Lubrizol Advanced Materials India Pvt.Ltd., Baroda V. The Dy.CIT.,Circle-1(2), Baroda

ITA 3320/AHD/2010

• Counselvise Citation: [2013] 140 COUNSELVISE.COM (IT) 68052 (ITAT-AHMEDABAD)
• Duration Of Justice: 2 year(s) 11 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-12-2013
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 23-10-2013
• Assessment Year: 2006-2007
• Appeal Filed On: 15-12-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: O P VAISHNAV
• Keywords: Transfer pricing; Opportunity of being heard; International transaction; Services rendered outside India; Retrospective amendment; Commercial expediency; Onus to prove; Revenue expenditure
• Section: 92C; 143(3); 92D; 244A; 92F; 37(1); 10B; 37; 92

Judgement Text

ITA NO 3320 /AHD/2010 . A.Y. 2006- 07 1 IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, AHMEDABAD (BEFORE SHRI D. K. TYAGI, J.M. & SHRI ANIL CHATURV EDI, A.M.) I.T. A. NO. 3320/AHD/2010 (ASSESSMENT YEAR: 2006-07) LUBRIZOL ADVANCED MATERIALS INDIA PRIVATE LTD. (FORMERLY KNOWN AS INDIAMALT PVT. LTD.) P.O. MANJUSAR, TAL. SAVLI, DISTT. BARODA, GUJARAT. V/S THE D.C.I.T, CIRCLE 1(2), BARODA-390007 (APPELLANT) (RESPONDENT) PAN: AAACI4361B APPELLANT BY : SHRI DHANESH BAFNA RESPONDENT BY : SHRI O.P. VAISHNAV, CITD.R. ( )/ ORDER DATE OF HEARING : 23-10-2013 DATE OF PRONOUNCEMENT : 06-12-2013 PER SHRI ANIL CHATURVEDI,A.M. 1. THIS APPEAL IS FILED BY THE ASSESSEE AGAINST THE OR DER OF DISPUTE RESOLUTION PANEL (DRP), AHMEDABAD DATED 13.09.2010 FOR A.Y. 2006- 07. 2. THE RELEVANT FACTS AS CULLED OUT FROM THE MATERIAL ON RECORD ARE AS UNDER; ITA NO 3320 /AHD/2010 . A.Y. 2006- 07 2 3. ASSESSEE IS A COMPANY ENGAGED IN THE BUSINESS OF MA NUFACTURE OF CASSIA GUM POWDER AND GUAR GUM POWDER. IT FILED ITS RETURN OF INCOME FOR A.Y. 06-07 ON 30.12.2006 DECLARING TOTAL INCOME OF RS. 66,50,170/-. AS THE VALUE OF INTERNATIONAL TRANSACTIONS ENTERED BY ASSESSEE WITH ITS (ASSOCIATED ENTERPRISE) A.ES EXCEEDED RS. 5 CRORE, REFERENCE U/S. 92CA(1) WAS MADE FOR DETERMINATION OF ARMSS LENGTH PRICE (ALP) TO TPO. TPO VIDE ORDER U/S. 92CA(1) MADE AN UPWARD ADJ USTMENT OF RS. 19,45,136/-. ASSESSEE THEREAFTER AGITATED THE MATT ER BEFORE DRP. DRP VIDE ORDER DATED 24.09.2010 ISSUED DIRECTIONS U/S. 144C(1) OF THE ACT. PURSUANT TO THE DIRECTIONS OF DRP, ASSESSMENT U/S 1 43(3) R.W.S. 144C(5) WAS FRAMED VIDE ORDER DATED 08.10.2010. AGGRIEVED B Y THE AFORESAID ORDER, ASSESSEE IS NOW IN APPEAL BEFORE US AND HAS RAISED THE FOLLOWING GROUNDS:- 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN L AW, THE LEARNED DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE1(2), BARODA (DCIT) HAS ERRED I N CONCLUDING THE ASSESSMENT UNDER SECTION 143(3) OF THE INCOME TAX ACT, 1961 (THE ACT), IN PURSUANCE TO THE DIRECTIONS OF THE LEARNED DISPUTE RESOLUTION PANEL (LD. DRP) UNDER SECTION 144C(5) OF THE ACT. 2. THE LEARNED DCIT ERRED ON FACTS AND IN LAW IN CONFI RMING THE ADDITION OF RS. 17,37,400/- TO THE INCOME OF THE APPELLANT BY DETERMINING THE ARMSS-L ENGTH PRICE OF THE APPELLANTS INTERNATIONAL TRANSACTION OF PROVISION OF MARKETING SUPPORT SERVI CES AT RS. 1,48,13,649 INSTEAD OF RS. 1,30,76,249/- AS DETERMINED BY THE APPELLANT AS FOL LOWS:- 2.1 IN REJECTING THE CONTEMPORANEOUS DOCUMENTATION MAIN TAINED BY THE APPELLANT AS REQUIRED UNDER THE INDIAN TP REGULATIONS; 2.2 NOT ALLOWING THE USE OF MULTIPLE YEAR DATA AS PRESC RIBED UNDER RULE 10B(4) OF THE RULES READ WITH THE OECD TP GUIDELINES AND DETERMINING THE ARM S LENGTH PRICE ON THE BASIS OF FINANCIAL INFORMATION OF THE COMPARABLES FOR ONLY F Y 05-06. 2.3 DENYING THE (+/-)5% RANGE BENEFIT AVAILABLE UNDER P ROVISO TO SETION 92C(2) OF THE ACT. 3. THE LEARNED DCIT ERRED ON FACTS AND IN LAW IN DISAL LOWING COMMUNITY WELFARE EXPENSES OF RS. 5,06,950/- ALTHOUGH SUCH EXPENSES HAVE BEEN INCURRE D BY THE APPELLANT IN COURSE OF ITS BUSINESS AND ARE ALLOWABLE UNDER SECTION 37 OF THE ACT. 4. WITHOUT PREJUDICE TO GROUND NO.3, THE LEARNED DCIT ERRED ON FACTS AND IN LAW IN NOT ADDING SUCH AMOUNT OF RS. 5,06,950/- TO PROFITS OF THE BUSINESS FOR COMPUTING DEDUCTION UNDER SECTION 10B OF THE ACT. 5. THE LEARNED DCIT ERRED ON FACTS AND IN LAW IN REDUC ING BROKERAGE OF RS. 1,00,318 ON SEA FREIGHT CHARGES FROM ELIGIBLE PROFITS OF BUSINESS FOR COMPU TING OF DEDUCTION UNDER SECTION 10B OF THE ACT. 6. THE LEARNED DCIT ERRED ON FACTS AND IN LAW IN REDUC ING REFUND OF EXCESS INSURANCE CHARGES OF RS. 64,125/- FROM ELIGIBLE PROFITS OF BUSINESS FOR COMP UTING DEDUCTION UNDER SECTION 10B OF THE ACT. 7. THE LEARNED DCIT ERRED ON FACTS AND IN LAW IN COMPU TING SHORT INTEREST UNDER SECTION 244A OF THE ACT ON THE REFUND DUE TO THE APPELLANT. 8. THE LEARNED DCIT ERRED ON FACTS AND IN LAW IN INITI ATING PENALTY PROCEEDINGS UNDER SECTION 271(1)(C) OF THE ACT. ITA NO 3320 /AHD/2010 . A.Y. 2006- 07 3 GROUND NO. 1 IS GENERAL AND THEREFORE REQUIRES NO A DJUDICATION. GROUND NO. 2 AND ITS SUB GROUNDS ARE IS WITH RES PECT TO DETERMINATION OF ALP 4. DURING THE YEAR UNDER REVIEW, ASSESSEE HAD PROVIDED SUPPORT SERVICES IN CONNECTION WITH MARKETING OF PRODUCTS TO ITS ASSOCI ATED ENTERPRISES (AE) WORTH RS 1,30,76,249/-. FOR BENCH MARKING THE SUPPO RT SERVICES, ASSESSEE CARRIED OUT SEARCH ON THE MARKETING SUPPOR T SERVICE AND AFTER APPLYING QUALITATIVE AND QUANTITATIVE FILTERS SHORT LISTED 4 COMPANIES NAMELY ACE SOFTWARE EXPORTS LTD, CSS TECHNOLOGY LTD , HEALICA BIO SCIENCE LTD AND VAKRANGEE SOFTWARE LTD AS COMPARABL ES FOR THE PURPOSE OF BENCHMARKING INTERNATIONAL TRANSACTIONS OF THE C OMPANY AS ACCORDING TO THE ASSESSEE THE AFORESAID COMPANIES WERE HAVING SIMILAR ACTIVITIES AS THAT OF ASSESSEE. ON THE BASIS OF FUNCTIONS PERFORM ED, ASSETS DEPLOYED AND RISKS ASSUMED BY THE ASSESSEE, TRANSACTIONAL NE T MARGIN METHOD (TNMM) WAS CHOSEN BY THE ASSESSEE AS THE MOST APPRO PRIATE METHOD. PBIT (PROFIT BEFORE INTEREST AND TAX) ON COST WAS T AKEN AS PROFIT LEVEL INDICATOR (PLI) AND IT WAS ACCORDINGLY WORKED AT 5. 12%. TNMM METHOD CHOSEN BY THE ASSESSEE WAS ALSO ACCEPTED BY THE TRA NSFER PRICING OFFICER (TPO). IN ADDITION TO THE COMPANIES CHOSEN AS COMPA RABLES, TPO CONSIDERED 4 MORE COMPANIES NAMELY KALS INFO SYSTEM S LTD, LUCID SOFTWARE LTD, BODHTREE CONSULTING LTD AND ACCEL TRA NSMATICS LTD AS COMPARABLES AND AFTER CONSIDERING THE 8 COMPANIES ( 4 SELECTED BY ASSESSEE AND 4 SELECTED BY TPO) NOTED THAT THE AVER AGE PLI OF THE COMPANIES WORKED OUT TO 20.76% AND THE ASSESSEE WAS THEREFORE SHOW ITA NO 3320 /AHD/2010 . A.Y. 2006- 07 4 CAUSED AND ASKED AS TO WHY THE PLI OF 20.76% NOT BE ADOPTED AND THE ARM'S LENGTH PRICE (ALP) OF SERVICES RENDERED TO AE BE RECOMPUTED ACCORDINGLY. ASSESSEE INTERALIA SUBMITTED THAT THE ACTIVITIES OF THE 4 COMPANIES SELECTED BY TPO WERE NOT COMPARABLE WITH THAT OF THE ASSESSEE AS THEY WERE ENGAGED IN THE BUSINESS OF SO FTWARE DEVELOPMENT. IT WAS FURTHER SUBMITTED THAT FOR SELECTION OF COMP ANY BY THE ASSESSEE, IT HAD APPLIED QUANTITATIVE FILTER OF TURNOVER/GROSS P ROFIT OF NOT MORE THAN RS 50 CRORES. IT WAS FURTHER SUBMITTED THAT VAKRANG EE SOFTWARE LTD, THOUGH SELECTED BY THE ASSESSEE SHOULD BE REJECTED SINCE ITS TURNOVER WAS IN EXCESS OF RS 50 CRORES AND WAS NOT MEETING THE Q UANTITATIVE FILTER FOR FY 2005-06. THE SUBMISSIONS OF THE ASSESSEE OF EXCL UDING VAKRANGEE SOFTWARE LTD WAS NOT FOUND ACCEPTABLE TO THE TPO AS HE WAS OF THE VIEW THAT VAKRANGEE SOFTWARE LTD WAS SELECTED BY THE ASS ESSEE ITSELF AND ITS TURNOVER WAS RS 51.15 CRORE, WHICH WAS NEARER TO TH E LIMIT OF RS 50 CRORE ACCEPTED BY THE ASSESSEE. HE ALSO REJECTED THE SUBM ISSION OF EXCLUDING THE 4 COMPANIES SELECTED BY THE TPO AS ACCORDING TO THE TPO THE NATURE OF BUSINESS WAS SIMILAR TO THAT OF ASSESSEE. HE ACC ORDINGLY WORKED OUT THE ALP OF SERVICES MADE TO AE AT RS 1,50,21,381/- AS AGAINST THE TRANSACTION VALUE OF RS 1,30,76,249/- AND SINCE THE VALUE OF SERVICES WORKED OUT BY HIM DID NOT FELL WITHIN THE RANGE OF +/-5% AS PER THE PROVISO TO S. 92C(2) OF THE ACT, HE SUGGESTED UPWAR D ADJUSTMENT OF RS 19,45,136/- TO THE TOTAL INCOME VIDE ORDER DATED 14 .10.2009 PASSED U/S 92CA(3) AND THE SAME WAS MADE BY THE AO IN THE DRAF T ASSESSMENT ORDER PASSED U/S 143(3) RWS 144C OF THE ACT. AGGRIEVED BY THE AFORESAID ORDER, ASSESSEE CARRIED THE MATTER BEFORE DISPUTE RESOLUTI ON PANEL (DRP). DRP VIDE ORDER DATED 13.9.2010 PARTLY AGREED WITH THE S UBMISSIONS BY HOLDING AS UNDER: ITA NO 3320 /AHD/2010 . A.Y. 2006- 07 5 4.WE HAVE CONSIDERED THE ORDER OF THE TPO/AO AND SU BMISSIONS OF THE ASSESSEE. GROUNDS OF OBJECTIONS NO. 3 TO 12 HAVE BEEN PREFERRED BY THE ASSESSEE COM PANY AGAINST THE TRANSFER PRICING ADJUSTMENTS PROPOSED BY THE TPO/AO. BRIEFLY, THE ASSESSEE HAS T WO DIVISIONS. IN THE MANUFACTURING DIVISION SPECIALITY PRODUCTS FIOM AGRICIILTURE INPUT ARE BEI NG MANUFACTURED, WHILE IN THE ITES/BPO DIVISION, PROVISION OF SUPPORT SERVICES IN CONNECTION WITH MA RKETING OF THE PRODUCTS TO AE IN EUROPE ARE CARRIED ON. FOR BENCHMARKING THE SUPPORT SERVICES, THE ASSE SSEE COMPANY CARRIED OUT A SEARCH BASED ON BROAD FUNCTIONL COMPARABILITY USING ITES AND BPO AS BROAD LY COMPARABLES ON FUNCTIONAL ANALYSIS. THE ASSESSEE FINALLY SELECTED 4 COMPANIES AS COMPARABLE S VIZ. : 1.ACC SOFTWARE EXPORT LTD. 2.CSS TECHNOLOGY LTD. 3.HEALICA BIO SCIENCE LIMITED 4.VAKRANGEE SOFTWARE LIMITED THE TPO ACCEPTED ALL THE ABOVE COMPANIES SELECTED B Y THE ASSESSEE AS COMPARABLES, BUT ADOPTED 4 ADDITIONAL COMPARABLES, IN RESPECT OF SUPPORT SERVI CE ACTIVITIES. A NOTICE WAS ISSUED TO TIE ASSESSEE AND AFTER TAKING INTO CONSIDERATION THE OBJECTIONS OF T HE ASSESSEE, THE TPO PROPOSED AN ADDITION OF RS. 19,45,136/-. FROM THE ORDER OF THE TPO, IT IS NOTIC ED THAT THE TPO HAS NOT REJECTED THE TRANSFER PRICI NG ANALYSIS OF THE ASSESSEE, BUT ADDED ADDITIONAL 4 CO MPARABLES AND APPLIED ARITHMETIC MEAN OF THE OPERATING PROFIT TO COST, AS PLI TO COMPARE THAT OF THE ASSESSEE (INDIAN PARTY) TO ARRIVE AT THE ABOVE REFERRED ADJUSTMENT OF RS. 19,45,136/-. 5.IT IS SEEN THAT THE TPO HAS NOT PROVIDED THE ASSE SSEE WITH THE SEARCH PROCESS CARRIED OUT BY HIM TO ARRIVE AT THE FINAL 8 COMPARABLE COMPANIES, WHICH C ONSISTED OF 4 COMPANIES SELECTED BY THE ASSESSEE AND THE OTHER 4 COMPANIES SELECTED BY THE TPO AND C ONSIDERED AS COMPARABLE COMPANIES. DURING THE COURSE OF DRP PROCEEDINGS, THE TPO WAS SPECIFICALLY ASKED TO POINT OUT THE SEARCH PROCESS THROUGH WHICH THOSE 4 COMPANIES WERE SELECTED AS IT WAS STA TED HY HIM IN THE TP ORDER THAT THOSE 4 ADDITIONAL COMPARABLES WERE IDENTIFIED ON INDEPENDENT SEARCH. THE TPO SHOWED HIS INABILITY TO DO SO. IT WAS VERIFIED BY THE TPO FROM THE TRANSFER PRICING REPOR T SUBMITTED BY THE ASSESSEE DURING THE COURSE OF TP PROCEEDINGS THAT THESE ADDITIONAL 4 COMPANIES HA VE NOT BEEN SELECTED OUT OF THE COMPANIES REJECTED IN THE QUALITATIVE ANALYSIS DONE BY THE ASSESSEE. I T IS TRITE LAW THAT THE TPO CANNOT INDULGE IN 'CHER RY PICKING' (TOSHIBA INDIA PVT. LTD). FURTHER, THE TPO HAS NOT DISTURBED OR OBJECTED TO, OR REJECTED THE SEARCH PROCESS CARRIED OUT BY THE ASSESSEE, BY WHIC H IT SELECTED THE COMPARABLES, IN FACT, ALL THE 4 COMPARABLES CHOSEN BY THE ASSESSEE WERE ACCEPTED BY THE TPO. PROVISIONS OF SECTION 92C(3) OF THE INCOME-TAX ACT, LAY DOWN THE CONDITIONS UNDER WHICH THE TPO CAN REJECT THE COMPARABLES CHOSEN BY THE ASSESSEE AND CONDUCT A FRESH SEARCH. NONE OF TH E CONDITIONS LAID DOWN UNDER THE ABOVE SECTION ARE SHOWN TO HAVE BEEN VIOLATED BY THE ASSESSEE. IN CIR CULAR NO. 12/2001 DT. 23/8/2001, IT HAS BEEN SPECIFICALLY REITERATED THAT THE ASSESSING OFFICER CAN HAVE RECOURSE TO SECTION 92C(3) OF THE ACT, ONL Y UNDER THE CIRCUMSTANCES ENUMERATED UNDER CLAUSES (A ) TO(D) OF THAT SUB-SECTION AND IN THE EVENT OF MATERIAL INFORMATION OR DOCUMENT IN HIS POSSESSION ON.THE BASIS OF WHICH AN OPINION CAN BE FORMED THAT ANY SUCH CIRCUMSTANCE EXISTED. IN ALL OTHER CA SES, THE VALUE OF THE INTERNATIONAL TRANSACTION SHO ULD BE ACCEPTED. AS NONE OF THE CIRCUMSTANCES ENUMERATE D IN CLAUSE (A) TO (D) OF SEC.92C(3) OF THE ACT ARE SHOWN TO HAVE EXISTED, RELYING UPON THE DECISION IN THE CASE OF MENTOR GRAPHICS NOIDA P LTD. VS. DC1T (112-TTJ-408 (DELHI) AND ACIT VS MSS INDIA PVT . LTD. [2009] (TIOL-416-ITAT-PUNE), THE TPO COULD NOT HAVE ADDED FURTHER 4 COMPARABLES TO THE C OMPARABLES ALREADY CHOSEN BY THE ASSESSEE AFTER DUE SEARCH PROCESS. THE AO IS DIRECTED TO EXCLUDE T HE ADDITIONAL 4 COMPARABLES SELECTED BY HIM. IT IS SEEN THAT THE ASSESSEE HAS ITSELF SELECTED VA KRANGEE AS ONE OF THE 4 COMPARABLE SELECTED BY IT A FTER FAR ANALYSIS. THE ONLY REASON FOR ITS EXCLUSION IN THE FINAL SET OF COMPARABLES IS THAT ASSESSEE HAS APPLIED A QUANTITATIVE FILTER OF COMPANIES TO BE SE LECTED AS COMPARABLES BEING LESS THAN 50 CRORE TURNOVER. IT IS SEEN THAT FOR A SERVICE INCOME OF R S. 1,30,76,249/- THE UPPER QUANTITATIVE FILTER OF R S.50 CRORES HAS BEEN APPLIED WITHOUT GIVING ANY REASONS AS TO WHY SUCH QUANTITATIVE FILTER OF 40 TIMES THE SALES IS REQUIRED. MORE IMPORTANTLY, IT IS REQUIRED TO BE SEEN AS TO WHETHER UPPER QUANTITATIVE FILTER HAS ANY ROLE TO PLAY IN THE SELECTION OF COMPARABLES. I N THE FAR ANALYSIS DONE TO SELECT COMPARABLES, COMPARISON OF ASSETS HAVE AN IMPORTANT ROLE TO PLAY . THE UNDERLYING LOGIC IS THAT WITH THE APPLICATION OF SIMILAR ASSETS, SIMILAR OR ALMOST SIMILAR SALES ARE ACHIEVED. THE QUANTITATIVE FILTER APPLIED FOR SELECTION OF COMPARABLES EVEN OUT THE COMPARABLES U SING SIMILAR ASSETS. HOWEVER, IN ITES INDUSTRY, THESE QUANTITATIVE FILTERS HAVE NO ROLE TO PLAY AS THE RATES ARE CHARGED PER HOUR, IN ANY CASE, IF AN ADHOC UPPER FILTER OF 50 CRORES IS APPLIED, THE MER E DIFFERENCE IN RECEIPT OF 1 OR 2 CRORE WOULD NOT MAKE ANY DIFFERENCE, IF THE COMPARABLE IS, OTHERWIS E, FUNCTIONALLY SIMILAR. AS THE ASSESSEE HAS HIMSEL F ITA NO 3320 /AHD/2010 . A.Y. 2006- 07 6 SELECTED THIS COMPARABLE AS FUNCTIONALLY SIMILAR, I T CANNOT BE REJECTED MERELY BECAUSE IT DOES NOT FAL L IN ASSESSEE'S OWN ADHOC FILTER. 