Citicorp Maruti Finance Ltd., New Delhi V. DCIT, New Delhi

ITA 4634/DEL/2010

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 3151 (ITAT-DELHI)
• Duration Of Justice: 6 year(s) 6 month(s) 20 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-05-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I1
• Next Hearing Date: 09-06-2016
• Assessment Year: 2006-2007
• Appeal Filed On: 21-10-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Depreciation; Transfer pricing; Principle of natural justice; International transaction; Initiation of penalty proceedings; Bad and doubtful debts; Onus to prove
• Section: 92C; 143(3); 92D; 37; 144; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I-1 NEW DELHI BEFORE SHRI N.K. SAINI, ACCOUNTANT MEMBER AND SHRI SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER ITA NO. 4634/DEL/2010 AY: 20 06-07 CITICORP MARUTI FINANCE LTD., VS DCI T, 4 TH FLOOR, JEEVAN BHARTI BUILDING, CIRCLE-3(1), 124, PARLIAMENT STREET, NEW DELHI. CONNAUGHT CIRCUS, NEW DELHI-110001 (PAN: AAACC5029L) (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI C.S. AGGARWAL, SR. ADV., MS PUSHPA SHARM A, ADV. RESPONDENT BY : SHRI PIYUSH JAIN, CIT DR ORDER PER SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER THIS APPEAL HAS BEEN PREFERRED BY THE ASSESSEE AGA INST THE ORDER OF DCIT, NEW DELHI, DATED 17.8.2010, PASSED U /S 143(3) R.W.S. 144C OF THE INCOME TAX ACT, 1961 AND PASSED CONSEQU ENT TO THE DIRECTIONS OF THE HONBLE DRP VIDE ORDER DATED 02/0 7/2010 FOR ASSESSMENT YEAR 2006-07. 2.0 THE FACTS, IN BRIEF ARE, THAT THE ASSESSEE IS A NON-BANKING FINANCE COMPANY ENGAGED IN THE BUSINESS OF HIRE PUR CHASE AND AUTO LOANS. BY AN ORDER U/S 92CA(3) OF THE INCOME-TAX AC T, 1961 (THE ACT), THE LD. TPO HAS MADE AN UPWARD ADJUSTMENT OF RS. 4,46,62,367/- IN THE INCOME RETURNED BY THE ASSESSE E FOR THE I.T.A. 4634/DEL/2010 ASSESSMENT YEAR 2006-07 2 ASSESSMENT YEAR 2006-07. THE ADJUSTMENTS MADE OF IN RESPECT OF THE ARMS LENGTH PRICE (ALP) OF THE INTERNATIONAL TRANS ACTION FOR THE YEAR UNDER CONSIDERATION ARE AS UNDER: S.NO. NATURE OF TRANSACTION EXPENDITURE INCURRED ARMS LENGTH PRICE DIFFERENCE 1. TECHNOLOGY SUPPORT CHARGES 2,36,16,000 NIL 2,36,16,000 2. BACK-END SERVICE CHARGES 29,82,614 NIL 2 9,82,614 3. LOAN PROCESSING FEES 1,08,43,184 4,04,812 1,04 ,38,373 4. INTEREST ON FIXED DEPOSITS EARNED 9,47,088 9,47,088 NIL 5. INTEREST AND FINANCE CHARGES PAID DEBENTURES 1,59,19,041 1,59,19,041 NIL 6. INTEREST ON TERM LOANS 2,57,07,055 