NOT HAS GIVE ANY JUSTIFICATION FOR INCURRING SUCH EXPENDITURE. THEREFORE, THE TPO IS OF THE . VIEW THAT SUCH EXPENDITURE CANNOT BE CONSIDERED TO BE OF THE NATURE OF SELLING EXPENSES AND HAS BEEN INCURRED BY THE TAXPAYER FOR ADVERTISEMENT AND MARKET PROMOTION. PRODUCT TRAINING EXPENSES 686,125 ACCEPTED AS SELLING EXPENSES. NEW PRODUCT LAUNCH EXPENSES - C _ ENSES 4,964,739 ACCEPTED AS SELLING EXPENSES. OPTICIANS 2,858,420 ACCEPTED AS SELLING EXPENSES. OTHERS 246,678 ACCEPTED AS SELLING EXPENSES. WARRANTY REPLACEMENTS 6,860,385 ACCEPTED AS SELLING EXPENSES. EXIBITION 1,680,498 ACCEPTED AS SELLING EXPENSES. SEMINAR & CONFERENCE EXPENSES 2,118,554 ACCEPTED AS SELLING EXPENSES. GIFT 565,974 ACCEPTED AS SELLING EXPENSES. TOTAL 84,558,779 THEREFORE, EXPENDITURE OF RS. 84,558,779 AS ABOVE, IS CONSIDERED TO BE AMP EXPENDITURE AND NOT SELLING EX PEN EEX EXPENDITURE BY THE TPO. TARGETED AT CONSUMERS ADVERTISEMENT IN TV 96,103,376 PRODUCT AWARENESS 1,038,583 BRAND AMBASSADOR FOR PRODUCTS 1,978,182 CALL CENTRE 59,562 IT(TP)A NO190,176(B)/2014 & C.O NO.39(B)/2016 IN IT(TP)A NO190(B) /2014. 8 TOTAL 99,179,703 THESE ARE ALSO EXPENSES INCURRED FOR ADVERTISEMENT AND MARKET PROMOTION. TOTAL EXPENDITURE ON ACCOUNT OF ADVERTISEMENT AND MARKET P ROMOTION AS PER THE TPO AFTER CONSIDERING THE TAXPAYER'S SUBMISSION (RS.84,558,779+99,179,703) 183,738,482 8.1.2 THEREFORE, LOOKING INTO THE NATURE OF EXPENSES INCURRED BY THE TAXPAYER, THE TPO HAS IDENTIFIED AN AMOUNT OF RS. 183,738,482/ - AS AMP EXPENDITURE AS AGAINST RS. 214,774,054/ - DEBITED UNDER THIS CLASSIFICATION OF EXPENSES IN THE AUDITED FINANCIALS OF THE T AXPAYER. THE BALANCE EXPENDITURE BEING OF THE NATURE OF SELLING EXPENSES. 8.2 THEREFORE, EXCESS EXPENDITURE INCURRED BY THE TAXPAYER OVER THE BRIGHTLINE OF SUCH EXPENDITURE IS COMPUTED BY THE TPO AS UNDER: AMP EXPENSES 183,738,482 TOTAL REVENUE 2,175,415,877 AMP/ OR 8.45% SPA/S ALES OF THE T A X PAYE R (A) 8.45% 8.45% SPA/SALES OF THE COMPARABLE (B) 1.93% 1.93% EXCESS SPA EXPENSES AFTER APPLICATION OF BRIGHT LINE (C) 6.52% 6.52% EXCESS SPA EXPENSES AFTER APPLICATION OF BRIGHT LINE (C ) 6.52% 6.52% EXCESS EXPENDITURE INCURRED BY TAXPAYER AFTER BRIGHT LINE (D) 2,175,415,877 *6.52 % 141,837,115 EXPENSE INCURRED FOR AE'S BRAND PROMOTION (E)=(D) 141,837,115 PRICE RECEIVED (F) NIL NIL ADJUSTMENT U/S 92CA (G)=(E - F) 141,837,115 6. THE TPO FINALLY COMPUTED TH E ALP AND THE ADJUSTMENT TO BE MADE TO THE TOTAL INCOME AS FOLLOWS; IT(TP)A NO190,176(B)/2014 & C.O NO.39(B)/2016 IN IT(TP)A NO190(B) /2014. 9 8.13 . TH EREFORE, THE ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTION OF BRAND PROMOTION SERVICES RENDERED BY THE TAXPAYER TO ITS AE IS CONSIDERED TPO BE AT RS.141,837,115/ - WHICH IS THE EXCESS AMP EXPENDITURE INCURRED BY THE TAXPAYER OVER THE BRIGHTLINE AS D ISCUSSED ABOVE. ACCORDINGLY, THE TRANSFER PRICING ADJUSTMENT IN THE C A SE OF THE TAXPAYER IS COMPUTED AS UNDER; 9. COMPUTATION OF ALP & TRANSFER PRICING ADJUSTMENT A PARTICULARS AMOUNT (RS.) EXCESS AMP EXPENSES INCURRED BY THE TAXPAYER FOR PROMOTION OF BR A ND ON BEHALF OF AE. R S.141,837,115/ - ARMS LENGTH PRICE RS.141,837,115/ - REIMBURSEMENT RECEIVED FOR AMP EXPENSES INCURRED FOR BRAND PROMOTION OF AES PRODUCTS NIL SHORTFALL BEING ADJUSTMENT U/S 92CA RS. 141,837,115/ - COMPARABLE (M/S TECHTRAN POLYLENSES LIMITED) PROFIT MARGIN WITH ADVERTISEMENT & SELLING EXPENSES (ASE) 7.61% COMPARABLE (M/S TECHTRAN POLYLENSES LIMITED) PROFIT MARGIN WITHOUT ADVERTISEMENT & SELLING EXPENSES (B) 18.24% ASE DIFFERENCE IN MARGIN (C )= (B - A_ 10.63% VALUE OF SALES PROMOTION AND ADVERTISEMENT EXPENDITURE BY TAXPAYER FOR AE(D) 141,837,115 MARK UP@ 10.63%(E) =(C ) X (D) 15,077,285 TOTAL ADJUSTMENT AMOUNT (RS. SHORTFALL BEING ADJUSTMENT U/S 92CA 141,837,115 MARK - UP THEREON 15,077,285 TOTAL ADJUSTMENT 156,914,400 7. T HE ASSESSEE FILED OBJECTIONS B E FORE THE DRP AGAINST THE AFORESAID PROPOSAL OF THE TP O WHICH WAS INCORPORATED BY TH E AO IN THE DRAFT ORDER OF ASSESSMENT . THE DRP D E LETED THE ADDITION MADE BY THE O BY RENDERING THE CONCLUSION THAT THE INCURRING OF MARKETING AND ADVERTISEMENT EXPENSES WAS NOT AN INTERNATIONAL TRANSACTION. IN DOING SO, T H E DRP FOLLOWED THE DECISION OF IT(TP)A NO190,176(B)/2014 & C.O NO.39(B)/2016 IN IT(TP)A NO190(B) /2014. 10 THE HONBLE DELHI HIGH COURT IN THE CA SE OF M/S MAR UTI SUZUKI INDIA LTD VS CIT 381 ITR 117(DEL.) AND ALSO IN THE CASE OF M/S SONY ERICSSON MOBILE COMMUNICATIONS PVT.LTD. VS CIT 374 ITR 118(DEL.) . THE DRP HOWEVER HELD THAT A SUM OF RS.9.91 CRORES WHICH WAS INCURRED ON MEDIA ADVERTISEMET AND BRAND AMBASSAD ORS ARE IN THE NATURE OF CAPITAL EXPENDITURE WHICH RESULT IN ENDURING BENEFIT IN THE FORM OF CREATING THE BRAND OF THE ASSESSEE AND THEREFORE IT CANNOT BE ALLOWED AS REVENUE EXPENDITURE. TO THIS EXTENT THE DRP DIRECTED THE AO TO DISALLOW EXPENDITURE AND A DD THE SAME TO THE TOTAL INCOME OF THE ASSESSEE. 8. AGGRIEVED BY THE AFORESAID DECISION OF THE DRP WH I CH WAS INCORPORATED IN THE FINAL ORDER OF ASSESSMENT, THE REVENUE HAS PREFERRED THE APPEAL BEFORE THIS TRIBUNAL RAISING FOLLOWING GROUNDS OF APPEAL; 1.THE HON'BLE DRP HAS ERRED ON FACTS AND LAW, IN HOLDING THAT AMP EXPENSES IS NOT COVERED UNDER THE DEFINITION OF UNDER THE INTERNATIONAL TRANSACTIONS WHEN AS PER THE AMENDED PROVISIONS OF SECTION 92B(1),MERE FACT THAT SERVICE OR BENEFIT HAS BEEN PROVIDED BY ONE PARTY TO THE OTHER WOULD BY ITSELF CONSTITUTE A TRANSACTION IRRESPECTIVE OF WHETHER CONSIDERATION FOR THE SAME HAS BEEN PAID OR REMAINS PAYABLE OR WHETHER THERE IS A MUTUAL AGREEMENT OR NOT TO CHARGE ANY COMPENSATION FOR SUCH SERVICE OR BENEFIT AND THEREBY, AMP EXPENSES CONSTITUTE AN INTERNATIONAL TRANSACTION. 2.ON THE FACTS AND CIRCUMSTANCE OF THE CASE AND IN LAW THE HON'BLE DRP ERRED IN NOT APPRECIATING THAT AS PER INDIAN TRANSFER PRICING LEGISLATION COMPENSATION FOR THE FUNCTION PERFORMED [AMP SE RVICES RENDERED TO THE A.E.S IN THESE CASES] NEEDS TO BE BENCHMARKED SEPARATELY. 3.IN THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW THE HON'BLE DRP HAS ERRED IN EXAMINING THE APPROPRIATENESS OF AMP EXPENDITURE ONLY FROM THE VIEW POINT OF ITS ROLE IN CREATION/BUILDING OF BRAND/BRAND AWARENESS AND NOT EXAMINING ITS ROLE FROM THE VIEW POINT OF CREATION OF MARKETING INTANGIBLES AS A WHOLE. 4.IN THE F ACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW THE HON'BLE DRP HAS ERRED IN CITING PARA'S 6.36 TO 6.39 OF THE OECD TRANSFER IT(TP)A NO190,176(B)/2014 & C.O NO.39(B)/2016 IN IT(TP)A NO190(B) /2014. 11 PRICING GUIDELINES TO CONCLUDE THAT THE INTERNATIONAL JURISPRUDENCE DOES NOT RECOGNIZE THE 'BRIGHT LINE TEST' WHEN THE PARAGRAPHS, AC TUALLY RECOGNIZE THE FACT OF REMUNERATION BEING PAYABLE WHERE AN ENTITY CARRIES OUT SIGNIFICANT MARKETING ACTIVITIES WHEN THE LEGAL OWNER OF THE BRAND IS ANOTHER ENTITY WITHOUT MENTIONING 'BRIGHT LINE TEST AS SUCH'. 