9.4 IN. VIEW OF THE ABOVE, THE FINAL SET OF COMPARA BLES WHICH IS NOW DIRECTED TO BE TAKEN FOR BENCHMARKING THE INTERNATIONAL TRANSACTION FOLLOWIN G TNMM ARE AS UNDER. THE PLIS (OPERATING PROFIT/OPERATING EXPENDITURE) OF THESE COMPARABLES FOR F.Y. 2005-06 AS COMPUTED BY THE ASSESSEE, ITSELF HAVE ALSO BEEN MENTIONED HEREUNDER. SR. NO. NAME O THE COMPANY PLI (OP/OC) (%) 1 ACE SOFTWARE EXPORTS LTD. 7.81 2 CSS TECHNERGY LTD 19.84 3 VAKRANGEE SOFTWARE LTD. 29.62 ARITHMETIC MEAN 1 9.09% 10. THE ASSESSEE HAS ALSO CONTENDED THAT BENEFIT OF +/-5% BE ALLOWED TO IT IN THE ALP. WE HAVE CONSIDERED THIS ISSUE, PROVISO TO SECTION 92C (2) O F THE I.T. ACT PROVIDES THAT WHERE MORE THAN ONE PRICE IS DETERMINED BY THE MOST APPROPRIATE METHOD, THE ARMS LENGTH PRICE SHALL BE TAKEN TO BE THE ARITHMETICAL MEAN OF SUCH PRICES, OR, AT THE OPTION OF THE ASSESSEE, A PRICE WHICH MAY VARY FROM THE ARITHMETICAL MEAN BY AN AMOUNT NOT EXCEEDING 5% OF SUCH ARITHMETICAL MEAN. THE TRANSFER PRICING PROVISIONS WERE BROUGHT ON THE STATUTE BY THE FINAN CE ACT, 2001 W.E.F. 1.4.2002. IT IS WITH A VIEW TO AVOID HARDSHIP TO THE TAX PAYERS IN THE INITIAL YEA RS OF IMPLEMENTATION OF THESE PROVISIONS, THE GOVERNMENT OF INDIA, THROUGH A PRESS NOTE ISSUED BY THE MINISTRY OF FINANCE (DEPT. OF REVENUE) ON 22.08.2001 , EXPRESSED ITS INTENTION OF NOT MAKING, ANY ADJUSTMENT IF THE PRICE ADOPTED BY THE ASSESSE D WAS UP TO 5% LESS OR UP TO 5% MORE THAN THE ARM'S L ENGTH PRICE DETERMINED BY THE A.O. IMMEDIATELY THEREAFTER, THE CENTRAL BOARD OF DIRECT TAXES (CBDT ) ISSUED THE CIRCULAR NO.12 DTD.23. 08 2001 SPECIFYING THAT THE A,O. SHALL NOT MAKE ANY ADJUSTM ENT TO THE PRICE SHOWN BY THE ASSESSES, IF SUCH PRI CE WAS UP TO 5% LESS OR UP TO 5% MORE THAN THE ARM' S LENGTH PRICE DETERMINED BY THE A.O. AND IN SUCH CASES, THE PRICE DECLARED BY THE ASSESSEE MAY BE AC CEPTED. IN THE PRESENT CASE IT IS SEEN THAT THE ALP OF THE INTERNATIONAL TRANSACTIONS UNDERTAKEN BY THE AS SESSEE IS BEYOND THE 5% MARGIN OF THE PRICE OF INTERNATIONAL TRANSACTION COMPUTED BY THE ASSESSEE. THE PROVISO TO SECTION 92C(2) HAS BEEN, AMENDED W.E.F. 1/10/2009. IN THE CASE OF GLOBAL VANTEDGE (I ) LTD. VS. DCIT (2010)1 ITR(TRIB) 326 (DEL) THE BENEFIT OF ADJUSTMENT OF + 5% REJECTED BY THE CIT(A )S WAS CONFIRMED BY THE ITAT EVEN THOUGH COUNSEL FOR THE ASSESSEE MADE A SPECIAL SUBMISSION ABOUT TH E BENEFIT OF ADJUSTMENT OF + 5%/-5% . THEREFORE, IN VIEW OF THE PROVISIONS OF THE LAW, DETAILS AND INTE NTIONS AS ARE EVIDENT FROM THE PRESS NOTE OF GOVT. OF INDIA AS WELL AS CIRCULAR OF THE CBDT, AS AFOREMENT IONED THE BENEFIT OF THE SAFE HARBOUR OF +5/-5% IS NOT AVAILABLE TO THE ASSESSEE. 5. AGGRIEVED BY THE ORDER OF DRP, ASSESSEE IS NOW IN A PPEAL BEFORE US. 6. BEFORE US, THE LD A.R. SUBMITTED THAT THE COMPANY I S ENGAGED IN BUSINESS PROCESS OUTSOURCED ACTIVITIES AND THE SERV ICES PROVIDED BY THE ASSESSEE TO ITS AE ARE PURELY AUXILIARY AND PREPARA TORY IN NATURE. HE FURTHER SUBMITTED THAT ALP WAS COMPUTED BY ASSESSEE AS PER THE PROVISIONS OF SECTION 92 TO 92F OF THE ACT, WHICH R EQUIRES THE COMPUTATION TO BE BASED ON THE INFORMATION AVAILABL E IN THE PUBLIC DOMAIN UPTO THE DATE OF FILING OF RETURN. HE FURTHE R SUBMITTED THAT ITA NO 3320 /AHD/2010 . A.Y. 2006- 07 7 ASSESSEE FOR THE PURPOSE OF COMPUTATION OF AVERAGE NET MARGINS OF THE COMPARABLE COMPANIES HAD CONSIDERED MULTIPLE YEAR D ATA I.E. DATA PERTAINING TO PRIOR TWO YEARS FOR THE REASON THAT T HE DATA FOR THE RELEVANT YEAR WAS NOT AVAILABLE AT THE TIME OF CONDUCTING SE ARCH PROCESS. HE FURTHER SUBMITTED THAT THE TPO CONSIDERED ONLY THE DATA PERTAINING TO THE FINANCIAL YEAR IN WHICH THE INTERNATIONAL TRANSACTI ONS WERE ENTERED BY THE ASSESSEE I.E. FINANCIAL YEAR ENDING 31 ST MARCH 2006 AS BEING THE DATA THAT IS CONTEMPORANEOUS AND APPROPRIATE FOR COMPUTING TH E MARGIN OF THE COMPARABLE COMPANIES. HE FURTHER SUBMITTED THAT IF SINGLE YEAR DATA (I.E. FOR YEAR ENDED 31 ST MARCH 2006) WAS CONSIDERED FOR BENCHMARKING, THEN VAKRANGEE SOFTWARE LTD, AS A COMPARABLE COMPANY SHO ULD HAVE BEEN EXCLUDED AS IT DID NOT MEET THE QUANTITATIVE CRITER IA FOR THE REASON THAT ITS TURNOVER FOR YEAR ENDING 31.3.2006 WAS RS 51.15 CRO RE WHICH WAS IN EXCESS OF THE UPPER LIMIT ON THE TURNOVER CRITERIA (RS 50 CRORE) APPLIED FOR ALL OTHER COMPANIES FOR CARRYING OUT BENCHMARKING O F THE INTERNATIONAL TRANSACTIONS OF THE ASSESSEE. HE FURTHER SUBMITTED THAT IN YEAR ENDED 31 ST MARCH 2006, THE TURNOVER OF VAKRANGEE SOFTWARE LTD WAS FROM SOFTWARE AND DATABASE RELATED SERVICES SEGMENT, WHICH WAS DI FFERENT FROM THE ACTIVITIES OF THE ASSESSEE AND THEREFORE ALSO IT WA S NOT COMPARABLE WITH THE ASSESSEE. HE FURTHER SUBMITTED THAT FOR AY 07-0 8, THOUGH THE ASSESSEE HAD SELECTED VAKRANGEE SOFTWARE AS COMPARA BLE BUT THE SAME WAS NOT CONSIDERED AS COMPARABLE BY THE TPO IN SUPP ORT OF WHICH HE PLACED ON RECORD THE RELEVENT EXTRACT OF THE ORDER OF TPO DATED 30.9.2010. HE FURTHER SUBMITTED THAT EVEN THOUGH TH E ASSESSEE HAS TAKEN VAKRANGEE SOFTWARE LTD AS A COMPARABLE IN ITS TP ST UDY BUT HOWEVER BEFORE TRIBUNAL IT CAN RAISE A GROUND FOR ITS EXCLU SION ON ACCOUNT OF NON COMPARABILITY AND FOR WHICH IT RELIED ON THE DECISI ON OF SPECIAL BENCH IN ITA NO 3320 /AHD/2010 . A.Y. 2006- 07 8 THE CASE OF DCIT VS QUARK SYSTEMS PVT LTD 2010 TIOL 31 ITAT CHD (SB). HE ALSO PLACED ON RECORD A COPY OF THE AFORES AID ORDER. HE THEREFORE URGED THAT VAKRANGEE SOFTWARE SHOULD BE EXCLUDED FO R THE CALCULATION OF AVERAGE OP/TC % . 7. THE LD D.R. ON THE OTHER HAND SUBMITTED WRITTEN SUB MISSIONS. THE RELEVANT PORTION OF THE WRITTEN SUBMISSIONS ARE AS UNDER: GROUND NO. 2.1 2.1 IN THIS REGARD, IT CAN BE SEEN THAT THE TPO HAD NOT REJECTED THE ENTIRE DOCUMENTATION PREPARED BY THE ASSESSE. FROM PERUSAL OF THE ORDER IT CAN BE SE EN THAT THE TPO HAD ACCEPTED THE SELECTION OF TESTE D PARTY, THE SELECTION OF MOST APPROPRIATE METHOD AND THE SELECTION OF PROFIT LEVEL INDICATOR AS THE RAT IO OF PBIT TO COST. THE ONLY DISPUTE IN THIS CASE IS W ITH RESPECT TO CONSIDERATION OF FOUR MORE COMPARABL ES BY THE TPO, IN ADDITION TO THE COMPARABLES SELECTED BY THE ASSESSEE. 2.1.1 IN THIS REGARD IT IS ALSO IMPORTANT TO NOTE T HE PROVISIONS OF SECTION 92C(3) WHICH ARE REPRODUCE D BELOW: '(3) WHERE DURING THE COURSE OF ANY PROCEEDING FOR THE ASSESSMENT OF INCOME, THE ASSESSING OFFICER IS, ON THE BASIS OF MATERIAL OR INFORMATION OR DOCUMENT IN HIS POSSESSION, OF THE OPINION THAT (A) THE PRICE CHARGED OR PAID IN AN INTERNATIONAL T RANSACTION [OR SPECIFIED DOMESTIC TRANSACTION] HAS NOT BEEN DETERMINED IN ACCORDANCE WITH SUB-SECTIONS (1) AND (2); OR (B) ANY INFORMATION AND DOCUMENT RELATING TO AN INT ERNATIONAL TRANSACTION [OR SPECIFIED DOMESTIC CONTAINED IN SUB-SECTION (1) OF SECTION 92D AND THE RULES MADE IN THIS BEHALF; OR (C) THE INFORMATION OR DATA USED IN COMPUTATION OF THE ARM'S LENGTH PRICE IS NOT RELIABLE OR CORRECT; OR (D) THE ASSESSEE HAS FAILED TO FURNISH, WITHIN THE SPECIFIED TIME, ANY INFORMATION OR DOCUMENT WHICH H E WAS REQUIRED TO FURNISH BY A NOTICE ISSUED UNDER SU B-SECTION (3) OF SECTION 92D, THE ASSESSING OFFICER MAY PROCEED TO DETERMINE THE ARM'S LENGTH PRICE IN RELATION TO THE SAID INTERNATIONAL TRANSACTION [OR SPECIFIED DOMESTIC TR ANSACTION] IN ACCORDANCE WITH SUB-SECTIONS (1) AND (2), ON THE BASIS OF SUCH MATERIAL OR INFORMATION O R DOCUMENT AVAILABLE WITH HIM: ' 2.1.2FROM PERUSAL OF THE ABOVE PROVISIONS, IT IS CL EAR THAT IF THE AO/TPO IS IN POSSESSION OF MATERIAL/INFORMATION/DOCUMENTS, ON THE BASIS OF WHI CH IS OF THE OPINION THAT ONE OF THE FOUR CONDITION S AS MENTIONED IN THE ABOVE SECTION ARE NOT FULFILLED THEN THE AO/TPO IS EMPOWERED TO DETERMINE THE ARM'S-LENGTH NATURE OF INTERNATIONAL TRANSACTIONS O N THE BASIS OF SUCH MATERIAL/INFORMATION/DOCUMENT J AVAILABLE WITH HIM. DURING THE COURSE OF PROCEEDING S, THE TPO WAS IN POSSESSION OF THE INFORMATION IN RELATION TO THE FOUR NEW COMPARABLES IDENTIFIED BY HIM, ACCORDING TO WHICH THOSE COMPARABLES OPERATED IN THE SIMILAR BUSINESS LIKE THE ASSESSEE COMPANY, AN ASSERTION WHICH IS MADE IN PARA 3 OF THE SHOW CAUSE NOTICE PROVIDED TO THE ASSESSEE. SIN CE, THE ASSESSEE HAD ONLY CONSIDERED FOUR COMPARABLES, ON THE BASIS OF TP DOCUMENTATION PREPA RED BY IT, IT IS CLEAR THAT WITHOUT CONSIDERATION OF THE FOUR NEW COMPARABLES IDENTIFIED BY THE TPO IN A DDITION TO THE COMPARABLES IDENTIFIED BY THE ASSESSEE, THE INFORMATION AND THE DATA USED IN THE COMPUTATION OF ARM'S-LENGTH PRICE WOULD NOT REMAIN CORRECT SINCE THE ARM'S-LENGTH PLI IS REQUIRED TO B E CONSIDERED AS THE MEAN PLI OF ALL THE COMPARABLES IDENTIFIED. NON-CONSIDERATION OF CERTAIN COMPARABLE COMPANIES WOULD LEAD TO A SITUATION IN WHICH THE MEAN PLI WOULD BE INCORRECT AND CONSEQUENTLY THE DE TERMINATION OF ARM'S-LENGTH PRICE WOULD BE INCORRECT. CONSEQUENTLY, THE PROVISIONS OF SECTION 92C(3)(C) WOULD BE APPLICABLE AND THUS THE TP DOCUMENTATION PREPARED BY THE ASSESSEE WOULD BE LIA BLE TO BE REJECTED TO THE EXTENT FOUND ERRONEOUS. 2.1.3 IN ADDITION TO THE ABOVE, IT IS FURTHER SEEN THAT THE ASSESSEE HAS USED THE MULTIPLE YEAR DATA I N ITS TP DOCUMENTATION FOR DETERMINING THE ARM'S-LENGTH P RICE FOR THE INTERNATIONAL TRANSACTIONS. AS DISCUSSED IN DETAIL BELOW WITH RESPECT TO GROUND NU MBER 2.2, THE USE OF MULTIPLE YEAR DATA IN DETERMINATION OF ARM'S-LENGTH PRICE IS CONTRARY TO LAW AND CONSEQUENTLY IT WILL LEAD TO A SITUATION IN WHICH THE DATA/INFORMATION USED IN THE DETERMINATIO N OF ARM'S-LENGTH PRICE WOULD BE INCORRECT, LEADING ITA NO 3320 /AHD/2010 . A.Y. 2006- 07 9 TO THE APPLICABILITY OF THE PROVISIONS OF SECTION 9 2C(3)(C) AND THEREFORE ON THIS GROUND ALSO THE TP DOCUMENTATION PREPARED BY THE ASSESSEE WOULD BE LIA BLE TO BE REJECTED TO THE EXTENT FOUND ERRONEOUS. 