ACIT 8(1), MUMBAI V. BUNGE INDIA P. LTD, MUMBAI

ITA 4336/MUM/2009

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 3420 (ITAT-MUMBAI)
• Duration Of Justice: 6 year(s) 10 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-05-2016
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: K
• Next Hearing Date: 25-02-2015
• Assessment Year: 2005-2006
• Appeal Filed On: 17-07-2009
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: DEBASHISH CHANDRA
• Assessee Lawyers: VISPI PATEL
• Keywords: Capital asset; Business income; Depreciation; Transfer pricing; Business expenditure; Principle of natural justice; International transaction; Rule of consistency; Cost of acquisition; Avoidance of tax; Scheme of amalgamation; Capital receipt; Revised return; Revenue expenditure; Capital expenditure
• Section: 92D; 92A; 32; 37; 56; 92

Judgement Text

1 , INCOME-TAX APPELLATE TRIBUNAL -KBENCH MUM BAI , . . , BEFORE S/SH.RAJENDRA,ACCOUNTANT MEMBE R AND C.N. PRASAD,JUDICIAL MEMBER ./I.T.A./4336/MUM/2009, /ASSESSMENT YEAR: 2005-06 DCIT, CIRCLE-8(1) ROOM NO.210, 2 ND FLOOR AAYAKAR BHAVAN, MUMBAI-400020. VS. M/S. BUNGE INDIA PVT. LTD. 601 C & 601 D, 6 TH FLOOR, THE CAPITAL, C- 70,G-BLOCK, BANDRA KURLA COMPLEX, BANDRA (E), MUMBAI-400051. PAN: AAACG 7034 K ( /APPELLANT ) ( / RESPONDENT) /C.O/.NO.29/M/2010,AY.2005-06 M/S. BUNGE INDIA PVT. LTD. MUMBAI-400 051. VS. DCIT, CIRCLE-8(1) MUMBAI-400 020. (CROSS OBJECTOR) ( / RESPONDENT ) ./I.T.A./2697/MUM/2011, /ASSESSMENT YEAR: 2006-07 ACIT, RANGE -8(1) AAYAKAR BHAVAN,MUMBAI-400 020. VS. M/S. BUNGE INDIA PVT. LTD. MUMBAI-400 051. ( /APPELLANT ) ( / RESPONDENT ) C.O.174/MUM/2011-AY.2006-07 M/S. BUNGE INDIA PVT. LTD. MUMBAI-400 051. VS. DCIT, CIRCLE-8(1) MUMBAI-400 020. (CROSS OBJECTOR) ( / RESPONDENT ) ./I.T.A./607/MUM/2012, /ASSESSMENT YEAR: 2007-08 DCIT, CIRCLE-8(1) AAYAKAR BHAVAN, MUMBAI-400020. VS. M/S. BUNGE INDIA PVT. LTD. MUMBAI-400051. ( /APPELLANT ) ( / RESPONDENT) /C.O/.NO.262/M/2012,AY.2007-08 M/S. BUNGE INDIA PVT. LTD. MUMBAI-400 051. VS. DCIT, CIRCLE-8(1) MUMBAI-400 020. (CROSS OBJECTOR) ( / RESPONDENT ) REVENUE BY: SHRI DEBASHISH CHANDRA ASSESSEE BY: SHRI VISPI PATEL / DATE OF HEARING: 12.04.2016 / DATE OF PRONOUNCEMENT: 18.05.2016 ,1961 254(1) ORDER U/S.254(1)OF THE INCOME-TAX ACT,1961(ACT) PER RAJENDRA, AM - 2 CHALLENGING THE ORDERS OF THE CS.IT(A)THE ASSESSING OFFICER (AO)AND THE ASSESSEE HAVE FILED THE APPEALS/CROSS OBJECTIONS FOR THE ABO VE MENTIONED ASSESSMENT YEARS (AY.S.),RAISING VARIOUS GROUNDS OF APPEAL.ASSESSEE- COMPANY IS ENGAGED IN THE BUSINESS OF PROCESSING OF OIL SEEDS, MANUFACTURING AND TRADING IN EDIBLE OILS, DE- OILED CAKE, CRUDE OIL, REFINED OIL, HYDROGENATED OI L AND DEALING IN OTHER AGRICULTURAL COMMODITIES.THE DETAILS OF FILING OF RETURNS,RETURN ED INCOMES, ASSESSED INCOMES ETC.CAN BE SUMMARISED AS UNDER: A.Y. ROI FILED ON RETURNED INCOME(RS.) ASSESSMENT DT. ASSESSED INCOME(RS.) DT. OF ORDERS OF CIT(A) 2005-06 31.10.2005 40,61,95,550/- 29.12.2008 5,94,2 0,21,732/- 11.05.2009 2006-07 29.11.2006(REVISED RETURN ON 11.3.2008) 8,03,99,566/- (DECLRG TAXABLE INCOME AT RS. 7,84, 42,338/-) 15.12.2009 41,96,97,240/- 17.01.2011 2007-08 12.11.2007(REVISED RETURN ON 26.03. 09 (-)9,28,09,353/- 23.12.2010 1,04,23,69,746/- 29.11. 2011 ITA/4336/MUM/2009,AY.2005-06 2. DURING THE ASSESSMENT PROCEEDINGS,THE AO FOUND THAT THE ASSESSEE HAD ENTERED INTO INTERNATIONAL TRANSACTIONS WITH ITS ASSOCIATED ENTERPRISES(AES),AS STIPULATED BY THE PROVISIONS OF SECTION 92A OF THE ACT.HE MADE A REFERENCE TO THE TRANSFER PRICING OFFICER(TPO)FOR COMPUTING THE ARMS LENGTH PRICE(AL P)OF THE TRANSACTION.DURING THE TRANSFER PRICING(TP)PROCEEDINGS THE TPO FOUND T HAT THE ASSESSEE HAD ACQUIRED THE EDIBLE OIL AND FATS BUSINESS OF HINDUSTAN LEVER LTD.(HLL)DURING THE YEAR UNDER CONSIDERATION,THAT THE COMPANY WAS FORMED BY THE ME RGER OF BUNGE AGRIBUSINESS INDIA PRIVATE LTD.INTO GEEPEE CEVAL PROTEINS & INVE STMENT PRIVATE LTD.AS PER THE SCHEME OF AMALGAMATION SANCTIONED BY THE HONORABLE HIGH COURTS, THAT LATER ON GEEPEE CEVAL WAS RENAMED AS BUNGE AGRIBUSINESS INDI A PRIVATE LTD., THAT IT HAD BIFURCATED ITS ACTIVITIES INTO MANUFACTURING ACTIVI TIES(MA) AND MTA,THAT FOR THE PURPOSE OF THE TP DOCUMENTATION IT HAD FUNCTIONALIT Y ANALYSED THE TRANSACTIONS OF THE MTA AND MA,THAT IT BENCHMARKED THEM SEPARATELY, THAT FOR BENCHMARKING 3 MTA IT WORKED OUT ITS OPERATING PROFIT AT RS.99.31 CRORES,THAT THE AMOUNT INCLUDED INTEREST OF RS.112.86 CRORES ON FDRS AND FORWARD DI SCOUNT OF RS.4.59 CRORES,THAT ON THE EXPENDITURE SIDE IN ADDITION TO THE IMPORT P RICE OF THE GOODS,VALUE-ADDED EXPENSES OF RS.20.29 CRORES HAD BEEN SHOWN THAT INC LUDED CONSULTANCIES,L/C CHARGES,FORWARD PREMIUM AND FOREIGN EXCHANGE PREMIU M, THAT PROFIT MARGIN ON VALUE-ADDED EXPENSES WAS CALCULATED AT 489.28%, AS COMPARED TO MEAN MARGIN OF 6.44% OF THE COMPARABLES, THAT THE PROFIT MARGIN WA S CALCULATED BY CONSIDERING ONLY THOSE EXPENSES AS OPERATING COST. THE TPO ISSU ED A SHOW CAUSE NOTICE ASKING THE ASSESSEE AS TO WHY FDR INTEREST WAS INCLUDED IN THE OPERATING PROFITS.IT WAS CONTENDED BY THE ASSESSEE THAT IT USED TO RECEIVE A DVANCE AGAINST SALES IMMEDIATELY AND IN RESPECT OF IMPORT IT ENJOYED CREDIT PERIOD O F 180 DAYS WHICH WAS UTILISED IN MAINTAINING THE AMOUNT IN FORM OF TERM DEPOSIT WITH THE BANKS,THAT THE FDRS WERE USED FOR OPENING L/C IN FAVOUR OF THE SELLER,THAT T HE FDR INTEREST WAS AN INTEGRAL PART OF THE MTA, THAT THE OPERATING PROFIT WAS CALC ULATED ACCORDINGLY.HOWEVER,THE TPO DID NOT CONSIDER THE INTEREST ON FDR AS PART OF BUSINESS INCOME AS WELL AS PART OF OPERATING INCOME.HE OBSERVED THAT THERE WAS NO BUSINESS COMPULSION TO CREATE THE FDRS,THAT INVESTMENT IN FDRS WERE MADE T O ENJOY INTEREST INCOME, THAT THERE WAS NO CLEAR AGREEMENT WITH THE SUPPLIERS REG ARDING CREDIT PERIOD OF 180 DAYS,THAT THERE WAS NO DIRECT NEXUS WITH THE BUSINE SS ACTIVITY AND THE INTEREST INCOME,THAT THE INTEREST INCOME SHOULD BE EXCLUDED WHILE WORKING OUT THE OPERATING PROFIT.HE REFERRED TO SEVEN CASE LAWS AND THE PROVISIONS OF SECTION 80 HHC IN HIS SUPPORT.THE TPO OBSERVED THAT INTEREST O N FDRS WAS INCOME FROM OTHER SOURCES AS PER THE PROVISIONS OF SECTION 56 O F THE ACT,THAT THE INTEREST COULD NOT BE CONSIDERED UNDER THE HEAD BUSINESS INCOME,TH AT L/C CHARGES, AMOUNTING TO RS.20.29 CRORES WERE INCURRED FOR THE PURPOSE OF EA RNING OPERATE PROFIT FROM BUSINESS ACTIVITIES,THAT NO PART OF SUCH EXPENDITUR E COULD BE RELATABLE TO EARNING FDR INTEREST INCOME,THAT ALL THOSE EXPENSES WERE DI RECTLY RELATED TO BUSINESS 4 ACTIVITY OF MERCHANTING TRADE,THAT THE ASSESSEE HAD DRAWN THE ACCOUNTS FOR MTA BY INCLUDING DIRECT EXPENDITURE I.E. PURCHASE COST AND VALUE OF SALES,THAT FOR THE TP PURPOSES THE ASSESSEE HAD AMENDED THE AUDITED ACCOU NTS BY EXCLUDING THE COST OF PURCHASE FOR CALCULATING OPERATING COST OF MTA,THAT THE OPERATING COST INCLUDED BOTH DIRECT AND INDIRECT EXPENDITURE,THAT THE ASSES SEE HAD EXCLUDED DIRECT EXPENDI - TURE WHILE COMPUTING THE OPERATING COST,THAT IT WAS NOT ENTITLED TO AMEND THE BASIC STRUCTURE OF THE AUDITED FINANCIALS OF MTA BY EXCLU DING THE DIRECT COST OF PURCHASE, THAT THE PURCHASE AND SALE INVOICES WERE IN THE NAM E OF THE ASSESSEE. ACCORDINGLY,THE OPERATING PROFIT MARGIN FROM MTA WA S RE-COMPUTED BY THE TPO BY TAKING TOTAL COST(IMPORT PRICE+INDIRECT COST)OF RS.75,77,20,87,912/-AS THE OPERAT -ING COST AND TOTAL INCOME WAS TAKEN AT RS.75,63,66 ,42,465/- BY EXCLUDING INTEREST OF RS.112.86 CRORES.THE ADJUSTED OPERATING RESULT I .E.LOSS WAS WORKED OUT AT RS.13.54 CRORES AS AGAINST THE PROFIT OF RS.99.31 C RORES SHOWN BY THE ASSESSEE FOR WORKING OUT THE ALP.IN LIGHT OF THE CHANGE IN THE P LI A SHOW CAUSE NOTICES WERE ISSUED TO THE ASSESSEE BY THE TPO.THE ASSESSEE SUBM ITTED THAT THE OPERATING MARGIN OF 1.31% WAS ARRIVED AT AFTER CONSIDERING THE IMPOR T AND EXPORT PRICE OF GOODS AND THE INTEREST INCOME, THAT THE TPO WAS DUTY BOUND TO BE CONSISTENT WITH HIS OWN ANALYSIS,THAT HE SHOULD HAVE CONSIDERED THE FUNCTIO NALLY COMPARABLE COMPANIES THAT WERE ENGAGED IN TRADING ACTIVITY,THAT HE SHOUL D NOT HAVE CONSIDERED THE COMPANIES ENGAGED IN SERVICE COMPARABLES WHICH WERE SUBMITTED BY THE ASSESSEE IN THE DOCUMENTATION.VIDE ITS SUBMISSION,DATED 20/1 0/2008,THE ASSESSEE SUBMITTED THAT THE TPO HAD CONSIDERED MTA AS TRADING ACTIVITY ,THAT HE SHOULD CONSIDER A LIST OF COMPARABLES HAVING TRADING ACTIVITY,THAT SUCH CO MPARABLE HAD MEAN MARGIN OF 0.94% ON COSTS.RELIANCE WAS PLACED ON RULE 10 A OF THE INCOME TAX RULES, 1962 (RULES)AND WAS ARGUED THAT TP REGULATIONS RECOGNISE D THE DIFFERENCE BETWEEN THE GOODS AND SERVICES.IT WAS STATED THAT THE TPO DID N OT CONSIDER THE TRADING COMPARABLE MARGIN OF 0.94% ON COST.HOWEVER,THE TPO STARTED WITH OPERATING MARGIN OF 6.44% OF SUPPORT SERVICE COMPARABLES AND ACCORDINGLY DETERM -INED THE ALP OF EXPORT TO AES AT RS.80,32,96,30,156/-.IN TER MS OF % ADJUSTMENT TO ALP OF EXPORT WORKED OUT TO 6.24%.THE TPO OBSERVED THAT IT WAS MORE THAN 5% RANGE, ALLOWABLE UNDER THE PROVISO TO SECTION 92 C(2)OF TH E ACT.FINALLY,THE TPO PROPOSED AN ADDITION OF RS.5,01, 51,67, 909/-. 