5.UNDER THE FACTS AND CIRCUMSTANCES OF T HE CASE AND IN LAW THE HON'BLE DRP HAS ERRED IN NOT APPRECIATING THAT FACT THAT BRIGHT LINE IS A MERE STEP [OF THE MOST APPROPRIATE METHOD FOR BENCHMARKING THE AMP SERVICES] CARRIED OUT TO BIFURCATE EXPENDITURE PERTAINING TO THE TAXPAYER FOR ITS OWN ROUTIN E DISTRIBUTION FUNCTION AND THE EXPENDITURE INCURRED ON AMP SERVICE PROVIDED TO THE AE - IN A SITUATION WHERE THE ASSESSEE HAS NOT REPORTED THE INTERNATIONAL TRANSACTION PERTAINING TO MARKETING FUNCTION . 9. AGGRIEVED BY THE ORDER OF THE DRP HOLDING THAT OUT OF THE AMP EXPENDITURE A SUM OF RS.9.91 CRORES WHICH WAS INCURRED ON MEDIA ADVERTISEME N T AND BRAND AMBASSADORS ARE IN THE NATURE OF CAPITAL EXPENDITURE WHICH RESULT IN ENDURING BENEFIT IN THE FORM OF CREATING THE BRAND OF THE ASSESSEE AND THEREFORE IT CANNOT BE ALLOWED AS REVENUE EXPENDITURE, THE ASSESSEE HAS PREFERRED APPEAL AND IN ASSESSEES APPEAL GR.NO.2 TO 4 DEAL WITH THIS ASPECT OF THE GRIEVANCE OF THE REVENUE. IT IS THE PLEA OF THE ASSESSEE IN GR.NO.4 THAT THE DRP DID NOT CONFRONT THE ASSESSEE W ITH ITS DECISION TO DISALLOW RS.9.91CRORES OUT OF AMP EXPENSES AS CAPITAL EXPENDITURE AND DID NOT ALLOW OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. 10. SO FAR AS IN ASSESSMENT YEAR 2012 - 13, 2013 - 14 AND 2014 - 15 SIMILAR ADDITION WAS MADE BY THE TPO IN TH ESE ASSESSMENT YEARS. THE DRP HOWEVER, CONFIRMED THE ORDERS OF THE TPO IN ALL THESE ASSESSMENT YEARS. IT MAY ALSO BE MENTIONED THAT IN ASSESSMENT YEAR 2013 - 14 , THE TPO WAS APPRISED O F THE FACT THAT ON IDENTICAL ISSUE THE HONBLE ITAT IN ASSES S EES OWN CAS E FOR ASSESSMENT YEAR 2009 - 10 AND 2011 - 12 IN IT(TP)A NO.29/B/2014 & IT(TP)A NO190,176(B)/2014 & C.O NO.39(B)/2016 IN IT(TP)A NO190(B) /2014. 12 227/B/2015 UPHELD THE ORD E R OF DRP IN THOSE YEARS , WH EREBY IT WAS HELD THAT INCURRING OF ADVER TISEMENT AND MARKETING EXPENSES IS NOT IN THE NATURE OF INTERNATIONAL TRANSACTION AND THERE CANNOT BE ANY DETERMINATION OF ARMS LENGTH PRICE IN RESPECT OF THOSE TRANSACTION BUT T HE DRP HOWEVER, DID NOT AGREE WITH THE CLAIM OF THE ASSESSEE. FOR THE ASSESSMENT YEAR 2013 - 14, THE TPO GAV E THE FOLLOWING REASONS A S TO WHY THE ADDITION MADE BY THE AO ON ACCOUNT OF AMP EXPENSES SHOULD BE UPH E LD. 1. THE ORDER OF ITAT FOR ASSESSMENT YEAR 2009 - 10 AND 2010 - 11 HAS NOT BEEN ACCEPTED BY THE REVENUE A ND AN APPEAL TO THE HONBLE HIGH COURT IS BEING PREFERRED. 2.THE DECISION OF THE H O N BLE D E LHI H IG H COURT IN THE CASE OF M/S MARUTI SUZUKI INDIA LTD.(SUPRA) AND ALSO IN THE CASE OF M/S SONY ERICSSON MOBILE COMMUNICATION (SUPRA) 276 CTR 97 WERE THE DECISIONS O F THE HONBLE DELHI H IGH COURT AND NOT THAT OF THE JURISDICTIONAL HIGH COURT. 3. THE DRP QUOTED CLAUSES FROM THE DISTRIBUTION AND MARKETING AGREEMENT BETWEEN THE ASSESSEE AND M/S CHEMIGLAS CORPORATION LTD. KOREA TO COME TO THE CONCLUSION THAT THE ASSESSEE AS A DISTRIBUTOR BY INCURRING ADVERTISEMENT AND SALES PROMOTION SERVES THE INTEREST OF THE FOREIGN AE. 4. ANY ARRANGEMENT BETWEEN TWO OR MORE AE FOR ALLOCATION OR APPORTIONMENT OR ANY CONTRIBUTION TO OR ANY COST OR EXPENSE INCURRED TO BE INCURRED WOULD ALSO BE AN INTERNATIONAL TRANSACTION WITHIN THE MEANING OF SEC.92B OF TH E ACT, AS PER THE AMEN D MENT MADE TO THOSE PROVISIONS BY THE FINANCE ACT 2012 WI TH RETROSPECTIVE EFFECT FROM 01 - 04 - 2002 5. A REFERENCE WAS MADE TO BASE EROSION AND PROFIT SPLITTING ( BEPS ) REPORTS ON ANALYZING CON D UCT OF A SSESSEE IN THE MATTER ON DETERMINATION O F ALP. ACCORDING TO TPO THERE WERE FIVE BRAND NAME OWNED BY THE ESSILOR INTERNATIONAL, THE FOREIGN AE NAMELY VARILUX, CRIZAL,LIBERTY UC, VARILUX ELLIPSE UC ETC. THERE WERE EXPENDITURES FOR THE ADVERTISEMENT OF THE AFORESAID NAMES BY THE ASSESSEE IN ELECTRONIC A ND PRINT MEDIA. IT(TP)A NO190,176(B)/2014 & C.O NO.39(B)/2016 IN IT(TP)A NO190(B) /2014. 13 6. THE ASSESSEE WAS ALSO A PARTY TO PRO CEEDINGS INITIATED BY M/S ESSILOR INTERNATIONAL FOR INFRINGEMENT OF TH E TRADE MARK AND TRADE NAME BY ESSILOR BY SOME THIRD PARTY. 7. THE ASSESEE HAD DISTRIBUTION AGREEMENT WITH 338 OPTOMETRISTS AND 1233 OPTICAL OUTLETS LOCAT E D IN DIFFERENT PARTS OF THE COUNTRY. THE ASSESEE BY CREATING SYSTEMATIC NET WORK A ND SERVICE AGENTS CRE A TED INTANGIBLE ASSET TO THE ASSE S SEE WHICH BENEFIT THE AE. THERE WERE R E ASONS GIVEN BY THE TPO FOR MAKING ADDITION ON ACCOUNT OF DETERMINATION OF ALP OF AMP EXPENSES AND THOSE REASONS W ERE THE SAME AS WERE GIVEN FOR MAKING SIMILAR ADDITION IN ASSESSMENT YEAR 2011 - 12 WH I CH IS ALSO NOT BEEN ACCEPTED BY THE TRIBUNAL AND THEREFORE, THOSE REASONS ARE NOT BEING SET OUT IN THIS ORDER. THE DRP IN ALL THESE YEAR ACCEPTED THE STAND TAKEN BY THE TPO AND SUSTAINED THE ADDITION MADE ON SET OFF OF DETERMINATION OF ALP ON ACCOUNT OF AMP EX P ENSES. 1 1 . AGGRIEVED BY THE DECISION OF THE REVENUE AUTHORITIES IN ASSESSMENT YEAR 2012 - 13, 2013 - 14 A ND 2014 - 15 THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUN A L. THERE IS A A DELAY OF ABOUT 3 DAYS IN FILING OF THIS APPEAL BY THE ASSESSEE FOR ASSESSMENT YEAR 2013 - 14 WHICH HAS BEEN STATE D IN AN AFFIDAVIT FILELD BY THE DIRECTOR BEFORE THE TRIBUNAL TO BE DUE TO THE ABSENCE OF SHRI J. SHIVAKUMAR, DIRECTOR OF THE ASSESSEE, AS HE WAS ON OFFICIAL TRAV E L. WE ARE OF THE VIEW THAT THE DEL A Y IS VERY NOMINAL AND HAS TO BE CONDONED ACCEPTING THE REASON GIVEN IN THE A FFIDAVIT. ACCO R DINGLY, THE DELAY IN FIL I NG THIS APPEAL IS CONDONED. 1 2 . WE HAVE HEARD THE SUBMISSIONS OF THE LEARNED COUNSEL FOR THE A SSESSEE AS WELL AS THE LD.DR. THE FIRST ASPECT WHICH W A S BROUGHT TOUR NOTICE BY THE LD. COUNSEL FOR THE ASSESSEE IS THE DECISION OF THE ITAT IN ASSE S SEES OWN C A S E FOR ASSESSMENT YEAR 2009 - 10 A ND 2010 - 11 ON THE SAME ISSUE OF AMP EXPENSES. THE TRIBUNAL TOOK THE FOLLOWING VIEW AFTER EXTRACTING THE DECISION OF THE HONBLE DELHI HIGH COURT IN THE CASE OF M/S MARUTI SUZUKI INDIA LTD. (SUPRA) . 21. RESPECTFULLY FOLLOW ING THE RATIO OF THE DECISION OF THE HON'BLE DELHI HIGH COURT IN THE ABOVE CASES, WE HOLD THAT NO TP ADJUSTMENT CAN BE MADE BY DEDUCING FROM THE DIFFERENCE BETWEEN AMP EXPENDITURE IT(TP)A NO190,176(B)/2014 & C.O NO.39(B)/2016 IN IT(TP)A NO190(B) /2014. 14 INCURRED BY ASSESSEE - COMPANY AND AMP EXPENDITURE OF COMPARABLE ENTITY, IF TH ERE IS NO EXPLICIT ARRANGEMENT BETWEEN THE ASSESSEE - COMPANY AND ITS FOREIGN AE FOR INCURRING SUCH EXPENDITURE. THE FACT THAT THE BENEFIT OF SUCH AMP EXPENDITURE WOULD ALSO ENSURE TO ITS FOREIGN AE IS NOT SUFFICIENT TO INFER EXISTENCE OF INTERNATIONAL TRANS ACTION. THE ONUS LIES ON THE REVENUE TO PROVE THE EXISTENCE OF INTERNATIONAL TRANSACTION INVOLVING AMP EXPENDITURE BETWEEN THE ASSESSEE - COMPANY AND ITS FOREIGN AE. WE ALSO HOLD THAT THAT IN THE ABSENCE OF MACHINERY PROVISIONS TO ASCERTAIN THE PRICE INCURRE D BY THE ASSESSEE - COMPANY TO PROMOTE THE BRAND VALUES OF THE PRODUCTS OF THE FOREIGN ENTITY, NO TP ADJUSTMENT CAN BE MADE BY INVOKING THE PROVISIONS OF CHAPTER X OF THE ACT. 22. APPLYING THE ABOVE LEGAL POSITION TO THE FACTS OF THE PRESENT CASE, IT IS NOT A CASE OF REVENUE THAT THERE EXISTED AN ARRANGEMENT AND AGREEMENT BETWEEN THE ASSESSEE - COMPANY AND ITS FOREIGN AE TO INCUR AMP EXPENDITURE TO PROMOTE BRAND VALUE OF ITS PRODUCTS ON BEHALF OF THE FOREIGN AE, MERELY BECAUSE THE ASSESSEE - COMPANY INCURRED