2,57,07,055 N IL 7. INTEREST AND FINANCE CHARGES PAID TO OTHERS 55,45,626 55,45,626 NIL 8. SECONDMENT CHARGES 5,14,625 5,14,625 N IL 9. SHARED COST FOR CO-LOCATED PREMISES 76,25,380 NIL 76,25,380 4,46,62,367 2.1 THUS, AN UPWARD ADJUSTMENT WA S MADE IN RESPECT OF: (A) TECHNOLOGY SUPPORT CHARGES; (B) BACK-END SERVICE CHARGES; (C) LOAN PROCESSING FEES; AND (D) SHARED COST FOR CO-LOCATED PREMISES. 2.2 THE HONBLE DRP UPHELD THE PROPOSED ADJUSTME NT IN THE ALP. APART FROM THE ADJUSTMENT RELATING TO ALP IN R ESPECT OF INTERNATIONAL TRANSACTIONS, THE HONBLE DRP ALSO UP HELD ADDITION OF RS. 1,12,05,815/- ON ACCOUNT OF LOSS ON SALE OF REPOSSESSED ASSETS ON THE GROUND THAT THE SAME WAS CAPITAL IN N ATURE AND I.T.A. 4634/DEL/2010 ASSESSMENT YEAR 2006-07 3 HENCE NOT AN ALLOWABLE EXPENSES. THE HONBLE DRP AL SO UPHELD THE DISALLOWANCE OF EXPENDITURE AMOUNTING TO RS. 4, 08,770/- ON SALES PROMOTION. THE HONBLE DRP ALSO UPHELD THE PR OPOSED ACTION OF THE AO IN NOT ALLOWING DEPRECIATION @ 60% ON COMPUTER ACCESSORIES AND PERIPHERALS LIKE PRINTERS, SCANNERS , RACKS, NETWORK CABLES ETC. 2.3 THE FOLLOWING GROUNDS HAVE BEEN RAISED BY THE ASSESSEE:- 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE, THE LEARNED TRANSFER PRICING OFFICER (TPO) AND THE LEAR NED ASSESSING OFFICER (AO) HAVE ERRED IN PROPOSING AND THE HON'BLE DISPUTE RESOLUTION PANEL (DRP) HAS FURTHER ERRED IN CONFIRMING THE PROPOSED ADDITION ON ACCOUNT OF PAYM ENT OF RS. 4,46,62,367/- MADE BY THE ASSESSEE TO CITIBANK NA, INDIA BRANCH (CITIBANK INDIA), ITS ASSOCIATED ENTER PRISE, IN RESPECT OF THE INTERNATIONAL TRANSACTIONS UNDERTAKE N BY THE ASSESSEE BY ALLEGEDLY HOLDING THAT THE SAME ARE NOT AT ARMS LENGTH PRICE. 1.1. THAT THE LD. TPO AND AO HAVE ERRED, BOTH ON FACTS AND IN LAW, IN PROPOSING AND THE HONBLE DRP HAS FURTHER E RRED IN DETERMINING NIL ARMS LENGTH PRICE IN THE HANDS OF THE ASSESSEE; 1.2. THAT THE LD. TPO, AO AND HONBLE DRP FAILED TO APP RECIATE THE FACT THAT TRANSFER PRICING ASSESSMENT OF CITIBA NK INDIA FOR FINANCIAL YEAR 2005-06 HAS BEEN COMPLETED, WHER EIN THE SAME TRANSACTION INVOLVING RECEIPT OF INCOME BY CIT IBANK INDIA BRANCH OFFICE HAS BEEN ACCEPTED AT ARMS LENG TH BY THE REVENUE. LOSS ON SALE OF REPOSSESSED ASSETS: I.T.A. 4634/DEL/2010 ASSESSMENT YEAR 2006-07 4 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E THE ID. AO HAS ERRED IN PROPOSING AND THE HONBLE DRP HAS FURT HER ERRED IN CONFIRMING THE ADDITION OF RS. 1,12,05,815 /- ON ACCOUNT OF LOSS ON SALE OF REPOSSESSED