2.1.4 THERE CAN BE A GROUND OF OBJECTION THAT THE D ATA NOT AVAILABLE WITH THE ASSESSEE AT THE TIME OF PREPARATION OF DOCUMENTATION, COULD NOT BE USED BY THE TPO WHILE CARRYING OUT HIS BENCHMARKING. AS PER PROVISIONS OF INDIAN TRANSFER PRICING REGULATIO NS, THE REQUIREMENT OF MAINTENANCE OF DOCUMENTATION IS CAST ON THE ASSESSEE AND THE PURPO SE OF SAME IS ONLY LIMITED TO SUPPORT THE JUSTIFICATION OF ARMS LENGTH PRICE ANALYSIS CARRIED OUT BY THE ASSESSEE; THE SAME CANNOT FETTER THE POWER OF TPO TO CONSIDER OTHER COMPARABLES WHICH AR E OUTSIDE THE DOCUMENTATION KEPT BY THE ASSESSEE. IN THIS RESPECT IT IS PERTINENT TO NOTE T HE FOLLOWING PROPOSITION HELD IN THE CASE OF KODIAK NETWORKS (INDIA) PRIVATE LIMITED (15ITR610) (51SOT1 91) (BANGALORE TRIBUNAL) (2012) AND GENISYS INTEGRATING SYSTEMS (INDIA) PRIVATE LIMITED VS DCIT (ITA NO. 1231) (BANGALORE TRIBUNAL)(2019) WHERE THIS ISSUE IS DISCUSSED IN DETAILS BY THE HON 'BLE BENCHES: '12.1 AS FAR AS THE DATA TO BE USED BY THE TPO WHIL E DETERMINING THE ALP IS CONCERNED, WE FIND THAT IT IS COVERED BY THE PROVISIONS OF RULE -10D SUB-RULE- 4 OF THE IT RULES, 1962. SEC.92C PROVIDES THE METHOD FOR COMPUTATION OF ALP AND PRESCRIBES FIVE M ETHODS FOR COMPUTING THE ALP AND ALSO ANY OTHER METHOD AS MAY BE PRESCRIBED BY THE BOARD. SEC.92D P ROVIDES THAT EVERY PERSON WHO HAS ENTERED INTO AN INTERNATIONAL TRANSACTION SHALL MAINTAIN AND KEE P SUCH INFORMATION AND DOCUMENTS IN RESPECT THEREOF AND THE BOARD MAY ALSO PRESCRIBE THE PERIOD FOR WHICH THE INFORMATION AND DOCUMENTS SHALL BE KEPT AND MAINTAINED AND THE AO AND THE CIT(A) MAY I N THE COURSE OF ANY PROCEEDINGS UNDER THE ACT, REQUIRE ANY PERSON WHO HAS ENTERED INTO AN INTERNAT IONAL TRANSACTION TO FURNISH ANY INFORMATION AND DOCUMENTS IN RESPECT THEREOF THUS, IT CAN BE SEEN T HAT THE REQUIREMENTS IS ONLY TO MAINTAIN AND KEEP THE INFORMATION AND DOCUMENTS RELATING TO INTERNATI ONAL TRANSACTIONS SO THAT THEY ARE AVAILABLE AS AND WHEN REQUIRED DURING ANY PROCEEDINGS UNDER THE ACT. THE SECTION DOES NOT PROVIDES THAT THE INFORMATION AND DOCUMENTS ARE TO BE KEPT AND MAINTA INED FOR A PERIOD OF 8 YEARS. RULE 10-D OF SUB- SEC. 1 SPECIFIES THE DOCUMENTS AND INFORMATION WHIC H ARE TO BE KEPT AND MAINTAINED BY THE ASSESSEE AND SUB-RULE-2 THEREOF PROVIDES THAT NOTHING CONTAI NED IN SUB-RULE-1 SHALL APPLY IN A CASE WHERE THE AGGREGATE .VALUE AS RECORDED IN THE BOOKS OF ACCOUN TS, THE INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE ASSESSEE DOES NOT EXCEED 1.00 CRORE RUPEES. SUB -RULE-3 PROVIDES THE SUPPORTING AUTHENTIC DOCUMENTS WHICH ARE TO BE KEPT AND MAINTAINED AND S UB-RULE-4 THEREOF PROVIDES THAT THE INFORMATION AND DOCUMENTS SPECIFIED UNDER SUB-RULE 1 & 2 SHOULD AS FAR AS POSSIBLE BE CONTEMPORANEOUS AND SHOULD EXISTS LATEST BY TH L E 'SPECIFIED DATE' REFERRED TO IN CLAUSE-4 OF 92F. CLAUSE-4 OF SEC.92F GIVES THE DEFINITION OF 'SPECIFIED DATE' TO HAVE THE SAME MEANING AS ASSIGNED TO 'DUE DATE' IN EXPLANATION-2 BELOW SUB-SEC. 1 OF SEC.139. EXPLANATION-2 TO SEC.1 39 DEFINES 'DUE DATE' IN A CASE OF A COMPANY TO BE '30TH DAY OF SEPTEMBER OF THE ASSESSMENT YEAR'. THE ASSESSEE BEFORE US IS A COMPANY AND THEREFORE, AS ON '30 DAY OF SEPTEMBER' OF THE RELEVANT ASSESSMENT YEAR, THE ASSESSEE IS SUPPOSED TO MAINTAIN INFORMATION AND DOCUMENTS. AFTER GOING THROUGH THE ABOVE PROVISIONS OF LAW, IT IS CLEAR THAT THE ACT HAS NOT PROVIDED FOR ANY CUT OFF DATE UPTO WHICH ON LY THE INFORMATION AVAILABLE IN PUBLIC DOMAIN HAS T O BE TAKEN INTO CONSIDERATION BY THE TPO, WHILE MAKIN G THE TP ADJUSTMENTS AND ARRIVING AT ARM'S LENGTH PRICE. THE ASSESSEE AS WELL AS THE,REVENUE ARE BOTH BOUND BY THE ACT AND THE RULES THERE UNDER AND THEREFORE, AS PROVIDED UNDER THE ACT AND RULES THEY ARE SUPPOSED TO BE TAKING INTO CONSIDERATIO N, THE CONTEMPORANEOUS DATA RELEVANT TO THE PREVIOUS Y EAR IN WHICH THE TRANSACTION HAS TAKEN PLACE. THE ASSESSEE HAD STRENUOUSLY ARGUED THAT THE PROVISION OF SEC.92D AND RULE-10D IS DEFEATED IF, THE TPO TAKES THE DATA WHICH IS AVAILABLE IN THE PUBLIC DOM AIN AFTER THE SPECIFIED DATE AND THE ALP WOULD BE FLUID AND THERE WOULD BE NO CERTAINTY FOR THE SAME. WE ARE UNABLE TO AGREE WITH THE ARGUMENTS OF THE LEARNED COUNSEL FOR THE ASSESSEE. THE ALP HAS TO BE DETERMINED BY THE TPO IN ACCORDANCE WITH LAW AND THE ACT PROVIDES THAT THE TPO SHALL TAKE INTO C ONSIDERATION THE CONTEMPORANEOUS DATA. THE ASSESSEE IS ONLY REQUIRED TO MAINTAIN THE INFORMATI ON AND DOCUMENTS AS MAY BE NECESSARY RELATING TO THE INTERNATIONAL TRANSACTIONS SO THAT IT CAN BE MA DE AVAILABLE TO THE TPO OR THE AO OR ANY OTHER AUTHORITY IN ANY PROCEEDINGS UNDER THE ACT. BY PROVIDING A SPECIFIED DATE IN THE ACT, THE OBLIGATION IS CAST UPON THE ASSESSEE TO KEEP AND MAINTAIN THE DOCUMENTS FOR THAT PERIOD. BUT, IT DOES NOT RESTRICT THE TPO FROMMAKING ENQUIRIES THEREAFTER, FOR DETERM INING THE CORRECT ALP. HAVING HELD SO, WE COME TO THE NEXT QUESTION, AS TO WHETHER THE TPO CAN MAKE HIS OWN RESEARCH AND CALL FOR INFORMATION FROM VARIOUS ENTITIES WITHOUT THE KNOWL EDGE OF THE ASSESSEE. UNDER SUB-SEC(3) & (7) OF SEC.92CA, THE TPO IS ENTRUSTED WITH ALL THE POWERS UNDER CLAU SES (A) TO (D) OF SUB-SEC.L) OF SEC.(3) OR SUB-SEC.(6) OF SEC.133 TO CALL FOR AND GATHER ANY I NFORMATION AS MAY BE REQUIRED. WHEN HE IS MAKING THE SEARCH FOR A RELEVANT COMPARABLE, THE TPO CAN I SSUE NOTICES TO THE PARTIES WHOM HE CONSIDERS AS ITA NO 3320 /AHD/2010 . A.Y. 2006- 07 10 RELEVANT TO GATHER REQUISITE INFORMATION AND ON BEI NG SATISFIED WITH REGARD TO RELEVANCY OF THE MATERIAL WHICH CAN BE USED AGAINST THE ASSESSEE ONLY THEN THE ASSESSEE HA S TO BE GIVEN AN OPPORTUNITY OF PRESENTING ITS OBJECTIONS ' 2.1.4.1 THUS, IT CAN BE SEEN THAT THE POWER OF THE TPO TO SELECT COMPARABLE IS NOT LIMITED TO THE DOCUMENTATION KEPT BY THE ASSESSEE AND HE IS WELL W ITHIN HIS POWERS TO EXAMINE OTHER SOURCES TO FIND OUT THE COMPARABLES.THE RIGOURS OF RULE 10 D(L),(2) AND (3) APPLY TO THE ASSESSEE AND NOT TO THE TPO. 2.1.5 IN PARA-5.9 THE OECD PRESCRIBES THE MAINTENAN CE OF DOCUMENTATION ON THE BASIS OF INFORMATION AVAILABLE TO THE TAX PAYER AT THE TIME OF ESTABLISHMENT OF TRANSFER PRICE RATHER THAN JUSTIFICATION OF THE SAME. IN THE INSTANT CASE, THE ASSESSEE IS TRYING T O JUSTIFY ITS TRANSFER PRICE BY THE USE OF INDEPEND ENT EXTERNAL COMPARABLE RATHER THAN DETERMINE ITS TRANS FER PRICE. THIS IS A CRUCIAL DIFFERENCE WHICH THE ASSESSEE HAS NOT NOTICED.THIS ISSUE ASSUMES IMPORTA NCE IN THE PRESENT CONTEXT. IN A CASE WHERE TRANSFER PRICE IS SET BEFORE ENTERING INTO THE TRAN SACTION, THE ONLY DATA THAT CAN BE TAKEN INTO ACCOU NT IS THE DATA AVAILABLE TO THE ASSESSEE I.E. THE DATA WH ICH WAS AVAILABLE IN PUBLIC DOMAIN AND THEREFORE IN THIS CONTEXT THE AVAILABILITY OF DATA WITH THE ASSE SSEE ASSUMES IMPORTANCE. ON THE CONTRARY IN A CASE WHERE THE TRANSACTION HAS ALREADY BEEN ENTERED INTO AT A PRICE WHICH IS SOUGHT TO BE JUSTIFIED AS ALP, THEN RELIANCE ON THE 'AVAILABILITY ' OF DATA WITH T HE ASSESSEE OR THE SAME BEING IN PUBLIC DOMAIN BECOMES MISPLACED. WHEN THE TRANSACTIONS HAS ALREAD Y BEEN ENTERED AT A PRICE WHICH IS SOUGHT TO BE JUSTIFIED THEN THAT PRICE SHOULD BE JUSTIFIABLE ON THE BASIS OF ANY DATA (AVAILABLE FROM ANY SOURCE) AND AT ANY POINT OF TIME (BEFORE OR AFTER THE PREPARATION OF TP DOCU MENTATION BY THE ASSESSEE) WITH THE CONDITIONS BEING THAT THE DATA SHOULD BE OF THE SAM E PERIOD IN WHICH THE TRANSACTION HAS BEEN ENTERED INTO AND THE DATA SHOULD BE 'COMPARABLE'. THEREFORE , THE CONTENTION, IF ANY, REGARDING THE FETTER ON T HE POWER OF THE TPO TO USE DATA AVAILABLE TO HIM BUT N OT AVAILABLE TO THE ASSESSEE, AT THE TIME OF TP DOCUMENTATION IS MISPLACED AND ERRONEOUS. 2.1.6 THUS, ON THE BASIS OF DISCUSSION MADE ABOVE T ILL THIS POINT,IT BECOMES CLEAR THAT BY NOT CONSIDERING SOME OF THE COMPARABLES SUBSEQUENTLY ID ENTIFIED BY THE TPO, THE ANALYSIS CARRIED OUT BY THE ASSESSEE WAS INCORRECT AND THUS THE TPO WAS RIG HT IN CONSIDERING THE NEW COMPARABLE ENTITIES. IT I S ALSO SEEN THAT THERE IS NO BAR ON THE POWER OF THE TPO TO SELECT ANY ENTITY AS COMPARABLE, EVEN WHEN THE SAME MAY OR MAY NOT HAVE BEEN AVAILABLE TO THE ASSESSEE WHILE CARRYING OUT ITS TP DOCUMENTATION. 2.1.7 AS FAR AS THE ISSUE REGARDING THE SELECTION O F COMPARABLES FOUND BY THE TPO IS CONCERNED, IT CAN BE SEEN THAT OECD GUIDELINES 2010 PRESCRIBE TWO DIF FERENT KIND OF APPROACHES FOR SELECTING POTENTIAL COMPARABLES. ONE OF SUCH APPROACH IS CALLED 'ADDITIVE APPROACH' IN WHICH THE PERSON CARRYING OUT SEARCH PROCESS MAKE LIST OF THIRD PARTIES WHICH ARE BELIEVED TO CARRY OUT POTENTIAL COMPARABLE TRANSACTIONS. THE INFORMATION IS THEN COLLECTED ON SUCH TRANSACTIONS TO DETERMINE THEIR COMPARABILITY. IN THE GUIDELINES, IT IS ALSO ACKNOWLEDGED THAT SUC H AN APPROACH GIVES WELL FOCUSED RESULTS. THE GUIDELINES FURTHER GO ON TO SUGGEST THAT THE ADDITIVE APPROACH OR OTHER APPROACH BEING DEDUCTIVE APPROACH MAY NOT BE PREFERABLE OVER EACH OTHER AND THE KEY R EQUIREMENT SHOULD BE IDENTIFICATION OF POTENTIAL COMPARABLE. BY ITS VERY NATURE THE 'ADDITIVE APPROACH ' IS BOUND TO FACE ALLEGATIONS OF 'CHERRY PICKING'. HOWEVER, IT MUST ALSO BE NOTED THAT THE INDIAN TRAN SFER PRICING REGULATIONS DO NOT PRESCRIBE ANY METHOD OR PROCEDURE REQUIRED TO BE AD OPTED FOR THE IDENTIFICATION OF COMPARABLE TRANSACTIONS. CONSEQUENTLY, THERE CAN BE NO HARD AN D FAST RULE TO FIND OUT THE COMPARABLES ONLY ON THE BASIS OF 'DEDUCTIVE APPROACH' USING A DATABASE. FROM THE PERUSAL OF PARA 3.41 OF THE OECD GUIDELINES WHICH DETAILS THE 'ADDITIVE APPROACH', IT IS CLEAR THAT THERE IS NO REQUIREMENT FOR SELECT ION OF COMPANIES FOR 'ADDITIVE APPROACH' ONLY FROM PUBLIC DOMAIN. THE TPO CAN IDENTIFY COMPA RABLES ON THE BASIS OF DATA/INFORMATION AVAILABLE WITH HINU T HEREFORE, BASED ON THE ABOVE DISCUSSION THE ASSERTION THAT THE SELECTION OF POTENTIAL COMPARABL ES BY THE TPO IS NECESSARILY REQUIRED TO BE CARRIED OUT USING A STRUCTURED DEDUCTIVE PROCESS IS NEITHER PRESCRIBED IN THE INDIAN LAW NOR PRESCRIBED IN THE OECD GUIDELINES. THE ONLY REQUIREMENT IS THAT THE ' COMPARABLES' SO IDENTIFIED SHOULD SATISFY THE FACTORS OF COMPARABILITY, MENTIONED IN RULE 1 OB(2) .THEREFORE, THE CONTENTION OF THE ASSESSEE REGARDING NON CONSIDERATION OF THE NEW COMPARABLES IDENTIFIED BY THE TPO MERELY ON THE BASIS THAT THE SAME HAVE NOT BEEN IDENTIFIED ON THE BASIS OF ANY S TRUCTURED SEARCH PROCESS IS WITHOUT ANY LEGAL BASIS . THE SAME IS THEREFORE, REQUIRED TO BE REJECTED 2.1.8 THE ISSUE REGARDING THE COMPARABILITY OF THE COMPANIES IS COMMENTED UPON BELOW. GROUND NO. 2.2 THE USE OF DATA FOR THE PERIOD OTHER THAN THE RELEV ANT FINANCIAL YEAR ALONG WITH THE USE OF MULTIPLE YEAR DATA IS CONTRARY TO LAW. THE PROVISIONS OF RULE 10B(4) O F INCOME TAX RULES PRESCRIBE THAT FOR THE PURPOSES OF BENCHMARKING INTERNATIONAL TRANSACTION THE DATA OF COMPARABLES USED WOULD BE THE DATA ITA NO 3320 /AHD/2010 . A.Y. 2006- 07 11 FOR THE YEAR IN WHICH INTERNATIONAL TRANSACTION TOO K PLACE AND MORE COMMONLY KNOWN AS CONTEMPORANEOUS DATA. THE PROVISION OF RULE 10B (4) IS REPRODUCED HERE UNDER:- 10B DETERMINATION OF ARMS LENGTH PRICE UNDER SECTI ON 92C (1). (2). (3). (4) THE DATA TO BE USED IN ANALYSING THE COMPARABIL ITY OF AN UNCONTROLLED TRANSACTION WITH AN INTERNATIONAL TRANSACTION SHALL BE THE DATA RELATIN G TO THE FINANCIAL YEAR IN WHICH THE INTERNATIONAL TRANSACTION HAS BEEN ENTERED INTO: PROVIDED THAT DATA RELATING TO A PERIOD NOT BEING M ORE THAN TWO YEARS PRIOR TO SUCH FINANCIAL YEAR MAY ALSO BE CONSIDERED IF SUCH DATA REVEALS FACTS WHICH COULD HAVE AN INFLUENCE ON THE DETERMINATION OF TRANSFER PRICES IN RELATION TO THE TRANSACTIONS BEI NG COMPARED. 2.2.1 THE USE OF THE WORD 'SHALL', IN THE MAIN PROV ISION OF THE RULE, MAKES IT CLEAR, IN NO UNCERTAIN TERMS THAT THE USE OF CURRENT FINANCIAL YEAR DATA ( I.E. THE FINANCIAL YEAR IN WHICH INTERNATIONAL TRANSACTION WAS ACTUALLY ENTERED INTO) IS A MANDATO RY REQUIREMENT OF LAW IN THE COMPARABILITY ANALYSIS UNDER THE INDIAN TRANSFER PRICING REGULATIONS. THE PROVISO TO THE SAID RULE MAKES IT AN EXCEPTION IN ALLOWING THE USE OF DATA FOR THE PRECEDING TWO YEAR S, IF AND ONLY IF, IT IS PROVED THAT SUCH DATA REVE ALS FACTS, WHICH COULD HAVE AN INFLUENCE ON THE DETERMI NATION OF TRANSFER PRICE. THEREFORE, THE EXCEPTION COMES INTO PLAY ONLY WHEN PROOF OF SUCH INFLUENCE I S BROUGHT ON RECORD. 