MOR E EXPENDITURE ON AMP COMPARED TO THE EXPENDITURE INCURRED BY COMPARABLE COMPANIES, IT CANNOT BE INFERRED THAT THERE EXISTED INTERNATIONAL TRANSACTION BETWEEN ASSESSEE - COMPANY AND ITS FOREIGN AE. THEREFORE, THE QUESTION OF DETERMINATION OF ALP ON SUCH TRANS ACTION DOES NOT ARISE. HOWEVER, THE TRANSACTION OF EXPENDITURE ON AMP SHOULD 'CO TREATED AS A PART OF AGGREGATE OF BUNDLE OF TRANSACTIONS ON WHICH TNMM SHOULD BE APPLIED IN ORDER TO DETERMINE THE ALP OF ITS TRANSACTIONS WITH ITS AE. IN OTHER WORDS, THE TRANSACTION OF EXPENDITURE ON AMP CANNOT BE TREATED AS A SEPARATE TRANSACTION. IN THE PRESENT CASE, WE FIND FROM THE TP STUDY THAT THE OPERATING PROFIT COST TO THE TOTAL OPERATING COST WAS ADOPTED AS PROFIT LEV EL INDICATOR WHICH MEANS THAT THE AMP EXPENDIT URE WAS NOT CONSIDERED AS A PART OF THE OPERATING COST. THIS GOES TO SHOW THAT THE AMP EXPENDITURE WAS NOT SUBSUMED IN THE OPERATING PROFITABILITY OF THE ASSESSEE - COMPANY. THEREFORE, IN ORDER TO DETERMINE THE ALP OF INTERNATIONAL TRANSACTION WITH ITS AE, IT IS SINE QUA NON THAT THE AMP EXPENDITURE SHOULD BE CONSIDERED A PART OF THE OPERATING COST THEREFORE, WE RESTORE THE ISSUE OF DETERMINATION OF ALP, ON THE ABOVE LINES, TO THE FILE OF THE AO/TPO. THE GROUNDS OF APPEAL RAISED BY THE ASSESSEE - COMPANY ON THIS ISSUE ARE PARTLY ALLOWED. 1 3 . THE LD. COUNSEL FOR THE ASSESSEE POINTED OUT THAT N ONE OF THE RE A SONS GIVEN B Y THE TPO IN THE ORDER FOR ASSESSMENT YEAR 2013 - 14 , FOR NOT FOLLOWING DECISION OF THE ITAT CAN BE SUSTAINED. I N THIS REGARD , THE LD. COUNSEL BROUGHT TO OUR NOTICE TH E FACTS WHICH WERE HIGHLIGHTED BY T HE A SSESSEE BEFORE THE DRP. 1. WITH REGARD TO THE STAND OF THE TPO THAT AS PER THE DISTRIBUTION AGREEMENT WITH M/S. CHEMIGLAS CORP LTD, KOREA THE ASSESSEE WAS UNDER OBLIGATION TO PROMOTE THE BRAND OF THE FOREIGN AE, IT WAS POINTED OUT THAT IT(TP)A NO190,176(B)/2014 & C.O NO.39(B)/2016 IN IT(TP)A NO190(B) /2014. 15 THE ASSESSEE NEVER USED THE TRADE MARK/BRAN D NAME OF CHEMIGLAS IN ANY OF ITS MEDIA ADVERTISEMENT . SECONDLY THE TPOS CASE IS THAT THE AMP EXPENSES PROMOTED THE BRAND NAME OF ESSILOR INTERNATIONAL A DIFFERENT ENTITY AND NOT M/S.CHEMIGLAS CORPN.LTD., KOREA. THEREFORE, THE CONTENTION OF THE TPO THAT THE ASSESSEE HAS PROMOTED THE BRAND OF CHEMIGLAS IS NOT CORRECT IN LAW. THERE IS NO FINDING BY THE LEARNED TPO THAT THE ASSESSEE HAS PROMOTED THE BRAND NAME BELONGING TO CHEMIGLAS CORPORATION. 2. WITHOUT PREJUDICE , IT WAS SUBMITTED THAT THE INTERPRETATION PLACED BY THE LEARNED TPO ON CLAUSE 3.5 OF THE DISTRIBUTORSHIP AGREEMENT WAS ERRONEOUS. CLAUSE 3.5 STATES THAT THE DISTRIBUTOR AGREES TO USE ITS BEST EFFORTS TO PROMOTE THE SALE OF THE PRODUCTS IN THE TERRITORY IN ACCORDANCE WITH TH E SUPPLIER'S POLICY AND SHALL PROTECT THE SUPPLIER'S INTEREST WITH DILIGENCE OF A RESPONSIBLE BUSINESS MAN. IT WAS SUBMITTED THAT SUCH CLAUSES ARE NORMAL CLAUSE ENTERED INTO BETWEEN DISTRIBUTOR AND SUPPLIER OF PRODUCTS. ANY PURPOSE OF DISTRIBUTION IS TO IN CREASE THE SALE OF THE PRODUCTS OF THE SUPPLIER AND MERELY STATING THIS IN THE AGREEMENT WOULD NOT MEAN THAT THE DISTRIBUTOR IS UNDER AN OBLIGATION TO PROMOTE A BRAND. CLAUSE 3.5 DOES NOT EVEN CREATE AN OBLIGATION ON THE PART OF THE DISTRIBUTOR TO UNDERTAK E ADVERTISEMENT. 3. ON THE TPOS REFERENCE TO CLAUSES 8.1 TO 8.6 OF THE AGREEMENT IT WAS SUBMITTED THAT C LAUSE 8.1 GIVES A LIMITED RIGHT TO USE THE TRADEMARKS OF THE SUPPLIER AND STATES THAT DISTRIBUTOR MAY DO SO ONLY FOR THE PURPOSE OF IDENTIFYING AND ADVERTISING THE PRODUCTS IN THE SUPPLIER'S SOLE INTEREST. THIS CLAUSE ONLY PROVES THAT ANY ADVERTISEMENT IF CARRIED OUT SHOULD BE IN THE SUPPLIERS SOLE INTEREST AND IT DOES NOT AMOUNT TO BRAND PROMOTION. THIS CLAUSE HAS TO BE UNDERSTOOD IN THE CONTEXT. CLAUSE 8 OF THE AGREEMENT DEALS WITH THE RIGHT OF THE DISTRIBUTOR TO USE THE TRADEMARKS AND SYMBOLS OF THE SUPPLIER AND IN THAT CONTEXT IT HAS PLACED MANY RESTRICTIONS ON SUCH USE. THE RESTRICTIONS PLACED IN CLAUSE 8 ARE NORMAL RESTRICTIONS. THE OTHER SUB CLAUSES OF CLAUSE 8 ARE SUMMARIZED BELOW: A) DISTRIBUTOR IS PROHIBITED FROM USING THE TRADEMARKS OF THE SUPPLIER WITH ITS OWN COMMERCIAL NAME. (CLAUSE 8.1) B) DISTRIBUTOR SHALL NOT REPRESENT THAT IT IS IN OWNERSHIP OF THE TRADE MARKS. (CLAUSE 8.3) C) DISTRIBUTOR SHALL NOT REGISTER THE TRADEMARKS. (CLAUSE 8.4) D) DISTRIBUTOR HAS A LIMITED RIGHT TO USE THE TRADEMARK FOR THE PURPOSE OF ADVERTISEMENT. (CLAUSE 8.5 ) E) DISTRIBUTOR HAS RIGHT TO USE INTELLECTUAL PROPERTY WHICH ARE SPECIFICALLY GRANTED BY SUPPLIER (CLAUSE 8.6) IT WAS SUBMITTED THAT THE ABOVE CLAUSES IN THE AGREEMENT DO NOT IN ANY WAY SUGGEST THAT ASSESSEE IS PROMOTING THE SOLE INTEREST OF THE SUPPLIER THROUGH AN OBLIGATION TO II ADVERTISING AND PROMOTE THE BRAND NAME OF THE SUPPLIER. IN ANY CASE, THE ASSESSEE HA S USED THE TRADEMARKS/BRAND NAME BELONGING IT(TP)A NO190,176(B)/2014 & C.O NO.39(B)/2016 IN IT(TP)A NO190(B) /2014. 16 TO CHEMIGLAS IN MEDIA ADVERTISEME NT. THEREFORE, THE ISSUE OF PROMOTING THE BRAND NAME OF CHEMIGLAS IS NON - EXISTENT. 4. ON THE ASPECT OF REFERENCE TO BEPS REPORT BY THE TPO, IT WAS SUBMITTED THAT BEPS REPORT CANNOT BE PREFERRED OVER THE JUDICIAL DECISIONS WHICH BINDING ON THE TPO. EVEN OTHERWISE, THE BEPS REPORT DEALS WITH A CASE WHERE THERE I S A DIVERGENCE BETWEEN THE WRITTEN AGREEMENT AND THE CONDUCT OF THE ASSOCIATE ENTERPRISES. IT STATES THAT WHEN THERE AR E MATERIAL DIFFERENCES BETWEEN THE CONTRACTUAL TERMS AND THE CONDUCT OF THE ASSOCIATE ENTERPRISES IN THEIR RELATIONS WITH ONE ANOTHER, THE FUNCTIONS THEY ACT UALLY PERFORM, THE ASSETS THEY ACTUALLY USE, AND THE RISK THEY ACTUALLY ASSUME, THE ULTIM A TE DETERM INATION SHOULD BE BASED ON THE FACTUAL SUBSTANCE AND THE ACTUAL TRANSACTIONS. I T WAS SUBMITTED THAT WHEN THE ASSESSEE HAS NOT ENTERED INTO ANY WRITTEN AGREEMENT WITH ESSILOR INTERNATION AL FOR BRAND PROMOTION, THE QUESTION OF VARIANCE BETWEEN THE CONTRACTUA L TER MS AND THE CONDUCT OF THE PARTIES DOES NOT ARISE AT ALL. THERE IS NO FINDING BY THE LEARNED TPO THAT THE ASSESSEE HAS ENTERED INTO ANY WRITTEN CONTRACT OR OTHER ARRANGEMENT WHEREBY IT IS AGREED TO INCUR AMP ACTIVITIES TO PROMOTE THE BRAND NAME OF ESSI LOR INTERNATIONAL. THE LEARNED TPO HAS SIMPLY PRESUMED THE EXISTENCE OF INTERNATIONAL TRANSACTION JUST BECAUSE THE AMP EXPENSES INCURRED BY THE ASSESSEE ARE MORE THAN THE AMP EXPENSES INCURRED BY THE COMPARABLE ENTITIES. THIS HAS BEEN HELD TO BE IMPERMISSIBLE BY THE HON'BLE DELHI HIGH COURT IN MARUTHI SUZUKI'S CASE AND HON'BLE ITAT IN ASSESSEE'S OWN CASE. 5. WITH REGARD TO THE ACTION OF THE TPO IN DRAWI NG INFERENCE FROM LEGAL PROCEEDINGS INSTITUTED IN INDIA BY THE FOREIGN AE FOR PROTECTING ITS TRADE MARK, IT WAS SUBMITTED THAT M/S. ESSILOR INTERNATIONAL WAS THE OWNER OF THE BRAND AND WAS A PARTY TO THE PROCEEDINGS AND THE ASSESSEE AS INDIAN AE JOINED TH E PROCEEDINGS AS AGENT OF THE FOREIGN AE BECAME A PARTY TO THE PROCEEDINGS. IT WAS SUBMITTED THAT THE LEGAL ACTION TAKEN BY THE ASSESSEE AS AGENTS OF ESSILOR INTERNATIONAL FOR A VERY LIMITED PURPOSE OF ENSURING THAT THERE IS NO INFRINGEMENT OF THE INTELLE CTUAL PROPERTY RIGHTS OF ESSILOR INTERNATIONAL. 