ASSETS ON TH E GROUND THAT IT IS CAPITAL IN NATURE AND IS NOT AN ALLOWABL E EXPENSE / DEDUCTION; 2.1 THAT THE RELIANCE PLACED BY THE LD. AO AND BY HONBLE DRP IN THIS REGARD ON THE DECISION OF ALLAHABAD HIGH CO URT IN THE CASE OF MOTOR & GENERAL SALES (PRIVATE) LIMITED VS. CIT (226ITRJ37)IS MISPLACED AND UNWARRANTED; * 2.2 THAT THE LD. ASSESSING OFFICER AND HON'BLE DRP HAVE ERRED IN NOT APPRECIATING THAT SIMILAR ISSUE HAS BEEN DEC IDED IN ASSESSEES FAVOUR IN ASSESSEES OWN CASE BY HON'BLE TRIBUNAL IN ASSESSMENT YEAR 2003-04 AND 2004-05. DISALLOWANCE ON ACCOUNT OF SALE PROMOTION EXPENSES: 3. THE LD. AO HAS ERRED, BOTH ON FACTS AND IN LAW, IN DISALLOWING EXPENDITURE AMOUNTING TO RS. 8,770/- INCURRED ON AC COUNT OF SALES PROMOTION EXPENSES DESPITE THE FACT THAT SUFF ICIENT VOUCHERS / IS WERE SUBMITTED FOR AOS VERIFICATION; DEPRECIATION ON COMPUTER PERIPHERALS: 4. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE, THE LD. AO HAS ERRED IN PROPOSING AND THE HONBLE DRP HAS F URTHER ERRED IN NOT ALLOWING DEPRECIATION UNDER THE BLOCK OF COMPUTERS @ 60% AMOUNTING TO RS. 3,645/- IN RESPE CT OF COMPUTER ACCESSORIES AND PERIPHERALS LIKE PRINTERS, SCANNERS, RACKS, NETWORK CABLES ETC. 4.1 THAT THE LD. AO AND THE HONBLE DRP HAVE ERR ED IN NOT CONSIDERING THE FACT THAT SIMILAR ISSUE HAS BEEN DE CIDED IN ASSESSEES FAVOUR IN ASSESSEES OWN CASE BY DELHI B ENCH OF TRIBUNAL IN AY 2003-04 AND 2004-05. I.T.A. 4634/DEL/2010 ASSESSMENT YEAR 2006-07 5 INITIATION OF PENALTY PROCEEDINGS U/S 271(L)(C): 5. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE ID. AO HAS ERRED IN INITIATING PENALTY PROCEEDINGS UNDER S ECTION 271(L)(C) OF THE ACT. PRINCIPLES OF NATURAL JUSTICE: 6. THAT THE DIRECTIONS ISSUED BY THE HONBLE DRP ARE BAD IN LAW AND VIOLATE THE PRINCIPLES OF NATURAL JUSTICE BY BE ING NON- SPEAKING IN NATURE. 3.0 THE LD. AUTHORISED REPRESENTATIVE, IN RESPECT O F GROUND NO. 1, SUBMITTED THAT THE PAYMENT OF TECHNOLOGY SUPPORT SERVICES AMOUNTED TO RS. 2,36,16,000/-. NO BENCH MARKING WAS DONE BY THE ASSESSEE WHEREAS THE LD. TPO HAD APPLIED CUP ME THOD IN WHICH THE ARMS LENGTH PRICE HAS BEEN DETERMINED AT NIL. IT WAS SUBMITTED THAT THE DEPARTMENTS GROUND FOR SUCH ADD ITION WAS THAT NO DOCUMENTARY EVIDENCE WAS FURNISHED IN RESPE CT OF RENDITION THE SERVICES EXCEPT THE AGREEMENT AND CON FIRMATION FROM THE CITIBANK NA. HE SUBMITTED THAT IT WAS ALSO THE CONTENTION OF THE DEPARTMENT THAT THE NATURE OF THE SERVICES WERE IN THE NATURE OF INFORMATION TECHNOLOGY ENABLED