2.2.2 THE MANDATORY REQUIREMENT UNDER LAW TO USE, C ONTEMPORANEOUS DOCUMENTATION HAS A SOLID ECONOMIC SENSE IN THE WAY THAT CONTEMPORANEOUS TRAN SACTIONS REFLECT SIMILAR ECONOMIC CONDITIONS. THEREFORE, THE USE OF CURRENT FINANCIAL YEAR DATA I S MORE RELEVANT AND APPROPRIATE FOR ENSURING A HIGHER DEGREE OF COMPARABILITY OF UNCONTROLLED TRAN SACTIONS FOR ARRIVING AT THE ARM'S LENGTH PRICE IN RESPECT OF THE INTERNATIONAL TRANSACTION. THE IMPOR TANCE OF CONTEMPORARY ECONOMIC AND MARKET CONDITIONS ON PRICE SETTING MECHANISMS IS ALSO REFL ECTED IN THE PROVISIONS OF RULE 10B (3) OF THE RULE S. THE PRICE SETTLING MECHANISM IS A BUSINESS DECISION AND CIRCUMSCRIBED BY SETTLED ECONOMIC PARAMETERS. UNDER TRANSACTIONS IN OPEN MARKET CONDITIONS, PRICES ARE SET BY CONTEMPORARY ECONOMIC REALITIES OF DEMAND, SUPPLY, MARKET STRUCTURE AND OTHER RELEVANT FACTORS. IN THIS LIGHT, THE STATUTE HAS GUIDED THE PREPARATION AND MAINTENANCE DOCUMENTATION USING CONTEMPORANEOUS DATA USED AT TH E TIME OF SETTING THE PRICE OF THE INTERNATIONAL TRANSACTION BETWEEN ASSOCIATED ENTERPRISES BY USING THE MOST APPROPRIATE METHOD PRESCRIBED UNDER THE INCOME TAX ACT. HOWEVER, THE TP REGULATIONS ALSO AL LOW FOR DOCUMENTATION ON THE BASIS OF EX-POST ANALYSIS TO SUPPLEMENT SUCH DOCUMENTATION, FOR JUST IFYING THE PRICES ALREADY SET AT THE TIME OF THE TRANSACTION. NONETHELESS, INITIAL DOCUMENTATION PRE PARED AT THE TIME OF ENTERING INTO THE INTERNATIONA L TRANSACTION IS PRIMARY AND EX-POST DOCUMENTATION IS SUPPLEMENTARY IN NATURE. IT IS INCUMBENT UPON THE TAXPAYER TO DEMONSTRATE ON THE BASIS OF CONTEMPORAN EOUS DOCUMENTATION AT THE TIME OF FIXING/DETERMINING TRANSFER PRICES, THAT: A) THE COMPENSATION FOR THE OPERATIONS OF AN ENTERPRIS E HAS BEEN DETERMINED ON THE BASIS OF CONTEMPORANEOUS DATA AVAILABLE THEN; AND B) THE COMPENSATION IS COMMENSURATE TO THE FUNCTIONAL PROFILE (I.E. FUNCTIONS PERFORMED, ASSETS EMPLOYED AND RISKS ASSUMED. 2.2.3 THE OECD GUIDELINES IN PARA 1.49 TO 1.51 HAVE ACKNOWLEDGED THE USE OF MULTIPLE YEAR DATA UNDER SPECIAL CIRCUMSTANCES. USE OF MULTIPLE YEAR D ATA IS CONSIDERED USEFUL TO IRON OUT THE FLUCTUATIO NS CAUSED BY BUSINESS/ECONOMIC/PRODUCT LIFE CYCLE. HOW EVER, THE EXISTENCE OF ANY SUCH CYCLE AND ANATOMY THEREOF NEED TO BE APTLY DEMONSTRATED BY THE ASSESS EE SO AS TO PROVE THAT USAGE OF MULTIPLE YEAR DATA PROVIDES SUCH IMPETUS TO THE TRANSFER PRICING ANALY SIS WHICH THE USAGE OF SINGLE YEAR DATA WOULD NOT ARGUMENT. 2.2.4 A RE-LOOK AT THE PROVISIONS OF SECTION 92D ( 1) CLEARLY STATES THAT, EVERY PERSON ENTERING INTO AN INTERNATIONAL TRANSACTION IS REQUIRED TO KEEP AND M AINTAIN SUCH INFORMATION AND DOCUMENT, IN RESPECT THEREOF, AS BEING PRESCRIBED UNDER THE RULES. CORRE SPONDING RULE 10D(1) OF THE RULES, REQUIRES MAINTENANCE OF A RECORD OF THE ANALYSIS PERFORMED T O EVALUATE COMPARABILITY AS WELL AS A RECORD OF THE ACTUAL WORKING CARRIED OUT FOR DETERMINING THE ALP. RULE 10D (4) OF THE RULES, REQUIRES THAT THE INFORMATION AND DOCUMENTATIONS TO BE MAINTAINED UND ER RULE 10D (1), SHOULD BE CONTEMPORANEOUS AS FAR AS POSSIBLE AND SHOULD EXIST LATEST BY THE DUE DATE OF FILING OF THE INCOME-TAX RETURN. HENCE, EVE N IN TERMS OF THE RELEVANT SECTION OF THE INCOME TAX ACT AND RULES THE IMPORTANCE AND PEDESTAL ASSIGNED TO THE INITIAL DOCUMENTATION IN CONTEMPORARY PARLANCE PREPARED AT THE TIME OF SETTLING THE PRICE OF THE ITA NO 3320 /AHD/2010 . A.Y. 2006- 07 12 INTERNATIONAL TRANSACTION IS CLEARLY BROUGHT OUT. I T NEEDS TO BE APPRECIATED THAT THE REQUIREMENT OF T HE EXISTENCE OF INFORMATION AND DOCUMENTATION BY THE D UE DATE OF FILLING OF RETURN, DOES NOT OVERRIDE THE PROVISIONS OF RULE 10B (4) OF THE RULES REGARDING M ANDATORY USE OF CURRENT FINANCIAL YEAR DATA FOR CONDUCTING COMPARABILITY ANALYSIS. 2.2.5 NOTWITHSTANDING ANYTHING CONTAINED IN THE DIS CUSSION ABOVE, MULTIPLE YEAR DATA CANNOT BE ENCOURAGED AS A MATTER OF RULE AND IS ONLY TO BE US ED UNDER WELL DOCUMENTED CIRCUMSTANCES. THERE IS NOTHING IN THE ACT THAT PROHIBITS THE ANALYSIS OF T HE TRANSFER PRICE OF THE INTERNATIONAL TRANSACTION BY THE TRANSFER PRICING OFFICER USING DATA OF THE CURR ENT YEAR. MOREOVER, IT IS MANDATORY AND ABSOLUTE REQUIREMENT OF LAW TO USE THE CURRENT FINANCIAL YEA R DATA. ALSO, THE TPO NOT ONLY HAS THE POWER BUT IS ALSO BOUND BY DUTY TO DETERMINE ALP BY USING THE CU RRENT FINANCIAL YEAR DATA IN THE COMPARABILITY ANALYSIS, EVEN IF SUCH DATA WAS NOT AVAILABLE TO TH E ASSESSEE IN THE PUBLIC DATABASE; AT THE TIME OF PREPARATION OF TRANSFER PRICING REPORT. IN THE CASE OF CIT VS. BRITISH PAINTS INDIA LTD REPORTED IN 188 ITR 44, IT HAS BEEN HELD THAT IT IS NOT ONLY THE RIGHT BUT THE DUTY OF THE ASSESSING OFFICER, TO ACT IN EXERCISE OF HIS STATUTORY POWER, FOR DETERMINING, W HAT IN HIS OPINION, IS THE CORRECT TAXABLE INCOME. THE SAME APPEARS TO BE RELEVANT UNDER THE CURRENT FACTU AL SITUATION AS WELL. 2.2.6 THE ASSESSEE HAS NOT BROUGHT ON RECORD ANY CO GENT, RELEVANT AND RELIABLE EVIDENCE TO PROVE THAT THE DATA FOR PRECEDING TWO YEARS REVEALED FACTS,' WHICH COULD HAVE AN INFLUENCE ON THE DETERMINATION OF AL P. THE EXISTENCE OF ANY PRODUCT/ECONOMIC/BUSINESS CYCL E AFFECTING THE PERFORMANCE OF THE ASSESSEE AND THO SE OF THE COMPARABLES HAS NOT BEEN DOCUMENTED FOR, BY THE ASSESSEE. IT MAY BE PERTINENT TO MENTION HERE T HAT THE ASSESSEE HAS ONLY GIVEN GENERAL STATEMENTS TO S UBSTANTIATE ITS CLAIM THAT THE USE OF MULTIPLE YEAR DATA AFFECTS THE DATA FOR THE YEAR UNDER CONSIDERATION. THE ASSESSEE HAS SIMPLY STATED THAT THE PAST YEARS DATA WOULD AFFECT THE CURRENT AND FUTURE DECISIONS OF TH E COMPANY. HOWEVER, IT IMPORTANT TO NOTE THAT NO DOCUMENTARY EVIDENCE FOR THE SAME WAS BROUGHT ON RE CORD. IT MAY BE OUT OF PLACE TO MENTION THE ONUS FO R MAINTAINING SUCH DOCUMENTS SPECIFICALLY ON THE ASSE SSEE AND THIS PROPOSITION IS CLEARLY BROUGHT OUT BY THE JUDGMENT DELIVERED IN THE CASE OF AZTEC SOFTWARE & TECHNOLOGY SERVICES LTD. VS. ACIT CIR. II (1) (2007 ) 107 ITO 141 (BANG) (SB). THE RELEVANT PORTION OF TH E JUDGMENT IS GIVEN BELOW. HAVING REGARD TO THE STATUTORY PROVISIONS, IT IS CL EAR THAT BURDEN TO ESTABLISH THAT INTERNATIONAL TRA NSACTION -WAS CARRIED AT ALP IS ON THE TAXPAYER. HE, HAS ALS O TO FURNISH COMPARABLE TRANSACTIONS, APPLY APPROPR IATE METHOD FOR DETERMINATION OF ALP AND JUSTIFY THE SAM E BY PRODUCING RELEVANT MATERIAL AND DOCUMENTS BEFORE THE REVENUE AUTHORITIES. IN CASE REVENUE AUT HORITIES ARE NOT SATISFIED WITH THE ALP AND THE SUPPORTING DOCUMENTS / INFORMATION FURNISHED BY THE TAXPAYER, THE AUTHORITIES HAVE AMPLE POWER TO DETERMINE THE SAME AND MAKE SUITABLE ADJUSTMENTS. T HE RESPONSIBILITY OF DETERMINATION OF ALP IS SHIFTE D TO THE REVENUE AUTHORITIES WHO ARE TO DETERMINE THE SA ME IN ACCORDANCE WITH STATUTORY REGULATIONS. [PARA 127] THERE IS CRITICISM THAT THE LEGISLATURE IS NOT JUST IFIED IN PLACING ONEROUS BURDEN ON THE TAXPAYER TO MAINTAIN DETAILED DOCUMENTS AND TO JUSTIFY THAT TRANSACTION WAS CARRIED AT ALP. IT IS CONTENDED THAT THIS IS LI KE INSISTING UPON PRODUCTION OF SELF-INCRIMINATING EVI DENCE AND IS UNCALLED FOR. THIS CRITICISM, IS WITHO UT ANY VALID BASIS. IT IS TO BE REMEMBERED THAT INTERNATIO NAL TRANSACTIONS CARRIED BY TAXPAYER ARE CROSS-BORD ER TRANSACTIONS. THE DEPARTMENTAL AUTHORITIES IN INDIA ARE REQUIRED TO DEAL WITH AND DETERMINE ALP OF TRANSACTIONS CARRIED IN ASIA, EUROPE, AMERICA, AUST RALIA, OTHER DEVELOPED AND UNDER-DEVELOPED COUNTRIE S IN AFRICA, ETC. IT IS VERY DIFFICULT, IF NOT IMPOSS IBLE FOR THEM TO FIND RELEVANT DATA OF AN EXACT OR OF A SIMILAR TRANSACTION OR THAT PROFIT IS MADE NOT ONLY BY THE TAXPAYER, BUT ALSO BY OTHER SIMILARLY SITUATED UNCO NTROLLED ENTERPRISES. KNOWLEDGE OF ECONOMIC CONDITIONS PREVA ILING AT THE PLACE WHERE TRANSACTIONS ARE CARRIED I S ALSO ESSENTIAL THE VERY NATURE OF THIS JOB OF COLLE CTION OF DATA IS SUCH THAT THE ASSESSEE IS IN THE B EST POSITION TO GATHER THE REQUISITE INFORMATION. [PARA 128] THE TAXPAYER, ON THE OTHER HAND, AS A PARTY TO THE TRANSACTION HAS FULL KNOWLEDGE OF THE TRANSACTION C ARRIED ON AND PROFIT EARNED BY HIM. AS A PERSON ASSOCIATED WITH THAT PARTICULAR LINE OF BUSINESS ACTIVITY, TH E ASSESSEE IS REASONABLY EXPECTED TO BE NOT ONLY AWAR E ABOUT NUANCES OF THAT BUSINESS, BUT ALSO ABOUT ECONOMIC CONDITIONS AND PECULIAR CIRCUMSTANCES, IF ANY, OF THAT BUSINESS. HE IS LIKELY TO KNOW EVEN AB OUT COMPARABLE UNCONTROLLED TRANSACTIONS. ............ 2.2.7 CONSIDERING THE ABOVE DISCUSSION, IT IS CLEAR THAT THE ASSESSEE HAS NOT DISCHARGED ITS ONUS IN T HE PROCEEDINGS FOR SUBSTANTIATING HOW THE USE OF EARLI ER YEAR DATA AFFECTED THE DATA FOR THE YEAR UNDER CONSIDERATION IN THE CASE OF COMPARABLES. 2.2.8 THE ASSESSEE DID NOT USE THE CURRENT YEAR DAT A IN THE BENCH MARKING ANALYSIS SUBMITTED BY IT AT ALL. IN THIS RESPECT, IT WAS SUBMITTED THAT THE SAME COULD NOT HAVE BEEN USED BY THE ASSESSEE AS THE DATA WAS NOT AVAILABLE AT THAT TIME. IN THIS RESPECT IT CAN BE S EEN THAT RULE 10B(4) IS VERY CATEGORICAL IN THE USE OF DATA TO ITA NO 3320 /AHD/2010 . A.Y. 2006- 07 13 BE USED FOR ANALYSIS TO THE DATA RELATING TO FINANC IAL YEAR IN WHICH TRANSACTION WAS TAKEN PLACE. SINC E THE ASSESSEE DID NOT SUBSTANTIATE HOW THE USE OF EARLIE R YEARS DATA AFFECTED THE CURRENT YEARS DATA, THE APPLICATION OF PROVISO IS NOT TRIGGERED AT ALL. WIT HOUT PREJUDICE AND IN ADDITION TO THE ABOVE, IT IS SEEN THAT THE PROVISO ONLY PROVIDES AN OPTION TO THE ASSESSEE OF USING EARLIER YEARS DATA BUT THERE IS NO COMPRO MISE ON THE MANDATORY USE OF THE CURRENT YEARS DATA. THU S, IT CAN BE SEEN THAT LAST TWO YEARS DATA CAN BE U SED ON ADDITION TO THE CURRENT YEAR'S DATA THAT TOO ONLY I F THE EFFECT OF EARLIER DATA CAN BE SHOWN ON THE CU RRENT YEAR'S DATA. IT CAN BE SEEN THAT IN THE TRANSFER P RICING ANALYSIS, THE ASSESSEE HAS NOT USED THE CURR ENT YEAR DATA AT ALL. BY NOT USING THE CURRENT YEAR DATA AT ALL, THE TRANSFER PRICING DOCUMENT IS AGAINST THE PROVISIONS OF RULE 10B (4) OF THE INCOME TAX RULES. 2.2.9 THE ISSUE RELATING TO USE OF CURRENT YEAR DAT A IS WELL SETTLED NOW IN VIEW OF THE DECISION OF TH E SPECIAL BENCH OF BANGALORE TRIBUNAL IN THE CASE OF AZTEE SO FTWARE & TECHNOLOGY SERVICES LTD. (2007) 294 ITR (AT) 32 AND REAFFIRMED BY THE DELHI BENCH OF INCOME TAX APPELLATE TRIBUNAL IN THE CASE OF MENTOR GRAPHICS PRIVATE LIMITED (2007) 109 ITD (101) WHICH STIPULATED THAT THE COMPARABILITY ANALYSIS IS TO B E CONDUCTED ON THE BASIS OF CURRENT YEAR DATA. OTHER CASES WHERE IT WAS HELD SO ARE: I. HONEYWELL LIMITED 2009-TIOL-104-ITAT-PUNE II.CUSTOMER SERVICES INDIA PVT LIMITED 2009-TIOL-42 4-ITAT-DELHI III. SCHEFENACKER MOTHERSON LIMITED 2009-TIOL-376-I TAT-DELHI IV. PANASONIC INDIA PVT LIMITED 2010-TII-47-ITAT-DE L-TP V. GEODIS OVERSEAS P LIMITED 201 L-TII-34-ITAT-DEL- TP VI. HAWORTH INDIA PVT LIMITED ITA NO. 5341/DEL /2010 VII. TNT INDIA PVT LIMITED 2011TII-39-ITAT-BANG-TP VIII NGC NETWORK INDIA PVT LIMITED 2011-TII-45-IT AT-MUM-INTL IX ADP PRIVATE LIMITED 201 L-TII-44-ITAT-HYD-TP X. DELOITTE CONSULTING INDIA PVT LTD. 1082 AND 1 084/HYD/2010. XI. ACIT VS BIRLASOFT LTD 47 SOT 437 WHETHER EXPRESSION 'SHALL' HAS BEEN EMPLOYED IN THI S RULE 10B(4), WHICH MAKE IT ABUNDANTLY CLEAR THAT CURRENT YEAR DATA OF AN UNCONTROLLED TRANSACTION IS TO BE USED FOR PURPOSE OF COMPARABILITY, WHILE EXAMINING INTERNATIONAL TRANSACTIONS WITH ASSOCIATE ENTERPRISES - HELD, YES XII. EXXON MOBIL COMPANY INDIA (P.) LTD. VS DCIT 46 SOT 294 WHETHER DATA RELATING TO CURRENT YEAR HAS TO BE CON SIDERED FOR DETERMINING TRANSFER PRICING - HELD, YE S - WHETHER HOWEVER, IF AN ASSESSEE WANTS TO TAKE PREVI OUS YEAR'S DATA, THEN BURDEN IS ON ASSESSEE TO DEMONSTRATE THAT PREVIOUS YEAR'S DATA CONTAINED CER TAIN FACTS WHICH WOULD INFLUENCE DETERMINATION OF TRANSFER PRICING - HELD, YES XIII. SYMENTAC SOFTWARE SOLUTIONS PVT LTD 46 SOT 48 WHILE DETERMINING ALP, TPO USED FINANCIAL INFORMATI ON OF COMPARABLES WHICH WAS NOT AVAILABLE AT TIME O F TP STUDY DONE BY ASSESSEE, BUT AVAILABLE AT TIME OF ASSESSMENT UPDATED DATA WERE PROVIDED BY ASSESSEE ITSELF AND TPO HAD GATHERED NO INFORMATION WHETHER ACT OF CONSIDERING SAID INFORMATION BY TPO DID NOT AMOUNT TO VIOLATION OF ANY PROVISION OF LAW - HELD, YES - WHETHER IT IS MANIFEST FROM RULE 10B(4) THAT GENERALLY DATA OF FINANCIAL YEAR IN WHICH INTERNATI ONAL TRANSACTION HAS BEEN ENTERED INTO IS TO BE USE D FOR ANALYSING COMPARABILITY OF UNCONTROLLED TRANSACTION IN ORDER TO DETERMINE ALP; PROVISO TO RULE 10B(4) DOES NOT MANDATE TO ALWAYS CONSIDER TWO MORE YEARS' DATA OF COMPARABLES IN SUCH ANALYSIS - HELD, YES - WHETHER THERE IS A RATIONALE FOR USING DATA OF COMP ARABLES PERTAINING TO SAME PERIOD DURING WHICH INTERNATIONAL TRANSACTIONS TOOK PLACE BECAUSE IT WI LL RULE OUT EFFECT OF DIFFERENCE IN ECONOMIC AND MA RKET CONDITIONS PREVAILING/EXIST AT DIFFERENT TIME PERIO D AND THEREFORE, THERE IS NO ERROR OR ILLEGALITY BY TAKING INTO CONSIDERATION ONLY DATA OF FINANCIAL YEAR IN W HICH INTERNATIONAL TRANSACTION HAS BEEN ENTERED INT O - HELD, YES 2.2.10 IN ADDITION TO THE DISCUSSION ALREADY MADE A BOVE, CERTAIN NEW JUDICIAL DECISIONS IN SUPPORT OF THE STAND TAKEN BY THE REVENUE ARE GIVEN BELOW: A. USE OF CURRENT YEAR DATA 1. ACITVSBIRLASOFT LTD 47 SOT 437 2. BINDVIEW INDIA PVT LTD. ITA NO 1386/PN/10 PUNE T RIBUNAL 3. M/S GENISYS INTEGRATING SYSTEMS (INDIA) PVT. LTD , I.T.A. NO.L231(BANG.)