6. WITH REGARD TO THE CONCLUSION OF THE TPO THAT THE ASSESSEE HAS SET UP A VAST DISTRIBUTION NETWORK THEREBY CREATING MARKETING INTANGIBLE FOR THE BENEFIT OF ITS AE , IT WAS SUBMITTED THAT THE T PO HAS FAILED TO RECOGNIZE THE IMPORTANCE OF HAVING DISTRIBUTORSHIP NETWORK BY THE ASSESSEE. THE LENSES IMPORTED AND SOLD BY THE ASSESSEE ARE USED BY INDIVIDUAL RETAIL CUSTOMERS. LIKE ANY OTHER CONSUMER PRODUCTS, IT IS NECESSARY FOR THE ASSESSEE TO HAVE AN EFFICIENT AND EFFECTIVE DISTRIBUTOR NETWORK TO ENSURE THAT IT IS ABLE TO SELL ITS PRODUCTS. THE PURPOSE OF SETTING UP THE DISTRIBUTOR NETWORK IS TO SELL THE LENSES OF THE ASSESSEE AND NOT TO PROMOTE THE BRAND NAME OF ESSILLOR INTERNATIONAL. IT WAS SUBMITT ED THAT MERE CREATION OF A VAST DISTRIBUTOR NETWORK DOES NOT MEAN THAT IT IS PROMOTING THE BRAND NAME . IT(TP)A NO190,176(B)/2014 & C.O NO.39(B)/2016 IN IT(TP)A NO190(B) /2014. 17 7. AS REGARDS THE TPOS CONTENTIONS IN PARAGRAPH 9.3,9.4,9.5,9.6 OF THE ORDER U/S 92CA , IT WAS SUBMITTED THAT THESE ARGUMENTS ARE THE SAME A S ADVANCED BEFORE THE HONBLE DELHI HIGH COURT IN MARUTI SUZUKIS CASE, SONY ERICSSONS CASE AND ASSESSEES OWN CASE BEFORE THE TRIBUNAL. THESE ARGUMENTS HAVE BEEN DEALT WITH IN AN ELABORATE MANNER BY THE COURT AND THE TRIBUNAL AND THE CONTENTIONS OF THE REVENUE HA VE BEEN REJECTED. THE ASSESSEE RELIES ON THE SAME. 14. THE LEARNED COUNSEL HIGHLIGHTED THE FACT THAT THE DRP HOWEVER, UPHELD THE ORDER OF AO WITHOUT DEALING WITH VARIOUS CONTENTIONS TO BE VERIFIED BY THE ASSESSEE. HE SUBMITTED THAT THE ORDER OF THE TRI BUNAL FOR ASSESSMENT YEAR 2009 - 10 AND 2010 - 11 SHOULD BE FOLLOWED AND IT SHOULD BE HELD THAT THERE WAS NO INTERNATIONAL TRANSACTION AND CONSEQUENTLY, THERE IS NO REQUIREMENT FOR DETERMINATION OF ALP. 1 5 . THE LD.DR REITERATES THE STAND OF THE REVENUE AS CONTAINED IN THE ORDER OF THE TPO FOR THE ASSESSMENT YEAR 2013 - 14. 1 6 . WE HAVE GIVEN OUR CAREFUL CONSIDERATION TO THE RIVAL SUBMISSIONS. THE HONBLE DELHI HIGH COURT IN THE CASE OF MARUTI SUZUKI INDIA LTD. (MSIL) V. ADDL. CIT, TPO [2010] 328 ITR 210 (DELHI) , IN THE CASE OF A LICENSED MANUFACTURER INCURRING AMP EXPENSES IT WAS HELD THAT IT INCURRING OF AMP EXPENSES WOUL D BE AN INTERNATIONAL TRANSACTION AND THE ISSUE OF DETE RMINATION OF ALP WAS REMANDED. THIS DECISION WAS HOWEVER OVERRULED IN MARUTI SUZUKI INDIA LTD. V. ADDL. CIT [2011] 335 ITR 121 (SC) WHEREIN THE HONBLE SUPREME COURT LEFT THE QUESTION WHETHER AMP EXPENSES GIVES RAISE TO INTERNATIONAL TRANSACTION OR NOT OPEN WITH THE F OLLOWING OBSERVATIONS: IN THIS CASE, THE HIGH COURT HAS REMITTED THE MATTER TO THE TRANSFER PRICING OFFICER ('THE TPO' FOR SHORT) WITH LIBERTY TO ISSUE FRESH SHOW - CAUSE NOTICE. THE HIGH COURT HAS FURTHER DIRECTED THE TRANSFER PRICING OFFICER TO DECIDE THE MATTER IN ACCORDANCE WITH LAW. FURTHER, ON GOING THROUGH THE IMPUGNED JUDGMENT OF THE HIGH COURT DATED JULY 1, 2010, WE FIND THAT THE HIGH COURT HAS NOT MERELY SET ASIDE THE ORIGINAL SHOW CAUSE NOTICE BUT IT HAS MADE CERTAIN IT(TP)A NO190,176(B)/2014 & C.O NO.39(B)/2016 IN IT(TP)A NO190(B) /2014. 18 OBSERVATIONS ON THE MERITS OF THE CASE AND HAS GIVEN DIRECTIONS TO THE TRANSFER PRICING OFFICER, WHICH VIRTUALLY CONCLUDE THE MATTER. IN THE CIRCUMSTANCES, ON THAT LIMITED ISSUE, WE HEREBY DIRECT THE TRANSFER PRICING OFFICER, WHO, IN THE MEANTIME, HAS ALREADY ISSUED A SHOW CAUSE NOTICE ON SEPTEMBER 16, 2010, TO PROCEED WITH THE MATTER IN ACCORDANCE WITH LAW UNINFLUENCED BY THE OBSERVATIONS/DIRECTIONS GIVEN BY THE HIGH COURT IN THE IMPUGNED JUDGMENT DATED JULY 1, 2010. THE TRANSFER PRICING OFFICER WILL DECIDE THIS MATTER ON OR BEFORE DE CEMBER 31, 2010. THE CIVIL APPEAL IS, ACCORDINGLY, DISPOSED OF WITH NO ORDER AS TO COSTS.' 1 7 . THE HONBLE DELHI HIGH COURT IN AN OTHER CASE OF MARUTI SUZUKI INDIA LTD. VS. CIT 381 ITR 117 (DELHI) HELD THAT THE FACT THAT THE BENEFIT OF SUCH AMP EXPENSES WOULD ALSO EN S URE TO THE AE IS ITSELF INSUFFICIENT TO INFER THE EXISTENCE OF AN INTERNATIONAL TRANSACTION. SIMILAR DECISION WAS ALSO RENDERED BY THE HONBLE DELHI HIGH COURT IN THE CASE OF CIT (LTU) V. WHIRLPOOL OF INDIA LTD., 381 ITR 154. THE BRIGHT LIN E TEST WHICH WAS APPLIED BY THE AO IN THE PRESENT CASE WAS ALSO APPLIED BY THE AO IN THE AFORESAID CASES. THE BRIGHT LINE TEST WHICH WAS ACCEPTED BY THE SPECIAL BENCH OF ITAT IN THE CASE OF L.G. ELECTRONICS INDIA PVT. LTD. V. ACIT (2013) 22 ITR (TRIB.) 1 (DEL)(SB) WAS HELD BY THE HONBLE DELHI HIGH COURT TO BE NOT CORRECT. IN THE CASE OF MARUTI SUZUKI (SUPRA), THE FACTS WERE MARUTI SUZUKI INDIA LTD. (MSIL) WAS ENGAGED IN THE MANUFACTURE OF PASSENGER CARS IN INDIA. IT WAS A SUBSIDIARY OF SMC, A JAPANESE CO MPANY. MSIL STARTED ITS BUSINESS IN 1982 AS A GOVERNMENT OF INDIA OWNED COMPANY. SMC WAS SELECTED AS THE BUSINESS PARTNER INDEPENDENTLY BY MSIL. THE CO - BRANDED TRADE MARK 'MARUTI - SUZUKI' WAS USED SINCE THE INCEPTION OF MSIL. A LICENCE AGREEMENT WAS ENTERED INTO BETWEEN MSIL AND SMC IN OCTOBER 1982 FOR ITS MODELS M - 800, OMNI AND GYPSY. BY THE AGREEMENT, MSIL WAS PERMITTED TO USE THE CO - BRANDED TRADE MARK 'MARUTI - SUZUKI' ON THE VEHICLES. IN THE ASSESSMENT OF MSIL FOR ASSESSMENT YEAR 2005 - IT(TP)A NO190,176(B)/2014 & C.O NO.39(B)/2016 IN IT(TP)A NO190(B) /2014. 19 06, THE AO INVOKED TH E PROVISIONS OF SECTION 92CA(1) OF THE ACT AND REFERRED THE CASE TO THE TRANSFER PRICING OFFICER FOR DETERMINATION OF THE ARM'S LENGTH PRICE IN RELATION TO THE INTERNATIONAL TRANSACTIONS UNDERTAKEN BY MSIL WITH ITS ASSOCIATED ENTERPRISE, SMC. THE TRANSFER PRICING OFFICER PASSED AN ORDER MAKING AN ADJUSTMENT OF RS. 154.12 CRORES TOWARDS THE ADVERTISEMENT, MARKETING AND SALES PROMOTION EXPENSES IMPUTING A NOTIONAL ARM'S LENGTH COMPENSATION TOWARDS THE ADVERTISEMENT, MARKETING AND SALES PROMOTION EXPENSES INC URRED BY MSIL FOR SMC. ON THE ABOVE FACTS, THE HONBLE DELHI HIGH COURT HELD AS FOLLOWS: . WHEN THE LICENCE AGREEMENTS WERE ORIGINALLY ENTERED INTO IN 1982, MSIL WAS KNOWN AS MUL AND SMC DID NOT HOLD A SINGLE SHARE IN MUL. IN 2003 SMC ACQUIRED THE CONT ROLLING INTEREST IN MSIL. THERE WERE VARIOUS MODELS OF SUZUKI MOTOR CARS MANUFACTURED BY MSIL AND EACH MODEL WAS COVERED BY A SEPARATE LICENCE AGREEMENT. UNDER THESE AGREEMENTS, GRANTED LICENCE TO MSIL TO MANUFACTURE THAT PARTICULAR CAR MODEL AND PROVIDED TECHNICAL KNOW - HOW AND INFORMATION AND RIGHT TO USE SUZUKI'S PATENTS AND TECHNICAL INFORMATION. IT ALSO GAVE MSIL THE RIGHT TO USE SUZUKI'S TRADE MARK AND LOGO ON THE PRODUCT. PURSUANT TO THIS AGREEMENT, MSIL WAS USING THE CO - BRAND, I.E., MARUTI SUZUKI TR ADE MARK AND LOGO FOR MORE THAN 30 YEARS. THIS CO - BRAND COULD NOT BE USED BY SMC AND WAS NOT OWNED BY IT. THE CLAUSES IN THE AGREEMENT BETWEEN MSIL AND SMC INDICATED THAT PERMISSION WAS GRANTED BY SMC TO MSIL TO USE THE CO - BRAND 'MARUTI SUZUKI' NAME AND L OGO. THE MERE FACT THAT THE CARS MANUFACTURED BY MSIL BORE THE SYMBOL 'S' WAS NOT DECISIVE AS THE ADVERTISEMENTS WERE OF A PARTICULAR MODEL OF THE CAR WITH THE LOGO 'MARUTI - SUZUKI'. THE REVENUE HAD BEEN UNABLE TO CONTRADICT THE SUBMISSION OF MSIL THAT THE CO - BRAND MARK 'MARUTI - SUZUKI' IN FACT DID NOT BELONG TO SMC AND COULD NOT BE USED BY SMC EITHER IN INDIA OR ANYWHERE ELSE. THE DECISION IN THE CASE OF SONY ERICSSON REQUIRES THAT THE MARK OR BRAND SHOULD BELONG TO THE FOREIGN ASSOCIATED ENTERPRISE. THE RE VENUE ALSO DID NOT DENY THAT AS FAR AS THE BRAND 'SUZUKI' WAS CONCERNED ITS LEGAL OWNERSHIP VESTED WITH THE FOREIGN ASSOCIATED ENTERPRISE, I.E., SMC. MOREOVER AS MSIL WAS CONCERNED, ITS OPERATING PROFIT MARGIN WAS 11.19 PER CENT. WHICH WAS HIGHER THAN THAT OF THE COMPARABLE COMPANIES WHOSE PROFIT MARGIN WAS 4.04 PER CENT. THEREFORE, APPLYING THE TRANSACTIONAL NET MARGIN METHOD IT MUST BE STATED THAT THERE WAS NO QUESTION OF A TRANSFER PRICING ADJUSTMENT ON ACCOUNT OF ADVERTISEMENT, MARKETING AND SALES PROMO TION EXPENDITURE. THE ADVERTISEMENT, MARKETING AND IT(TP)A NO190,176(B)/2014 & C.O NO.39(B)/2016 IN IT(TP)A NO190(B) /2014. 