DCIT 10(1)(1), MUMBAI V. HINDUJA VENTURES LTD, MUMBAI

ITA 3631/MUM/2015

• Counselvise Citation: [2019] 118 COUNSELVISE.COM (IT) 8022 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 6 month(s) 20 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 02-01-2019
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: K
• Next Hearing Date: 28-06-2017
• Assessment Year: 2003-2004
• Appeal Filed On: 12-06-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: AKHILENDRA YADAV SENIOR
• Assessee Lawyers: ABHISHEK TILAK
• Keywords: Depreciation; Transfer pricing; International transaction; Rule of consistency; Earning of tax free income; Wholly owned subsidiary; Arm length price
• Section: 92C; 143(3); 92; 14A; 10B

Judgement Text

K IN THE INCOME TAX APPELLATE TRIBUNAL K BENCH, MUMBAI BEFORE SHRI MAHAVIR SINGH, JUDICIAL MEMBER AND SHRI RAMIT KOCHAR, ACCOUNTANT MEMBER ./ I.T.A. NO. 3631 / MUM/2015 ( / ASSESSMENT YEAR : 2003 - 04 ) DEPUTY COMMISSIONER OF INCOME - TAX,10(1)(2) ROOM NO. 209, AAYAKAR BHAWAN, M K ROAD, MUMBAI - 400020 / V. HINDUJA VENTURES LIMITED, (FORMERLY KNOWN AS HINDUJA TMT LIMITED) 49/50, IN CENTRE , MIDC 12 TH ROAD, MAROL, ANDHERI(E), MUMBAI - 400093 ./ PAN : AAACH2058N ( / APPELLANT ) .. ( / RESPONDENT ) REVENUE BY: MR AKHILENDRA YADAV, SENIOR AR ASSESSEE BY : SHRI. ABHISHEK TILAK / DATE OF HEARING : 23 .10.2018 / DATE OF PRONOUNCEMENT : 02 .01.2019 / O R D E R PER RAMIT KOCHAR, ACCOUNTANT MEMBER: THIS APPEAL, FILED BY REVENUE , BEING ITA NO. 3631 / MUM/201 5 , IS DIRECTED AGAINST APPELLATE ORDER DATED 04.03 .2015 PASSED BY LEARNED COMMISSIONER OF INCOME TAX (APPEALS) - 56 , MUMBAI (HEREINAFTER CALLED THE CIT(A)), FOR ASSESSMENT YEAR 2003 - 04 , THE APPELLATE PROCEEDINGS HAD ARISEN BEFORE LEARNED CIT(A) FROM THE OR DER GIVING EFFECT TO THE ITATS ORDER , DATED 15.03.2013 PASSED U/S 143(3) READ WITH SECTION I.T.A. NO.3631 /MUM/201 5 2 254 OF THE INCOME - TAX ACT, 1961 (HEREINAFTER CALLED THE ACT) FOR AY 20 03 - 04 BY LEARNED ASSESSING OFFICER . 2. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE IS ENGAGED IN THE BUSINESS OF RENDERING OF INFORMATION TECHNOLOGY ENABLED SERVICES (ITES) , BUSINESS PROCESS OUTSOURCING AND IT SERVICES. IN THE FIRST ROUND OF LITIGATION, ADDITIONS WERE MADE BY THE AO TO THE INCOME OF THE ASSESSEE U/S 14A OF THE 1961 ACT AS WELL TRANSFER PRICING ADJUSTMENTS WERE MADE U/S 92 TO ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE ASSESSEE WITH ITS ASSOCIATED ENTERPRISE(AE) HTMT INC., USA AS DETERMINED BY THE TRANSFER PRICING OFFICER U/S 92C OF THE 1961 ACT. THE MATTER WENT UPTO TRIBUNAL AT THE BEHEST OF THE ASSESSEE IN FIRST ROUND OF LITIGATION, WHEREIN THE TRIBUNAL WAS PLEASED TO SET ASIDE AND RESTORE THE MATTER BACK TO THE AO WITH CERTAIN DIRECTIONS. THE AO IN SECOND ROUND OF LITIGATION AO PASSED AN ORDER GIVING EFFECT DATED 15.03.2013 U/S 143(3) READ WITH SECTION 254 OF THE 1961 ACT TO THE DIRECTIONS OF ITAT . 3. AGGRIEVED BY THE AFORESAID ORDER DATED 15.03.2013 PASSED BY THE AO IN SECOND ROUND OF LITIGATION, THE ASSESSEE FILED AN AP PEAL WITH LEARNED CIT(A), WHEREIN LEARNED CIT(A) ALLOWED THE APPEAL OF THE ASSESSEE ON ACCOUNT OF TP ADJUSTMENT WHICH STOOD DELETED BY LEARNED CIT(A) BY FOLLOWING THE ORDER OF THE ITAT, MUMBAI IN ASSESSEES OWN CASE FOR AY 2004 - 05 AND 2005 - 06. 3.2 ON THE SECOND ISSUE FOR WHICH ADDITIONS WERE MADE BY THE AO PERTAIN ED TO ADDITION OF RS. 6,52,86,000/ - U/S. 14A OF THE ACT BY DISALLOWING AN EXPENDITURE INCURRED FOR EARNING AN EXEMPT INCOME . THE AO MADE ADDITIONS U/S. 14A IN ITS ORDER DATED 15 TH MARCH, 2013 GIVI NG EFFECT TO ITATS ORDER U/S. 143(3) R.W.S. 254 OF THE 1961 ACT, BY HOLDING AS UNDER: - I.T.A. NO.3631 /MUM/201 5 3 3 . 