Dover India Private Limited, Bangalore V. Deputy Commissioner of Income-tax,

ITA 411/PUN/2014

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 9599 (ITAT-PUNE)
• Duration Of Justice: 3 year(s) 1 month(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-04-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 01-02-2017
• Assessment Year: 2009-2010
• Appeal Filed On: 04-03-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Business income; Transfer pricing; International transaction; Services rendered outside India; Wholly owned subsidiary; Tangible material; Competent authority
• Section: 92C; 143(3); 92B; 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH A, PUNE , , BEFORE MS. SUSHMA CHOWLA, JM AND SHRI ANIL CHATURVEDI, AM . / ITA NO.411/PUN/2014 [ [ / ASSESSMENT YEAR : 2009-10 DOVER INDIA PVT. LTD., BAGMANE LAUREL, 1 ST FLOOR, C' BLOCK, BAGMANE TECH PARK, C.V. RAMAN NAGAR, BANGALORE 560093 . / APPELLANT PAN: AAACI3920N VS. THE DY. COMMISSIONER OF INCOME TAX, CIRCLE 1(2), PUNE . / RESPONDENT / APPELLANT BY : SHRI KISHORE PHADKE / RESPONDENT BY : S/SHRI RAJEEV KUMAR, CIT SUHAS KULKARNI / DATE OF HEARING : 01.02.2017 / DATE OF PRONOUNCEMENT: 19.04.2017 / ORDER PER SUSHMA CHOWLA, JM: THIS APPEAL FILED BY THE ASSESSEE IS AGAINST THE ORDER OF DCIT, CIRCLE 1(2), PUNE, DATED 01.01.2014 RELATING TO ASSESSMENT YEAR 2009-10 PASSED UNDER SECTION 143(3) R.W.S. 144C(1) OF THE INCOME-TAX ACT, 1961 (IN SHORT THE ACT). 2. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL:- ITA NO.411/PUN/2014 DOVER INDIA PVT. LTD. 2 1. GENERAL GROUNDS THE LEARNED DCIT CIRCLE 1(2) PUNE ('AO') PUNE ERRED IN LAW AND ON FACTS AND HON'BLE DRP ERRED IN LAW AND FACTS IN ACCEPTING THE ADDITIONS OF RS.3,25,00,371/- MADE BY LOWER AUTHORITY TO THE TAXABLE INCOME OF THE ASSESSEE COMPANY. 2. TRANSFER PRICING RELATED GROUNDS OF APPEAL 2.1 MANUFACTURING FUNCTION (TOTAL ADDITION RS.1,65,23,053) 2.1.1 THE HON'BLE DRP PUNE HAS ERRED IN LAW AND ON FACTS IN ACCEPTING AND THE LEARNED AO / TPO ERRED IN MAKING OBSERVATION THAT ASSESSEE COMPANY SHOULD GET RS 1,65,23,053 AS A SUPPORT PAYMENT FROM ITS AE COMPANY, AGAINST THE LOSSES INCURRED IN THE MANUFACTURING DIVISION , 2.1.2 THE HON'BLE DRP PUNE HAS ERRED IN LAW AND ON FACTS IN ACCEPTING AND THE LEARNED AO / TPO ERRED IN NOT GRANTING CARVE OUT AMOUNTING TO RS 1,61,09,646, FOR UNDERUTILIZATION OF CAPACITY IN MANUFACTURING DIVISION . 2.1.3 THE HON'BLE DRP PUNE HAS ERRED IN LAW AND ON FACTS IN ACCEPTING AND THE LEARNED AO / TPO ERRED IN HOLDING THAT THE ASSESSEE COMPANY CANNOT ALTERNATIVELY APPLY RESALE PRICE METHOD ('RPM '), FOR BENCHMARKING PURCHASE AND SALES TRANSACTIONS WITH ITS AE COMPANIES. 2.1.4 THE HON'BLE DRP PUNE HAS ERRED IN LAW AND ON FACTS IN ACCEPTING AND THE LEARNED AO / TPO ERRED IN HOLDING THAT THE ASSESSEE COMPANY CANNOT ALTERNATIVELY APPLY GROSS PROFIT MARGIN % AS PLI FOR BENCHMARKING PURCHASE AND SALES TRANSACTIONS WITH ITS AE COMPANIES UNDER TNMM 2.2 MARKETING SUPPORT SERVICES (TOTAL ADDITION RS.69,71,612) 2.2.1 THE HON'BLE DRP PUNE HAS ERRED IN LAW AND ON FACTS IN ACCEPTING AND THE LEARNED AO / TPO ERRED IN HOLDING THAT ALP FOR MARKETING SUPPORT SERVICES SHOULD BE WORKED OUT BY CONSIDERING 20.49% MARGIN ON COSTS INSTEAD OF 6.24% MARGIN, LEADING TO AN ADDITION OF RS.69,71,612/- 2.2.2 THE HON'BLE DRP PUNE HAS ERRED IN LAW AND ON FACTS IN ACCEPTING AND THE LEARNED AO / TPO ERRED IN HOLDING THAT AGRIMA INTERNATIONAL IS A GOOD COMPARABLE FOR BENCHMARKING THE MARKETING SUPPORT ACTIVITY IRRESPECTIVE OF THE FACTS THAT CONTEMPORANEOUS DATA IS NOT AVAILABLE. 2.2.3 THE HON'BLE DRP PUNE HAS ERRED IN LAW AND ON FACTS IN ACCEPTING AND THE LEARNED AO / TPO ERRED IN HOLDING THAT REMAINING 4 COMPARABLES OUT OF 7 SELECTED BY THE DRP IN AY 08- 09 DIRECTIONS IN THE ASSESSEE'S OWN CASE ARE NOT GOOD COMPARABLES AND SHOULD NOT BE INCLUDED IN THE FINAL ARRAY FOR BENCHMARKING. 2.3 DESIGN ENGINEERING SERVICES (TOTAL ADDITION RS.23,24,178) ITA NO.411/PUN/2014 DOVER INDIA PVT. LTD. 3 2.3.1 THE HON'BLE DRP PUNE HAS ERRED IN LAW AND ON FACTS IN ACCEPTING AND THE LEARNED AO / TPO ERRED IN HOLDING THAT ALP FOR DESIGN ENGINEERING SERVICES SHOULD BE WORKED OUT BY CONSIDERING 17.60% MARGIN ON COSTS INSTEAD OF 10% MARGIN, LEADING TO AN ARITHMETICALLY INCORRECT ADDITION OF RS.23,24,178/- 2.3.2 ALTERNATIVELY AND WITHOUT PREJUDICE TO GROUND NO 2.3.1 ABOVE, THE HON'BLE DRP PUNE HAS ERRED IN LAW AND ON FACTS IN ACCEPTING AND THE LEARNED AO / TPO ERRED IN CALCULATING CORRECT ADDITION AMOUNT WHICH OUGHT TO HAVE BEEN RS.10,03,622 ONLY INSTEAD ON RS 23,24,178. 2.3.3 THE HON'BLE DRP PUNE HAS ERRED IN LAW AND ON FACTS IN ACCEPTING AND THE LEARNED AO / TPO ERRED IN HOLDING THAT MARGINS OF KLG SYSTEL LIMITED SHOULD BE USED IN TOTALITY INSTEAD OF USING SEGMENTAL DATA BASED ON ANNUAL REPORT. 3. OTHER THAN TRANSFER PRICING RELATED GROUND OF APPEAL 3.1 THE HON'BLE DRP PUNE HAS ERRED IN LAW AND ON FACTS IN ACCEPTING AND THE LEARNED AO ERRED IN LAW AND ON FACTS IN DISALLOWING 10A DEDUCTION AMOUNTING TO RS.17,66,764 FOR RECEIPT OF EXPORT PROCEEDS OF RS. 1,64,54,148 IN INDIAN RUPEES. 3.2 ALTERNATIVELY AND WITHOUT PREJUDICE TO GROUND NO 3.1 ABOVE, THE LEARNED AO ERRED IN LAW AND ON FACTS IN CALCULATING CORRECT DISALLOWANCE U/S 10A OF INCOME TAX ACT 1961 FOR RECEIVING EXPORTS PROCEEDS IN INDIA RUPEES. 3.3 THE HON'BLE DRP PUNE HAS ERRED IN LAW AND ON FACTS IN ACCEPTING AND THE LEARNED AO ERRED IN LAW AND ON FACTS IN DISALLOWING PROVISION FOR OBSOLESCE OF STOCK U/S 37 OF THE ITA, 1961 AMOUNTING TO RS.49,14,764 BY OBSERVING THAT THE SAME IS CONTINGENT IN NATURE, WITHOUT APPRECIATING THE FACT THAT INVENTORY HAS TO BE VALUED ON COST OR MARKET PRICE WHICHEVER IS LOWER. 3. THE GROUND OF APPEAL NO.1 RAISED BY THE ASSESSEE IS GENERAL, HENCE THE SAME IS DISMISSED. THE ISSUE RAISED IN GROUND OF APPEAL NO.2 RAISED BY THE ASSESSEE RELATES TO THE TRANSFER PRICING ADJUSTMENT. UNDER GROUND OF APPEAL NO.2.1, THE ASSESSEE IS AGGRIEVED BY THE ORDER OF ASSESSING OFFICER / DISPUTE RESOLUTION PANEL (IN SHORT THE DRP) IN MAKING ADDITION OF RS.1,65,23,053/- AS SUPPORT PAYMENT FROM ITS ASSOCIATE ENTERPRISES AGAINST LOSSES INCURRED IN THE MANUFACTURING DIVISION. THE ASSESSEE IS ALSO AGGRIEVED BY THE ORDER OF ASSESSING OFFICER / DRP IN NOT GRANTING CARVE OUT AMOUNTING TO RS.1,61,09,646/- FOR UNDERUTILIZATION OF CAPACITY IN THE MANUFACTURING DIVISION. ITA NO.411/PUN/2014 DOVER INDIA PVT. LTD. 4 4. BRIEFLY, IN THE FACTS OF THE CASE, THE ASSESSEE WAS WHOLLY OWNED SUBSIDIARY OF DOVER (SWITZERLAND) HOLDING LLC AND THE BUSINESS OF ASSESSEE WAS DIVIDED INTO DIFFERENT BUSINESS SEGMENTS. THE ASSESSEE FOR THE YEAR UNDER CONSIDERATION HAD FURNISHED RETURN OF INCOME DECLARING TOTAL LOSS OF RS.3,37,48,249/-. THE ASSESSEE WAS OPERATING DIFFERENT DIVISIONS I.E. OPW FUEL COMPONENTS (OPW-FC), OPW-FLUID TRANSFER (OPW-FT), HEAIL TRAILER, WILDEN PUMPS AND CORPORATE DIVISIONS. THE ASSESSEE WAS OPERATING PUNE DIVISION AT CHAKAN. THE ASSESSEE HAD UNDERTAKEN SEVERAL INTERNATIONAL TRANSACTIONS DURING THE YEAR WITH ITS ASSOCIATE ENTERPRISES AS PER PROVISIONS OF SECTION 92B OF THE ACT. THE TOTAL VALUE OF INTERNATIONAL TRANSACTIONS WAS RS.20,17,81,685/- AND THEREFORE, THE ASSESSING OFFICER MADE REFERENCE UNDER SECTION 92CA(1) OF THE ACT TO THE TRANSFER PRICING OFFICER (IN SHORT THE TPO) TO DETERMINE THE ARM'S LENGTH PRICE OF SAID