20 SALES PROMOTION EXPENSES INCURRED BY MSIL COULD NOT BE TREATED AND CATEGORISED AS AN INTERNATIONAL TRANSACTION UNDER SECTION 92B OF THE ACT. 1 8 . IN THE CASE OF WHIRLPOOL OF INDIA LTD. (SUPRA) , IT WAS HELD THAT THERE HAD TO BE AN INTERNATIONAL TRANSACTION WITH A CERTAIN DISCLOSED PRICE. THE TRANSFER PRICING ADJUSTMENT ENVISAGES THE SUBSTITUTION OF THE PRICE OF SUCH INTERNATIONAL TRANSACTION WITH THE ARM'S LENGTH PRICE. THE TRANSFER PRICING ADJUSTMENT WAS N OT EXPECTED TO BE MADE BY DEDUCING FROM THE DIFFERENCE BETWEEN THE EXCESSIVE ADVERTISING, MARKETING AND SALES PROMOTION EXPENDITURE INCURRED BY THE ASSESSEE AND THE ADVERTISING, MARKETING AND SALES PROMOTION EXPENDITURE OF A COMPARABLE ENTITY THAT AN INTER NATIONAL TRANSACTION EXISTED AND THEN PROCEEDING TO MAKE THE ADJUSTMENT OF THE DIFFERENCE IN ORDER TO DETERMINE THE VALUE OF SUCH ADVERTISING, MARKETING AND SALES PROMOTION EXPENDITURE INCURRED FOR THE ASSOCIATED ENTERPRISE. THUS, THE BRIGHT LINE TEST HAD BEEN REJECTED AS A VALID METHOD FOR EITHER DETERMINING THE EXISTENCE OF AN INTERNATIONAL TRANSACTION OR FOR THE DETERMINATION OF THE ARM'S LENGTH PRICE OF SUCH TRANSACTION. ALTHOUGH UNDER SECTION 92B READ WITH SECTION 92F(V), AN INTERNATIONAL TRANSACTION C OULD INCLUDE AN ARRANGEMENT, UNDERSTANDING OR ACTION IN CONCERT, THIS COULD NOT BE A MATTER OF INFERENCE. THERE HAD TO BE SOME TANGIBLE EVIDENCE ON RECORD TO SHOW THAT TWO PARTIES HAD ACTED IN CONCERT. IT WAS ALSO HELD THAT THE PROVISIONS UNDER CHAPTER X ENVISAGED A SEPARATE ENTITY CONCEPT. IN OTHER WORDS, THERE COULD NOT BE A PRESUMPTION THAT THE ASSESSEE WAS A SUBSIDIARY OF THE FOREIGN COMPANY AND THAT ALL THE ACTIVITIES OF THE ASSESSEE WERE IN FACT DICTATED BY THE FOREIGN COMPANY. MERELY BECAUSE THE FOR EIGN COMPANY HAD A FINANCIAL INTEREST, IT COULD NOT BE PRESUMED THAT ADVERTISING, MARKETING AND SALES PROMOTION EXPENSES INCURRED BY THE ASSESSEE WERE AT THE INSTANCE OR ON BEHALF OF THE FOREIGN COMPANY. THE INITIAL ONUS WAS ON THE REVENUE TO DEMONSTRATE T HROUGH IT(TP)A NO190,176(B)/2014 & C.O NO.39(B)/2016 IN IT(TP)A NO190(B) /2014. 21 SOME TANGIBLE MATERIAL THAT THE TWO PARTIES ACTED IN CONCERT AND FURTHER THAT THERE WAS AN AGREEMENT TO ENTER INTO AN INTERNATIONAL TRANSACTION CONCERNING ADVERTISING, MARKETING AND SALES PRO - MOTION EXPENSES. 1 9 . IN THE LIGHT OF THE LAW AS IT EXISTS TODAY, WE SHALL EXAMINE THE ARGUMENTS OF THE RIVAL PARTIES. THERE HAS BEEN NO AGREEMENT BETWEEN ESSILOR INTERNATIONAL WHICH OWNS THE VARIOUS BRANDS SET OUT BY THE TPO IN HIS ORDER AND THE ASSESSEE TO INCUR ANY ADVERTISEMENT AND MARKETING OR SALES P ROMOTION EXPENSES. NONE OF THE OTHER REASONS GIVEN BY THE TPO WHICH HAVE BEEN EXPLAINED BY THE ASSESSEE AND S ET OUT IN THE EARLIER PARAGRAPH CAN BE THE BASIS TO HOLD THAT THERE WAS IN FACT AN INTERNATIONAL TRANSACTION IN THE MATTER OF INCURRING OF AMP EXP ENSES BY THE ASSESSEE. THE ORDER OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR A.Y. 2009 - 10 AND 2010 - 11 IN OUR VIEW REQUIRES TO BE FOLLOWED AND THERE ARE NO REASONS WHATSOEVER TO TAKE A DIFFERENT VIEW. CONSEQUENTLY, THERE COULD NOT BE ANY EXERCISE OF DETERMI NING THE ALP OF THE AMP EXPENSES BY COMPARING THE EXPENSES INCURRED BY THE ASSESSEE WITH COMPARABLE COMPANIES. IN VIEW OF THE ABOVE CONCLUSIONS, THE OTHER ASPECTS WHETHER THE COMPARABLE COMPANIES CHOSEN BY THE TPO ARE IN FACT COMPARABLE IN TERMS OF FUNCTI ONS PERFORMED, ASSETS EMPLOYED AND RISKS ASSUMED (FAR) ANALYSIS AND OTHER ASPECTS OF DETERMINATION OF ALP DOES NOT REQUIRE ANY CONSIDERATION. THEREFORE THE ADDITION MADE ON ACCOUNT OF DETERMINATION OF ALP OF AMP EXPENSES IN AY 2011 - 12 TO 2014 - 15 IS DI RECTED TO BE DELETED. 20. AS FAR AS THE GRIEVANCE OF THE ASSESSEE IN ITS APPEAL FOR AY 2011 - 12 WHICH IS CHALLENGED IN GR.NO.2 TO 4 RAISED IN ITS APPEAL FOR THE SAID AY IN IT(TP)A.NO.542/BANG/2016, IS CONCERNED, THE BREAK - UP OF THE SUM OF RS.9,91,79,703 W HICH WAS REGARDED AS CAPITAL EXPENDITURE AND DISALLOWED BY THE DRP IS GIVEN AT PARAGRAPHS 9.1.1 AND 8.1.2 OF THE TPOS ORDER. PERUSUAL IT(TP)A NO190,176(B)/2014 & C.O NO.39(B)/2016 IN IT(TP)A NO190(B) /2014. 22 OF THE NATURE OF EXPENSES SHOWS THAT NONE OF THEM IS CAPITAL IN NATURE. EVEN IN PARAGRAPH 8.1.2 OF THE TPOS ORDER, THE SE EXPENSES HAVE BEEN ACCEPTED AS SELLING EXPENSES AND NOT FORMING PART OF THE AMP EXPENSES THAT RESULT IN BRAND BUILDING. THE LEARNED COUNSEL FOR THE ASSSESSEE HAS PLACED RELIANCE ON DECISION OF THE HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. SPICE D ISTRIBUT ION LTD. , 374 ITR 30 (DELHI) WHEREIN THE HONBLE DELHI COURT HELD THAT ADVERTISEMENT EXPENDITURE INCURRED BY A PERSON SELLING MOBILE HAND - SETS AND OTHER ELECTRONIC ITEMS AND ACCESSORIES CANNOT BE SAID TO BE CAPITAL EXPENDITURE. THE LEARNED DR RELI ED ON THE ORDER OF THE DRP. 21. AFTER CONSIDERING THE RIVAL SUBMISSIONS, WE ARE OF THE VIEW THAT THE EXPENDITURE IN QUESTION CANNOT BE REGARDED AS CAPITA IN NATURE. EVEN THE TPO HAS CONSIDERED THESE EXPENSES AS ROUTINE SELLING EXPENSES. FROM THE NATURE OF THESE EXPENSES WHICH ARE SET OUT IN PARAGRAPH - 5 OF THIS ORDER, IT CAN BE SEEN THAT THEY ARE ROUTINE SELLING EXPENSES AND CANNOT BE REGARDED AS CAPITAL EXPENDITURE. THE DECISION OF THE DELHI HIGH COURT IN THE CASE OF SPICE DISTRIBUTION LTD. (SUPRA) SUPP ORTS THE PLEA OF THE ASSESSEE IN THIS REGARD. THE ORDER OF THE DRP WHICH DOES NOT GIVE ANY REASON FOR HOLDING THE AFORESAID EXPENDITURE TO BE CAPITAL EXPENDITURE IS THEREFORE REVERSED AND THE ADDITION MADE IN THIS REGARD IS DIRECTED TO BE DELETED. 22. THE NEXT COMMON ISSUE THAT ARISES FOR CONSIDERATION IN ALL THESE APPEALS IS THE DISALLOWANCE OF EXPENSES INCURRED IN EARNING EXEMPT INCOME U/S 14A OF THE ACT. AS FAR AS THIS ISSUE IS CONCERNED, WE FIRST DEAL WITH THE ISSUE IN ASSESSEES APPEAL FOR ASSESSMENT YEAR 2011 - 12. THE RELEVANT GROUND OF APPEAL OF THE ASSESSEE IN THE ASSESSMENT YEAR 2011 - 12 ARE GROUND NOS.5 - 7 WHICH READS AS FOLLOWS; IT(TP)A NO190,176(B)/2014 & C.O NO.39(B)/2016 IN IT(TP)A NO190(B) /2014. 