Appeal Details
Counselvise Citation
[2012] 119 COUNSELVISE.COM (IT) 9207 (ITAT-MUMBAI)
Assessee PAN
Bench
Appeal Number
CRN Number
Duration Of Justice
2 year(s) 6 month(s) 26 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
19-12-2012
Appeal Filed By
Assessee
Order Result
Partly Allowed
Bench Allotted
K
Next Hearing Date
25-10-2012
Assessment Year
2003-2004
Appeal Filed On
24-05-2010
Judgement Text
, , , , IN THE INCOME TAX APPELLATE TRIBUNAL K BENCH, MUMBAI . , , ! ! ! ! '# $% '# $% '# $% '# $% , ,, , & & & & ' ' ' ' BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER AND SHRI AMIT SHUKLA, JUDICIAL MEMBER . / ITA NO. 4189/MUM./2010 ( &) * !+* / ASSESSMENT YEAR : 200304 ) M/S. GARWARE POLYESTER LTD. GARWARE HOUSE, 50A SWAMI NITYANAND MARG VILE PARLE (EAST), MUMBAI 400 057 .. ,- / APPELLANT ) V/S ASSTT. COMMISSIONER OF INCOME TAX CIRCLE8(1), AAYAKAR BHAVAN 101, M.K. ROAD, MUMBAI 400 020 .... ./,- / RESPONDENT , . / PERMANENT ACCOUNT NUMBER AAACG0571D . / ITA NO. 4418/MUM./2010 ( &) * !+* / ASSESSMENT YEAR : 200304 ) ASSTT. COMMISSIONER OF INCOME TAX CIRCLE8(1), AAYAKAR BHAVAN 101, M.K. ROAD, MUMBAI 400 020 .. ,- / APPELLANT ) V/S M/S. GARWARE POLYESTER LTD. GARWARE HOUSE, 50A SWAMI NITYANAND MARG VILE PARLE (EAST), MUMBAI 400 057 .... ./,- / RESPONDENT , . / PERMANENT ACCOUNT NUMBER AAACG0571D M/S. GARWARE POLYESTER LTD. 2 . / ITA NO. 4444/MUM./2011 ( &) * !+* / ASSESSMENT YEAR : 200506 ) DY. COMMISSIONER OF INCOME TAX CIRCLE8(1), AAYAKAR BHAVAN 101, M.K. ROAD, MUMBAI 400 020 .. ,- / APPELLANT ) V/S M/S. GARWARE POLYESTER LTD. GARWARE HOUSE, 50A SWAMI NITYANAND MARG VILE PARLE (EAST), MUMBAI 400 057 .... ./,- / RESPONDENT , . / PERMANENT ACCOUNT NUMBER AAACG0571D 1! 2 3 / REVENUE BY : MR. AJEET KUMAR JAIN A/W MR. PRAVIN KUMRA &) *4# 2 3 / ASSESSEE BY : MR. VIJAY MEHTA )! 2 # / DATE OF HEARING 25.10.2012 $ 5+ 2 # / DATE OF ORDER 19.12.2012 $ $ $ $ / ORDER ./ ./ ./ ./ PER BENCH CROSS APPEALS FOR ASSESSMENT YEAR 200304, ARE DIRE CTED AGAINST THE IMPUGNED ORDER DATED 11 TH MARCH 2010, WHEREAS THE REVENUES APPEAL FOR ASSESSMENT YEAR 200506, IS DIRECTED AGAINST TH E IMPUGNED ORDER DATED 17 TH MARCH 2011, AND BOTH THE ORDERS ARE PASSED BY THE LEARNED COMMISSIONER (APPEALS)XV, MUMBAI, FOR THE QUANTUM OF ASSESSMENT PASSED UNDER SECTION 143(3) OF THE INCOME TAX ACT, 1961 (FOR SHORT THE ACT ). SINCE THE ISSUES INVOLVED ARE COMMON AND INTERC ONNECTED IN ALL THESE APPEALS, THEREFORE, THESE WERE HEARD TOGETHER AND, AS A MATTER OF M/S. GARWARE POLYESTER LTD. 3 CONVENIENCE, THESE APPEALS ARE BEING DISPOSED OFF B Y WAY OF THIS CONSOLIDATED ORDER. 2. LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED BEFORE U S THAT IN ASSESSMENT YEAR 200506, THE LEARNED COMMISSIONER ( APPEALS) HAS PASSED A VERY DETAILED ORDER AFTER DISCUSSING AND A NALYSING THE ISSUE RELATING TO TRANSFER PRICING ADJUSTMENT, HAS PASSED A VERY DETAIL ORDER FOR COMING TO HIS CONCLUSION REGARDING TRANSFER PRICING ADJUSTMENT IN FAVOUR OF THE ASSESSEE. THEREFORE, HE PLEADED THAT APPEAL FOR ASSESSMENT YEAR 200506 BE TAKEN UP FIRST. LEARNED DEPARTMENTAL REP RESENTATIVE DID NOT OBJECT TO THIS CONTENTION OF THE LEARNED COUNSEL FO R THE ASSESSEE. 3. IN REVENUES APPEAL IN ITA NO.4444/MUM./2011, FOR A SSESSMENT YEAR 200506, FOLLOWING GROUNDS HAVE BEEN RAISED: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE LD CIT(A) ERRED IN DELETING THE ADDITION MADE B Y THE TPO / AO ON ACCOUNT OF SALE OF FILMS AMOUNTING TO RS. 3,38,9 3,862/-, AND IGNORING THE FACT THAT THE GLOBAL AVERAGE PRICE ADO PTED BY THE TPO / AO FOR UK & USA IS A GOOD COMPARABLE PRICE. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LD. CIT(A) ERRED IN REDUCING THE ADJUSTMENT OF RS. 61,12,632/- MADE BY THE TPO / AO ON ACCOUNT OF COMMISSION PAID TO GPIL (AE) TO RS. 11,60,682/-, AND N NOT APPRECIATING THE FACT THAT SAFE HARBOR OF (+/-) 5% IS NOT ALLOWED UNDER CUP METHOD. 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LD. CIT(A) ERRED IN DELETING THE DISALLOWANCE O F INTEREST OF RS. 28,52,000/- RELATED TO CAPITAL W.I.P. U/S. 36(1)(II I) OF THE I.T. ACT, 1961, WITHOUT APPRECIATING THE FACT THAT THE PROVIS ION OF SECTION 36(1)(III) STATES THAT THE AMOUNT OF INTEREST PAID IN RESPECT OF CAPITAL BORROWED FOR ACQUISITION ON AN ASSET FOR EX TENSION OF EXISTING BUSINESS OR PROFESSION FOR ANY PERIOD BEGI NNING FROM THE DATE ON WHICH THE CAPITAL WAS BORROWED FOR ACQUISIT ION OF THE ASSETS TILL THE DATE ON WHICH SUCH ASSET WAS FIRST PUT TO USE, SHALL NOT BE ALLOWED AS DEDUCTION . 4. RELEVANT FACTS, APROPOS THE ISSUE ARISING OUT OF GR OUNDS NO.1 AND 2, RELATING TO TRANSFER PRICING ADJUSTMENT MADE IN RES PECT OF THE TRANSACTIONS UNDERTAKEN WITH THE ASSOCIATE ENTERPRISES (FOR SHOR T A.E ) ARE THAT THE ASSESSEE IS ENGAGED IN THE BUSINESS OF MANUFACTURE AND SALE OF PLAIN M/S. GARWARE POLYESTER LTD. 4 POLYESTER FILMS, SUN CONTROL FILMS, METALIZED FILMS AND OTHER VERITIES OF POLYESTER FILMS. THE ASSESSEE IS SELLING ITS PRODUC TS NOT ONLY AT THE LOCAL LEVEL BUT ALSO INVOLVED IN EXPORT TO VARIOUS COUNTR IES. INSOFAR AS SALE TO COUNTRIES LIKE RUSSIA, SOUTH ARABIA, TURKEY, SINGAP ORE, JAPAN AND OTHER PARTS OF THE WORLD ARE CONCERNED, THE ASSESSEE HAS BEEN SELLING DIRECTLY TO THE THIRD PARTIES THROUGH NON-A.E. FOREIGN AGENTS. AS REGARDS U.S. AND U.K. MARKETS ARE CONCERNED, THE ASSESSEE HAS SETUP WHOLLY OWNED SUBSIDIARY NAMELY GPIL IN U.K. (GARWARE POLYESTER I NTERNATIONAL LTD.) GPF, U.S.A., (GLOBAL PET FILMS IMC), TO UNDERTAKE THE MA RKETING, PROMOTION, BUSINESS DEVELOPMENT AND DISTRIBUTION OF ASSESSEES PRODUCTS. THESE A.ES HAVE BEEN APPOINTED AS ASSESSEES SOLE SELLING AGEN T, NOT ONLY TO PERFORM THE SALES BUT ALSO TO PROVIDE OTHER SERVICES SUCH A S MARKET DEVELOPMENT, SALES PROMOTION, NEW PRODUCT DEVELOPMENT, ETC., IN THEIR RESPECTIVE TERRITORIES. FOR THE ASSESSMENT YEAR 200506, THE A SSESSEE HAS UNDERTAKEN FOLLOWING INTERNATIONAL TRANSACTIONS WIT H ITS A.ES. S.NO. NAME OF TRANSACTION AMOUNT ( ` ) METHOD 1. SALE OF PLAIN FILM TO GPF 13,85,98,000 CUP 2. SALE OF SUN CONTROL FILM TO GPIL 12,56,91,000 CUP 3. SALE OF SUN CONTROL FILM TO GPF 22,71,64,000 CUP 4. PAYMENT OF COMMISSION TO GPL 1,01,87,553 CUP 5. THE ASSESSEE, IN ITS REPORT IN FORM NO.3CEB, HAS BE NCH MARKED ITS TRANSACTIONS BY APPLYING CUP METHOD, WHEREIN AVERAG E PRICE CHARGED TO A.ES FOR SUN CONTROL FILMS AND PLAIN FILMS HAVE BEE N COMPARED WITH THE AVERAGE PRICE FOR THESE PRODUCTS CHARGED TO LOCAL C USTOMERS OF THE ASSESSEE IN INDIA. THE PAYMENT OF COMMISSION TO THO SE A.ES HAS ALSO BEEN BENCH MARKED BY APPLYING CUP METHOD @ 12.9% . A REFERENCE WAS MADE UNDER SECTION 92CA(1) TO THE TRANSFER PRICING OFFIC E (FOR SHORT TPO ) BY M/S. GARWARE POLYESTER LTD. 5 THE ASSESSING OFFICER, TO EXAMINE AND DETERMINE THE ASSESSEES ARMS LENGTH PRICE OF ITS TRANSACTIONS WITH ITS A.ES. 6. THE TPO HELD THAT THE APPROACH OF THE ASSESSEE FOR COMPARING LOCAL SALE PRICE IN THE INDIAN MARKET WITH THE PRICE CHAR GED FROM THE A.E. IS NOT A CORRECT APPROACH BECAUSE CUP METHOD CAN BE APPLIE D ONLY WHEN THE PRODUCTS ARE ABSOLUTELY SIMILAR TO EACH OTHER OR WH ERE ADJUSTMENTS CAN BE ACCURATELY MADE FOR ADJUSTMENT OF THESE DIFFERENCES . HE FURTHER NOTED THAT THE ASSESSEE IS SELLING SUN CONTROL FILMS AND PLAIN FILMS TO NONA.ES LOCATED IN DIFFERENT COUNTRIES LIKE RUSSIA, SOUTH ARABIA, T URKEY, SINGAPORE, AFRICA, ETC., AND IN CASE OF SALES MADE TO U.S.A. AND U.K., THE ASSESSEE IS CARRYING OUT ITS BUSINESS ACTIVITIES ONLY THROUGH A.ES. HE, THOUGH ADMITTED THAT THERE EXIST GEOGRAPHICAL DIFFERENCE BETWEEN U.S.A. AND U.K. MARKETS ON ONE HAND AND THE OTHER COUNTRIES ON THE OTHER HAND, HOWEVER, HELD THAT SUCH GEOGRAPHICAL DIFFERENCES ARE TAKEN CARE OF WHE N MULTIPLE COUNTRY NONA.E. SALES ARE CONSIDERED. BASED ON THIS ASSUMP TION, HE PROCEEDED TO COMPARE PRODUCT QUALITYWISE AVERAGE OF NONA.E. EXP ORT PRICE VISAVIS PRICE CHARGED FROM A.ES AND COMPUTED THE TRANSFER P RICING ADJUSTMENT OF ` 3,38,93,862. SIMILARLY, IN RESPECT OF PAYMENT OF CO MMISSION TO A.E. / GPIL, THE TPO NOTED THAT COMMISSION PAID @ 12.5% TO ITS A.ES IS EXCESSIVE BECAUSE THE ASSESSEE HAS BEEN GETTING EXP ORT ORDERS FROM VARIOUS COUNTRIES AFTER PAYING NORMAL COMMISSION OF 5% TO VARIOUS INDEPENDENT NON-A.E. FOREIGN PARTIES. CONSEQUENTLY, THE TPO DETERMINED ARMS LENGTH COMMISSION @ 5% AND MADE TRANSFER PRIC ING ADJUSTMENT OF ` 61,12,532 AFTER HOLDING THAT COMMISSION OF 7.5% IS EXCESSIVE. THUS, THE AGGREGATE TRANSFER PRICING ADJUSTMENT OF ` 4,00,06,934, WAS MADE IN RESPECT OF PRODUCT SALES AS WELL AS FOR THE EXPORT COMMISSION. 7. THE ASSESSEE, BEING AGGRIEVED BY THE STAND SO TAKEN BY THE TPO, CARRIED THE MATTER IN FIRST APPEAL, WHEREIN, BEFORE THE LEARNED COMMISSIONER (APPEALS), THE ASSESSEE MADE A VERY DE TAIL SUBMISSION AFTER ANALYZING VARIOUS FACTORS SPECIFICALLY WITH REGARD TO GEOGRAPHICAL AND MARKET DIFFERENCE AND OTHER FACTS OF THE CASE IN TH E FOLLOWING MANNER:- M/S. GARWARE POLYESTER LTD. 6 GEOGRAPHICAL AND MARKET DIFFERENCES : APPELLANT SUBMITTED THAT APPROACH OF TPO OF COMPARI NG THE EXPORT PRICES CHARGED TO AES (WHO OPERATES IN US AND EUROP EAN GEOGRAPHIES) WITH THE PRICES CHARGED TO NON AES (WH O OPERATE IN THE COUNTRIES FALLING WITHIN ASIAN, AFRICAN, MIDDLE -EAST, FAR EAST, RUSSIA AND OTHER CIS COUNTRIES) IS ERRONEOUS AND DE VOID OF BUSINESS REALITIES AS IT DO NOT TAKE INTO CONSIDERA TION GEOGRAPHICAL, ECONOMIC AND MARKET DIFFERENCES. AES ARE OPERATING IN AMERICAN MARKETS AND EUROPEAN MARKETS WHICH ARE DEVELOPED MA RKETS. IN CONTRAST TO THAT, EXPORTS SALES TO NON AES ARE IN A SIAN, AFRICAN, MIDDLEEAST, FAR EAST, RUSSIA AND OTHER CIS COUNTRI ES WHICH ARE EITHER DEVELOPING MARKETS OR NOT SO DEVELOPED MARKE TS. HENCE, THERE ARE GEOGRAPHICAL DIFFERENCES BETWEEN AE EXPOR T SALES AND NON AE EXPORT SALES. THESE DIFFERENCES ARE ON ACCOU NT OF MARKET SIZE, MARKET LOCATION AND LEVEL OF COMPETITION AND OVERALL ECONOMIC DEVELOPMENT OF RESPECTIVE MARKETS. THE APPELLANTS EXPORT PRICES SUBSTANTIALLY DIFFER FROM COUNTRY TO COUNTRY FOR VA RIETY OF ECONOMIC REASONS AND MARKET FORCES, FEW OF THEM ARE AS FOLLO WS: I. AVAILABILITY OF LOCALLY MANUFACTURED MATERIAL; II. PRESENCE OF COMPETITOR IN THE TERRITORY; III. DUTIES & TAX STRUCTURE OF THE COUNTRY; IV. GENERAL PURCHASING POWER IN THE COUNTRY; V. AVAILABILITY OF SUBSTITUTES, ETC. VI. SIZE OF THE MARKET AND LEVEL OF DEMAND AND SUPP LY 2.8 AMERICAN AND EUROPEAN MARKETS WHERE AES OPERATE ARE MATURED, HIGHLY COMPETITIVE AND BIGGER SIZE MARKETS AS COMPARED TO ASIAN, AFRICAN, MIDDLE-EAST, FAR EAST AND RUSSIA N MARKETS WHICH CONSISTS OF MOSTLY ECONOMICALLY UNDERDEVELOPED NATI ONS EXCEPT SOME OF THE COUNTRIES LIKE JAPAN, AUSTRALIA. THERE ARE ALWAYS PRICE VARIATIONS ON ACCOUNT OF GEOGRAPHICAL DIFFERENCES B ETWEEN AMERICAN & EUROPEAN MARKETS ON THE ONE HAND AND ASIAN, AFRIC AN, FAR EAST AND MIDDLE EAST MARKETS ON THE OTHER HAND. THE MARK ET PRICES IN AMERICAN AND EUROPEAN MARKETS, WHICH ARE DEVELOPED AND HIGHLY COMPETITIVE MARKETS, ARE GENERALLY LOWER THAN OTHER MARKETS. 2.9 THUS, APPELLANTS INTERNATIONAL TRANSACTIONS OF SALE OF POLYESTER FILM PRODUCTS TO ITS AES INCLUDING PRICIN G FOR THE SAME ARE GUIDED BY THE ECONOMIC AND MARKET CONDITIONS PREVAI LING IN THE EUROPE, NORTH AMERICAN AND LATIN AMERICAN GEOGRAPHI CAL MARKETS. IN CONTRAST TO THAT, APPELLANTS TRANSACTIONS OF SA LE OF POLYESTER FILM PRODUCTS TO ITS NON AE CUSTOMERS INCLUDING PRICING FOR THE SAME ARE GUIDED BY THE ECONOMIC AND MARKET CONDITIONS PREVAI LING IN THESE RESPECTIVE ASIAN, AFRICAN, MIDDLE-EAST, FAR EAST, R USSIA AND OTHER CIS GEOGRAPHIES. 2.10 IT HAS BEEN FURTHER SUBMITTED THAT WHILE THE T PO HIMSELF ADMITTED IN PARA 6 AND 7 (ON PAGE 2) OF HIS ORDER U /S. 92CA(3) THAT FOR APPLICATION OF CUP, BESIDES SIMILARITY OF PROD UCTS ONE HAS TO TAKE INTO ACCOUNT THE VARIATIONS ARISING ON ACCOUNT . OF GEOGRAPHICAL M/S. GARWARE POLYESTER LTD. 7 DIFFERENCES. HOWEVER, HE FAILED TO TAKE THE SAME I NTO CONSIDERATION OR PROVIDE APPROPRIATE ADJUSTMENT FOR DIFFERENCES I N ECONOMIC AND GEOGRAPHICAL MARKETS. THE TPO PROCEEDED ON THE ASSU MPTION THAT SINCE APPELLANTS NON AE SALES COMPRISE OF MANY COU NTRIES, THE SALE PRICE CHARGED TO NON AES DO REFLECT THE INTERNATION AL PRICES OF THE PRODUCTS AND THE COMPARISON OF THESE PRICES VIS--V IS THE PRICES CHARGED TO AES WITHOUT ANY ADJUSTMENT WOULD REFLECT A COMPARABLE UNCONTROLLED PRICE. APPELLANT SUBMITTED THAT TPOS AFORESAID ASSUMPTION / PROPOSITION IS ERRONEOUS AND IS DEVOID OF MARKET REALITIES AS IT FAILS TO APPRECIATE THAT AMERICAN A ND EUROPEAN MARKETS IN WHICH AES OPERATE IS A DISTINCT MARKET G EOGRAPHY WITH DISTINCT FEATURES AS COMPARED TO OTHER COUNTRIES (A S A CLASS) WHERE NON AES OPERATES. MERELY AVERAGING THE SALES TO NON AES OF TWO OR THREE COUNTRIES DOES NOT ELIMINATE THE PRICING DIFF ERENCES THAT EXIST ON ACCOUNT OF GEOGRAPHICAL AND MARKET FACTORS. 