3 AGGRIEVED BY THE ORDER DATED 15.03.2013 PASSED BY THE AO IN SECOND ROUND OF LITIGATION, THE ASSESSEE FILED APPEAL BEFORE LD. CIT(A) ON THIS SECOND ISSUE OF DISALLOWANCE U/S 14A AND AT THE OUTSET THE ASSESSEE SUBMITTED BEFORE LEARNED CIT(A) THAT THE AO WENT BEYOND THE I.T.A. NO.3631 /MUM/201 5 4 SCOPE OF ISSUE WHICH WAS REMANDED TO HIM BY THE TRIBUNAL SO FAR AS ADDITIONS U/S 14A ARE CONCERNED . THE ASSESSEE CONTEND ED THAT IN FACT THE AO INVOKE D RULE 8D OF INCOME - T AX RULES , 1962 AND THE SAID R ULE 8D OF THE 1962 RULES COULD NOT HAVE BEEN INVOKED KEEPING IN VIEW THAT THE SAID R ULE 8D IS APPLICABLE FROM ASSESSMENT YEAR 2008 - 09 , WHILE PRESENTLY WE ARE CONCERN ED WITH ASS ESSMENT YEAR 2003 - 04. THE ASSESSEE HAS ALSO POINTED OUT DEFECT/MISTAKE COMMITTED BY THE AO IN TAKING FIGURE OF INTEREST EXPENSES WHILE MAKING DISALLOWANCE U/S 14A AND IT WAS SUBMITTED THAT THE SAID FIGURE WAS IN FACT DEPRECIATION AND AMORTIZATION WHICH WAS MISTAKENLY TAKEN BY THE AO AS AN INTEREST EXPENDITURE . IT IS FURTHER SUBMITTED THAT THE DIVIDEND INCOME WHICH THE ASSESSEE EARNED DURING THE YEAR WAS NOT EXEMPT FROM TAX FOR THE YEAR UNDER CONSIDERATION I.E. AY 2003 - 04 , AS THE DIVIDEND INCOME WAS TAXABL E . THE LEARNED CIT(A) AFTER CONSIDERING THE SUBMISSION S OF THE ASSESSEE ORDER ED THE DELETION OF TH E ADDITION MADE BY THE AO MAINLY ON THE GROUND THAT WHEN DIVIDEND INCOME IS NOT EXEMPT FROM INCOME - TAX , NO DISALLOWANCE U/S. 14A WAS HELD BY LEARNED CIT(A) TO BE WARRANTED , BY HOLDING AS UNDER VIDE APPELLATE ORDER DATED 04.03.2015 : - 12. THOUGH THERE IS MERIT IN THE VARIOUS GROUNDS OF APPEAL FILED BY THE ASSESSEE ON THIS ISSUE, THE FACT THAT DIVIDEND INCOMES WERE TAXABLE DURING THE PERIOD RELEVANT TO A.Y, 2003 - 04 THAT IS PRESENTLY UNDER CONSIDERATION WOULD BE DECISIVE IN DETERMINING WHETHER ANY DISALLOWANCE U/S.14A WAS REQUIRED IN THE FACTS OF THE PRESENT CASE OR NOT. SECTION 10(33) OF THE ACT THAT GRANTED EXEMPTION FROM TAXATION OF DIVIDEND RECEIPTS WAS OM ITTED BY FINANCE ACT, 2002 WITH EFFECT FROM 01.04.2003 AND IT WAS ONLY THE FINANCE ACT 2003 THAT BROUGHT IN SECTION 10(34) OF THE ACT WITH EFFECT FROM 01.04. 2004 THAT ONCE AGAIN GRANTED EXEMPTION TO INCOME BY WAY OF DIVIDEND. THUS, FOR THE INTERVENING PERI OD, BEING THE PERIOD RELEVANT TO A.Y. 2002 - 03, PRESENTLY UNDER CONSIDERATION, DIVIDEND WAS NOT EXEMPT UNDER THE PROVISIONS OF THE ACT AND, THEREFORE, THE QUESTION OF IDENTIFYING ANY EXPENSES RELATABLE TO EXEMPT INCOMES WOULD NOT AT ALL ARISE IN THE FACTS O F THE PRESENT CASE. SUCH ACTION I.T.A. NO.3631 /MUM/201 5 5 OF THE AO IS FOUND TO BE FACTUALLY AND STATUTORILY BASELESS. IN THE SAME CONTEXT, IT IS FURTHER SEEN THAT THE ASSESSEE DURING A.Y, 2003 - 04 WAS ENTITLED TO A DEDUCTION UNDER SECTION 80M OF THE ACT RELATABLE TO THE AMOUNT OF D IVIDEND DISTRIBUTED BY THE ASSESSEE. HOWEVER, DIVIDEND RECEIVED ALWAYS REMAINED IN THE NATURE OF INCOME OTHERWISE TAXABLE UNDER THE ACT. THE PROVISIONS OF SECTION 14A OF THE ACT WOULD BE APPLICABLE ONLY TO THE EARNING OF EXEMPT INCOMES AND NOT TO DEDUCTION S ALLOWABLE UNDER THE ACT. NO DISALLOWANCE U/S. 14A OF THE ACT WAS CALLED FOR IN THE FACTS OF THIS CASE AND THE SAME IS HEREBY DIRECTED TO BE DELETED. APPEAL FILED ON THIS GROUND MAY BE TREATED AS ALLOWED . 4. NOW THE R EVENUE IS AGGRIEVED B Y THE DECISION O F LD. CIT(A) VIDE APPELLATE ORDER DATED 04.03.2015 AND HAS FILED AN APPEAL WITH THE TRIBUNAL . T HE LD. DR HAS RELIED UPON THE ORDER DATED 15.03.2013 PASSED BY THE AO AND IT WAS PLEADED THAT THE SAME MAY BE UPHELD , WHILE ON THE OTHER HAND THE LD. COUNSEL FOR THE ASSESSEE HAS STRONGLY PLEADED FOR UPHOLDING THE APPELLATE ORDER DATED 04.03.2015 PASSED BY THE LD. CIT(A). IT IS CONTENDED BY THE LD. COUNSEL FOR THE ASSESSEE THAT THERE ARE TWO DISALLOWANCES /ADDITIONS TO THE INCOME WHICH WERE MADE BY THE AO , FI RSTLY WITH RESPECT TO THE EXCESS COMMISSION PAID BY THE ASSESSEE TO ITS AE NAMELY HTMT INC.,USA FOR BUSINESS GENERATED IN FAVOUR OF THE ASSESSEE FROM AETNA FOR WHICH COMMISSION WAS PAID TO HTMT INC.,USA @ 20% OF THE B USINESS SO GENERATED FROM AETNA FOR THE IMPUGNED ASSESSMENT YEAR , AS AGAINST COMMISSION @ 12% PAID ON THE BUSINESS GENERATED BY SAID AE IN THE IMMEDIATELY PRECEDING YEAR. THERE WAS A REVISED AGREEMENT ENTERED BY THE ASSESSEE FOR PAYMENT OF REVISED COMMISS ION @ 20% ON BUSINESS GENERATED BY HTMT INC., USA FROM AETNA EFFECTIVE FROM 01 ST APRIL 2002. THE T RANSFER PRICING PROVISION S WERE INVOKED AND IT WAS HELD THAT THE ARM LENGTH PRICE (ALP) OF THE COMMISSION PAYMENT BE COMPUTED AT 12% OF THE BUSINESS GENERATED BY ITS AE NAMELY HTMT INC.,USA FROM AETNA , WHILE THE REST OF EXCESS COMMISSION @8% ON BUSINESS GENERATED BY ITS AE NAMELY HTMT INC.,USA FROM AETNA BE DISALLOWED . I T WAS SUBMITTED THAT THE CO - ORDINATE BENCHES OF TRIBUNAL HAS