5 3 .AFTER RECEIVING THE ORDER OF THE TPO,THE AO ISSUED A DRAFT ASSESSMENT ORDER TO THE ASSESSEE.AGGRIEVED BY THE ORDERS OF THE AO AND THE TPO,THE ASSESSEE FILED AN APPEAL BEFORE THE FIRST APPELLATE AUTHORITY(FAA).BE FORE HIM,IT WAS ARGUED THAT DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE H AD CARRIED OUT MTA WITH RESPECT TO AGRICULTURAL COMMODITIES WHEN IT DETERMINED THAT FINANCING ASPECT OF THE TRADE INVOLVING THIRD-PARTY BANKS IN COMBINATION WITH A 1 0CENT/METRIC TON SPREAD ON THE EXPORT/IMPORT PRICING WOULD ALLOW IT TO EARN A SUFF ICIENT PROFIT,THAT IT TRANSACTED WITH ITS AES ON AND INSTANTANEOUS BASIS,THAT THE P URCHASE AND SALE OF VARIOUS AGRICULTURAL COMMODITIES WERE UNDERTAKEN AT THE SAM E TIME WITHOUT CARRYING OUT ANY MARKETING ACTIVITIES,THAT IT DID NOT PLAY ANY R OLE IN DECIDING THE PRICE OF THE PURCHASE/SALE,THAT NO LEGAL CONSEQUENCES HAD TO BE SUFFERED BY THE ASSESSEE AS A RESULT OF FAILURE/DEFAULT ON PART OF THE EITHER OF THE PARTIES OF THE TRANSACTIONS, THAT THE AES MADE THE ASSESSEE RISK MITIGATED TRADER,THA T THE AES WERE INVOLVED IN THE IMPORT AND EXPORT OF VARIOUS AGRICULTURAL COMMODITI ES AS AGREED UPON THE TERMS AND CONDITIONS(PRICE, PORTS, LEGAL CONSEQUENCES) WI THOUT THE ASSESSEES INTERVENTION AT ALL,THAT THE AES WERE RESPONSIBLE FOR FAILURE/DE FAULT WITH REGARD TO SUCH TRANSAC- TIONS,THAT THE ASSESSEE WOULD IDENTIFY AND PARTICIP ATE IN SUCH TRADE FLOWS ONLY AFTER EVALUATING THE POTENTIAL TO EARN INTEREST ON THE CA SH FLOWS LINKED TO SUCH TRANSACTIONS,THAT IT HAD A ROLE LIMITED TO PREPARAT ION OF NECESSARY TRADE DOCUMENTS IN THE OVERALL TRADE FLOW,THAT IT WOULD ENTER INTO SUCH PURCHASE AND SALE TRANSACTIONS WITHOUT TAKING PHYSICAL DELIVERY,THAT THE TITLE TO THE GOODS REMAINED WITH THE ASSESSEE ONLY FOR AN INSTANT AND WAS SIMULTANEOUSLY TRANSFERRED TO THE AES, THAT IT HAD NO CONTROL OVER UNDERLYING TRANSACTIONS,THAT TH E FIRST LEG OF THE TRANSACTION INCLUDED RECEIVING ADVANCE AGAINST DELIVERY TO BE M ADE WITHIN 180/360 DAYS, THAT THE ASSESSEE WOULD APPROACH A LOCAL BANK TO OPEN L/ C FOR THE PAYMENT AT 180 DAYS FROM THE DATE OF L/C FOR THE IMPORT BACK OF THE TRA NSACTION,THAT THE L/C ISSUING BANK WOULD REQUIRE THE ASSESSEE TO PLACE FUNDS IN F IXED DEPOSITS TO ACT AS SECURITY AND LIEN AGAINST THE ISSUE OF L/C, THAT THE ASSESSE E WOULD PLACE THE EXPORT ADVANCE IN FDR,THAT THE BANK WOULD ISSUE 180 DAYS L/C FOR T HE IMPORT BACK OF TRANSACTION, THAT THE MATURITY DATE OF L/C AND FD WOULD NOT COIN CIDE, THAT THERE WOULD BE A TIME LAG OF A FEW DAYS BETWEEN THE MATURITY OF L/C AND FD,THAT THE L/C WOULD MATURE A FEW DAYS BEFORE THE FD,THAT THE SALE PROCEEDS RECEIVED WERE UTILISED TO RETIRE THE L/C,THAT IN THE SECOND LEG O F THE TRANSACTION WOULD INCLUDE ENTERING INTO A SPOT BY AND SELL TRANSACTION WITH A VIEW TO COMPLETE THE OVERALL 6 SEQUENCE THEREOF, THAT L/C WAS NOT REQUIRED TO BE P ROVIDED TO THE AE SINCE IT WOULD BE A SPOT TRANSACTION,THAT ON MATURITY OF FD THE PROCEEDS WERE UTILISED TO SQUARE OF THE SPOT BY TRANSACTION,THAT IN THE OVERF LOW OF THE TRANSACTION THE ASSESSEE WOULD RECEIVE $.10 PER METRIC TON FOR EACH LEG OF T HE TRANSACTION,IN ADDITION TO THE INTEREST ON FDR.IT WAS FURTHER STATED THAT THE TRAD E WAS ENTERED INTO BETWEEN THE BUYER AND THE SELLER,THAT THE BUSINESS DID NOT DEPE ND ON THE ASSESSEE, THAT THE PARTICIPATION BY IT IN THE TRANSACTION WAS TO EARN INTEREST INCOME,THAT THE IMPORT AND EXPORT PRICES WERE INHERENTLY AT ARMS LENGTH,THAT THE ASSESSEE WAS INCAPABLE OF CONTROLLING THE TRANSACTION WITH REGARD TO PRICING, TERMS,DELIVERY,QUALITY OF THE PRODUCTS,THAT THERE WAS NO CONTRACTUAL/FINANCIAL/LE GAL OBLIGATION ON PART OF THE ASSESSEE,THAT IN CASE OF DEFAULT BY OVERSEAS ENTITI ES THE ASSESSEE HAD NOT TO FACE ANY RISK OR LIABILITY,THAT IT PARTICIPATED IN THE INTER NATIONAL TRADING OF DOCUMENTS OF AN UNDERLYING TRADE ONLY WHEN THERE WAS AN OPPORTUNITY TO EARN INTEREST INCOME OVER AND ABOVE $ .10/ MT, THAT WHILE CARRYING OUT THOSE ACTIVITIES IT INCURRED CERTAIN EXPENDITURES SUCH AS L/C CHARGES AGENCY EXPENSES, T HAT THOSE COSTS WERE INEXTRICABLY LINKED TO THE EARNING OF INTEREST ON T HE ADVANCES RECEIVED BY IT,THAT SAME WERE DIRECTLY RELATED TO THE EARNING OF INTERE ST INCOME ON THE FUNDS AVAILABLE,THAT THE INCURRING OF L/C CHARGES, HEDGIN G EXPENSES ETC.WOULD NOT ARISE IF THERE WAS NO EARNING OF INTEREST INCOME, THAT THE O THER OPERATING EXPENDITURES OF THE ASSESSEE WERE INSIGNIFICANT,THAT ITS ROLE IN MT A WAS RESTRICTED TO THAT OF A FACILITATOR AND THE FUNCTIONS PERFORMED BY IT WERE MORE IN THE NATURE OF SUPPORT SERVICE,THAT THE PURCHASE AND SALES HAD TO BE ADMIT TED AT ARMS LENGTH AND SHOULD NOT BE DISREGARDED IN ARRIVING AT THE OPERATING MAR GIN. 4. DURING THE APPELLATE PROCEEDINGS,THE FAA CALLED FOR A REMAND REPORT FROM THE TPO.IN HIS REMAND REPORT,DATED 5/5/ 2009,THE TPO RE ITERATED HIS ARGUMENTS ON VARIOUS ISSUES REGARDING MTA INCLUDING THE EXCLUSIO N OF INTEREST INCOME FOR THE PURPOSE OF COMPUTING THE ALP.THE TPO SUBMITTED,IN H IS REPORT,THAT THE ASSESSEE HAD NOT CLAIMED THAT INTEREST INCOME ON FDR WAS AN INTERNATIONAL TRANSACTION IN ITS FORM NUMBER 3CEB,THAT INTEREST INCOME OF RS. 26.70 LAKHS ONLY WAS SHOWN AS INTERNATIONAL TRANSACTION, THAT THE DIRECT SOURCE O F INTEREST INCOME WAS FDRS,THAT THE ASSESSEE COULD NOT TAKE AN ARGUMENT THAT INTERE ST INCOME HAD TO BE INCLUDED FOR COMPUTING ALP OF INTERNATIONAL TRANSACTION OF SALE AND PURCHASE OF AGRICULTURAL COMMODITIES,THAT THE ASSESSEE HAD MADE CLAIM OF CLU BBING OF BOTH TRADING LOSS OF INTERNATIONAL TRANSACTION OF MTA AND INTEREST INCOM E WITH A VIEW TO JACKING UP OF 7 NET OPERATING MARGIN FROM IMPORT AND EXPORT OF AGRI CULTURAL COMMODITIES,THAT THE INTEREST DERIVED FROM BORROWED FUNDS WERE INVESTED IN SHORT-TERM DEPOSITS WITH THE BANKS,THAT SUCH INCOME HAD TO BE BROUGHT TO TAX UND ER THE HEAD INCOME FROM OTHER SOURCES,THAT SAME COULD NOT BE ADJUSTED AGAINST THE INTEREST PAYABLE BY IT ON TERM LOANS SECURED FROM FINANCIAL INSTITUTIONS,THAT THE INTEREST INCOME-BEING INCOME FROM OTHER SOURCES-COULD NOT BE TAKEN UP FOR CALCU LATING NET OPERATING MARGIN OF MTA,THAT THE CLAIM OF THE ASSESSEE OF MAKING SALE T O AES AGAINST THE ADVANCE PAYMENT WAS FACTUALLY INCORRECT,THAT THE NOMENCLATU RE OF THE BUSINESS TO THE MTA WOULD NOT CHANGE THE ACTUAL NATURE OF THE TRANSACTI ON WHICH WAS NOTHING BUT TRADING EXPORT ACTIVITY, THAT THE ASSESSEE SHOULD N OT HAVE ANY GRIEVANCE AS THE TPO HAD ACCEPTED THE METHOD ADOPTED BY IT AS WELL AS TH E COMPARABLES DISCLOSED IN THE TP REPORT,THAT THE TPO HAD NEITHER TREATED THE BUSI NESS MODEL OF THE ASSESSEE DIFFERENTLY NOR HAD MADE ANY DEPARTURE IN THE TP ME THOD AND COMPARABLES DISCLOS- ED IN THE TP REPORT,THAT HE HAD ONLY OBJECTED TO TH E COMPUTATION OF NET OPERATING MARGIN FROM TRADING BUSINESS DIVISION AS DISCLOSED IN THE TP REPORT WHICH WAS ARRIVED AT BY AMENDING THE AUDITED PROFIT AND LOSS ACCOUNT,THAT THE PURCHASES AND SALES OF AGRICULTURAL COMMODITIES WERE INTERNATIONA L TRANSACTIONS, THAT IT WAS INCORRECT TO EXCLUDE THE COST OF IMPORT IN ORDER TO COMPUTE THE OPERATING COST TO DETERMINE THE NET OPERATING MARGIN,THAT THE CORRECT ION OF INCORRECT WAY OF COMPUTING OPERATING COST TO COMPUTE THE NET OPERATI NG MARGIN OF THE MTA SEGMENT COULD NOT BE HELD A FUNDAMENTAL CHANGE IN T HE BUSINESS MODEL,THAT L/C CHARGES WERE INCURRED FOR IMPORT OF AGRICULTURAL CO MMODITIES,THAT IT COULD NOT BE HELD THAT SAME WERE INCURRED FOR EARNING INTEREST I NCOME.IN RESPONSE TO THE REMAND REPORT,THE ASSESSEE MADE ELABORATE SUBMISSIONS BEFO RE THE FAA ON 8/05/2009. 4.1. AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE A ND THE REMAND REPORT,THE FAA HELD THAT NO LOSS HAD BEEN INCURRED IN THE MTA, THAT FROM THE REMAND REPORT IT WAS CLEAR THAT THE SALES INVOICES SHOWED EARNING OF $ .10/METRIC TON, THAT OVERALL THE ASSESSEE HAD EARNED PROFIT,THAT ALMOST ALL THE TRANSACTIONS WERE WITH THE AES,THAT IT COULD NOT BE INFERRED THAT ASSESSEE HAD INCURRED LOSS IN TRADING OPERATION WITH ITS AES, THAT THE COMPUTATION OF THE TPO GAVE DISTORTED FIGURE, THAT OPERATING COST COULD NOT BE REDUCED FROM THE SALE P RICE,THAT TO COMPUTE THE GROSS MARGIN ONLY THE IMPORT PRICE OF GOODS FROM THE EXPO RT RIGHTS OF THE GOODS HAD TO BE REDUCED,THAT THE ASSESSEE HAD EARNED GROSS MARGIN O F RS. 2.15 CRORES,THAT THE TPO HAD WRONGLY CONCLUDED THAT NO ADVANCE WAS RECEIVED AGAINST FUTURE SALE OF GOODS, 8 THAT ALL THE ADVANCES RECEIVED HAD BEEN INVESTED IN FDRS,THAT THE ADVANCE RECEIVED SERVED TWO PURPOSES,THAT IT WAS PLACED IN FDR,THAT THE FDRS ACTED AS A SECURITY AND LIEN AGAINST THE L/C TO BE ISSUED TO THE SUPPLI ER, THAT THE L/C ON MATURITY WAS ADJUSTED AGAINST THE SALE PROCEEDS OF THE FIRST LEG THOUGH THE ADVANCE STILL REMAINED IN FORM OF FDRS,THAT THE ASSESSEE HAD MERELY CHANGE D ECONOMIC ANALYSIS OF THE MTA,THAT THE INHERENT BUSINESS MODEL OF THE ASSESSE E DID NOT CHANGE-IT REMAINED THAT OF A TRADER,THAT EVEN POST-MERGER THE MTA CONT INUED TO REMAIN THE SAME,THAT THE COMPARABILITY OF THE INTERNATIONAL TRANSACTIONS SHOULD REMAIN AT PAR, THAT NO MATERIAL WAS BROUGHT ON RECORD TO SHOW THAT ANY CHA NGE IN THE BUSINESS MODEL OF THE MTA HAD TAKEN PLACE,THAT THE ONLY CHANGE IN THE BUSINESS MODEL THAT