2.11 TO SUPPORT ITS SUBMISSION THAT THERE EXIST SUB STANTIAL PRICE VARIATION FROM COUNTRY TO COUNTRY AND MARKET TO MAR KET, THE APPELLANT RELIED ON THE DETAILS OF NON AE EXPORT SA LES FILED BEFORE THE TPO AND SUBMITTED THAT EVEN THE EXPORT PRICES C HARGED TO NON AES LOCATED IN DIFFERENT COUNTRIES DIFFERS SUBSTANT IALLY FOR THE SAME PRODUCT DUE TO DIFFERENCES IN ECONOMICAL, GEOGRAPHI CAL AND MARKET CONDITIONS AND OTHER FACTORS POINTED OUT ABOVE. APP ELLANT ALSO RELIED ON JUDICIAL PRONOUNCEMENT IN THE CASES OF IN TERVET INDIA (P) LTD VS. ACIT-8(2) [130 TTJ 301, MUMBAI ITAT] AND AC IT, 8(1), MUMBAI VS. DUFON LABORATORIES [39 SOT 59, MUMBAI IT AT] AND ALSO ON PARA 1.30 OF TRANSFER PRICING GUIDELINES FOR MUL TINATIONAL ENTERPRISES AND TAX ADMINISTRATIONS ISSUED BY THE O RGANISATION FOR ECONOMIC DEVELOPMENT AND CO-OPERATION TO EMPHASIZE THE IMPORTANCE OF GEOGRAPHICAL AND MARKET COMPARABILITY IN ANY FAIR TRANSFER PRICING ANALYSIS. ALTERNATIVE COMPARABLE UNCONTROLLED TRANSACTIONS : 2.12 APPELLANT SUBMITTED THAT TPO FAILED TO APPRECI ATE THAT BECAUSE AES OPERATE ONLY IN THE DEFINED TERRITORIES OF EUROPE AND AMERICA, THE NON-AE TRANSACTIONS WITH WHICH TRANSAC TIONS WITH AES CAN BE COMPARED (APPLYING THE CUP METHOD) ARE ONLY THOSE INSTANCES WHEREIN APPELLANT HAS SOLD PRODUCTS TO NO N-AE CUSTOMERS IN THE SAME GEOGRAPHY UNDER THE COMPARABLE CIRCUMST ANCES. THE APPELLANT HAS NOT DIRECTLY SOLD ANY PRODUCT TO NON- AE CUSTOMERS (EUROPE/AMERICA) IN THE GEOGRAPHY WHERE AES OPERATE . IN SUCH CIRCUMSTANCES, IT WAS CONTENDED THAT THE MOST APPRO PRIATE WAY TO EXAMINE THE COMPLIANCE OF ARMS LENGTH CONDITIONS I N THE APPELLANTS TRANSACTIONS WITH ITS AE IS TO DEDUCE T HE MARKET PRICES PREVAILING IN THE CONCERNED GEOGRAPHICAL MARKET FRO M THE AES SALES TRANSACTIONS WITH THEIR CUSTOMERS, SUBJECT TO ADJUS TMENT FOR THE EXPENSES THAT THE AES NEED TO INCUR TO CONSUMMATE T HE TRANSACTIONS AND SALE THE PRODUCTS, BECAUSE AES ARE SELLING THE PRODUCTS PURCHASED FROM APPELLANT TO THIRD PARTY UN RELATED CUSTOMERS / SECOND LEVEL DISTRIBUTORS. THUS, SALE P RICES CHARGED TO SUCH THIRD PARTY UNRELATED CUSTOMERS FOR THE PARTIC ULAR QUALITY OF M/S. GARWARE POLYESTER LTD. 8 THE PRODUCT REPRESENT COMPARABLE UNCONTROLLED PRICE S ON AGGREGATE BASIS IN THE RESPECTIVE COMPARABLE MARKET. THEREFOR E, THESE TRANSACTIONS CAN BE SAID TO MEET THE COMPARABILITY TEST. 2.13 THE APPELLANT FILED THE STATEMENTS SETTING OUT THE PRICES AT WHICH AES SOLD PLAIN FILM PRODUCTS AND SUN CONTROL PRODUCTS (THAT THEY PURCHASED FROM APPELLANT) TO THEIR THIRD PARTY CUSTOMERS AND CONTENDED THAT THE GROSS DIFFERENCE BETWEEN THE LAN DED COST OF GOODS SOLD AND THE PRICE AT WHICH AE SELLS THOSE PR ODUCTS TO THIRD PARTY CUSTOMERS IN THEIR DESIGNATED TERRITORY IS VE RY NOMINAL AND IN SOME CASES EVEN NOT SUFFICIENT TO COVER THE OVERHEA DS OF AE WHICH ARE AROUND 20% TO 25% OF THE LANDED COST OF THE GOO DS SOLD. OPERATING RESULTS OF AES DO NOT JUSTIFY TRANSFER PR ICING ADJUSTMENT : 2.14 IN THIS REGARD, CONTENTIONS OF APPELLANT ARE A S FOLLOWS: (A) AES ARE WORKING AS DISTRIBUTORS SOLELY FOR THE APPELLANT. THEREFORE, THE FINANCIAL RESULTS OF AES GET AFFECTE D SOLELY ON ACCOUNT OF ITS TRANSACTIONS WITH THE APPELLANT. BOTH GPF AN D GPIL HAVE BEEN CONSISTENTLY EITHER SUFFERING LOSSES OR ARE MAKING ONLY VERY NOMINAL PROFITS. IN SUPPORT OF THIS CONTENTION, APPELLANT F URNISHED GROSS PROFIT AND NET PROFIT ANALYSIS OF AES FOR SEVERAL Y EARS SINCE COMMENCEMENT OF THEIR OPERATIONS. BASED ON THIS ANA LYSIS, IT WAS CONTENDED THAT ON AN AGGREGATE BASIS, THE GAP BETWE EN THE PRICES AT WHICH AES PROCURED PRODUCTS FROM APPELLANT AND T HE PRICE AT WHICH THEY SOLD THE PRODUCTS DOES NOT EXCEED 10%. I N CONTRAST TO THAT, THE TPOS WORKING OF TRANSFER PRICING ADJUSTM ENT HIGHLIGHTS THAT THE DIFFERENCE BETWEEN AE PRICES AND NON AE PR ICES IS AS HIGH AS 30% TO 40%, WHICH IS ENTIRELY CONTRARY TO FACTS REFLECTED FROM AUDITED FINANCIAL STATEMENTS OF AES. SUCH CONTRADIC TING DIFFERENCES EXIST BECAUSE TPO HAS NOT TAKEN SAME MARKET / GEOGR APHY NONAE TRANSACTIONS AS COMPARABLE TRANSACTIONS. (B) SUCH PRICE DIFFERENCE RETAINED BY THE AES IS NO T: ENOUGH TO COVER EVEN THE AES OPERATING EXPENSES. NO THIRD PA RTY DISTRIBUTOR WOULD WORK FOR THE APPELLANT AT SUCH LOSS MAKING PR OPOSITION. IT WAS SUBMITTED THAT HAD IT BEEN THE CASE THAT APPELL ANT HAS CHARGED LOWER PRICES TO ITS AES THAN PREVAILING MARKET PRIC ES IN THE RESPECTIVE GEOGRAPHICAL MARKET THEN AES WOULD HAVE BEEN MAKING SIGNIFICANT PROFITS YEAR BY YEAR, RATHER THAN SUFFE RING LOSSES OR EARNING ONLY NOMINAL PROFITS. (C) FROM ABOVE, IT WAS ARGUED THAT THERE IS NO SHIF TING OF PROFITS BY THE APPELLANT TO ITS OVERSEAS AES. IT WAS ALSO S UBMITTED THAT CORPORATE TAX RATES IN USA AND UK ARE COMPARATIVELY HIGHER OR ON PAR WITH CORPORATE TAX RATES IN INDIA AND HENCE THE RE IS NO MOTIVE TO AVOID PAYMENT OF TAXES. THUS, APPELLANTS CASE I S NOT THE ONE TO WHICH TRANSFER PRICING ADJUSTMENT SHOULD APPLY GIVE N THAT TRANSFER PRICING REGULATIONS ARE APPLIED AS ANTI-AVOIDANCE M EASURES TO CURB SHIFTING OF PROFITS FROM ONE JURISDICTION TO ANOTHE R JURISDICTION. M/S. GARWARE POLYESTER LTD. 9 (D) IF TPOS PROPOSAL OF UPWARD TRANSFER PRICING AD JUSTMENT IS TO BE APPLIED IN THE GIVEN CASE OF THE APPELLANT THEN IT. INDIRECTLY MEANS THAT APPELLANTS AES SHOULD NOT BE EXPECTED T O MAKE ANY PROFIT OR SHOULD CONTINUE TO SUFFER LARGER AMOUNTS OF LOSSES. THIS PROPOSITION BLATANTLY APPEARS TO BE FOUNDED ON NON -ARMS LENGTH PRINCIPLE, BECAUSE NO INDEPENDENT THIRD PARTY EXCL USIVE DISTRIBUTOR WOULD WORK ON SUCH LOSS MAKING BUSINESS PROPOSITION UNDER THE ARMS LENGTH BUSINESS DEALINGS. 2.15 BUSINESS STRATEGY ASPECT: APPELLANT ALSO SUBMI TTED THAT FOR THE DESIGNATED TERRITORY FOR WHICH AES OPERATE, THE APPELLANT, IN COLLABORATION WITH ITS AES, FOLLOWS THE BUSINESS ST RATEGY OF MARKET PENETRATION ARID INCREASING MARKET SHARE FOLLOWING COMPETITIVE PRICING POLICY. 2.16 CAPACITY UTILIZATION ASPECT: IT WAS FURTHER SU BMITTED BY THE APPELLANT THAT AT TIMES IN ORDER TO ENSURE THAT PLA NTS RUNS AT THE MAXIMUM CAPACITY, BOOKS THE ORDERS EVEN FROM THIRD PARTIES AT THE PRICES WHICH ARE FAR BELOW THE STANDARD LIST PRICES OF THE APPELLANT, SO LONG SUCH SALES RESULT INTO CONTRIBUTION TOWAR DS THE FIXED OVERHEADS. IT WAS SUBMITTED THAT THIS FACT CAN BE G ATHERED FROM THE COMPARATIVE STATEMENT OF PRODUCT WISE DETAILS O F SALES TO AES AND NON-AES, WHICH CLEARLY REFLECTS THAT EVEN IN CA SE OF SALES TO NON-AE CUSTOMERS, PRICES FLUCTUATE WIDELY. 2.17 IT WAS ALSO SUBMITTED THAT AES HAVE TO FURTHER PROCESS THE PRODUCTS BY UNDERTAKING SLITTING, REPACKAGING, LABE LING AS PER LOCAL STANDARDS AND LAWS, ETC FOR WHICH EXPENSES ARE INCU RRED BY THE AES. IN CASE OF SALE OF PRODUCTS TO AE G-PF, GPF SE LLS AND MARKETS SOME OF THE PRODUCTS PURCHASED FROM APPELLANT UNDER ITS OWN GPF BRAND AND TRADE MARKS, WHEREAS APPELLANTS SALES TO NON-AE CUSTOMERS IN ALL OTHER GEOGRAPHIES ARE SOLD UNDER A PPELLANTS OWN BRAND. THUS, GPF NEED TO INCUR ADDITIONAL COST AND EXPENSES FOR DEVELOPMENT OF THE BRAND, 1:C, WHICH ARE BORNE BY G PF ONLY. GPF ALSO HAS TO BEAR THE HEAVY ANTIDUMPING DUTY LEVIED BY USA GOVERNMENT ON THE POLYESTER FILM IMPORTED FROM INDI A, DUE TO WHICH THE IMPORT COST OF THE POLYESTER FILM FOR IT IS COMPARATIVELY HIGH. THEREFORE, IN ORDER TO DERIVE THE ARMS LENGT H PRICE FOR THE PRODUCTS SOLD TO AES, ONE IS REQUIRED TO MAKE APPRO PRIATE ADJUSTMENTS TO THE NON AE PRICES. THE LD. AO/TPO HA S NOT MADE ANY SUCH ADJUSTMENT. 2.18 FURTHER, WITHOUT PREJUDICE TO OTHER ARGUMENTS AND SUBMISSIONS, APPELLANT CONTENDED THAT TPO ERRED IN NOT MAKING APPROPRIATE ADJUSTMENTS FOR MATERIAL DIFFERENCES IN TRANSACTIONS WITH AES AND NON AE CUSTOMERS. THE APPELLANT BROUGH T OUT THE FOLLOWING MATERIAL COMMERCIAL DIFFERENCES THAT EXIS T BETWEEN THE TRANSACTIONS WITH AE AND THE TRANSACTIONS WITH THE NON-AES, WHICH DIFFERENCES HAVE MATERIAL IMPACT ON THE PRICES IN T HE OPEN MARKET: 2.19 ADJUSTMENT FOR QUANTITY VOLUME: THE AVERAGE QU ANTITY OF SUN CONTROL FILMS AND PLAIN FILMS SOLD TO AES ARE SUBST ANTIALLY HIGHER M/S. GARWARE POLYESTER LTD. 10 THAN AVERAGE QUANTITIES OF THESE PRODUCTS SOLD TO E ACH OF NON AE CUSTOMERS IN THE EXPORT MARKET. REFERRING TO WRITTE N SUBMISSIONS, IT WAS POINTED OUT THAT , AVERAGE QUANTITIES SOLD TO A ES ARE 22 TIMES HIGHER THAN AVERAGE NON AE QUANTITY IN CASE OF SUN CONTROL FILMS AND ARE 19 TIMES HIGHER THAN AVERAGE NON AE QUANTIT Y IN CASE OF PLAIN FILMS. IT WAS FURTHER CONTENDED THAT SINCE AE S ARE EXCLUSIVELY PROMOTING, MARKETING AND DISTRIBUTING THE PRODUCTS OF APPELLANT AND THEY DO NOT DEAL WITH ANY THIRD PARTY SUPPLIERS OR MANUFACTURES OF POLYESTER FILM PRODUCTS, IT IS BUT NATURAL THAT ALL THEIR ORDERS OR REQUIREMENTS WILL BE PROCURED FROM THE APPELLANT. T HEREFORE, IT WAS SUBMITTED THAT, THE EXPECTED VOLUME OF PROCUREMENT BY THE AES WILL, GENERALLY BE HIGHER THAN ANY NON AE SINGLE CU STOMER. IF SALES OF SUCH HIGH MAGNITUDE WERE MADE TO UNCONTROLLED PA RTIES THEN A VOLUME DISCOUNT RANGING FROM 15% TO 20% WOULD BE CO NSIDERED WHICH IS GENERALLY GRANTED BY WAY OF CHARGING REDUC ED SALES PRICES AND ALSO SUCH DISCOUNT WOULD BE REQUIRED TO JUSTIFY THE COMMERCIAL NATURE OF THE TRANSACTION. 2.20 GEOGRAPHICAL ADJUSTMENT: APPELLANT REITERATED ITS SUBMIS SIONS AS REGARDS GEOGRAPHICAL AND MARKETS DIFFERENC ES AND SUBMITTED THAT ON AN AVERAGE A PRICE VARIATION ALWA YS EXISTS TO THE EXTENT OF 20% TO 30% ON ACCOUNT OF GEOGRAPHICAL DIF FERENCES BETWEEN AMERICAN & EUROPEAN MARKETS ON THE ONE HAND AND ASIAN, AFRICAN, FAR EAST AND MIDDLE EAST MARKETS ON THE OT HER HAND. IT SUBMITTED THAT ADJUSTMENT ON ACCOUNT OF GEOGRAPHICA L DIFFERENCES TO THE EXTENT OF APPROXIMATELY 20% HAS BEEN JUDICIA LLY APPROVED BY THE HONBLE MUMBAI ITAT IN THE CASE OF INTERVET IND IA (P) LTD VS. ACIT -8(2) [1 3OTTJ 301, MUMBAI ITAT] 2.21 SELLING AND MARKETING COST: FOR MAKING SALES T O NON AES, SELLING AND MARKETING COSTS ARE INCURRED. FOR MAKIN G SALES TO AES, SUCH COSTS ARE NOT REQUIRED TO BE INCURRED. IN CASE OF SALES TO NON AES APPELLANT NEEDS TO PAY COMMISSION TO INTERMEDIA TERIES, WHICH RANGES FROM 3% TO 10%, WITH AVERAGE COMMISSION OF 5 %. THEREFORE, AN ADJUSTMENT ON ACCOUNT OF SAVING IN SE LLING AND MARKETING COST IN CASE OF SALES TO AES NEEDS TO BE MADE. GIVEN THAT AVERAGE COMMISSION RATE ALONE IS 5% AND IF ONE FURTHER CONSIDER AT LEAST 2% OF SALES AS OTHER SELLING AND MARKETING COST THEN AN ADJUSTMENT OF 7% ON ACCOUNT OF SAVING IN SE LLING AND MARKETING COST IS REQUIRED. 2.22 APPELLANT ALSO REFERRED TO RULE 10B(1) OF THE INCOME TAX RULES 1962 AND SUBMITTED THAT IN TERMS OF SUB-CLAUS ES (II) AND (III) OF CLAUSE (A) OF RULE 10B(1) OF THE INCOME TAX RULE S 1962, ONE IS OBLIGED TO CONSIDER THE ADJUSTMENTS FOR MATERIAL DI FFERENCES IN THE TRANSACTIONS WHILE APPLYING THE CUP METHOD. REFERRI NG TO STATEMENTS FILED ALONG WITH WRITTEN SUBMISSIONS, IT WAS SUBMITTED THAT IF THESE ADJUSTMENT ARE TAKEN INTO CONSIDERATI ON, THE APPELLANTS REALIZATION FROM AES ARE FAR BETTER THA N THE PRICE REALIZATION FROM NON AE CUSTOMERS. M/S. GARWARE POLYESTER LTD. 11 2.23 THE APPELLANT ALSO HIGHLIGHTED DISCREPANCIES I N PRICE COMPARISON DONE BY THE TPO CONCERNING (A) SUN CONTR OL FILM PRODUCTS SAFETY 4 MIL SRC B AND SAFETY 7 MIL SRC B AND (B) COMPARISON OF HIGH VOLUME AE TRANSACTIONS WITH LOW VOLUME ISOLATED & SOLITARY NON AE TRANSACTIONS AND CONTEND ED THAT IF THESE DISCREPANCIES ARE CURED THAN THAT ALONE WILL REDUCE THE TRANSFER PRICING ADJUSTMENT SIGNIFICANTLY. 2.24 BASED ON ABOVE IT WAS SUBMITTED THAT THE UPWAR D TRANSFER PRICING ADJUSTMENT OF ` 33,893,862/- MADE BY TPO IN RESPECT OF SALE OF SUN CONTROL AND PLAIN FILMS TO AES IS ERRON EOUS, DEVOID OF MARKET AND BUSINESS REALITY AND JUDICIAL PRONOUNCEM ENTS IN THIS RESPECT AND HENCE, IT WAS PRAYED THAT SAME BE DELET ED. 8. THE COMMISSIONER (APPEALS) APPRECIATED THE ASSESSEE S CONTENTIONS AND THE SUBMISSIONS AND AFTER ANALYZING THE SAME DE LETED THE T.P. ADJUSTMENT OF ` 3,38,93,862, WHILE OBSERVING AND HOLDING AS UNDER: - 2.25 I HAVE PERUSED AND CONSIDERED THE FACTS OF THE CASE , TPOS ORDER U/S. 92CA (3), THE ASSESSMENT ORDER ON THIS A SPECT AND THE WRITTEN SUBMISSIONS AND ORAL ARGUMENTS OF APPELLANT . 2.26 TRANSFER PRICING IS NOT AN EXACT SCIENCE. IT I NVOLVES A RATIONALE AND OBJECTIVE ANALYSIS OF ALL ECONOMIC AN D COMMERCIAL ASPECTS & CIRCUMSTANCES OF EACH SPECIFIC CASE TO DE RIVE A FAIR AND PROPER ANALYSIS. FACTS AND CIRCUMSTANCES IN TOTALIT Y NEED TO BE TAKEN INTO , CONSIDERATION TO COME TO CONCLUSION O N WHETHER OR NOT IN PARTICULAR CASE THE CONDITION OF ARMS LENGTH ST ANDARD (OR PRICE) IS SATISFIED. 2.27 THERE IS FORCE IN THE FIRST CONTENTION OF APPE LLANT THAT WHILE APPLYING THE CUP METHOD THE APPROACH OF TPO OF COMP ARING THE EXPORT PRICES CHARGED TO AES (WHO OPERATES IN US AN D EUROPEAN GEOGRAPHIES) WITH THE PRICES CHARGED TO NON AES (WH O OPERATE IN THE COUNTRIES FALLING WITHIN ASIAN, AFRICAN, MIDDLE -EAST, FAR EAST, RUSSIA AND OTHER CIS COUNTRIES) IS ERRONEOUS AND DE VOID OF BUSINESS REALITIES AS IT DOES NOT TAKE INTO CONSIDE RATION GEOGRAPHICAL, ECONOMIC AND MARKET DIFFERENCES. UNDE R THE CUP METHOD, THE PRICE OF THE GOODS OR SERVICES IS DIREC TLY COMPARED WITH THE PRICE IN UNCONTROLLED TRANSACTION UNDER SIMILAR CONDITIONS. THOUGH THE CUP APPEARS SIMPLE IN CONCEPT, IT IS VER Y DIFFICULT TO APPLY IN PRACTICE. ITS SENSITIVITY ON THE PROPERTI ES OF THE PRODUCT AND THE ACCOMPANYING CIRCUMSTANCES AND CONDITIONS R EQUIRES A CAREFUL ANALYSIS IN ITS APPLICATION. THIS METHOD C ALLS FOR NOT ONLY A VERY HIGH DEGREE OF COMPARABILITY IN THE PRODUCTS B UT ALSO IN THE UNDERLYING CIRCUMSTANCES AND OTHER ECONOMICAL FACTO RS OF THE TRANSACTION. FOR SUCH COMPARISON TO BE USEFUL, THE RELEVANT ECONOMIC, MARKET AND GEOGRAPHICAL CHARACTERIZATION UNDERLYING THE TRANSACTIONS MUST BE SUFFICIENTLY ALIKE. THE REQUIR EMENT OF M/S. GARWARE POLYESTER LTD. 12 SIMILARITY IN GEOGRAPHICAL AND MARKET CONDITIONS IS GIVEN STATUTORY RECOGNITION IN INDIAN LAW IN RULE 10B(2) OF THE INC OME TAX RULES 1962 WHICH SPEAKS OF COMPARABILITY STANDARDS FOR TR ANSFER PRICING PURPOSES AND PROVIDES AS FOLLOWS: RULE 10B(2): FOR THE PURPOSES OF SUB-RULE (1), THE COMPARABILIT Y OF AN INTERNATIONAL TRANSACTION WITH AN UNCONTROLLED TRAN SACTION SHALL BE JUDGED WITH REFERENCE TO THE FOLLOWING, NAMELY: (A) TO(C)* * * (D) CONDITIONS PREVAILING :.N THE MARKETS IN WHICH THE RESPECTIVE PARTIES TO THE TRANSACTIONS OPERATE, INCLUDING THE GEOGRAPHICAL LOCATION AND SIZE OF THE MARKETS, THE LAWS AND GOVE RNMENT ORDERS IN FORCE, COSTS OF LABOUR AND CAPITAL IN THE MARKET S, OVERALL ECONOMIC DEVELOPMENT AND LEVEL OF COMPETITION AND W HETHER THE MARKETS ARE WHOLESALE OR RETAIL. 