SER VICES (ITES) AND THAT THE SAME SHOULD HAVE BEEN BENCHMARKED FROM THE DATA AVAILABLE IN THE PUBLIC DOMAIN. IT WAS FURTHER SUB MITTED BY THE LD. AR THAT THE CONTENTION OF THE DEPARTMENT IS ALS O THAT MARK I.T.A. 4634/DEL/2010 ASSESSMENT YEAR 2006-07 6 UP CALCULATED AND GIVEN BY THE ASSESSEE WAS NOT VER IFIABLE AND THAT NO UNCONTROLLED ENTERPRISES WOULD PREFER TO MA KE ANY KIND OF PAYMENT WHICH WAS NOT IN ACCORDANCE WITH THE CUR RENT RATES IN VOGUE. THE LD. AUTHORISED REPRESENTATIVE SUBMIT TED THAT THESE CONTENTIONS OF THE DEPARTMENT WERE FACTUALLY INCORRECT AS PROPER EVIDENCE OF HAVING RENDERED SERVICES WAS AVA ILABLE ON PAGES 226 TO 232 AND PAGE 236 OF THE PAPER BOOK 1. IT WAS ALSO SUBMITTED THAT FOR SIMILAR SERVICES, PRICE BEING CH ARGED WAS HIGHER THAN THE PRICE PAID BY THE ASSESSEE. IT WAS SUBMITTED THAT THE MARK UP CHARGED BY THE AE WAS ONLY 15% WHEREAS OTHER REPUTED IT COMPANIES WERE CHARGING THE RATES AFTER A MARK UP WHICH RANGED BETWEEN 27% AND 32%. HE DREW OUR ATTE NTION TO PAGE 232 OF THE PAPER BOOK 1 IN THIS REGARD. IT WA S ALSO SUBMITTED THAT IN THE TRANSFER PRICING ASSESSMENT O F THE ASSOCIATED ENTERPRISE (AE) FOR THE INSTANT YEAR, TH E RECEIPT OF PAYMENT FROM THE ASSESSEE HAS BEEN ACCEPTED AS BEIN G AT ARMS LENGTH BY THE DEPARTMENT AS WAS EVIDENT FROM PAGE N O. 305 AND PAGES 423 TO 466 OF PAPER BOOK 1. IT WAS FURTHER S UBMITTED BY THE LD. AUTHORISED REPRESENTATIVE THAT THE AE OF TH E ASSESSEE, BEING A BRANCH OF FOREIGN BANK, WAS ASSESSED IN IND IA AND WAS LIABLE TO PAY TAX @40% WHEREAS THE ASSESSEE WAS LIA BLE TO PAY TAX I.T.A. 4634/DEL/2010 ASSESSMENT YEAR 2006-07 7 @30% AND, THEREFORE, BY PAYING A HIGHER AMOUNT TO T HE AE, AE OF THE ASSESSEE CANNOT BE SAID TO HAVE BENEFITTED OR A NY TAX HAVING BEEN AVOIDED. LD. AUTHORISED REPRESENTATIVE ALSO SUBMITTED THAT THE ARMS LENGTH PRICE WAS ACCEPTED IN CASE OF THE ASSESSEE IN THE PRECEDING ASSESSMENT YEAR I.E. 2005-06 AS WE LL AS IN SUCCEEDING ASSESSMENT YEARS 2007-08 AND 2008-09. 3.01 IT WAS FURTHER SUBMITTED THAT THE PAYMENT OF BACKEND SUPPORT SERVICE CHARGES AMOUNTED TO RS. 29,82,614/- DURING THE INSTANT ASSESSMENT YEAR WHICH HAD NOT BEEN BENCHMAR KED BY THE ASSESSEE WHEREAS THE LD. TPO HAD APPLIED THE CU P METHOD AND DETERMINED THE ARMS LENGTH PRICE AS NIL AND CO NSEQUENTLY PROPOSED AN ADDITION OF RS. 29,82,614/-. IT WAS SU BMITTED THAT THE DEPARTMENTS CONTENTION WAS THAT THE SERVICES S PECIFIED IN THE AGREEMENT BETWEEN QUEST SCREENING SERVICES PVT. LTD . AND CITIFINANCIAL