RESULTED FROM THE MERGER WAS THE ADDITION OF MORE ACTIVITIES BY WAY OF MANUFACTURING APART FROM CONTINUING THE MTA,THAT ON A CONSISTENT PRINCI PAL BASIS THE MTA SHOULD FOLLOW THE TRADER MODEL AS WAS FOLLOWED IN THE EARL IER YEARS AND WAS ACCEPTED BY THE TPO,THAT IT WAS INCUMBENT UPON THE TPO TO CONSI DER BOTH IMPORT AND EXPORT TRANSACTION FOR COMPUTING THE OPERATING MARGIN OF T HE ASSESSEE. THE FAA FURTHER HELD THAT FOCUS OF THE ASSESSEE,WHI LE CARRYING OUT THE MTA,WAS TO TAKE ADVANTAGE OF THE OPPORTUNITIES TO EARN INTERES T ON FUNDS IN THE INTERVENING PERIOD I.E. THE TIME LAG BETWEEN RECEIPT OF ADVANCE AND ENCASHMENT OF L/C AT A FIXED RATE OF $.10/ METRIC TON,THAT FROM THE TOTAL INCOME EARNED BY THE ASSESSEE MAJOR CHUNK WAS COMING FROM THE INTEREST EARNED ON FDRS,THAT THE INTEREST INCOME ORIGINATED FROM THE MTA ACTIVITIES ONLY,THAT THE IN TEREST INCOME WAS INEXTRICABLY LINKED TO SUCH ACTIVITIES,THAT IT HAD AN INSEPARABL E ECONOMY NEXUS WITH THE BUSINESS MODEL ADOPTED BY IT,THAT THE CASE LAWS RELIED UPON BY THE TPO DEALT WITH THE DEDUCTION UNDER SECTION 80 HHC OR 10A OF THE ACT,TH AT THE PLACING OF FDRS HAD A DIRECT NEXUS TO THE CARRYING ON OF MTA,THAT THE FDR S STEM FROM THE RECEIPT OF ADVANCES, THAT THE FDRS WERE AGAIN PLACED AS SECURI TY AND LIEN WITH THE BANK FOR OPENING L/CS,THAT THE LIVE LINK OF EARNING OF INTER EST INCOME FROM FDRS WAS WELL ESTABLISHED WITH CARRYING ON OF MTA,THAT U/S.92 OF THE ACT THE FOCUS WAS ON DETERMINATION OF THE INCOME FROM AN INTERNATIONAL T RANSACTION AND EVALUATION OF THE FACT WHETHER IT WAS AT ARMS LENGTH,THAT THE EMPHAS IS WAS ON DETERMINING THE TRUE INCOME ATTRIBUTABLE TO AN INTERNATIONAL TRANSACTION ,THAT THE DETERMINATION WAS BASED ON THE FUNCTIONS, ASSETS AND RISK ANALYSIS OF THE T RANSACTION, THAT IT HAD NO RELEVANCE UNDER WHICH HEAD THE INCOME WAS TAXABLE UNDER THE A CT,THAT ALL THE INCOME INCLUDING INTEREST INCOME,AS LONG AS,IT EMANATED FR OM AN INTERNATIONAL TRANSACTION HAD TO BE EVALUATED U/S.92 OF THE ACT TO FIND OUT A S TO WHETHER IT WAS AT ARMS 9 LENGTH OR NOT, THAT THE IMPORTANCE WAS TO THE ECONO MIC RELEVANCE OF SUCH INCOME TO AN ACTIVITY AND NOT TO IT BEING TAXED UNDER A PARTI CULAR HEAD OF INCOME.HE FURTHER HELD THAT WHAT WAS TO BE CONSIDERED WHILE BENCHMARK ING THE MTA OF THE ASSESSEE AS A TRADER AND THAT THE RELEVANT FACTORS FOR ARRIV ING AT THE ARMS LENGTH PRICE WITH REGARD TO AN INTERNATIONAL TRANSACTION WITH ITS AE S WAS THE BUSINESS MODEL,THE APPROPRIATE COMPARABLES AND THE COMPUTATION OF THE CORRECT OPERATING INCOME OF THE ASSESSEE FOR BENCHMARKING THE MTA. 5. BEFORE US,THE DEPARTMENTAL REPRESENTATIVE (DR) CONT ENDED ,THAT THE ASSESSEE HAD NOT PRODUCED ANY EVIDENCE TO SHOW THAT THERE WAS AN AGREEMENT WITH THE SUPPLIERS REGARDING CREDIT PERIOD OF 180/360 DAYS, THAT THERE WAS NO DIRECT NEXUS BETWEEN THE EARNING OF INTEREST AND MTA,THAT THE AO HAD RIGHTLY EXCLUDED THE INTEREST INCOME FOR MAKING TP ADJUSTMENTS.HE HEAVILY RELIED UPON TH E ORDER OF THE TPO ALONG WITH THE REMAND REPORT SENT TO THE FAA DURING THE APPELL ATE PROCEEDINGS.THE AUTHORIED REPRESENTATIVE(AR)SUBMITTED THAT WHILE CARRYING OUT MTA THE ASSESSEE WOULD ENTER INTO BACK-TO-BACK PURCHASE AND SALE TRANSACTI ONS INSTANTANEOUS-WITHOUT THE GOODS PHYSICALLY ENTERING INDIA,THAT THE INTEREST R ECEIVED BY IT WAS AN INTEGRAL PART OF MTA AND THAT SAME WAS FACTORED IN THE ECONOMICS OF SUCH TRADE, THAT NOMINAL TRADING MARGIN OF $.10/METRIC TON-WHEN COMPLEMENTED WITH THE EMBEDDED INTEREST EARNING-MADE THE ACTIVITY ECONOMY CAN VISIBLE AND P ROFITABLE, THAT THE ASSESSEE HAD PARTICIPATE IN MTA OUT OF ITS OWN INTEREST,THAT THE RE WAS AN OPPORTUNITY TO EARN INTEREST INCOME OVER AND ABOVE $.10/METRIC TON,THAT INTEREST INCOME WAS CONSIDERED AND ACCEPTED AS A PART OF OPERATING INCOME IN THE T P ORDERS FOR THE EARLIER YEARS, THAT COSTS L/C CHARGES, HEDGING EXPENSES WOULD NOT ARISE IF THERE WAS NO EARNING OF INTEREST INCOME, THAT THE TPO IN HIS SHOW CAUSE NOT ICE DATED 16/10/2008 ARRIVED AT OP/OC OF 1.31% WHEREIN HE INCLUDED INTEREST INCOME AS PART OF THE OPERATING INCOME,THAT WHILE PASSING THE ORDER HE EXCLUDED INT EREST INCOME FROM THE PROFIT LEVEL INDICATOR,THAT WHEN INTEREST WAS AN INTEGRAL PART OF THE BUSINESS ACTIVITY THE SAME SHOULD BE CONSIDERED FOR WORKING OUT THE PROFI TABILITY OF THE SAID ACTIVITY,THAT 10 THE AO/TPO COULD NOT GO BEYOND THE SHOW CAUSE NOTIC E,THAT THE TPO EXCLUDED INTEREST INCOME FROM OPERATING PROFIT AND ALSO FROM PLI WITHOUT GIVING ANY OPPORTUNITY TO THE ASSESSEE AND MADE TRANSFER PRICI NG ADJUSTMENTS, THAT THE ASSESSEE HAD RAISED THE ISSUE BEFORE THE AO WHEREIN THE COMP ANY CLAIMED THAT THE ORDER OF THE TPO WAS VIOLATIVE OF PRINCIPLE OF NATURAL JUSTI CE, THAT THE TPO HAD BENCHMARK THE INTERNATIONAL TRANSACTION OF MTA BY SELECTING S UPPORT SERVICE COMPARABLES AT THE RATE OF 6.44%, THAT THE BENCHMARKING OF THE INT ERNATIONAL TRANSACTIONS USING TRADING COMPARABLES HAD BEEN CONSIDERED AND CONSIST ENTLY ACCEPTED BY THE TPO IN THE EARLIER AS WELL AS IN SUBSEQUENT ASSESSMENT YEA RS, THAT THERE HAD BEEN NO CHANGE IN THE BUSINESS MODEL OF THE COMPANY IN THE CURRENT YEAR, THAT THE TPO IN A SHOW CAUSE NOTICE HAD ACCEPTED THAT THE COMPANY WAS ENGA GED IN MTA, THAT HE SHOULD HAVE CONSIDERED FUNCTIONALLY COMPARABLE COMPANIES E NGAGED IN TRADING ACTIVITIES AS COMPARABLES AND NOT THE SUPPORT SERVICE COMPARAB LES, THAT THE COMPANY ARE ALSO PROVIDED CAL/CULATION OF MARGINS FROM THE COMPARABL E COMPANIES HAVING TRADING ACTIVITY.HE RELIED UPON THE CASES OF SONY INDIA(P) LTD (315ITR150-AT),E-GAIN INDICATIONS PRIVATE LTD(118 ITD 243)MENTOR GRAPHICS (NOIDA)PRIVATE LTD(109 ITD 101),DHARAMPAL PREMCHAND LTD(317 ITR 353), VELLORE ELECTRIC CORPORATION LTD.(227 ITR 557), LOKAY HOLDINGS (308 ITR 356). 6 .WE FIND THAT WITH A VIEW TO BENCHMARK THE INTERNAT IONAL TRANSACTIONS OF THE MTA,THE ASSESSEE HAD CARRIED OUT DETAILED COMPREHEN SIVE BENCHMARKING ANALYSIS, THAT IT HAD SELECTED TNMM IS THE MOST APPROPRIATE M ETHOD(MAM),THAT IT CARRIED OUT A SEARCH PROCESS ON CAPITALINE DATABASE FOR IDE NTIFYING THE COMPARABLES,THAT THE SEARCH RESULTED INTO IDENTIFICATION OF EIGHT COMPAN IES ENGAGED IN SUPPORT SYSTEM ACTIVITIES,THAT THE OPERATING PROFIT MARGIN OF COMP ARABLES WAS FOUND TO BE 6.44% ON OPERATING COSTS,THAT IT SELECTED OPERATING PROFI T TO VALUE ADDED COST AS THE APPLICABLE PLI,THAT WHILE COMPUTING THE OPERATING C OST IT EXCLUDED THE SALE AND 11 PURCHASE PRICE,THAT THE ASSESSEE CALCULATED ITS OPE RATING PROFIT MARGIN FROM ITS MTA@489.28%,THAT THE TPO HAD CARRIED OUT DETAILED A NALYSIS FOR DETERMINING THE ALP,THAT CONSIDERING THE SUPPORT SERVICE NATURE OF THE FUNCTIONS PERFORMED BY THE ASSESSEE,HE COMPARED ITS MARGIN WITH THE MARGINS OF COMPARABLE COMPANIES ENGAGED IN SUPPORT SERVICE ACTIVITIES,THAT HE HAD P ROPOSED THE ADJUSTMENTS OF RS.501.51CRORES,THAT THE ADJUSTMENT WAS AS ARRIVED AT BY COMPUTING THE OPERATING PROFIT MARGIN BY TAKING TOTAL COSTS AS OPERATING CO ST AND TOTAL INCOME BY EXCLUDING INTEREST UNDER ON FDR,THAT THE ADJUSTED OPERATING L OSS WAS ARRIVED AT RS.13.54 CRORES,THAT THE LOSS WAS WORKED OUT BY CHANGING THE PLI,THAT THE TPO APPLIED OPERATING PROFIT TO TOTAL COST(INCLUDING IMPORT COS T),AS COMPARED TO THE PLI APPLIED BY THE ASSESSEE I.E.OPERATING PROFIT TO VALUE ADDED COST (WITHOUT INCLUDING IMPORT COST).THE CHANGE OF PLI BY THE TPO VIS-A-VIS THE AS SESSEE MEANT THAT THE TPO HAD CONSIDERED THE TOTAL MTA(INCLUDING IMPORTS AND EXPO RTS),WHEREAS THE ASSESSEE HAD BENCHMARKED THE ACTIVITY BY CONSIDERING THE FINANCI AL RESULTS FROM GROSS MARGIN($ 0.10/METRIC TON)ONWARDS. WE FIND THAT VIDE SHOW CAUSE NOTICES DATED 14/10/20 04 AND 16/10/2004 THE TPO HAD COMPUTED THE OPERATING MARGIN AFTER CONSIDERING THE INTEREST AS OPERATING INCOME.BOTH THE NOTICES PROVE THAT THE TPO WAS CONV INCED ABOUT THE CLAIM MADE BY THE ASSESSEE IN THE EARLIER YEARS.BUT,THE FINAL ORDER PASSED BY THE TPO RAN CONVERSE TO THE SHOW CAUSE NOTICES.WE WOULD LIKE TO REFER TO THE NOTICE DTD. 16. 10. 