2.28 THE REQUIREMENT OF SIMILARITY IN GEOGRAPHICAL AND ECONOMICAL CONDITIONS OF MARKETS IS ALSO JUDICIALLY APPROVED O F IN THE FOLLOWING CASES: ACIT, 8(1), MUMBAI VS. DUFON LABORATORIES [3 9 SOT 59, MUMBAI ITAT], INTERVET INDIA (P) LTD VS. ACIT -8(2) [130TJ 301, MUMBAI ITAT]. IMPORTANCE OF GEOGRAPHICAL AND MARKET COMPARA BILITY IN ANY FAIR TRANSFER PRICING ANALYSIS FOR DE TERMINATION OF ARMS LENGTH PRICE IS ALSO HIGHLIGHTED IN PARA 1.30 OF TH E OECD TP GUIDELINES. 2.29 IN HIS ORDER U/S. 92CA(3), THE TPO ADMITS THAT BESIDES SIMILARITY OF PRODUCTS ONE HAS TO TAKE INTO ACCOUNT THE PRICE VARIATIONS ARISING ON ACCOUNT OF GEOGRAPHICAL DIFFE RENCES HE FURTHER STATES THAT THERE ARE NO DIRECT THIRD PARTY EXPORTS BY APPELLANT TO USA AND UK WHERE AES OPERATE AS IN THESE COUNTRIES THE AES ARE THE SOLE SELLING AGENTS AND THAT THE APPELLANTS TH IRD PARTY EXPORTS ARE TO DIFFERENT COUNTRIES LIKE RUSSIA, SAUDI ARABI A, TURKEY, SINGAPORE, ARGENTINA, JAPAN ETC. HOWEVER, IN SPITE OF ADMITTING THAT THERE ARE GEOGRAPHICAL DIFFERENCES AND ONE HAS TO TAKE INTO ACCOUNT VARIATIONS ON ACCOUNT OF GEOGRAPHICAL DIFFE RENCES FOR ARRIVING AT THE COMPARABLE UNCONTROLLED PRICE IN CA SE OF INTERNATIONAL TRANSACTIONS, THE TPO CONCLUDES THAT PRICES CHARGED FROM NON AES DO REFLECT THE INTERNATIONAL PRICES OF PRODUCTS AS NON AES ARE BASED IN MORE THAN ONE COUNTRY AND THAT THE COMPARISON OF THESE PRICES VIS-A-VIS THE PRICE CHARGED TO THE AES WITHOUT ANY ADJUSTMENT WOULD REFLECT THE COMPARABLE UNCONTROLLE D PRICE. THERE IS AN APPARENT CONTRADICTION BETWEEN THE ADMITTED F ACTS AND THE ULTIMATE CONCLUSION. WHILE TPO WAS BOLD ENOUGH TO E NTER THE CHOPPING SEAS OF THE CUP METHOD BUT WAS UNABLE TO N AVIGATE IT ON ACCOUNT OF IGNORING THE CORE TENETS OF REASONABLY A CCURATE ADJUSTMENTS TO BE MADE THUS LEADING TO AN ERRONEOUS ARMS LENGTH PRICE COMPUTATION MECHANISM. TPOS ASSUMPTION THAT SINCE APPELLANTS NON AE SALES COMPRISE OF MANY COUNTRIES , THE AVERAGE M/S. GARWARE POLYESTER LTD. 13 OF SUCH NON AE SALE PRICES DO REFLECT THE INTERNATI ONAL PRICES OF THE PRODUCTS, IS FAULTY AND MISCONCEIVED. THIS IS SO BE CAUSE, FIRSTLY AMERICAN AND EUROPEAN MARKETS IN WHICH AES OPERATE IS DISTINCT MARKET GEOGRAPHY WITH DISTINCT FEATURES AS COMPARED TO OTHER COUNTRIES (AS A CLASS) WHERE NON AES OPERATES. MERE LY AGGREGATING THE SALES TO NON AES OF TWO OR THREE COUNTRIES DOES NOT ELIMINATE THE PRICING DIFFERENCES THAT EXIST ON ACCOUNT OF GE OGRAPHICAL AND MARKET FACTORS. THE AVERAGE OF NON AE PRICES WOULD STILL CONTINUE TO REFLECT THE CHARACTERISTICS OF MARKETS IN WHICH NON AES OPERATE AND WOULD NOT CONVERT THOSE CHARACTERISTICS INTO CHARAC TERISTICS AND CONDITIONS OF AMERICAN & EUROPEAN MARKETS. THIS IS BASED ON THE THEORY THAT A SUM / AVERAGE OF APPLES STILL RETAINS THE CHARACTERISTICS OF APPLES ONLY AND THAT JUST BECAUS E IT IS A SUM/AVERAGE OF APPLES DOES NOT TURN ITS CHARACTERIS TIC INTO THOSE OF ORANGES. SECONDLY, IT IS NOT THE CASE THAT ALL PROD UCTS ARE SOLD IN ALL NON AE COUNTRIES AND THUS AT TIMES SUCH AVERAGE WIL L REPRESENT JUST ONE OR TWO COUNTRIES ONLY. 2.30 IT IS NOTED FROM APPELLANTS SUBMISSIONS AND M ATERIAL PLACED ON RECORD THAT EXPORT PRICES OF PRODUCTS MANUFACTUR ED AND SOLD BY THE APPELLANT VARY CONSIDERABLY FROM COUNTRY TO COU NTRY AND REASON FOR SUCH PRICE VARIATION IS ATTRIBUTED PRIMARILY TO VARIOUS ECONOMIC AND MARKET CONDITIONS PREVAILING IN RESPECTIVE COUN TRY / MARKET SUCH AS AVAILABILITY OF LOCALLY MANUFACTURED MATERI AL, PRESENCE OF COMPETITOR IN THE TERRITORY, DUTIES & TAX STRUCTURE OF THE COUNTRY, GENERAL PURCHASING POWER IN THE COUNTRY, AVAILABILI TY OF SUBSTITUTES, SIZE OF THE MARKET AND LEVEL OF DEMAND AND SUPPLY I N THE RESPECTIVE COUNTRY. AN ANALYSIS OF APPELLANTS EXPORT TRANSACT IONS WITH ITS NON AE CUSTOMERS REVEALS THAT EVEN THE EXPORT PRICES CH ARGED TO NON AE CUSTOMERS BASED IN TWO DIFFERENT COUNTRIES FOR T HE SAME PRODUCT VARY CONSIDERABLY ON ACCOUNT OF AFORESAID ECONOMICA L AND GEOGRAPHICAL DIFFERENCES. AEGPF AND AE GPIL ARE OP ERATING IN AMERICAN MARKETS AND EUROPEAN MARKETS. ON THE OTHER HAND, EXPORTS SALES OF APPELLANT TO NONAE CUSTOMERS ARE IN ASIAN, AFRICAN, MIDDLEEAST, FAR EAST, RUSSIA AND OTHER CI S COUNTRIES. AMERICAN AND EUROPEAN MARKETS WHERE AES OPERATE ARE MATURED, HIGHLY COMPETITIVE ARID BIGGER SIZE MARKETS AS COMP ARED TO ASIAN, AFRICAN, MIDDLE-EAST, FAR EAST AND RUSSIAN MARKETS WHICH CONSISTS OF MOSTLY ECONOMICALLY UNDERDEVELOPED NATIONS EXCEP T SOME OF THE COUNTRIES LIKE JAPAN, AUSTRALIA AND THAT THESE MARK ETS ARE FRAGMENTED IN NATURE. THE MARKET PRICES IN AMERICAN AND EUROPEAN MARKETS, WHICH ARE DEVELOPED AND HIGHLY COMPETITIVE MARKETS, ARE GENERALLY LOWER THAN OTHER MARKETS. THIS FACT IS ES TABLISHED FROM MATERIAL PLACED ON RECORD BY THE APPELLANT. FOR EXA MPLE, TABLE BELOW REFLECTS SOME OF INSTANCES WHERE WHOLESALE PR ICES OF AE GPF FOR ITS US BASED CUSTOMERS ITSELF, ARE LOWER THAN T HE SALE PRICES CHARGED BY APPELLANT TO ITS NON AES CUSTOMERS: M/S. GARWARE POLYESTER LTD. 14 SR. NO. PRODUCT QUALITY APPELLANTS NON AE PRICES (US$ / LAC SQ.FT) AE GPFS WHOLESALE PRICE IN US TO UNRELATED CUSTOMERS (US$/ LAC SG.FT) 1 GRD/BLUE/GREY 20 SRC 0.35 0.26 2 GRD/BLUE/GREY 5 SRC 0.35 0.25 3 GRD GOLD/BRONZE 15 0.35 0.30 4 GRD SIL/GREY 20 SRC 0.33 0.25 5 MATTE BRONZE 0.28 0.20 6 R BLUE 15 SRC 0.27 0.22 7 R BRONZE 10 SRC 0.28 0.26 8 R GOLD 15 SRC 0.27 0.25 2.31 THE AMERICAN AND EUROPEAN MARKETS CANNOT BE CO NSTRUED TO BE SIMILAR TO AFRICAN, ASIAN, MIDDLE-EAST, FAR EAST MARKETS WHERE NON AES ARE BASED WHEN THE END CUSTOMER PRICES (I.E . THE PRICE AT WHICH AES SELL SUBJECT PRODUCTS TO UNRELATED CUSTOM ERS) IN AMERICAN AND EUROPEAN MARKETS ARE ITSELF LOWER THAN THE EXPORT PRICES AT WHICH APPELLANT SELLS TO NON AE CUSTOMERS BASED IN OTHER GEOGRAPHICAL MARKETS. THE TPO HAS IGNORED THESE DOC UMENTED FACTS AND WORKED OUT ARMS LENGTH PRICES FOR SALE O F PRODUCTS BY THE APPELLANT TO ITS AES, WHICH WORKS OUT TO BE MORE TH AN ACTUAL PRICES REALISED BY AES FROM SALE OF THOSE PRODUCTS TO UNRE LATED THIRD PARTY CUSTOMERS. IT IS A CLASSICAL PARADOX WHERE, IN MOST OF INSTANCES, THE TPO DETERMINED ARMS LENGTH PRICES FOR SALE BY THE APPELLANT TO ITS AES IS MORE THAN THE ACTUAL PRICES AT WHICH AES ARE SELLING THOSE PRODUCTS TO THEIR UNRELATED CUSTOMERS. 2.32 FOR THE REASONS SET OUT IN PARAGRAPHS 225 TO 2 .31 ABOVE, I REJECT THE APPROACH OF TPO OF COMPARING THE EXPORT PRICES CHARGED TO AES (WHO OPERATES IN US AND EUROPEAN GEOGRAPHIES ) WITH THE PRICES CHARGED TO NON AES WHILE APPLYING THE CUP ME THOD. IN THIS CONTEXT, IT IS ALSO PERTINENT TO NOTE THE BENCHMARK ING EXERCISE DONE BY APPELLANT WHILE FILING ACCOUNTANTS REPORT IN FO RM 3CEB. IN FORM 3CEB AND ITS TRANSFER PRICING DOCUMENTATION, THE AP PELLANT ESTABLISHED ARMS LENGTH PRICES OF SALE OF PRODUCTS TO ITS AES BY COMPARING AVERAGE EXPORT PRICES CHARGED TO AES WITH AVERAGE PRICES CHARGED TO LOCAL INDIAN CUSTOMERS. THE APPEL LANTS AFORESAID APPROACH IS ALSO NOT ACCEPTABLE AS GEOGRAPHICAL DIF FERENCE DOES EXIST BETWEEN INDIAN MARKET ON ONE HAND AND AMERICA N & EUROPEAN ON THE OTHER HAND. 2.33 AS THERE ARE NO DIRECT THIRD PARTY EXPORTS BY APPELLANT TO USA AND UK WHERE AES OPERATE, THEREFORE, THERE ARE NO D IRECTLY COMPARABLE UNCONTROLLED TRANSACTIONS. IN THESE CIRC UMSTANCES, THE MOST APPROPRIATE WAY TO EXAMINE THE COMPLIANCE OF A RMS LENGTH M/S. GARWARE POLYESTER LTD. 15 CONDITIONS IS TO DEDUCE TAE MARKET PRICES PREVAILIN G IN THE CONCERNED GEOGRAPHICAL MARKET FROM THE FINANCIAL ST ATEMENTS OF RESPECTIVE AES ITSELF, SUBJECT TO ADJUSTMENT FOR TH E EXPENSES THAT AES NEED TO INCUR TO CONSUMMATE THE TRANSACTIONS AN D SALE THE PRODUCTS. AES ARE SELLING PRODUCTS PURCHASED FROM A PPELLANT TO THIRD PARTY UNRELATED CUSTOMERS. THUS, SALE PRICES CHARGED TO SUCH THIRD PARTY UNRELATED CUSTOMERS FOR THE PARTICULAR QUALITY OF THE PRODUCT REPRESENT COMPARABLE UNCONTROLLED PRICES ON AGGREGATE BASIS IN THE RESPECTIVE COMPARABLE MARKET UNDER COM PARABLE CIRCUMSTANCES. IN THIS REGARD, PERUSAL OF STATEMENT FURNISHED BY THE APPELLANT SETTING OUT THE PRICES AT WHICH AE GP F SOLD PLAIN FILM PRODUCTS AND SUN CONTROL PRODUCTS TO ITS THIRD PART Y CUSTOMER AND AE GPFS CORRESPONDING LANDED COST OF THOSE PRODUCT S PURCHASED FROM APPELLANT AND THE GROSS MARGIN EARNED BY THE A E GPF, REVEALS THAT THE GROSS DIFFERENCE BETWEEN THE LANDED COST O F GOODS SOLD AND THE PRICE AT WHICH AE SELLS THOSE PRODUCTS TO THIRD PARTY CUSTOMERS IN ITS DESIGNATED TERRITORY IS VERY NOMINAL AND IN SOME CASES EVEN NOT SUFFICIENT TO COVER THE OVERHEADS OF AE WHICH A RE AROUND 20% TO 25% O: HE LANDED COST OF THE GOODS SOLD. AES HA VE TO FURTHER PROCESS THE PRODUCTS BY UNDERTAKING SLITTING, REPAC KAGING, LABELING AS PER LOCAL STANDARDS AND LAWS, ETC FOR WHICH EXPE NSES ARE INCURRED BY THE AES. AE GPF SELLS AND MARKETS SOME OF THE PRODUCTS PURCHASED FROM APPELLANT UNDER ITS OWN GPF BRAND AND TRADE MARKS, FOR WHICH GPF NEED TO INCUR ADDITIONAL , COST AND EXPENSES FOR DEVELOPMENT OF THE BRAND, ETC. ONE HAS TO ALSO BEAR IN MIND THAT IN USA THERE IS HEAVY ANTIDUMPING DUTY ON THE POLYESTER FILM IMPORTED FROM INDIA. 2.34 IN THIS CONTEXT, IT IS ALSO RELEVANT TO NOTE T HAT AES ARE WORKING AS DISTRIBUTORS SOLELY FOR THE APPELLANT. A ES DO NOT HAVE ANY OTHER BUSINESS OTHER THAN THAT WITH THE APPELLA NT. THE FINANCIAL RESULTS OF AES, THEREFORE, GET AFFECTED SOLELY ON A CCOUNT OF ITS TRANSACTIONS WITH THE APPELLANT. THE FINANCIAL RESU LTS OF THE AES FOR THE RELEVANT FINANCIAL PERIOD ARE TABULATED BELOW: PARTICULARS GPF GPIL TURNOVER $7,862,503 5,883,738 GROSS PROFIT $780,692 641,990 G.P/ RATIO 9.93% 10.91% OPERATING EXPENSES $890,968 699,818 % OF OPERATING EXP TO SALES 11.33% 11.89% OPERATING PROFIT/-LOSS -$110,276 -57,828 THE ABOVE ANALYSIS REFLECTS THAT, ON AN AGGREGATE B ASIS, THE GAP BETWEEN THE PRICES AT WHICH AES PROCURED PRODUCTS F ROM APPELLANT AND THE PRICE AT WHICH THEY SOLD THE PRODUCTS DOES NOT EXCEED 9.93% FOR AE GPF AND 10.91% FOR AE GPIL AS IS REFLE CTED IN THE GROSS PROFIT MARGINS OF THESE AES. FURTHER, SUCH PR ICE DIFFERENCE RETAINED BY THE AES IS NOT ENOUGH TO COVER EVEN THE AES OPERATING M/S. GARWARE POLYESTER LTD. 16 EXPENSES. NO THIRD PARTY DISTRIBUTOR WOULD WORK FOR THE APPELLANT AT SUCH LOSS MAKING PROPOSITION. IN CONTRAST TO THAT, THE TPOS WORKING OF TRANSFER PRICING ADJUSTMENT HIGHLIGHTS THAT THE DIFFERENCE BETWEEN AE PRICES AND NON-AE PRICES IS AS HIGH AS 3 0% TO 40%, WHICH IS ENTIRELY CONTRARY TO FACTS REFLECTED FROM AUDITED FINANCIAL STATEMENTS OF AES. SUCH CONTRADICTION/ DIFFERENCES EXIST BECAUSE TPO HAS NOT TAKEN SAME MARKET / GEOGRAPHY NON-AE TR ANSACTIONS AS COMPARABLE TRANSACTIONS. 2.35 THE APPELLANT ALSO FURNISHED AES PROFITABILITY MARGIN STATEMENT SINCE THEIR INCEPTION TILL THE RELEVANT F INANCIAL PERIOD. ON PERUSAL OF THE SAID STATEMENT IT IS OBSERVED THAT AES ARE EITH ER SUFFERING LOSSES CONSISTENTLY FOR THE YEARS OR ARE EARNING ON LY NOMINAL NET PROFIT MARGINS. HAD IT BEEN THE CASE THAT APPELLANT HAS CHARGED LOWER PRICES TO ITS AES THAN PREVAILING MARKET PRIC ES IN THE RESPECTIVE GEOGRAPHICAL MARKET THE AES WOULD HAVE B EEN MAKING SIGNIFICANT PROFITS YEAR BY YEAR, RATHER THAN SUFFE RING LOSSES OR EARNING ONLY NOMINAL PROFITS. THE FACT THAT THE MAR GINAL RATES OF TAX ARE HIGHER IN USA AND UK ALSO ACTS AS A DAMPENER IN SHIFTING PROFITS. 2.36 IT IS A CLICH IN TRANSFER PRICING CIRCLES HUT NONETHELESS TRUE THAT TRANSFER PRICING IS MORE OF AN ART THAN A SCIE NCE. THIS PROPOSITION ALLOWS THE DEGREE OF THE JUDGMENT ABOUT THE LEVEL OF EVIDENCE THAT IS REQUIRED TO EVALUATE A TRANSFER PR ICE AND TO ASCERTAIN THAT A PARTICULAR METHOD IS A REASONABLE ESTIMATION OF THE ARMS LENGTH PRICE. BASED ON THE LEVEL OF EVIDENCE F ILED AND BROUGHT ON RECORD A JUDGMENT CAN BE MADE THAT THIS TRANSACT ION WITH ITS AE IS AT ARMS LENGTH PRICE. 2.37 TAKING ALL THE ABOVE FACTS AND CIRCUMSTANCES C UMULATIVELY AND FOR REASONS RECORDED IN PARA 2.25 TO 2.37, IT I S HELD THAT THE APPELLANTS INTERNATIONAL TRANSACTIONS OF SALE OF S UN CONTROL AND PLAIN FILM PRODUCTS WITH ITS AES GPF AND GPIL WAS A T ARMS LENGTH AND THERE WAS NO CASE FOR MAKING TRANSFER PRICING A DJUSTMENTS. THE ADDITION OF ` 33,893,862/- MADE BY ASSESSING OFFICER ON ACCOUNT OF TRANSFER PRICING ADJUSTMENTS IS THEREFORE DELETED. 2.38 THE OTHER ASPECTS OF APPELLANTS SUBMISSIONS C ONCERNING INTERNATIONAL TRANSACTIONS OF SALE OF SUN CONTROL A ND PLAIN FILM PRODUCTS ARE DEALT WITH HEREINAFTER: 2.39 THE APPELLANT TOOK THE ALTERNATIVE PLEA THAT I F AT ALL PRICES CHARGED TO NON AES IN DIFFERENT GEOGRAPHIES ARE TO BE COMPARED WITH THE PRICE CHARGED TO AES THEN ONE NEED TO CONS IDER DIFFERENCES IN THE TRANSACTIONS AND APPROPRIATE ADJUSTMENTS NEE D TO BE MADE IN NON AE PRICES TO ARRIVE AT THE ARMS LENGTH PRIC E. THE APPELLANT SOUGHT ADJUSTMENTS FOR (A) VOLUME DISCOUNT, (B) GEO GRAPHICAL DIFFERENCES AND (C) SELLING & AND MARKETING COST (D ) MISTAKE IN RESPECT OF CERTAIN TRANSACTION VIDE PARAS 2.19, 2.2 0, 2.21 & 2.23 OF M/S. GARWARE POLYESTER LTD. 17 THIS ORDER. THERE IS MERIT IN ITS CLAIM SO FAR IT A PPLIES TO VOLUME DISCOUNTS AND APPARENT MISTAKES. HOWEVER SINCE THE MATTER HAS BEEN ALREADY DECIDED IN ITS FAVOUR HENCE THE SAME I S NOT BEING ADDRESSED HENCE. AS REGARDS ADJUSTMENTS ON ACCOUNT OF GEOGRAPHICAL DIFFERENCES AND SELLING D MARKETING CO ST IT IS FELT THAT IT IS NOT POSSIBLE TO MAKE REASONABLY ACCURATE ADJUSTM ENTS HENCE IT CANNOT BE ACCEDED TO. IN ANY CASE, AS STATED EARLIE R, THE MAIN ISSUE HAS BEEN ADDRESSED ON MERITS IN APPELLANTS FAVOUR A ND SO THESE ISSUES HAVE BECOME REDUNDANT. 