23 5. THAT THE LEARNED LOWER AUTHORITIES ERRED IN LAW AND ON FACTS IN DISALLOWING A SUM OF RS.1,37,40,222/ - U/S 14A OF THE ACT. 6. THAT THE LEARNED LOWER AUTHORITIES ERRED IN LAW AND ON FACTS IN HOLDING THAT .14A IS ATTRACTED, EVEN THOUGH THE AO HAS NOT RECORDED ANY SATISFACTION AS TO WHY THE CLAIM OF THE ASSESSEE THAT NO EXPENDITURE HAS BEEN INCURRED IS NOT CORRECT. 7. WITHOUT PREJUDICE TO THE GROUNDS THE LEARNED AO ERRED IN L A W AND ON FACTS IN DISALLOWING A SUM OF RS.1,37,40,222/ - EVEN THOUGH THE ACTUAL DIVIDEND EARNED BY THE ASSESSEE IS RS.68,74,800/ - . 23 . T HE FACTUAL DETAILS WITH REGARD TO THE DISALLOWANCE U/S 14A OF THE ACT ARE THAT THE ASSESSEE HAD EARNED EXEMPT INCOME OF RS.68,74,800/ - . THE AO DISALLOWED THE EXPENSES TO THE TUNE OF RS.1,37,40,222/ - UND ER RULE 8D(2)(III) OF THE RULES WHICH DEALS WITH DISA LLOWANCE OF OTHER EXPENSES OTHER THAN DIRECT AND INTEREST EXPENSES, I.E., DISALLOWANCE OF 0.5% OF THE AVERAGE VALUE OF INVESTMENTS. THE DRP CONFIRMED THE ORDER OF THE AO. THE SUBMISSION OF THE LD. COUNSEL FOR THE ASSESSEE WAS THAT THE ASSESSEE INCURRE D NO EXPENSES FOR EARNING DIVIDEND INCOME. WE ARE OF THE VIEW THAT SUCH GENERAL STATEMENT WILL NOT HELP THE PLEA OF THE ASSESSEE. SEC.14A CONTEMPLATES DISALLOWANCE HAVING REGARD TO THE BOOK OF ACCOUNTS OF THE ASSESSEE. IT IS THEREFORE, NECESSARY TO ALLO W THE EXPENSES DEBITED IN P&L ACCOUNT AND COME TO A CONCLUSION AS TO WHAT WOULD BE THE EXPENSES INCURRED IN EARNING DIVIDEND INCOME. THE EXERCISE HAS TO BE DONE WHILE CONS IDERING TH E NEXUS BETWEEN THE EXPENSES INCURRED AND EXEMPT IN C OME EARNED. NO SUCH EXERCISE HA S BEEN CARRIED OUT BY THE ASSESSEE OR BY THE AO . R ATHER THE ASSESSEE HAS SOUGHT TO PLE A D BASED ON SEVERAL JUDICIAL PRONOUNCEMENTS FOR THE DELETION OF THE ADDITION, WITHOUT ANY FACTUAL BACKGROUND REGARDING THE NATURE OF EXPENSES DEBITED IN THE P&L ACCOUNT. WE THEREFORE, DEEM IT FIT A ND PROPER TO SET ASID E THE ORDE R OF THE A O AND REMAND TH E ISSUE OF D E T E RMINATION OF QUANTUM OF DISALLOWANCE U/S 14A OF TH E ACT TO THE AO AFTER DUE OPPORTUNITY TO THE ASSESSEE. IT(TP)A NO190,176(B)/2014 & C.O NO.39(B)/2016 IN IT(TP)A NO190(B) /2014. 24 24. AS FAR A S ASSESSMENT YEAR 2012 - 13 IS CONCERNED, THE DISALLOWANCE U/S 14A OF THE ACT, THE FACTS ARE THAT THE ASSESSEE EARNED DIVIDEND INCOME OF RS.87, 08,080/ - WHICH WAS CLAIMED AS EXEMPT. THE AO DISALLOWED A SUM OF RS. 2,39,19,152/ - PER THE FOLLOWING DETAILS. IN VIEW OF THE ABOVE, THE DISALLOWANCE U/ 14A R.W.R.8D IS WORKED OUT AS BELOW; A TOTAL AMOUNT OF DIRECT INTEREST/OTHER EXPENSES PERTAINING TO TAX EXEMPT INVESTMENTS N I L B TOTAL AMOUNT OF INDIRECT INTEREST PERTAINING TO TAX EXEMPT INVESTMENTS 77,10,866 AY: 12 - 13 AY 11 - 12 AVERAGE C AVERAGE AMOUNT OF TAX EXEMPT 448,49,31,085 305,70,40,480 377,09,85,783 INVESTMENTS D AVERAGE AMOUNT OF TOTAL ASSETS 679,54,92,909 468,80,33,198 574,17,63,054 E PROPORTIONATE INDIRECT INTEREST TO BE DISALLOWED BXC D 50,64,223 F 0.5% OF AVERAGE AMOUNT OF TAX EXEMPT INVESTMENTS 1,88,54,929 G TOTAL DISALLOWANCE ATTRACTED U/S 14A READ WITH RULE 8D A + E + F 2,39,19,152 HENC E AN AMOUNT OF RS.2,39,19,152/ - IS DISALLOWED U/S 14A R.W.R.8D AND ADDED TO TH E INCOME OF THE ASSESSEE. 25. BEFORE THE DRP THE ASSESSEE SUBMITTED WITH REGARD TO DISALLOWANCE OF INTEREST EXPENDITURE UNDER RULE 8D(2)(III) OF THE RULES THAT THE INTEREST EXPENSES DEB ITE D IN P&L ACCOUNT WERE IN RESPECT OF LOANS WHICH WERE UTILIZED FOR THE PURPOSE OF THE ASSESSEE AND NO PART OF THE BORROWED FUNDS HAD BEEN UTILIZED FOR THE PURPOSE OF MAKING INVESTMENTS WHICH YIELDED THE DIVIDEND INCOME. IN THIS REGARD THE FOLLOWING PART I CUL A RS WERE FILED BEFORE THE CIT(A). IT(TP)A NO190,176(B)/2014 & C.O NO.39(B)/2016 IN IT(TP)A NO190(B) /2014. 25 ESSILOR INDIA PVI LTD. ASSESSMENT YEAR 2012 - 13 STATEMENT SHOWING THE DETAILS OF INTEREST PAID I NAME OF THE BANK TYPE OF LOAN DATE OF LOAN TAKEN AMOUNT OF LOAN TAKEN INTEREST PAID - PURPOSE OF LOAN TAKEN CITIBANK WORKING CAPITAL RUPEE LOAN 03 - DEC - 11 15,50,00,000 54,32,432 WORKING CAPITAL CITIBANK WORKING CAPITAL FCNR (USD 1,000,000) 17 - JAN - 12 3,37,A14 WORKING CAPITAL CITIBANK OVERDRAFT CASH CREDIT 18,18,86 WORKING CAPITAL INTEREST ON DEPOSITS RECEIVED FROM DISTRIBUTORS 1,76,604 OTHER INTEREST (54,470) INTEREST AS PER SCH 23 OF FINANCIAL STATEMENTS 77,10,866 2 6 . THE DRP HOWEVER, DID NOT DEAL WITH ANY OF THOSE SUBMISSIONS BUT PREFERRED TO UPHOLD THE ORDER OF THE AO. AS FAR AS THE DISALLOWANCE U/S 8D(2)(III) OF THE RULES IS CONCERNED, THE FACTS ARE IDENTICAL AS THE FACTS IN ASSESSMENT YEAR 2011 - 12. THE LEARNED COUNSEL FOR THE ASSESSEE HAS ALSO FILED A STATEMENT BEFORE US SHOWING AVAILABILITY OF OWN FUNDS AND THE INVESTMENTS WHICH ACTUALLY YIELDED THE DIVIDEND INCOME. T HE SAME IS PLACED ON RECORD. WE ARE OF THE VIEW THAT IT WILL BE JUST AND PROPER TO SET ASIDE THE ORDER OF THE DRP/AO IN THIS REGARD AND REMAND THE ISSUE FOR FRESH CONSIDERATION BY THE AO. AS FAR AS DISALLOWANCE OF EXPENSES U/S 8D(2)(II) OF THE RULES IS CONCERNED, THE AO IS DIRECTED TO SEE THE AVAILABILITY OF OWN FUNDS AND ALSO TO SEE WHETHER THE BORROWED FUNDS ON WHICH INTEREST WAS PAID FOR THE PURPOSE OF MAKING INVESTMENTS THAT CAN YIELD DIVIDEND INCOME. THE AO IS ALSO DIRECTED TO KEEP IN MIND THE DECI SION OF THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF M/S MICRO LABS INDIA PVT.LTD 3 83 ITR 490. (KAR.). IN SO FAR AS THE DISALLOWANCE U/S 8D(2)(II) OF THE RULES IS CONCERNED, THE A O SHALL EXAMINE THE DISALLOWANCE AFRESH IN THE LIGHT OF THE DIRECTIONS GIV EN IN IT(TP)A NO190,176(B)/2014 & C.O NO.39(B)/2016 IN IT(TP)A NO190(B) /2014. 26 THIS REGARD WHILE DECIDING THE IDENTICAL GROUNDS OF A PP E AL IN ASSESSMENT YEAR 2011 - 12. 2 7 . AS FAR AS THE ASSESSMENT YEAR 2013 - 14 IS CONCERNED, THE DISALLOWANCE U/S 14A OF THE ACT AS MADE BY THE AO AS FOLLOWS; IN VIEW OF THE ABOVE THE DISALLOWANCE U/S 14A R.W.S.RULE 8D IS WORKED OUT AS BELOW: A TOTAL AMOUNT OF DIRECT INTEREST/OTHER EXPENSES PERTAINING TO TAX EXEMPT INVESTMENTS NIL B 3,31,16,593 AY 2012 - 13 AY 2013 - 14 AVERAGE C AVERAGE AMOUNT OF TAX EXEMPT INVESTMENTS 408,19,46,568 423,47,51,677 415,83,49,123 D AVERAGE AMOUNT OF TOTAL ASSTS 629,05,78,304 692,28,57,496 660,67,71,900 E PROPORTIONATE INDIRECT INTEREST TO BE DISALLOWED B X C D 2,08,43,989 F 0.5% OF AVERAGE AMOUNT OF TAX EXEMPT INVESTMENTS 2,07,91,746 G TOTAL DISALLOWANCE ATTRACTED U/S14A A + E + F 4,16,35,735 LESS 14A DISALLOWANCE ALREADY DISALLOWED BY THE ASSESSEE ITSELF IN ITS COMPUTATION OF INCOME. NIL DISALLOWANCE U/S 14A R.W.RULE 8D 4,16,35,735 2 8 . BEFORE THE DRP THE ASSESSEE GAVE THE DETAILS OF LOAN AVAILED AND THE INVESTMENTS MADE AND ALSO THE DETAILS OF THE FUNDS AVAILABLE WHICH WAS TO THE TUNE OF RS.4 71,82,45,164/ - . THE DETAILS IN THIS REGARD A RE AS FOLLOWS: STATEMENT SHOWIN G LOANS AVAILED/REPAID AND INVESTMENTS MADE DURING THE YEAR. PARTICULARS _ WORKING CAPITAL LOAN BUYERS CREDIT TOTAL FY 2011 - 12 FRESH LOAN TAKEN DURING THE YEAR 21,01,01,015 - CLOSING BALANCE 21,01,01,015 - 21,01,01,015 IT(TP)A NO190,176(B)/2014 & C.O NO.39(B)/2016 IN IT(TP)A NO190(B) /2014. 