ALREADY DECIDED THE ISSUE IN F AVOUR OF I.T.A. NO.3631 /MUM/201 5 6 THE ASSESSEE IN ASSESSEES OWN CASE IN ITA NO. 920/MUM / 2010 VIDE ORDERS DATED 29.11.2013 FOR A.Y 2004 - 05 AND ALSO IN ITA NO. 4089/MUM/2011 AND 4062/MUM/2011 FOR AY 2005 - 06 , VIDE O RDER S DATED 31.01.2012 . I T WAS SUBMITTED THAT THE COMMISSION HAS BEEN PAID TO THE SAME PARTIES AND FOLLOWING THE RULE OF CONSISTENCY , THE SAME SHOULD BE ALLOWED. SO FAR AS SECOND ISSUE IS CONCERN ED IT WAS SUBMITTED THAT NO DISALLOWANCE OF EXPENDITURE INCURRED IN RELATION TO AN I NCOME WHICH DOES NOT FORM PART OF THE INCOME U/S. 14A I S WARR ANTED AS DIVIDEND INCOME EARNED DURING THE IMPUGNED ASSESSMENT YEAR UNDER CONSIDERATION BEFORE THE TRIBUNAL WAS FULLY TAXABLE AND SECTION 14A IS APPLICABLE ONLY IN THE CASE WHEN THERE IS AN EXEM PT INCOME. IT IS STATED BEFORE US THAT S INCE THERE IS NO EXEMPT INCOME EARNED BY THE ASSESSEE DURING THE IMPUGNED ASSESSMENT YEAR, THERE IS NO NECESSITY TO INVOKE PROVISION S OF S ECTION 14A OF THE 1961 ACT . THE ASSESSEE RELIED UPON THE DECISION OF HONBLE SUP REME COURT IN THE CASE OF CIT V. ESSAR TELEHOLDINGS LTD., {2018} 90 TAXMANN.COM 2 (SC). 5 . WE HAVE CONSIDERED RIVAL CONTENTION S AND HAVE PERUSED THE MATERIAL ON RECORD INCLUDING CITED CASE LAWS. W E HAVE OBSERVED THAT THE ASSESSEE IS ENGAGED IN THE BUS INESS OF IN FORMATION TECHNOLOGY AND INFORMATION TECHNOLOGY ENABLED S ERVICES , BUSINESS PROCESS OUTSOURCING AND IT SERVICES . THIS IS SECOND ROUND OF LITIGATION BEFORE THE TRIBUNAL. T HERE ARE TWO ISSUES WITH WHICH WE ARE SEIZED OF IN THIS APPEAL BEFORE US . T HE FIRST ISSUE RELATES TO TRANSFER PRICING ADJUSTMENTS OF RS. 189.55 LACS PROPOSED BY THE TPO AND ACCEPTED BY THE LD. ASSESSING OFFICER. THIS ADJUSTMENTS RELATES TO THE COMMISSION PAYMENT S MADE BY THE ASSES SEE TO ITS AE BEING WHOLLY OWNED SUBSIDIARY H TMT INC. , USA FOR MARK ET ING SERVICES AND COORDINATION SUPPORT PROVIDED BY THAT AE NAMELY HTMT INC. IN USA WITH RESPECT TO ASSESSEES LARGEST CUSTOMER NAMELY A ET NA .THE H TMT INC. , USA IS ASSOCIATED ENTERPRISES (AE) OF THE ASSESSEE AND INTERNATIONAL TRANSACTIO N PERTAIN S TO THE PAYMENT OF COMMISSION TO THE SAID AE NAMELY HTMT INC., USA AT THE RATE OF 20% I.T.A. NO.3631 /MUM/201 5 7 W.E.F. 01.04.2002 ON BUSINESS GENERATED BY THE AFORESAID AE IN FAVOUR OF THE ASSESSEE FROM AETNA , WHILE PRIOR TO THAT COMMISSION WAS PAID BY THE ASSESSEE TO I TS AE NAMELY HTMT INC.,USA @ 12% OF THE BUSINESS GENERATED BY THE AFORESAID AE IN ASSESSEES FAVOUR FROM AETNA . THERE IS A REVISED AGREEMENT ENTERED INTO BY THE ASSESSEE WITH HTMT INC.,USA WHICH STIPULATED HIGHER COMMISSION PAYMENTS @20% ON BUSINESS GENERAT ED BY HTMT INC., USA FROM AETNA. THE ASSESSEE HAS CONSIDERED TNMM AT THE ENTITY LEVEL AS THE MO ST APPRO PRIATE METHOD FOR BENCH MARKING OF ITS INTERNATIONAL TRANSACTIONS AND SINCE THE M ARGIN EARNED BY THE ASSESSEE WERE MUCH HIGHER THAN THE ARITHMETIC MEAN OF THE MARGIN OF THE COMPARABLE COMPANIES AND ON THAT BASIS IT WAS CONCLUDED BY THE ASSESSEE IN ITS TP STUDY THAT THE INTERNATIONAL TRANSACTION WITH ITS AE INCLUDING THE P AYMENT OF COMMISSION TO ITS AE NAMELY HTMT, INC., USA WAS AT ARMS LENGTH PRICE. THE TPO ON THE OTHER HAND HAS MADE COMPARISON WITH THE COMMISSION PAID BY THE ASSESSEE TO THE SAME AE NAMELY HTMT INC.,USA @ 12% IN PRECEDING YEAR AND HENCE THE EXCESS AMOUNT OF RS. 189.55 LACS WAS CONSIDERED BY THE AO/TPO TO B E INCOME BY WAY OF TP ADJUSTMENTS U/S 92 OF THE 1961 ACT . WE HAVE OBSERVED THAT THE CO - ORDINATE BENCHES OF THE TRIBUNAL IN ASSESSEES OWN CASE HAS PASSED AN ORDER FOR AY 2004 - 05 AND 2005 - 06 , WHEREIN FOR BOTH THESE YEARS TNM M ANALYSIS CARRIED OUT BY THE ASS ESSEE WAS CONSIDERED TO BE VALID METHOD / BASIS FOR COMPUTING THE ALP AND BASED ON THAT THE TRANSFER PRICE ADJUSTMENTS AS WERE DONE BY THE AO WAS DELETED. THE INTERNAL CUP USED BY THE TPO BEING COMMISSION PAID TO ANOTHER AE WHEREIN HE COMPARED ONE CONTROL LED TRANSACTION WITH ANOTHER CONTROL LED TRANSACTION WAS ALSO REJECTED BY TRIBUNAL. THE TRIBUNAL ORDERS FOR BOTH THESE Y EARS IN ASSESSEES OWN CASE ARE REPRODUCED HEREUNDER. FIRSTLY , THE TRIBUNAL VIDE ORDERS DATED 31.01.2012 FOR AY 2005 - 06 IN ITA NO.4089 /MUM/2011 AND ITA NO. 4062/MUM/2011 IN ASSESSEES OWN CASE , HELD AS