2.40 COMPARISON WITH NON COMPARABLE ISOLATED SOLITA RY TRANSACTIONS: REFERRING TO ANNEXURES TO. TRANSFER P RICING ORDER U/S. 92CA(3) AND STATEMENTS ENCLOSED WITH APPELLANTS WR ITTEN SUBMISSIONS DATED 07/12/2010, THE APPELLANT DREW MY ATTENTION TO THE FACT THAT IN SOME INSTANCES THE TPO HAS COMPARE D PRICES CHARGED TO AE WITH THE PRICES CHARGED IN HIGHLY PRI CED SOLITARY LOW VOLUME NON AE TRANSACTIONS RESULTING INTO DISPROPOR TIONATE QUANTUM OF TRANSFER PRICING ADJUSTMENT. APPELLANT S UBMITTED THAT SUCH HIGHLY PRICED, SOLITARY, LOW VOLUME NON AE TRA NSACTIONS ARE NOT AT ALL COMPARABLE WITH AE TRANSACTIONS. ON PERUSAL OF DETAILS PLACED ON RECORD, IT IS NOTED THAT THE TPO HAS COMPARED AE TRANSACTION OF SALE OF PLAIN FILM PRODUCT GARFILM MATT (MT-12) T O AE PF OF 70,601.90 KGS WITH A HIGH PRICED SOLITARY TRANSACTI ON WITH A JAPAN BASED NON AE CUSTOMER WHEREIN QUANTITY OF ONLY 4395 KGS IS INVOLVED AND THIS TRANSACTION ALONE HAS LED TO TRAN SFER PRICING ADJUSTMENT OF 5,003,428/-. IN TERMS OF QUANTITY, TH ESE TWO TRANSACTIONS ARE NOT COMPARABLE AT ALL. HENCE, THE TRANSFER PRICING ADJUSTMENT OF 5,003,428/- ON ACCOUNT OF SAID TRANSA CTION IS UNJUSTIFIED. TPO HAS COMPARED AE TRANSACTION OF SAL E OF SUN CONTROL FILM PRODUCT GRD SILVER GREY 05 TO AE GPIL OF 1,1 9,331 KG WITH A HIGH PRICED TRANSACTION WITH TWO NOIL AE CUSTOMERS WHEREIN TOTAL QUANTITY OF ONLY 2,167 KGS IS INVOLVED, LEADING TO TRANSFER PRICING ADJUSTMENT OF RS. 6,08,811/-. IN. TERMS OF QUANTITY , THESE TWO TRANSACTIONS ARE NOT COMPARABLE AT ALL. HENCE, THE TRANSFER PRICING ADJUSTMENT OF 6,08,811/- ON ACCOUNT OF SAID TRANSAC TION IS UNJUSTIFIED. FURTHER, YET IN ANOTHER CASE TPO COMPA RED AE TRANSACTION OF SALE OF SUN FILM PRODUCT HP GREY 05 SRC TO AE GPIL OF 49,519.90 KG WITH A HIGH PRICED SOLITARY TRANSAC TION OF NON AE CUSTOMER WHEREIN TOTAL QUANTITY OF ONLY 2,000 KG. I S INVOLVED, LEADING TO TRANSFER PRICING ADJUSTMENT OF 4,33,471/ -. IN TERMS OF QUANTITY, THESE TWO TRANSACTIONS ARE NOT COMPARABLE AT ALL. HENCE, THE TRANSFER PRICING ADJUSTMENT OF 4,33,471 ON ACCO UNT OF SAID TRANSACTION IS UNJUSTIFIED. THE APPROACH OF TPO OF COMPARING HIGH VOLUME AE TRANSACTIONS WITH LOW VOLUME SOLITARY TRA NSACTIONS OF APPELLANT WITH ITS NON AE CUSTOMERS DO NOT MEET WIT H COMPARABILITY STANDARDS REQUIRED UNDER CUP METHOD AND SUCH COMPAR ISON DONE BY TPO IS NO PERMISSIBLE IN TERMS OF LAW AND ON FAC TS. HOWEVER, THIS ALSO BECOMES AN ACADEMIC EXERCISE AS I HAVE AL READY HELD IN PARA 2.37 THAT THE APPELLANTS ALL INTERNATIONAL TRA NSACTIONS OF SALE OF SUN CONTROL AND PLAIN FILM PRODUCTS WITH ITS AE GPF & GPIL ARE AT ARMS LENGTH AND THERE WAS NO CASE FOR MAKING ADJUST MENTS AND DELETED ENTIRE TRANSFER PRICING ADDITION OF 33,893, 862. M/S. GARWARE POLYESTER LTD. 18 9. ON THE ISSUE OF TRANSFER PRICING ADJUSTMENT OF ` 61,12,532, RELATING TO COMMISSION PAID TO A.E., GPIL, THE ASSESSEE, BEF ORE THE COMMISSIONER (APPEALS), FIRST OF ALL, OBJECTED THAT THE COMMISSI ON ACCRUED TO A.E., GPIL, FOR THE FINANCIAL YEAR 2004-05, HAS BEEN MISTAKENLY TAKEN AS ` 1,01,87,553, WHEREAS, THE ACTUAL AMOUNT OF COMMISSI ON ACCRUED TO A.E., GPIL FOR THE RELEVANT FINANCIAL YEAR AND WHICH WAS DEBITED TO COMMISSION EXPENDITURE ACCOUNT IN THE BOOKS WAS AT ` 72,54,263 ONLY. THEREFORE, EXCESSIVE TRANSFER PRICING ADJUSTMENT OF ` 17,59,974 [29,33,290 / 12.5 * 7.5] HAS BEEN CALCULATED ON DIFFERENTIAL COMMISSION AMOUNTING TO ` 29,33,290, WHICH IS THE PAYMENT OF REMITTANCE MADE TO THE A.E. GPIL IN THE F.Y. 2004-05 FOR THE COMMISSION AMOUNT ALREADY DEBITED IN THE BOOKS OF THE ASSESSEE IN THE F.Y. 2003-04, WHICH HAS BEEN REPORTED IN FORM NO.3CEB, FOR THE F.Y. 2003-04. THIS MISTAKE NEEDS T O BE RECTIFIED. ON MERITS, IT WAS SUBMITTED THAT THE ASSESSEE HAS BENC H MARKED ITS COMMISSION TO A.E. APPLYING CUP METHOD WHEREIN COMM ISSION TO A.E. @ 12.5% HAS BEEN COMPARED WITH COMMISSION RANGING FRO M 3% TO 10% PAID TO SEVERAL NON-A.E. FOREIGN AGENTS OF THE ASSESSEE. IT WAS SUBMITTED BEFORE THE COMMISSIONER (APPEALS) THAT INCREASE RAT E OF 12.50% IS JUSTIFIED ON ACCOUNT OF SIGNIFICANT DIFFERENCES IN ASSESSEES AGENCY ARRANGEMENT WITH ITS A.E. FOREIGN AGENTS. SUCH DIF FERENCES ARE IN TERMS OF OBLIGATION UNDERTAKEN FUNCTIONS PERFORMED, PRODUCTS COVERED UNDER THE AGENCY ARRANGEMENT RISK ASSUMPTION, ETC. IN SUPPORT OF THIS DIFFERENCE, THE ASSESSEE FILED COPY OF AGENCY AGREEMENTS WITH I TS A.E. AND NON-A.E. FOREIGN AGENTS. VARIOUS DIFFERENCES WERE POINTED OU T BEFORE THE TPO FROM THESE AGREEMENTS. THE COMMISSIONER (APPEALS) ANALYS ED THE AGENCY AGREEMENT WITH A.E. GPIL AND WITH NON-A.E. FOREIGN AGENCIES IN THE FOLLOWING MANNER:- M/S. GARWARE POLYESTER LTD. 19 AGENCY ARRANGEMENT WITH AE GPIL AGENCY ARRANGEMENT WITH NON AE FOREIGN AGENTS AE GPIL HAS BEEN APPOINTED AS SOLE SELLING AGENT FOR PROMOTING AND CANVASSING ORDERS AND UNDERTAKES MARKET DEVELOPMENT, ADVERTISING AND SALES PROMOTION AT ITS OWN COST AND RESOURCES. NON AES HAVE BEEN APPOINTED AS INDENTING AGENT FOR ONLY CANVASSING ORDERS. THEY ARE NOT OBLIGED TO UNDERTAKE MARKET DEVELOPMENT, SALES PROMOTION AND ADVERTISING AT THEIR OWN COST AND RESOURCES. AE GPIL IS ACTING AS FULL FLEDGED AGENT WHO UNDERTAKES MARKET DEVELOPMENT, BRAND PROMOTION OF ITS PRINCIPAL (I.E. APPELLANT) AT ITS OWN COST, RISKS AND RESOURCES. NON AE AGENTS ARE LIMITED RISK AGENTS AS THEY ARE NOT UNDER ANY OBLIGATION TO APPELLANT TO UNDERTAKE ANY PROMOTIONAL AND MARKET DEVELOPMENT EFFORTS AND THEREBY THE RISK OF FINANCIAL LOSS DOES NOT EXIST FOR THEM. PRODUCT DIFFERENCES THE AGENCY ARRANGEMENT WITH AE GPIL IS FOR ALL TYPES O POLYESTER FILM PRODUCTS SUCH A METALIZED FILMS, PLAIN FILMS AND SUN CONTROL FILMS I.E SUN CONTROL FILMS PRODUCTS WHICH ARE CONSUMER PRODUCTS (CPD PRODUCTS) AND PLAIN FILMS WHICH ARE INDUSTRIAL PRODUCTS (IPD PRODUCTS). THE AGENCY ARRANGEMENT WITH NON AE FOREIGN AGENTS IS ONLY FOR PLAIN FILM (GARFILM) I.E. ONLY FOR IPD PRODUCTS. CONSUMER PRODUCTS ARE NOT COVERED IN THE ARRANGEMENT WITH NON AE FOREIGN AGENTS. MARKET TERRITORY DIFFERENCES AE GPIL OPERATES IN EUROPE WHERE THE COSTS OF OPERATIONS ARE COMPARATIVELY HIGHER. NON AE FOREIGN AGENTS OPERATES IN THE TERRITORIES OF IRAN, EGYPT, ARGENTINA, SRILANKA, PHILIPPINES, SOUTH AFRICA, TURKEY, ETC. WHERE THE COST OF OPERATIONS ARE COMPARATIVELY LOWER. INDUSTRY & COMPETITION DIFFERENCES CPD PRODUCTS ARE USED AS FINAL PRODUCT IN AUTOMOBILE INDUSTRY AND BUILDING INDUSTRY BY ULTIMATE END CONSUMERS. THUS, THESE ARE CONSUMER PRODUCTS. IPD PRODUCTS ARE INDUSTRIAL PRODUCTS (AND NOT CONSUMER PRODUCTS) AND ARE USED AS INPUT BY VARIOUS INDUSTRIES VIZ. PACKAGING INDUSTRY, ELECTRIC AND MOTOR INSULATION INDUSTRY, ETC. CPD PRODUCTS ARE SOLD IN MORE THAN 300 QUALITIES AND BROADLY IN 80 TO 9() QUALITY CATEGORIES. EACH QUALITY DIFFERS FROM OTHER BASED ON CUSTOMERS SPECIFIC REQUIREMENT, SPECIFICATIONS, ETC. FOR EXAMPLE, IN CASE OF BUILDING INDUSTRY MAINLY USED IN WINDOW APPLICATION, CUSTOMER MAY REQUIRE PARTICULAR VLT % (VISUAL LIGHT TRANSMISSION WITHIN THE LIMIT OF PARTICULAR COUNTRYS SPECIFIC PARAMETERS), PARTICULAR COLOUR, PARTICULAR THICKNESS FOR SAFETY PURPOSES, ETC. IPD PRODUCTS ARE SOLD ONLY IN MAXIMUM 12 TO 16 QUALITIES. M/S. GARWARE POLYESTER LTD. 20 IN CASE OF CPD PRODUCTS, SUBSTITUTE PRODUCTS ARE AVAILABLE IN THE MARKET WHICH ALMOST LOOKS SIMILAR AS APPELLANTS PRODUCTS BUT PERFORMANCE WISE IT IS OF INFERIOR QUALITY. BUT ONE CANNOT MAKE OUT THESE DIFFERENCES UNLESS PRACTICALLY IT HAS BEEN USED. IPD PRODUCTS ARE COMMODITY PRODUCTS. ALMOST ALL COMPETITORS PRODUCTS ARE ALIKE WITH LITTLE VARIATION. RESULTANTLY, IT IS VERY DIFFICULT TO DEVELOP MARKET FOR THESE PRODUCTS. ONE HAS TO MAKE EXTRA EFFORTS TO SELL THESE PRODUCTS LIKE ORGANIZING VIDEO FILM PRESENTATIONS, MAKE ADVERTISE- MENTS BY VARIOUS MEDIUM SUCH AS TAKING PART IN EXHIBITIONS, DO A MARKET SURVEY ON A REGULAR BASIS TO CHECK THE CUSTOMERS TASTES ETC. FOR CPI) PRODUCTS, CUSTOMER IS KING AND ONE HAS TO DEPEND PURELY ON CUSTOMERS REQUIREMENT, TASTES, LIKES, DISLIKES AND ACCORDINGLY STRIVES HARD TO CONVINCE, SATISFY AND DEMONSTRATE CUSTOMERS ITS QUALITY PRODUCTS. BEING INDUSTRIAL PRODUCT, THERE IS NO NEED TO MAKE MUCH EFFORT IN SELLING IPD PRODUCTS. THE MARKETING OF THESE PRODUCTS DOES NOT INVOLVE SIGNIFICANT PROMOTIONAL EXPENSES. ONE CANNOT BUILD A MARKET FOR CONSUMER PRODUCTS UNLESS IT DEMONSTRATES AND SATISFIES CUSTO MERS IN ALL RESPECT VIZ DURABILITY, LATEST PRODUCT, CONVENIENT TO USE ETC. IT CAN ONLY BE ALONE BY EXTENSIVE SALES AND MARKETING EFFORTS WHICH REQUIRE ADDITIONAL EXPENSES OF ADVERTISEMENT AND SALES PROMOTION ACTIVITIES. FURTHER EUROPEAN AND AMERICAN MARKETS ARE VERY COMPETITIVE MARKETS AS COMPARED TO OTHER MARKETS. THE CUSTOMERS IN THESE MARKETS ARE HIGHLY EDUCATED CUSTOMERS AND ONE CANNOT REMAIN IN SUCH MARKET UNLESS IT OFFERS A. QUALITY PRODUCT. IN SOME OF THE COUNTRIES THE CUSTOMERS PREFER INTRODUCTION OF AN AGENT IN BETWEEN IN ORDER TO CHASE FOR TIMELY DELIVERY AND COMPLETING ALL CUSTOM CLEARANCE FORMALITIES INVOLVED IN THE IMPORT PROCESS. HENCE APPELLANT HAS NO OTHER CHOICE EXCEPT TO APPOINT AN AGENT IN THESE COUNTRIES TO SALE PLAIN FILM PRODUCTS. THE ROLE OF THESE NON AE FOREIGN AGENTS IS VERY LIMITED FOR THIS SPECIFIC PURPOSE OF LIAISONING AND COORDINATION WITH ALREADY ESTABLISHED INDUSTRIAL CUSTOMER BASE. 10. THE COMMISSIONER (APPEALS) FURTHER NOTED THAT FOR P ROMOTING AND MARKETING OF CONSUMER PRODUCTS I.E. SUN CONTROL FIL M, AGENT NEED TO UNDERTAKE MASSIVE ADVERTISEMENT AND PUBLICITY CAMPA IGNS AND NEED TO MAINTAIN SUFFICIENT ORGANIZATIONAL FACILITY FOR SAL ES PROMOTION AND MARKET DEVELOPMENT ACTIVITIES AND INITIATIVES. SUCH ACTIVI TIES INVOLVE INCREMENTAL COSTS IN THE FORM OF OFFICE FACILITIES, MARKETING S TAFF SALARIES, EMPLOYEE RELATED REGULATORY AND SOCIAL SECURITY COSTS, TRAVE LING EXPENSES, ETC. WITHOUT INCURRING SUCH COSTS ONE CANNOT BOOST THE S ALE OF CONSUMER PRODUCTS. ONE CANNOT EVEN MAKE CONSUMER AWARE OF TH E PRODUCTS WITHOUT M/S. GARWARE POLYESTER LTD. 21 ADVERTISEMENT AND PROMOTIONS THROUGH SECOND LEVEL D ISTRIBUTORS AND IN EXHIBITIONS. IT IS PRACTICALLY IMPOSSIBLE TO SELL T HE CONSUMER PRODUCT WITHOUT EDUCATING THE CONSUMERS ON PRODUCT FEATURES AND ADVANTAGES. CONSUMERS FOR SUCH PRODUCTS CONSIST OF GENERAL MASS ES. THESE PRODUCTS ARE SOLD IN SMALL QUANTITIES AND CAN NOT BE SOLD IN BULK QUANTITIES LIKE INDUSTRIAL PRODUCTS. ONE SHOULD ALSO CONSIDER THE F ACT THAT GENERALLY CONSUMER PRODUCTS ARE SOLD IN RETAIL OUTLETS AND FO R THIS PURPOSE ORGANISATION, CO-ORDINATION AND MANAGEMENT OF LARGE R SUPPLY CHAIN (SUCH AS STOCKIEST, DISTRIBUTOR / WHOLESALER, RETAILER, E TC) NEEDS TO BE UNDERTAKEN. ALL THESE INVOLVE INCREASED LEVEL OF EXPENSES FOR T HE AGENT, ESPECIALLY WHEN AE AGENT HAS UNDERTAKEN CONTRACTUAL OBLIGATION TO U NDERTAKE MARKET DEVELOPMENT. ON PERUSAL OF FINANCIAL STATEMENTS OF AES IT WAS OBSERVED THAT THEY DID INCUR ADVERTISEMENT EXPENSES, TRAVEL AND ENTERTAINMENT EXPENSES AND EMPLOYEE SALARIES AT CONSIDERABLE LEVE LS. FURTHER, IT WAS SUBMITTED THAT IT IS A FACT THAT NOT MUCH EFFORTS A RE REQUIRED FOR PROMOTION OF INDUSTRIAL PRODUCTS AND THERE IS NO NEED TO HUNT FOR THE POTENTIAL CUSTOMERS FOR SUCH INDUSTRIAL PRODUCTS. POTENTIAL C USTOMERS ARE FEW SPECIALIZED INDUSTRIAL CUSTOMERS WHO EITHER USE THE PRODUCT AS RAW MATERIALS OR AS COMPONENT PARTS FOR MANUFACTURE OF FINISHED GOODS OR ANY ACTIVITY ANCILLARY TO MANUFACTURE OF PRODUCTS. HENC E, THE PURCHASER OF THE INDUSTRIAL PRODUCTS IS GENERALLY AWARE OF THE POTEN TIAL SUPPLIERS BY WAY OF ITS INTERNAL MARKET INTELLIGENCE. THEY APPROACH SUP PLIER DIRECTLY THROUGH INDEPENDENT AGENTS. INDUSTRIAL PRODUCTS ARE ALWAYS SOLD IN BULK QUANTITIES. ONE CAN BUILD THE GOOD VOLUME FOR INDUSTRIAL PRODUC TS ONLY FROM FEW CUSTOMERS. THE QUANTUM OF COMMISSION PAYABLE TO SUC H INDEPENDENT AGENTS DEPENDS UPON AGENCY ARRANGEMENT WITH SUCH AG ENT. AS INDUSTRIAL PRODUCTS CAN BE SOLD IN SUBSTANTIAL VOLUME WITHOUT MAKING SUBSTANTIAL EFFORTS, COMMISSION PAYABLE COMMENSURATE WITH AGENT S EFFORTS IS MUCH EASIER THAN THE COMMISSION PAYABLE FOR MARKETING AN D PROCURING ORDERS FOR CONSUMER PRODUCTS WHERE ENORMOUS EFFORTS AND EXPENS ES ARE REQUIRED TO BE INCURRED. IN THE APPELLANTS CASE, IT IS NOTED T HAT ALL NON AE FOREIGN M/S. GARWARE POLYESTER LTD. 22 AGENTS ARE LIMITED RISK AGENTS. THERE IS NO OBLIGAT ION ON THEM FOR INCURRING EXPENSES ON MARKET DEVELOPMENT. THUS, THEY BEAR THE LIMITED RISK. 11. THE COMMISSIONER (APPEALS) FURTHER OBSERVED THAT TH ERE IS NO GUARANTEED MINIMUM COMMISSION FROM THE APPELLANT TO AE GPIL, THERE IS RISK ATTACHED TO GPIL ON ACCOUNT OF THE FACT THAT W HILE GPIL INCURRS SUCH ADDITIONAL COSTS BUT THERE MAY NOT BE COMMENSURATE COMMISSION INCOME AND THEREBY GPIL BEARING THE RISK OF FINANCIAL LOSS ON ACCOUNT OF IT FUNCTIONING AS SOLE SELLING AGENT. THE EXTENT OF TH IS RISK IS VERY LIMITED IN CASE OF NON AE AGENTS FOR INDUSTRIAL PRODUCTS WHERE IN AS SUCH MUCH EFFORTS ARE NOT INVOLVED AND THEY ARE ALSO NOT UNDER ANY CO NTRACTUAL OBLIGATIONS TO COMPULSORILY PROMOTE APPELLANTS PRODUCTS ONLY. 12. THE COMMISSIONER (APPEALS), THUS, CONCLUDED THAT IN CASE OF NON- A.E. FOREIGN AGENCY, WHERE THERE IS A LIMITED RISK, THE ASSESSEE HAS PAID COMMISSION @ 8% AND IN THAT 2% SHOULD BE ADDED FOR ADDITIONAL RISK ATTACHED TO THE FULL FLEDGED AGENT AND, THEREFORE, 10% COMMISSION SHOULD BE TAKEN AS ARMS LENGTH COMMISSION FOR A.E. GPIL. HIS