CONSUMER FINANCE INDIA LTD. CANNOT BE COMPARED WITH THAT OF THE SERVICES PROVIDED TO THE ASSESSEE AND THAT NO UNCONTROLLED ENTERPRISE WOULD PREFER ANY KIND OF PA YMENT WHICH WAS NOT SUBJECT TO THE PRESENT RATES IN VOGUE. THE LD. AUTHORISED REPRESENTATIVE SUBMITTED THAT THESE CONT ENTIONS OF THE DEPARTMENT WERE INCORRECT BECAUSE EVIDENCE OF F INANCIAL SERVICES RENDERED BY THE AE WERE AVAILABLE ON PAGE NO. 226 TO I.T.A. 4634/DEL/2010 ASSESSMENT YEAR 2006-07 8 232 AND PAGE 306 OF PAPER BOOK 1 TO WHICH OUR ATTEN TION WAS DRAWN. IT WAS FURTHER SUBMITTED THAT BACK END SUPP ORT SERVICES PROVIDED BY INFOMAX TO CITIFINANCIAL CONSUMER FINAN CE INDIA LTD. WERE SIMILAR TO THE SERVICES PROVIDED BY THE AE TO THE ASSESSEE AND, AS SUCH, THE AGREEMENT HAD BEEN ARBIT RARILY IGNORED. OUR ATTENTION WAS DRAWN TO PAGE NO. 301 A ND 302 OF THE PAPER BOOK 1 AND IT WAS SUBMITTED THAT THE QUOTATIO NS RECEIVED FROM TWO INDEPENDENT PARTIES WOULD SHOW THAT THE PR ICE OFFERED WAS HIGHER THAN THE PRICE CHARGED BY THE AE. IT WA S ALSO SUBMITTED THAT IN THE TP ASSESSMENT OF THE AE FOR T HIS VERY SAME ASSESSMENT YEAR, THE RECEIPT OF PAYMENT FROM THE AS SESSEE HAS BEEN ACCEPTED AS BEING AT ARMS LENGTH. IT WAS ALS O SUBMITTED THAT THE ARMS LENGTH PRICE HAS BEEN ACCEPTED IN AS SESSMENT YEARS 2005-06, 2006-07 AND 2008-09 BY THE DEPARTMEN T. 3.02 LD. AUTHORISED REPRESENTATIVE ALSO SUBMIT TED THAT THE SHARED COST FOR CO-LOCATED PREMISES WAS RS. 76,25,3 80/- WHICH HAD NOT BEEN BENCHMARKED BY THE ASSESSEE BUT THE LD . TPO HAD APPLIED CUP AND HAD DETERMINED THE ARMS LENGTH PRI CE AT NIL IN THIS RESPECT ALSO. IT WAS SUBMITTED THAT THE CONTE NTION OF THE DEPARTMENT HAS BEEN THAT NO DOCUMENTARY EVIDENCE HA D BEEN FURNISHED BY THE ASSESSEE TO DETERMINE THE AREA OCC UPIED BY I.T.A. 4634/DEL/2010 ASSESSMENT YEAR 2006-07 9 CITIBANK INDIA AND ALSO THE AMOUNT CHARGED BY THE L ANDLORDS FROM CITIBANK INDIA AND SUBSEQUENTLY THE AMOUNT CHA RGED BY CITIBANK INDIA FROM THE ASSESSEE. LD. AUTHORISED R EPRESENTATIVE DREW OUR ATTENTION TO PAGE NO. 226 TO 232 OF THE PA PER BOOK AND SUBMITTED THAT THE RELEVANT EVIDENCES WERE FILED BE FORE THE ASSESSING OFFICER. IT WAS ALSO SUBMITTED THAT THE ASSESSEE HAD DULY SUBMITTED THE AREA OCCUPIED BY THE ASSESSEE IN RESPECT OF THE PREMISES SHARED WITH CITIBANK INDIA IN GURGAON AND MUMBAI WHICH WAS AVAILABLE ON PAGE 222-298 OF PAPER BOOK 1 AND HAD ALSO SUBMITTED THE BREAK-UP OF MONTHLY RENTALS CHAR GED FROM THE ASSESSEE. IT WAS ALSO SUBMITTED THAT IN THE TP ASS ESSMENT OF THE AE FOR THE SAME ASSESSMENT YEAR, THE RECEIPT OF PAY MENT FROM THE ASSESSEE HAS BEEN ACCEPTED AS BEING AT ARMS LE NGTH BY THE DEPARTMENT. IT WAS ALSO SUBMITTED THAT THE ALP HAS BEEN ACCEPTED BY THE DEPARTMENT IN ASSESSMENT YEAR 2007- 08 AND 2008-09. 