INTERNATIONAL TRANSACTIONS. THE ASSESSEE PRESENTED ANALYSIS OF VARIOUS INTERNATIONAL TRANSACTIONS AND POINTED OUT THAT IT WAS UNDERTAKING SOFTWARE SERVICES FUNCTION, MARKETING SUPPORT SERVICES FUNCTION, DISTRIBUTION FUNCTION AND MANUFACTURING FUNCTION. THE MOST APPROPRIATE METHOD FOR BENCHMARKING THE INTERNATIONAL TRANSACTIONS BY THE ASSESSEE WAS SELECTED TO BE TNMM METHOD. IT WAS CONTENDED BY THE ASSESSEE THAT IT HAD UNDERTAKEN ALL ITS INTERNATIONAL TRANSACTIONS AT ARM'S LENGTH PRICE. THE TPO FIRST OF ALL, TOOK UP THE MANUFACTURING FUNCTION OF THE ASSESSEE I.E. WILDEN PUMPS DIVISION, UNDER WHICH IT WAS MANUFACTURING AND ASSEMBLING AIR-OPERATED DOUBLE DIAPHRAGM PUMPS USED IN A WIDE VARIETY OF FLUID TRANSFER APPLICATIONS IN GENERAL, INDUSTRIAL, PROCESS INDUSTRY AND SPECIALIZED APPLICATIONS AND WAS LOCATED AT CHENNAI. FURTHER, THE SECOND DIVISION WAS DESTACO DIVISION, WHEREIN IT WAS ASSEMBLING TOGGLE CLAMPS, CYLINDERS, WORK-HOLDING DEVICES, ROBOT-HANDS, ROBOTIC AND AUTOMATION COMPONENTS AND SOLUTIONS. THE ITA NO.411/PUN/2014 DOVER INDIA PVT. LTD. 5 DIVISION ASSEMBLES MANUAL, PNEUMATIC AND AUTOMATION POWER CLAMPS USING RIVETING MACHINES AND HAND TOOLS FOR SALE TO DOMESTIC CUSTOMERS. THIS DIVISION WAS LOCATED AT CHAKAN EARLIER AND LATER AT CHENNAI. THE TPO NOTED FROM THE TP DOCUMENTATION THAT IN THE MANUFACTURING SEGMENT, THE ASSESSEE HAD UNADJUSTED MARGINS OF (NEGATIVE) OP/SALES OF (-) 68.59% AS COMPARED TO THE OP/SALES MARGINS OF THE EXTERNAL UNCONTROLLED COMPARABLES OF 4.81% (AS PER THE ASSESSEES SUBMISSION DATED 20.02.2012) ACCORDING TO UPDATED SINGLE YEAR MARGINS. THE ASSESSEE IN THE TP DOCUMENTATION FOR ASSESSMENT YEAR 2009-10 I.E. THE YEAR UNDER APPEAL HAD WORKED OUT THE AMOUNT OF CAPACITY UTILIZATION OF RS.1,61,09,646/-. AS PER THE ASSESSEE, SINCE THE MANUFACTURING OPERATIONS WERE IN NASCENT STAGE AND THE ASSESSEE HAD INCURRED ABNORMAL LOSSES DUE TO UNDERUTILIZATION OF CAPACITY AND OTHER UNABSORBED EXPENSES, ETC., THE SAID CAPACITY UNDER UTILIZATION ADJUSTMENT SHOULD BE ALLOWED. IT WAS FURTHER REPORTED BY THE MANAGEMENT THAT ONCE THE ECONOMIC CONDITIONS IMPROVE, THEN THE SALES WOULD INCREASE AND THE COMPANY WOULD BE ABLE TO EARN NORMAL PROFITS ON ITS OPERATIONS. THE TPO VIDE PARA 10.2 OBSERVED THAT WHERE THE ASSESSEE WAS 100% OWNED SUBSIDIARY OF THE DOVER GROUP AND WHERE ASSOCIATE ENTERPRISES TAKES DECISIONS ON BEHALF OF THE ASSESSEE COMPANY, THEN UNDERUTILIZATION OF CAPACITY COULD BE DIRECTLY ATTRIBUTED TO ASSOCIATE ENTERPRISES, AT WHOSE INSTANCE THE ASSESSEE HAD SET UP THE CAPACITY. THE TPO REFERRED TO THE INSTANCE OF ASSESSMENT YEAR 2010-11, WHEREIN THE ASSESSEE WAS ASKED TO PAY COMMISSION TO THIRD PARTY IN ANTICIPATION OF CERTAIN ORDERS, WHICH DID NOT MATERIALIZE, THEN THE AMOUNT WAS PAID TO THE ASSESSEE BY ASSOCIATE ENTERPRISES AS SUPPORT PAYMENTS. THE TPO IN SUCH SCENARIO, WAS OF THE VIEW THAT THE ASSESSEE WAS TOTALLY UNDER THE CONTROL OF ASSOCIATE ENTERPRISES. HE ALSO POINTED OUT THAT IN CASE THERE WAS THIRD PARTY SCENARIO, THEN ANY PERSON WHO HAD SET UP THE CAPACITY WOULD HAVE ASKED FOR COMPENSATION FROM THE PRINCIPAL IF ITA NO.411/PUN/2014 DOVER INDIA PVT. LTD. 6 THE INSTALLED CAPACITY REMAINED UNDERUTILIZED. ANOTHER POINT NOTED BY THE TPO WAS THAT THE ASSESSEE WAS WORKING ONLY FOR THE ASSOCIATE ENTERPRISES FROM YEAR TO YEAR, WHERE THE ASSESSEE PROCURES GOODS FROM ASSOCIATE ENTERPRISES, PROCESS THEM FURTHER AND SELLS THE SAME IN INDIA. THE TPO THUS, HELD THAT CAPACITY UTILIZATION WAS DIRECTLY ATTRIBUTABLE TO THE ASSESSEE. THE TPO PROPOSED THAT EITHER THERE SHOULD BE NO ADJUSTMENT FOR CAPACITY UNDERUTILIZATION AND ADJUSTMENT TO BE WORKED OUT FOLLOWING TNMM AS APPLIED BY THE ASSESSEE COMPANY OR THERE SHOULD BE A CLAIM OF COMPENSATION FROM THE AE AS HAPPENED IN THE SUBSEQUENT YEARS. THE TPO IN THE FIRST SCENARIO WORKED OUT THE TP ADJUSTMENT AT RS.1,44,58,737/-. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE HAS ASSERTED THAT IF THE ABOVE ADJUSTMENT WAS TO BE MADE, THEN IT WOULD AMOUNT TO SITUATION WHERE ITS ASSOCIATE ENTERPRISES WOULD HAVE TO SELL THE GOODS FREE TO THE ASSESSEE AND IN ADDITION WOULD GIVE SOME MONEY, WAS REJECTED BY THE TPO BEING WITHOUT ANY BASIS. THE TPO FURTHER WAS OF THE VIEW THAT THE RM TRANSACTION WAS TOTALLY A DIFFERENT TRANSACTION AND THE ADJUSTMENT FOR SUPPORT PAYMENT TOWARDS MARKETING EXPENSES AND INITIAL STARTUP OVERHEAD CHARGES WAS DIFFERENT. THE ALTERNATE CONTENTION RAISED BY THE TPO WAS THAT SINCE THE ASSESSEE GOT SUPPORT PAYMENTS FOR LOW CAPACITY UTILIZATION IN ASSESSMENT YEAR 2010-11 AND SINCE THE CIRCUMSTANCES WERE THE SAME IN THE INSTANT ASSESSMENT YEAR, ASSOCIATE ENTERPRISES OUGHT TO HAVE COMPENSATED THE ASSESSEE TO THE EXTENT OF RS.1,65,23,053/-, AS PER WORKING REPRODUCED UNDER PARA 10.4 AT PAGE 6 OF THE ORDER OF TPO. THE TPO ISSUED SHOW CAUSE NOTICE TO THE ASSESSEE IN THIS REGARD, WHO IN TURN, FILED REPLY WHICH WE HAVE ALREADY REFERRED TO. HOWEVER, THE CONTENTION OF ASSESSEE WAS REJECTED AS FIRSTLY SINCE THE MITIGATING CIRCUMSTANCES WERE SAME AS IN ASSESSMENT YEARS 2009-10 AND 2010-11 AND SINCE THE ASSOCIATE ENTERPRISES HAD GIVEN SUPPORT PAYMENTS IN ASSESSMENT YEAR 2010-11, THE SAME SHOULD HAVE BEEN GIVEN IN ASSESSMENT ITA NO.411/PUN/2014 DOVER INDIA PVT. LTD. 7 YEAR 2009-10 ALSO. THE CONTENTION OF ASSESSEE THAT THE ADJUSTMENT WOULD AMOUNT TO GETTING THE RM FREE AND OVER AND ABOVE GETTING SOME PAYMENT ALONG WITH WAS HELD TO BE PATENTLY WRONG AND INCORRECT. THE TPO REITERATED THAT ADDITIONAL PAYMENT FOR EFFORTS IN CAPACITY UTILIZATION AND MARKETING AND OTHER EFFORTS UNDERTAKEN, SINCE RECEIVED IN ASSESSMENT YEAR 2010-11, SHOULD ALSO HAVE BEEN RECEIVED IN ASSESSMENT YEAR 2009-10. THE COVET APPROACH PLEADED BY THE ASSESSEE WAS ALSO REJECTED. THE ALTERNATE PLEA OF ASSESSEE OF APPLICATION OF RPM WAS REJECTED WHERE THE SAME IS GENERALLY APPLIED TO TRADING CONCERNS. THE TPO CONCLUDED BY HOLDING AS UNDER:- 23. THUS EITHER THERE SHOULD BE NO ADJUSTMENT FOR CAPACITY UNDERUTILIZATION AND ADJUSTMENT TO BE WORKED OUT FOLLOWING TNMM AS APPLIED BY THE ASSESSEE COMPANY OR THERE SHOULD BE A CLAIM OF COMPENSATION FROM THE AE AS HAPPENED IN THE SUBSEQUENT YEARS. ON TNMM AS MAM, THERE WILL BE A TP ADJUSTMENT OF RS.1,44,58,737/-. ALTERNATIVELY IN VIEW OF THE ABOVE DISCUSSION, I HOLD THAT ON USING THE EXTENDED CUP FOR THE VALUATION OF THE SUPPORT PAYMENTS FOR THE CURRENT AY, DIPL SHOULD HAVE RECEIVED RS.1,65,23,053/-, AN AMOUNT OF SUPPORT PAYMENTS TOWARDS MARKETING EXPENSES AND INITIAL STARTUP OVERHEAD CHARGES. (THE LOWER AMOUNT OF TP ADJUSTMENT OF RS.1,44,58,737 WILL GET SUBSUMED IN THE HIGHER FIGURE OF RS.1,65,23,053/-). TP ADJUSTMENT ON ACCOUNT OF THE NON RECEIPT OF THE SUPPORT PAYMENTS TOWARDS MARKETING EXPENSES AND INITIAL STARTUP OVERHEAD CHARGES OF RS.1,65,23,053/- 5. THE ASSESSING OFFICER PROPOSED ADDITION BY WAY OF DRAFT ASSESSMENT ORDER, AGAINST WHICH THE ASSESSEE FILED OBJECTIONS BEFORE THE DRP. THE DRP HOWEVER, WHILE TAKING NOTE OF MANUFACTURING FUNCTIONS UNDERTAKEN BY THE ASSESSEE, WHICH HAD RESULTED IN LOSSES WHICH WERE CLAIMED TO BE DUE TO UNDERUTILIZATION OF INSTALLED CAPACITY AND DUE TO INCURRENCE OF FIXED COSTS, WAS NOT ACCEPTED BY THE DRP. IT WAS HELD THAT WHERE THE ASSOCIATE ENTERPRISES WERE RESPONSIBLE FOR LOSSES INCURRED BY THE ASSESSEE IN ITS MANUFACTURING FUNCTIONS AND WHERE THE ASSOCIATE ENTERPRISES WERE ALSO RESPONSIBLE FOR FULL CAPACITY UTILIZATION OF MANUFACTURING PLANTS, THERE WAS NO MERIT IN THE CLAIM OF ASSESSEE IN THIS REGARD AND THE ORDER OF TPO WAS UPHELD. ITA NO.411/PUN/2014 DOVER INDIA PVT. LTD. 8 6. THE ASSESSEE BY WAY OF GROUND OF APPEAL NO.2.1 I.E. 2.1.1 TO 2.1.4 HAS RAISED THE ISSUE AGAINST AFORESAID ADDITION MADE BY THE ASSESSING OFFICER / DRP. 7. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT THE ASSESSEE COMPANY WAS WHOLLY OWNED SUBSIDIARY OF DOVER (SWITZERLAND) HOLDING LLC. IT WAS POINTED OUT THAT DOVER LLC WAS MANUFACTURING MNC WHICH WAS INVOLVED IN MULTIPLE BRANDS I.E. MANUFACTURE OF HIGH PRECISION PRODUCTS THROUGH WHICH LIQUID PASSES WHICH IS SPECIALIZED MANUFACTURING ACTIVITY. IT WAS FURTHER POINTED OUT BY THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE THAT THE COMPANY STARTED MANUFACTURING IN ASSESSMENT YEAR 2008-09 FOR PERIOD OF THREE MONTHS. HE FURTHER STATED THAT THE TOTAL SALES OF ASSESSEE WERE TO THE DOMESTIC MARKET EXCEPT ABOUT 10%, BUT THE SOURCING OF MANUFACTURED ITEMS WAS FROM THE ASSOCIATE ENTERPRISES. THE ASSESSEE CLAIMED THAT SINCE THERE WAS UNDERUTILIZATION OF CAPACITY I.E. TO THE EXTENT OF 15% TO 20%, IT ASKED FOR COVET OF SAID UNDERUTILIZATION. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT IN ASSESSMENT YEAR 2008-09, ADJUSTMENT WAS GRANTED; IN THIS YEAR ALSO, THERE WERE LOSSES AND ALSO IN THE NEXT YEAR THERE WERE LOSSES. HOWEVER, ASSOCIATE ENTERPRISES GAVE SOME COMPENSATION IN NEXT YEAR AND ON THAT BASIS, THE TPO HAS SUPPOSED A TRANSACTION WHICH DOES NOT EXIST IN THE PRESENT YEAR. HE STRESSED THAT THE TPO HAS ENVISAGED THAT THERE SHOULD BE TRANSACTION OF SUPPORT SINCE THERE IS SUPPORT FROM ASSOCIATE ENTERPRISES IN THE NEXT YEAR. HE FURTHER STRESSED THAT THE SAME COULD NOT BE INTERNATIONAL TRANSACTION IN ANY CASE. THE TRANSACTION WAS QUID PRO . REFERRING TO THE PROVISIONS OF SECTION 92B OF THE ACT, THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT NO SPECIFIC LIMBS OF SAID ITA NO.411/PUN/2014 DOVER INDIA PVT. LTD. 9 SECTION COVERS THE HYPOTHETICAL LINK WHICH HAS BEEN PROPOUNDED BY THE TPO. IN THIS REGARD, RELIANCE WAS PLACED ON THE RATIO LAID DOWN BY THE HONBLE HIGH COURT OF DELHI IN MARUTI SUZUKI INDIA LTD. & ANR. VS. CIT & ANR. (2016) 282 CTR 0001 (DEL) AND IN CIT VS. WHIRLPOOL OF INDIA LTD. (2016) 129 DTR 169 (DEL). THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT ASSOCIATE ENTERPRISES HAD GIVEN SUPPORT SERVICES IN THE NEXT YEAR BUT THE SAME COULD NOT BE THE BASIS FOR MAKING ANY ADJUSTMENT IN THE ABSENCE OF ANY TRANSACTION BETWEEN THE ASSESSEE AND IT ASSOCIATE ENTERPRISES IN THE CURRENT YEAR. ANOTHER ASPECT POINTED OUT BY THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE WAS THAT VIDE PARA 4 OF THE TPOS ORDER, THE INTERNATIONAL TRANSACTIONS WHICH WERE REFERRED UNDER SECTION 92C OF THE ACT ARE ENLISTED AND THERE IS NO REFERENCE OF THIS TRANSACTION BY THE ASSESSING OFFICER TO THE TPO. HE FURTHER POINTED OUT THAT THE TPO HAS BENCHMARKED THE TRANSACTION OF IMPORT OF RAW MATERIALS WHERE THE TPO SAYS THAT THE ASSESSEE HAS NOT BENCHMARKED IT. HE STRESSED THAT IF THE TPOS ORDER IS UPHELD, THEN COST OF GOODS WOULD BE NIL AND THIS WOULD BE AN ADJUSTMENT. HE POINTED OUT THAT THE ORDER OF TPO IN DISMISSING THE PLEA OF ASSESSEE IN MAKING ADDITION WAS INCORRECT. HE STRESSED THAT LOW CAPACITY UTILIZATION HAS BEEN ALLOWED BY VARIOUS BENCHES OF TRIBUNAL INCLUDING THE PUNE BENCH OF TRIBUNAL IN TASTY BITE EATABLES LTD. VS. ACIT (2015) 59 TAXMANN.COM 437 (PUNE-TRIB.). REFERRING TO THE OBSERVATIONS OF DRP, AT PAGE 12 THE ASSESSEE POINTED OUT THAT ON ONE HAND, THE DRP OBSERVED THAT THE ELIGIBLE ASSESSEE HAS UNDERTAKEN ASSOCIATE ENTERPRISES AND ON THE OTHER HAND, IT SAYS THAT THE ASSOCIATE ENTERPRISES IS RUNNING PLANT. HE POINTED OUT THAT BECAUSE OF CONFUSION, THE ISSUE WAS DECIDED AGAINST THE ASSESSEE. ITA NO.411/PUN/2014 DOVER INDIA PVT. LTD. 10 8. THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE ON THE OTHER HAND, POINTED OUT THAT THE CASE OF TPO WAS THAT UNDERUTILIZATION OF CAPACITY HAS TO BE SUPPORTED BY ASSOCIATE ENTERPRISES. HE FURTHER STATED THAT WHERE ARM'S LENGTH PRICE HAS TO BE DETERMINED, THEN COMPLETE FAR ANALYSIS HAS TO BE CONSIDERED. SINCE THE ASSESSEE HAS NOT PROVIDED COMPLETE DETAILS AND THERE IS NO AGREEMENT BETWEEN THE PARTIES, SO THERE IS NO FAR ANALYSIS PROVIDED BY THE ASSESSEE. REFERRING TO THE APPROACH OF ASSESSEE BY APPLYING TNMM METHOD UNDER WHICH, COMPARABLES HAVE BEEN SELECTED, THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE REFERRED TO THE TABULATED CHART IN THIS REGARD AND POINTED OUT THAT COST WAS NOT HIGHER WHEN COMPARED TO THE COMPARABLES AND HENCE, THERE IS NO MERIT IN ALLOWANCE OF ANY CAPACITY UNDERUTILIZATION. 9. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE IN REJOINDER POINTED OUT THAT THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE CONTENDS THAT COMPLETE FAR ANALYSIS WAS NOT GIVEN. HE STRESSED THAT THE ASSESSEE HAD BENCHMARKED ITS INTERNATIONAL TRANSACTIONS IN THE TP STUDY AND HAD GIVEN TOTAL DETAILS. HE FURTHER POINTED OUT THAT EVEN UNDER OECD GUIDELINES, THE TRANSFER PRICING PROVISIONS CANNOT BE USED FOR TRANSFERRING THE LOSSES OR FOR TRUST / THRUST OF SUPPORT. HE ALSO REFERRED TO PAGE 10 OF PAPER BOOK, WHERE THE TOTAL TURNOVER OF FIVE UNITS WAS GIVEN WHICH HAVE BEEN APPLIED BY THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE IN ITS CHART AS AGAINST THE TURNOVER OF MANUFACTURING UNITS AT RS.1 CRORE IN ORDER TO WORK OUT ADJUSTMENT, IF ANY, IN THE HANDS OF ASSESSEE. 10. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. THE ISSUE RAISED BY WAY OF GROUND OF APPEAL NO.2 IS IN RELATION TO THE APPLICATION OF TRANSFER PRICING PROVISIONS TO THE MANUFACTURING DIVISION OF THE ASSESSEE, ITA NO.411/PUN/2014 DOVER INDIA PVT. LTD. 11 WHEREIN THE ASSESSEE WAS MANUFACTURING SPECIALIZED HIGH PRECISION PRODUCTS. THE MANUFACTURING UNIT WAS ESTABLISHED IN THE ASSESSMENT YEAR 2008-09 AND OPERATED FOR THREE MONTHS. THE TOTAL SALES OF THE GOODS MANUFACTURED WERE FOR DOMESTIC MARKET, EXCEPT TO THE EXTENT OF 10%. HOWEVER, SOURCING FOR THE MANUFACTURING WAS FROM THE ASSOCIATE ENTERPRISES. THE ASSESSEE WAS 100% CAPTIVE SERVICE PROVIDER TO ITS ASSOCIATE ENTERPRISES. DURING THE YEAR UNDER CONSIDERATION, IN THE MANUFACTURING UNIT, THE ASSESSEE HAD UNADJUSTED MARGINS OF OP/SALES AT (-) 68.59%. WHILE BENCHMARKING ITS INTERNATIONAL TRANSACTIONS BY USING TNMM METHOD AS MOST APPROPRIATE METHOD, THE ASSESSEE IN THE TP STUDY REPORT WORKED OUT THE ADJUSTMENT ON ACCOUNT OF CAPACITY UNDER-UTILIZATION AT RS.1,61,09,646/-. SIMILAR ADJUSTMENT OF UNDER-UTILIZATION OF CAPACITY WAS CARVED OUT AND ALLOWED TO THE ASSESSEE BY THE ASSESSING OFFICER IN THE PRECEDING YEAR. SINCE THIS WAS THE FIRST COMPLETE YEAR OF OPERATION AND THE MANUFACTURING UNIT WAS IN THE NASCENT STAGE, THE ASSESSEE INCURRED LOSSES AND ASKED FOR AFORESAID ADJUSTMENTS. DURING THE SUCCEEDING YEAR I.E. ASSESSMENT YEAR 2010-11, THERE WERE ALSO LOSSES. THE TPO NOTED THAT IN THE SUCCEEDING YEAR, THE ASSOCIATE ENTERPRISES HAD GIVEN COMPENSATION TO THE ASSESSEE FOR UNDER-UTILIZATION. THE TPO WAS OF THE VIEW THAT SIMILAR ADJUSTMENT SHOULD HAVE BEEN ALLOWED BY THE ASSOCIATE ENTERPRISES FOR THE YEAR UNDER CONSIDERATION ALSO. REJECTING THE PLEA OF ASSESSEE TO ALLOW CAPACITY UNDER-UTILIZATION ADJUSTMENT, THE TPO WAS OF THE VIEW THAT ON USING EXTENDED CUP METHOD FOR VALUATION OF SUPPORT PAYMENTS, THE ASSESSEE SHOULD HAVE RECEIVED SUM OF RS.1,65,23,053/- ON ACCOUNT OF SUPPORT PAYMENTS TOWARDS MARKETING EXPENSES AND INITIAL START-UP OVERHEAD CHARGES. HENCE, TP ADJUSTMENT ON ACCOUNT OF NON-RECEIPT OF SAID SUPPORT PAYMENTS TOWARDS MARKETING EXPENSES AND INITIAL START-UP OVERHEAD CHARGES AT RS.1.65 CRORES WAS MADE IN THE HANDS OF ASSESSEE. THERE ARE TWO ISSUES ARISING IN THE PRESENT GROUND OF APPEAL AS TO ITA NO.411/PUN/2014 DOVER INDIA PVT. LTD. 12 WHETHER THE ASSESSEE IS ENTITLED TO THE ADJUSTMENT FOR CAPACITY UNDER-UTILIZATION AND IN THE ALTERNATE, WHETHER TP ADJUSTMENT COULD BE MADE ON ACCOUNT OF NON- RECEIPT OF SUPPORT PAYMENTS FROM THE ASSOCIATE ENTERPRISES I.E. ADJUSTMENT MADE ON ACCOUNT OF AN ARRANGEMENT WHICH DOES NOT EXIST. 