27 FY 2012 - 13 OPENING BALANCE 21,01,01,015 - ..... ADD:FRESH LOAN TAKEN DURING THE YEAR YEAR 42,80,99,785 - - TOTAL 63,82 ,00, 800 _ - LESS: REPAID DURING THE YEAR 21,01,01,015 - CLOSING BALANCE 42,80,99,785 - 42,80,99,785 INVESTMENTS PARTICULARS AMOUNT AS ON 01.04.2011 2,78,21,64,568 INVESTMENTS MADE DURING THE YEAR 1,29,97,82,000 AS ON 31.03.2012 4,08,19,46,568 AS ON 01.04.2012 4,08,19,46,568 INVESTMENTS MADE DURING THE YEAR 15,28,05,109 AS ON 31.03.2013 4,23,47,51,677 (AMOUNT IN RS.) NOTE AS OF MARCH 31 2012 2011 EQUITY AND LIABILITIES SHAREHOLDERS FUND 2 3,750,000,000 2,750,000,000 SHARE CAPITAL 3 968,245,164 646,347,788 RESERVES AND SURPLUS 4,718,245,1 64 3,396,347,788 NON - CURRENT LIABILITIES 4 14,052,585 13,202,565 LONG TERM BORROWINGS 5 28,034.386 22,315,289 CURRENT LIABILITIES 6 SHORT TERM BORROWINGS 210,101,015 TRADE PAYABLES 7 889,101,096 612,359,373 OTHER CURRENT LIABILITIES 8 436.441,286 266,264,990 SHORT TERM PROVISIONS 9 499,517,377 377,543 ,173 TOTAL 6,795,492,909 4,688,033,198 29. THE DRP HOWEVER , DID NOT DEAL WITH ANY OF THIS SUBMISSIONS AND PREFERRED TO UPHOLD THE ORDER OF THE AO. THE LEARNED COUNSEL FOR THE ASSESSEE HAS ALSO FILED A STATEMENT BEFORE US SHOWING AVAILABILITY OF OWN FUNDS AND THE INVESTMENTS WHICH ACTUALL Y YIELDED THE DIVIDEND INCOME. THE SAME IS PLACED ON RECORD. AFTER CONSIDERING THE RIVAL SUBMISSIONS WE ARE OF TH E VIEW THAT THE ISSUE IN ASSESSMENT YEAR IT(TP)A NO190,176(B)/2014 & C.O NO.39(B)/2016 IN IT(TP)A NO190(B) /2014. 28 2013 - 14 NEEDS TO BE DECIDED AFRESH BY THE AO AND ORDER OF THE DRP/AO IS SET ASIDE, TO BE DECIDED AFRESH BY THE AO IN THE LIGHT OF THE DIRECTIONS GIVEN IN SIMILAR ISSUE IN ASSESSMENT YEAR 2012 - 13. 30 . AS FAR AS AS SESSMENT YEAR 2014 - 15 IS CONCERNED THE DISALLOWANCE U/S 14A OF THE ACT WAS MADE BY THE AO AS FOLLOWS; DISALLOWANCE U/ S 14A R.W.S.RULE 8D IS WORKED OUT AS BELOW: A TOTAL AMOUNT OF DIRECT INTEREST/OTHER EXPENSES PERTAINING TO TAX EXEMPT INVESTMENTS N I L B TOTAL AMOUNT OF INDIRECT INTEREST PERTAINING TO TAX EXEMPT INVESTMENTS 4,50,20,135 AY 2014 - 15 AY 2015 - 16 AVERAGE C AVERAGE AMOUNT OF TAX EXEMPT INVESTMENTS 423,47,51,677 428,40,63,487 425,94,07,582 D AVERAGE AMOUNT OF TOTAL ASSTS 692,28,57,496 741,76,05,228 717,02,31,362 E PROPORTIONATE INDIRECT INTEREST TO BE DISALLOWED B X C D 2,67,43,782 F 0.5% OF AVERAGE AMOUNT OF TAX EXEMPT INVESTMENTS 2,12,97,038 G TOTAL DISALLOWANCE ATTRACTED U/S14A A + E + F 4,80,40,820 LESS 14A DISALLOWANCE ALREADY DISALLOWED BY THE ASSESSEE ITSELF IN ITS COMPUTATION OF INCOME. 11,95,245 DISALLOWANCE U/S 14A R.W.RULE 8D 4,68,45,575 BASED ON THE ABOVE, DISALLOWANCE U/S 14A R.W.RULE 8D WAS WORK E D OUT TO RS.4,68,45,575/ - W H ICH WAS ADDED TO THE INCOME OF THE ASSESSEE. 31 . BEFORE THE DRP THE ASSESSEE SUBMITTED THAT NO BORROWED FUNDS WERE USED FOR THE PURPOSE OF MAKING INVESTMENTS THAT YIELDED DIVIDEND INCOME . THE DRP HOWEVER, CONFIRMED THE ORDER OF THE AO WITHOUT EXAMINING THE CLAIM OF THE ASSESSEE BY MERELY OBSERVING THAT IT WOULD BE DIFFICULT TO DRAW INFERENCE THAT T HE BORROWE D FUNDS WERE NOT USED TO MAKE INVESTMENTS WHICH YIELDED DIVIDEND INCOME. THIS INFERENCE OF THE DRP IS CONTRARY TO THE LAW LAID DOWN BY THE HONBLE KARNAT AKA HIGH COURT IN THE CASE OF MICRO LA BS INDIA PVT.LTD. (SUPRA). SINCE FACTS HAVING BEEN PROPERLY EXAMINE IN RESPECT OF THE DISALLOWANCE U/S 14A OF THE ACT , BOTH RULE UNDER 8D 2(II) AND (III) OF THE RULES WE SET ASIDE THE ORDER OF DRP/AO TO RE - CONSIDER THE ISSUE IN THE LIGHT OF THE ABOVE DISCUSSION AND IN IT(TP)A NO190,176(B)/2014 & C.O NO.39(B)/2016 IN IT(TP)A NO190(B) /2014. 29 THE LIGHT OF THE DIRECTION AS GIVEN WHILE DECIDING IDENTICAL ISSUE IN ASSESSMENT YEAR 2012 - 13. 3 2 . THE NEXT COMMON ISSUE WHICH ARISES FOR CONSIDERATION IN ASSESSME NT YEAR 2012 - 13 AND 2013 - 14 IS DISALLOWANCE MARKED TO MARKET LOSSES. THE FACTS IN THIS REGARD ARE THAT THE ASSESSEE ENTERED INTO FORWARD CONTRACTS TO HEDGE AGAINST THE LOSSES DUE TO FOREIGN EXCHANGE FLUCTUATION IN RESPECT OF TRADE PAYABLES. THE ASSESSEE I MPORTS GOODS AN D IS REQUIRED TO PAY THE AMOUNT IN FOREIGN EXCHANGE. SINCE THERE IS A TIME LAG BETWEEN THE IMPORT AND THE DATE OF PAYMENT, THE ASSESSEE ENTERS INTO FORWARD CO NTRACTS TO GUARD ITSELF AGAINST EXCHANGE FLUCTUATION AND CONSEQUENT LOSSES. AS AT THE YEAR END, THE OUTSTANDING CONTRACTS ARE MARKED TO MARKET AND ACCORDINGLY, THE RESULTANT FOREIGN EXCHANGE LOSS IS PROVIDED FOR. IT WAS THE PLEA OF THE A S SESSEE THAT THE MARKED TO MARKET LOSSES IN RESPECT OF FORWARD CONTRACT IS ALLOWABLE AS A DEDUCTIO N . THE ASSESSEE PLACED RELIANCE ON DECISION OF THE HONBLE BOMBAY HIGH COURT IN DIT (INTERNATIONAL TAXATION VS CITIBANK N.A.377 ITR 69 WHEREIN IT HELD THAT THE PROVISION FOR FOREIGN EXCHANGE LOSS ON UNMATURED FOREIGN EXCHANGE CONTRACT IS NOT A NOTIONAL LOS S AND IS ALLOWABLE AS DEDUCTION. THE HONBLE HIG H COURT A PPROVED THE DE CISION OF THE SPECI A L BENCH OF TRIBUNAL IN DCIT VS BANK OF BAHRAIN AND K UWAIT 5 ITR (TRIB.) 301 WHERE IT WAS HELD THAT THE PROVISION OF LOSS ON UNMATURED FORWARD CONTR A CT IS ALLOWABLE. THE ASSESSEE ALSO PLACED RELIANCE ON THE DECISION SUPREME COURT IN CIT VS WOODWARD GOVERNOR INDIA PVT.LTD.(312) 254. IT WAS HELD THEREIN TH A T THE LO S S S UFFERED BY AN ASSESSEE ON ACCOUNT OF THE FLUCTUATION IN THE RATE OF FOREIGN EXCHANGE AS ON TH E DATE OF BALANCE SHEET IS AN IT E M OF EXPENDITURE U/S 37(1) OF THE ACT. THE ASSESSEE POINTED OUT AS TO HOW CERTAIN TESTS WERE LAID DOWN TO DECIDED THE ALLOWABILITY OF SUCH LOSSES AND AS TO HOW THE ASSESSEES CASE IS ALSO SIMILAR TO THE FACTS OF THE CASE D ECIDED BY THE HONBLE SUPREME COURT. THE SAID TABLE IS GIVEN BELOW: TESTS LAID DOWN BY HONBLE SUPREME COURT ASSESSEE RESPONSE 1 WHETHER THE SYSTEM OF ACCOUNTING FOLLOWED IS MERCANTILE S YSTEM YES 2 WHETHER THE SAME SYSTEM IS FOLLOWED BY HE ASSESSEE FROM THE VERY BEGINNING AND IF THERE WAS CHANGE IN THE SYSTEM, WHETHER IT WAS BONAFIDE? YES THE A SSESEE IS CONSISTENTLY FOLLOWING THIS SYSTEM OF ACCOUNTING F OR NUMBERS OF YEARS. THE QUESTION OF CHANGE DOES NOT A R ISE AS IT IS FOLLOWING THIS SYSTEM CON SISTENTLY. IT(TP)A NO190,176(B)/2014 & C.O NO.39(B)/2016 IN IT(TP)A NO190(B) /2014. 30 3 WHETHER THE ASSESSEE HAS GIVEN THE SAME TREATMENT TO THE LOSSES CLAIMED TO HAVE ACCRUED AND THE GAINS THAT MAY ACCRUE TO IT? YES 4 WHETHER THE ASSESSEE HAS BEEN CONSISTENT AND DEFINITE IN MAKING ENTRIES IN THE BOOKS OF ACCOUNT IN RESPECT OF LOSSES AND GAINS? YES 5 WHETHER THE METHOD ADOPTED BY THE ASSESSEE FOR MAKING ENTRIES IN BOOKS BOTH IN RESPECT OF LOSSES AND GAINS I AS PER NATIONALLY ACCEPTED ACCOUNTING STANDARDS. YES THE ACCOUNTING POLICY IN RESPECT OF FOREIGN EXCHANGE LOSS/GAINS FOLLOWED BY THE ASSESSEE IS AS PER THE ACCOUNTING STANDARD 11 NOTIFIED BY COMPANIES (ACCOUNTING STANDARD)RULES 2008 AND ACCOUNTING STANDARD 11 ISSUED BY THE INSTITUTE OF CHARTERED A CCOUN TANTS OF I NDIA 6 WHETHER THE SYSTEM ADOPTED BY THE ASSESSEE IS FAIR AND REASONABLE OR IS ADOPTED ONLY WITH A VIEW TO REDUCING THE INCIDENCE OF TAXATION? THE SYSTEM ADOPTED IS FAIR. IT IS IN ACCORDANCE WITH THE GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND RELEVANT ACCOUNTING STANDARDS NOTIFIED BY CENTRAL GOVERNMENT UNDER COMPANIES ACT AND ACCOUNTING STANDARDS ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA. THE ASSESSEE IS ADOPTING THIS SYSTEM BOTH IN RESPE CT OF GAINS AND LOSSES AND OFFERING THE GAIN TO TAX. THEREFORE, THE ASSESSEE IS FAIR AND CONSISTENT IN ITS APPRO A CH. . 