3.03 LD. AUTHORISED REPRESENTATIVE FURTHER SUBM ITTED THAT THE ASSESSEE HAD PAID LOAN PROCESSING FEE AMOUNTING TO RS. 1,08,43,184/- TO ITS AE DURING THE YEAR WHICH THE A SSESSEE HAD NOT BENCHMARKED BUT THE LD. TPO, AFTER APPLYING THE CUP METHOD, HAD DETERMINED THE ALP AT NIL. LD. AUTHORI SED I.T.A. 4634/DEL/2010 ASSESSMENT YEAR 2006-07 10 REPRESENTATIVE SUBMITTED THAT IT WAS THE CONTENTION OF THE ASSESSING OFFICER THAT THE ASSESSEE HAD PAID LOAN P ROCESSING FEE AT RS. 750/- PER FILE WHEREAS FOR SIMILAR SERVICES, CITIFINANCIAL CONSUMER FINANCE INDIA LTD. HAD PAID AN AMOUNT OF R S. 28/- PER FILE TO INFOMAX MANAGEMENT SERVICES (INDIA) PVT. LT D. IT WAS SUBMITTED THAT FOR SIMILAR SERVICES, CITIFINANCIAL CONSUMER FINANCE INDIA LTD. HAD PAID RS. 1500/- TO M/S QUEST SCREENING SERVICES PVT. LTD. AS AGAINST RS. 750/- PAID BY THE ASSESSEE AND, THEREFORE, THIS CONTENTION OF THE ASSESSING OFFICER WAS INCORRECT. OUR ATTENTION WAS DRAWN TO PAGE NO. 257-275 OF THE PAPER BOOK IN SUPPORT OF THIS ARGUMENT. OUR ATTENTION WAS ALS O DRAWN TO PAGE 302 TO 304 OF THE PAPER BOOK AND IT WAS SUBMIT TED THAT THE QUOTATION RECEIVED FROM THE TWO INDEPENDENT PARTIES WOULD SHOW THAT THE PRICE OFFERED WAS HIGHER THAN THE PRICE CH ARGED BY THE AE. IT WAS ALSO SUBMITTED THAT THE COMPARISON BY T HE REVENUE IN RESPECT OF SERVICES PROVIDED BY INFOMAX MANAGEMENT SERVICES (INDIA) PVT. LTD. WAS ENTIRELY ERRONEOUS AS BACKGRO UND CHECK OF CUSTOMER CANNOT BE EQUATED WITH THE TRANSACTION OF PROCESSING OF TRANSACTION AND UPDATING OF RECORDS. IT WAS ALSO S UBMITTED THAT IN THE TRANSFER PRICING ASSESSMENT OF THE AE IN THE INSTANT ASSESSMENT YEAR, RECEIPT OF PAYMENT FROM THE ASSESS EE HAD BEEN I.T.A. 4634/DEL/2010 ASSESSMENT YEAR 2006-07 11 ACCEPTED AS BEING AT ARMS LENGTH AND ALSO THE ALP HAS BEEN ACCEPTED BY THE DEPARTMENT IN ASSESSMENT YEARS 2005 -06 AND 2007-08. 3.04 IT WAS FURTHER SUBMITTED THAT THE FINDING O F THE LD. TPO WAS HIGHLY ARBITRARY. ONCE THE LD. TPO HAS ADOPTED CUP METHOD AS THE MOST APPROPRIATE METHOD, IT IS DIFFICULT TO ACCEPT THE PROPOSITION BY ANY STANDARD OR LOGIC THAT VALUE OF SERVICES IN RESPECT OF WHICH EXPENDITURE HAS BEEN INCURRED COUL D BE NIL. IT WAS SUBMITTED THAT, RULE 10 B(1) OF INCOME TAX RULE S ON