11. FIRST, TAKING UP THE ALTERNATE BASIS FOR MAKING THE ADJUSTMENT BY THE TPO, REFERENCE IS MADE TO THE PROVISIONS OF SECTION 92B OF THE ACT, WHICH DEFINES INTERNATIONAL TRANSACTION. AS PER SECTION 92B(1) OF THE ACT, INTERNATIONAL TRANSACTION MEANS A TRANSACTION BETWEEN TWO OR MORE ASSOCIATE ENTERPRISES, EITHER OR BOTH OF WHOM ARE NON-RESIDENT, IN THE NATURE OF PURCHASE, SALE OR LEASE OR TANGIBLE OR INTANGIBLE PROPERTY OR PROVISION OF SERVICES OR LENDING OR BORROWING MONEY OR ANY OTHER TRANSACTIONS HAVING THE BEARING ON PROFITS, INCOME, LOSSES OR ASSETS OF SUCH ENTERPRISE. FURTHER, IT SHALL ALSO INCLUDE MUTUAL AGREEMENT OR AN ARRANGEMENT BETWEEN TWO OR MORE ASSOCIATE ENTERPRISES FOR THE ALLOCATION OR APPORTIONMENT OR ANY OTHER CONTRIBUTION TO, ANY COST OR EXPENSE INCURRED OR TO BE INCURRED IN CONNECTION WITH THE BENEFIT, SERVICE OR FACILITY PROVIDED OR TO BE PROVIDED TO ANY ONE OR MORE OF SUCH ENTERPRISES. IN OTHER WORDS, THE TERM INTERNATIONAL TRANSACTION INCLUDES AN EXISTING UNDERSTANDING OR CONTRACT BETWEEN TWO OR MORE PERSONS WHO ARE ASSOCIATE ENTERPRISES. SUB-SECTION (2) TO SECTION 92B OF THE ACT TALKS OF TRANSACTION ENTERED INTO BY AN ENTERPRISE WITH A PERSON OTHER THAN ASSOCIATE ENTERPRISES, WHICH WOULD BE DEEMED TO BE AN INTERNATIONAL TRANSACTION ENTERED INTO BETWEEN TWO ASSOCIATE ENTERPRISES, IF THERE EXISTED PRIOR AGREEMENT IN RELATION TO RELEVANT TRANSACTIONS, ETC. EXPLANATION UNDER SECTION 92B OF THE ACT CLARIFIES THAT THE EXPRESSION INTERNATIONAL TRANSACTION WOULD INCLUDE VARIOUS TRANSACTION OF PURCHASE, SALE, TRANSFER OR LEASE OF TANGIBLE OR INTANGIBLE PROPERTY, CAPITAL FINANCING, BORROWING, LENDING, ETC. AND PROVISION OF SERVICES ITA NO.411/PUN/2014 DOVER INDIA PVT. LTD. 13 INCLUDING DIFFERENT TYPES OF SERVICES; AND TRANSACTION OF BUSINESS RESTRUCTURING OR REORGANIZATION, ETC. IN OTHER WORDS, SECTION 92B OF THE ACT COVERS SUCH TRANSACTIONS WHICH ACTUALLY EXIST BETWEEN TWO ASSOCIATE ENTERPRISES. NONE OF THE LIMBS OF SECTION 92B OF THE ACT OR EXPLANATION DEFINING THE EXPRESSION INTERNATIONAL TRANSACTION TALKS OF ANY HYPOTHETICAL TRANSACTION AND IN THE ABSENCE OF THE SAME, TPO CANNOT PRE-SUPPOSE AN INTERNATIONAL TRANSACTION BETWEEN THE ASSESSEE AND ITS ASSOCIATE ENTERPRISES AND THE DETERMINATION OF TP ADJUSTMENT ON ACCOUNT THEREOF. ADMITTEDLY, DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE HAD NOT RECEIVED ANY SUPPORT PAYMENTS TOWARDS ITS MARKETING EXPENSES OR THE INITIAL START-UP OVERHEAD CHARGES. THERE WAS NO AGREEMENT BETWEEN THE PARTIES TO PAY ANY SUCH SUPPORT PAYMENTS OR TO RECEIVE THE SAME. IN THE ABSENCE OF THE SAME, ADDITION MADE ON THE BASIS OF NON- EXISTING AGREEMENT, BY THE TPO, DOES NOT STAND. THE TPO HAD PRE-SUPPOSED THE SAID TRANSACTION SINCE SUCH SUPPORT PAYMENT WAS PROVIDED BY THE ASSOCIATE ENTERPRISES TO THE ASSESSEE IN THE SUCCEEDING YEAR. HOWEVER, IN THE INSTANT ASSESSMENT YEAR, NO SUCH SUPPORT PAYMENT WAS PROVIDED BY THE ASSOCIATE ENTERPRISES TO THE ASSESSEE. ACCORDINGLY, WE HOLD THAT THERE IS NO MERIT IN THE ORDER OF TPO IN MAKING TP ADJUSTMENT ON ACCOUNT OF NON-RECEIPT OF SUPPORT PAYMENT AT RS.1.65 CRORES. 12. THE HONBLE HIGH COURT OF DELHI IN MARUTI SUZUKI INDIA LTD. & ANR. VS. CIT & ANR. (2015) 129 DTR 25 (DEL) HELD THAT IN THE ABSENCE OF REVENUE DEMONSTRATING EXISTENCE OF INTERNATIONAL TRANSACTION, ONLY ON ACCOUNT OF QUANTUM OF AMP EXPENDITURE BY A CONCERN, COULD NOT PRE-SUPPOSE THE EXISTENCE OF INTERNATIONAL TRANSACTIONS. THE HONBLE HIGH COURT OF DELHI FURTHER HELD THAT THERE WAS NO CORRESPONDING MACHINERY PROVISION IN CHAPTER X THAT ENABLE THE ASSESSING OFFICER TO DETERMINE WHAT SHOULD BE FAIR COMPENSATION ITA NO.411/PUN/2014 DOVER INDIA PVT. LTD. 14 AND INDIAN ENTITY WOULD BE ENTITLED TO IF IT WAS FOUND THAT THERE WAS AN INTERNATIONAL TRANSACTION IN THAT REGARD. APPLYING THE PRINCIPLE LAID DOWN BY THE HONBLE SUPREME COURT IN CIT VS. B.C. SRINIVASA SETTY (1979) 128 ITR 294 (SC) AND PNB FINANCE LTD. VS. CIT (2008) 307 ITR 75 (SC), IN THE ABSENCE OF ANY MACHINERY PROVISION, BRINGING IMAGINED INTERNATIONAL TRANSACTION TO TAX WAS FRAUGHT WITH DANGER OF INVALIDATION. THE HONBLE HIGH COURT DELHI HELD THAT IN ASSESSEES CASE, IN THE ABSENCE OF THERE BEING INTERNATIONAL TRANSACTION INVOLVING AMP SPEND WITH ASCERTAINABLE PRICE, NEITHER SUBSTANTIVE NOR MACHINERY PROVISIONS OF CHAPTER X CANNOT BE APPLICABLE TO TRANSFER PRICING ADJUSTMENT EXERCISE. THE QUESTION OF TPO MAKING ANY TRANSFER PRICING ADJUSTMENT IN RESPECT OF TRANSACTION UNDER CHAPTER X DID NOT ARISE. THE HONBLE HIGH COURT HELD AS UNDER:- 75. THERE IS NO CORRESPONDING 'MACHINERY PROVISION IN CHAPTER X WHICH ENABLES AN AO TO DETERMINE WHAT SHOULD BE THE FAIR 'COMPENSATION' AN INDIAN ENTITY WOULD BE ENTITLED TO IF IT IS FOUND THAT THERE IS AN INTERNATIONAL TRANSACTION IN THAT REGARD. IN PRACTICAL TERMS, ABSENT A CLEAR STATUTORY GUIDANCE, THIS MAY ENCOUNTER FURTHER DIFFICULTIES. THE STRENGTH OF A BRAND, WHICH COULD BE PRODUCT SPECIFIC, MAY BE IMPACTED BY NUMEROUS OTHER IMPONDERABLES NOT LIMITED TO THE NATURE OF THE INDUSTRY, THE GEOGRAPHICAL PECULIARITIES, ECONOMIC TRENDS BOTH INTERNATIONAL AND DOMESTIC, THE CONSUMPTION PATTERNS, MARKET BEHAVIOUR AND SO ON. A SIMPLISTIC APPROACH USING ONE OF THE MODES SIMILAR TO THE ONES CONTEMPLATED BY SECTION 92C MAY NOT ONLY BE LEGALLY IMPERMISSIBLE BUT WILL LEND ITSELF TO ARBITRARINESS. WHAT IS THEN NEEDED IS A CLEAR STATUTORY SCHEME ENCAPSULATING THE LEGISLATIVE POLICY AND MANDATE WHICH PROVIDES THE NECESSARY CHECKS AGAINST ARBITRARINESS WHILE AT THE SAME TIME ADDRESSING THE APPREHENSION OF TAX AVOIDANCE. 13. THE HONBLE HIGH COURT OF DELHI IN CIT VS. WHIRLPOOL OF INDIA LTD. (2016) 129 DTR 169 (DEL) HAS HELD THAT REVENUE WAS UNABLE TO DEMONSTRATE ANY TANGIBLE MATERIAL TO EFFECT THAT THERE WAS INTERNATIONAL TRANSACTION INVOLVING AMP EXPENSES BETWEEN ASSESSEE AND ITS ASSOCIATE ENTERPRISES. IN THE ABSENCE OF FIRST STEP, QUESTION OF DETERMINING THE ALP OF SUCH TRANSACTION COULD NOT ARISE. IN ABSENCE OF MACHINERY PROVISION IT WOULD BE HAZARDOUS FOR ANY TPO TO PROCEED TO DETERMINE ALP OF SUCH TRANSACTION SINCE BLT HAD BEEN NEGATIVED ITA NO.411/PUN/2014 DOVER INDIA PVT. LTD. 15 BY COURT AS VALID METHOD OF DETERMINING EXISTENCE OF INTERNATIONAL TRANSACTION AND THEREAFTER ITS ALP. FOLLOWING THE SAID PRECEDENT, WE DELETE THE ADDITION MADE OF RS.1.65 CRORES ON ACCOUNT OF TP ADJUSTMENT. FURTHER, WE ALSO HOLD THAT THERE IS NO MERIT IN THE ORDER OF TPO IN SUPPOSING A TRANSACTION WHICH DOES NOT EXIST AND IN ANY CASE, IF THERE IS A PRESUMPTION OF SUPPORT PAYMENTS FROM THE ASSOCIATE ENTERPRISES TO ASSESSEE, IT DOES NOT GET COVERED BY THE DEFINITION OF INTERNATIONAL TRANSACTION AND ACCORDINGLY, IT IS BEYOND THE SCOPE OF THE TPO TO MAKE ANY ADJUSTMENT IN THIS REGARD. 