UNDER: 30. WE HAVE CAREFULLY CONSIDERED THE SUBMISSIONS OF LD. REPRESENTATIVES OF PARTIES AND ORDERS OF AUTHORITIES BELOW. WE HAVE ALSO CONSIDERED ORDER OF TPO. WE OBSERVE THAT TPO SUG GESTED TO MAKE AN ADJUSTMENT OF RS. I.T.A. NO.3631 /MUM/201 5 8 1,49,16,166/ - ONLY FOR THE REASON THAT HE COMPARED THE CASE OF FIRST NOTICE WHERE THE RATE OF COMMISSION PAID WAS 12% AS AGAINST COMMISSION PAID TO AETNA @ 15%. HOWEVER, RELEVANT FACTS SUBMITTED BY ASSESSEE THAT THE AS SESSEE GENERATED TOTAL BUSINESS OF RS. 50,14,02,800/ - FROM HTMT INC., AE AND OUT OF WHICH BUSINESS PERTAINING TO AETNA WAS MORE THAN 99% OF TOTAL BUSINESS AND ONLY 1% WAS WITH FIRST NOTICE TO WHOM THE COMMISSION @ 12% WAS PAID AS AGAINST PAYMENT OF COMMISS ION OF 15% TO AETNA. FURTHER IT IS ALSO NOT IN DISPUTE THAT FIRST NOTICE, IS ALSO AN ASSOCIATED ENTERPRISES OF ASSESSEE. IT IS ALSO NOT IN DISPUTE THAT ASSESSEE DETERMINED ITS PROFIT BY FOLLOWING TNMM METHOD AND THE SAME HAS NOT BEEN DISTURBED BY TPO. NO C OMPARABLE HAS ALSO BEEN STATED TO ESTABLISH THAT PAYMENT OF COMMISSION BY ASSESSEE TO AETNA IS EXCESSIVE AND IS NOT AT ARMS LENGTH PRICE. WE CONSIDER IT PRUDENT TO STATE THAT SECTION 92 OF I.T. ACT, 1961 PROVIDES THAT ANY INCOME ARISING FROM AN INTERNATIO NAL TRANSACTION SHALL BE COMPUTED HAVING REGARD TO THE ALP. FURTHER SEC. 92C DEALS WITH THE COMPUTATION OF ALP. SUB - SECTION (1) OF SEC. 92C PRESCRIBES THAT THE ALP IN RELATION TO AN INTERNATIONAL TRANSACTIONS SHALL BE DETERMINED BY ANY OF THE PRESCRIBED ME THODS, WHICH INTER ALIA INCLUDE TNMM. RUL E 10B OF I.T. RULES, 1962 PROVI D ES THE MECHANISM FOR DETERMINATION OF ALP U/S. 92C. RULE 10B(1)(E)(I) PROVIDES THAT THE ALP IN RELATION TO AN INTERNATIONAL TRANSACTION SHALL BE DETERMINED BY TNMM BY WHICH THE NET PROFIT MARGIN REALIZED BY THE ENTERPRISES FROM AN INTERNATIONAL TRANSACTION ENTERED INTO WITH AN ASSOCIATED ENTERPRISE IS COMPUTED IN RELATION TO COSTS INCURRED OR SALES EFFECTED OR ASSETS EMPLOYED OR TO BE EMPLOYED BY THE ENTERPRISE OR HAVING REGARD TO AN Y OTHER RELEVANT BASE. SUB - CLAUSE (II) OF CLAUSE (E) OF RULE 10B(1) PROVIDES AS UNDER: - THE NET PROFIT MARGIN REALIZED BY THE ENTERPRISE OR BY AN UNRELATED ENTERPRISE FROM A COMPARABLE UNCONTROLLED TRANSACTION OR A NUMBER OF SUCH TRANSACTION IS COMPUTED H AVING REGARD TO THE SAME BASE: 31. FROM THE ABOVE IT CAN BE SEEN THAT THE NET PROFIT MARGIN IS TO BE CONSIDERED QUA THE COMPARABLE UNCONTROLLED TRANSACTION OR NUMBER OF SUCH UNCONTROLLED TRANSACTIONS. UNCONTROLLED TRANSACTION HAS BEEN DEFINED IN RULE 10A (A) TO MEAN A TRANSACTION BETWEEN ENTERPRISES OTHER THAN ASSOCIATE ENTERPRISES, WHETHER RESIDENT OR NON - RESIDENT. RULE 10B(1)(E) IN JUXTAPOSITION TO RULE 10A(A). THE POSITION WHICH EMERGES IS THAT IN APPLYING THE TNMM, NET PROFIT MARGIN REALIZED FROM A C OMPARABLE UNCONTROLLED TRANSACTION IS TO BE TAKEN INTO CONSIDERATION. THE CONDITIONS THUS ENVISAGED FOR MAKING A CASE AS COMPARABLE FOR THIS PURPOSE, SHOULD NOT ONLY BE COMPARABLE BUT ALSO HAVE UNCONTROLLED TRANSACTION. THESE TWIN CONDITIONS NEED TO BE CUM ULATIVELY SATISFIED. IF SUCH OTHER CASE IS ONLY COMPARABLE BUT HAS CONTROLLED TRANSACTION OR VICE - VERSA, IT SHALL FALL OUTSIDE THE AMBIT OF LIST OF COMPARABLE CASES. 32. IN THE CASE BEFORE US, TPO SUGGESTED TO MAKE ADJUSTMENT ONLY BY COMPARING THE RATE OF COMMISSION PAID TO AE ON FIRST NOTICE AND NO CASE HAS BEEN BROUGHT ON RECORD THAT COMMISSION PAID BY ASSESSEE TO AE @ 15% IS EXCESSIVE. FURTHER WE OBSERVE THAT LD. CI T(A) HAS HELD THAT SIMILAR ISSUE WAS ALSO CONSIDERED IN THE PRECEDING ASSESSMENT YEAR 2004 - 05 AND SIMILAR ADJUSTMENT MADE WERE NOT AGREED TO AND IT WAS HELD THAT ASSESSEES TRANSACTION WITH AE IN RESPECT OF COMMISSION WAS AT ARMS LENGTH. I.T.A. NO.3631 /MUM/201 5 9 33. CONSIDERING ABOVE FACTS AND IN THE ABSENCE OF ANY OTHER FACTS BROUGHT ON RECORD BY DEPARTMENT, WE DO NOT FIND ANY REASON TO INTERFERE WITH THE ORDER OF LD. CIT(A). HENCE, WE CONFIRM THE ORDER OF LD. CIT(A) AND REJECT GROUND NO. 2 & 3 TAKEN BY DEPARTMENT. FURTHER, T HE CO - ORDINATE BENCHES OF THE TRIBUNAL IN ITA NO. 920/MUM/2010 FOR AY 2004 - 05 VIDE ORDER S DATED 29 - 11 - 2013 IN ASSESSEES OWN CASE HELD AS UNDER : - 5.GROUNDS OF APPEAL NO.2 AND 3 ARE ABOUT DELETING THE ADDITION,AMOUNTING