2004(PG.210 OF THE PAPER BOOK)AND SAME READS AS UND ER : SUB: NOTICE U/S. 92CA (2) AND 92D (3) OF THE INCOME TAX ACT, 1961- COMPUTATION OF ARM'S LENGTH PRICE - ASSTT. YEAR 2005-06 REGARDING WITH REGARD TO THE ABOVE PROCEEDINGS IN YOUR CASE, AND IN CONTINUATION OF THE EARLIER QUESTIONNAIRE/ NOTICE DATED13-10-08 ISSUED TO YOU, YOUR ATTENTION IS INVITED TO ANNEXURE 6 OF YOUR T.P. STUDY FOR THE A. Y. 2005-06, GIVING THE CALCULATION OF THE OPERATING PROFIT MARGIN OF MERCHANTING TRADE ACTIVITY. IN THIS CALCULATION T HE OPERATING COST HAS BEEN TAKEN WITHOUT CONSIDERING THE IMPORT PRICE OF GOODS. THE OPERAT ING COST INCLUDES BOTH DIRECT AND INDIRECT 12 EXPENDITURE WHILE YOU HAVE EXCLUDED DIRECT EXPENDIT URE I.E, PURCHASE OF GOODS, WHILE COMPUTING THE TOTAL COST ALTHOUGH THE IMPORT PRICE OF GOODS HAS BEEN INCLUDED IN THE EXPENDITURE SHOWN (COST OF MATERIALS) IN THE AUDITE D ACCOUNTS. PLEASE SHOW CAUSE AS TO WHY THIS TOTAL COST SHOWN AT RS.7577,20,87,912/- SHOULD NOT BE HELD AS OPERATING COST. ACCORDINGLY, THE OPERATING PROFIT MARGIN FROM MER CHANTING TRADE ACTIVITY IS CALCULATED AS UNDER: OPERATING COST RS.7577,20,87,912/- TOTAL INCOME RS.7676,52,56,560/- OPERATING PROFIT RS.99,31,68,648/- THE OP/SALES RATIO 1.29% THE OP/OPERATING COST 1/31% OPERATING COST YOUR OP/OC COMES TO 1.31% WHILE THE MEAN FOR THE CO MPARABLES FILED BY YOU COMES TO 6.44%. WHY SHOULD THIS NOT BE BENCHMARKED AGAINST THE COMP ARABLES AND ADJUSTMENT MADE. FROM THE ADJUSTMENT CALCULATION,MADE BY THE TPO ABO UT INTERNATIONAL TRANSACTIONS, IT IS CLEAR THAT THE INTEREST PORTION WAS NOT CONSI DERED FOR DETERMINING ALP.WE FAIL TO UNDERSTAND AS TO HOW THE TPO CAN MAKE AN ADJUSTM ENT WITHOUT INFORMING THE ASSESSEE ABOUT EXCLUSION OF AN ITEM-ESPECIALLY WHEN THE SAME WAS NOT EXCLUDED IN THE SHOW CAUSE NOTICE.NO ASSESSEE CAN BE TAXED UNWA RNED.PRINCIPLES OF NATURAL JUSTICE DEMAND THAT THE ASSESSEES SHOULD BE GIVEN A FAIR CHANCE OF HEARING BEFORE DUE TAXES ARE COLLECTED.THE TPO,BEING A REPRESENTAT IVE OF THE STATE,CANNOT BEHAVE LIKE A MERE TAX GATHERER.COLLECTION OF DUE TAXES PRESUPPOSES FAIR PLAY AND ADHERING TO PRINCIPLES OF AFFORDING A REASONABLE OP PORTUNITY OF HEARING TO THE MEMBERS OF SUBJECT OF THE STATE I.E.TO THE TAX-PAYE R.IN THE CASE BEFORE US,WE FIND THAT NO JUSTIFICATION HAS BEEN GIVEN BY THE TPO AS TO WHY HE OPTED FOR NOT INCLUDING THE INTEREST PORTION WHILE PASSING THE FI NAL ADJUSTMENT ORDER.IT APPEARS THAT ONCE HE FOUND THE TRANSACTION FALLS WITHIN THE SAFE LIMIT(MARGIN OF +/- 5%),HE DECIDED TO EXCLUDE THE INTEREST PORTION SO THAT ADJ USTMENT COULD BE MADE.IF THAT WAS THE REASON,IT CANNOT BE ENDORSED.DEFINITELY ADJUSTM ENTS CAN BE MADE WHILE INVOKING THE PROVISIONS OF CHAPTER X OF THE ACT,BUT ,NOT IN THIS MANNER.SUCH A TREND WILL RESULT IN MAKING ADJUSTMENTS AT ANY COST.TP PR OVISIONS WERE NOT INTRODUCED FOR 13 ACHIEVING SUCH OBJECTS.IN OTHER WORDS,THE SECTIONS GOVERNING THE TP ADJUSTMENTS WERE INCLUDED IN THE ACT TO MAKE A MEANINGFUL COMPA RISON BETWEEN THE CONTROLLED AND UNCONTROLLED TRANSACTIONS TO DETERMINE IF THE I NTERNATIONAL TRANSACTIONS WERE AT ARMS LENGTH.THEREFORE,IF THE COMPARISON PROCESS IS VITIATED THE DETERMINATION OF ALP WOULD ALSO BE VITIATED.IF THERE WERE ANY OTHER REASONS FOR DEVIATING FROM THE SHOW CAUSE NOTICE BY THE TPO,THEY ARE NOT COMING OU T OF THE FINAL ADJUSTMENT ORDER.THEREFORE, ONLY ON THIS COUNT THE ORDER OF TH E TPO HAS TO BE REVERSED. 6.1. BUT,WE WOULD LIKE TO DISCUSS THE MERITS OF THE CASE ALSO.WE FIND THAT INTEREST INCOME WAS CONSIDERED AS PART OF OPERATING INCOME I N THE EARLIER YEARS BY THE TPO AND THAT SO LONG THERE WAS NO CHANGE IN THE FACTS A ND CIRCUMSTANCES INTEREST INCOME SHOULD HAVE BEEN CONTINUED TO BE CONSIDERED AS PART OF THE OPERATING INCOME.IN ITS REPLY TO THE SHOW CAUSE NOTICE,DATED 16/10/2010,THE ASSESSEE HAD ARGUED THAT THE OPERATING MARGIN OF MTA SHOULD BE COMPARED WITH TRA DING COMPARABLES AND NOT WITH SUPPORT SERVICE COMPARABLES.BESIDES,THE ASSESS EE HAD GIVEN A DETAILED WORKING OF COMPUTING OPERATING MARGINS OF TRADING C OMPARABLE COMPANIES AND THE OPERATING MARGIN OF TRADING COMPARABLES WAS @ 0.95% ON COST AND AT THE RATE OF 0.92% ON SALES.IN OUR OPINION,THE TPO HAD FAILED TO RECOGNISE THE DIFFERENCE BETWEEN THE COMPARABLES.WE HOLD THAT HE COMMITTED A MISTAKE BY COMPARING ASSESSEES MARGIN WITH SUPPORT SERVICE COMPARABLES, THAT THE BENCHMARKING PROCESS ADAPTED BY THE ASSESSEE WAS CONSISTENT WITH THE PRO CESS FOLLOWED AND ACCEPTED BY THE TPO IN THE EARLIER YEARS,THAT MTA EXISTED DURIN G THE PRE-MERGER PERIOD AND THE ASSESSEE HAD CARRIED OUT THE SIMILAR ACTIVITIES IN THE YEAR UNDER CONSIDERATION,THAT THE NEXUS OF INTEREST ON MTA WAS EXPLAINED TO THE T PO IN THE SUBMISSIONS MADE ON 10/9/2008 AND 13/8/2008. 14 IT IS OBSERVED THAT THE TPO HAD NOT CONSIDERED THE ABOVE REPLIES FILED BY THE ASSESSEE,WHILE FRAMING THE FINAL ORDER OR WHILE FOR WARDING THE REMAND REPORT.HE CONTINUED TO BENCHMARK THE OPERATING MARGIN OF THE MTA WITH THAT OF SUPPORT SERVICE COMPARABLES.BUT THE MARGIN(@2.36%)WAS REFLE CTIVE OF THE COMPLETE VALUE CHAIN ACTIVITIES COMPRISED IN MANUFACTURING,CONVERS ION, MARKETING AND SELLING.IN OTHER WORDS THE TPO HAD CONSIDERED THE COMPARABLES OF MANUFACTURING AND TRADING COMPANIES HAVING MEAN OPERATING MARGIN OF 2.36%.WHE N IT APPEARED THAT THE MARGIN WAS WITHIN THE RANGE OF +/-5%,THE TPO EXCLUD ED THE INTEREST INCOME WHILE MAKING FINAL ADJUSTMENT.THUS,THE OPERATING MARGIN O F THE ASSESSEE FROM MTA (INCLUDING INTEREST INCOME) IS 1.31% ON COST,AS AP PEARING IN THE SHOW CAUSE NOTICE OF THE TPO(DATED 16/10/2008),AS COMPARED TO THE TRA DING COMPARABLE MEAN MARGIN OF 0.94% ON COST (AS SUBMITTED TO THE TPO BY THE AS SESSEE IN ITS SUBMISSION DATED 20/10/2008).AS IT IS HIGHER,SO IT COULD SAFELY BE C ONCLUDED THAT ASSESSEES INTER - NATIONAL TRANSACTIONS OF MTA WERE AT ARMS LENGTH. 6.2. WE ARE ALSO OF THE OPINION THAT THE TPO HAD WRONGLY RELIED UPON THE JUDGMENTS DEALING WITH DEDUCTION UNDER SECTION 80 HHC/10 A OF THE ACT,THAT THE CASES RELIED UPON BY THE TPO WERE NOT RELEVANT FOR COMPUTING THE ALP,THAT CLASSIFICATION OF INCOME UNDER THE HEADS LIKE BUSINESS INCOME/INCOME FROM OTHER SOURCES HAD NO BEARING ON THE TP ANALYSIS,THAT FOR TP PURPOSES HE HAD TO CONSIDER THE FUNCTIONAL PROFILING OF THE ASSESSEE AND HAD TO EVALUATE INCOM E ATTRIBUTABLE TO THE INTERNATION- AL TRANSACTIONS, WHILE INVOKING THE PROVISIONS OF C HAPTER X OF THE ACT,THAT THERE WAS LINK OF INTEREST INCOME WITH THE FUNCTIONAL ANA LYSIS,THAT THE ASSETS WERE DEPLOYED IN THE BUSINESS OF THE ASSESSEE,THAT SAME WERE NOT DEPENDENT ON THE CHARGEABILITY UNDER THE DIFFERENT SETS OF INCOME. 15 6.3 .IT WAS NOT THE CASE OF THE TPO THAT SURPLUS FUNDS OF THE COMPANY WERE PARKED WITH THE BANK, THAT THE ADVANCE RECEIVED AGAINST TH E EXPORTS WERE IMMEDIATELY PLACED IN FDR WITH THE BANK FOR THE PURPOSE OF TAKI NG LETTER OF CREDIT IN FAVOUR OF THE OVERSEAS SELLERS.A PERUSAL OF THE BALANCE SHEET OF THE ASSESSEE REVEALES THAT THE RESERVE AND SURPLUS OF THE ASSESSEE FOR THE YEAR UN DER CONSIDERATION WAS AT RS. 63.06 CRORES.THEREFORE,IT COULD NOT BE SAID THAT TH E SURPLUS FUNDS WERE PARKED IN THE FDRS TO EARN INTEREST INCOME.IT IS A FACT THAT IMPORT/ EXPORT OF THE GOODS DID NOT TAKE PLACE FROM OR TO INDIA AND THE ASSESSEE CAME I NTO PICTURE TO PARTICIPATE IN THE TRADING OF INTERNATIONAL TRADE DOCUMENTS ONLY.THE P ARTICIPATION BY THE ASSESSEE AT A PARTICULAR JUNCTURE RESULTED IN EARNING OF INTEREST INCOME WHICH WOULD NOT HAVE BEEN EARNED IF THE TRADE WOULD HAVE TAKEN PLACE COM PLETELY AND DIRECTLY OUTSIDE INDIA.IN OUR OPINION,THE INTEREST INCOME WAS AN INH ERENT AN INTEGRAL PART OF THE ASSESSEE IS BUSINESS ACTIVITY AND SAME WAS RIGHTLY CONSIDERED AS AN OPERATING INCOME FOR THE PURPOSE OF CALCULATION OF OPERATING MARGIN,BY THE FAA.SO,WE ENDORSE THE VIEWS OF THE FAA THAT THE INTEREST INCO ME EMANATED FROM MTA AND THAT SAME COULD NOT BE EXCLUDED FROM CALCULATING TH E OPERATING MARGIN OF SUCH ACTIVITIES FOR THE PURPOSE OF SECTION 92 OF THE ACT . IN THE EARLIER PART OF OUR ORDER,WE HAVE HELD THAT THE ASSESSEES INTERNATIONAL TRANSACTIONS OF MTA WERE AT ARMS LENGTH.THEREFORE, FIRST EFFECTIVE GOA(GROUND NO.1(A-I) STAND DECIDED IN ITS FAVOUR. 7. NEXT TWO GROUNDS DEAL WITH DELETING OF ADDITIONS BY THE FAA WITH REGARD TO IMPORT OF RAW MATERIAL AND RELATED ISSUES INCLUDING THE TREATMENT TO BE GIVEN TO THE SEGMENTAL ACCOUNTS.DURING THE TP PROCEEDINGS,THE TP O FOUND THAT THE ASSESSEE HAD ENTERED INTO INTERNATIONAL TRANSACTION RELATING TO IMPORT OF SOYABEAN OIL, PALM OIL AND PALMOLINE OIL AS WELL AS EXPORT OF SOYA BEA N MEAL AND RAPESEED MEAL,THAT IT HAD USED CUP METHOD WITH REGARD TO THE INTERNATIONA L TRANSACTIONS.HOWEVER, THE 16 TPO WAS OF THE OPINION THAT CUP WAS NOT THE MAM.SO, HE APPLIED TNMM.HE DREW SEGMENTED ACCOUNT AND EXAMINED THE PERFORMANCE OF SEGMENT OTHER THAT MTA AND OTHER INCOMES.ACCORDING TO THE TPOS WORKIN G OPERATING PROFIT OF THE ASSESSEE WAS(-)6.94%.FOR APPLYING TNMM HE TOOK 26 COMPARABLES BUT LATER ON EXCLUDED 5.IN RESPONSE TO THE SHOW CAUSE NOTICE ISS UED BY TPO,THE ASSESSEE CONTENDED THAT IT HAD CORRECTLY USED THE CUP METHOD , THAT IN THE EARLIER TWO YEARS TPO HAD ACCEPTED THE SAID METHOD FOR DETERMINING TH E ALP, THAT THE RATES OF CUP WITH REGARD TO IMPORT OF CRUDE OIL COULD NOT BE COM PARED TO RATES OF MERCHANTING- TRADE OF THE SAME COMMODITY.THE TPO OBSERVED UNDER THE TP REGULATION ALP OF A TRANSACTION COULD VARY YEAR TO YEAR DEPENDING UPO N ECONOMIC CONDITIONS AND COMPARABILITY OF THE PROVISIONS,THAT CUP RATES, APP LIED BY THE ASSESSEE,WERE NOT EXACTLY IDENTIFIABLE,THAT THE SAME COMMODITY WAS TR ANSACTED AT DIFFERENT RATES IN MTA,THAT ASSESSEE WAS NOT ABLE TO PROVIDE THE RESAL E MARGIN OF THE CRUDE OIL SOLD IN THE LOCAL MARKET,THAT SOYABEAN MEAL WAS SOLD AT A DIFFERENT RATE AS COMPARED TO THE EXPORT TO THE AES. 8. DURING THE APPELLATE PROCEEDINGS,THE FAA DIRECTED T HE TPO TO SUBMIT A REMAND REPORT.THE TPO ISSUED A SHOW CAUSE NOTICE AND PROPO SED OPERATING PROFIT MARGIN OF RS.2.92 CRORES TO BE APPLIED ON THE OPERATING IN COME OF RS.806.56 CRORES AS AGAINST ASSESSEES OPERATING LOSS OF RS.56.01 CRORE S.AFTER CONSIDERING THE SUBMISS- ION OF THE ASSESSEE,THE TPO RE-WORKED THE OPERATING MARGIN OF COMPARABLE COMPANIES@ 2.63%.AFTER MAKING ADJUSTMENT TO THE OPE RATING EXPENSES (UNUTILISED CAPACITY AND NON OPERATING