14. NOW, COMING TO THE SECOND LIMB OF SAID ADDITION, UNDOUBTEDLY, THE UNIT OF ASSESSEE WAS A CAPTIVE SERVICE PROVIDER BUT IT WAS IN THE INITIAL STAGE OF SETTING UP OF ITS MANUFACTURING UNIT AND HAD SUFFERED LOSSES. IN THE FIRST YEAR, WHEN IT OPERATED ONLY FOR THREE MONTHS, THE ASSESSEE ASKED FOR ADJUSTMENT ON ACCOUNT OF CAPACITY UNDER-UTILIZATION AND THE SAME WAS ALLOWED BY THE ASSESSING OFFICER/TPO WHILE APPLYING THE TNMM METHOD, AS APPLIED BY THE ASSESSEE. HOWEVER, SIMILAR EXERCISE CARRIED OUT BY THE ASSESSEE DURING THE YEAR UNDER CONSIDERATION I.E. AFTER SELECTING THE TNMM METHOD AS THE MOST APPROPRIATE METHOD, THE ASSESSEE HAD MADE ADJUSTMENT ON ACCOUNT OF CAPACITY UNDER- UTILIZATION, WHILE BENCHMARKING ITS INTERNATIONAL TRANSACTION VIS--VIS THE MARGINS EARNED BY THE COMPARABLES, WHICH WAS REJECTED BY THE TPO. WE FIND MERIT IN THE CLAIM OF ASSESSEE AS THIS WAS THE FIRST COMPLETE YEAR OF OPERATION. ACCORDINGLY, THE ASSESSEE IS ENTITLED TO THE ADJUSTMENT ON ACCOUNT OF CAPACITY UNDER-UTILIZATION. THE PUNE BENCH OF TRIBUNAL IN TASTY BITE EATABLES LTD. (2015) 59 TAXMANN.COM 437 (PUNE-TRIB) HAS ALREADY ALLOWED SIMILAR ADJUSTMENT AND ACCORDINGLY, WE HOLD THAT THE SAME IS TO BE ALLOWED IN THE HANDS OF ASSESSEE. ACCORDINGLY, WE DELETE THE PROPOSED ADDITION ON ACCOUNT OF NON-ALLOWABLE ADJUSTMENT FOR CAPACITY UNDER-UTILIZATION AT RS.1.44 CRORES. ITA NO.411/PUN/2014 DOVER INDIA PVT. LTD. 16 WE ALSO DELETE THE TP ADJUSTMENT MADE ON ACCOUNT OF NON-RECEIPT OF SUPPORT PAYMENTS AT RS.1.65 CRORES. 15. BEFORE PARTING, WE MAY ALSO MENTION THAT THE TPO HAS LIMITED POWER TO EXERCISE I.E. DETERMINATION OF ARM'S LENGTH PRICE OF SUCH INTERNATIONAL TRANSACTIONS WHICH ARE REFERRED UNDER SECTION 92C OF THE ACT BY THE ASSESSING OFFICER. THE PERUSAL OF PARA 4 OF THE TPOS ORDER SHOWS THE INTERNATIONAL TRANSACTIONS WHICH WERE REFERRED BY THE ASSESSING OFFICER TO THE TPO UNDER SECTION 92C OF THE ACT AND THE ABOVE SAID TRANSACTIONS OF SUPPORT PAYMENTS IS NOT PART OF REFERENCE. THE GROUND OF APPEAL NO.2.1 IS THUS, ALLOWED. 16. THE ISSUE IN GROUND OF APPEAL NO.2.2 RAISED BY THE ASSESSEE IS AGAINST THE TP ADJUSTMENT UNDER MARKET SUPPORT SERVICES AT RS.69,71,612/-. THE ASSESSEE HAD PROVIDED MARKETING SUPPORT SERVICES TO ITS VARIOUS GROUPS IN FAVOUR OF OPW-FC DIVISION AND CORPORATE DIVISION. THE ASSESSEE HAD SELECTED TNMM METHOD AS THE MOST APPROPRIATE METHOD TO BENCHMARK THE INTERNATIONAL TRANSACTION RELATING TO RENDERING OF SOFTWARE DEVELOPMENT SERVICES. THE PLI WAS ADOPTED AT OPERATING PROFITS / OPERATING COST. THE ASSESSEE HAD IDENTIFIED COMPARABLE COMPANIES ON THE BASIS OF FAR ANALYSIS AND HAD SELECTED FOUR CONCERNS AS COMPARABLE. THE TPO PROPOSED FRESH CONCERNS AS COMPARABLE AND ISSUED SHOW CAUSE NOTICE TO THE ASSESSEE IN VIEW THEREOF. THE ASSESSEE OBJECTED TO THE INCLUSION OF SAID NEW CONCERNS WHICH WAS NOT ACCEPTED BY THE TPO. THE TPO IN THE FINAL ANALYSIS REJECTED ALL THE CONCERNS WHICH WERE INITIALLY SELECTED BY THE ASSESSEE AND ADOPTED THE MARGINS OF FOLLOWING CONCERNS TO BENCHMARK THE INTERNATIONAL TRANSACTION OF THE ASSESSEE:- 1. TSR DARASHAW LTD. (TATA SHARE REGISTRY LTD.) 2. AGRIMA INTERNATIONAL 3. PRIYA INTERNATIONAL ITA NO.411/PUN/2014 DOVER INDIA PVT. LTD. 17 17. THE TPO ALSO NOTED THAT THE SAID CONCERNS WERE CONFIRMED BY THE DISPUTE RESOLUTION PANEL (IN SHORT THE DRP) IN ASSESSEES OWN CASE AS COMPARABLE RELATING TO ASSESSMENT YEAR 2008-09. THE TPO HOWEVER, ALLOWED THE WORKING CAPITAL ADJUSTMENT AND MADE TP ADJUSTMENT ON ACCOUNT OF INTERNATIONAL TRANSACTIONS RELATING TO MARKETING SUPPORT SERVICES AT RS.69,71,612/-. THE DRP UPHELD THE ORDER OF TPO AND CONSEQUENTLY, THE ASSESSING OFFICER MADE AN ADJUSTMENT WHILE PASSING THE ORDER UNDER SECTION 143(3) R.W.S. 144C(13) OF THE ACT. 18. THE ASSESSEE IS IN APPEAL AGAINST THE AFORESAID ORDER OF ASSESSING OFFICER. 19. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT THE TPO IN PARAS 32 AND 33 REFERS TO THE ORDER OF TPO IN EARLIER YEAR AND TALK OF COMPARABLES APPLIED IN THE PAST YEAR. HOWEVER, THIS YEAR, THE TPO MAKES SELECTIVE APPLICATION, WHEREIN LOSS MAKING CONCERNS WERE REMOVED AND ONLY THREE CONCERNS WERE PICKED UP AS COMPARABLE BY THE TPO. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT ONE CONCERN I.E. AGRIMA CONSULTANCY INTERNATIONAL LTD. WAS KNOWLEDGE BASED CONSULTANCY CONCERN AND THE SAID CONCERN WAS NOT FUNCTIONALLY COMPARABLE TO THE ASSESSEE WHICH WAS ENGAGED IN PROVIDING MARKETING SUPPORT SERVICES TO ITS ASSOCIATE ENTERPRISES. HE STRESSED THAT AGRIMA CONSULTANCY INTERNATIONAL LTD. IS TO BE REMOVED FROM FINAL LIST OF COMPARABLES. HE FURTHER POINTED OUT THAT EITHER THE MARGINS OF ALL THE CONCERNS WHICH WERE APPLIED IN EARLIER YEAR WHETHER LOSS MAKING OR PROFIT MAKING SHOULD BE APPLIED, THEN THE MEAN MARGINS OF THE COMPARABLES WOULD WORK OUT (-) 2.98% ON WHICH WORKING CAPITAL ADJUSTMENT IS TO BE APPLIED. IN THE ALTERNATE, HE POINTED OUT THAT ALL THE CONCERNS WHICH WERE ITA NO.411/PUN/2014 DOVER INDIA PVT. LTD. 18 PROFIT MAKING I.E. NATIONAL SMALL INDUSTRIES CORPORATION LTD. IS ALSO TO BE INCLUDED IN THE FINAL LIST OF COMPARABLES ALONG WITH TSR DARASHAW LTD. AND PRIYA INTERNATIONAL LTD. HE POINTED OUT THAT THE AVERAGE MARGINS OF SAID CONCERNS WOULD BE 11.22% AND AFTER ALLOWING WORKING CAPITAL ADJUSTMENT, IT WOULD WORK OUT AT 2%. 20. THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE PLACED RELIANCE ON THE ORDER OF ASSESSING OFFICER / TPO. 21. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. THE ISSUE WHICH ARISES VIDE GROUND OF APPEAL NO.2.2 IS IN RESPECT OF ADJUSTMENT MADE TO THE MARKETING SUPPORT SERVICES DIVISION. THE ASSESSEE WAS PROVIDING THE SAID SERVICES TO ITS ASSOCIATE ENTERPRISES AND IN ORDER TO BENCHMARK THE INTERNATIONAL TRANSACTION, TNMM METHOD WAS SELECTED AS THE MOST APPROPRIATE METHOD. THE CONCERNS SELECTED BY THE ASSESSEE WERE REJECTED AND THE TPO WAS OF THE VIEW THAT SIMILAR TRANSACTIONS HAVING BEEN UNDERTAKEN IN THE PRECEDING YEAR, THE MARGINS OF COMPARABLES PICKED UP IN THE PRECEDING YEAR SHOULD BE APPLIED. THOUGH, HE TALKS OF THE CONCERNS WHICH WERE FINALLY SELECTED IN ASSESSMENT YEAR 2008-09 BUT WHILE MAKING THE ANALYSIS FOR THE YEAR UNDER CONSIDERATION, HE SELECTS ONLY THREE CONCERNS WHICH WERE PROFIT MAKING AND REJECTS THE MARGINS OF OTHER CONCERNS WHICH WERE SELECTED AND APPLIED IN ASSESSMENT YEAR 2008-09. WE AGREE WITH THE CONTENTION OF ASSESSEE THAT THE APPROACH OF TPO SHOULD BE CONSISTENT, IN CASE, HE WANTS TO APPLY THE MARGINS OF CONCERNS SELECTED IN THE PRECEDING YEAR AS COMPARABLE, THEN SUCH CONCERNS SHOULD BE PICKED UP AND THEIR MARGINS BY APPLIED. THIS SELECTIVE APPROACH OF THE TPO IS NOT CORRECT APPROACH. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE HAS FAIRLY MADE ALTERNATE PLEA BEFORE US THAT EITHER THE MARGINS OF ALL THE CONCERNS EXCEPT ITA NO.411/PUN/2014 DOVER INDIA PVT. LTD. 19 AGRIMA INTERNATIONAL SHOULD BE APPLIED TO BENCHMARK THE INTERNATIONAL TRANSACTIONS OF THE ASSESSEE OR AT BEST, THE MARGINS OF THREE CONCERNS WHICH ARE SHOWING PROFITS SHOULD BE APPLIED AND THE CONCERNS WHICH ARE SHOWING LOSSES SHOULD BE IGNORED. WE ARE OF THE VIEW THAT THE FOLLOWING THREE CONCERNS SHOULD BE SELECTED AS COMPARABLE TO THE ASSESSEE AND THE MARGINS SHOULD BE APPLIED AS ALL THE THREE CONCERNS HAVE SHOWN POSITIVE PROFITS, THE LOSS MAKING CONCERNS BE IGNORED FOR THE TP ANALYSIS. THE CONCERNS WHOSE MARGINS ARE TO BE APPLIED ARE AS UNDER:- A) NATIONAL SMALL INDUSTRIES CORPORATION - 1.20% B) TSR DARASHAW LTD. - 21.05% C) PRIYA INTERNATIONAL - 11.40% 22. WE FIND THAT THE CONCERN AGRIMA INTERNATIONAL CONSULTANCY LTD. WAS ALSO EXCLUDED FROM THE FINAL SET OF COMPARABLES IN ASSESSMENT YEAR 2008-09 IN ASSESSEES OWN CASE IN ITA NO.408/PN/2013, VIDE ORDER DATED 27.05.2015. ACCORDINGLY, AGRIMA INTERNATIONAL CONSULTANCY LTD. IS TO BE EXCLUDED. AFTER ALLOWING WORKING CAPITAL ADJUSTMENT @ 10% BPLR, THE ASSESSING OFFICER IS DIRECTED TO RE-COMPUTE THE MEAN MARGINS OF COMPARABLES. AS PER THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE, IN CASE THIS PLEA OF THE ASSESSEE IS ALLOWED, NO FURTHER TP ADJUSTMENT IS TO BE MADE IN THE HANDS OF ASSESSEE. ACCORDINGLY, WE ALLOW THE CLAIM OF ASSESSEE. THUS, THE GROUND OF APPEAL NO.2.2 IS ALLOWED. 23. NOW, COMING TO THE ISSUE RAISED VIDE GROUND OF APPEAL NO.2.3, WHEREIN THE TP ADJUSTMENT WAS MADE IN DESIGN ENGINEERING SERVICES AT RS.23,74,178/- THE LIMITED ISSUE WHICH ARISES VIDE PRESENT GROUND OF APPEAL IS IN CONNECTION WITH THE TRANSFER PRICING ADJUSTMENT MADE IN THE DESIGN ENGINEERING SERVICES DIVISION, WHEREIN THE ASSESSEE HAD PROVIDED THE SAID SERVICES IN RELATION TO ITA NO.411/PUN/2014 DOVER INDIA PVT. LTD. 20 DESIGNING OF PRODUCTS MANUFACTURED BY THE RESPECTIVE ASSOCIATE ENTERPRISE COMPANIES. THESE WERE PROVIDED PURSUANT TO DESIGN ENGINEERING SERVICES AGREEMENT ENTERED INTO WITH THE RESPECTIVE ASSOCIATE ENTERPRISES. THE ASSESSEE HAD APPLIED TNMM METHOD TO BENCHMARK ITS INTERNATIONAL TRANSACTIONS AND THE PLI APPLIED WAS OP/OC WHICH WORKED OUT TO 10% FOR THE YEAR UNDER CONSIDERATION. THE GRIEVANCE OF THE ASSESSEE IS AGAINST SELECTION OF THE CONCERNS BY THE TPO. THE FIRST OBJECTION IS TO THE SELECTION OF ROLTA INDIA LTD. ON THE PREMISE THAT IT HAD DIFFERENT YEAR ENDING. THE SAID CONCERN WAS ALSO SELECTED AND APPLIED BY THE TPO IN ASSESSMENT YEAR 2008-09 BUT THE TRIBUNAL (SUPRA) HAD CONSIDERED THAT THE YEAR ENDING OF ROLTA INDIA LTD. WAS 30.06.2007 AS AGAINST ASSESSEES YEAR ENDING WAS 31.03.2008 AND HENCE, HELD THAT THE DATA OF THE SAID CONCERN COULD NOT BE APPLIED BECAUSE OF DIFFERENT ACCOUNTING PERIODS. 24. THE HONBLE BOMBAY HIGH COURT IN CIT VS. PTC SOFTWARE (I) PVT. LTD. IN INCOME TAX APPEAL NO.732/2014 VIDE JUDGMENT DATED 26.09.2016 HAVE HELD THAT WHERE THE CONCERN HAS DIFFERENT ACCOUNTING PERIOD, THEN THE SAME CANNOT BE COMPARED AS COMPARABLE. THE HONBLE BOMBAY HIGH COURT HELD THAT AS PER PROVISIONS OF SECTION 10B(4) OF THE INCOME TAX RULES, 1962 CLEARLY MANDATES THAT THE DATA TO BE USED FOR COMPARABILITY ANALYSIS SHOULD BE OF THE SAME FINANCIAL YEAR IN WHICH THE INTERNATIONAL TRANSACTIONS WERE ENTERED INTO BY THE TESTED PARTY. IN VIEW THEREOF, IT HELD THAT WHERE A CONCERN HAS DIFFERENT ACCOUNTING PERIOD, THEN THE MARGINS OF SAID CONCERNS ARE NOT COMPARABLE. FOLLOWING THE SAME PARITY OF REASONING, WE HOLD THAT ROLTA INDIA LTD. HAVING DIFFERENT YEAR CLOSING THAN THE ASSESSEE BEFORE US CANNOT BE SELECTED AS COMPARABLE AND CONSEQUENTLY, DIRECT THE ASSESSING OFFICER TO EXCLUDE THE MARGINS OF THE SAID CONCERN FROM THE MEAN MARGINS OF COMPARABLES. ITA NO.411/PUN/2014 DOVER INDIA PVT. LTD. 21 25. ANOTHER ISSUE WHICH HAS BEEN RAISED BY THE ASSESSEE WITH REGARD TO DESIGN ENGINEERING SERVICES DIVISION IS THAT WHILE SELECTING THE KLG SYSTEL LTD., THE TPO HAS ERRED IN NOT APPLYING THE SEGMENTAL PROFITS OF THE SAID CONCERN WHILE BENCHMARKING THE INTERNATIONAL TRANSACTIONS. WE FIND MERIT IN THE PLEA OF THE ASSESSEE THAT THE MARGINS OF THE SAID CONCERNS WHICH ARE FUNCTIONALLY COMPARABLE ARE TO BE SELECTED AND APPLIED AND IN CASE ANY CONCERN IS ENGAGED IN VARIOUS ACTIVITIES, THEN THE SEGMENTAL DETAILS OF THE ACTIVITY, WHICH IS FUNCTIONALLY COMPARABLE TO THE ASSESSEE ARE TO BE APPLIED IN ORDER TO WORK OUT THE MARGINS OF THE SAID CONCERN. ACCORDINGLY, WE HOLD SO AND DIRECT THE ASSESSING OFFICER TO RE-COMPUTE THE MARGINS OF KLG SYSTEL LTD. THE GROUND OF APPEAL NO.2.3 IS THUS, ALLOWED. 26. NOW, COMING TO THE GROUNDS OF APPEAL NO.3.1 AND 3.2 RAISED BY THE ASSESSEE, UNDER WHICH THE ASSESSEE IS AGGRIEVED BY THE CURTAILMENT OF DISALLOWANCE UNDER SECTION 10A OF THE ACT ON THE PORTION OF EXPORT PROCEEDS RECEIVED IN INDIAN RUPEES. THE ASSESSING OFFICER DURING THE COURSE OF ASSESSMENT PROCEEDINGS ON THE PERUSAL OF FORM NO.56F AT POINT 16(1) NOTED THAT THE FULL CONSIDERATION IN CONVERTIBLE FOREIGN EXCHANGE FOR EXPORTS MADE BY THE UNDERTAKING WAS BROUGHT INTO INDIA WITHIN PERIOD OF SIX MONTHS FROM THE END OF PREVIOUS YEAR AND THE AMOUNT INCLUDED OF RS.1,64,54,148/- RECEIVED IN INDIAN RUPEES FOR EXPORT OF SOFTWARE FROM A COMPANY OUTSIDE INDIA. THE ASSESSEE WAS ASKED TO EXPLAIN HOW THE AMOUNT RECEIVED IN INDIAN RUPEES WAS ELIGIBLE UNDER SECTION 10A OF THE ACT. THE ASSESSEE FILED COMPREHENSIVE REPLY IN THIS REGARD AND POINTED OUT THAT IT HAD RAISED FOUR BILLS ON DEK INTERNATIONAL GMBH IN INDIAN RUPEES AMOUNTING TO RS.93,79,042/-. THE PHOTO COPIES OF THE SAID BILLS ALONG WITH FIRC WERE FILED. THE PAYMENT WAS RECEIVED IN INDIAN RUPEES ITA NO.411/PUN/2014 DOVER INDIA PVT. LTD. 22 AGAINST THE SAID BILLS. THE OTHER BILLS WERE RAISED IN FOREIGN EXCHANGE AND THE AMOUNT WAS ALSO SO RECEIVED. THE CLAIM OF ASSESSEE WAS THAT THE AMOUNT MENTIONED AT RS.1,64,54,148/- WAS INCORRECT AND THE SAME SHOULD BE CONSIDERED AT RS.93,79,042/-. THE ASSESSEE HAD ALSO TABULATED DATE-WISE EXPORT BILLINGS MADE TO THE SAID PARTY THOUGH THE INVOICE AMOUNT IN INDIAN RUPEES OR USD FOREIGN EXCHANGE, ALONG WITH DATE OF RECEIPT OF THE SAID PAYMENTS, WHICH ARE TABULATED AT PAGES 2 AND 3 OF THE ASSESSMENT ORDER. THE ASSESSEE FURTHER EXPLAINED THAT AS PER PROVISIONS OF SECTION 10A OF THE ACT, THE AMOUNT SHOULD BE RECEIVED IN CONVERTIBLE FOREIGN EXCHANGE. HE FURTHER REFERRED TO THE DEFINITION OF CONVERTIBLE FOREIGN EXCHANGE UNDER THE INCOME TAX ACT, WHICH MEANT FOREIGN EXCHANGE WHICH IS FOR THE TIME BEING TREATED BY THE RESERVE BANK OF INDIA AS CONVERTIBLE FOREIGN EXCHANGE FOR THE PURPOSE OF FOREIGN EXCHANGE REGULATION ACT, 1973 AND ANY RULES MADE THEREUNDER. HE POINTED OUT THAT FERA DID NOT DEFINE CONVERTIBLE FOREIGN EXCHANGE BUT DEFINED FOREIGN EXCHANGE AS FOREIGN CURRENCY AND DEPOSITS, CREDITS AND BALANCES PAYABLE IN ANY FOREIGN CURRENCY; DRAFTS, TRAVELERS CHEQUES, LETTERS OF CREDIT OR BILLS OF EXCHANGE, EXPRESSED OR DRAWN IN INDIAN CURRENCY BUT PAYABLE IN FOREIGN EXCHANGE; AND DRAFTS, TRAVELLERS CHEQUES, LETTERS OF CREDIT OR BILLS OF EXCHANGE DRAWN BY BANKS, INSTITUTIONS OR PERSONS OUTSIDE INDIA, BUT PAYABLE IN INDIAN CURRENCY. THE CONTENTION OF ASSESSEE WAS THAT EVEN THE AMOUNT RECEIVED IN INDIAN RUPEES, CAN BE CONSIDERED AS RECEIVED IN CONVERTIBLE FOREIGN EXCHANGE AND SUCH AMOUNT WAS ELIGIBLE FOR EXPORT BENEFIT. HE STRESSED THAT THE MAIN OBJECT WAS TO HAVE EXPORTS EARNING FROM OUTSIDE INDIA AND AMOUNT SHOULD BE RECEIVED IN INDIA. THE ASSESSEE ALSO FILED ON RECORD THE ALTERNATE WORKING EXPORT BENEFIT DEDUCTION UNDER SECTION 10A OF THE ACT AFTER EXCLUDING THE AMOUNT OF EXPORT PROCEEDS RECEIVED IN INDIAN RUPEES. THE ASSESSING OFFICER REJECTED THE CONTENTION OF ASSESSEE HOLDING THAT EXPORT TURNOVER UNDER SECTION ITA NO.411/PUN/2014 DOVER INDIA PVT. LTD. 23 10A OF THE ACT MEANS CONSIDERATION IN RESPECT OF EXPORT BY THE UNDERTAKING OF ARTICLE OR THINGS OR COMPUTER SOFTWARE RECEIVED IN, OR BROUGHT INTO INDIA BY THE ASSESSEE IN CONVERTIBLE FOREIGN EXCHANGE. HE WAS OF THE VIEW THAT THE AMOUNT RECEIVED IN INDIAN RUPEES COULD NOT BE SAID TO BE RECEIVED AS PER THE PROVISIONS OF SECTION 10A OF THE ACT. HE FURTHER HELD THAT IF THE PROVISIONS OF THE ACT HAVE TO BE APPLIED, IT HAD TO BE APPLIED IN TOTALITY. THE ASSESSING OFFICER DENIED THE DEDUCTION CLAIMED UNDER SECTION 10A OF THE ACT AND HELD THAT SUM OF RS.17,66,764/- WAS NOT ELIGIBLE AND WAS ADDED BACK TO THE INCOME IN THE DRAFT ASSESSMENT ORDER. THE ASSESSING OFFICER AFTER THE ORDER OF DRP, DISALLOWED RS.17,66,764/- UNDER SECTION 10A OF THE ACT. 27. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT AS PER RBI NOTIFICATION I.E. FEMA 9 AND 14, PARA 3, WHERE PAYMENT IS RECEIVED IN INDIAN RUPEES FROM THE ACCOUNT OF FOREIGN BANK, THEN THE SAME IS DEEMED TO BE FOREIGN EXCHANGE. HE POINTED OUT THAT WHERE THE SERVICES ARE PROVIDED TO A FOREIGN CONCERN AND THE PAYMENT IS RECEIVED IN INDIAN RUPEES THROUGH FOREIGN BANK, THEN THE SAME WAS HELD TO BE NOT ELIGIBLE FOR LEVY OF SERVICE TAX. RELIANCE WAS PLACED ON THE ORDERS OF CESTAT, MUMBAI BENCH IN COMMISSIONER OF SERVICE TAX VS. PMI ORGANIZATION CENTRE (P.) LTD. (2016) 65 TAXMANN.COM 7 (MUMBAI CESTAT) AND CESTAT, AHMEDABAD BENCH IN COMMISSIONER OF CENTRAL EXCISE VS. SHELPAN EXPORTS (2010) 28 STT 42 (AHD. CESTAT). FURTHER, THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE PLACED RELIANCE ON THE ORDER OF HONBLE SUPREME COURT IN J.B. BODA & CO. PVT. LTD. VS. CBDT (1997) 223 ITR 271 (SC). FURTHER, THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE ALSO PLACED RELIANCE ON THE DECISION OF HONBLE HIGH COURT OF MADRAS IN SUPRASESH GENERAL INSURANCE SERVICES & BROKERS (P.) LTD. VS. COMMISSIONER OF SERVICE TAX (2015) 62 TAXMANN.COM 364 (MADRAS), ITA NO.411/PUN/2014 DOVER INDIA PVT. LTD. 24 WHEREIN THE PAYMENTS WERE RECEIVED IN INDIAN CURRENCY AND THE AUTHORITIES WERE OF THE VIEW THAT IT WAS NOT EXPORT. THE HONBLE HIGH COURT HELD THAT WHERE THE SERVICES WERE PROVIDED TO FOREIGN COMPANY AND SERVICES WERE CONSUMED ABROAD, IT AMOUNTS TO EXPORT OF SERVICES AND THERE WAS NO CHARGE OF SERVICE TAX. 28. THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE RELYING ON THE ORDER OF ASSESSING OFFICER POINTED OUT THAT DEEMED FOREIGN EXCHANGE CONCEPT IS NOT APPLICABLE FOR CLAIM OF DEDUCTION UNDER SECTION 10A OF THE ACT. 29. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. UNDER THE PROVISIONS OF SECTION 10A OF THE ACT, DEDUCTION IS ALLOWABLE ON SUCH PROFITS AND GAINS WHICH ARE DERIVED BY AN UNDERTAKING FROM EXPORT OF ARTICLES OR THINGS OR COMPUTER SOFTWARE SERVICES. THE MAIN PROVISIONS OF SAID SECTION PROVIDES THAT IN RESPECT OF AN UNDERTAKING DERIVING PROFITS FROM EXPORT OF ARTICLES OR THINGS OR COMPUTER SOFTWARE FOR PERIOD OF TEN CONSEQUENT ASSESSMENT YEARS, IS ENTITLED TO CLAIM THE DEDUCTION UNDER SECTION 10A OF THE ACT. SO AT FIRST STEP, THE UNDERTAKING MUST MAKE EXPORTS OF THE ARTICLES OR THINGS OR COMPUTER SOFTWARE IN ORDER TO BE ELIGIBLE TO CLAIM THE DEDUCTION UNDER SECTION 10A OF THE ACT. SUB- SECTION (2) TO SECTION 10A OF THE ACT LAYS DOWN THE CONDITIONS WHICH HAVE TO BE FULFILLED FOR CLAIMING THE DEDUCTION UNDER SECTION 10A OF THE ACT. FURTHER SUB- SECTION (3) PROVIDES THAT THE SECTION APPLIES TO THE UNDERTAKING, IF THE SALE PROCEEDS OF ARTICLES OR THINGS OR COMPUTER SOFTWARE EXPORTED, WITHIN INDIA, ARE RECEIVED IN OR BROUGHT INTO INDIA BY THE ASSESSEE IN CONVERTIBLE FOREIGN EXCHANGE, WITHIN PERIOD OF SIX MONTHS FROM THE END OF THE PREVIOUS YEAR OR WITHIN SUCH FURTHER PERIOD AS THE COMPETENT AUTHORITY MAY ALLOW IN THIS BEHALF. UNDER EXPLANATION (1), IT IS FURTHER PROVIDED THAT THE COMPETENT AUTHORITY MEANS THE RESERVE BANK OF INDIA OR ANY OTHER AUTHORITY AUTHORIZED. EXPLANATION (2) ITA NO.411/PUN/2014 DOVER INDIA PVT. LTD. 25 PROVIDES THAT SALE PROCEEDS REFERRED TO IN SUB-SECTION SHALL BE DEEMED TO HAVE BEEN RECEIVED IN INDIA WHERE SUCH SALE PROCEEDS ARE CREDITED TO SEPARATE ACCOUNT MAINTAINED FOR THE PURPOSE BY THE ASSESSEE WITH ANY BANK OUTSIDE INDIA, WITH THE APPROVAL OF THE RESERVE BANK OF INDIA. EXPLANATION (2) UNDER SECTION 10A(8) OF THE ACT DEFINES CONVERTIBLE FOREIGN EXCHANGE TO MEAN FOREIGN EXCHANGE WHICH IS FOR THE TIME BEING TREATED BY THE RESERVE BANK OF INDIA AS CONVERTIBLE FOREIGN EXCHANGE FOR THE PURPOSE OF FOREIGN EXCHANGE MANAGEMENT ACT, 1999 (42) OF 1999, AND ANY RULES MADE THEREUNDER OR ANY OTHER CORRESPONDING LAW FOR THE TIME BEING IN FORCE. THE RESERVE BANK OF INDIA VIDE NOTIFICATION NO.FEMA 9/2000-RB, DATED 03.05.2000 HAD INTRODUCED THE FOREIGN EXCHANGE MANAGEMENT (REALISATION, REPATRIATION AND SURRENDER OF FOREIGN EXCHANGE) REGULATIONS, 2000 AND AS PER ARTICLE 3 OF SAID NOTIFICATION, REFERENCE IS TO THE DUTY OF PERSONS TO REALIZE FOREIGN EXCHANGE DUE. THE MANNER OF REPATRIATION IS PROVIDED IN ARTICLE (4), WHICH READS AS UNDER:- 4. MANNER OF REPATRIATION:- (1) ON REALIZATION OF FOREIGN EXCHANGE DUE, A PERSON SHALL REPATRIATE THE SAME TO INDIA, NAMELY BRING INTO, OR RECEIVE IN, INDIA AND (A) SELL IT TO AN AUTHORIZED PERSON IN INDIA IN EXCHANGE FOR RUPEES; OR (B) RETAIN OR HOLD IT IN ACCOUNT WITH AN AUTHORIZED DEALER IN INDIA TO THE EXTENT SPECIFIED BY THE RESERVE BANK; OR (C) USE IT FOR DISCHARGE OF A DEBT OR LIABILITY DENOMINATED IN FOREIGN EXCHANGE TO THE EXTENT AND IN THE MANNER SPECIFIED BY THE RESERVE BANK. (2) A PERSON SHALL BE DEEMED TO HAVE REPATRIATED THE REALIZED FOREIGN EXCHANGE TO INDIA WHEN HE RECEIVES IN INDIA PAYMENT IN RUPEES FROM THE ACCOUNT OF A BANK OR AN EXCHANGE HOUSE SITUATED IN ANY COUNTRY OUTSIDE INDIA, MAINTAINED WITH AN AUTHORIZED DEALER. 30. AS PER CLAUSE (2) TO ARTICLE 4, A PERSON SHALL BE DEEMED TO HAVE REPATRIATED THE REALIZED FOREIGN EXCHANGE TO INDIA WHEN HE RECEIVES IN INDIA PAYMENT IN RUPEES FROM THE ACCOUNT OF A BANK OR AN EXCHANGE HOUSE SITUATED ITA NO.411/PUN/2014 DOVER INDIA PVT. LTD. 26 IN ANY COUNTRY OUTSIDE INDIA, MAINTAINED WITH AN AUTHORIZED DEALER. THEN THE PERIOD FOR SURRENDER OF REALIZED FOREIGN EXCHANGE IS PROVIDED WHICH ARE NOT NECESSARY FOR ADJUDICATING THE PRESENT ISSUE. 31. THEREAFTER, THE RESERVE BANK OF INDIA HAD ISSUED NOTIFICATION NO.FEMA 14/2000-RB, DATED 03.05.2000, WHICH LAID DOWN THE REGULATIONS FOR FOREIGN EXCHANGE MANAGEMENT (MANNER OF RECEIPT AND PAYMENT) REGULATIONS, 2000. IT ALSO VIDE ARTICLE 2 PROVIDED VARIOUS DEFINITIONS AND ARTICLE 3 REFERRED TO MANNER OF RECEIPT IN FOREIGN EXCHANGE WHICH HAD GROUP OF MEMBER COUNTRIES IN THE ASIAN CLEARING UNION, AS A SEPARATE GROUP FROM ALL COUNTRIES OTHER THAN MENTIONED IN CLAUSE (1). IN RESPECT OF ALL THE OTHER COUNTRIES, IT WAS PROVIDED THAT THE MANNER OF RECEIPT OF FOREIGN EXCHANGE WOULD BE PAYMENT IN RUPEES FROM THE ACCOUNT OF BANK SITUATED IN ANY COUNTRY OTHER THAN MEMBER COUNTRY OF ASIAN CLEARING UNION OR NEPAL OR BHUTAN; PAYMENT IN ANY PERMITTED CURRENCY. THESE ARE THE GUIDELINES ISSUED BY THE RESERVE BANK OF INDIA UNDER FEMA ACT, WHEREIN IT IS PROVIDED THE MODE OF RECEIPT OF FOREIGN EXCHANGE. 