RELEVANT FINDINGS ARE AS UNDER:- 3.11 THE QUESTION THEREFORE ARISES AS TO WHAT SHOU LD BE ARMS LENGTH RATE OF COMMISSION FOR AE GPIL IN VIEW OF DI FFERENCES IN APPELLANTS AGENCY ARRANGEMENT WITH GPIL AND WITH N ON AE FOREIGN AGENTS. IT IS NOTED THAT IN CASE OF LIMITED RISK NO N AE FOREIGN AGENT ALSO THE APPELLANT HAS PAID COMMISSION @ 8% FOR IND USTRIAL PRODUCTS I.E. PLAIN FILMS. THEREFORE, IT IS NOT THE CASE THAT INCREASED RATE OF COMMISSION HAVE BEEN PAID ONLY TO AES. IN C ASE OF NON-AES ALSO, WHEREVER THE PERCEIVED BENEFIT FROM AGENTS A CTIVITIES ARE HIGHER, INCREASED RATE OF COMMISSION IS PAID AS COM PARED TO NORMAL RATE OF COMMISSION OF 5%. CONSIDERING THE FACT THAT (A) AE GPIL IS A FULL FLEDGED AGENT; (B) AGENCY ARRANGEMENT WITH A E COVERS ALL TYPES OF PRODUCTS (I.E. INDUSTRIAL PRODUCT AS WELL AS CONSUMER PRODUCTS) AND (C) THAT THERE IS INCREASED SCOPE AND INTENSITY OF RISK ASSUMED AND FUNCTIONS PERFORMED BY AE, IT DESERVES MORE COMMISSION COMPARED TO LIMITED RISK NON AE AGENTS. HENCE, IN MY OPINION, DETERMINATION OF ARMS LENGTH COMMISSION F OR AE GPIL @ 10% WOULD BE IN CONFORMITY WITH ARMS LENGTH STANDA RD. THIS COMMISSION IS WORKED OUT BY ADDING 2% FOR ADDITIONA L RISKS ATTACHED TO FULL FLEDGED AGENT ON THE 8% COMMISSION PAID BY APPELLANT TO LIMITED RISK NON AE AGENT . M/S. GARWARE POLYESTER LTD. 23 13. THE COMMISSIONER (APPEALS), HOWEVER, GAVE THE BENEF IT OF +/- 5% RANGE HELD THAT THE SAME SHOULD BE ALLOWED IN VIEW OF VARIOUS DECISIONS OF THE TRIBUNAL, AS DISCUSSED IN PARA-3.13 OF HIS ORDE R. HE RESTRICTED THE TRANSFER PRICING ADJUSTMENT ON ACCOUNT OF COMMISSIO N PAID TO A.E. AT ` 11,60,682, IN THE FOLLOWING MANNER:- 3.12 ON PERUSAL OF DOCUMENTS PLACED ON RECORD BY T HE APPELLANT, IT IS OBSERVED THAT TOTAL AMOUNT OF COMMISSION ACCR UED TO AE GPIL IN THE FINANCIAL YEAR 2004-05 IS ONLY RS.72,54,263/ - AND NOT RS 1,01,87,553 /-. RS.72,54,263/- REPRESENTS COMMISSIO N @ 12.50%. COMMISSION AT THE ARMS LENGTH RATE OF 10% WOULD TH US BE RS.5,803,410/- [I.E. (72,54,263/12.5)*10]. AS THE A RMS LENGTH RATE OF COMMISSION HAS BEEN DETERMINED HAVING REGAR D TO SEVERAL AGENCY ARRANGEMENTS OF APPELLANT WITH ITS NON AE FO REIGN AGENTS (I.E. INTERNAL CUP), APPELLANT IS ENTITLED TO BENEF IT OF ARMS LENGTH RANGE OF +/ 5% IN TERMS OF PROVISO TO SECTION 92C( 2) OF THE ACT. THUS, +5% RANGE WOULD EXTEND UPTO ` 6,093,581/ [I.E., ` 5,803,410*105%]. CONSEQUENTLY, THE TRANSFER PRICING ADJUSTMENT SHALL SURVIVE ONLY FOR ` 1,160,682/ [I.E., ` 72,54,263 MINUS ` 6,093,581/]. ACCORDINGLY, I HOLD THAT TRANSFER PRI CING ADJUSTMENT IN RESPECT OF COMMISSION PAID TO AE SHALL BE RESTRI CTED TO ` 1,160,682 AND BALANCE TRANSFER PRICING ADJUSTMENT O F ` 4,951,850 [I.E., ` 61,12,532 MINUS ` 1,160,682] STANDS DELETED. 14. BEFORE US, THE LEARNED DEPARTMENTAL REPRESENTATIVE, WITH REGARD TO THE ADJUSTMENT MADE IN THE SALES TO A.E., SUBMITTED THAT THE ASSESSEE HAS COMPARED THE SALES OF U.S.A. AND U.K. WITH THE AVER AGE SALE PRICE OF INDIA WHICH APPROACH ITSELF IS ERRONEOUS WHEN THE ASSESSE E ITSELF HAS BEEN CONTENDING THAT THE ASSESSEES MARGIN CANNOT BE COM PARED WITH SALES MADE TO OTHER COUNTRIES. HE POINTED OUT THAT THE CO MMISSIONER (APPEALS) HIMSELF HAS REJECTED THIS APPROACH OF THE ASSESSEE IN PARA3.32. HE FURTHER SUBMITTED THAT IF A METHOD ADOPTED BY THE T PO IS ALSO NOT CORRECT, THEN BEST WAY WAS TO COMPARE THE THIRD PARTIES DEAL ING IN SIMILAR CASE. THE PRODUCTS ARE THE SAME, THEREFORE, THE MATTER SHOULD GO BACK TO THE FILE OF THE TPO AND SUCH THIRD PARTY SHOULD BE CONSIDERED I N CUP METHOD. HE FURTHER ADDED THAT IN THE COUNTRIES WHERE A.ES ARE DEALING, THERE ARE THIRD PARTIES WHO ARE INVOLVED IN SUCH BUSINESS, THE SAME CAN ALSO BE CONSIDERED. LASTLY, HE SUBMITTED THAT IF THERE ARE NO INTERNAL AND EXTERNAL M/S. GARWARE POLYESTER LTD. 24 COMPARABLES, THEN THE MOST APPROPRIATE METHOD WHICH SHOULD BE ADOPTED IS THAT OF TNMM. THE LEARNED DEPARTMENTAL REPRESENT ATIVE FURTHER SUBMITTED THAT THE GEOGRAPHICAL AND MARKETING DIFFE RENCE IN THE COUNTRIES WHERE A.ES ARE OPERATING AND OTHER COUNTRIES HAVE A SIGNIFICANT DIFFERENCE, THEN ALSO HOW CAN THE COMMISSIONER (APPEALS) DELETE THE ENTIRE ADJUSTMENT WHEN NONE OF THE APPROACH EITHER OF THE TPO OR OF THE ASSESSEE HAS BEEN FOUND TO BE ACCEPTABLE BY HIM. RE GARDING ADJUSTMENT ON ACCOUNT OF COMMISSION, HE SUBMITTED THAT THERE I S NO DIFFERENCE IN THE ACTIVITIES CARRIED OUT BY THE NONA.E. AGENTS AND T HE A.E., THEN WHY 5% SHOULD NOT BE TAKEN AS HELD BY THE TPO. HE FURTHER SUBMITTED THAT THE LEARNED COMMISSIONER (APPEALS) ERRONEOUSLY GIVEN TH E STANDARD DEDUCTION OF +/ 5% WHICH IS NOT PERMISSIBLE AS PER LAW SPECI FICALLY AFTER THE AMENDMENT. 15. THE LEARNED COUNSEL, MR. VIJAY MEHTA, ON THE OTHER HAND, SUBMITTED THAT THE LEARNED COMMISSIONER (APPEALS) HAS THREAD BEAR ANALYSED THE DIFFERENCE OF THE MARKET MECHANISM OF THE COUNTRIES IN WHICH THE A.ES ARE CARRYING OUT THEIR ACTIVITIES AND THE OTHER COUNTRI ES WHERE THE ASSESSEE IS HAVING DEALING THROUGH ITS INDEPENDENT AGENTS AND T HEN COME TO THE CONCLUSION. HE FURTHER SUBMITTED THAT GEOGRAPHICAL AND MARKETING DIFFERENCE WHICH HAS A HUGE IMPACT WHILE DECIDING T HE MARGIN OF PROFITABILITY HAS NOT BEEN FOUND TO BE INCORRECT EI THER BY THE LOWER AUTHORITIES OR BY THE LEARNED DEPARTMENTAL REPRESEN TATIVE. HE THUS, STRONGLY RELIED UPON THE DETAIL REASONING GIVEN BY THE LEARNED COMMISSIONER (APPEALS) ON THIS ISSUE OF ADJUSTMENT OF SALES MADE TO THE A.ES. 16. REGARDING TRANSFER PRICING ADJUSTMENT ON ACCOUNT OF COMMISSION PAID TO A.E., HE FAIRLY ADMITTED THAT THE LEARNED C OMMISSIONER (APPEALS)S FINDINGS WITH REGARD TO BENEFIT OF +/ 5% AS STANDA RD DEDUCTION CANNOT BE ALLOWED. HOWEVER, HE SUBMITTED THAT INSOFAR AS THE APPLICABILITY @ 10% COMMISSION IS CONCERNED, THE REASONING AND FUNCTION AL ANALYSIS DONE BY THE LEARNED COMMISSIONER (APPEALS) IS ABSOLUTELY CO RRECT AND NO FAULT OR M/S. GARWARE POLYESTER LTD. 25 DISCREPANCY HAS BEEN FOUND BY THE LEARNED DEPARTMEN TAL REPRESENTATIVE. HE, THUS, STRONGLY RELIED UPON THE FINDINGS OF THE LEARNED COMMISSIONER (APPEALS). 17. WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTENTIONS OF THE PARTIES, PERUSED THE FINDINGS GIVEN BY THE TPO AS WELL AS BY THE COMMISSIONER (APPEALS). THE ASSESSEE IS ENGAGED IN THE BUSINESS OF MANUFACTURE AND SALE OF VARIOUS TYPES OF POLYESTER FILMS AND SUN CO NTROL FILMS. FOR EXPORTING ITS PRODUCTS, THE ASSESSEE HAS TWO TYPES OF SETUPS FOR EXPORT SALES FIRSTLY, INDEPENDENT AGENTS (FOR SHORT NONA.E. AGENTS ) OPERATING IN ASIAN COUNTRIES, AFRICAN COUNTRIES, MIDDLE EAST, FA R EAST, RUSSIA AND OTHER CIS COUNTRIES, WHICH ARE MOSTLY DEVELOPING MARKETS AND SECONDLY, THROUGH TWO SUBSIDIARY COMPANIES WHICH ARE TERMED AS A.E AND ARE OPERATING IN AMERICAN AND EUROPEAN MARKETS WHICH ARE DEVELOPED M ARKETS. THE ASSESSEE HAS BENCH MARKED ITS INTERNATIONAL TRANSAC TIONS WITH ITS A.ES BY APPLYING CUP METHOD, WHEREIN AVERAGE PRICE CHARGED TO A.ES HAVE BEEN COMPARED WITH THE AVERAGE EXPORT PRICES CHARGED TO LOCAL CUSTOMERS IN INDIA. THE TPO HAS REJECTED THE ASSESSEES COMPARIS ON OF EXPORT SALES CHARGED TO A.ES WITH LOCAL SALES PRICE AND COMPARED THE AVERAGE NONA.E. EXPORT PRICE WITH THE PRICE CHARGED TO TWO A.ES. TH E LEARNED COMMISSIONER (APPEALS) ACCEPTED THE CONTENTIONS OF THE ASSESSEE THAT THE TPO HAS FAILED TO TAKE INTO CONSIDERATION THE GEOGRAPHICAL, ECONOM ICAL MARKET DIFFERENCES WHERE THE A.E AND NONA.E. AGENTS ARE CARRYING OUT THEIR BUSINESS ACTIVITIES. HE ALSO APPRECIATED THAT THE EXPORT PRI CE OF THE PROCEEDS VARIES CONSIDERABLY FROM COUNTRY TO COUNTRY AND SPECIFICAL LY IN A DEVELOPED MARKET OF U.S. AND U.K. IN COMPARISON TO ASIAN AND AFRICAN COUNTRIES. HE ANALYSED THE PRICES AND ALSO THE NATURE OF MARKET W HICH HAS BEEN ADVERTUM DISCUSSED IN DETAIL IN THE FOREGOING PARAG RAPHS. HOWEVER, AFTER HAVING COME TO THE CONCLUSION THAT THE TPOS APPROA CH IS NOT CORRECT AND HE HAS NOT TAKEN INTO ACCOUNT THE VITAL FACTOR OF G EOGRAPHICAL, ECONOMICAL MARKET DIFFERENCES, HELD THAT EVEN THE ASSESSEES A PPROACH IS ALSO NOT ACCEPTABLE AS THE GEOGRAPHICAL DIFFERENCE DOES E XISTS BETWEEN THE M/S. GARWARE POLYESTER LTD. 26 INDIAN MARKET ON ONE HAND AND AMERICAN & EUROPEAN M ARKETS ON THE OTHER HAND. THUS, ON THE SAME LOGIC, HE REJECTED TH E ASSESSEES APPROACH FOR BENCH MARKING THE ALP OF ITS TRANSACTIONS WITH THE A.E. THIS HAS BEEN DISCUSSED IN PARA3.32 AS REPRODUCED ABOVE. 18. AFTER HAVING REJECTED THE APPROACH OF THE TPO AS WE LL AS THE ASSESSEE, HE ADMITTED THAT THERE ARE NO DIRECT COMP ARABLE UNCONTROL TRANSACTIONS TO BENCH MARK THE ALP OF THE A.ES AS T HEIR MARKET PRICES PREVAILING IN THE CONCERNED GEOGRAPHICAL COUNTRIES I.E., U.S.A. AND EUROPE HAS TO BE SEEN SUBJECT TO CERTAIN ADJUSTMENT OF EXP ENSES. THE SALE PRICES CHARGED TO SUCH THIRD PARTY UNRELATED CUSTOMERS REP RESENTS COMPARABLE UNCONTROL PRICES ON AGGREGATE BASIS IN THE RESPECT IVE COMPARABLE MARKET UNDER COMPARABLE CIRCUMSTANCES. HE EVEN WENT TO ANA LYSE THE PROFIT RATIO AND OPERATING EXPENSES OF THE A.ES AND HELD THAT TH ESE A.ES ARE RUNNING INTO LOSSES AND NO THIRD PARTY WILL CARRY SUCH BUSI NESS AT LOSS. IN THIS MANNER, THE LEARNED COMMISSIONER (APPEALS) HAS MADE THESE A.ES AS TESTED PARTIES AND WITHOUT LOOKING INTO THE INDEPEN DENT COMPARABLES OPERATING IN THE SAME KIND OF PRODUCTS IN THE SAID COUNTRIES, HE ACCEPTED THE OPERATING MARGIN OF THE A.ES. THIS IS WHERE THE LEARNED COMMISSIONER (APPEALS) WENT ON A WRONG FOOTING AND INCORRECT APP ROACH. ONCE THE LEARNED COMMISSIONER (APPEALS) ACCEPTED THAT THE CU P IS THE APPROPRIATE METHOD, THEN HE HAS TO EXAMINE WHETHER THERE ARE AN Y INTERNAL COMPARABLES OR ANY EXTERNAL COMPARABLES. IN THE PRE SENT CASE, ONCE HE HAS HELD THAT THERE ARE NO INTERNAL COMPARABLES, HE WAS REQUIRED TO LOOK INTO EXTERNAL COMPARABLES OPERATING OR DEALING WITH THE SIMILAR PRODUCTS UNDER SIMILAR TERMS IN A SIMILAR MARKET CONDITIONS WHERE THESE A.ES ARE OPERATING, WHICH HE FAILED TO DO SO AND SIMPLY ACCE PTED THE TRADING RESULTS OF THE A.ES. UNDER THE CUP METHOD, THE PRICE OF THE GOODS OR SERVICES IS DIRECTLY COMPARED WITH THE PRICE IN UNCONTROL TRANS ACTIONS UNDER SIMILAR CONDITIONS. INTERNAL CUP WOULD BE AVAILABLE IF THE ASSESSEE OR ITS GROUP ENTITY ENTERS INTO A COMPARABLE TRANSACTION WITH UN RELATED PARTY WHERE THE GOODS OR SERVICES UNDER CONSIDERATION ARE SAME OR S IMILAR. ON THE OTHER M/S. GARWARE POLYESTER LTD. 27 HAND, THERE COULD BE AN EXTERNAL CUP IF A TRANSACTI ON BETWEEN TWO INDEPENDENT ENTERPRISES INVOLVES COMPARABLE GOODS O R SERVICES UNDER COMPARABLE CONDITIONS. THE CUP METHOD ALSO REQUIRES A VERY HIGH DEGREE OF COMPARABILITY WITH REGARD TO THE QUALITY OF PROD UCTS OR SERVICES, CONTRACTUAL TERMS, LEVEL OF THE MARKET, GEOGRAPHICA L MARKET IN WHICH THE TRANSACTION TAKES PLACE AND HOST OF OTHER FACTORS. 19. ONCE THE LEARNED COMMISSIONER (APPEALS) FOUND THAT THERE ARE SO MUCH OF VARIABLES FOR APPLYING EITHER INTERNAL CUPS AND HAS NOT APPLIED EXTERNAL CUP, PROBABLY, DUE TO THIS FACTOR, THEN TH E ENTIRE APPLICATION OF CUP FAILS IN THIS CASE. THE LEARNED COMMISSIONER (A PPEALS) CANNOT GO TO EXAMINE, INDEPENDENTLY THE OPERATING EXPENDITURE AN D OPERATING PROFITS OF THE A.ES FOR DETERMINING THE ALP. A COMPARABILITY A NALYSIS HAS TO BE CARRIED OUT FOR DETERMINING THE ALP. PROVISIONS OF SECTION 92C PROVIDES COMPUTATION OF ALP AND ENVISAGES THAT THE ALP IN RE LATION TO AN INTERNATIONAL TRANSACTION SHALL BE DETERMINED BY AN Y OF THE METHODS PRESCRIBED THEREIN, BEING THE MOST APPROPRIATE METH OD HAVING REGARD TO THE NATURE OF TRANSACTIONS OR CLASS OF TRANSACTIONS OR CLASS OF ASSOCIATED PERSONS OR FUNCTIONS PERFORMED TO SUCH PERSONS. FOR THIS PURPOSE, SIX METHODS HAVE BEEN SPELT OUT. SUBSECTION (2) OF SEC TION 92C PROVIDES THAT THE MOST APPROPRIATE METHOD REFERRED TO IN SUBSECT ION (1) SHALL BE APPLIED FOR DETERMINATION OF ALP. THUS, FOR COMPUTA TION ON EXAMINING OF ALP, ONE OF THE MOST APPROPRIATE METHODS HAS TO BE APPLIED. ONCE THE CUP METHOD FAILS IN THIS CASE, THEN IT WAS REQUIRED BY THE LEARNED COMMISSIONER (APPEALS) TO LOOK INTO FOR OTHER APPRO PRIATE METHODS. NOW, THE QUESTION IS WHAT SHOULD BE THE MOST APPROPRIATE METHOD. AT THE TIME OF HEARING, BOTH THE PARTIES AGREED THAT IN CASE CU P METHOD IS FAILED, THEN TNMM CAN BE ADOPTED AS MOST APPROPRIATE METHOD, WHE REIN THE ALP IS DETERMINED BY COMPARING THE OPERATING PROFIT RELATI VE TO APPROPRIATE BASE VIZ. COST AS WELL AS ASSET OF THE TESTED PARTY WITH THE OPERATING PROFIT OF AN UNCONTROL PARTY ENGAGED IN COMPARABLE TRANSACTIONS. ACCORDINGLY, WE SET ASIDE THE IMPUGNED ORDER PASSED BY THE LEARNED COMM ISSIONER (APPEALS) M/S. GARWARE POLYESTER LTD. 28 AND RESTORE THE MATER TO THE FILE OF THE TPO AND DI RECT HIM TO EXAMINE THE ALP AFTER ADOPTING TNMM AND CARRY OUT FRESH COMPARA BILITY ANALYSIS. THE ASSESSEE WILL PROVIDE ALL THE NECESSARY INFORMATION AND SEARCH ANALYSIS FOR THE COMPARABLES. THE TPO WILL ALSO PROVIDE DUE AND EFFECTIVE OPPORTUNITY OF HEARING TO THE ASSESSEE TO REPRESENT ITS CASE. A CCORDINGLY, GROUND NO.1, IS TREATED AS ALLOWED FOR STATISTICAL PURPOSES. 20. NOW, COMING TO THE ISSUE OF ADJUSTMENT ON ACCOUNT O F COMMISSION PAID TO THE A.E., THE LEARNED DEPARTMENTAL REPRESEN TATIVE HEAVILY RELYING UPON THE FINDINGS OF THE TPO SUBMITTED THAT ONCE TH ERE IS A SIMILAR NATURE OF TRANSACTION FOR THE SAME PRODUCT WHICH ARE BEING DEALT WITH BY THE A.ES AND NONA.E. FOREIGN AGENTS, THEN THERE CANNOT BE T WO RATES FOR PAYMENT OF COMMISSION. PAYMENT OF COMMISSION @ 12.5% IS DEF INITELY EXCESSIVE AND THE TPO HAS RIGHTLY TAKEN @ 5% BASED ON RATES O F COMMISSION PAID TO NONA.E. FOREIGN AGENTS. ON THE OTHER HAND, THE LEA RNED COUNSEL FOR THE ASSESSEE HAD SUBMITTED THAT THE AGENCY ARRANGEMENTS WITH THE A.ES WERE ENTIRELY DIFFERENT FROM THAT OF NON A.E. FOREIGN AG ENTS AND THIS ANALYSIS HAS BEEN DISCUSSED IN DETAIL BY THE LEARNED COMMISSIONE R (APPEALS). HE ALSO POINTED OUT THE RELEVANT OBLIGATIONS WHICH WERE TO BE CARRIED OUT BY THE A.ES WHICH WERE NOT THERE IN CASE OF NONA.E. FOREI GN AGENTS. HE, THUS, STRONGLY RELIED UPON THE FINDINGS AND THE CONCLUSIO N DRAWN BY THE LEARNED COMMISSIONER (APPEALS). 