TO RS.2.81 CRORES,MADE ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT (TPA) U/S. 92CA(3) OF THE ACT.DURING THE ASSESSMENT PROCEEDINGS,AO FOUND THAT ASSESSEE HAD FURNISHED AUDIT REPORT IN RESPECT OF INTERNATIONAL TRANSACT - TIONS WITH ASSOCIATED ENTERPRISES (AE),THAT ASSESSEE HAD PAID COMMISSION TO ITS AE NAMELY HTMT INC. FOR MARKETING DONE ON BEHALF OF IT, THAT THE RATE OF COMMISSION CHARGED BY THE AE FOR A CLIENT AETNA WAS 20%,THAT RATE OF COMMISSION IN CASE OF FIRST NOTICE - OTHER AE - WAS 12 %, THAT THE AO HAD RELIED ON THE ORDER OF THE TRANSFER P RICING OFFICER(TPO) FOR THE AYS. - 2002 - 03 AND 2003 - 04 WHEREIN 12% RATE WAS HELD TO BE ARMS LENGTH RATE,THAT AO HAD MADE ADJUSTMENT,ON THE BASIS OF THE ORDER OF THE TPO, IN EARLIER YEARS.AO MADE A REFERENCE TO THE TPO U/S 92CA(1) OF THE ACT FOR COMPUTATION OF ARMS LENGTH PRICE (ALP).BASED ON THE ORDER OF THE TPO, AO MADE AN ADDITION OF RS. 2.84 CRORES ON ACCOUNT OF EXCESS PAYMENT OF COMMISSION OF AE. 6.ASSESSEE PREFERRED AN APPEAL BEFORE THE FIRST APPELLATE AUTHORITY(FAA).AFTER CONSIDERING THE ORDER OF TH E TPO AND SUBMISSIONS MADE BY THE ASSESSEE,FAA HELD T HAT IN THE CASE UNDER CONSIDE RATION ONE CONTROLLABLE TRANSACTION WAS COMPARED WITH ANOTHER CONTROLLABLE TRANSACTION, THAT THE AE WAS SUBSIDIARY OF THE ASSESSEE,THAT IT HAD ENTERED INTO SERVICE AGREEMENT WITH BOTH OF INSURANCE COMPANIES I.E.AETNA AND FIRST NOTICE FOR UNDERTAKING INSURANCE CLAIMS,THAT IN RESPECT OF AETNA THE RATE OF COMMISSION PAYABLE WAS 12%,THAT THE TPO HAD ADOPTED THE RATE OF 12% AS ARMS LENGTH RATE AND HAD DISALLOWED 8% COMMISSION IN C ASE OF AETNA,THAT THE APPROACH ADOPTED BY THE TPO WAS FUNDAMENTALLY FLAWED,THAT ONE CONTROL TRANSACTION FOR THE PURPOSE OF DETERMINING ALP COULD ONLY BE COMPARED WITH UNCONTROLLABLE TRANSACTION, THAT TPO HAD ADOPTED AN OPPOSITE METHOD,THAT ON THIS GROUND I TSELF THE WHOLE ACTION OF THE TPO WAS LIABLE TO BE REVERSED AS IT WENT INTO THE ROOT OF THE CASE AND TANTAMOUNTED THE JURISDICTIONAL ERROR. HE FURTHER HELD THAT TURNOVER IN RESPECT OF FIRST NOTICE WAS RS. 20 LACS AS AGAINST THE TURNOVER OF RS. 35 CRORES IN CASE OF AETNA,THAT COMMISSION WAS IN NATURE OF MARK UP COVER THE COST INCURRED BY AE FOR MARKETING ON BEHALF OF THE ASSESSEE,THAT EFFORTS PUT IN FOR GETTING HUGE BUSINESS WITH AETNA WOULD HAVE TO BE COMPENSATED,THAT THE VOLUME OR TURNOVER DIFFERENCE BETWE EN AETNA AND FIRST NOTICE COULD NOT BE TERMED COMPARABLE,THAT TPO HAD IGNORED THE VITAL ASPECT,THAT THE TERMS AND CONDITIONS BETWEEN THE PARTIES WERE WERE DETERMINED BY DYNAMICS OF BUSINESS INCLUD ING INCREASED IN VOLUME OF BUSINESS,THAT IN CASE OF AETNA NU MBER OF CLAIMS INCREASED AROUND 400%, THAT BUSINSEE INCREASED FROM 4.08 CRORES (AY - 2002 - 03) TO RS. 14.44 CRORES, I.T.A. NO.3631 /MUM/201 5 10 THAT THE NATURE OF SERVICE PROVIDED TO FIRST NOTICE AND AETNA WERE ALSO DIFFERENT AND HENCE NOT COMPARABLE, THAT CUP METHOD REQUIRED A HIGH DEG REE OF COMPARABILITY AND ADJUSTMENT OF SUCH MATERIAL DIFFERENCES COULD NOT BE APPLIED AS A RULE OF THUMB AS DONE BY THE TPO, THAT THE INCREASED IN COMMISSION COMMENSURATED WITH INCREASED IN BUSINESS PROCURED BY AE FOR THE ASSESSEE, THAT THE ASSESSEE HAD AD OPTED THE TNMM AS MOST APPROPRIATE METHOD IN THE LIGHT OF NATURE OF TRANSACTIONS, THAT THERE WAS NO ATTEMPT ON PART OF THE TPO TO DEMONSTRATE AS TO HOW IT WAS NOT APPROPRIATE IN DETERMINING THE ALP,THAT ASSESSEE HAD SELECTED 156 COMPANIES FOR COMPARISON AF TER TAKING DUE PROCESS OF SEARCH, THAT TPO HAD NOT QUESTIONED THE ADMISSIBILITY OF THESE COMPARABLES,THAT TRANSACTION WITH AE WERE AT ARMS LENGTH,THAT TPO/AO HAD ACCEPTED THE TRANSACTION WITH REGARD TO SALE OF SERVICE TO AE WHEREAS SAME METHOD HAD BEEN RE JECTED FOR COMMISSION PAID,THAT BOTH THE TRANSACTION WERE PART OF THE SAME SERVICE AGREEMENT, THAT CONTRADICTORY STAND TAKEN BY THE TPO COULD NOT BE ENDORSED.FINALLY,HE HELD THAT COMMISSION PAYMENT TO AETNA WAS AT ARM LENGTH.HE DELETED THE ADDITION MADE BY THE AO. 7.BEFORE US, REPRESENTATIVES OF THE SIDES AGREED THAT ISSUE WAS DECIDED IN FAVOUR OF THE ASSESSEE BY THE ORDER OF THE TRIBUNAL FOR THE AY2005 - 06(ITA/4089/MUM/20011 - DTD.31.01.2012).WE FIND THAT TRIBUNAL HAS DEALT THE ISSUE AS UNDER: 30.WE HAV E CAREFULLY CONSIDERED THE