/2010 4. ACTIS ADVISERS PVT. LTD.,IT A NO. 5277/DEL/2011 5. SANDSTONE CAPITAL ADVISORS P LTD ITA NO.6315/MUM /2012 GROUND NO 2.3 ISSUE REGARDING ALLOWANCE OF 5% VARIATION AS STAND ARD DEDUCTION ITA NO 3320 /AHD/2010 . A.Y. 2006- 07 14 1. THE PROVISO TO SECTION 92C(2) OF THE I.T. ACT PROVI DES THAT WHERE MORE THAN ONE PRICE IS DETERMINED BY THE MOST APPROPRIATE METHOD, THE ARMS LENGTH PRICE SHALL BE TAKEN TO BE THE ARITHMETICAL MEAN OF SUCH PRICES, OR, AT THE OPTION OF THE ASSESSEE, A PRICE WHICH MAY VARY FROM THE ARITHMETICAL MEAN BY AN AMOUNT NOT EXCEEDING 5% OF SUCH ARITHMETICAL MEAN. 2. THE TRANSFER PRICING PROVISIONS WERE BROUGHT ON THE STATUTE BY THE FINANCE ACT, 2001 W.E.F. 1.4.2002. IT IS WITH A VIEW TO AVOID HARDSHIP TO THE TAX PAYE RS IN THE INITIAL YEARS OF IMPLEMENTATION OF THESE PROVISIONS, THE GOVERNMENT OF INDIA, THROUGH A PRES S NOTE ISSUED BY THE MINISTRY OF FINANCE (DEPT. OF REVENUE) ON 22.08.2001, EXPRESSED ITS INTENTION OF NOT MAKING ANY ADJUSTMENT IF THE PRICE ADOPTED BY THE ASSESSEE WAS UP TO 5% LESS OR UP TO 5% MORE THA N THE ARM'S LENGTH PRICE DETERMINED BY THE A.O. IMMEDIATELY THEREAFTER, THE CENTRAL BOARD OF DIRECT TAXES (CBDT) ISSUED THE CIRCULAR NO.12 DTD.23.08.2001 SPECIFYING THAT THE A.O. SHALL NOT M AKE ANY ADJUSTMENT TO THE PRICE SHOWN BY THE ASSESSEE IF SUCH PRICE WAS UP TO 5% LESS OR UP TO 5 % MORE THAN THE ARM'S LENGTH PRICE DETERMINED BY THE A.O. AND IN SUCH CASES, THE PRICE DECLARED BY T HE ASSESSEE MAY BE ACCEPTED. IN THE PRESENT CASE IT IS SEEN THAT THE ALP OF THE INTERNATIONAL TRANSACTIONS UNDERTAKEN BY THE ASSESSEE FALLS BEYOND THE 5% MARGIN OF THE PRICE OF INTERNATIONAL TRANSACTION CO MPUTED BY THE ASSESSEE. THE PROVISO TO SECTION 92C(2) HAS BEEN AMENDED W.E.F. 1/10/2009. IN THE CASE OF GLOBAL VANTEDGE (P) LTD. VS. DCIT (2010)1 ITR (TRIB) 326 (DEL) THE BENEFIT OF ADJUSTMENT OF + 5% REJECTED BY THE CIT(A)S WAS CON FIRMED BY THE ITAT EVEN THOUGH COUNSEL FOR THE ASSESSEE MADE A SPECIAL SUBMISSION ABOUT THE BENEFI T OF ADJUSTMENT OF + 5% . IT WAS AGAIN DECIDED BY THE HON'BLE DELHI TRIBUNAL IN THE CASE OF MARUBENI INDIA PVT. LTD (2011-TN-36-ITAT-DEL-TP) THAT: 'THE BENEFIT OF+/- 5 % AS PER PROVISO TO SECTION 92 C OF THE ACT CANNOT BE CONSIDERED TO BE A STANDARD UNIVERSAL DEDUCTION ALLOWED IN EACH AND EVERY CASE WHICH THE ASSESSEE EXCEEDS THE PERMISSIBLE LIMIT AND FALLS OUTSIDE THE ARM'S LENGTH. THE PROVISO PRO VIDES A RELIEF TO THE TAXPAYER AT THE TIME OF DETERMINING THE ALP. THEREFORE, THIS OPTION IS AVAI LABLE TO THE ASSESSEE ONLY WHEN ASSESSEE IS COMPUTING THE ALP AND NOT WHEN THE A O/TPO IS COMPU TING THE ALP'. THE SAME VIEW IS UPHELD IN THE FOLLOWING JUDGEMENTS : I. ST MICROELECTRONICS(2011-TII-63-ITAT-DEL-TP) II. DCIT VS. DELOITTE CONSULTING INDIA PVT. LIMITED (ITAT HYDERA BAD) 4 FURTHER IT HAS BEEN HELD IN A PLETHORA OF JUDGMEN TS THAT THE BENEFIT OF +/- 5% IS TO BE GIVEN ONLY WHEN WHERE MORE THAN ONE PRICE IS DETERMINED BY THE MOST APPROPRIATE METHOD .THE DEDUCTION IS NOT TO BE GIVEN WHEN ONLY ONE ARMS LENGTH PRICE IS DETE RMINED. SIMILAR VIEW IS PROPOUNDED IN THE FOLLO WING JUDGMENTS: I. UE TRADE CORPORATION (INDIA) (2011-TII-04-ITAT-DEL- TP) II. HAWORTH (INDIA) PVT LTD. A.Y. 2006-07 (ITA NO. 5341 /DEL/2010) III. ADP PRIVATE LIMITED (2011-TII-44-ITAT-HYD-TP) IV. PEROT SYSTEMS TSI (INDIA) LTD 2010-TIOL-15-DEL V. ESSAR STEEL LTD. (2011-TII-17-ITAT-VIZAG-TP 5.THIS ISSUE IS ALSO DECIDED IN FAVOUR OF THE REVEN UE IN A RECENT DECISION IN THE CASE OF M/S. DELOITT EE CONSULTING INDIA PVT. LTD. AS UNDER: '31. NEXT WE DEAL WITH THE ISSUE WITH REGARD TO THE ALLOWANCE OF 5% DEDUCTION BEFORE COMPUTING THE ALP. IT IS CONTENTION OF THE LEARNED COUNSEL FOR TH E ASSESSEE THAT THE ARITHMETICAL MEAN OF THE COMPARABLE PRICE SHOULD BE REDUCED BY 5% FOR DETERM INING THE ALP. WE HAVE GONE THROUGH THE SUBMISSIONS AND ALSO THE CASE LAW RELIED UPON BY HI M. HE POINTED OUT THAT THE AMENDMENT MADE UNDER SECTION 92C OF THE ACT WOULD BE APPLICABLE PROSPECT IVELY AND NOT RETROSPECTIVELY. WHEREAS THE LEARNED DEPARTMENTAL REPRESENTATIVE OBJECTED TO THE ABOVE P ROPOSITION AND SUBMITTED THAT UNDER THE PROVISO, NO STANDARD DEDUCTION HAS BEEN PROVIDED TO THE ASSE SSEE COMPANY. IN OUR CONSIDERED VIEW, THE TOLERANCE BAND PROVIDED IN THE AFORESAID PROVISION IS NOT TO BE TAKEN AS A STANDARD DEDUCTION. IF THE ARITHMETIC MEAN FALLS WITHIN THE TOLERANCE BAND, TH EN THERE SHOULD NOT BE ANY ALP ADJUSTMENT. IF IT EXCEEDS THE SAID TOLERANCE BAND, THEN ALP ADJUSTMEN T IS NOT REQUIRED TO BE COMPUTED AFTER ALLOWING THE DEDUCTION AT 5%. THAT MEANS, ACTUAL WORKING IS TO BE TAKEN FOR DETERMINING THE ALP WITHOUT GIVING DEDUCTION OF 5%. OUR VIEW IS SUPPORTED BY THE RECEN T DECISION OF THE DELHI BENCH OF THE TRIBUNAL IN TH E CASE OF M/S. ST MICROELECTRONICS PRIVATE LIMITED VS . CIT (A) XX, NEW DELHI AND OTHERS (SUPRA). WE ALSO FIND THAT THE ISSUE IS COVERED IN FAVOUR OF TH E REVENUE BY THE DECISION OF CO-ORDINATE BENCH IN T HE CASE OF ADP PRIVATE LIMITED, HYDERABAD VS. DCIT, HY DERABAD (ITA NO.L06/HYD/2009 AND ITA NO.L55/HYD/2009 DATED 25-2-2011, TO WHICH ONE OF US WAS A PARTY OF THAT ORDER AND THE SAME IS BINDING ON US. SINCE THE DECISION OF CO-ORDINATE BE NCH IS BINDING ON US, WE ARE NOT INCLINED TO FOLLOW ITA NO 3320 /AHD/2010 . A.Y. 2006- 07 15 THE DECISIONS RENDERED BY OTHER BENCHES OF THIS TRI BUNAL WHICH ARE RELIED ON BY THE LEARNED COUNSEL FOR THE ASSESSEE. WE ARE ALSO IN AGREEMENT WITH THE ELABORATE FINDINGS OF THE FIRST APPELLATE AUTHORIT Y IN DEALING WITH THIS ISSUE AND ACCORDINGLY WE DO NOT S EE ANY INFIRMITY IN HIS ORDER. HENCE, THE GROUNDS RAISED BY THE ASSESSEE ON THIS ISSUE ARE REJECTED. 6.AGAIN IN A VERY RECENT JUDGEMENT DELIVERED IN THE CASE OF DCIT VS ROCHE DIAGNOSTICS 19 TAXMANN.COM 192 (MUM)(2012),IT HAS BEEN HELD THAT THE 5% VARIATION IS NOT TO BE ALLOWED AS STANDARD DEDUCTION. THE ISSUE IS DISCUSSED IN THE J UDGMENT AS BELOW: '25. IT IS IMPORTANT TO MENTION THAT THE PROVISO TO SECTION 92C(2) HAS BEEN ENSHRINED TO MAKE THE ASSESSEE'S DECLARED PRICE AS ACCEPTABLE IF THE ALP SO DETERMINED IS WITHIN PLUS MINUS 5% RANGE OF SUCH PRICE. IT IS NOT IN THE NATURE OF ANY STANDARD DEDUCTION OR STANDARD ADDITION WHICH HAS TO BE INVARIABLY ALLOWED OR MADE. ONLY IF THE PRICE CHARG ED BY THE ASSESSEE IS WITHIN PLUS MINUS 5% OF THE AVERAGE PROFIT OF COMPARABLE CASES, THAT THIS BENEF IT OF PLUS MINUS 5% IS TO BE GRANTED. IN CASE IT IS BEYOND SUCH PLUS MINUS 5% RANGE, THEN THE DIFFERENCE BETWEEN THE ASSESSEES PRICE AND ALP CALLS FOR ADDITION. WE MAKE IT CLEAR THAT IF TH E AVERAGE PRICE OF UNCONTROLLED TRANSACTIONS IS SAY RS. 100 AND THE ASSESSEE HAS PAID RS. 104 OR RS. 10 5 THEN NO ADDITION IS CALLED FOR AS IT FALLS WITHIN + 5% RANGE. IF HOWEVER, THE ASSESSEE HAS PAID RS. 106 , THEN ADDITION FOR RS. 6 IS WARRANTED IRRESPECTIVE OF ANY BENEFIT FOR PLUS MINUS 5%. 7 IN ANOTHER RECENT JUDGMENT IN THE CASE OF JOHNSON MATTNEY INDIA (P) LTD. 20 TAXMANN.COM 39(DEL) GOOD DISCUSSION IS MADE ON THIS ISSUE WHICH IS REPR ODUCED BELOW '14. WE HAVE HEARD BOTH THE SIDES ON THE ISSUE. VARIOUS BENCHES OF ITAT HAD DECIDED THE ISSUE. IN THE CASE OF DCITV. DELOITTE CONSULTING INDIA PVT. LTD., THE ITAT, HYDERABAD BENCH 'A' IN LTA NO.1082/HYD./2010 HAS DECIDED THIS ISSUE AS UNDER : - 31. NEXT WE DEAL WITH THE ISSUE WITH REGARD TO THE ALLOWANCE OF 5% DEDUCTION BEFORE COMPUTING THE ALP. IT IS CONTENTION OF THE LEARNED COUNSEL FOR TH E ASSESSEE THAT THE ARITHMETICAL MEAN OF THE COMPARABLE PRICE SHOULD BE REDUCED BY 5% FOR DETERM INING THE ALP. WE HAVE GONE THROUGH THE SUBMISSIONS AND ALSO THE CASE LAW RELIED UPON BY HI M. HE POINTED OUT THAT THE AMENDMENT MADE UNDER SECTION 92C OF THE ACT WOULD BE APPLICABLE PROSPECT IVELY AND NOT RETROSPECTIVELY. WHEREAS THE LEARNED DEPARTMENTAL REPRESENTATIVE OBJECTED TO THE ABOVE P ROPOSITION AND SUBMITTED THAT UNDER THE PROVISO, NO STANDARD DEDUCTION HAS BEEN PROVIDED TO THE ASSE SSEE COMPANY. IN OUR CONSIDERED VIEW, THE TOLERANCE BAND PROVIDED IN THE AFORESAID PROVISION IS NOT TO BE TAKEN AS A STANDARD DEDUCTION. IF THE ARITHMETIC MEAN FALLS WITHIN THE TOLERANCE BAND, TH EN THERE SHOULD NOT BE ANY ALP ADJUSTMENT. IF IT EXCEEDS THE SAID TOLERANCE BAND, THEN ALP ADJUSTMEN T IS NOT REQUIRED TO BE COMPUTED AFTER ALLOWING THE DEDUCTION AT 5%. THAT MEANS, ACTUAL WORKING IS TO BE TAKEN FOR DETERMINING THE ALP WITHOUT GIVING DEDUCTION OF 5%. OUR VIEW IS SUPPORTED BY THE RECEN T DECISION OF THE DELHI BENCH OF THE TRIBUNAL IN TH E CASE OF M/S. ST MICROELECTRONICS PRIVATE LIMITED V. CIT (A) XX, NEW DELHI AND OTHERS (SUPRA). WE ALSO FIND THAT THE ISSUE IS COVERED IN FAVOUR OF TH E REVENUE BY THE DECISION OF CO-ORDINATE BENCH IN T HE CASE OF ADP PRIVATE LIMITED, HYDERABAD V. DGIT, HYD ERABAD(ITA NO.L06/HYD/2009 AND ITA NO.L55/HYD/2009 DATED 25-2-2011, TO WHICH ONE OF US WAS A PARTY OF THAT ORDER AND THE SAME IS BINDING ON US. SINCE THE DECISION OF CO-ORDINATE BE NCH IS BINDING ON US, WE ARE NOT INCLINED TO FOLLOW THE DECISIONS RENDERED BY OTHER BENCHES OF THIS TRI BUNAL -WHICH ARE RELIED ON BY THE LEARNED COUNSEL FOR THE ASSESSEE.,;WE ARE ALSO IN AGREEMENT WITH TH E ELABORATE FINDINGS OF THE FIRST APPELLATE AUTHORI TY IN DEALING WITH THIS ISSUE AND ACCORDINGLY WE DO NO T SEE ANY INFIRMITY IN HIS ORDER. HENCE, THE GROUND S RAISED BY THE ASSESSEE ON THIS ISSUE ARE REJECTED.' IN THE CASE OF MS. ST MICROELECTRONICS PVT. LTD. V. ADDL. CITIN ITA NOS.1806 & 1807/DEL.2008 & ORS., THE ITAT, DELHI BENCH 'G', NEW-DELHI IN ITS ORDER D ATED 03.06.2011 HAS ALSO CONSIDERED THE SIMILAR ISSUED AND DECIDED AS UNDER :- '44. WITH THE ASSISTANCE OF LEARNED REPRESENTATIVES , WE HAVE GONE THROUGH THE RECORD CAREFULLY. LEARNED CIT(APPEALS) IN ASSESSMENT YEAR 2003-04 HAS EXAMINED THIS ISSUE IN DETAIL. HE OBSERVED THAT IN ORDER TO AVOID HARDSHIPS TO THE ASSESSEES IN THE INITIAL YEARS OF IMPLEMENTATION OF THE TP PROVISIO NS, THE GOVERNMENT OF INDIA, THROUGH A PRESS NOTE ISSUE D BY THE MINISTRY OF FINANCE ON 22ND AUGUST 2001 EXPRESSED ITS INTENTION THAT NO ADJUSTMENT COULD BE MADE IF THE TRANSFER PRICE ADOPTED BY THE ASSESSEE WAS WITHIN THE BAND OF 5% OF THE ALP DETERMINED BY THE ASSESSING OFFICER. CBDT HAD ISSUED CIRCULAR NO. 12 ON 23.8.2001 SPECIFYING THAT ASSESS ING OFFICER SHALL NOT MAKE ANY ADJUSTMENT TO THE PRICE SHOWN BY THE ASSESSEE IF IT IS WITHIN THE 5% BAND, THE EFFECT OF THE CIRCULAR WAS THAT TRANSFER PRICE SHOWN BY THE ASSESSEE WAS NOT TO BE DISTURBED IF IT WAS UP TO 5% LESS IN CASE OF RECEIPT AND UP TO 5% MORE IN CASE OF OUTGOING. THE RELAXATION EXTENDE D BY THIS CIRCULAR WAS IN SUBSTANCE BROUGHT ON TO ITA NO 3320 /AHD/2010 . A.Y. 2006- 07 16 THE STATUTE BY THE FINANCE ACT 2002 BY AMENDING THE PROVISO TO SEC. 92C(2) WITH RETROSPECTIVE EFFECT FROM 1.4.2002. IT PROVIDES A TOLERANCE BAND. IT ALS O SUGGESTS THAT THERE WILL BE NO TP ADJUSTMENT IN CASES OF MARGINAL VARIATION UP TO 5% BUT SUBSTANT IAL VARIATION WOULD RESULT IN APPROPRIATE TP ADJUSTMENT. LEARNED CIT(APPEALS) HAS EXPLAINED THE MEANING OF TOLERANCE BAND WHICH READ AS UNDER : 'WHETHER THERE IS AN INTERNATIONAL TRANSACTION INVO LVING SALE OF A PRODUCT OR EXPORT OF SERVICES, THER E WOULD BE A CREDIT ENTRY IN THE PROFIT & LOSS ACCOUN T. BY ALLOWING A MARGIN OF (-) 5% FOR SUCH A TRANSACTION, A TAXPAYER IS PERMITTED TO HAVE A CRED IT ENTRY WHICH IS NOT BELOW 95% OF THE ALP SO THAT PROFIT FROM THE TRANSACTION IS NOT UNDERSTATED BEYO ND THE TOLERANCE LEVEL OF(-) 5%. WHENEVER THERE IS AN INTERNATIONAL TRANSACTION INVO LVING PURCHASE OF A PRODUCT OR IMPORT OF SERVICES, THERE WOULD BE A DEBIT ENTRY IN THE PROFIT AND LOSS ACCOUNT. BY ALLOWING A MARGIN OF (+) 5% UNDER SUCH A TRANSACTION, A TAXPAYER IS PERMITTED TO HAVE A DE BIT ENTRY WHICH IS NOT ABOVE 105% OF THE ALP SO THA T PROFIT FROM THE TRANSACTIJON IS NOT UNDERSTATED BEY OND THE TOLERANCE LEVEL OF (+) 5%. 