21. AFTER CAREFULLY CONSIDERING THE RIVAL CONTENTIONS, WE FIND THAT THE TPO HAS MADE THE ADJUSTMENT ON THE GROUND THAT COMMISSI ON RATE OF 12.5% PAID TO THE A.ES ARE FAR MORE THAN THE COMMISSION R ATE PAID TO THE NON A.E. FOREIGN AGENTS WHICH WERE RANGING FROM 3% TO 1 0% AND HAS BENCH MARKED THE SAID TRANSACTIONS BY ADOPTING THE RATE O F 5% AND THEREBY HOLDING THAT THE PAYMENT OF COMMISSION @ 7.5% IS EX CESSIVE. THE LEARNED COMMISSIONER (APPEALS) HAS, IN DETAIL, ANALYSED THE AGENCY ARRANGEMENT WITH THE A.E. AND ALSO THE AGENCY ARRANGEMENT WITH THE NONA.E. FOREIGN AGENTS. HE HAS EXAMINED THE FUNCTIONAL ANALYSIS IN PARA3.8 WHICH HAS BEEN REPRODUCED ABOVE. FROM THE CONCLUSION AND THE REASONING GIVEN BY M/S. GARWARE POLYESTER LTD. 29 THE LEARNED COMMISSIONER (APPEALS) IN PARAS3.8 TO 3.10 BASED ON SUCH FUNCTIONAL ANALYSIS, IT IS SEEN THAT THE SAME HAVE BEEN CORRECTLY ANALYSED AND ARE LIABLE TO BE ACCEPTED. HE HAS CONCLUDED THA T LOOKING TO THE VARIOUS DIFFERENCES IN THE AGENCY ARRANGEMENT WITH THE A.E. AND NONA.E. FOREIGN AGENTS, THE ARMS LENGTH COMMISSION OF THE A.E. SHO ULD BE TAKEN @ 10%, AS CONCLUDED BY HIM IN PARA3.11 ABOVE AND THE REAS ONING GIVEN BY HIM IS QUITE APPRECIABLE. OTHERWISE ALSO, IF ONE ANALYSE T HE AGENCY AGREEMENT BETWEEN THE A.ES AND THAT OF NON-A.ES AND CARRIES O UT THE FUNCTIONAL ANALYSIS, THEN IT WOULD BE SEEN THAT THE COST WHICH IS TO BE INCURRED BY THE A.ES AND RISK ASSUMED ARE FAR MORE. RATE OF 10% IS QUITE REASONABLE WHEN IT IS ANALYSED WITH A CASE WHERE THERE IS LESS RISK AND COMMISSION RATES RANGES BETWEEN 3% AND 10%. THEREFORE, THE RATE ADOP TED BY THE COMMISSIONER (APPEALS) @ 10% IS DEFINITELY AT ARMS LENGTH. 22. HOWEVER, AFTER HAVING COMING TO THE CONCLUSION THAT RATE OF 10% OF THE COMMISSION IS AT ARMS LENGTH, HE HAS GIVEN THE BENEFIT OF ARMS LENGTH RANG OF +/ 5% IN TERMS OF THE PROVISO TO SECTION 9 2C. WHILE DOING SO, HE HAS GONE ON THE PREMISE THAT IT IS A SOME KIND OF A STANDARD DEDUCTION. SUCH A CONCLUSION IS WHOLLY ERRONEOUS AS THE STATUT E DOES NOT PROVIDE ANY KIND OF STANDARD DEDUCTION. THUS, THE BENEFIT OF +/ 5% GIVEN BY THE LEARNED COMMISSIONER (APPEALS) IS SET ASIDE. INSOFA R AS THE APPLICATION OF RATE OF PAYMENT OF COMMISSION @ 10% TO ITS A.ES IS CONCERNED, THE SAME IS HEREBY UPHELD. THUS, GROUND NO.2, IS PARTLY ALLO WED. 23. GROUND NO.3, IS WITH REGARD TO DISALLOWANCE OF INTE REST WHICH RELATES TO CAPITAL WORKINPROGRESS UNDER SECTION 36(1)(III ) FOR A SUM OF ` 28.52 LAKHS. 24. AS ADMITTED BY BOTH THE PARTIES, IDENTICAL ISSUE HA S BEEN DECIDED BY THE COORDINATE BENCH OF THIS TRIBUNAL IN ITA NO.7394/MUM./2007 AND ITA NO.7687/MUM./2007 , WHEREIN THE ISSUE WAS RESTORED TO THE FILE OF THE ASSESSING OFFICER WITH CERTAIN DIRECTIONS. M/S. GARWARE POLYESTER LTD. 30 25. AFTER GOING THROUGH THE SAID ORDER, WE FIND THAT SI MILAR ISSUE HAS BEEN DECIDED BY A COORDINATE BENCH OF THE TRIBUNAL IN ASSESSEES OWN CASE IN ITAS NO.7394 & 7687/MUM./2007, FOR A.Y. 200 405, VIDE ORDER DATED 2 ND JULY 2009, WHEREIN IT HAS BEEN OBSERVED AND HELD A S UNDER: 5.4 WE HAVE CONSIDERED THE RIVAL SUBMISSIONS MADE B Y BOTH THE SIDES, PERUSED THE ORDERS OF THE AUTHORITIES BELOW. WE HAVE ALSO CONSIDERED THE PAPER BOOK FILED ON BEHALF OF THE AS SESSEE. WE FIND THE PROVISO OF SECTION 36(1)(III) AS AMENDED BY THE FINANCE ACT 2003, W.E.F. 1.4.2004, IS VERY CLEAR WHICH READS AS UNDER: [PROVIDED THAT ANY AMOUNT OF THE INTEREST PAID, IN RESPECT OF CAPITAL BORROWED FOR ACQUISITION OF AN A SSET FOR EXTENSION OF EXISTING BUSINESS OR PROFESSION (WHETHER CAPITALISED IN THE BOOKS OF ACCOUNT OR NOT ); FOR ANY PERIOD BEGINNING FROM THE DATE ON WHICH THE CAPITAL WAS BORROWED FOR ACQUISITION OF THE ASSET T ILL THE DATE ON WHICH SUCH ASSET WAS FIRST PUT TO USE, SHALL NOT BE ALLOWED AS DEDUCTION.] 5.5 SINCE THE AUDITORS HAVE POINTED OUT THAT AN AMO UNT OF ` 81.70 LAKHS REPRESENTS CAPITAL WORKINPROGRESS, TH EREFORE, PROPORTIONATE INTEREST HAS TO BE DISALLOWED IN VIEW OF THE AMENDED PROVISIONS. HOWEVER, THE DATEWISE DETAILS OF SUCH CAPITAL WORKIN PROGRESS IS NOT GIVEN BY THE ASSESSEE EITHER BEFORE THE ASSESSING OFFICER OR BEFORE THE LEARNED CIT(A) OR EVEN BEFORE USE. THE ASSESSING OFFICER HAS CALCULATED SUCH INTEREST @ 12 % FOR THE WHOLE YEAR WHICH, IN OUR OPINION, MUST BE FROM THE DATE T HE ASSESSEE HAS INCURRED SUCH EXPENDITURE. WE, THEREFORE, RESTORE T HE MATTER BACK TO THE FILE OF THE ASSESSING OFFICER WITH A DIRECTI ON TO GIVE ONE MORE OPPORTUNITY TO THE ASSESSEE TO GIVE THE DATEWISE D ETAILS OF SUCH EXPENDITURE. THE ASSESSING OFFICER SHALL CALCULATE SUCH INTEREST ACCORDINGLY. THE GROUND RAISED BY THE ASSESSEE IS A LLOWED FOR STATISTICAL PURPOSES. 26. KEEPING IN VIEW THE AFORESAID DECISION OF THE TRIBU NAL, WE SET ASIDE THE IMPUGNED ORDER PASSED BY THE LEARNED COMMISSION ER (APPEALS) AND RESTORE THE MATTER TO THE FILE OF THE ASSESSING OFF ICER WITH SIMILAR DIRECTIONS. ACCORDINGLY, GROUND NO.3, STANDS PARTLY ALLOWED FOR STATISTICAL PURPOSES. M/S. GARWARE POLYESTER LTD. 31 WE NOW TAKE UP ASSESSEES APPEAL IN ITA NO.4189/MUM./2010 , FOR ASSESSMENT YEAR 200304, VIDE WHICH FOLLOWING GROUN DS HAVE BEEN RAISED: 1. THE ID. COMMISSIONER OF INCOME TAX (APPEALS) 15, MUMBAI, ERRED IN REJECTING THE CLAIM OF THE APPELLANT FOR A LLOWING COMMISSION PAID TO THE SUBSIDIARY COMPANIES WHICH WAS PARTLY D ISALLOWED BY THE A.O. AMOUNTING TO RS.2,03,94,752/-. THE APPELLA NT SUBMITS THAT COMMISSION PAID TO THE FOREIGN SUBSIDIARY COMP ANIES WAS NOT EXCESSIVE CONSIDERING THE CIRCUMSTANCES IN WHICH TH E COMMISSION WAS PAID AND THE PERFORMANCE REQUIRED TO BE MADE BI THE SUBSIDIARY COMPANIES AND IT WAS NOT FOR TRANSFERRIN G OR DIVERTING ANY PROFIT TO THE SUBSIDIARY COMPANIES AS STATED BY THE A.O. 2. THE SAID CIT(A) ERRED IN CONFIRMING ACTION OF TH E ASSESSING OFFICER IN LEVYING INTEREST ON SHORT FALL OF PAYMEN T OF ADVANCE TAX U/S 115JB IGNORING THE SUBMISSIONS MADE BY THE APPE LLANT THAT IN CASE OF LIABILITY UNDER 115JB NO INTEREST CAN BE LE VIED FOR SHORT FALL IN PAYMENT OF ADVANCE TAX AS HAS BEEN HELD BY VARIO US HIGH COURT DECISIONS. 27. GROUND NO.1, RELATES TO TRANSFER PRICING ADJUSTMENT OF ` 2,03,94,752, IN RELATION TO THE COMMISSION PAID TO THE A.E. 28. HAVING HEARD THE RIVAL CONTENTIONS AND HAVING PERUS ED THE MATERIAL ON RECORD AS WELL AS THE FINDINGS OF LEARN ED COMMISSIONER (APPEALS) AND THE ASSESSING OFFICER, WE FIND THAT T HE ISSUE BEFORE US IS IDENTICAL TO THE ISSUE ARISING OUT OF GROUND NO.2, DECIDED BY US IN REVENUES APPEAL IN ITA NO.4444/MUM./2011, IN ASSES SEES OWN CASE FOR ASSESSMENT YEAR 200506. IN THIS YEAR, THE LEARNED COMMISSIONER (APPEALS) HAS CONFIRMED THE ADJUSTMENT MADE ON ACCO UNT OF COMMISSION PAID TO THE A.E. THE ASSESSING OFFICER FOUND THAT T HE ASSESSEE HAS PAID COMMISSION TO ITS TWO SUBSIDIARY COMPANIES (A.ES) @ 12.5% WHEREIN, ON SAME KIND OF EXPORT SALES, THE PARTIES HAVE BEEN PA ID COMMISSION @ 5% AND 10% RESPECTIVELY. THE ASSESSING OFFICER RESTRIC TED THE COMMISSION TO 5% IN RELATION TO PAYMENT MADE TO THE A.ES. SINCE T HE FACTS OF THIS ISSUE ARE IDENTICAL TO THE FACTS OF GROUND NO.2, RAISED B Y THE REVENUE IN ITS APPEAL IN ITA NO.4444/MUM./2011, IN ASSESSEES OWN CASE, THE OBSERVATIONS MADE THEREIN WILL APPLY MUTATIS MUTAND IS IN THIS GROUND ALSO. M/S. GARWARE POLYESTER LTD. 32 THE VIEW TAKEN BY THE LEARNED COMMISSIONER (APPEALS ) THAT THE PAYMENT OF COMMISSION TO THE A.E. SHOULD BE TAKEN @ 10% INSTEAD OF 12.5% HAS BEEN UPHELD. CONSEQUENTLY, WE SET ASIDE THE IMPUGNE D ORDER PASSED BY THE LEARNED COMMISSIONER (APPEALS) AND DIRECT THE A SSESSING OFFICER TO TAKE THE RATE OF COMMISSION @ 10%. THIS GROUND IS, THUS, PARTLY ALLOWED. 29. IN GROUND NO.2, THE ASSESSEE HAS CHALLENGED THE LEV Y OF INTEREST ON SHORT FALL OF PAYMENT OF ADVANCE TAX UNDER SECTION 115JB. 30. AT THE OUTSET, THE LEARNED COUNSEL SUBMITTED THAT I N VIEW OF THE JUDGMENT OF HON'BLE SUPREME COURT IN JCIT V/S ROLTA INDIA LTD., [2011] 330 ITR 470 (SC), INTEREST UNDER SECTION 234B IS TO BE LEVIED ON FAILURE TO PAY ADVANCE TAX IN RESPECT OF TAX PAYABLE UNDER SEC TION 115JB. HOWEVER, HE SUBMITTED THAT WITH REGARD TO THE AMOUNT OF DEFE RRED TAX AND PROVISIONS THEREOF, INTEREST UNDER SECTION 234B, CA NNOT BE LEVIED AS THE RETROSPECTIVE AMENDMENT IN EXPLANATION1, CLAUSE (H ) WAS BROUGHT IN STATUTE BY THE FINANCE ACT, 2008, WITH RETROSPECTIV E EFFECT FROM 1 ST APRIL 2001 AND IN VIEW OF THE LATEST JUDGMENT OF CALCUTTA HIGH COURT IN EMAMI LTD. V/S CIT, [2011] 337 ITR 470 (CAL.) , INTEREST UNDER SECTION 234B CANNOT BE CHARGED ON ACCOUNT OF SUCH INCOME UNDER S ECTION 115JB. 31. SIMILARLY, WITH REGARD TO THE PROVISIONS OF DOUBTFU L DEBTS, HE SUBMITTED THAT THE ASSESSING OFFICER HAS TREATED SU CH PROVISIONS TO BE IN THE NATURE OF RESERVE OR CONTINGENCY MADE IN THE AC COUNT AND THE SAME HAS BEEN ADDED IN EXPLANATION1, CLAUSE (I) TO SECT ION 115JB BY THE FINANCE ACT, 2009, W.E.F. 1 ST APRIL 2000, AND THEREFORE, NO INTEREST UNDER SECTION 234C CAN BE LEVIED. 32. LEARNED DEPARTMENTAL REPRESENTATIVE, ON THE OTHER H AND, FAIRLY AGREED THAT INSOFAR AS THE SECOND ARGUMENT OF THE L EARNED COUNSEL IS CONCERNED, THE SAME IS COVERED BY THE JUDGMENT OF C ALCUTTA HIGH COURT IN EMAMI LTD. (SUPRA). M/S. GARWARE POLYESTER LTD. 33 33. HAVING HEARD THE RIVAL CONTENTIONS AND HAVING PERUS ED THE MATERIAL ON RECORD AS WELL AS THE FINDINGS OF LEARNED COMMIS SIONER (APPEALS) AND THE ASSESSING OFFICER, WE FIND THAT THE INSOFAR AS THE CHARGEABILITY OF INTEREST UNDER SECTION 234B IS CONCERNED, THE SAME IS PAYABLE ON FAILURE TO PAY THE ADVANCE TAX IN RESPECT OF THE TAX PAYABLE U NDER SECTION 115JB, KEEPING IN VIEW THE LAW SETTLED BY THE HON'BLE SUPR EME COURT IN ROLTA INDIA LTD. (SUPRA), WHEREIN THEIR LORDSHIPS HAVE OB SERVED AND HELD AS UNDER: 9. THE QUESTION WHICH REMAINS TO BE CONSIDERED IS W HETHER THE ASSESSEE, WHICH IS A MAT COMPANY, WAS NOT IN A POSI TION TO ESTIMATE ITS PROFITS OF THE CURRENT YEAR PRIOR TO T HE END OF THE FINANCIAL YEAR ON 31ST MARCH. IN THIS CONNECTION TH E ASSESSEE PLACED RELIANCE ON THE JUDGMENT OF THE KARNATAKA HIGH COUR T IN THE CASE OF KWALITY BISCUITS LTD. VS. CIT (SUPRA) AND, ACCORDIN G TO THE KARNATAKA HIGH COURT, THE PROFIT AS COMPUTED UNDER THE IT ACT, 1961 HAD TO BE PREPARED AND THEREAFTER THE BOOK PRO FIT AS CONTEMPLATED UNDER S. 115J OF THE ACT HAD TO BE DET ERMINED AND THEN, THE LIABILITY OF THE ASSESSEE TO PAY TAX UNDE R S. 115J OF THE ACT AROSE, ONLY IF THE TOTAL INCOME AS COMPUTED UND ER THE PROVISIONS OF THE ACT WAS LESS THAN 30 PER CENT OF THE BOOK PROFIT. ACCORDING TO THE KARNATAKA HIGH COURT, THIS ENTIRE EXERCISE OF COMPUTING INCOME OR THE BOOK PROFITS OF THE COMPANY COULD BE DONE ONLY AT THE END OF THE FINANCIAL YEAR AND HENC E THE PROVISIONS OF SS. 207, 208, 209 AND 210 (PREDECESSORS OF SS. 2 34B AND 234C) WERE NOT APPLICABLE UNTIL AND UNLESS THE ACCOUNTS S TOOD AUDITED AND THE BALANCE SHEET STOOD PREPARED, BECAUSE TILL THEN EVEN THE ASSESSEE MAY NOT KNOW WHETHER THE PROVISIONS OF S. 115J WOULD BE APPLIED OR NOT. THE COURT, THEREFORE, HELD THAT THE LIABILITY WOULD ARISE ONLY AFTER THE PROFIT IS DETERMINED IN ACCORD ANCE WITH THE PROVISIONS OF THE COMPANIES ACT, 1956 AND, THEREFOR E, INTEREST UNDER SS. 234B AND 234C IS NOT LEVIABLE IN CASES WH ERE S. 115J APPLIED. THIS VIEW OF THE KARNATAKA HIGH COURT IN K WALITY BISCUITS LTD. (SUPRA) WAS NOT SHARED BY THE GAUHATI HIGH COU RT IN ASSAM BENGAL CARRIERS LTD. VS. CIT (2000) 162 CTR (GAU) 1 70 : (1999) 239 ITR 862 (GAU) AND MADHYA PRADESH HIGH COURT IN ITARSI OILS & FLOURS (P) LTD. VS. CIT (2001) 170 CTR (MP) 158 : ( 2001) 250 ITR 686 (MP) AS ALSO BY THE BOMBAY HIGH COURT IN THE CA SE OF CIT VS. KOTAK MAHINDRA FINANCE LTD. (2003) 183 CTR (BOM) 49 1 : (2003) 130 TAXMAN 730 (BOM) WHICH DECIDED THE ISSUE IN FAV OUR OF THE DEPARTMENT AND AGAINST THE ASSESSEE. IT APPEARS THA T NONE OF THE ASSESSEES CHALLENGED THE DECISIONS OF THE GAUHATI H IGH COURT, MADHYA PRADESH HIGH COURT AS WELL AS BOMBAY HIGH CO URT IN THE SUPREME COURT. HOWEVER, IT MAY BE NOTED THAT THE JU DGMENT OF THE KARNATAKA HIGH COURT IN KWALITY BISCUITS LTD. (SUPR A) WAS CONFINED TO S. 115J OF THE ACT. THE ORDER OF THE SUPREME COU RT DISMISSING THE SPECIAL LEAVE PETITION IN LIMINE FILED BY THE D EPARTMENT AGAINST M/S. GARWARE POLYESTER LTD. 34 KWALITY BISCUITS LTD. (SUPRA) IS REPORTED IN CIT VS . KWALITY BISCUITS LTD. (2006) 205 CTR (SC) 122 : (2006) 284 ITR 434 ( SC). THUS, THE JUDGMENT OF KARNATAKA HIGH COURT IN KWALITY BIS CUITS (SUPRA) STOOD AFFIRMED. HOWEVER, THE KARNATAKA HIGH COURT H AS THEREAFTER IN THE CASE OF JINDAL THERMAL POWER CO. LTD. VS. DY . CIT (2006) 203 CTR (KAR) 381 : (2006) 154 TAXMAN 547 (KAR) DISTING UISHED ITS OWN DECISION IN CASE OF KWALITY BISCUITS LTD. (SUPR A) AND HELD THAT S. 115JB, WITH WHICH WE ARE CONCERNED, IS A SELF-CO NTAINED CODE PERTAINING TO MAT, WHICH IMPOSED LIABILITY FOR PAYM ENT OF ADVANCE TAX ON MAT COMPANIES AND, THEREFORE, WHERE SUCH COM PANIES DEFAULTED IN PAYMENT OF ADVANCE TAX IN RESPECT OF T AX PAYABLE UNDER S. 115JB, IT WAS LIABLE TO PAY INTEREST UNDER SS. 234B AND 234C OF THE ACT. THUS, IT CAN BE CONCLUDED THAT INT EREST UNDER SS. 234B AND 234C SHALL BE PAYABLE ON FAILURE TO PAY AD VANCE TAX IN RESPECT OF TAX PAYABLE UNDER S. 115JA/115JB. FOR TH E AFORESTATED REASONS, CIRCULAR NO. 13 OF 2001, DT. 9TH NOV., 200 1 ISSUED BY CBDT REPORTED IN (2001) 171 CTR (ST) 45 : (2001) 25 2 ITR (ST) 50 HAS NO APPLICATION. MOREOVER, IN ANY EVENT, PARA 2 OF THAT CIRCULAR ITSELF INDICATES THAT A LARGE NUMBER OF COMPANIES L IABLE TO BE TAXED UNDER MAT PROVISIONS OF S. 115JB WERE NOT MAKING AD VANCE TAX PAYMENTS. IN THE SAID CIRCULAR, IT HAS BEEN CLARIFI ED THAT S. 115JB IS A SELF-CONTAINED CODE AND THUS, ALL COMPANIES WERE LIABLE FOR PAYMENT OF ADVANCE TAX UNDER S. 115JB AND CONSEQUEN TLY PROVISIONS OF SS. 234B AND 234C IMPOSING INTEREST O N DEFAULT IN PAYMENT OF ADVANCE TAX WERE ALSO APPLICABLE. 