EXPENSES)OF THE ASSESSEE ,THE OPERATING LOSS WAS REDUCED TO RS.29.54CRORE.ACCORDINGLY, THE MEAN OPERATING MA RGIN OF THE COMPARABLES, I.E. 2.36% WAS APPLIED TO THE OPERATING INCOME OF RS.809 .54CRORE RESULTING IN ARMS- LENGTH PROFIT OF RS.19.10 CRORE.HE ADJUSTED THE LOS S,ENTERED BY THE ASSESSEE, OF RS. 29.54 CRORES AND MADE AN ADJUSTMENT OF RS.48.65 CRO RE TO THE IMPORT PRICE. AS A 17 RESULT THERE WAS AN OVERALL REDUCTION IN THE IMPORT PRICE OF THE ASSESSEE . AS IT WAS MORE THAN 5% (54.27%) ALLOWABLE UNDER THE PROVISIO TO SECTION 92C(2) OF THE ACT, SO,THE ASSESSEE WAS NOT GIVEN THE BENEFIT. BEFORE THE FAA,IT WAS ARGUED THAT CUP WAS MAM,THAT THE IMPORTS MADE WERE FOR ITS OWN CONSUMPTION,THAT IT WAS NOT POSSIBLE FOR TH E ASSESSEE TO IDENTIFY SPECIFIC SHIPMENT WITH CONSUMPTION IN MANUFACTURING OR RE-SA LE, THAT THE TPO HAD FAILED IN APPLYING CUP,THAT HE HAD NOT BROUGHT ANY EVIDENCE O R DOCUMENT TO REJECT OTHER COMPARABLE TRANSACTION AS PROVIDED BY THE ASSESSEE, THAT WHILE APPLYING THE TNMM HE HAD NOT ACCEPTED ALL THE ADJUSTMENT PROPOSED BY THE ASSESSEE, THAT THE UNUTILISED CAPACITY IN RESPECT OF POWER, FUEL ETC, WAS CONSIDE RED AT NIL AS AGAINST 20% CLAIMED BY THE ASSESSEE,THAT IT RESULTED IN A HIGHER OPERAT ING LOSS BY RS.3.81CRORE, THAT FACTORY, SALARY AND WAGES ON ACCOUNT OF UNDER UTILI SATION CAPACITY WAS ALSO TAKEN AT NIL BY THE TPO AS AGAINST 70% CLAIMED BY THE ASSESS EE, THAT IT RESULTED IN A HIGHER OPERATING LOSS BY ABOUT RS.5.46CRORE, THAT THE DEPR ECIATION ON TANGIBLE ASSETS AND UNDER UTILISATION RESULTED IN HIGHER LOSS OF RS.2.2 0CRORE, THAT THE DEFERRED REVENUE EXPENDITURE OF RS.1.05 CRORES RESULTED IN A REDUCTI ON OF OPERATING EXPENSES BY RS.1.05 CRORES,THAT THE CLAIM MADE BY THE ASSESSEE TO ACCEPT REVISED MARGIN OF 1.07% WAS NOT CONCEDED BY THE TPO. THE FAA HELD THAT THE COMPUTATION OF REVISED MARGIN WAS NOT CONSIDERED BY THE TPO, THAT TPO WAS NOT CORRECT IN HIS REMAND REPORT THAT NO REASONS WERE GIVEN BY THE ASSESSEE FOR TAKING SEGMENTAL RESULTS OF SIX CO MPANIES WHEREAS WHOLE COMPANY RESULTS FOR REMAINING 20 COMPANIES,THAT FOR REJECTI NG THE CUP METHOD TPO HAD GIVEN VALID REASONS,THAT TNMM WAS MORE APPROPRIATE METHOD WITH REGARD TO ADJUSTMENT TO BE MADE.THE FAA HELD THAT THE TPO IN THE REMAND REPORT HAD SUMMARILY CONCLUDED THAT NON OPERATING EXPENSES,RES ULTING FROM ABNORMAL ITEMS, WERE CORRECTLY ACCOUNTED FOR,THAT THE CONTENTION OF THE TPO WAS NOT FACTUALLY CORRECT,THAT THE TPO HAD ALLOWED,WHILE CONSIDERING THE CLAIM FOR REDUCTION OF 18 OPERATING EXPENDITURE,DUE TO UNUTILISED CAPACITY AS ABNORMAL DEPRECIATION ON TANGI -BLE ASSETS,THAT HE HAD ADOPTED 50% OF THE TOTAL EX PENDITURE,THAT HE HAD CONSIDERED THE OPTIMUM CAPACITY AT 60%AND NOT 100% THAT HE HAD ARRIVED AT ABNORMAL EXPENSE OF 50% OF TOTAL EXPENSES BY THE ASSESSEE AS AGAINST 70%. THE FAA ALLOWED RS.3.81 CRORES UNDER THE HEAD POWER AND FUE L, REPAIRS AND MAINTENANCE OF BUILDING PLANT AND MACHINERY TO THE EXTENT OF 5/7 TH OF THE EXPENSES AND OBSERVED THAT THE LOSS WOULD BE REDUCED BY RS.2.72CRORE.THE FAA ALLOWED RS.5.46CRORE UNDER THE HEADS SALARY AND WAGES(5/7 TH OF THE EXPENSES) FURTHER REDUCING THE LOSS BY RS.3.90CRORE. DEFERRED REVENUE EXPENDITURE OF R S.1.05 CRORE WAS ALSO ALLOWED, INCREASING THE LOSS BY THE SAME AMOUNT.THE FAA RE-W ORKED THE SEGMENT ACCOUNT TO DETERMINE THE ALP AND ARRIVED AT THE CONCLUSION THAT THERE WAS A DIFFERENCE OF RS.43.07CRORE TO THE OPERATING COST OF THE ASSESSEE .HE OBSERVED THAT IF THE DIFFERENCE WAS TO BE ALLOCATED ON IMPORT OF GOODS F ROM AES, AS DONE BY THE TPO, THE ADJUSTMENT WOULD LEAD TO AN OVERALL REDUCTION O F 31.15% TO THE IMPORT PRICE OF GOODS FROM THE AES.IT WAS FURTHER OBSERVED BY THE F AA THAT WHILE MAKING ADJUSTMENT TO ALP OF EXPORT VIS-A-VIS MTA THE TPO H AD APPLIED ARITHMETIC MEAN OF OPERATING MARGIN ON COST ON UNCONTROLLED COMPANI ES OF 6.44%, THAT IT WAS APPLIED TO INTERNATIONAL TRANSACTION OF SALE TO THE AES,THAT SAME RESULTED IN ADJUST - MENT OF 6.24% OF THE VALUE,THAT THE TPO HAD DENIED THE BENEFIT OF PROVISO TO SECTION 92C(2),THAT WHEN COMPARABLE TRADING COMPANI ESOPERATING MARGIN ON COST OF 0.94%WAS APPLIED IT WAS CLEAR THAT ASSESSEES OP M WAS HIGHER THAN COMPARABLE MARGIN,THAT THE EXPORT TO AES WAS AT ARMS LENGTH, THAT THE ALP FOR EXPORT WAS LOWER THAN THE EXPORT RECORDED IN THE BOOKS OF ACCO UNT, THAT THE TPO HAD MADE ADJUSTMENT VIS-A-VIZ ONLY THE IMPORT OF GOODS FROM THE AES, THAT MANUFACTURING OPERATIONS HAD RESULTED IN LOSS AFTER THE ASSESSEE ACQUIRED VARIOUS BUSINESSES DURING THE YEAR UNDER CONSIDERATION.THE ASSESSEE H AD REQUESTED THAT ADJUSTMENT OF RS.43.07CRORE SHOULD BE SPARED OVER THE TOTAL OPERA TING COST OF RS.790.44CRORE 19 AFTER GIVING EFFECT TO 5% RANGE. FINALLY, THE F AA CONCLUDED THAT THE ADJUSTMENT MADE BY TPO RESULTED IN OVERALL REDUCTION TO THE IM PORT PRICE OF GOODS BY 54%, THAT EVEN AFTER PROVIDING ADDITIONAL RELIEF THERE W AS ONLY PARTIAL REDUCTION IN THE TP ADJUSTMENT,THAT IT WENT AGAINST THE VERY PRINCIPLE OF PROFIT BASED METHOD, THAT THE ADJUSTMENT HAD NO CONSONANCE TO THE REALITY OF THE SITUATION, THAT THE TPO HAD APPROACHED AN INCORRECT METHOD, THAT THE APPLICATIO N OF CUP ANALYSIS SHOWED THAT FLUCTUATION IN PRICES OF AGRICULTURAL COMMODITIES W AS AT MAXIMUM 5%,THAT ADJUST - MENT OF HIGH DISCOUNT OF 54% OR LOWER COULD NOT BE SAID TO BE IN JUSTIFIABLE, THAT TRANSFER PRICING WAS NOT AN EXACT SCIENCE,THAT IT W AS AN ART WHEREIN PRINCIPLES OF LAW,ECONOMICS AND BUSINESS WERE APPLIED TO ACHIEVE EQUITABLE RESULTS, THAT APPLICATION OF CUP AND TNMM GAVE VERY WIDE VARIATIO N,THAT TNMM LED TO ADJUSTMENT OF 31.15% EVEN AFTER ALLOWANCE OF PARTIA L RELIEF AS COMPARED TO AN ADJUSTMENT UNDER CUP OF ABOUT 5%, THAT ASSESSEE WA S JUSTIFIED IN CLAIMING THAT WHILE APPLYING TNMM TOTALITY OF THE OPERATIONS SHOU LD BE CONSIDERED, THAT THE EXERCISE SHOULD NOT BE CENTERED ON INTERNATIONAL TR ANSACTIONS.AFTER MAKING ABOVE OBSERVATIONS, THE FAA REWORKED THE ALP OF INTERNATI ONAL TRANSACTION OF IMPORT OF GOODS IN MANUFACTURING ACTIVITY AS UNDER: RUPEES ADJUSTED OPERATING EXPENSES OF THE ASSESSEE SHOWN I N (E) ABOVE. 7,90,44,26,285 105% OF THE ABOVE (APPLYING 5% AS PER PROVISO TO SECTION 92C(2)-ARMS LENGTH OPERATING COST-(F) 8,29.96,47,599 TOTAL OPERATING EXPENSES OF THE ASSESSEE AS PER (B) ABOVE 8,33,51,92,616 DIFFERENCE TO BE ADJUSTED TOWARDS INTERNATIONAL TRA NSCTIONS OF IMPORT OF GOODS FROM AES ASSESSEE (F-B)ASSESSEEG (3,55,45,017) INTERNATIONAL TRANSACTIONS OF GOODS IMPORTED FROM A ES (H) 138,28,94,614 ARMS LENGTH PRICE OF INTERNATIONAL TRANSACTIONS OF GOODS IMPORTED FROM AES ASSESSEE (H-G)ASSESSEEI 134,73,49,597 ON THE BASIS OF ABOVE ADJUSTMENT, THE IMPORT PRICE OF GOODS WAS DETERMINED AT RS. 3.55CRORE AS AGAINST RS.48.65 CRORES DETERMINED BY THE TPO.AS A RESULT,THE ASSESSEE GOT A RELIEF OF RS.45.09 CRORES. 20 9. BEFORE US,THE DR RELIED UPON THE ORDER OF THE TPO.T HE AR ARGUED THAT THE ASSESSEE HAD ACQUIRED DALDA BRAND FROM HLL, THAT TH E SAID ACQUISITION WOULD TAKE SOME YEARS TO FRUCTIFY, THAT THE ASSESSEE HAD TO BE EXTRA ORDINARY COSTS IN THAT REGARD,THAT IT HAD TO INCUR SIGNIFICANT START-UP CO STS TO ESTABLISH THE NEWLY ACQUIRED BRANDS IN THE INITIAL YEARS OF ACQUISITION, IT WAS NOT ABLE TO FULLY UTILISE ITS MANUFACTURING CAPACITY, THAT THERE WAS EXTRAORDINAR Y UNUTILISED CAPACITY,THAT IT HAD CALCULATED REVISED MARGIN OF 20 COMPARABLES SELECTE D BY THE TPO AND HAD ARRIVED AT THE ARITHMETIC MEAN OF 1.07% (PAGE 222 OF THE PA PER BOOK),THAT THE SAME WAS NOT CONSIDERED BY THE TPO,THAT THOUGH THE FAA HAD S TATED THAT REVISED MARGIN (1.07%)HAD TO BE TAKEN HE HAD ERRONEOUSLY,BY OVERSI GHT,TOOK 2.36%WHILE CALCULA - TING THE ADJUSTMENT,THAT IF THE CORRECT MARGIN(1.07 %) OF COMPARABLES WAS TEN THEN THE INTERNATIONAL TRANSACTIONS OF THE ASSESSEE OF I MPORT OF OIL WOULD BE WITHIN THE PERMISSIBLE LIMIT OF +/-5%, THAT TP ADJUSTMENT SHOU LD HAVE BEEN MADE ONLY ON INTERNATIONAL TRANSACTIONS, THAT THE FAA HAD CALCUL ATED THE AMOUNT OF ADJUSTMENT TO RS. 3.55 CRORES, THAT IF THE CORRECT MARGIN OF 1.07 % OF THE COMPARABLES WAS ADAPTED THEN THE ASSESSEES INTERNATIONAL TRANSACTION OF IM PORT OF OIL WOULD BE WITHIN THE PERMISSIBLE LIMIT OF+/-5%. 10 .WE FIND THAT THE TPO HAD MADE AN ADJUSTMENT OF RS. 48.65 CRORES TO THE ENTIRE SEGMENT OF MANUFACTURING ACTIVITIES INSTEAD OF MAKI NG THE ADJUSTMENT TO ONLY INTERNATIONAL TRANSACTIONS,THAT IT HAD AN EFFECT OF REDUCING THE IMPORT PRICE BY 54.27%,THAT THE FAA HAD REWORKED THE ADJUSTMENT AFT ER CONSIDERING THE EXTRA ORDINARY ITEMS THAT WOULD AFFECT THE PROFIT MARGIN OF THE ASSESSEE FOR THE YEAR UNDER CONSIDERATION,THAT THE FACTORS LIKE UNDERUTILISATIO N OF CAPACITY AND NON-OPERATING EXPENDITURE WAS GIVEN DUE IMPORTANCE BY THE FAA, TH AT THE ASSESSEE HAD HE CALCULATED REVISED MARGIN OF THE 20 COMPARABLES SEL ECTED BY THE TPO, THAT THE 21 ARITHMETIC MEAN ARRIVED AT BY THE ASSESSEE WAS NOT CONSIDERED BY HIM, THAT FAA HAD HELD THAT TPO WAS INCORRECT IN NOT CONSIDERING THE REVISED CAL/CULATION OF MARGINS,THAT THE FAA HAD OBJECTED TO THE TREATMENT GIVEN TO THE SIX COMPARABLE WHERE THE TPO HAD NOT TAKEN THE SEGMENTS BASED ON T HEIR ECONOMY PROFILE, THAT THE FAA HAD MENTIONED THAT REVISED MARGIN (1.07%) HAD T O BE ADAPTED FOR DETERMINING ADJUSTMENTS AND THE RESULTANT ALP. IN OUR OPINION,THE TPO WAS NOT JUSTIFIED IN MAKING ADJUSTMENT TO THE ENTIRE SEGMENT OF MANUFACTURING ACTIVITY AND NOT RESTRICTI NG THE SAME TO THE INTERNATIONAL TRANSACTIONS.WE FIND THAT IN THE CASES OF TARA JEWE LS EXPORTS PVT. LTD(ITA NO. 1814 OF 2013)AND THYSSEN KRUPP INDUSTRIES INDIA PVT . LTD.