11.18.3 THE DECISION RULE CONTAINED IN THE PROVISO TO THE SEC. 92C(2) OF THE ACT CONTAINING A TOLERANC E BAND IS AKIN TO A SIMILAR DECISION RULE OF CONFIDEN CE INTERVAL USED IN THE THEORY OF STATISTICAL INFER ENCE. UNDER THAT THEORY, A 5% LEVEL OF SIGNIFICANCE WOULD PROVIDE FOR A TOLERANCE BAND CONSISTING OF 95% & 105% OF THE ARITHMETICAL MEAN AND THESE POINTS ARE KNOWN AS 'CRITICAL VALUES'. THE RULE IS ONE OF 'ALL' OR 'NOTHING' KIND OF A SITUATION. IF A COMPUT ED VALUE FALLS WITHIN THE TOLERANCE BAND, A FAVORAB LE INFERENCE IS DRAWN. THE DECISION RULE CONTAINED IN THE PROVISO TO SECTION 92C(2) OF THE ACT THUS IS A 'ALL' OR 'NOTHING' KIND OF RULE. AFTER ALL IN THE T RANSFER PRICING ANALYSIS, A SAMPLE SET OF COMPARABL ES ALONG WITH THE DISTRIBUTION OF PROFITABILITY OF THI S SET IS EXAMINED AND AN INFERENCE IS SOUGHT TO BE DRAWN ABOUT THE APPROPRIATENESS OF PROFITABILITY SH OWN BY A TAXPAYER. THEREFORE, STATISTICAL INFERENCE THEORY BASED ON SAMPLING IS DIRECTLY APPLICABLE TO THE BENCHMARKING ANALYSIS CARRIED OUT IN THE TRANSFER PRICING ANALYSIS WITH THE HELP OF A SAMPLE SET OF COMPARABLES. THERE IS NO SCOPE FOR ANY 'STANDARD DEDUCTION' UNDER THIS RULE. IN OTHER WORD S, IF THE ALP FALLS OUTSIDE THE TOLERANCE BAND, TP ADJUSTMENT WOULD HAVE TO BE MADE FOR THE DIFFERENCE BETWEEN THE ALP DETERMINED BY THE A.O. BASED ON THE ARITHMETICAL MEAN OF THE PRICES AND THE PRICE S HOWN BY THE ASSESSEE'. 45. THE CONTENTION OF THE LEARNED COUNSEL FOR THE A SSESSEE 'WAS THAT ARITHMETIC MEAN OF THE COMPARABLE PRICE SHOULD BE REDUCED BY 5% FOR DETERM INING THE ALP. HE POINTED OUT THAT IN 2009, THE PROVISO APPENDED TO SECTION 92C HAS BEEN AMENDED BU T THIS AMENDMENT WOULD BE APPLICABLE PROSPECTIVELY, BECAUSE THE BASIS OF DETERMINATION O F ALP IN RESPECT OF INTERNATIONAL TRANSACTION GET CHANGED. THIS AMENDMENT EFFECTS IMPOSING A NEW LIAB ILITY BY TAKING THE OPTION AWAY FROM THE TAXPAYERS. THUS, ACCORDING TO THE LEARNED COUNSEL F OR THE ASSESSEE, THE AMENDED PROVISO IS NOT APPLICABLE. ON THE OTHER HAND, LEARNED DR HAS SUBMI TTED THAT UNDER THE PROVISO NO STANDARD DEDUCTION HAS BEEN PROVIDED TO THE ASSESSEE. 46. ON DUE CONSIDERATION OF THE FACTS AND CIRCUMSTA NCES AND PERUSAL OF THE PROVISO INTRODUCED IN 2002 AS WELL AS IN 2009, WE ARE OF THE VIEW THAT THIS TO LERANCE BAND PROVIDED IN THE PROVISO IS NOT TO BE CONSTRUED AS A STANDARD DEDUCTION. IN THE PRESENT A PPEALS, LEARNED TPO HAS ADOPTED THE ARITHMETIC MEAN OF SEVERAL COMPARABLES FOR TAKING OUT A PLI WH ICH WOULD BE TESTED WITH THE PLI OF THE ASSESSEE. IF THAT ARITHMETIC MEAN FALLS WITHIN THE RANGE OF A LLEGED TOLERANCE BAND THEN THERE MAY NOT BE ANY ADJUSTMENT BUT IF IT EXCEEDS THE ULTIMATE ADJUSTMEN T IS NOT REQUIRED TO BE COMPUTED AFTER REDUCING THE ARITHMETIC MEAN BY 5%. THE ACTUAL WORKING IS TO BE TAKEN. LEARNED FIRST APPELLATE AUTHORITY HAS CONSIDERED THIS ASPECT ELABORATELY IN ASSESSMENT YE AR 2003-04 AND AFTER GOING THROUGH HIS ORDER, WE DO NOT SEE ANY MERIT IN THE GROUND OF APPEAL RAISED BY THE ASSESSEE IN ALL THESE THREE ASSESSMENT YEA RS. CONSIDERING ALL THESE DECISIONS OF ITAT BENCHES AND PLEADINGS ON BOTH THE SIDES, WE ARE OF THE VIEW THAT THIS TOLERANCE BAND PROVIDED IN THE PROVISO IS NOT TO BE CONSTRUED AS A STANDARD DEDUCTION. IN TH IS CASE, THE TPO HAS ADOPTED THE ARITHMETIC MEAN OF SE VERAL COMPARABLES FOR TAKING OUT A PLI WHICH WOULD BE TESTED WITH THE PLI OF THE ASSESSEE. IF TH AT ARITHMETIC MEAN FALLS WITHIN THE RANGE OF TOLERA NCE BAND THEN THERE MAY NOT BE ANY ADJUSTMENT BUT IF IT EXCEEDS THEN ULTIMATE ADJUSTMENT IS NOT REQUIRED T O BE COMPUTED AFTER REDUCING THE ARITHMETIC MEAN BY 5 %. THE ACTUAL WORKING IS TO BE TAKEN INTO CONSIDERATION. CONSIDERING ALL THESE FACTS, THE APP EAL OF THE ASSESSEE IS ALSO DISMISSED ON THIS GROUN D. ' 8 IT IS ALSO PERTINENT TO NOTE THE AMENDMENT CARRIE D OUT IN THE FINANCE ACT 2012 WHEREIN THE ISSUE IS CLEARLY DEALT WITH. IT WAS HELD IN SOME OF THE JUDG MENTS DELIVERED BY HON'BLE TRIBUNALS THAT THE AMENDMENT CARRIED OUT BY FINANCE ACT 2009 IS ONLY P ROSPECTIVE IN NATURE AND THUS IS APPLICABLE ONLY FOR AY 2009-10 ONWARDS. HOWEVER BY CARRYING OUT THE BELOW MENTIONED AMENDMENT, THE DISPUTE HAS BEEN LAID TO REST. THE RELEVANT PORTIONS OF THE AME NDMENT IN SECTION 92C IS PRODUCED BELOW: ITA NO 3320 /AHD/2010 . A.Y. 2006- 07 17 '(2A) WHERE THE FIRST PROVISO TO SUB-SECTION (2) AS IT STOOD BEFORE ITS AMENDMENT BY THE FINANCE (NO. 2) ACT, 2009 (33 OF 2009), IS APPLICABLE IN RESPECT OF AN INTERNATIONAL TRANSACTION FOR AN ASSESSMENT YEA R AND THE VARIATION BETWEEN THE ARITHMETICAL MEAN REF ERRED TO IN THE SAID PROVISO AND THE PRICE AT WHICH SUCH TRANSACTION HAS ACTUALLY BEEN UNDERTAKEN EXCEE DS FIVE PER CENT OF THE ARITHMETICAL MEAN, THEN, TH E ASSESSEE SHALL NOT BE ENTITLED TO EXERCISE THE OPTI ON AS REFERRED TO IN THE SAID PROVISO.' 9. THUS AS FAR AS THE ISSUE OF APPLICABILITY OF STA NDARD DEDUCTION OF+/-5% IS CONCERNED, IN VIEW OF TH E DISCUSSION ABOVE; THE SAME CANNOT BE GRANTED AND TH E CONTENTION THEREFORE IS REJECTED. 3. ISSUE REGARDING THE COMPARABILITY OF ENTI TIES 3.1 IT CAN BE SEEN FROM THE TABLE ON PAGE 7 O F THE TPO'S ORDER THAT THE ENTITIES CONSIDERED AS COMPARABLE BY THE ASSESSEE WERE ENGAGED IN PROVIDIN G COMPUTER SOFTWARE SERVICES. AS A MATTER OF FACT THE SAME IS ALSO CLEAR FROM THE SEARCH PROCESS CARR IED OUT BY THE ASSESSEE ITSELF. ANNEXURE 4A OF THE TP STUDY REPORT IN WHICH THE COMPARABLE ENTITIES SELEC TED BY THE ASSESSEE CAN BE SEEN SHOW THE FOLLOWING EXTRACT: S. NO. COMPANY NAME ECONOMIC ACTIVITY NIC CODE 1 ACE SOFTWARE EXPORTS LTD. COMPUTER SOFTWARE 722 00 2 C S SOFTWARE ENTERPRISE LTD. COMPUTER SOFTWARE 72200 3 CRISIL MARKETWIRE LIMITED ITES/BPO 722 4 VAKRANGEE SOFTWARE LTD. COMPUTER SOFTWARE 72200 3.1.1 FROM PERUSAL OF THE ABOVE, IT CAN BE SEEN THA T THE ASSESSEE HAS ITSELF CONSIDERED THE ENTITIES ENGAGED IN PROVIDING COMPUTER SOFTWARE SERVICES COM PARABLE TO ITSELF. IN SUCH A CASE, THE CONTENTION RAISED BY THE ASSESSEE REGARDING THE INCOMPARABILIT Y OF THE COMPARABLES SELECTED BY THE TPO ON THE BASIS THAT THEY WERE ENGAGED IN PROVIDING COMPUTER SOFTWARE IS HYPOCRITICAL AND MISLEADING. ONCE A FAR IS CONSIDERED AS COMPARABLE BY THE ASSESSEE W HILE SELECTING ITS OWN COMPARABLES, IT CANNOT TAKE A U-TURN AND FIND FAULTS IN THE COMPARABLES SELECTE D BY THE TPO WERE ENGAGED IN PROVIDING COMPUTER SOFTWARE SERVICES, AND CONSEQUENTLY INCOMPARAGLE TO THE ASSESSEE, IS IN CONTRAVENTION TO THE COMPARABLES SELECTED BY THE ASSESSEE ITSELF. IF THE COMPARABLES CONSIDERED BY THE ASSESSEE BY THE TPO ARE ALSO REQUIRED TO BE CONSIDERED AND THEY CANNOT BE REJECTED SOLELY ON THE BASIS THAT THEY WERE ENGAGED IN PROVIDING COMPUTER SOFTWARE SERVICES. 3.1.2. NO COMMENTS CAN BE MADE ON THE SPECIFIC COMP ARABLES, UNLESS THE OBJECTIONS ON THE SAME CAN BE LEARNT FROM THE ASSESSEES SIDE. 4 BEFORE PARTING IT IS ALSO IMPORTANT TO NOTE THE OBSERVATIONS MADE BY THE HON. SPECIAL BENCH IN THE CASE OF AZTEC SOFTWARE & TECHNOLOGY SERVICES LTD 10 7 ITD 141(BANGALORE) (SB). THE RELEVANT PORTION OF THE SAME IS REPRODUCED BELOW: 'HAVING REGARD TO THE PURPOSE OF THE LEGISLATION AN D APPLICATION OF SIMILAR ENACTMENT WORLD OVER, IT MUST FURTHER BE HELD THAT ADJUSTMENTS MADE ON ACCOU NT OF ALP BY TAX AUTHORITIES CAN BE DELETED IN APPEAL ONLY IF THE APPELLATE AUTHORITIES ARE SATISFIED AND RECORD A FINDINS THAT ALP SUBMITTED BY THE ASSESSEE IS FAIR AND REASONABLE. MERELY BY FINDING FAULTS WITH THE TRANSFER PRICE DETERMINED BY THE REVENUE AUTHORITIES (A.O./TPO), ADDITION ON ACCOUNT OF ADJUSTMENTS' CANNOT BE DELETED. THIS IS BECAUSE THE MANDATE OF SECTION 92(1) IS THAT IN EVE RY CASE OF INTERNATIONAL TRANSACTION, INCDME HAS TO BE DETERMINED HAVING REGARD TO ALP. THEREFORE, UNLE SS ALP FURNISHED BY THE TAXPAYER IS SPECIFICALLY ACCEPTED, THE APPELLATE AUTHORITIES ON THE BASIS OF MATERIAL AVAILABLE ON RECORD HAVE TO DETERMINE ALP THEMSELVES. SUBJECT TO STATUTORY PROVISIONS, APPELL ATE AUTHORITIES CAN DIRECT LOWER REVENUE AUTHORITIE S TO CARRY THIS EXERCISE IN ACCORDANCE WITH LAW. THE MATTER CANNOT BE LEFT HANGING IN BETWEEN. ALP OF INTERNATIONAL TRANSACTION HAS TO BE DETERMINED IN E VERY CASE. 4.1 ON THE BASIS OF THE ABOVE, IF IT IS FOUND THAT THE BENCHMARKING CARRIED OUT BY THE TPO IS INCORREC T, IT SHOULD NOT AUTOMATICALLY MEAN THAT THE COMPARABI LITY ANALYSIS CARRIED OUT BY THE ASSESSEE IS ACCEPTABLE. IF THE COMPARABLES CONSIDERED BY THE TP O ARE NOT FOUND TO BE COMPARABLES ON THE BASIS THAT THEY WERE ENGAGED IN PROVIDING COMPUTER SOFTWA RE SERVICES, IT SHOULD NOT AUTOMATICALLY MEAN, THAT THE COMPARABLES CONSIDERED BY THE ASSESSEE ARE CORR ECT SINCE THE MAJORITY OF THE COMPARABLES WERE ALSO ENGAGE IN PROVIDING COMPUTER SOFTWARE SERVICES . AT THIS JUNCTURE IT IS ALSO IMPORTANT TO NOTE THA T IN CASE TNMM IS USED AS THE MOST APPROPRIATE METHOD , THE COMPARABLE SIZE SHOULD BE SUCH WHICH WOULD LEAD TO A RELIABLE ESTIMATE OF THE ARMS LENGT H PRICE. A SINGLE COMPARABLE SHOULD NOT BE CONSIDERED UNLESS IT IS EXACTLY SIMILAR TO THE TRAN SACTIONS UNDERTAKEN BY THE ASSESSEE.LT WAS HELD IN THE ITA NO 3320 /AHD/2010 . A.Y. 2006- 07 18 CASE OF SAP LABS INDIA (P.) LTD [2011] 44 SOT 156 ( BANG.)- - THREE COMPARABLES ARE NOT A RELIABLE SAMPLE SIZE. THUS UNLESS THE COMPARABLE IS AN EXACT COMPARABLE, A VERY SMALL COMPARABLE SIZE SHOULD NOT BE USED. THUS, EVEN IF IT IS HELD THAT THE COMP UTER SOFTWARE ENTITIES ARE INCOMPARABLE, IT SHOULD NOT AUTOMATICALLY LEAD TO THE CORRECTNESS OF THE ASSESS EE'S JUSTIFICATION OF ALP ON THE BASIS OF ONE COMPARABLE. 8. APART FROM THE WRITTEN SUBMISSIONS AS ABOVE, LD D.R . FURTHER SUBMITTED THAT THE FACTS IN THE CASE OF QUARK SYSTEMS (SUPRA) WHICH HAS BEEN RELIED UPON BY THE LD A.R. ARE DISTINGUISHABLE AND THEREFO RE CANNOT BE APPLIED TO THE FACTS OF THE PRESENT CASE. HE THUS SUPPORTED THE ORDER OF AO AND DRP . 9. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL IN RECORD. IT IS AN UNDISPUTED FACT THAT FOR THE PURPOSE OF TP STUDY, ASSESSEE HAS CONSIDERED VAKRANGEE COMPUTER SOFTWARE AS A COMPARA BLE BUT HOWEVER LATER ON IT WAS SUBMITTED THAT THE SAME SHOULD BE E XCLUDED AS IT WAS FUNCTIONALLY NOT COMPARABLE WITH THE ASSESSEE MORES O WHEN THE NATURE OF ITS ACTIVITIES WAS NOT FUNCTIONALLY COMPARABLE WITH THAT OF THE ASSESSEE. BEFORE US THE REVENUE HAS SUBMITTED THAT ONCE A FAR IS CONSIDERED AS COMPARABLE BY THE ASSESSEE WHILE SELECTING ITS OWN COMPARABLES, IT CANNOT TAKE A U TURN AND FIND FAULTS IN THE COMPARA BLES SELECTED BY THE TPO ON THE BASIS OF SAME FAR. WE FIND THAT BEFORE T HE SP. BENCH OF TRIBUNAL IN THE CASE OF QUARK SYSTEM (SUPRA), THE A SSESSEE HAD RAISED AN ISSUE THAT ONE OF THE INDEPENDENT COMPARABLE WHICH WAS INCLUDED BY THE ASSESSEE AS ALSO BY THE TPO HAD WRONGLY BEEN INCLUD ED IN THE COMPARABLE AND THEREFORE SHOULD BE EXCLUDED. THE RE LEVANT PORTION OF THE ORDER OF THE HON. SPECIAL BENCH ON THE AFORESAID IS AS UNDER: 21. SHRI S.D. KAPILA, LEARNED SPECIAL COUNSEL FOR THE A SSESSEE VEHEMENTLY OPPOSES THE ADMISSION OF THE ADDITIONAL GROUND REGARDING EXCLUDING OF DATAMA TICS TECHNOLOGIES LTD AT THIS STAGE. HE SUBMITS THAT DATAMATICS TECHNOLOGIES LTD WAS INCLUD ED IN THE LIST OF COMPARABLE GIVEN BY THE ASSESSEE HIMSELF, THEREFORE, THERE IS NO GOOD REASO N FOR THE ASSESSEE TO BACK OUT FROM THE SAME. IN ITA NO 3320 /AHD/2010 . A.Y. 2006- 07 19 ALL FAIRNESS, HE DID ACCEPT THAT THE COMPUTATION OF OPERATING PROFITS OF DATAMATICS TECHNOLOGIES LTD IS INDEED VITIATED IN AS MUCH AS OPERATING PROF ITS OF 5.79 CORES HAVE NOT BEEN TAKEN INTO ACCOUNT TO ARRIVE AT CORRECT FIGURE OF OPERATING PR OFITS AS A RESULT OF THIS ERROR, THE NET OPERATING PROFIT TO COST RATIO WHICH IS ACTUALLY 93 06% AS AG AINST 138.46% ADOPTED BY THE IPO. LEARNED SPECIAL COUNSEL HOWEVER, SUBMITS THAT TINKERING WIT H THE LOSS OF COMPARABLES AT THIS STAGE AND A FRESH DETERMINATION AS TO WHICH COMPARABLE BE ACCEP TED AND WHICH ONE SHOULD NOT BE ACCEPTED WILL LEAD TO REVISING THE TRANSFER PRICING ANALYSIS CONDUCTED BY THE ASSESSEE HIMSELF. HE SUBMITS THAT SUCH AN EXERCISE WILL OPEN FLOODGATES OF UNCER TAINTY TO THE SETTLED ASSESSMENTS OF TRANSFER