10. FOR THE AFORESTATED REASONS CIT SUCCEEDS IN THE CIVIL APPEAL ARISING OUT OF SLP (C) NO. 25746 OF 2009 [JT. CIT V S. ROLTA INDIA LTD.] AS ALSO IN THE CIVIL APPEAL ARISING OUT OF SL P (C) NO. 18367 OF 2010 [CIT VS. EXPORT CREDIT GUARANTEE CORPORATION O F INDIA LTD.]. CONSEQUENTLY, CIVIL APPEAL NO. 459 OF 2006 [NAHAR E XPORTS VS. CIT] AND CIVIL APPEAL NO. 7429 OF 2008 [LAKSHMI PRECISIO N SCREWS LTD. VS. CIT] STAND DISMISSED WITH NO ORDER AS TO COSTS. 34. NOW COMING TO THE CHARGEABILITY OF INTEREST UNDER S ECTION 234B ON ACCOUNT OF PROVISIONS FOR DOUBTFUL DEBTS, IT IS SEE N FROM THE ORDER PASSED BY THE ASSESSING OFFICER THAT THE ASSESSEE HAD MADE PROVISIONS OF ` 24,01,402, ON ACCOUNT OF PROVISIONS FOR DOUBTFUL DE BTS AND HAD ADDED BACK IN ITS COMPUTATION OF TOTAL INCOME. HOWEVER, THE SA ME WAS NOT ADDED BACK TO THE BOOK PROFIT IN ORDER TO CALCULATE MAT UNDER SECTION 115JB. HE WAS OF THE VIEW THAT IT IS NOT AN ASCERTAINED LIABILITY AN D IS MORE IN THE NATURE OF RESERVE, THEREFORE, THE SAME IS COVERED BY CLAUSE ( C) OF EXPLANATION1 TO SUBSECTION (2) OF SECTION 115JB AND, ACCORDINGLY, HE ADDED BACK THE AMOUNT AS BOOK PROFIT. THE LEARNED COMMISSIONER (AP PEALS) HAS DEALT THE ISSUE IN THE FOLLOWING MANNER: M/S. GARWARE POLYESTER LTD. 35 3. THE FIRST GROUND OF APPEAL RELATES TO PROVISIONS FOR DOUBTFUL DEBTS OF ` 24,01,402. THE ASSESSING OFFICER HAS HELD THAT THE PROVISIONS FOR DOUBTFUL DEBTS OF RS.24,01,402/- MAD E IN THE PROFIT AND LOSS ACCOUNT WERE NOT ALLOWABLE AS DEDUCTION WH ILE COMPUTING BOOK PROFIT U/S. 115JB OF THE I.T. ACT. ACCORDING T O THE AO, SUCH PROVISIONS WERE IN THE NATURE OF RESERVE OR CONTING ENCY MADE IN THE ACCOUNT OF THE ASSESSEE, THE APPELLANT HAD PLACED R ELIANCE ON SUPREME COURT DECISION IN THE CASE OF HCL COMNET LT D (305 ITR 409) TO BACK ITS POINT THAT SUCH PROVISION WERE ALL OWABLE. 3.1. I HAVE PERUSED THE FACTS OF THE CASE AND THE L EGAL POSITION. THE DISPUTE REGARDING DOUBTFUL DEBTS U/S. 115JB OF THE I.T. ACT NOW STANDS SETTLED BY THE AMENDMENT MADE IN THE FINANCE ACT 2009. IT IS NOW PROVIDED THAT WHILE COMPUTING THE BOOK PROF IT FOR THE PURPOSE OF SECTION 1 15J8 THE NET PROFIT SHALL BE I NCREASED BY THE PROVISION FOR DIMINUTION IN THE NATURE OF ANY ASSET DEBITED TO THE PROFIT AND LOSS ACCOUNT. THE SAID AMENDMENT IS RETR OSPECTIVELY APPLICABLE FROM 1ST APRIL 2001. THIS NULLIFIES THE EFFECT OF THE ABOVE SUPREME COURT JUDGMENT RETROSPECTIVELY. THE DISALLO WANCE SO MADE IS THEREFORE CONFIRMED. 35. THUS, THE LEARNED COMMISSIONER (APPEALS) HAS CONFIR MED THE FINDINGS OF THE ASSESSING OFFICER ON THE GROUND THA T BY FINANCE ACT, 2009, AMENDMENT HAS BEEN BROUGHT ON STATUTE IN EXPLANATIO N1 CLAUSE (I) WITH RETROSPECTIVE EFFECT FROM 1 ST APRIL 2001, THEREFORE, THE SAME HAS BEEN RIGHTLY ADDED. IN CASE OF SUCH A SITUATION WHERE AN Y AMOUNT IS BEING ADDED AS INCOME IN THE COMPUTATION UNDER SECTION 11 5JB, WHICH HAS BEEN BROUGHT ON STATUTE BY RETROSPECTIVE AMENDMENT, HAS BEEN DEALT WITH BY THEIR LORDSHIPS OF CALCUTTA HIGH COURT IN EMAMI LTD . (SUPRA), AFTER ANALYSING THE PROVISIONS OF SECTION 115JB, SECTION 234B AND 234C, PROVISIONS RELATING TO PAYMENT OF ADVANCE TAX AND P ROVISIONS OF SECTIONS 207, 208 AND 2011, HAVE COME TO THE FOLLOWING CONCL USION: 8. IN THE CASE BEFORE US, THE LAST DATE OF THE RELE VANT FINANCIAL YEAR WAS 31ST MARCH, 2001 AND ON THAT DAY, ADMITTED LY, THE APPELLANT HAD NO LIABILITY TO PAY ANY AMOUNT OF ADV ANCE TAX IN ACCORDANCE WITH THE THEN LAW PREVAILING IN THE COUN TRY. CONSEQUENTLY, THE APPELLANT PAID NO ADVANCE TAX AND SUBMITTED ITS REGULAR RETURN ON 31ST OCT., 2001 WITHIN THE TIME F IXED BY LAW WHEREIN IT DECLARED ITS TOTAL INCOME AND THE BOOK P ROFIT BOTH AS NIL. HOWEVER, CONSEQUENT TO THE AMENDMENT OF THE PROVISI ONS CONTAINED IN S. 115JB OF THE ACT BY VIRTUE OF FINAN CE ACT, 2002 WHICH WAS PUBLISHED IN THE OFFICIAL GAZETTE ON 11TH MAY, 2002 M/S. GARWARE POLYESTER LTD. 36 GIVING RETROSPECTIVE EFFECT TO THE AMENDMENT FROM 1 ST APRIL, 2001, THE APPELLANT FIRST VOLUNTARILY PAID A SUM OF RS. 1 ,55,62,511 ON ACCOUNT OF THE TAX PAYABLE ON BOOK PROFIT AS PROVID ED IN AMENDED PROVISION OF S. 115JB AND THEN FILED ITS REVISED RE TURN OF 31 ST MARCH, 2003 DECLARING ITS BUSINESS INCOME AS NIL BUT THE B OOK PROFIT UNDER S. 115JB AS RS. 20,63,65,711. THE AO ACCEPTED SUCH RETURN OF INCOME BUT IMPOSED INTEREST UNDER SS. 234B AND 234C OF THE ACT AMOUNTING TO RS.44,00,937 AND RS. 11,78,960 RESPECT IVELY. IN OUR OPINION, THE AMENDED PROVISION OF S. 115JB H AVING COME INTO FORCE W.E.F. 1ST APRIL, 2001, THE APPELLANT CANNOT BE HELD DEFAULTER OF PAYMENT OF ADVANCE TAX. AS POINTED OUT EARLIER, ON THE LAST DATE OF THE FINANCIAL YEAR PRECEDING THE RELEVANT ASSESS MENT YEAR, AS THE BOOK PROFIT OF THE APPELLANT IN ACCORDANCE WITH THE THEN PROVISION OF LAW WAS NIL, WE CANNOT CONCEIVE OF ANY 'ADVANCE TAX ' WHICH IN ESSENCE IS PAYABLE WITHIN THE LAST DAY OF THE FINAN CIAL YEAR PRECEDING THE RELEVANT ASSESSMENT YEAR AS PROVIDED IN SS. 207 AND 208 OR WITHIN THE DATES INDICATED IN S. 211 OF THE ACT WHICH INEVITABLY FALLS WITHIN THE LAST DATE OF FINANCIAL YEAR PRECEDING THE RELEVANT ASSESSMENT YEAR. CONSEQUENTLY, THE ASSESSE E CANNOT BE BRANDED AS A DEFAULTER IN PAYMENT OF ADVANCE TAX AS MENTIONED ABOVE. AT THIS STAGE, WE MAY PROFITABLY RELY UPON T HE OBSERVATIONS OF THE SUPREME COURT IN THE CASE OF STAR INDIA (P) LTD. VS. CCE (2006) 201 CTR (SC) 63 : (2006) 280 ITR 321 (SC) ST RONGLY RELIED UPON BY MR. BAJORIA, WHERE THE APEX COURT IN THE CO NTEXT OF IMPOSITION OF SERVICE TAX BY THE FINANCE ACT, 2002 WITH RETROSPECTIVE EFFECT HELD THAT THE LIABILITY TO PAY INTEREST WOULD ARISE ONLY ON DEFAULT AND IS REALLY IN THE NATURE OF QUAS I-PUNISHMENT AND THUS, ALTHOUGH THE LIABILITY TO PAY TAX AROSE DUE T O RETROSPECTIVE EFFECT OF LAW, SAME SHOULD NOT ENTAIL THE PUNISHMEN T OF PAYMENT OF INTEREST. ALTHOUGH MR. NIZAMUDDIN, THE LEARNED COUN SEL APPEARING ON BEHALF OF THE REVENUE, IN THIS CONNECTION, STRON GLY RELIED UPON THE DECISION OF THE SUPREME COURT IN THE CASE OF JT . CIT VS. ROLTA INDIA LTD. (SUPRA), WE FIND THAT IN THAT CASE THE Q UESTION WAS WHETHER INTEREST UNDER S. 234B OF THE ACT COULD BE CHARGED ON THE TAX CALCULATED ON THE BOOK PROFIT UNDER S. 115JA AN D IN OTHER WORDS, WHETHER ADVANCE TAX WAS AT ALL PAYABLE ON BO OK PROFITS UNDER S. 115JA OF THE ACT. THE SUPREME COURT ANSWER ED THE SAID QUESTION IN THE AFFIRMATIVE AND FURTHER HELD THAT T HE PROVISIONS OF INTEREST ON DEFAULT AS PROVIDED IN SS. 234B AND 234 C WOULD ALSO APPLY. WE HAVE ALREADY POINTED OUT THAT MR. BAJORIA , AT THE VERY OUTSET, CONCEDED THAT THE SAID DECISION SHOULD BE A PPLIED FOR ANSWERING THE FIRST QUESTION FORMULATED IN THIS APP EAL AGAINST HIS CLIENT. IN OUR OPINION, THE SAID DECISION IS NOT RE LEVANT FOR CONSIDERING THE SECOND AND THE THIRD QUESTIONS AS T O WHETHER AN ASSESSEE CAN BE SAID TO BE A DEFAULTER IN PAYMENT O F ADVANCE TAX IF HE HAD NO LIABILITY TO MAKE PAYMENT OF SUCH TAX ON THE LAST DATE OF A FINANCIAL YEAR PRECEDING THE RELEVANT ASSESSMENT YEAR AS SUCH QUESTION DID NOT ARISE IN THE SAID CASE BEFORE THE SUPREME COURT. IT APPEARS THAT THE LEARNED TRIBUNAL HAS NOT AT ALL CONSIDERED THE AFORESAID ASPECT AS TO THE LIABILITY OF THE ASSESSE E TO MAKE PAYMENT M/S. GARWARE POLYESTER LTD. 37 OF THE ADVANCE TAX ON THE LAST DAY OF THE FINANCIAL YEAR I.E. 31ST MARCH, 2001 WHEN ITS BOOK PROFIT WAS NIL ACCORDING TO THE THEN LAW OF THE LAND. THE VARIOUS DECISIONS OF THE OTHER HIG H COURTS AND THE TRIBUNALS RELIED UPON BY THE TRIBUNAL DID NOT EFFEC TIVELY CONSIDER THE QUESTION WHETHER EVEN IN A CASE LIKE THE PRESEN T ONE WHERE ON THE LAST DATE OF THE FINANCIAL YEAR PRECEDING THE R ELEVANT ASSESSMENT YEAR, THE ASSESSEE HAD NO LIABILITY TO P AY ADVANCE TAX, HE WOULD BE NEVERTHELESS ASKED TO PAY INTEREST IN T ERMS OF S. 234B AND S. 234C OF THE ACT FOR DEFAULT IN MAKING PAYMEN T OF TAX IN ADVANCE WHICH WAS PHYSICALLY IMPOSSIBLE. WE, THEREFORE, PARTLY ALLOW THE APPEAL BY ANSWERING THE FIRST QUESTION IN THE AFFIRMATIVE AND AGAINST THE ASSESSE E AND THE SECOND AND THE THIRD QUESTIONS IN THE NEGATIVE AND AGAINST THE REVENUE. THE ORDER PASSED BY THE TRIBUNAL IS, THUS, SET ASID E TO THE EXTENT INDICATED ABOVE. 36. THUS, RESPECTFULLY FOLLOWING THE AFORESAID JUDGMENT OF THE CALCUTTA HIGH COURT, WE SET ASIDE THE IMPUGNED ORDER PASSED BY THE LEARNED COMMISSIONER (APPEALS) AND HOLD THAT ANY SUCH AMOUN T OF PROVISIONS WHICH HAS BEEN AMENDED RETROSPECTIVELY, NO INTEREST UNDER SECTION 234B IS CHARGEABLE AND THE ASSESSEE CANNOT BE HELD TO BE DE FAULTER IN PAYMENT OF ADVANCE TAX AS NO ADVANCE TAX WAS PAYABLE ON THE LA ST DAY AS PER THE LAW THEN PREVAILING. THUS, GROUND NO.2, IS PARTLY ALLOW ED. 37. THE ASSESSEE HAS RAISED FOLLOWING ADDITIONAL GROUND S: WITHOUT PREJUDICE TO ANY OTHER GROUND, ON THE ACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, WE HEREBY REQ UEST YOUR HONOURS TO GRANT DEDUCTION UNDER SECTION 80HHC UND ER MAT PROVISIONS TO THE EXTENT OF 100% OF THE ELIGIBLE PR OFITS. THE SAID CLAIM IS IN ACCORDANCE WITH THE DECISION OF HONBLE APEX COURT IN CASE OF M/S. AJANTA PHARMA WHEREIN IT HAS BEEN DECI DED THAT THE DEDUCTION UNDER SECTION 80HHC FROM MAT INCOME IS NO T SUBJECTED TO RESTRICTION LAID DOWN BY SUBSECTION (IB) OF SEC TION 80HHC. 38. AFTER HEARING BOTH THE PARTIES, WE FIND THAT THIS G ROUND IS SIMILAR TO THE GROUND NO.1, RAISED BY THE DEPARTMENT; THEREFOR E, THIS GROUND WILL BE DISPOSED OFF WHILE DECIDING THE REVENUES APPEAL IN ITA NO.4418/MUM./ 2010, FOR ASSESSMENT YEAR 200304, WHICH HAS BEEN D EALT IN SUCCEEDING PARAGRAPHS. M/S. GARWARE POLYESTER LTD. 38 39. 4 #6 &) *4# 2 '$ !# 7 2 1# 89 : 40. IN THE RESULT, ASSESSEES APPEAL IS PARTLY ALLOWED. WE NOW TAKE UP REVENUES APPEAL IN ITA NO.4418/MUM./2010 , FOR ASSESSMENT YEAR 200304, VIDE WHICH, FOLLOWING GROU NDS HAVE BEEN RAISED: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LEARNED CIT(A) ERRED IN DELETING THE ADDITION OF ` 3,68,37,122, UNDER SECTION 80HHC ON THE BOOK PROFIT UNDER SECTION 115J B WITHOUT APPRECIATING THE FACT THAT THERE IS NO SUCH PROVISI ON IN THE ACT TO DEAL WITH SECTION 80HHC DIFFERENTLY IF THE ASSESSEE IS PAYING TAX UNDER SECTION 115JB . 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LEARNED CIT(A) ERRED IN ALLOWING DEPRECIATION O N KNOW HOW FEES AMOUNTING TO ` 77,89,026 WITHOUT APPRECIATING THE FACTS OF THE CASE. 41. INSOFAR AS GROUND NO.1, IS CONCERNED, THE LEARNED C OMMISSIONER (APPEALS) HAS DISCUSSED THIS ISSUE IN THE FOLLOWING MANNER: 4. 4) THE SECOND GROUND OF APPEAL RELATES TO DEDUCT ION U/S. 8OHHC FROM BOOK PROFIT U/S.115JB OF RS.3,68,37,122/ -. THE AO HAS NOT ALLOWED DEDUCTION OF RS.3,68,37,122/- WHILE COMPUTING BOOK PROFIT U/S.115JB. THE AO HAS DISCUSSED THE ISS UE IN PARA 6 OF THE ASSESSMENT ORDER WHEREIN HE HAS STATED THAT THE COMPANY IS NOT ENTITLED TO THIS DEDUCTION UNDER THE NORMAL PRO VISIONS FOR COMPUTATION OF TOTAL INCOME DUE TO BROUGHT FORWARD LOSS. 4.1 EXPLANATION (IV) TO SECTION 115JB PROVIDES FOR THE FOLLOWING DEDUCTION. THE AMOUNT OF PROFITS ELIGIBLE FOR DEDUCTION U/S.80 HHC COMPUTED UNDER CLAUSE (A) OR CLAUSE (B) OR CLAUSE (C) OF SUB -SECTION (3) OF SUB-SECTION (3A) AS THE CASE MAY BE, OF THAT SECTIO N, AND SUBJECT TO CONDITIONS SPECIFIED IN THAT SECTION. 4.2. IT WAS ALSO SUBMITTED THAT THE COMPUTATION OF TOTAL INCOME AT PAGE 1 OF THE BUSINESS INCOME HAS BEEN COMPUTED AT RS.18,89,96,640/-. THIS HAS BEEN ACCEPTED IN THE CO MPUTATION OF TOTAL INCOME ON PAGE 7 OF THE ASSESSMENT ORDER. THE AO HAS MADE ADDITIONS OF RS.2,86,10,444/- TO THIS INCOME AND CO MPUTED BUSINESS INCOME AT RS.21,76,07,084/. M/S. GARWARE POLYESTER LTD. 39 4.3. IT WAS FURTHER SUBMITTED THAT THERE WAS SUFFIC IENT POSITIVE BUSINESS PROFIT IN THE YEAR UNDER APPEAL AND THE AP PELLANT WAS ELIGIBLE TO DEDUCTION OF RS.3,69,04,360/-. IT IS SU BMITTED THAT U/S. 1 15JB- EXPLANATION(IV) WHAT IS PROVIDED IS THAT THE AMOUNT OF PROFIT ELIGIBLE FOR DEDUCTION AS COMPUTED U/S.8OHHC IS AL LOWABLE AS DEDUCTION FROM BOOK PROFIT. IT IS NOT THE CONDITION OF SEC. 115JB THAT SUCH DEDUCTION HAS BEEN ACTUALLY ALLOWED OR NO T IN THE COMPUTATION OF TOTAL INCOME UNDER THE OTHER PROVISI ON. THE APPELLANT ALSO RELIED ON THE SPECIAL BENCH DECISION IN DCIT V/S. SYNDROME FORMULATION (1) LTD 2007 106 LTD 793(MUM) AS WELL AS THAT OF GLENRNARK LABORATORIES LTD DATED 09-11-2004 . 4.4. I HAVE PERUSED THE FACTS OF THE CASE AND THE L EGAL POSITION ON THIS ISSUE. AS FAR AS PERCENTAGE OF DEDUCTION ALLOW ABLE IN EACH YEAR THE ASSESSEE WOULD NOT BE ENTITLED TO 100% DEDUCTIO N SINCE SUB- SECTION 1 TO SECTION 8OHHC INTRODUCED BY THE FINANC E ACT W,E.F 1ST APPEAL 2001 WAS SPECIFICALLY MEANT TO PHASE OUT THE DEDUCTION COMPLETELY FOR A.Y,2005-06 IN WHICH EVENT ON AN APP LICATION OF THE SUB-SECTION ONLY A PORTION OF THE AMOUNT COMPUTED U /S.8OHHC IS ALLOWABLE FOR A.Y.2004-05. THIS IS IN ACCORDANCE WI TH THE DECISION OF THE BOMBAY HIGH COURT IN AJANTA PHARMA. 