32. ANOTHER ASPECT OF THE EXPORTS MADE BY ANY CONCERN IS NON-LEVY OF SERVICE TAX. THE HONBLE HIGH COURT OF MADRAS IN SUPRASESH GENERAL INSURANCE SERVICES & BROKERS (P.) LTD. VS. COMMISSIONER OF SERVICE TAX (SUPRA) WHILE DECIDING THE CASE OF ASSESSEE OBSERVED THAT WHERE THE ASSESSEE A REINSURANCE BROKER, HAD ARRANGED THE REINSURANCE FOR INDIAN INSURANCE FROM FOREIGN REINSURERS THROUGH FOREIGN BROKERS WHILE PAYING REINSURANCE PREMIUM, THE INDIAN INSURANCE DEDUCTED BROKERAGE COMMISSION PAYABLE TO THE BROKERS AND PART THEREOF WAS PAID TO THE ASSESSEE; WHETHER THE ASSESSEE WAS LIABLE TO PAY THE SERVICE TAX THEREON ON SERVICES PROVIDED TO FOREIGN COMPANY LOCATED OUTSIDE INDIA. THE CASE OF THE ASSESSEE WAS THAT IT WAS EXPORT OF SERVICE AND ITA NO.411/PUN/2014 DOVER INDIA PVT. LTD. 27 THE AMOUNT WAS RECEIVED OUT OF DEDUCTION FROM PREMIUM PAYABLE TO FOREIGN REINSURERS IN FOREIGN CURRENCY AND THE SAME AMOUNTED TO PAYMENT IN FOREIGN CURRENCY. HOWEVER, THE CASE OF THE DEPARTMENT WAS THAT SERVICES WERE PROVIDED TO INDIAN INSURANCE COMPANIES AND THE PAYMENT WAS ALSO RECEIVED IN INDIAN CURRENCY, HENCE, IT WAS NOT EXPORT AND HENCE, LIABLE TO SERVICE TAX. THE HONBLE HIGH COURT HELD THAT WHERE SERVICES WERE PROVIDED TO FOREIGN COMPANY AND SERVICES WERE SENT ABROAD, IT AMOUNTED TO EXPORT OF SERVICE AND THERE WAS NO CHARGE OF SERVICE TAX AFTER THE AMENDMENT OF THE EXPORT OF SERVICE RULES, SINCE THE RECIPIENT OF SERVICE WAS A FOREIGN COMPANY LOCATED OUTSIDE. IT ALSO AMOUNTED TO EXPORT OF SERVIE AND IT WAS HELD THAT THERE WAS NO REQUIREMENT TO RECEIVE CONSIDERATION IN FOREIGN EXCHANGE. 33. THE MUMBAI BENCH OF CESTAT IN COMMISSIONER OF SERVICE TAX VS. PMI ORGANIZATION CENTRE (P.) LTD. (SUPRA) CONSIDERING THE CASE OF ASSESSEE, WHO WAS PROVIDER OF RENT-A-CAB SERVICE AND OUTDOOR CATERING SERVICE, WHO IN TURN, CLAIMED CENVAT AGAINST THE EXPORT OF SERVICE, HELD THAT WHERE THE PAYMENT WAS RECEIVED BY THE ASSESSEE IN INDIAN RUPEES THROUGH FOREIGN BANK, WAS RECEIPT OF MONEY IN CONVERTIBLE FOREIGN EXCHANGE AND THE ASSESSEE WOULD BE ENTITLED TO REFUND OF CENVAT IN RESPECT OF SAID SERVICES. 34. IN ANOTHER DECISION, AHMEDABAD BENCH OF CESTAT IN COMMISSIONER OF CENTRAL EXCISE VS. SHELPAN EXPORTS (SUPRA) HELD THAT WHERE THE ASSESSEE EXPORTED VARIOUS GOODS ON COMMISSION BASIS AND THE CLAIM OF EXEMPTION FROM PAYMENT OF SERVICE TAX WAS DENIED BY THE REVENUE AUTHORITIES ON THE GROUND THAT THE ASSESSEE HAD NOT RECEIVED COMMISSION IN FOREIGN EXCHANGE AND HENCE, WAS NOT ELIGIBLE FOR EXEMPTION. THE TRIBUNAL HELD THAT WHERE THE PAYMENT OF COMMISSION WAS MADE IN INDIAN RUPEES AT PREVAILING USD/INR ITA NO.411/PUN/2014 DOVER INDIA PVT. LTD. 28 CONVERSION RATE AND THE SAME WAS MADE TO MINIMIZE COST RELATING TO TRANSFER CHARGES BY FOREIGN BANK, THEN IT WAS HELD THAT THE COMMISSION AMOUNT WAS RECEIVED IN FOREIGN CURRENCY AND THE ASSESSEE WAS ENTITLED TO ITS CLAIM. 35. THE HONBLE SUPREME COURT IN J.B. BODA & CO. PVT. LTD. VS. CBDT (SUPRA) WHILE DECIDING THE ISSUE OF DEDUCTION UNDER SECTION 80-O OF THE ACT, WHEREIN THE DEDUCTION WAS ALLOWABLE WHEN THE RECEIPTS WERE FROM FOREIGN ENTERPRISE IN CONVERTIBLE FOREIGN EXCHANGE, OBSERVED THAT WHERE THE ENTIRE TRANSACTION WAS EFFECTED THROUGH RBI, IN CONFORMITY WITH THE AGREEMENT BETWEEN THE ASSESSEE AND FOREIGN REINSURERS AND WHERE THE AMOUNT WAS EXPRESSED TO BE IN DOLLARS, MERELY BECAUSE THE BROKERAGE COMMISSION WAS RETAINED IN INDIAN RUPEES FOR SERVICES RENDERED OUTSIDE INDIA, THEN THE SAME WAS HELD TO BE ELIGIBLE FOR CLAIM OF DEDUCTION UNDER SECTION 80-O OF THE ACT. THE HONBLE SUPREME COURT CLEARLY HELD THAT THIS ACCORDING TO THEM, WAS RECEIPT OF INCOME IN CONVERTIBLE FOREIGN EXCHANGE AND TO INSIST ON FORMAL REMITTANCE TO THE FOREIGN REINSURERS FIRST AND THEREAFTER TO RECEIVE THE COMMISSION FROM THE FOREIGN REINSURERS, WOULD BE AN EMPTY FORMALITY AND MEANINGLESS RITUAL. THE HONBLE SUPREME COURT HELD THAT THE INCOME WAS RECEIVED IN INDIA IN CONVERTIBLE FOREIGN EXCHANGE, IN LAWFUL AND PERMISSIBLE MANNER AND HENCE, FULFILLING THE CONDITIONS OF SECTION 80-O OF THE ACT. 36. IN THE ABOVE SAID BACKGROUND, WE FIND THAT IN THE FACTS OF THE PRESENT CASE BEFORE US, WHERE THE ASSESSEE HAD ESTABLISHED AN EXPORT UNIT WHICH WAS RECOGNIZED TO BE ELIGIBLE FOR THE DEDUCTION UNDER SECTION 10A OF THE ACT AND THE EXPORTS WERE MADE BY THE ASSESSEE TO FOREIGN CONCERN. HOWEVER, THE AMOUNT DUE AGAINST FOUR OF THE BILLS RAISED BY THE ASSESSEE DURING THE YEAR WAS RECEIVED IN INDIAN RUPEES BUT FROM THE FOREIGN ENTITY THROUGH A FOREIGN BANK ITA NO.411/PUN/2014 DOVER INDIA PVT. LTD. 29 ESTABLISHES THE CASE OF ASSESSEE THAT IT HAS RECEIVED THE SAID CONSIDERATION IN FOREIGN EXCHANGE THROUGH THE FOREIGN BANK AGAINST EXPORT OF GOODS. IN OTHER WORDS, WHERE THE ASSESSEE HAD FULFILLED THE FIRST CONDITION OF EXPORTING THE GOODS TO A CONCERN OUTSIDE INDIA AND HAD ALSO RECEIVED THE MONEY FROM THE SAID CONCERN FROM OUTSIDE INDIA, MERELY BECAUSE THE AMOUNT WAS RECEIVED IN INDIAN CURRENCY, DOES NOT ESTABLISH THE CASE OF THE REVENUE THAT THE AMOUNT HAS NOT BEEN RECEIVED IN FOREIGN EXCHANGE. WE FIND NO MERIT IN THE ORDER OF ASSESSING OFFICER IN THIS REGARD. APPLYING THE PRINCIPLE LAID DOWN BY VARIOUS DECISIONS REFERRED IN THE PARAS HEREINABOVE, WE HOLD THAT EVEN THOUGH THE AMOUNT IS RECEIVED IN INDIAN CURRENCY BUT THE SAME IS IN THE NATURE OF FOREIGN EXCHANGE AND HENCE, THE ASSESSEE IS ENTITLED TO THE CLAIM OF DEDUCTION UNDER SECTION 10A OF THE ACT. THE OLD FERA ACT DEFINES FOREIGN EXCHANGE TO MEAN FOREIGN CURRENCY AND INCLUDING VARIOUS MODES I.E. DRAFTS, TRAVELLERS CHEQUES, ETC. PAYABLE IN ANY FOREIGN CURRENCY AND ALSO PAYABLE IN INDIAN CURRENCY. SO, THE WORD FOREIGN EXCHANGE CANNOT BE RESTRICTED TO ONLY FOREIGN CURRENCY BUT COVERS LARGER MEANING OF FOREIGN EXCHANGE, WHEREIN THE MONEY IS RECEIVED FROM FOREIGN SOURCES BUT IN INDIAN RUPEES. ACCORDINGLY, WE DIRECT THE ASSESSING OFFICER TO RE-COMPUTE THE DEDUCTION ALLOWABLE UNDER SECTION 10A OF THE ACT. THE GROUNDS OF APPEAL NO.3.1 AND 3.2 RAISED BY THE ASSESSEE ARE THUS, ALLOWED. 37. NOW, COMING TO THE LAST ISSUE RAISED BY VIDE GROUND OF APPEAL NO.3.3 IN RESPECT OF DISALLOWANCE OF PROVISION OF OBSOLESCE STOCK AMOUNTING TO RS.49,14,764/-. THE ASSESSING OFFICER HAD MADE THE AFORESAID DISALLOWANCE AS THE ASSESSEE HAD NOT WRITTEN OFF STOCK BUT HAD MADE ONLY PROVISION. ITA NO.411/PUN/2014 DOVER INDIA PVT. LTD. 30 38. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE BEFORE US POINTED OUT THAT THE SAME STOCK WERE OBSOLETE STOCK AND NON-LIVING STOCK, WHICH WAS CLAIMED AS EXPENDITURE. HE FURTHER STATED THAT THE SAME MAY BE SENT BACK FOR VERIFICATION. IN VIEW THEREOF, WE RESTORE THIS ISSUE BACK TO THE FILE OF ASSESSING OFFICER TO DECIDE THE SAME AFTER CONSIDERING THE FACTS OF THE CASE AND ALLOWING REASONABLE OPPORTUNITY OF HEARING TO THE ASSESSEE. THE GROUND OF APPEAL NO.3.3 IS ALLOWED FOR STATISTICAL PURPOSES. THE GROUNDS OF APPEAL RAISED BY THE ASSESSEE ARE THUS, ALLOWED. 39. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED ON THIS 19 TH DAY OF APRIL, 2017. SD/- SD/- (ANIL CHATURVEDI) (SUSHMA CHOWLA) / ACCOUNTANT MEMBER / JUDICIAL MEMBER / PUNE ; DATED : 19 TH APRIL, 2017 . GCVSR / COPY OF THE ORDER IS FORWARDED TO : 1. THE APPELLANT ; 2. THE RESPONDENT; 3. THE DIT (INTL. TAXATION), PUNE ; 4. THE DRP, PUNE ; 5. THE DR A , ITAT, PUNE; 6. GUARD FILE . / BY ORDER , // TRUE COPY // / ASSISTANT REGISTRAR, , / ITAT, PUNE