SUBMISSIONS OF LD.REPRESENTATIVES OF PARTIES AND ORDERS OF AUTHORITIES BELOW.WE HAVE ALSO CONSIDERED ORDER OF TPO.WE OBSERVE THAT TPO SUGGESTED TO MAKE AN ADJUSTMENT OF RS.1,49,16,166/ - ONLY FOR THE REASON THAT HE COMPARED THE CAS E OF FIRST NOTICE WHERE THE RATE OF COMMISSION PAID WAS 12% AS AGAINST COMMISSION PAID TO AETNA @15%. HOWEVER,RELEVANT FACTS SUBMITTED BY ASSESSEE THAT THE ASSESSEE GENERATED TOTAL BUSINESS OF RS. 50, 14,02,800/ - FROM HTMT INC.,AE AND OUT OF WHICH BUSINE SS PERTAINING TO AETNA WAS MORE THAN 99% OF TOTAL BUSINESS AND ONLY 1% WAS WITH FIRST NOTICE TO WHOM THE COMMISSION@ 12% WAS PAID AS AGAINST PAYMENT OF COMMISSION OF 15% TO AETNA.FURTHER IT IS ALSO NOT IN DISPUTE THAT FIRST NOTICE,IS ALSO AN ASSOCIATED ENT ERPRISES OF ASSESSEE.IT IS ALSO NOT IN DISPUTE THAT ASSESSEE DETERMINED ITS PROFIT BY FOLLOWING TNMM METHOD AND THE SAME HAS NOT BEEN DISTURBED BY TPO. NO COMPARABLE HAS ALSO BEEN STATED TO ESTABLISH THAT PAYMENT OF COMMISSION BY ASSESSEE TO AETNA IS EXCES SIVE AND IS NOT AT ARMS LENGTH PRICE.WE CONSIDER IT PRUDENT TO STATE THAT SECTION 92 OF I.T.ACT,1961 PROVIDES THAT ANY INCOME ARISING FROM AN INTERNATIONAL TRANSACTION SHALL BE COMPUTED HAVING REGARD TO THE ALP.FURTHER SEC.92C DEALS WITH THE COMPUTATION O F ALP.SUB - SECTION(1) OF SEC.92C PRESCRIBES THAT THE ALP IN RELATION TO AN INTERNATIONAL TRANSACTIONS SHALL BE DETERMINED BY ANY OF THE PRESCRIBED METHODS,WHICH INTER ALIA INCLUDE TNMM. RULE10B OF I.T. RULES,1962 PROVIDES THE MECHANISM FOR DETERMINATION OF ALP U/S. 92C.RULE 10B(1)(E)(I) PROVIDES THAT THE ALP IN RELATION TO AN INTERNATIONAL TRANSACTION SHALL BE DETERMINED BY TNMM BY WHICH THE NET PROFIT MARGIN REALIZED BY THE ENTERPRISES FROM AN INTERNATIONAL TRANSACTION ENTERED INTO WITH AN ASSOCIATED ENTERP RISE IS COMPUTED IN RELATION TO COSTS INCURRED OR SALES EFFECTED OR ASSETS EMPLOYED OR TO BE EMPLOYED BY THE ENTERPRISE OR HAVING REGARD TO ANY OTHER RELEVANT BASE.SUB - CLAUSE (II) OF CLAUSE (E) OF RULE 10B(1) PROVIDES AS UNDER THE NET PROFIT MARGIN REALIZE D BY THE ENTERPRISE OR BY AN UNRELATED ENTERPRISE FROM A I.T.A. NO.3631 /MUM/201 5 11 COMPARABLE UNCONTROLLED TRANSACTION OR A NUMBER OF SUCH TRANSACTION IS COMPUTED HAVING REGARD TO THE SAME BASE: 31.FROM THE ABOVE IT CAN BE SEEN THAT THE NET PROFIT MARGIN IS TO BE CONSIDERED QUA T HE COMPARABLE UNCONTROLLED TRANSACTION OR NUMBER OF SUCH UNCONTROLLED TRANSACTIONS.UNCONTROLLED TRANSACTION HAS BEEN DEFINED IN RULE 10A(A) TO MEAN A TRANSACTION BETWEEN ENTERPRISES OTHER THAN ASSOCIATE ENTERPRISES,WHETHER RESIDENT OR NON - RESIDENT.RULE 1 0B(1)(E) IN JUXTAPOSITION TO RULE 10A(A).THE POSITION WHICH EMERGES IS THAT IN APPLYING THE TNMM, NET PROFIT MARGIN REALIZED FROM A COMPARABLE UNCONTROLLED TRANSACTION IS TO BE TAKEN INTO CONSIDERATION.THE CONDITIONS THUS ENVISAGED FOR MAKING A CASE AS COM PARABLE FOR THIS PURPOSE,SHOULD NOT ONLY BE COMPARABLE BUT ALSO HAVE UNCONTROLLED TRANSACTION.THESE TWIN CONDITIONS NEED TO BE CUMULATIVELY SATISFIED. IF SUCH OTHER CASE IS ONLY COMPARABLE BUT HAS CONTROLLED TRANSACTION OR VICE - VERSA,IT SHALL FALL OUTSIDE THE AMBIT OF LIST OF COMPARABLE CASES. 32.IN THE CASE BEFORE US,TPO SUGGESTED TO MAKE ADJUSTMENT ONLY BY COMPARING THE RATE OF COMMISSION PAID TO AE ON FIRST NOTICE AND NO CASE HAS BEEN BROUGHT ON RECORD THAT COMMISSION PAID BY ASSESSE TO AE@15% IS EXCE SSIVE.FURTHER WE OBSERVE THAT LD.CIT(A)HAS HELD THAT SIMILAR ISSUE WAS ALSO CONSIDERED IN THE PRECEDING ASSESSMENT YEAR 2004 - 05 AND SIMILAR ADJUSTMENT MADE WERE NOT AGREED TO AND IT WAS HELD THAT ASSESSEES TRANSACTION WITH AE IN RESPECT OF COMMISSION WAS AT ARMS LENGTH. 33.CONSIDERING ABOVE FACTS AND IN THE ABSENCE OF ANY OTHER FACTS BROUGHT ON RECORD BY DEPART - MENT,WE DO NOT FIND ANY REASON TO INTERFERE WITH THE ORDER OF LD. CIT(A).HENCE, WE CONFIRM THE ORDER OF LD. CIT(A) AND REJECT GROUND NO. 2 & 3 TAKEN BY DEPARTMENT. WE DO NOT FIND ANY REASON TO DEVIATE FROM THE CONSISTENT STAND TAKEN BY THE CO - ORDINATE BENCHES OF TRIBUNAL FOR AY 2004 - 05 AND 2005 - 06 IN ASSESSEES OWN CASE BY ALLOWING ASSESSEE S CLAIM OF COMMISSION PAYABLE TO ITS AE NAMELY HTMT INC., USA AND RE SPECTFULLY FOLLOWING THE AFORESAID DECISION (S) OF THE CO - ORDINATE BENCHES OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR AY 2004 - 05 AND 2005 - 06, WE ALLOW THE CLAIM OF THE ASSESSEE AND APPEAL OF THE R EVENUE ON THIS GROUND STOOD DISMISSED. IN AR RIVING AT THE AFORESAID DECISION , W E ARE GUIDED BY DECISION OF HONBLE SUPREME COURT IN THE CASE OF RADHASOAMI SATSANG V. CIT REPORTED IN (1992) 193 ITR 321(SC). WE ORDER ACCORDINGLY. 