4.5. HOWEVER, THE METHOD OF COMPUTATION OF DEDUCTIO N U/S.8OHHC IS TO BE IN ACCORDANCE WITH THE DECISIONS OF THE S PECIAL BENCH IN DCIT V/S. SYNDROME FORMULATION (I) LTD (2007) 106 L TD 193(MUM). THE AO IS DIRECTED ACCORDINGLY. 42. AT THE OUTSET, BOTH THE PARTIES AGREED THAT THIS IS SUE STANDS COVERED BY THE JUDGMENT OF HON'BLE SUPREME COURT IN AJANTA PHARMA LTD. V/S CIT, [2010] 327 ITR 305 (SC) . 43. AFTER HEARING BOTH THE PARTIES AND ON PERUSAL OF TH E MATERIAL AVAILABLE ON RECORD, WE FIND THAT THE ISSUE OF COMP UTATION OF BOOK PROFIT UNDER SECTION 115JB AND DEDUCTION UNDER SECTION 80H HC HAVE BEEN DECIDED BY THE HON'BLE SUPREME COURT IN THE FOLLOWI NG MANNER: 9. ON THE OTHER HAND, S. 80HHC(1) INTER ALIA STATES THAT WHERE AN ASSESSEE, WHO IS THE INDIAN RESIDENT, IS ENGAGED IN THE BUSINESS OF EXPORTS OUT OF INDIA OF ANY GOODS EARNS CONVERTI BLE FOREIGN EXCHANGE THEN IN COMPUTING THE TOTAL INCOME, A DEDU CTION OF THE PROFITS DERIVED FROM SUCH EXPORTS WOULD BE ADMISSIB LE. THUS, S. 80HHC PROVIDES FOR TAX INCENTIVES. SEC. 80HHC(1) AT ONE POINT OF TIME LAID DOWN THAT AN AMOUNT EQUAL TO THE AMOUNT O F DEDUCTION CLAIMED SHOULD BE DEBITED TO THE P&L A/C OF THE PRE VIOUS YEAR IN RESPECT OF WHICH DEDUCTION IS TO BE ALLOWED AND CRE DITED TO THE RESERVE ACCOUNT TO BE UTILIZED FOR THE BUSINESS PUR POSE. SEC. M/S. GARWARE POLYESTER LTD. 40 80HHC(1) CONCERNS ELIGIBILITY WHEREAS S. 80HHC(3) C ONCERNS COMPUTATION OF THE QUANTUM OF DEDUCTION/TAX RELIEF. AT ONE POINT OF TIME PRIOR TO THE FINANCE ACT, 2000, EXPORTERS WERE ALLOWED 100 PER CENT DEDUCTION IN RESPECT OF PROFITS DERIVED FROM E XPORT OF GOODS. HOWEVER, THAT HAS NOW BEEN REDUCED IN A PHASE-WISE MANNER UNDER S. 80HHC(1B). IT MAY BE NOTED THAT ALL ASSESS ABLE ENTITIES ARE NOT ELIGIBLE FOR DEDUCTION UNDER S. 80HHC. SIMI LARLY, ONLY ELIGIBLE GOODS ARE ENTITLED TO SUCH SPECIAL DEDUCTI ON UNDER S. 80HHC(1). A BARE READING OF S. 80AB SHOWS THAT COMP UTATION OF DEDUCTION IS GEARED TO THE AMOUNT OF INCOME, BUT S. 80HHC(3), WHICH REFERS TO QUANTIFICATION OF DEDUCTION IS GEAR ED TO THE EXPORTS TURNOVER AND NOT TO THE INCOME. ON THE OTHER HAND, S. 115JB REFERS TO LEVY OF MAT ON THE DEEMED INCOME. THE ABOVE DISCUSSION IS ONLY TO SHOW THAT SS. 80HHC AND 115JB OPERATE IN DIFFERENT SPHERES. THUS, TWO ESSENTIAL C ONDITIONS FOR INVOKING S. 80HHC(1) ARE THAT ASSESSEE MUST BE IN T HE BUSINESS OF EXPORT AND SECONDLY THAT SALE PROCEEDS OF SUCH EXPO RTS SHOULD BE RECEIVABLE IN INDIA IN CONVERTIBLE FOREIGN EXCHANGE . HENCE, S. 80HHC(1) REFERS TO 'ELIGIBILITY' WHEREAS S. 80HHC(3 ) REFERS TO COMPUTATION OF TAX INCENTIVE. COMING TO S. 80HHC(1B ) IT IS CLEAR THAT AFTER FINANCE ACT, 2000 W.E.F. ASST. YR. 20010 2 EXPORTERS WOULD NOT GET 100 PER CENT DEDUCTION IN RESPECT OF PROFITS DERIVED FROM EXPORTS BUT THAT THEY WOULD GET DEDUCTION OF 8 0 PER CENT IN THE ASST. YR. 2001-02, 70 PER CENT IN THE ASST. YR. 2002-03 AND SO ON. THUS, S. 80HHC(1B) DEALS NOT WITH 'ELIGIBILITY' BUT WITH THE 'EXTENT OF DEDUCTION'. AS EARLIER STATED, S. 115JB IS A SELF-CONTAINED CODE. IT TAXES DEEMED INCOME. IT BEGINS WITH A NON OBSTANTE CLAUSE. SEC. 115JB REFERS TO COMPUTATION OF 'BOOK P ROFITS' WHICH HAVE TO BE COMPUTED BY MAKING UPWARD AND DOWNWARD ADJUSTMENTS. IN THE DOWNWARD ADJUSTMENT, VIDE CL. ( IV) IT SEEKS TO EXCLUDE 'ELIGIBLE' PROFITS DERIVED FROM EXPORTS. ON THE OTHER HAND, UNDER S. 80HHC (1B) IT IS THE EXTENT OF DEDUCTION W HICH MATTERS. THE WORD 'THEREOF' IN EACH OF THE ITEMS UNDER S. 80 HHC(1B) IS IMPORTANT. THUS, IF AN ASSESSEE EARNS RS. 100 CRORE S THEN FOR THE ASST. YR. 2001-02, THE EXTENT OF DEDUCTION IS 80 PE R CENT THEREOF AND SO ON WHICH MEANS THAT THE PRINCIPLE OF PROPORT IONALITY IS BROUGHT IN TO SCALE DOWN THE TAX INCENTIVE IN A PHA SED MANNER. HOWEVER, FOR THE PURPOSES OF COMPUTATION OF BOOK PR OFITS WHICH COMPUTATION IS DIFFERENT FROM NORMAL COMPUTATION UN DER THE 1961 ACT/COMPUTATION UNDER CHAPTER VI-A. WE NEED TO KEEP IN MIND THE UPWARD AND DOWNWARD ADJUSTMENTS AND IF SO READ IT B ECOMES CLEAR THAT CL. (IV) COVERS FULL EXPORT PROFITS OF 100 PER CENT AS 'ELIGIBLE PROFITS' AND THAT THE SAME CANNOT BE REDUCED TO 80 PER CENT BY RELYING ON S. 80HHC(1B). THUS, FOR COMPUTING 'BOOK PROFITS' THE DOWNWARD ADJUSTMENT, IN THE ABOVE EXAMPLE, WOULD BE RS. 100 CRORES AND NOT RS. 90 CRORES. THE IDEA BEING TO EXC LUDE 'EXPORT PROFITS' FROM COMPUTATION OF BOOK PROFITS UNDER S. 115JB WHICH IMPOSES MAT ON DEEMED INCOME. THE ABOVE REASONING A LSO GETS SUPPORT FROM THE MEMORANDUM OF EXPLANATION TO THE F INANCE BILL, 2000. M/S. GARWARE POLYESTER LTD. 41 10. ONE OF THE CONTENTIONS RAISED ON BEHALF OF THE DEPARTMENT WAS THAT IF CL. (IV) OF EXPLANATION TO S. 115JB IS READ IN ENTIRETY INCLUDING THE LAST LINE THEREOF (WHICH READS AS 'SUBJECT TO T HE CONDITIONS SPECIFIED IN THAT SECTION'), IT BECOMES CLEAR THAT THE AMOUNT OF PROFITS ELIGIBLE FOR DEDUCTION UNDER S. 80HHC, COMP UTED UNDER CL. (A) OR CL. (B) OR CL. (C) OF SUB-S. (3) OR SUB-S. ( 3A), AS THE CASE MAY BE, IS SUBJECT TO THE CONDITIONS SPECIFIED IN THAT SECTION. ACCORDING TO THE DEPARTMENT, THE ASSESSEE HEREIN IS TRYING TO READ THE VARIOUS PROVISIONS OF S. 80HHC IN ISOLATION WHE REAS AS PER CL. (IV) OF EXPLANATION TO S. 115JB, IT IS CLEAR THAT B OOK PROFIT SHALL BE REDUCED BY THE AMOUNT OF PROFITS ELIGIBLE FOR DEDUC TION UNDER S. 80HHC AS COMPUTED UNDER CL. (A) OR CL. (B) OR CL. ( C) OF SUB-S. (3) OR SUB-S. (3A), AS THE CASE MAY BE, OF THAT SECTION AND SUBJECT TO THE CONDITIONS SPECIFIED IN THAT SECTION, THEREBY M EANING THAT THE DEDUCTION ALLOWABLE WOULD BE ONLY TO THE EXTENT OF DEDUCTION COMPUTED IN ACCORDANCE WITH THE PROVISIONS OF S. 80 HHC. THUS, ACCORDING TO THE DEPARTMENT, BOTH 'ELIGIBILITY' AS WELL AS 'DEDUCTIBILITY' OF THE PROFIT HAVE GOT TO BE CONSID ERED TOGETHER FOR WORKING OUT THE DEDUCTION AS MENTIONED IN CL. (IV) OF EXPLANATION TO S. 115JB. WE FIND NO MERIT IN THIS ARGUMENT. IF THE DICHOTOMY BETWEEN 'ELIGIBILITY' OF PROFIT AND 'DEDUCTIBILITY' OF PROFIT IS NOT KEPT IN MIND THEN S. 115JB WILL CEASE TO BE A SELF-CONTA INED CODE. IN S. 115JB, AS IN S. 115JA, IT HAS BEEN CLEARLY STATED T HAT THE RELIEF WILL BE COMPUTED UNDER S. 80HHC(3)/(3A), SUBJECT TO THE CONDITIONS UNDER SUB-CLS. (4) AND (4A) OF THAT SECTION. THE CO NDITIONS ARE ONLY THAT THE RELIEF SHOULD BE CERTIFIED BY THE CHARTERE D ACCOUNTANT. SUCH CONDITION IS NOT A QUALIFYING CONDITION BUT IT IS A COMPLIANCE CONDITION. THEREFORE, ONE CANNOT RELY UPON THE LAST SENTENCE IN CL. (IV) OF EXPLANATION TO S. 115JB [SUBJECT TO THE CON DITIONS SPECIFIED IN SUB-CLS. (4) AND (4A) OF THAT SECTION] TO OBLITE RATE THE DIFFERENCE BETWEEN 'ELIGIBILITY' AND 'DEDUCTIBILITY' OF PROFIT S AS CONTENDED ON BEHALF OF THE DEPARTMENT. 44. IN VIEW OF THE LAW LAID DOWN BY THE HON'BLE SUPREME COURT, WE DIRECT THE ASSESSING OFFICER TO COMPUTE THE DEDUCTI ON UNDER SECTION 80HHC IN THE LIGHT OF THE AFOREMENTIONED JUDGMENT OF HON' BLE SUPREME COURT. THUS, GROUND NO.1, RAISED BY THE REVENUE IS DISMISS ED. 45. THE ADDITIONAL GROUND RAISED BY THE ASSESSEE IN ITS ITA NO.4189/MUM./2010, AS REPRODUCED ABOVE, IS HEREBY D ISPOSED OFF IN FAVOUR OF THE ASSESSEE AS THE SAME IS COVERED BY TH E AFOREMENTIONED JUDGMENT OF THE HON'BLE SUPREME COURT IN AJANTA PHA RMA LTD. (SUPRA). RESPECTFULLY FOLLOWING THE SAME, THE ADDITIONAL GRO UND RAISED BY THE ASSESSEE IS HEREBY ALLOWED. M/S. GARWARE POLYESTER LTD. 42 46. GROUND NO.2, RELATES TO DEPRECIATION ON KNOWHOW FEE S OF ` 77,89,026. 47. THE LEARNED COMMISSIONER (APPEALS) HAS DEALT WITH T HIS ISSUE IN THE FOLLOWING MANNER: 7. THE FIFTH GROUND OF APPEAL RELATES TO DEPRECIATI ON ON TECHNICAL KNOW- HOW FEES OF RS.77,89,026/-. THE AO HAS DISALLOWED RS.77,89,926/- BEING DEPRECIATION CLAIMED ON THE AB OVE HEAD ON THE GROUND THAT NO DEDUCTION FOR DEPRECIATION ON TE CHNICAL KNOW- HOW U/S.32 WAS ALLOWABLE. 7.1. I HAVE PERUSED THE FACTS OF THE CASE. THIS IS A RECURRING ISSUE WHERE FINDING HAS BEEN GIVEN BY THE ITAT AS WELL AS BY THE CIT(A) FOR IMMEDIATE SUCCEEDING YEAR I.E, 2004-05. FROM TH E SUBMISSION MADE BY THE APPELLANT AND SPECIFICALLY THE CHART PR OVIDED TO THE AO FOR THE CLAIM OF DEDUCTION US/. 35AB AND U/S,32 OF THE I.T. ACT, I DO NOT FIND ANY ERROR IN THE CLAIM MADE. THE AO SHALL HOWEVER, BEFORE ALLOWING THE CLAIM TO VERIFY FROM THE RECORD AND SU BMIT BEFORE HIM ALONG WITH THE FIGURE AS CLAIMED BOTH U/S.35AB AND U/S.32 OF THE L.T. ACT. THE AO SHOULD ALSO ENSURE THAT THE DEDUCT ION IS ALLOWABLE ONLY AFTER FACTORING IN THE CLAIM WHICH HAS NOT BEE N ACCEPTED IN FAVOUR OF THE DEPARTMENT BY THE HONBLE ITAT IN ITS ORDER IN ITA NO.645/MUM/98 DATED 28-10-2004 WHICH HAS BEEN RELIE D UPON BY THE AU IN THE ORDER IN THE CURRENT YEAR. THUS, THE AO, SHALL ENSURE AND VERIFY THE ENTIRE RECORDS AND CLAIMS MADE THERE IN FOR EACH YEAR WHICH HAS BEEN INCLUDED IN COMPUTING THE CLAIM U/S. 35AB AND 32 OF THE ACT . 48. BOTH THE PARTIES ADMITTED THAT THIS ISSUE IS COVERE D IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE BY THE DECISION OF A COORDINATE BENCH OF THIS TRIBUNAL IN ASSESSEES OWN CASE FOR ASSESSM ENT YEAR 200203, ITA NO.4774/MUM./2006. 49. AFTER HEARING BOTH THE PARTIES AND ON PERUSAL OF TH E FINDINGS OF THE LEARNED COMMISSIONER (APPEALS) AND THE ASSESSING OF FICER AS WELL AS THE ORDER PASSED BY THE TRIBUNAL, WE FIND THAT THIS ISS UE HAS BEEN RESTORED TO THE FILE OF THE ASSESSING OFFICER FOR CARRYING OUT VERIFICATION AS PER THE DIRECTIONS GIVEN THEREIN WHICH, FOR THE SAKE OF REA DY REFERENCE, IS REPRODUCED BELOW: M/S. GARWARE POLYESTER LTD. 43 11. GROUND NO. 4 OF THE APPEAL READS AS FOLLOWS :- THE SAID LEARNED CIT(A) ERRED IN NOT ACCEPTING THE CLAIM OF THE APPELLANT FOR DEDUCTION U/S. 35AB (RS. 1,15,86,168/ -) AND DEPRECIATION U/S. 32 (56,40,216) AGGREGATING TO RS. 1,72,26,384/-. THE SAID LEARNED CIT(A) ERRED IN OBSERVING THAT THI S MATTER HAS TO BE DECIDED BY THE ASSESSING OFFICER WHEN ALL THE DE TAILS WERE SUBMITTED AT THE TIME OF HEARING OF THE APPEAL AND THE QUESTION OF ALLOWABILITY OF THE DEDUCTION WAS REQUIRED TO BE TA KEN BY HIM. 12. THE OBSERVATIONS OF THE CIT(A) ON THIS ISSUE WE RE AS FOLLOWS: THE ASSESSING OFFICER DISALLOWED RS.1,22,18,252/- B UT THE CORRECT AMOUNT WAS RS.1,03,85,368/- BEING DEPRECIATION ON T ECHNICAL KNOWHOW ON THE GROUND THAT NO SUCH DEPRECIATION WAS ALLOWABLE ON COST PAID FOR ACQUIRING TECHNICAL KNOW HOW. THE ALT ERNATIVE CLAIM FOR DEDUCTION U/S. 35AB WAS ALSO NOT ALLOWED AS THE SAME HAD ALREADY BEEN EXHAUSTED. THE ASSESSING OFFICER IN TH E ASSESSMENT ORDER DISALLOWED THE CLAIM UNDER SECTION 35AB HOLDI NG THAT THE ALLOWANCE OF 1/6 TH OF THE TECHNICAL KNOWHOW EXPENSES ALREADY STOOD EXHAUSTED. THE ASSESSING OFFICER ALSO DID NOT ALLOW THE DEPRECIATION STATING THAT THIS ISSUE WAS COVERED BY THE DECISION OF HON'BLE ITAT VIDE ORDER BEARING ITA NO. 645/MUM/1998 DATED 28.10 .2004. IN APPEAL, IT HAS BEEN HELD THAT THE ASSESSEE IS ENTIT LED TO DEDUCTION OF 1/6 TH OF THE TECHNICAL KNOWHOW FEES PAID AND THAT THE AS SESSING OFFICER HAS IGNORED THE CHART SUBMITTED TO HIM REGA RDING THE SAME. IT WAS FURTHER BEEN ARGUED THAT THE ASSESSING OFFIC ER HAS COMMITTED AN ERROR IN NOT ALLOWING DEPRECIATION EVE N WHEN TECHNICAL KNOWHOW HAS FROM THE A.Y. 1999-2000 BEE N CLASSIFIED AS AN INTANGIBLE ASSET. BOTH THE DEDUCTION CLAIMED UNDER TECHNICAL KNOWHOW FEES AND DEPRECIATION CLAIMED ARE MATTER S TO BE DECIDED BY THE ASSESSING OFFICER ON THE FACTS AND EVIDENCES AVAILABLE TO HIM ON HIS RECORDS. UNDER THE CIRCUMSTANCES, THE ASSESS ING OFFICER SHALL PASS NECESSARY ORDERS AFTER VERIFICATION OF RECORDS AND EXAMINING THE PLEA OF THE ASSESSEE REGARDING HIS RELIANCE ON THE CHARTS AND DOCUMENTS SUBMITTED BEFORE THE ASSESSING OFFICER DU RING THE ASSESSMENT PROCEEDINGS. 13. WE ARE OF THE VIEW THAT THE LEARNED CIT(A) HAS NOT EXAMINED THE ISSUE AND HAS REMANDED THE ISSUE TO TH E ASSESSING OFFICER. WE ARE OF THE VIEW THAT IN THE LIGHT OF TH E CHART SUBMITTED BY THE ASSESSEE BEFORE THE ASSESSING OFFICER, THE A SSESSING OFFICER SHOULD EXAMINE AS TO WHETHER DEPRECIATION CLAIMED O N TECHNICAL KNOWHOW IS DIFFERENT FROM THE 1/6 TH DEDUCTION OF EXPENSE ON TECHNICAL KNOWHOW CLAIMED BY THE ASSESSEE U/S. 35AB OF THE ACT. IF THAT BE SO, THE CLAIM FOR DEPRECIATION U/S. 32 HAS TO BE ALLOWED AS PER THE AMENDED PROVISIONS OF SECTION 32 APPLICABLE TO A.Y. 2002- 03. 50. IN THIS YEAR ALSO, THE LEARNED COUNSEL FOR THE ASSE SSEE POINTED OUT THAT A SIMILAR CHART DEPICTING DEDUCTION SECTIONS 3 5AB AND 32, HAS BEEN M/S. GARWARE POLYESTER LTD. 44 GIVEN AT PAGE91 OF THE PAPER BOOK. THUS, KEEPING I N VIEW THE DECISION OF A COORDINATE BENCH OF THE TRIBUNAL CITED SUPRA, SI MILAR DIRECTIONS ARE ISSUED ON THIS ISSUE ALSO. CONSEQUENTLY, GROUND NO. 2, IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. 51. 4 #6 1! 2 ;2 <=> ' '$ !# 7 2 1# 89 : 49. IN THE RESULT, ASSESSEES APPEAL IS PARTLY ALLO WED FOR STATISTICAL PURPOSES. $ 2 + ? @)6 19 TH DECEMBER 2012 2 A : ORDER PRONOUNCED IN THE OPEN COURT ON 19 TH DECEMBER 2012 SD/- . .. . B. RAMAKOTAIAH ACCOUNTANT MEMBER SD/- '# '# '# '# $% $% $% $% & & & & AMIT SHUKLA JUDICIAL MEMBER MUMBAI, @) @) @) @) DATED: 19 TH DECEMBER 2012 $ 2 .&#'B CB+# / COPY OF THE ORDER FORWARDED TO : (1) &) *4# / THE ASSESSEE; (2) 1! / THE REVENUE; (3) D () / THE CIT(A); (4) D / THE CIT, MUMBAI CITY CONCERNED; (5) B!GA .&#&) , , / THE DR, ITAT, MUMBAI; (6) AH* I / GUARD FILE. /B# .&# / TRUE COPY $) / BY ORDER . 1. JK / PRADEEP J. CHOWDHURY !4L &)1 J! / SR. PRIVATE SECRETARY < / 8 1 / (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI
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