PRICING CASES. SHRI KAPILA ALSO SUBMITTED THAT THE ONUS WAS ON THE ASSESSEE TO GIVE ALL THE RELEVANT DETAILS TO THE TPO. WHICH HE OBVIOUSLY AND ADMITTEDLY DID NOT DO NOR DID HE DO SO AT THE STAGE TO PROCEEDINGS BEFORE THE CIT(A). SHRI KAPILA SUBMITS THAT THESE IS NO MATERIAL ON RECORD TO SHOW THAT EVEN BEFORE THE CIT (A) SUCH DETAILS W ERE EVER FILED AS REGARDS THE QUESTION OF INTRA ASSOCIATED ENTERPRISES TRANSACTION BEING INVOLVED I N THE TURNOVER OF THE DATAMATICS, SHRI KAPILA SUBMITS THAT THIS ISSUE WAS NEVER TAKEN UP BEFORE A NY OF THE AUTHORITIES BELOW. THE DETAILS WERE ALSO NOT AVAILABLE IN THE PROWESS DATABASE AND HAVE COME TO THE LIGHT ONLY AS A RESULT OF DETAILED BALANCE SHEET OF DATAMATICS TECHNOLOGIES LTD COMPAN Y FILED NOW BY THE ASSESSEE. IN SUCH CIRCUMSTANCES, ACCORDING TO THE LEARNED SPECIAL COU NSEL WE SHOULD NOT ENTERTAIN A GRIEVANCE REGARDING EXCLUSION OF DATAMATICS TECHNOLOGIES LTD IN THE COMPARABLES WITHOUT PREJUDICE TO THIS OPPOSITION LEARNED COUNSEL FAIRLY SUBMITS THAT IN T HE EVENT THE TRIBUNAL IS PLEASED TO ADMIT THIS GROUND OF APPEAL, THE MATTER CAN AT BEST BE REMITTE D TO THE FILE OF THE ASSESSING OFFICER FOR THE LIMITED PURPOSE OF EXAMINING THE RELEVANT FACT REGA RDING DATAMATICS TECHNOLOGIES LTD. LEARNED COUNSEL FURTHER SUBMITS THAT IN CASE WE ARE INCLINE D TO REMIT THE MATTER TO THE FILE OF THE ASSESSING OFFICER, HE HAS NO OBJECTION TO THE MATTER BEING RE STORED TO THE FILE OF THE ASSESSING OFFICER AS SUCH BUT AN EXERCISE SHOULD BE FOR THE LIMITED PURP OSES OF EXAMINING SPECIFIC POINTS AS THE BENCH MAY DEEM FIT BUT IT SHOULD NOT BE FOR THE PURPOSES OF REVISITING THE ENTIRE TRANSFER PRICING ANALYSIS IT IS ALSO SUBMITTED THAT THE QUESTION AS TO WHAT-F URTHER ADJUSTMENTS NEED TO BE MADE IN THE PROFITS SO AS TO ELIMINATE THE IMPACT OF VARIATIONS BETWEEN THE ASSESSEE AND THE COMPARABLES CANNOT BE ADDRESSED AT THIS STAGE AS IT WOULD AMOUNT TO REVIS ITING ENTIRE TRANSFER PRICING STUDY, AND THAT THE REMAND SHOULD BE CONFINED TO THE QUESTION AS TO WHE THER OR NOT A PARTICULAR COMPARABLE CAN BE TAKEN INTO ACCOUNT OR NOT. 30. LEARNED SPECIAL COUNSEL FOR THE REVENUE SHRI KA PILA HAS VEHEMENTLY ARGUED THAT 'DATAMATICS' WAS TAKEN AS ONE OF THE COMPARABLES BY THE TAXPAYER AND NO OBJECTION TO ITS INCLUSION WAS RAISED BEFORE THE TPO OR BEFORE THE L EARNED CIT (APPEALS) IN APPEAL. THEREFORE, THE TAXPAYER SHOULD NOT BE PERMITTED TO RAISE ADDIT IONAL GROUND AND ASK FOR EXCLUSION OF THE ABOVE ENTERPRISE IN THE DETERMINATION OF THE AVERAG E MARGINS. WE ARE UNABLE TO ACCEPT ABOVE CONTENTION. IN THE FIRST PLACE, THESE ARE INITIAL Y EARS OF IMPLEMENTATION OF TRANSFER PRICING LEGISLATION IN INDIA AND TAXPAYERS AS WELL AS TAX C ONSULTANTS WERE NOT FULLY CONVERSANT, WITH THIS NEW BRANCH OF LAW WHEN PROCEEDINGS WERE INITIATED O R EVEN AT APPELLATE STAGE. BESIDES, REVENUE AUTHORITIES, INCLUDING TPO WERE REQUIRED TO APPLY S TATUTORY PROVISIONS AND CONSIDER FOR PURPOSES OF COMPARISON FUNCTIONS, ASSETS AND RISKS (TURNOVER ), PROFIT AND TECHNOLOGY EMPLOYED BY THE TESTED PARTY AND OTHER ENTERPRISES TAKEN AS COMPARA BLE STATUTORY DUTY IS CAST ON THEM TO UNDERTAKE ABOVE EXERCISE. THIS HAS NOT BEEN DONE IN THIS CASE. WE WOULD ONLY SAY THAT PRIMA FACIE, AS PER THE MATERIAL, TO WHICH REFERENCE HAS BEEN DRAWN BY SHRI AGARWAL, DATAMATICS DOES NOT APPEAR TO BE COMPARABLE. EVEN IF THE TAXPAYER O R ITS COUNSEL HAD TAKEN DATAMATICS AS COMPARABLE IN ITS T P AUDIT, THE TAXPAYER IS ENTITL ED TO POINT OUT TO THE TRIBUNAL THAT ABOVE ENTERPRISE HAS WRONGLY BEEN TAKEN AS COMPARABLE IN FACT THERE ARE VAST DIFFERENCES BETWEEN TESTED PARTY AND THE DATAMATICS. THE CASE OF DATAM ATICS IS LIKE THAT OF 'IMERCIUS TECHNOLOGIES' REPRESENTING EXTREME POSITIONS. IF IMERCIUS TECHNOL OGIES, HAS SUFFERED HEAVY LOSSES AND, THEREFORE, IT IS NOT TREATED AS COMPARABLE BY THE T AX AUTHORITIES, THEY ALSO HAVE TO CONSIDER THAT THE DATAMATICS HAS EARNED EXTRAORDINARY PROFIT AND HAS A HUGE TURNOVER. BESIDES DIFFERENCES IN ASSETS AND OTHER CHARACTERISTICS REFERRED TO BY SHR I AGGARWAL. THE INCOME TAX APPELLATE TRIBUNAL IS A FACT FINDING BODY AND, THEREFORE HAS TO TAKE INTO ACCOUNT ALL THE RELEVANT MATERIAL AND DETERMINE THE QUESTION AS PER THE- STATUTORY RE GULATIONS. 31. IN THE CASE OF CIT VS BHARAT GENERAL REINSURANC E CO. LTD 81 ITR 303, THE HON'BLE DELHI HIGH COURT, OBSERVED AS UNDER: ITA NO 3320 /AHD/2010 . A.Y. 2006- 07 20 'IT IS TRUE THAT THE ASSESSEE ITSELF HAD INCLUDED T HAT DIVIDEND INCOME IN IS RETURN FOR THE YEAR IN QUESTION BUT THERE IS NO ESTOPPEL IN THE INCOME TAX ACT AND THE ASSESSEE HAVING ITSELF CHALLENGED THE VALIDITY OF TAXING THE DIVIDEND DURING THE YEAR OF ASSESSMENT IN QUESTION IT MUST BE TAKEN THAT IT HAD RESILED FROM THE POSITION WHICH IT HAD WRONG LY TAKEN WHILE FILING THE RETURN. QUIT APART FROM IF, IT IS INCUMBENT ON THE INCOME TAX DEPARTME NT TO FIND OUT WHETHER A PARTICULAR INCOME WAS ASSESSABLE IN THE PARTICULAR YEAR OR NOT. MERELY BE CAUSE THE ASSESSEE WRONGLY INCLUDED THE INCOME IN ITS RETURN FOR A PARTICULAR YEAR, IT CANN OT CONFER JURISDICTION ON THE DEPARTMENT TO TAX THAT INCOME IN THAT YEAR EVEN THOUGH LEGALLY SUCH I NCOME DID NOT PERTAIN TO THAT YEAR.' 32 IN THE CASE OF R.B.JESSA RAM FATEH CHAND VS. CIT 81 ITR 409, IT HAS BEEN FOUND AND OBSERVED AS UNDER: 'MR BRIJIAL GUPTA APPEARING FOR THE DEPARTMENT POIN TED OUT THAT THE ASSESSEE ITSELF FILED SEPARATE RETURNS FOR THE TWO PARTS OF A SINGLE ACCOUNTING PE RIOD. THE ASSESSEE APPLIED FOR REGISTRATION FOR THE FIRST PERIOD ONLY. THE ASSESSMENT FOR THE SECON D PERIOD PROCEEDED AS AGAINST AN UNREGISTERED FIRM. IT WAS, THEREFORE, URGED BY MR. GUPTA THAT IT IS NOT OPEN TO THE ASSESSEE TO URGE NOW THAT A SINGLE ASSESSMENT UNDER SECTION 26(1) OUGHT TO HAVE BEEN MADE. NOW, THERE CANNOT BE AN ESTOPPEL AGAINST STATUTE. IF IN FACT THE PROCEDURE ADOPTED BY THE INCOME-TAX OFFICER WAS INCORRECT, THE DEFECT IS NOT CURED BY THE ATTITUDE TAKEN UP BY THE ASSESSEE ' 33 IN THE CASE OF CIT VS. C.PARAKH & CO. (INDIA) LT D. 29 ITR 661, THEIR LORDSHIP OF SUPREME COURT MADE THE FOLLOWING OBSERVATIONS: 'ON THE QUESTION OF THE ADMISSIBILITY OF THE DEDUCT ION OF RS 1,23,719, THE CONTENTION OF THE APPELLANT IS THAT AS THE RESPONDENT HAD ITSELF SPLI T UP THE COMMISSION OF RS 3,12 699 PAID TO THE MANAGING AGENTS, AND APPROPRIATED RS 1,23,719 THERE OF TO THE PROFITS EARNED AT KARACHI AND HAD DEBITED THE SAME WITH IT, IT WAS NOT ENTITLED TO GO BACK UPON IT, AND CLAIM THE AMOUNT AS A DEDUCTION AGAINST THE INDIAN PROFITS. WE DO NOT SEE ANY FORCE IN THIS CONTENTION. WHETHER THE RESPONDENT IS ENTITLED TO A PARTICULAR DEDUCTION OR NOT WILL DEPEND ON THE PROVISION OF LAW RELATING THERETO, AND NOT ON THE VIEW WHICH IT MIGHT TAKE OF ITS RIGHTS, AND CONSEQUENTLY, IF THE WHOLE OF THE COMMISSION IS UNDER THE LAW LIABLE TO BE DEDUCTED A GAINST THE INDIAN PROFITS, THE RESPONDENT CANNOT HE ESTOPPED FROM CLAIMING THE BENEFIT OF SUC H DEDUCTION, BY REASON OF THE FACT THAT IT ERRONEOUSLY ALLOCATED A PART OF IT TOWARDS THE PROF ITS EARNED IN KARACHI. WHAT HAS THEREFORE TO BE DETERMINED IS WHETHER, NOTWITHSTANDING THE APPORTIO NMENT MADE BY THE RESPONDENT IN THE PROFIT AND LOSS STATEMENTS, THE DEDUCTION IS ADMISSIBLE UN DER THE LAW.' 34 IN THE CASE OF CIT VS. V.M.R.P.FIRM, MUAR (SC) 5 6 ITR 67, THE FOLLOWING OBSERVATIONS OF THEIR LORDSHIP OF SUPREME COURT ARE AS UNDER: 'THE DECISION IN AMARENDRA NARAYAN ROY VS CIT AIR 1 954 CAL 271 HAS NO BEARING ON THE QUESTION RAISED BEFORE US. THERE THE CONCESSIONAL S CHEME TEMPTED THE ASSESSES TO DISCLOSE VOLUNTARILY AIL HIS CONCEALED INCOME AND HE AGREED TO PAY THE PROPER TAX UPON IT. THE AGREEMENT THERE RELATED TO THE QUANTIFICATION OF TAXABLE INCO ME BUT IN THE PRESENT CASE WHAT IS SOUGHT TO BE TAXED IS NOT A TAXABLE INCOME. THE ASSESSEE IN SUCH A CASE CAN CERTAINLY RAISE THE PLEA THAT HIS INCOME IS NOT TAXABLE UNDER THE ACT WE, THEREFORE, REJECT THIS PLEA.' 35 IN PARA 4.16 OF LATEST REPORT, THE OECD PROVIDES THE FOLLOWING GUIDELINES. 'IN PRACTICE, NEITHER COUNTRIES NOR TAXPAYERS SHOUL D MISUSE THE BURDEN OF PROOF IN THE MANNER DESCRIBED ABOVE BECAUSE OF THE DIFFICULTIES WITH TR ANSFER PRICING ANALYSIS, IT WOULD BE APPROPRIATE FOR BOTH TAXPAYERS AND TAX ADMINISTRATIONS TO TAKE SPECIAL CARE AND TO USE RESTRAINT IN RELYING ON THE BURDEN OF PROOF IN THE COURSE OF THE EXAMINATIO N OF A TRANSFER PRICING CASE. MORE PARTICULARLY, AS A MATTER OF GOOD PRACTICE THE BURDEN OF PROOF SH OULD NOT BE MISUSED BY TAX ADMINISTRATIONS OR TAXPAYERS AS A JUSTIFICATION FOR MAKING GROUNDLESS OR UNVERIFIABLE ASSERTIONS ABOUT TRANSFER PRICING. A TAX ADMINISTRATION SHOULD BE PREPARED TO MAKE GOOD FAITH SHOWING THAT ITS DETERMINATION OF TRANSFER PRICING IS CONSISTENT WIT H THE ARM'S LENGTH PRINCIPLE EVEN WHERE THE BURDEN OF PROOF IS ON THE TAXPAYER, AND THE TAXPAYE RS SIMILARLY SHOULD BE PREPARED TO MAKE GOOD FAITH SHOWING THAT THEIR TRANSFER PRICING IS CONSIS TENT WITH THE ARM'S LENGTH PRINCIPAL REGARDLESS OF WHERE THE BURDEN OF PROOF LIES.' 36. THE AFORESAID DECISIONS AND GUIDELINES MAY NOT BE EXACTLY ON IDENTICAL FACTS BEFORE US BUT THEY EMPHATICALLY SHOW THAT TAXPAYER IS NOT ESTOPPED FRO M POINTING OUT A MISTAKE IN THE ASSESSMENT THOUGH SUCH MISTAKE IS THE RESULT OF EVIDENCE ADDUC ED BY THE TAXPAYER. ITA NO 3320 /AHD/2010 . A.Y. 2006- 07 21 37. WHEN SUBSTANTIAL JUSTICE AND TECHNICAL CONSIDER ATIONS ARE PITTED AGAINST EACH OTHER, THE CAUSE OF SUBSTANTIAL JUSTICE DESERVES TO BE PREFERRED. FO R THE OTHER SIDE CANNOT CLAIM TO HAVE A VESTED RIGHT IN INJUSTICE BEING DONE DUE TO SOME MISTAKES ON ITS PART. 38. ACCORDINGLY ON FACTS AND CIRCUMSTANCES OF THE C ASE, WE HOLD THAT TAXPAYER IS NOT ESTOPPED FROM POINTING OUT THAT DATAMATICS HAS WRONGLY BEEN TAKEN AS COMPARABLE. WHILE ADMITTING ADDITIONAL GROUND OF APPEAL RAISED BY THE ASSESSEE TO REQUIRE US TO CONSIDER WHETHER OR NOT DATAMATICS SHOULD BE INCLUDED IN THE COMPARABLE, WE MAKE NO COMMENTS ON MERIT EXCEPT OBSERVING THAT ASSESSEE FROM RECORD HAS SHOWN IT'S PRIMA-FACIE CASE. FURTHER CLAIM MAY BE EXAMINED BY THE ASSESSING OFFICER. THIS COURSE WE A DOPT AS OBJECTION TO THE INCLUSION OF DATAMATICS AS COMPARABLE HAS BEEN RAISED NOW AND NO T BEFORE REVENUE AUTHORITIES. THEREFORE, WE DEEM IT FIT AND PROPER TO REMIT THE MATTER TO THE F ILE OF THE ASSESSING OFFICER FOR CONSIDERATION OF CLAIM OF THE TAXPAYER AND MAKE A DE NOVO ADJUDICATI ON OF THE ARM'S LENGTH PRICE AFTER PROVIDING REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESS EE. WE ORDER ACCORDINGLY. 