(ITA NO. 2201 OF 2013),THE HONORABLE BOMBAY HIGH COURT HAS HELD THAT FOR MAKING ADJUSTMENT AS PER THE PROVISIONS OF CHAPTER X OF THE ACT TRANSACT ION WITH AES OF AN ASSESSEE HAD TO BE CONSIDERED. WE WOULD LIKE TO REPRODUCE THE RE LEVANT PORTION OF THE JUDGEMENT OF THYSSEN KRUPP INDUSTRIES INDIA PVT. LTD. (SUPRA) WE FIND THAT IN TERMS OF CHAPTER X OF THE ACT,THE DETERMINATION OF THE CONSIDERATION IS TO BE DONE ONLY WITH REGARD TO INCOME ARISING FROM INT ERNATIONAL TRANSACTIONS ON DETERMINATION OF ALP. THE ADJUSTMENT WHICH IS MANDA TED IS ONLY IN RESPECT OF INTERNATIONAL TRANSACTION AND NOT TRANSACTIONS ENTE RED INTO BY ASSESSEE WITH INDEPENDENT UNRELATED THIRD PARTIES. THIS IS PARTICULARLY SO AS THERE IS NO ISSUE OF AVOIDANCE OF TAX REQUIRING ADJUSTMENT IN THE VALUATION IN RESPECT OF TRANSACTIONS ENTERED INTO WITH INDEPENDENT THIRD PARTIES.THE ADJUSTMENT AS PROPOSE D BY THE REVENUE IF ALLOWED WOULD RESULT IN INCREASING THE PROFIT IN RESPECT OF TRANS ACTIONS ENTERED INTO WITH NON-AE.THE ADJUSTMENT IS BEYOND THE SCOPE AND AMBIT OF CHAPTER X OF THE ACT. WE FIND THAT WHILE REWORKING THE ADJUSTMENT, THE FA A HAD TAKEN THE MARGIN AT THE RATE OF 2.36%.WE FIND THAT THE ASSESSEE HAD NOT FIL ED ANY APPLICATION BEFORE THE FAA POINTING OUT THE APPARENT MISTAKE IN ADOPTING T HE REVISED MARGIN I.E. ADOPTING THE RATE OF 2.36% INSTEAD OF RATE OF 1.07%.CONSIDER ING THESE FACTS, WE ARE OF THE OPINION THAT MATTER SHOULD BE RESTORED BACK TO THE FILE OF THE AO/TPO TO VERIFY THE FACT AND DECIDE THE VALUE OF THE ADJUSTMENT BY TAKI NG APPROPRIATE REVISED MARGIN RATE.GROUNDS NO 2 AND 3 ARE DECIDED ACCORDINGLY. 22 11. GROUND NO.4 IS ABOUT TREATING THE INTEREST INCOME A S BUSINESS INCOME AMOUNTING TO RS.114.87CRORE.DURING THE ASSESSMENT P ROCEEDINGS,THE AO FOUND THAT THE ASSESSEE HAD SHOWN INTEREST INCOME OF RS.1 ,14,87,57,073/- UNDER THE HEAD BUSINESS INCOME.HE HELD THAT THE INCOME WAS EARNED ON BANK FDRS, THAT SAME HAD TO BE TAXED UNDER THE HEAD INCOME FROM OTHER SOURCE S, THAT THE ASSESSEE WAS NOT UNDER ANY BUSINESS COMPULSION TO INVEST IN FDRS. 12. IN THE APPELLATE PROCEEDINGS,THE FAA CONCLUDED THAT INTEREST INCOME EMANATING FROM THE FDRS WAS DIRECTLY CONNECTED WITH THE MTA, THAT SAME HAD TO BE TAXED UNDER THE HEAD BUSINESS INCOME. 13. BEFORE US,THE DR ARGUED THAT INTERESTS EARNED BY TH E ASSESSEE HAD NO CONNECTION WITH THE BUSINESS ACTIVITY, THAT SAME WAS RIGHTLY T AXED UNDER THE HEAD INCOME FROM OTHER SOURCES, THAT THE ASSESSEE HAD PARKED ITS EXT RA MONEY TO EARN INTEREST.THE AR CONTENDED THAT THE COMPANY WOULD RECEIVE ADVANCE AG AINST THE DELIVERY TO BE MADE WITHIN 180/360 DAYS, THAT IT WOULD APPROACH A LOCAL BANK TO OPEN L/C FOR PAYMENT AT 180 DAYS FROM THE DATE OF THE L/C FOR THE IMPORT LEG OF TRANSACTION, THAT THE L/C ISSUING BANK WOULD MANDATE THE COMPANY TO PLACE FUN DS IN THE FDRS TO ACT AS SECURITY AND LIEN AGAINST THE ISSUE OF L/C,THE COMP ANY WOULD PLACE THE EXPORT ADVANCE IN FD,THAT THE BANK WOULD ISSUE 180 DAYS L/ C FOR THE IMPORT LEG OF THE TRANSACTION, THAT THE MATURITY DATE OF L/C AND FD D ID NOT COINCIDE, THAT THERE WOULD BE A TIME LAG OF A FEW DAYS BETWEEN THE MATURITY OF L/C AND FD WHEREIN THE L/C WOULD MATURE A FEW DAYS BEFORE THE FD, THAT THE SAL E PROCEEDS RECEIVED WOULD BE UTILISED TO RETIRE THE L/C.HE RELIED UPON THE CASES OF KARNAL CO-OPERATIVE SUGAR MILLS LTD.(243 ITR 2), LOK HOLDINGS (308 ITR 356). 23 14. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE METAL BEFORE US. WE FIND THAT WHILE ADJUDICATING THE FIRST GROUND,WE HAVE EX TENSIVELY DEALT WITH THE ISSUE AND HAVE NOTED THE FACTS. WE HAVE HELD THAT THE PLA CING OF MONEY IN THE BANKS IN THE FORMS OF FDRS WAS DIRECTLY LINKED WITH THE CARR YING OUT OF BUSINESS OF THE ASSESSEE.WE FURTHER FIND THAT INTEREST INCOME AND B Y THE ASSESSEE HAS BEEN ACCEPTED TO BE TAXABLE UNDER THE HEAD INCOME FROM DISMISS A PROFESSION IN THE EARLIER AS WELL AS IN THE SUBSEQUENT AY.S I.E. AY.S.2003-04, 2004-0 5, 2008-09 AND 2011-12.THE AO HAS NOT BROUGHT ANYTHING ON RECORD TO PROVE THAT THE FACTS OF THE EARLIER AND SUBSEQUENT YEARS WERE DIFFERENT FROM THE FACTS FOR THE YEAR UNDER CONSIDERATION. THE RULE OF CONSISTENCY STIPULATES THAT IN ABSENCE OF DISTINGUISHING FACTS AND CIRCUMSTANCES,THE AO SHOULD NOT DEVIATE FROM THE ST AND TAKEN/FOLLOWED IN THE EARLIER YEARS.THEREFORE,WE ARE OF THE OPINION THAT ORDER OF THE FAA DOES NOT SUFFER FROM ANY LEGAL INFIRMITY.CONFIRMING THE SAME,WE DEC IDE FOURTH GROUND OF APPEAL AGAINST THE AO. 15. FIFTH GROUND DEALS WITH NON-COMPETE FEE OF RS.2,46, 34,254/-.DURING THE ASSESSMENT PROCEEDINGS,THE AO FOUND THAT THE ASSESS EE HAD CLAIMED REVENUE EXPENDITURE OF RS.2.45 CRORES,THAT IT HAD CLAIMED T HAT IT HAD ACQUIRED EDIBLE OIL AND FATS BUSINESS OF HINDUSTAN LEVER LTD.(HLL)WITH EFFE CT FROM SEPTEMBER 2003,THAT THE BUSINESS PURCHASES CONSISTED OF TANGIBLE ASSETS , BRANDS, PRODUCT TECHNOLOGY, KNOWHOW AND NON-COMPETE FEE AGREEMENT,THAT PURSUAN T TO AGREEMENT, HLL WAS NOT TO COMPETE IN RESPECT OF THE AFORESAID PRODUCTS IN THE TERRITORY OF INDIA AND NEPAL FOR A PERIOD OF 5 YEARS,THAT SIMILAR PAYMENT OF RS.7,00,00,000/- WAS MADE TO PRESTIGE FOODS LTD.(PFL)PROHIBITING THEM FROM MANUF ACTURING AND MARKETING CHAMBAL REFINED OIL IN THE DISTRICT OF DHAR FOR A PERIOD OF 5 YEARS, THAT IT HAD CLAIMED DEPRECIATION ON PAYMENTS FOR BRANDS AND TEC HNICAL KNOWHOW WITH REGARD 24 TO BUSINESS TAKEN OVER FROM HLL, THAT IT WAS FURTHE R CLAIMED THAT THE ASSESSEE WAS ENTITLED FOR DEPRECIATION OF GOOD WILL, THAT IT WAS WRITING OFF THE NON-COMPETE PAYMENT PROPORTIONATELY OVER A PERIOD OF 5 YEARS IN THE BOOKS OF ACCOUNTS, THAT THE NON-COMPETE PAYMENT WAS TREATED AS REVENUE EXPENDIT URE IN THE RETURN OF INCOME BY THE ASSESSEE, THAT A PRO-RATA CLAIM HAD BEEN MAD E OVER A PERIOD OF 5 YEARS, THAT THE ASSESSEE HAD CAPITALISED THE AMOUNT PAID TO PFL IN THE BOOKS OF ACCOUNTS, THAT IT HAD CLAIMED PROPORTIONATE DEPRECIATION OVER THE PERIOD OF 5 YEARS.CONSIDERING THE NON-COMPETE PAYMENT AS REVENUE EXPENDITURE IN T HE RETURN OF INCOME THE ASSESSEE COMPANY CLAIMED A DEDUCTION OF RS.81.66 LAKHS.THE ASSESSEE RELIED UPON THE CASE OF MADRAS INDUSTRIAL INVESTMENT LTD.( 225ITR802).THE AO DIRECTED THE ASSESSEE TO JUSTIFY AS TO HOW SUCH EXPENSES COU LD BE CLAIMED AS REVENUE EXPENDITURE.IN ITS REPLY,THE ASSESSEE CONTENDED TH AT THE NON-COMPETE FEE PAID TO HLL HAD BEEN CONSIDERED AS MISCELLANEOUS EXPENDITUR E WHEREAS THE PAYMENT MADE TO PFL HAS BEEN CONSIDERED AS FIXED ASSET.AFTE R CONSIDERING THE SUBMISSION OF THE ASSESSEE THE AO HELD THAT THE ASSESSEE WOULD DERIVE BENEFIT FROM PAYMENTS MADE TO HLL AND PFL FOR A VERY LONG PERIOD, THAT EX PENSES INCURRED BY IT COULD NOT BE ALLOWED AS REVENUE EXPENDITURE.FINALLY,HE MA DE DISALLOWANCE OF RS.2.45 CRORES. 16. AGGRIEVED BY THE ORDER OF THE AO,THE ASSESSEE PREF ERRED AN APPEAL BEFORE THE FAA.AFTER CONSIDERING THE AVAILABLE MATERIAL,HE HEL D THAT BY MAKING PAYMENTS UNDER THE HEADS NON-COMPETE FEE TO HLL AND PFL THE ASSESSEE HAD DEBARRED THE COMPETITORS TO DO BUSINESS IN SOME LIMITED AREAS FO R 5 YEARS,THAT THE BENEFIT DERIVED BY IT WAS COULD NOT BE CONSIDERED AS ENDURI NG BENEFIT OR LONG TERM BENEFIT, THAT THE PROVISIONS OF SECTION 35(D) OF THE ACT ALL OWED TO AMORTIZATION OF CERTAIN PRELIMINARY EXPENSES AND THE ASSESSEE WERE ALLOWED TO CLAIM SUCH EXPENSES DURING A PERIOD OF 5 YEARS,THAT FIVE YEAR PERIOD CO ULD NOT BE CONSIDERED A LONG PERIOD,THAT THE ASSESSEE REQUIRED ENTERING INTO NON -COMPETE AGREEMENT WAS ONLY IN 25 THE FORM OF FORBEARANCE UNDERTAKEN BY THE SELLER FO R A LIMITED PERIOD,THAT NO ENDURING BENEFIT HAD OCCURRED TO THE ASSESSEE, THAT THE EXPENSES INCURRED BY IT COULD NOT BE CONSIDERED AS CAPITAL EXPENDITURE. FOL LOWING THE ORDER OF THE EARLIER YEAR,THE FAA ALLOWED THE APPEAL. 