6 . THE NEXT GROUND RELATED TO THE DISALLOWANCE OF EXPENDITURE INCURRE D IN RELATION TO AN INCOME NOT FORMING PART OF THE INCOME OF THE ASSESSEE U/S. 14A OF THE ACT , WHICH WAS DISALLOWED BY THE AO TO THE TUNE OF RS. 6,52,86,000/ - . THE CLAIM OF THE ASSESSEE IS THAT FOR THE I.T.A. NO.3631 /MUM/201 5 12 IMPUGNED ASSESSMENT YEAR 2003 - 04 , THE DIVIDEND INCOM E WAS TAXABLE . IT IS CLAIMED THAT IN THE IMMEDIATE PRECEDING ASSESSMENT YEAR , THE DIVIDEND INCOME WAS EXEMPT FROM TAX U/S 10(33) OF THE 1961 ACT AND ALSO IT IS CLAIMED THAT FOR THE IMMEDIATELY SUCCEEDING ASSESSMENT YEAR , THE DIVIDEND INCOME WAS AGAIN EX EMPT FROM INCOME - TAX U/S 10(34) OF THE 1961 ACT . IT IS CLAIMED THAT DURING THE IMPUGNED ASSESSMENT YEAR I.E. AY 2003 - 04, THE DIVIDEND IS CHARGEABLE TO TAX . IT IS CLAIMED THAT THERE IS NO OTHER EXEMPT INCOME EARNED BY THE ASSESSEE. BY FINANCE ACT, 2002 , SECTION 10(33) OF THE 1961 ACT HAS BEEN OMITTED. IT IS USEFUL TO REFER AT THIS STAGE TO CIRCULAR NUMBER 8 OF 2002 , DATED 27 TH AUGUST 2002, AS UNDER: TAXATION OF DIVIDENDS. 52.1 UNDER THE EXISTING PROVISIONS CONTAINED IN SECTION 115 O, IN ADDITION TO THE INCOME TAX CHARGEABLE IN RESPECT OF THE TOTAL INCOME OF A DOMESTIC COMPANY, ANY AMOUNT DECLARED, DISTRIBUTED OR PAID BY WAY OF DIVIDENDS IS CHARGED TO ADDITIONAL INCOME TAX AT THE RATE OF 10 PER CENT. THE TAX SO PAID BY THE COMPAN Y IS TREATED AS THE FINAL PAYMENT OF TAX IN RESPECT OF THE AMOUNT DECLARED, DISTRIBUTED OR PAID BY WAY OF DIVIDEND. SUCH DIVIDEND REFERRED TO IN SECTION 115 O IS EXEMPT IN THE HANDS OF THE SHAREHOLDERS UNDER SUB CLAUSE ( I ) OF CLAUSE ( 33 ) OF SECTION 10. THE INCIDENCE OF TAX IS, THUS, ON THE PAYER COMPANY AND NOT ON THE RECIPIENT. 52.2 THROUGH THE FINANCE ACT, 2002, THE EARLIER SYSTEM OF TAXING DIVIDEND HAS BEEN REVERTED TO AND THE INCIDENCE OF TAX HAS BEEN SHIFTED ON TO THE SHAREHOLDER RECEIVING THE DIVIDEN DS, BY OMITTING SUB - CLAUSE ( I ) OF CLAUSE ( 33 ) OF SECTION 10 AND AMENDING SECTION 115 O SO AS TO MAKE THE PROVISIONS OF THIS SECTION APPLICABLE ONLY IN RESPECT OF THE PROFITS DISTRIBUTED BY THE DOMESTIC COMPANIES BEFORE THE 31ST DAY OF MARCH, 2002. 52.3 TO PREVENT CASCADING EFFECT IN THE CASE OF A COMPANY, SECTION 80M HAS BEEN REINTRODUCED IN A REVISED FORM. A DEDUCTION UNDER THIS SECTION WOULD BE AVAILABLE TO A DOMESTIC COMPANY, WHICH RECEIVES DIVIDEND FROM ANOTHER DOMESTIC COMPANY, AND AGAIN DISTRIBUTES D IVIDEND OUT OF ITS PROFITS. THE AMOUNT OF DEDUCTION ON THE DIVIDENDS, SO RECEIVED BY A DOMESTIC COMPANY FROM ANOTHER DOMESTIC COMPANY, IS LIMITED TO THE EXTENT OF DIVIDENDS DISTRIBUTED BY THE RECIPIENT COMPANY ON OR BEFORE THE DUE DATE OF FILING OF RETURN. I.T.A. NO.3631 /MUM/201 5 13 52.4 UNDER THE EXISTING PROVISIONS CONTAINED IN SECTION 194, NO TAX IS REQUIRED TO BE DEDUCTED AT SOURCE IN THE CASE OF A SHAREHOLDER, WHO IS RESIDENT IN INDIA, FOR DIVIDENDS REFERRED TO IN SECTION 115 O. WITH THIS SHIFTING OF THE TAX INCIDENCE TO THE RE CIPIENT, THE PROVISIONS OF TAX DEDUCTION AT SOURCE HAS ALSO BEEN REVIVED THROUGH THE FINANCE ACT, 2002. THE PRINCIPAL OFFICER OF AN INDIAN COMPANY OR A COMPANY WHICH HAS MADE THE PRESCRIBED ARRANGEMENTS FOR THE DECLARATION AND PAYMENTS OF DIVIDENDS WITHIN INDIA BEFORE MAKING ANY PAYMENT IN CASH OR BEFORE ISSUING ANY CHEQUE OR WARRANT IN RESPECT OF ANY DIVIDEND OR BEFORE MAKING ANY DISTRIBUTION OR PAYMENT TO A SHAREHOLDER, WHO IS RESIDENT IN INDIA, OF ANY DIVIDEND, WOULD NOW BE REQUIRED TO DEDUCT FROM THE AM OUNT OF SUCH DIVIDEND, INCOME TAX AT THE RATES IN FORCE. THESE RATES ARE SPECIFIED IN PART II OF THE FIRST SCHEDULE TO THE FINANCE ACT. WITH A VIEW TO AVOID HARDSHIP TO SMALL INVESTORS AND ALSO TO REDUCE THE AVOIDABLE INFRUCTUOUS PAPERWORK AND ISSUE OF REF UND IN NON TAXABLE CASES, A THRESHOLD LIMIT OF RS. 1,000 HAS BEEN PROVIDED BELOW WHICH NO TAX WOULD BE REQUIRED TO BE DEDUCTED AT SOURCE FROM PAYMENTS BY WAY OF DIVIDENDS. 