10. THUS IT IS SEEN THAT RESPECTED SP. BENCH OF THE TRI BUNAL AFTER RELYING ON VARIOUS DECISIONS OF APEX COURT AND HIGH COURTS HAS HELD THAT TAX PAYER IS NOT STOPPED FROM POINTING OUT A MISTAKE IN THE A SSESSMENT THOUGH SUCH MISTAKE IS THE RESULT OF EVIDENCE ADDUCED BY THE TA XPAYER. IT HAS FURTHER HELD THAT WHEN SUBSTANTIAL JUSTICE AND TECHNICAL CO NSIDERATIONS ARE PITTED AGAINST EACH OTHER, THE CAUSE OF SUBSTANTIAL JUSTIC E DESERVES TO BE PREFERRED. FURTHER THE OTHER SIDE CANNOT CLAIM TO H AVE A VESTED RIGHT IN INJUSTICE BEING DONE DUE TO SOME MISTAKES ON ITS PA RT. IN VIEW OF THE AFORESAID FACTS AND CONSIDERING THE PECULIARITY OF THE FACTS OF THE PRESENT CASE AND RELYING ON THE AFORESAID DECISION OF SPECI AL BENCH, WE ARE OF THE VIEW THAT VAKRANGEE SOFTWARE SHOULD BE EXCLUDED WHI LE WORKING OUT THE OP/TC%. WE THEREFORE RESTORE THE MATTER TO THE FILE OF AO FOR FRESH CONSIDERATION AFTER CONSIDERING THE FOREGOING AND T HEREAFTER DECIDE THE ISSUE AS PER LAW AND AFTER GIVING A REASONABLE OPPO RTUNITY OF HEARING TO THE ASSESSEE. THUS THIS GROUND OF THE ASSESSEE IS A LLOWED FOR STATISTICAL PURPOSES. GROUND NO 3 & 4 ARE INTERCONNECTED AND THEREFORE CO NSIDERED TOGETHER: ITA NO 3320 /AHD/2010 . A.Y. 2006- 07 22 11. AO NOTICED THAT ASSESSEE HAS INCURRED RS 506950/- U NDER THE HEAD 'COMMUNITY WELFARE EXPENSES'. ASSESSEE WAS ASKED TO SUBSTANTIATE ITS CLAIM AND HOW THE SAME WAS ALLOWABLE U/S 37(1) OF T HE ACT. ASSESSEE INTERALIA SUBMITTED THAT THE EXPENDITURE WAS INCURR ED FOR SCHOOL BUILDING AND TOILET AT THE VILLAGE WHICH WAS NEAR THE VICINI TY OF THE ASSESSEES FACTORY AND WAS FOR THE BENEFIT OF THE VILLAGERS. A O DID NOT AGREE WITH THE CONTENTION OF THE ASSESSEE. HE WAS OF THE VIEW THAT THE EXPENSES HAD NOTHING TO DO WITH THE BUSINESS OF THE ASSESSEE AND FURTHER THERE WAS NO CONTRACTUAL OBLIGATION OF THE ASSESSEE TO INCUR THE EXPENSES. HE ACCORDINGLY DISALLOWED THE EXPENSES. AGGRIEVED BY T HE DRAFT ORDER OF AO, ASSESSEE CARRIED THE MATTER BEFORE DRP. DRP UPH ELD THE DRAFT ORDER OF AO BY HOLDING AS UNDER: 11.10 THE ASSESSEE'S SUBMISSIONS HAVE BEEN CONSIDER ED CAREFULLY, BUT THE SANE ARE FOUND NOT ACCEPTABLE. FROM THE FACTS OF THE CASE IT CAN BE SE EN THAT THE AO HAD DISALLOWED THE CLAIM OF THE ASSESSEE ON THE GROUND THAT THE SAID EXPENDITURE WA S NOT FOR THE BUSINESS PURPOSES OF THE ASSESSEE COMPANY AND THERE WAS NO LIABILITY FOR THE ASSESSEE 'S COMPANY TO INCUR SUCH EXPENDITURE. THE PAYMENT UNDER CONSIDERATIONS CAN AT BEST BE TREATED AS APPL ICATION OF INCOME. FURTHER, ANY VOLUNTARY PAYMENT WHERE THERE IS NO LEGAL LIABILITY TO MAKE SUCH, PAY MENTS CANNOT BE CONSIDERED TO BE EXPENDITURE FOR THE PURPOSES OF BUSINESS. RELIANCE IN THIS RESPECT IS PLACED ON THE DECISION OF THE HON'BLE SC IN THE CASE OF C1T VS. BIRLA BROS. ( P)LTD. REPORTED IN 77 ITR. 751, WHEREBY THE HON. SC HELD AS UNDER 'NEITHER UNDER CUSTOM NOR UNDER ANY STATUTORY PROVI SION OR ANY CONTRACTUAL OBLIGATION WAS THE ASSESSEE BOUND TO GUARANTEE THE LOAN ADVANCED BY TH E BANK TO THE SELLING AGENT. IT IS DIFFICULT TO SEE HOW IT WAS IN THE INTEREST OF THE ASSESSEE'S BUSINE SS THAT THE GUARANTEE WAS GIVEN. THERE -WAS EVEN NO MATERIAL TO ESTABLISH THAT THE MANAGED COMPANY WAS UNDER ANY LEGAL OBLIGATION TO FINANCE THE SELLING AGENT OR TO GUARANTEE ANY LOANS ADVANCED TO THE SEL LING AGENT BY A THIRD PARTY. IT IS INCOMPREHENSIBLE IN WHAT MANNER THE GUARANTEEING OF THE LOAN ADVANCE D TO THE SELLING AGENT INDIRECTLY FACILITATED THE CARRYING ON OF THE ASSESSEE'S BUSINESS. IT IS EQUAL LY DIFFICULT TO APPRECIATE THE OBSERVATIONS OF THEH IGH COURT THAT IT WAS IN THE LARGER INTEREST OF THE ASS ESSEE'S BUSINESS THAT THE GUARANTEE WAS GIVEN. IN O UR OPINION THE VIEW OF THE APPELLATE TRIBUNAL WAS BASE D ON A COMPLETE MISAPPREHENSION OF THE TRUE LEGAL POSITION. THE HIGH COURT ALSO FELL INTO THE SAME ER ROR. THE ALLOWANCE WHICH WAS CLAIMED DID NOT FALL WITHIN SECTION 19(2)(O). NO ATTEMPT WAS MADE NOR IN DEED COULD IT BE USEFULLY MADE TO CLAIM ANY ALLOWANCE UNDER SECTION 10(2)(XV) OF THE ACT. FOR T HE REASONS GIVEN ABOVE THE CORRECT ANSWER TO THE QUESTION REFERRED SHOULD BE IN THE NEGATIVE AND AGA INST THE ASSESSEE. ITA NO 3320 /AHD/2010 . A.Y. 2006- 07 23 11.11 THE HON'BLE BOMBAY HIGH COURT WHILE ADJUDICATION SI MILAR ISSUE IN THE CASE OF STANDARD MILLS CO. LTD. VS. CIT REPORTED IN 209 ITR 85 (BOM) , AFTER RELYING UPON ITS DECISION VOLTAS LTD. VS. CIT, REPORTED IN 207 ITR 47 (BOM) HAS HELD AS UNDER:- 'BY THIS REFERENCE UNDER S, 156(1) OF THE, IT ACT, 1961, MADE AT THE INSTANCE OF THE ASSESSEE, THE TRIBUNAL HAS REFERRED THE FOLLOWING THREE QUESTIONS OF LAW TO THIS COURT FOR ITS OPINION: (I) WHETHER, ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE TRIBUNAL HAS RIGHTLY HELD THAT THE EXPENSES AMOUNTING TO RS. 22,507, RS. 85, 777 AND R S. 10,077 INCURRED BY THE ASSESSEE FOR VARIOUS SOCIAL WELFARE MEASURES WERE NOT ALLOWABLE AS REVEN UE EXPENDITURE FOR THE ASST. YRS. 1975-76, 1976-77 AND 1977-78 RESPECTIVELY ? (II) WHETHER, ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE TRIBUNAL HAS RIGHTLY HELD THAT TH E AMOUNT OF RS. 1,55, 569 PAID BY THE ASSESSEE-COMPAN Y TO THE ERSTWHILE OCCUPANT OF THE LAND ACQUIRED FROM THE BOMBAY MUNICIPAL CORPORATION IN EXCHANGE O F THE ASSESSEE'S LAND WAS NOT ALLOWABLE AS REVENUE EXPENDITURE ? III) WHETHER, ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE TRIBUNAL HAD RIGHTLY HELD THAT TH E ASSESSEE IS NOT ENTITLED TO WEIGHTED DEDUCTION UNDE R S. 35B OF THE IT ACT, 1961, IN RESPECT OF EXPORT FREIGHT AND EXPENSES AMOUNTING TO RS. 33,10,138 AND (II) BANK GUARANTEE COMMISSION AMOUNTING TO RS. 3,000 FOR THE ASST, YR. 1977-78?' 11.12 IN VIEW OF ABOVE MENTIONED FACTUAL AND LEGAL POSITION. WE DO NOT FIND ANY INFIRMITY IN THE PROPOSED ADDITION OF RS. 5,06,950/- ON ACCOUNT OF C OMMUNITY WELFARE EXPENSE AND HENCE THE SAME IS CONFIRMED. 12. AGGRIEVED BY THE ORDER OF DRP, ASSESSEE IS NOW IN A PPEAL BEFORE US. 13. BEFORE US, THE LD. A.R. REITERATED THE SUBMISSIONS MADE BEFORE DRP AND FURTHER SUBMITTED THE EXPENSES WAS INCURRED FOR THE PURPOSE OF BETTER RELATIONSHIP WITH THE WORKERS AND EMPLOYEES OF THE ASSESSEE AS MANY OF THE EMPLOYEE ARE HABITANT OF NEARBY AREA AND THEIR CHILDREN ARE STUDYING IN THAT SCHOOL. HE FURTHER SUBMITTED THAT EXISTENCE OF CONTRACTUAL OBLIGATION IS NOT A PREREQUISITE FOR ALLOWABILITY O F EXPENDITURE U/S 37(1) OF THE ACT. HE ALSO PLACED RELIANCE ON THE DECISION S WHICH WERE CITED BEFORE DRP. THE LD. D.R. ON THE OTHER HAND SUPPORTE D THE ORDER OF A.O. ITA NO 3320 /AHD/2010 . A.Y. 2006- 07 24 14. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. IT IS AN UNDISPUTED FACT THAT THE EXPENSES HAVE BEE N INCURRED FOR THE CONSTRUCTION OF SCHOOL BUILDING AND TOILET BLOCK IN THE VILLAGE. THE INCURRING OF EXPENDITURE HAS NOT BEEN DOUBTED OR HA S BEEN HELD TO BE BOGUS BY THE REVENUE. THE SUBMISSION OF THE ASSESSE E THAT THE EXPENSES HAS BEEN INCURRED FOR BETTER RELATIONSHIP WITH THE WORKERS AND EMPLOYEES OF THE ASSESSEE HAS NOT BEEN CONTROVERTED BY REVENU E BY BRINGING ANY CONTRARY MATERIAL ON RECORD. 15. IN THE CASE OF MYSORE KIRLOSKAR LTD. VS. CIT (1987) 166 ITR 836 (KAR) ONE OF THE QUESTION BEFORE THE H'BLE HIGH COURT WAS WHETHER THE AMOUNT DONATED BY THE ASSESSEE TO THE EDUCATION TRUST WAS ALLOWABLE AS DEDUCTION?. THE H'BLE HIGH COURT HELD AS UNDER: 'THERE IS YET ONE MORE THING TO BE REMEMBERED WHILE APPLYING S. 37(1). THE EXPENDITURE CLAIMED THEREIN NEED NOT BE 'NECESSARILY' SPENT BY THE ASSE SSEE. IT MUST BE INCURRED 'VOLUNTARILY' AND WITHOUT ANY 'NECESSITY', BUT IT MUST BE FOR PROMOTING THE B USINESS. IN OTHER WORDS, IF THE EXPENDITURE HAS BEE N INCURRED BY THE ASSESSEE VOLUNTARILY, EVEN WITHOUT NECESSITY, BUT IF IT IS FOR PROMOTING THE BUSINESS, THE DEDUCTION WOULD BE PERMISSIBLE UNDER S. 37(1). AGAI N THE WORDS 'FOR THE PURPOSE OF BUSINESS' USED IN S. 37(1) SHOULD NOT BE LIMITED TO THE MEANING OF 'E ARNING PROFIT ALONE'. BUSINESS EXPEDIENCY OR COMMERCIAL EXPEDIENCY MAY REQUIRE PROVIDING FACILIT IES LIKE SCHOOLS, HOSPITALS FOR THE EMPLOYEES OR THEIR CHILDREN OR FOR THE CHILDREN OF THE EX-EMPLOY EES. THE EMPLOYEES OF TODAY MAY BECOME THE EX- EMPLOYEES TOMORROW. ANY EXPENDITURE LAID OUT OR EXP ENDED FOR THEIR BENEFIT, IF IT SATISFIES THE OTHER REQUIREMENTS, MUST BE ALLOWED AS DEDUCTION UNDER S. 37(1). THE FACT THAT SOMEBODY OTHER THAN THE ASSESSEE IS ALSO BENEFITED OR INCIDENTALLY TAKEN AD VANTAGE OF BY THE PROVISION MADE, SHOULD NOT COME I N THE WAY OF THE EXPENDITURE BEING ALLOWED AS A DEDUC TION UNDER S. 37(1). BUT NEVERTHELESS, IT MUST BE A N 'EXPENDITURE' ALLOWABLE FOR DEDUCTION UNDER THE ACT .' 16. CONSIDERING THE TOTALITY OF FACTS AND RELYING ON TH E AFORESAID DECISION OF THE H'BLE HIGH COURT, WE ARE OF THE VIEW THAT IN TH E PRESENT CASE THE EXPENDITURE INCURRED BY THE ASSESSEE AS COMMUNITY W ELFARE EXPENSES IS ALLOWABLE. THUS THIS GROUND OF THE ASSESSEE IS ALLO WED. ITA NO 3320 /AHD/2010 . A.Y. 2006- 07 25 GROUND NO 5 & 6 ARE INTERCONNECTED AND IS WITH RESP ECT TO COMPUTATION OF DEDUCTION U/S 10B: 17. DURING THE COURSE OF ASSESSMENT PROCEEDINGS AO NOTI CED THAT ASSESSEE HAS RECEIVED BROKERAGE ON SEA FREIGHT OF RS 1,00,31 8/- AND INSURANCE CLAIM OF RS 64,125/- AND HAD CONSIDERED BOTH OF THE M AS PART OF PROFIT OF THE BUSINESS FOR COMPUTING DEDUCTION U/S 10B. AO WA S OF THE VIEW THAT THE AFORESAID AMOUNTS DID NOT HAVE THE ATTRIBUTES O F PROFITS DERIVED FROM THE BUSINESS OF THE UNDERTAKING OF EXPORT OF ARTICL ES OR THINGS AND THEREFORE CANNOT BE CONSIDERED TO BE PART OF PROFIT FOR DEDUCTION U/S 10B. HE ACCORDINGLY REWORKED THE PROFIT OF THE BUSINESS BY EXCLUDING THE SAME. AGGRIEVED BY THE ORDER OF AO, ASSESSEE CARRIE D THE MATTER BEFORE DRP. DRP UPHELD THE ORDER OF AO AND THEREFORE THE A SSESSEE IS NOW BEFORE US. 18. BEFORE US, THE LD. A.R. SUBMITTED THAT BROKERAGE ON SEA FREIGHT CHARGES WERE NOTHING BUT MERELY DISCOUNT AVAILED BY THE ASS ESSEE AND REFUND OF INSURANCE CHARGES WERE IN THE NATURE OF REFUND OF E XCESS AMOUNT PAID TO INSURANCE COMPANY AND CLAIMED AS DEDUCTION. HE FURT HER SUBMITTED THAT THE AFORESAID TRANSACTIONS WERE REDUCTION IN ACTUAL EXPENSES INCURRED IN CONNECTION WITH THE BUSINESS OF EXPORT OF MANUFACTU RED GOODS AND THEREFORE SHOULD NOT BE REDUCED FROM THE AMOUNT OF PROFIT FOR WORKING OUT DEDUCTION U/S 10B. HE FURTHER PLACED RELIANCE O N THE SPECIAL BENCH DECISION IN THE CASE OF MARAL OVERSEAS LTD VS ACIT (2012) 146 TTJ (IND) (SB) 129. THE ID. D.R. ON THE OTHER HAND RELI ED ON THE ORDER OF AO AND DRP. ITA NO 3320 /AHD/2010 . A.Y. 2006- 07 26 19. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. BEFORE US THE NATURE OF INCOME AS SUBMITTED BY THE ASSESSEE HAS NOT BEEN CONTROVERTED BY REVENUE. THE CONTENTION OF THE REVE NUE IS THAT THE INCOME CANNOT BE SAID TO BE DERIVED FROM THE ELIGIB LE UNDERTAKING AND HENCE IS NOT ALLOWABLE. WE FIND THAT BEFORE SPECIAL BENCH IN THE CASE OF MARAL OVERSEAS (SUPRA) ONE OF THE QUESTION WAS AS T O WHETHER THE UNDERTAKING IS ELIGIBLE FOR DEDUCTION ON EXPORT INC ENTIVE RECEIVED BY IT. THE SPECIAL BENCH HAS DECIDED THE ISSUE BY HOLDING AS UNDER;- IT IS CLEAR FROM THE PLAIN READING OF SECTION 10B( 1) OF THE ACT THAT THE SAID SECTION ALLOWS DEDUCTIO N IN RESPECT OF PROFITS AND GAINS AS ARE DERIVED BY A 10 0% EOU. FURTHER, SECTION 10B(4) OF THE ACT STIPULATES SPECIFIC FORMULA FOR COMPUTING THE PROFI T DERIVED BY THE UNDERTAKING FROM EXPORT. THUS, THE PROVISIONS OF SUB-SECTION(4) OF SECTION 10B OF THE ACT MANDATE THAT DEDUCTION UNDER THAT SECTION SHALL BE COMPUTED BY APPORTIONING THE PROFITS OF THE BUSI NESS OF THE UNDERTAKING IN THE RATIO OF EXPORT TURNOVER BY THE TOTAL TURNOVER. THUS, EVEN THOUGH S UB-SECTION(1) OF SECTION 10B REFERS TO PROFITS AND GAINS AS ARE DERIVED BY A 100% EOU, THE MANNER OF D ETERMINING SUCH ELIGIBLE PROFITS HAS BEEN STATUTORILY DEFINED IN SUB-SECTION(4) OF THAT SECTI ON. BOTH SUB-SECTIONS(1) AND (4) ARE TO BE READ TOGETHER WHILE COMPUTING THE ELIGIBLE DEDUCTION U/S 10BOF THE ACT. WE CANNOT IGNORE SUB-SECTION (4) OF SECTION 10B WHICH PROVIDES SPECIFIC FORMULA FOR COM PUTING THE PROFITS DERIVED BY THE UNDERTAKING FROM EXPORT. AS PER THE FORMULA SO LAID DOWN, THE ENTIR E PROFITS OF THE BUSINESS ARE TO BE DETERMINED WHIC H ARE FURTHER MULTIPLIED BY THE RATIO OF EXPORT TURNO VER TO THE TOTAL TURNOVER OF THE BUSINESS. IN CASE OF LIBERTY INDIA, THE HON. SUPREME COURT HAS DEALT WIT H THE PROVISIONS OF SECTION 80IA OF THE ACT WHEREIN NO FORMULA WAS LAID DOWN FOR COMPUTING THE PROFITS DERIVED BY THE UNDERTAKING WHICH HAS SPECIFICALLY BEEN PROVIDED UNDER SUB-SECTION (4) OF SECTION 10B WHILE COMPUTING THE PROFITS DERIVED BY THE UNDERTAKING FROM THE EXPORT. THUS THE DECISION OF T HE HON. SUPREME COURT IS OF NO HELP TO THE REVENUE IN DETERMINING THE CLAIM OF DEDUCTION U/S 10B IN RE SPECT OF EXPORT INCENTIVES. 20. THUS IT IS SEEN THAT THE RESPECTED SPECIAL BENCH OF THE TRIBUNAL HAS HELD THAT ONCE AN INCOME FORMS PART OF THE BUSINESS OF T HE UNDERTAKING, THE SAME WOULD BE INCLUDED IN THE PROFITS OF THE BUSINE SS OF THE UNDERTAKING AND WILL BE ELIGIBLE FOR DEDUCTION. RESPECTFULLY FO LLOWING THE AFORESAID SPECIAL BENCH DECISION, WE ARE OF THE VIEW THAT THE ASSESSEE IS ELIGIBLE ITA NO 3320 /AHD/2010 . A.Y. 2006- 07 27 FOR DEDUCTION ON THE BROKERAGE ON SEA FREIGHT AND I NSURANCE CLAIM WHICH IT HAS CREDITED TO ITS PROFIT AND LOSS ACCOUNT. THU S THIS GROUND OF THE ASSESSEE IS ALLOWED. GROUND NO 7 IS CONSEQUENTIAL AND THEREFORE DOES NOT REQUIRE ADJUDICATION . 21. IN THE RESULT THE APPEAL OF THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN OPEN COURT ON 06 - 12 - 2013. SD/- SD/- (D.K. TYAGI) (ANIL CHATURVEDI) JUDICIAL MEMBER ACCOUNTANT MEMBER AHMEDABAD. TRUE COPY RAJESH COPY OF THE ORDER FORWARDED TO: - 1. THE APPELLANT. 2. THE RESPONDENT. 3. THE CIT (APPEALS) 4. THE CIT CONCERNED. 5. THE DR., ITAT, AHMEDABAD. 6. GUARD FILE. BY ORDER DEPUTY/ASSTT.REGISTRAR ITAT,AHM EDABAD