17 .DURING THE COURSE OF HEARING BEFORE US,THE AR FAIR LY CONCEDED THAT THE ISSUE IS COVERED AGAINST THE ASSESSEE BY THE ORDER OF THE TR IBUNAL DELIVERED FOR THE AY.2004-05.WE FIND THAT WHILE DECIDING THE APPEAL F OR THE EARLIER YEAR (ITA/ 1779/M/2008) THE TRIBUNAL HAD HELD AS UNDER: 28. IN ADDITION TO THE ABOVE, ASSESSEE HAS RAISED TWO ADDITIONAL GROUNDS. THE FIRST ADDITIONAL GROUND RAISED IS AS UNDER: 'THE LEARNED ASSESSING OFFICER ERRED IN NOT ALLOWIN G A DEDUCTION FOR THE ENTIRE NON COMPETE FEE OF RS.5,29,00,000/- PAID BY THE APP ELLANT COMPANY TO HINDUSTAN LEVER LIMITED EVEN THOUGH THE EXPENSES HAS CRYSTAL LIZED DURING THE YEAR. IN ADDITION TO THE ABOVE, ASSESSEE HAS RAISED THE FOLLOWING ADDITIONAL GROUND: 'WITHOUT PREJUDICE TO GROUND 2, THE LEARNED ASSESSI NG OFFICER ERRED IN NOT ALLOWING DEPRECIATION IN RESPECT OF NON COMPETE FEE S OF RS.5,29, 00, 000 PAID TO HINDUSTAN LEVER LIMITED.' XXXXX 31.WE HAVE CONSIDERED THE RIVAL SUBMISSIONS CAREFUL LY.WE FIND THAT ASSESSEE HAS ALSO RAISED SECOND ADDITIONAL GROUND AND WHILE ADJUDICAT ING THE SAME IT WAS FOUND IN THE LATER PARAS THAT AO HAS OBSERVED IN PARA-8 OF HIS ORDER THAT IN THE AGREEMENT WITH HLL THERE WAS NO SEPARATE VALUE OF THE NON COMPETE FEE AND WHILE ADJUDICATING THE SECOND ADDITIONAL GROUND WE HAVE REMITTED THAT MATTER TO HIS FILE FOR DETERMINATION OF THE AMOUNT OF NON COMPETE FEE. WE FURTHER FIND THAT TH E SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF TECUMSEH INDIA (P) LTD. VS. ADDL. CIT [SUPR A] HAS CLEARLY HELD THAT AN EXPENDITURE INCURRED ON WARDING OFF OF COMPETITION IN BUSINESS FROM A RIVAL DEALER WILL CONSTITUTE CAPITAL EXPENDITURE AND IS NOT ALLOWABLE U/S.37[1]. THEREFORE, RESPECTFULLY FOLLOWING THIS DECISION WHILE CONFIRMING THE ORDER OF THE LD. CIT(A), WE DIRECT THE AO NOT TO ALLOW AS BUSINESS EXPENDITURE THE AMOUNT OF NON COMPETE FEE WHICH MAY BE DETERMINED BY HIM. 32. ADDL. GROUND NO.2: THE LD. COUNSEL OF THE ASSES SEE SUBMITTED THAT EVEN IF THE NON COMPETE WAS HELD TO BE OF CAPITAL NATURE, EVEN THEN SAME HAS TO BE CONSTRUED AS INTANGIBLE ASSET AND ACCORDINGLY DEPRECIATION HAS TO BE ALLOWED AND IN THIS REGARD HE RELIED ON THE DECISION OF CHENNAI TRIBUNAL IN THE CASE OF ACIT VS. REAL IMAGE TECH (P) LTD. [120 TTJ 983]. 26 33. ON THE OTHER HAND, LD. DR SUBMITTED THAT THIS I SSUE WAS NEVER ADJUDICATED BY THE AO OR LD. COUNSEL OF THE ASSESSEE. CIT(A). THEREFORE, MATTER MAY BE SET ASIDE TO THE FILE OF THE AO. 34. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS CAREFU LLY AND FIND THAT IN CASE OF ACIT VS. REAL IMAGE TECH (P) LTD. [SUPRA], AFTER ANALYZING T HE PROVISIONS OF SEC.32[1][II] IT WAS HELD THAT NON COMPETE FEE WOULD CONSTITUTE CAPITAL ASSET AND DEPRECIATION WAS ULTIMATELY HELD TO BE ALLOWABLE. HOWEVER, WE FIND THAT THE AO VIDE PARA-8 OF HIS ORDER HAS OBSERVED THAT NON COMPETE FEE WAS NOT MENTIONED IN THE AGREEMENT AS A SEPARATE PAYMENT. THEREFORE, HE SHOULD FIND OUT THE AMOUNT O F NON COMPETE FEE DETERMINED BY THE ASSESSEE AND ACCORDINGLY ALLOW DEPRECIATION IN VIEW OF THE DECISION THE CHENNAI TRIBUNAL IN THE CASE OF ACIT VS. REAL IMAGE TECH ( P) LTD. [SUPRA]. RESPECTFULLY FOLLOWING THE ABOVE WE HOLD THAT EXPEN DITURE INCURRED UNDER THE HEAD NON-COMPETE FEE IS TO BE TREATED AS CAPITAL EXPENDI TURE,THAT SAME IS ELIGIBLE FOR DEPRECIATION.GROUND NUMBER FIVE IS DECIDED IN FAVOU R OF THE AO. 18. LAST GROUND OF APPEAL PERTAINS TO DISALLOWANCE OF R S.57.27 LAKHS.DURING THE ASSESSMENT PROCEEDINGS,THE AO FOUND THAT THE ASSESS EE HAD CLAIMED MARKET RESEARCH EXPENSES OF RS.57,27,009/- UNDER THE HEAD MISCELLANEOUS EXPENDITURE OF TRICHY UNIT.THE AO DIRECTED THE ASSESSEE,VIDE ORDER SHEET ENTRY DATED 11.12.2008 AND 16.12.2008,TO EXPLAIN AS TO HOW THE EXPENDITURE COULD BE ALLOWED AS REVENUE EXPENDITURE.THE ASSESSEE CONTENDED THAT DURING THE FY 2004-05 IT HAD PAID RS. 57.27 LAKHS TO A.C.NEILSON(ACN) FOR PROVIDING MARKE T SHARE DATA ON MONTHLY BASIS,THAT THE DATA PROVIDED BY ACN INCLUDED THE MA RKET SHARE ACHIEVED BY DALDA BRAND IN EACH OF THE MONTHS, THAT SUCH EXPENSES WER E INCURRED EVERY YEAR AND THE BENEFITS ARISING OUT OF SUCH EXPENDITURE WOULD EXHA UST IN THAT YEAR ONLY, THAT NO ENDURING BENEFIT WAS DERIVED BY THE ASSESSEE AND NO CAPITAL ASSET HAD COME INTO EXISTENCE.HOWEVER, THE CLAIM OF ASSESSEE WAS REJECT ED BY AO AND HE STATED THAT THE 27 ASSESSEE HAD INCURRED EXPENDITURE FOR GETTING MARK ET RESEARCH OF DALDA BRAND, THAT IT HAD ORIENTED ITS MARKET STRATEGY FOR INCREASING THE SALES, THAT THE BENEFITS OF HISTORICAL DATA WERE NOT CONFINED TO A PARTICULAR M ONTH OR YEAR THAT THE BENEFITS WERE OF ENDURING NATURE. 19. AGGRIEVED BY THE ORDER OF THE AO, THE ASSESSEE PRE FERRED AN APPEAL BEFORE THE FAA, WHO HELD THAT THERE WAS NO ENDURING BENEFIT DE RIVED FROM THE EXPENDITURE. FOLLOWING THE ORDER FOR THE A.Y. 2005-06,HE TREATED IT REVENUE EXPENDITURE. 20. BEFORE US,THE DR STATED THAT THE EXPENDITURE INCURR ED BY THE ASSESSEE WAS OF CAPITAL NATURE,THAT IT HAD RESULTED IN ENDURING BEN EFIT TO THE ASSESSEE.THE AR CONTENDED THAT THE ASSESSEE WAS NOT DERIVING AND IN BENEFIT FROM THE MARKET RESEARCH,THAT SUCH RESEARCH WOULD BECOME OBSOLETE W ITHIN A SHORT SPAN OF TIME,THAT THE EXPENDITURE WAS REVENUE IN NATURE.HE REFERRED T O THE CASES OF ANANDA BAZAR PATRIKA (P) LTD.(184 ITR 542) AND JK CHEMICALS LTD. (207 ITR 985). 21. AFTER HEARING THE RIVAL SUBMISSIONS WE ARE OF THE O PINION THAT THE EXPENDITURE INCURRED BY THE ASSESSEE ON MARKET RESEARCH WAS A R EVENUE EXPENDITURE AND THAT IT COULD NOT BE TREATED CAPITAL EXPENDITURE. THE FACT THAT THE ASSESSEE HAS TWO INCUR EXPENDITURE FOR RESEARCH EVERY MONTH IN ITSELF PROV ES THAT THE SPAN OF LIFE OF THE SURVEY IS VERY SHORT.WE FIND THAT IN THE CASE OF AN ANDA BAZAR PATRIKA (P) LTD.,THE HONBLE CALCUTTA HIGH COURT HAS HELD AS UNDER: THE MARKET SURVEY WOULD GIVE INFORMATION ABOUT THE CIRCULATION OF THE NEWSPAPER AT A GIVEN POINT OF TIME. THERE WAS NO EVIDENCE TO SHOW THAT THE READERSHIP WOULD REMAIN CONSTANT OVER A LARGE NUMBER OF YEARS. HENCE, THE E XPENDITURE INCURRED ON MARKET SURVEY COULD NOT BE SAID TO HAVE BROUGHT INTO EXISTENCE AN YTHING OF AN ENDURING BENEFIT TO THE ASSESSEE. IT WAS ALLOWABLE AS REVENUE EXPENDITURE. 28 RESPECTFULLY FOLLOWING THE ABOVE JUDGEMENT, GROUND NUMBER SIX IS DECIDED AGAINST THE AO. CO/29/M/2010,AY.2005-06 : 22. THE EFFECTIVE GROUND OF APPEAL,FILED BY THE ASSESSE E ,IN THE CO(GOA 1-3),IS ABOUT APPLICATION OF CUP FOR DETERMINING ALP RELATI NG TO IMPORT OF OIL.WHILE DECIDING THE APPEAL FOR THE EARLIER AY.,FILED BY TH E AO,WE HAVE SET ASIDE THE ISSUE TO HIS FILE OF FOR FRESH ADJUDICATION.WE FIND THAT THE ISSUE RAISED BY THE ASSESSEE DIRECTLY CONNECTED WITH THE GROUNDS NUMBER 2&3,RAIS ED BY THE AO IN HIS APPEAL. FOLLOWING THE SAME,EFFECTIVE GROUND OF APPEAL IS DE CIDED ACCORDINGLY. ITA/2697/MUM/2011-AY. 2006-07: 23. FIRST GROUND OF APPEAL IS ABOUT APPLICATION OF CUP AND REJECTION OF TNMM FOR IMPORT OF OIL.FOLLOWING OUR ORDER FOR THE EARLIER Y EARS(GROUNDS 2&3),WE RESTORE BACK THE ISSUE TO THE FILE OF THE AO.GROUND NO.1 IS DECIDED ACCORDINGLY. 24. SECOND GROUND DEALS WITH INTEREST INCOME AND BY THE ASSESSEE.WHILE DECIDING THE APPEAL FOR THE LAST YEAR,WE HAVE HELD THAT INTE REST INCOME HAS TO BE TREATED AS BUSINESS INCOME INSTEAD OF INCOME FROM OTHER SOURCE S.FOLLOWING THE EARLIER YEARS ORDER,GROUND 2 IS DECIDED AGAINST THE AO. 25. TREATMENT TO BE GIVEN TO NON-COMPETE FEE IS THE SUB JECT MATTER OF NEXT GROUND OF APPEAL.FOLLOWING OUR ORDER FOR THE EARLIER YEAR THE ISSUE IS DECIDED AGAINST THE ASSESSEE. 26. LAST GROUND OF APPEAL IS ABOUT MARKET RESEARCH EXPE NSES OF RS. 32.30 LACS. WE HAD DISMISSED THE APPEAL FILED BY THE AO WHILE DECI DING THE APPEAL FOR THE LAST 29 ASSESSMENT YEAR.FOLLOWING THE SAME GROUND NUMBER FO UR IS DECIDED AGAINST THE AO. CROSS OBJECTION/174/MUM/2011-AY.2006-07: 27. FIRST TWO GROUNDS OF CO WERE NOT PRESSED BY THE AR, DURING THE COURSE OF HEARING BEFORE US.HENCE,SAME STAND DISMISSED AS NOT PRESSED. 28. THIRD GROUND PERTAINS TO DISALLOWANCE OF EXPENDITUR E OF RS.96,005/-INCURRED ON LAND AND SITE DEVELOPMENT.REJECTING THE CLAIM MADE BY THE ASSESSEE,THE AO HELD THAT EVIDENCE IN RESPECT OF THE CLAIM WERE NOT PROD UCED BEFORE HIM. 29. DURING THE APPELLATE PROCEEDINGS,THE ASSESSEE SUBMI TTED THE DETAILS OF AMOUNTS INCURRED ON LAND AND SITE DEVELOPMENTS IN THE PREVI OUS RELATING TO THE AY.1997-98 AND STATED THAT THE IT HAD TO INCUR EXPENDITURE FO R THE YEAR UNDER CONSIDERATION.THE FAA HELD THAT NO FURTHER AMOUNTS WERE INCURRED DURI NG THE PREVIOUS YEAR RELEVANT TO AY.2006-07,THAT THE ONUS WAS ON THE APPELLANT T O PRODUCE EVIDENCE IF IT CLAIMED DEDUCTION ON ANY ITEM THAT SAME WAS NOT PRO DUCED,THAT IT HAD MADE GENERAL ARGUMENTS WITHOUT ANY REFERENCE TO SPECIFIC MATERIAL DATA OR EVIDENCE.HE CONFIRMED THE DISALLOWANCE. 30. BEFORE US,THE AR SUBMITTED THAT THE DEPRECIATION CL AIM MAY BE ALLOWED FOR THE EXPENDITURE.THE DR SUPPORTED THE ORDER OF THE FAA. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERUSE D THE MATERIAL BEFORE US.IN OUR OPINION THE ORDER OF THE FAA DOES NOT SUFFER FR OM ANY LEGAL INFIRMITY.SO, CONFIRMING HIS ORDER,WE DECIDE THIRD GROUND AGAINST THE ASSESSEE. 