3 3 . THE AO HOWEVER DID NOT ACCEPT THE CLAIM OF THE ASSESSEE AND HE HELD THAT THE LOSS ARISING DUE TO FOREIGN EXCHANGE FLUCTUATION IS A NOTIONAL LOSS AND IS NOT REALI Z ED. HE ALSO HELD THAT UNDER THE ACT THERE IS NO SPECIAL PROVISION FOR TREATMENT OF MARKED TO MARKET METHOD OF ACCOUNTING. THE DRP CONFIRMED THE ORDER OF THE AO. 3 4 . IT WAS SUBMITTED BY THE LEARNED COUNSEL FOR THE ASSESSEE THAT JUST BECAUSE THERE IS NO SEPARATE PROVISION DEALING WITH MARKED TO MARKET LOSSES, IT CANNOT BE SAID THAT THE ASSESSEE IS NOT ENTITLED TO DEDUCTION. UNLESS THERE IS A SPECIFIC PROVISION PROHIBITING THE ALLOWANCE OF EXPENDITURE OR LOSS WHICH IS REVENUE IN NATURE INCURRED DURING THE COURSE OF BUSINESS, IT HAS TO BE ALLOWED. THE LEARNED COUNSEL ALSO DISTINGUISHED THE CASE OF SAN JEEV WOOLEN MILLS 279 ITR 234 AND IT(TP)A NO190,176(B)/2014 & C.O NO.39(B)/2016 IN IT(TP)A NO190(B) /2014. 31 ORIENTAL MOTORS CASE IN 124 ITR 74 BY POINTIN G OUT THAT I N THOSE CASES IT WAS CLEARLY HELD THAT THE LOSS WAS A NOTIONAL LOSS. IT WAS SUBMITTED THAT THE COURTS HAVE CONSISTENTLY HELD THAT THE LOSS DUE TO FOREIGN EXCHANGE FLUCTUATION IN RESPECT OF OUTSTANDING CONTRACTS IS NOT A NOTIONAL LOSS. IN THE CA SE OF ORIENTAL MOTORS THE ISSUE WAS WHETHER THE DISPUTED CLAIM CAN BE ALLOWED AS A DEDUCTION. THIS CASE HAS NO RELEVANCE TO THE FACTS OF THE PRESENT CASE AS THE ISSUE IS NOT ONE OF THE CLAIM FOR DISPUTED ITEMS. AS REGARDS THE RELIANCE ON INSTRUCTION NO. 3/ 2010 ISSUED BY CBDT IS CONCERNED, IT WAS SUBMITTED THAT THESE INSTRUCTIONS HAVE NOT BEEN FOLLOWED BY THE VARIOUS HIGH COURTS AND SUPREME COURT. I T WAS SUBMITTED THAT THE OPINION EXPRESSED BY CBDT IN CIRCULAR NO. 3/2010 IS NOT BINDING ON THE ASSESSEE AND IS CONTRARY TO THE CASE LAWS. THE COURTS AND THE TRIBUNALS HAVE CONSISTENTLY HELD THAT THE MARKED TO MARKET LOSSES ARE NOT CONTINGENT IN NATURE AND NOT MOTIONED. MOREOVER, THIS CIRCULAR IS WITH REFERENCE TO THE VALUATION OF FINANCIAL INSTRUMENTS AND NOT WITH REFERENCE TO FORWARD CONTRACTS OR HEDGE AGAINST EXCHANGE FLUCTUATIONS. THEREFORE, IT WAS PRAYED THAT A SUM OF RS. 35,40,261 BE ALLOWED AS A REVENUE LOSS. 3 5 . IN ASSESSMENT YEAR 2013 - 14 , TH E FACT ARE IDENTICAL BUT THE ONLY DIFFERENCE IS THAT A SUM OF RS.35,40,261/ - WAS INCOME AND NOT EXPENDITURE A ND SI N CE THIS IS ALREADY TAXED AND OFFERED TO TAX BY THE ASSESSEE MAKING ANOTHER ADDITION WOULD A MOUNT TO DOUBLE TAXATION OF T HE SAME INCOME. 3 6 . WE HAVE CONSIDERED SUBMISSIONS O F THE LD.COUNSEL FOR THE ASSESSEE. IN THE LIGHT OF THE FACTS OF THE CASE AND LEGAL POSITION AS LAID DOWN UNDER DECISION CITED BY THE LD.COUNSEL FOR THE ASSES SEE , WE ARE OF THE VIEW THAT THE CLAIM HAD TO BE ALLOWED. THE DRP HAS REJECTED THE CLAIM OF THE ASSE S SEE FOR THE ASSESSMENT YEAR 2013 - 14 AND IN DOING SO SEEMS TO HAVE PLACED RELIANCE ON THE DECISION OF THE ITAT B BENCH IN THE CASE OF M/S SHANKARA INFRASTRUCTURE VS A CIT 53 TAXMANN.COM 429(B). ON PERUSAL OF THE AFORESAID DECISION, WE FIND IN THAT C A SE, THE FORWARD CON T RACTS WERE ENTERED INTO BY THE ASSESSEE WITHOUT A NY REFERENCE TO THE TRANSACTIONS IT(TP)A NO190,176(B)/2014 & C.O NO.39(B)/2016 IN IT(TP)A NO190(B) /2014. 32 CONNECTED WITH TH E BUSINESS OF THE ASSES S EE AND THEREFORE THE TRANSACTIONS WERE NOT REGARDED AS HEDGING TRANSACTIONS TO SAFEGUARD LOSS ON REVENUE ACCOUN T. IN OTHER WORDS, THE F ORW A RD CONTRACTS HAD NO NEXUS WITH THE BUSINESS OF THE ASSESSEE AND THER EFORE, RECORDED AS SPECULATED. IN THE PRESENT C A SE, HOW EVER, IT IS UNDISPUTED THAT THE F ORWARD CONTRACTS WERE ENTERED INTO BY THE ASSESSEE TO SAFEGUARD ITSELF F ROM EXCHANGE LOSSES ON REALIZATION OF TR A D E PAYABLES. IN SUCH CIRCUMSTANCES, THE NEXUS BETWEEN THE FORWARD CONTRACTS AND THE A SSESSEES BUSINESS IS CLEARLY ESTABLISHED. SECONDLY, TH E LOSS IN QUESTION CANNOT BE RECORDED AS NOTIONAL LOSS AS LAID DOWN BY TH E HONBLE SUPREME COURT IN THE CASE OF CIT VS M/S W O ODWARD GOVERNOR INDIA PVT.LTD .(SUPRA) . L OOKED AT FROM ANY ANGLE THE CLAIM OF THE ASSESSEE DESERVES TO BE ACCEPTED AND THE GROUND RAISED IN THE GROUNDS OF A PP EA L FOR THE ASSESSMENT YEAR 2012 - 13 & 2013 - 14 ARE A LLOWED. WE MAY ALSO ADD THAT THE AO SHALL VERIFY THE PLEA OF THE ASSESSEE IN THE APPEAL FOR ASSESSMENT YE A R 2013 - 14 THAT A SUM OF RS.35.40 LAKHS THAT WAS ADDED WAS IN FACT NOT A LOSS BUT THE INCOME OFFERED BY THE ASSESSEE TO TAX. 3 7 . THE NEXT ISSUE WITH REGARD TO WARRANTY EXPENSES RAISED IN ASSESSMENT YEAR 2012 - 13 WAS NOT PRESSED HENCE DISMISSED AS NOT PRESSED. 3 8 . THE NEXT ISSUE ARISES FOR CONSIDERATION IS THE ISSUE WITH REGARD TO DISALLOWANCE OF FOREIGN EXCHANGE LOSSES IN ASSESSMENT Y EAR 2014 - 15. AS FAR AS T HIS ISSUE IS CONCERNED, THE FACTUAL DETAILS ARE THAT THE AO DISALLOWED THE CLAIM OF ASSESSEE AS WELL AS FOREIGN EXCHANGE LOSS BY HOLDING IT TO BE CAPITAL IN NATURE. BEFORE THE DRP THE ASSESSEE PLEADED THAT A LL T HE FOREIGN EXCHANGE LOSS WAS ON ACCOUNT OF TRANSACTI O N WHICH WERE REVENUE IN NATURE BUT THE PLE A WAS NOT ACCEPTED BY THE DRP FOR WANT OF PROPER DETAILS. THE LD.COUNSL FOR THE ASSESS E E MADE A PRAYER FOR REMAND OF THE ISSUE TO THE AO TO ENABLE THE A SSESSEE TO FILE THE REQUIRE D DETAILS SO THAT THE A O CAN DECIDE THE NATURE OF THE LOSS AS TO CAPITAL OR REV E NUE. THE PLEA IS ACCEPTED IT(TP)A NO190,176(B)/2014 & C.O NO.39(B)/2016 IN IT(TP)A NO190(B) /2014. 33 AND TH E ISSUE IS SET ASIDE TO THE AO FOR FRESH CONSIDERATION AFTER DUE OPPORTUNITY TO THE ASSESSEE. 3 9 . THE LAST ISSUE THAT ARISES FOR CONSIDERATION IN ASSESSMENT YEAR 2014 - 15 IS DISALLOWANCE U/S 43B OF THE ACT ON THE GROUND THAT THE SUM DISALLOWED U/S 43B OF THE A CT WERE NOT PAID ON OR BEFORE THE DUE DATE FOR FILING THE RETURN OF INCOME. THE A SSESSEE PLEA DED BEFORE THE DRP TH A T A PORTION OF THE S UM THAT WAS DISALLOWED U/S 43B OF THE ACT H A D BEEN PAID BEFOR E THE DUE DATE FOR FILING THE RETURN OF INCOME , A S IS EVIDENT FROM BY THE DETAILS AVAILABLE IN FORM - 3CD . THE LD.COUNSEL FO R THE A SSESSEE PRAYED THAT THE ISSUE SHOULD BE SE T ASIDE TO THE A O S O THAT THE ASSESSEE CAN EXPLAIN THE CORRECT DATE OF PAYMENT AND SATISFY THE AO THAT NO DISALLOWANCE U/S 43B IS WARRANTED. WE ACCEPT THE PRAYER OF T HE LD. COUNSEL FOR THE ASSESSEE AND SET ASIDE THE ISSUE TO THE AO FOR FRESH CONSIDERATION AFTER DU E OPPORTUNITY TO THE ASSESSEE. 40 . IN THE RESULT, THE APPEAL S OF THE ASSESSEE ARE PARTLY ALLOWED WHILE THE APPEAL BY THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 5 TH FEBRUARY, 2020. SD/ - SD / - (B.R.BASKARAN) ( N.V.VASUDEVAN ) ACCOUNTANT MEMBER VICE P[RESIDE NT DATED: 05 - 02 - 2020 *AM IT(TP)A NO190,176(B)/2014 & C.O NO.39(B)/2016 IN IT(TP)A NO190(B) /2014. 34 COPY OF THE ORDER FORWARDED TO: 1.APPELLANT; 2.RESPONDENT; 3.CIT; 4.CIT(A); 5. DR 6. ITO (TDS) 7.GUARD FILE BY ORDER ASST.REGISTRAR