52.5 AS PER THE SECOND PROVISO TO SUB SECTION (1) OF SECTION 195, NO TAX IS REQUIRE D TO BE DEDUCTED AT SOURCE IN THE CASE OF A SHAREHOLDER, WHO IS A NON RESIDENT, OR A FOREIGN COMPANY, IN RESPECT OF DIVIDENDS REFERRED TO IN SECTION 115 O. CONSEQUENT UPON THE CHANGE IN THE SCHEME OF TAXATION OF DIVIDEND, THIS PROVISO HAS BEEN OMITTED THRO UGH THE FINANCE ACT, 2002. THUS, ANY PERSON RESPONSIBLE FOR PAYING TO A NON RESIDENT, NOT BEING A COMPANY, OR A FOREIGN COMPANY, AT THE TIME OF CREDIT OF INCOME BY WAY OF DIVIDEND, TO THE ACCOUNT OF THE PAYEE OR AT THE TIME OF PAYMENT THEREOF IN CASH OR BY THE ISSUE OF A CHEQUE OR DRAFT OR BY ANY OTHER MODE, WOULD BE REQUIRED TO DEDUCT TAX AT THE RATES IN FORCE. THESE RATES ARE SPECIFIED IN PART II OF THE FIRST SCHEDULE TO THE FINANCE ACT. 52.6 SINCE PROVISIONS OF SECTION 115 O WOULD NOW BE INOPERATIVE, RE FERENCES TO 'OTHER THAN DIVIDENDS REFERRED TO IN SECTION 115 O' IN SECTIONS 10( 23FA ), 10( 23G ), 115A, 115AC, 115ACA, 115AD AND 115C HAVE ALSO BEEN OMITTED. THE PROVISOS TO SECTIONS 196C AND 196D HAVE ALSO BEEN OMITTED SO THAT THE TAX SHALL BE DEDUCTED AT SO URCE WITH RESPECT TO INCOMES REFERRED TO IN SECTIONS 115AC AND 115AD, WHERE THE INCOME IS RECEIVED IN THE FORM OF DIVIDENDS REFERRED TO IN SECTION 115 - O ALSO. 52.7 THESE AMENDMENTS WILL TAKE EFFECT FROM LST APRIL, 2003, AND WILL, ACCORDINGLY, APPLY IN REL ATION TO THE ASSESSMENT YEAR 2003 2004 AND SUBSEQUENT ASSESSMENT YEARS. HOWEVER, THE PROVISIONS I.T.A. NO.3631 /MUM/201 5 14 RELATING TO TAX DEDUCTION AT SOURCE UNDER SECTIONS 194, 195, 196C AND 196D WILL TAKE EFFECT FROM 1ST JUNE, 2002. THE EXEMPTION FROM TAXABILITY OF DIVIDEND INCOME WAS ONCE AGAIN RESTORED BY FINANCE ACT,2003 BY INSERTION OF SECTION 10(34) WEF 01.04.2004. O NCE THE DIVIDEND INCOME IS TAXABLE IN THE HANDS OF THE RECIPIENT WITHIN THE FRAME WORK OF PROVISIONS OF THE 1961 ACT FOR THE AY 2003 - 04 , WE FAILED TO UNDERS TAND ON WHAT BASIS PROVISION OF S ECTION 14A WAS INVOKED BY THE AO BY DISALLOWING EXPENSES INCURRED IN RELATION TO EARNING OF AN EXEMPT INCOME WHILE INFACT THERE WAS NO EXEMPT INCOME EARNED BY THE ASSESSEE. IT IS A DIFFERENT MATTER A SEPARATE DEDUCTION U/S 80M WAS RE - INTRODUCED IN A REVISED FORM WHEREIN A DEDUCTION UNDER THIS SECTION WOULD BE AVAILABLE TO A DOMESTIC COMPANY, WHICH RECEIVES DIVIDEND FROM ANOTHER DOMESTIC COMPANY, AND AGAIN DISTRIBUTES DIVIDEND OUT OF ITS PROFITS. THE AMOUNT OF DEDUCTION ON THE DIVIDENDS, SO RECEIVED BY A DOMESTIC COMPANY FROM ANOTHER DOMESTIC COMPANY, IS LIMITED TO THE EXTENT OF DIVIDENDS DISTRIBUTED BY THE RECIPIENT COMPANY ON OR BEFORE THE DUE DATE OF FILING OF RETURN. THERE IS A CLEAR DIFFERENCE BETWEEN DEDUCTION AND EXEM PTION. SECTION 14A SPEAKS OF DISALLOWANCE OF EXPENDITURE INCURRED IN RELATION TO AN INCOME WHICH DOES NOT FORM PART OF THE INCOME. IN THE INSTANT YEAR, DIVIDEND INCOME EARNED BY THE ASSESSEE FORMED PART OF THE INCOME OF THE ASSESSEE AND THEREAFTER ON COMPL IANCE OF THE CONDITIONS AS PRESCRIBED, IT PROVIDED FOR DEDUCTION U/80M FOR DIVIDEND DISTRIBUTED. WE ARE IN AGREEMENT WITH THE DECISION OF LEARNED CIT(A) DELETING ADDITIONS ON THIS GROUND , WHICH IS A WELL REASONED DECISION PASSED BY LEARNED CIT(A) . FURTHER , WE ARE ALSO IN AGREEMENT WITH THE ASSESSEE THAT RULE 8D OF THE 1962 RULES HAVE NO APPLICABILITY SO FAR AY 2003 - 04 IS CONCERNED AS THE SAME SHALL BE APPLICABLE FROM AY 2008 - 09 ONWARDS AS HELD BY HONBLE SUPREME COURT IN THE CASE OF CIT V. ESSAR TELEHOLDIN GS LTD., WHEREIN HONBLE SUPREME COURT HAS DEALT WITH THE ISSUE AND HELD THAT RULE 8D IS PROSPECTIVE IN NATURE AND SHALL BE APPLICABLE FROM AY 2008 - 09 I.T.A. NO.3631 /MUM/201 5 15 ONWARDS. WITH THESE FINDINGS, WE DISMISS THE APPEAL OF THE R EVENUE ON THIS GROUND ALSO. WE ORDER ACCORDIN GLY. 7 . IN THE RESULT , APPEAL O F THE R EVENUE IN ITA NO. 3631/MUM/2015 FOR AY 2003 - 04 STAND DISMISSED. ORDER PRON OUNCED IN THE OPEN COURT ON 0 2 .01.2019 . 0 2 .01.2019 S D / - S D / - ( MAHAVIR SINGH) (RAMIT KOCHAR) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI, DATED: 0 2 .01 . 2019 COPY TO 1 . THE APPELLANT 2 . THE RESPONDENT 3 . THE CIT(A) CONCERNED, MUMBAI 4 . THE CIT - CONCERNED, MUMBAI 5 . THE DR BENCH, 6 . 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