31. NEXT GROUND IS ABOUT DISALLOWANCE OF RS.14.05 LAKHS INCURRED ON PREMIUM ON PAYMENT OF LEASEHOLD LAND. DURING THE ASSESSMENT PR OCEEDINGS,THE AO FOUND THAT 30 THE ASSESSEE HAD CLAIMED AN EXPENDITURE OF RS.14.05 LAKHS UNDER THE HEAD PREMIUM PAID FOR LAND.THE ASSESSEE HAD ENCLOSED A N OTE WITH THE RETURN OF INCOME WHEREIN IT WAS CLAIMED THAT DURING THE YEAR 2002-03 THE COMPANY HAD LEASED CERTAIN LAND AT PITAMPUR FOR PERIOD OF 20 YEARS,THA T IT HAD PAID AN AMOUNT OF RS.2.81 CRORES AS UPFRONT PREMIUM FOR ACQUIRING THE LAND,THAT THE AMOUNT IN QUESTION WAS BEING CLAIMED ON PROPORTIONATE BASIS O VER THE LEASE PERIOD OF 20 YEARS,THAT ANNUAL LEASE PAYMENT OF RS.19.58 LAKHS W AS A REVENUE EXPENDITURE.THE AO DIRECTED THE ASSESSEE TO JUSTIFY THE CLAIM.AFTER CONSIDERING THE SUBMISSION OF THE ASSESSEE IT WAS HELD THAT LAND WAS CAPITAL ASSE T,THAT EXPENDITURE INCURRED WAS ON ACQUIRING OF LAND AND EXPENSES INCURRED BY WAY OF A NNUAL LEASE PAYMENT REPRESENT -ED CAPITAL EXPENDITURE,THAT IT WAS DERIVING ENDURI NG BENEFITS FROM THOSE ASSETS. FINALLY,THE AO REJECTED THE CLAIM MADE BY THE ASSES SEE. 32. BEFORE THE FAA,THE ASSESSEE ARGUED THAT THE PAYMENT S,BEING MADE ON THE LEASEHOLD PROPERTY FOR 20 YEARS,WERE MADE IN ADVANC E,THAT THE ANNUAL INSTALMENT PAYMENTS SPREAD OVER A PERIOD OF 20 YEARS,THAT AMOU NT CLAIMED SHOULD BE ALLOWED. AFTER CONSIDERING THE ASSESSMENT ORDER AND THE SUBM ISSIONS OF THE ASSESSEE,THE FAA HELD,IN HIS APPELLATE ORDER,THAT HELD THAT THE APPELLANT HAD MADE LUMP SUM PAYMENT CALLED 'SALAMI' AT THE TIME OF OBTAINING A LEASE,THAT BY ITS VERY NATURE SUCH TRANSACTIONS WERE CAPITAL IN NATURE AS THEY PR OVIDE ENDURING BENEFIT TO A BUSINESSMAN. CONFIRMING THE ORDER OF THE AO,HE UP HELD THE DISALLOWANCE 33. BEFORE US,THE AR CONTENDED THAT THE EXPENDITURE WAS INCURRED FOR BUSINESS PURPOSES,THAT SAME WAS INTERLINKED WITH ACQUISITION OF LEASE HOLD RIGHTS OF LANDS,THAT THE ASSESSEE HAD INCURRED AN EXPENDITURE OF RS.2.81 CRORES FOR A PERIOD OF TWENTY YEARS,THAT PROPORTIONATE EXPENDITURE SHOU LD BE ALLOWED.HE RELIED UPON 31 THE CASE OF MADRAS INDUSTRIAL INVESTMENT CORPORATIO N LTD.(225ITR802),AND SUN PHARMACEUTICAL IND.LTD.(329ITR479).ALTERNATIVELY,IT WAS ARGUED THAT DEPRECIATION SHOULD BE ALLOWED IF THE EXPENDITURE WAS TREATED AS CAPITAL EXPENDITURE.THE DR SUPPORTED THE ORDER OF THE FAA. 34. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL BEFORE US.WE FIND THAT IN THE CASE OF MADRAS INDUSTRIAL INVESTME NT CORPORATION LTD.THE ISSUE WAS ABOUT DISCOUNT-EXPENSES INCURRED FOR ISSUING DEBENT URES.IN OUR OPINION,THE MATTER IS OF NO HELP TO RESOLVE THE ISSUE.IN THE CASE UNDE R CONSIDERATION, A LUMP SUM WAS PAID AT THE TIME OF OBTAINING A LEASE.WE ARE OF THE OPINION,THAT IT IS A CAPITAL EXPENDITURE BY ITS NATURE ITSELF.THE LEASE WAS FOR A PERIOD OF TWENTY YEARS.SO, WE ARE NOT INCLINED TO DISTURB THE FINDINGS OF THE FAA AND HOLD IT TO BE A CAPITAL EXPENDITURE.HOWEVER,WE WANT TO ALLOW THE ALTERNATE CLAIM MADE BY THE ASSESSEE I.E. ALLOWING DEPRECIATION AS PER THE PROVISIONS OF SECTION 32 OF THE ACT.GROUND NO.4 IS ALLOWED IN FAVOUR OF THE ASSESSEE,IN PART. 35. LAST GROUND OF APPEAL PERTAINS TO DISALLOWANCE OF P ROVISION OF RS.7.63 LAKHS TOWARDS OBSOLETE STORES.DURING THE ASSESSMENT PROCE EDINGS,THE AO FOUND THAT THE ASSESSEE HAD MADE A PROVISION FOR THE SAID AMOUNT U NDER THE HEAD PROVISION FOR OBSOLETE STORES.HE DIRECTED THE ASSESSEE TO FILE DE TAILS IN THAT REGARD.BUT,NO EXPLANATION OR DETAILS WERE FILED IN THAT REGARD.SO ,HE DISALLOWED THE CLAIM MADE BY THE ASSESSEE. 36. AGGRIEVED BY THE ORDER OF THE AO,THE ASSESSEE PREFE RRED AN APPEAL BEFORE THE FAA.AFTER CONSIDERING THE ORDER OF THE AO AND THE S UBMISSIONS OF THE ASSESSEE,HE HELD THAT UNDER THE ACT,THE DEDUCTION WAS GENERALLY AND MAINLY ALLOWED ON ACTUAL 32 BASIS,THAT THE ASSESSEE HAD CLAIMED THAT PROVISION TO OBSOLETE STORES HAD BEEN MADE ON SCIENTIFIC BASIS,THAT NO MATERIAL EVIDENCE WAS P RODUCED BY IT IN THAT REGARD. UPHOLDING THE ORDER OF THE AO,HE DISMISSED THE GROU ND RAISED BY THE ASSESSEE. 37. BEFORE US,THE AR CONTENDED THAT THE ASSESSEE HAD FU RNISHED A DETAILED SCIENTIFIC EVALUATION OF THE OBSOLETE STORES, THAT THE STORE I TEMS WERE UNUSABLE, THAT SAME HAD TO BE IMPAIRED IN COMPLIANCE WITH THE REQUIREMENTS OF MANDATORY PROVISIONS CONTAINED IN THE COMPANIES ACT -SCHEDULES VI,THAT I F A CURRENT ASSETS DID NOT HAVE A VALUE ON REALISATION IN THE ORDINARY COURSE OF BUSI NESS AT WHICH THEY WERE TO BE STATED IN THE BALANCE SHEET THE PROVISION HAD TO BE PROVIDED FOR. HE RELIED UPON THE CASE OF INDIAN RARE EARTH LTD.(375 ITR 276),DELIVER ED BY THE HONBLE BOMBAY HIGH COURT.THE DR SUPPORTED THE ORDER OF THE FAA. 37. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL BEFORE US.WE FIND THAT THOUGH THE ASSESSEE HAD CLAIMED THAT IT H AD FOLLOWED A SCIENTIFIC METHOD WITH REGARD TO THE OBSOLETE STORES,BUT IT HAS NOT F URNISHED ANY DOCUMENTARY EVIDENCE BEFORE THE AO OR THE FAA OR EVEN BEFORE US .MAKING A CLAIM IS NOT SUFFICIENT IT HAS TO BE BACKED BY HARD CORE EVIDENC ES.IN THE CASE UNDER CONSIDERA - TION,THE ASSESSEE HAS MADE ONLY A PROVISION.HISTORI CAL DATA OR ANALYSIS WHICH COULD HAVE TILTED THE SCALE IN FAVOUR OF THE ASSESSEE,IS NOT AVAILABLE.THEREFORE, WE ARE OF THE OPINION THAT THE FAA HAD RIGHTLY UPHELD THE ORD ER OF THE AO.THE WAS NOT ABLE TO REBUT THE FACT THAT THE AMOUNT IN QUESTION WAS O NLY A PROVISION. AS FAR AS THE CASE RELIED UPON BY THE ASSESSEE IS C ONCERNED IT IS FOUND THAT THE ASSESSEE IN THAT MATTER WAS A GOVERNMENT OWNED COMP ANY AND HAD CHANGED ITS METHOD OF VALUATION AS PER THE DIRECTIONS OF THE C& AG.THE FACTS OF THE PRESENT CASE ARE TOTALLY DIFFERENT.CONFIRMING THE ORDER OF THE FAA,WE DECIDE GROUND NO.5 AGAINST THE ASSESSEE. 33 ITA/607/MUM/2012-AY.2007-08: 38. ALL THE THREE GROUNDS,RAISED BY THE AO (APPLICATION OF CUP/REJECTION OF TNMM FOR IMPORT OF OIL,NON-COMPETE FEE, MARKET RESEARCH EXPENSES OF RS.45.20 LAKHS) ARE SAME,WHICH HAVE BEEN DEALT BY US IN THE EARLIER YEA RS.FOLLOWING THE SAME GROUND NUMBER ONE IS RESTORED BACK TO THE FILE OF THE AO,G ROUND NUMBER TWO IS DECIDED IN FAVOUR OF THE AO AND THE LAST GROUND STANDS DISMISS ED. CO/262/MUM/2012-AY.2007-08 39. FIRST EFFECTIVE GROUND(GROUNDS 1-5)DEAL WITH THE AD JUSTMENT MADE WITH REGARD TO IMPORT OF OIL.FOLLOWING OUR ORDER FOR THE AY.200 5-06,MATTER IS RESTORED BACK TO THE FILE OF THE AO.FIRST EFFECTIVE GROUND STANDS AL LOWED ACCORDINGLY. 40. SIXTH GROUND IS ABOUT TREATMENT TO BE GIVEN TO THE INTEREST INCOME.FOLLOWING OUR ORDER FOR THE EARLIER YEAR,WHERE THE ISSUE WAS RAISED BY THE AO,WE HOLD THAT INTEREST INCOME IS TO BE ASSESSED AS BUSINESS INCOM E INSTEAD OF INCOME FROM OTHER SOURCES.GROUND 6 IS DECIDED IN FAVOUR OF THE ASSESS EE. 41 .DISALLOWANCE OF PROVISION OF RS. 64.15 LAKHS MADE TOWARDS OBSOLETE STORES IS THE SUBJECT MATTER OF GROUND 7.FOLLOWING OUR ORDER FOR THE EARLIER YEAR,WE DECIDE GROUND NO.7 AGAINST THE ASSESSEE. 42. GROUND EIGHT DEALS WITH DISALLOWANCE OF EXPENSES OF RS. 30.5 LAKHS, BEING PROVISION MADE FOR EMPLOYEE STOCK OPTION PLAN(ESOP) .DURING THE ASSESSMENT PROCEEDINGS,THE AO FOUND THAT THE PARENT COMPANY HA D RAISED DEBIT NOTE ON THE ASSESSEE FOR THE AMOUNT PAYABLE ON ACCOUNT OF ESOPS , THAT IT HAD MADE A PROVISION OF RS.30.5 LAKHS IN THE PROFIT AND LOSS ACCOUNT AND HAD CLAIMED THE SAME AS AN 34 ALLOWABLE EXPENDITURE.THE AO HELD THAT THE EXPENDIT URE COULD NOT BE ALLOWED AS PER THE PROVISIONS OF SECTION 37 OF THE ACT. IN THE APPELLATE PROCEEDINGS, THE FAA UPHELD THE ORDER OF THE AO. 43. BEFORE US,THE AR CONTENDED THAT THE PROVISIONS IN T HE ACCOUNTS WERE MADE IN CONFORMITY WITH THE MANDATORY ACCOUNTING STANDARDS AND AS PER SEBI REGULATIONS, THAT UPON THE ESOP GRANT PROVISION WAS REQUIRED TO BE MADE IN THE BOOKS OF ACCOUNTS,THAT THE ASSESSEE WOULD MAKE THE PAYMENT T O THE PARENT COMPANY TOWARDS THE DEBIT NOTES, THAT THE ESOPS WERE GRANTED TO THE ELIGIBLE EMPLOYEES OF THE GROUP COMPANY IN ACCORDANCE WITH THE EQUITY INCENTIVE PLA N, THE ASSESSEE HAD OFFERED FRINGE BENEFIT TAX IN ITS RETURNS ABOUT THE AMOUNT IN QUESTION, THAT THE PAYMENT OF EQUITY DEMONSTRATED THAT THE AMOUNT PAYABLE BY THE ASSESSEE WAS TOWARDS AN EXPENDITURE WHICH WAS IN FORM OF A BENEFIT TO THE E MPLOYEE. HE RELIED UPON THE CASE OF BIOCON LTD.(144 ITD 21) AND STATED THAT THE ASSESSEE WOULD ACTUALLY MAKE PAYMENT OF THE AMOUNT TO THE GROUP COMPANY AGAINST THE DEBIT NOTES, THAT THE PROVISION MADE IN THE BOOKS WAS TOWARDS THE PAYMENT FOR ACTUAL EXPENDITURE TO BE INCURRED BY THE ASSESSEE, THAT IT WAS NOT MERELY AN ENTRY. THE DR SUPPORTED THE ORDER OF THE FAA. 44. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL BEFORE US. WE FIND THAT THE ISSUE OF ALLOWABILITY OF EXPENDITURE RELATED WITH ESOPS HAS BEEN DELIBERATED UPON AND DISCUSSED EXTENSIVELY IN THE C ASE OF BIOCON LTD.(SUPRA). WE WOULD LIKE TO REPRODUCE THE RELEVANT PORTION OF THE ORDER AND SAME READS AS UNDER ONCE IT IS HELD AS A CONSIDERATION FOR EMPLOYMENT, THE NATURAL COROLLARY WHICH FOLLOWS IS THAT SUCH DISCOUNT (I) IS AN EXPENDITURE (II) SU CH EXPENDITURE IS ON AN ASCERTAINED (NOT CONTINGENT) LIABILITY AND (III) IT CANNOT BE TREATE D AS SHORT CAPITAL RECEIPT. IN VIEW OF THE 35 FOREGOING DISCUSSION, WE ARE OF THE CONSIDERED OPIN ION THAT DISCOUNT ON SHARES UNDER THE ESOP IS AN ALLOWABLE DEDUCTION. RESPECTFULLY FOLLOWING THE ORDER OF BIOCON LTD.(SUP RA) ,WE DECIDE GROUND NUMBER EIGHT IN FAVOUR OF THE ASSESSEE. 45. LAST GROUND IS ABOUT DISALLOWANCE OF RS. 49.49 LACS BEING THE LOSS ON HEDGING TRANSACTIONS.THE AR,BEFORE US,STATED THAT THE ASSES SEE WANTED TO WITHDRAW THE GROUND. HENCE,SAME STANDS DISMISSED AS WITHDRAWN. AS A RESULT,APPEALS FILED BY THE AO AND THE CO.S FI LED BY THE ASSESSEE FOR ALL THE AY.S.STAND PARTLY ALLOWED. . . . ORDER PRONOUNCED IN THE OPEN CO URT ON 18 TH MAY, 2016. 18 TH , 2016 SD/- SD/- ( . . / C.N. PRASAD ) ( !' / RAJENDRA ) / JUDICIAL MEMBER / ACCOUNTANT MEMBER MUMBAI; DATED : 18.05.2016. JV.SR.PS. / COPY OF THE ORDER FORWARDED TO : 1. APPELLANT / 2. RESPONDENT / 3. THE CONCERNED CIT(A)/ , 4. THE CONCERNED CIT / 5. DR A BENCH, ITAT, MUMBAI / , , . . . 6. GUARD FILE/ //TRUE COPY// / BY ORDER, / DY./ASST. REGISTRAR , /ITAT, MUMBAI.