DETERMINATION OF ARMS LENGTH PRICE U/S 92C OF THE ACT, PROVIDES THAT FOR THE PURPOSES OF SUB-SECTION (2) OF SECTION 92C OF THE ACT, THE ARMS LENGTH PRICE IN RELATION TO AN INTERNATIO NAL TRANSACTION SHALL BE DETERMINED BY ANY OF THE FOLLOWING METHODS , BEING THE MOST APPROPRIATE METHOD, IN THE FOLLOWING MANNER NA MELY: (A) COMPARABLE UNCONTROLLED PRICE METHOD, BY WHICH- (I) THE PRICE CHARGED OR PAID FOR PROPERTY TRANSFER RED OR SERVICES PROVIDED IN A COMPARABLE UNCONTROLLED TRANSACTION, OR A NUMBER OF SUCH TRANSACTIONS, IS IDENTIFIED; (II) SUCH PRICE IS ADJUSTED TO ACCOUNT FOR DIFFEREN CES, IF ANY, BETWEEN THE INTERNATIONAL TRANSACTION AND THE COMPA RABLE I.T.A. 4634/DEL/2010 ASSESSMENT YEAR 2006-07 12 UNCONTROLLED TRANSACTIONS OR BETWEEN THE ENTERPRISE S ENTERING INTO SUCH TRANSACTIONS, WHICH COULD MATERIALLY AFFE CT THE PRICE IN THE OPEN MARKET; (III) THE ADJUSTED PRICE ARRIVED AT UNDER SUB-CLAUS E(II) IS TAKEN TO BE AN ARMS LENGTH PRICE IN RESPECT OF THE PROPERTY TRANSFERRED OR SERVICES PROVIDED IN THE INTERNATIONAL TRANSACTION. 3.05 THE LD. AR SUBMITTED THAT WHILE ADOPTING THE AFORESAID METHOD CLAUSE (1) SPECIFICALLY PROVIDES THAT THE PR ICE PAID FOR SERVICES PROVIDED IN A COMPARABLE UNCONTROLLED TRAN SACTION SHOULD FIRST BE ADOPTED. IN THE INSTANT CASE, IF TH AT BE SO, IN A CASE OF COMPARABLE UNCONTROLLED TRANSACTION WHERE S UCH SERVICES HAVE BEEN PROVIDED AS THE MOST APPROPRIATE METHOD, IT CANNOT BE NIL. IT WAS SUBMITTED THAT, NO BASIS HAS BEEN GIVEN BY THE LD. TPO TO HOLD THAT THE SAME IS NIL. 3.06 IT WAS FURTHER SUBMITTED BY THE LD. AR THAT IT IS ONE THING TO SAY THAT THE ASSESSEE HAD FAILED TO ESTABLISH TH AT THE PAYMENTS HAVE BEEN MADE FOR RENDERING THE SERVICES AND IT IS ANOTHER THING TO SAY THAT ON THE APPLICATION OF CUP METHOD, THE V ALUE IS NIL. IT WAS SUBMITTED THAT THE LD. TPO HAD FAILED TO COMPRE HEND THAT THE EVIDENCES FURNISHED ESTABLISHED RENDERING OF SE RVICES AND I.T.A. 4634/DEL/2010 ASSESSMENT YEAR 2006-07 13 THEREFORE IT IS HIGHLY ARBITRARY TO HOLD THAT ON AD OPTION OF CUP METHOD THE ALP IS NIL. 3.07. THE LD. AR ALSO SUBMITTED THAT, IN CASE THE A.O. FRAMING ASSESSMENT ON THE ASSESSEE U/S 143(3) OF THE ACT WA S NOT SATISFIED THAT SUCH SERVICES HAVE BEEN RENDERED, TH E DISALLOWANCE WOULD HAVE BEEN MADE BY HOLDING THE SAME AS NOT ALL OWABLE U/S 37 OF THE ACT AND NOT BY INVOKING THE PROVISIONS OF SECTION 92 C(1) OF THE ACT. 3.08 IT WAS FURTHER SUBMITTED BY THE LD. AR THAT THE A.O. HAS NOT DISPUTED THAT THE ASSESSEE HAS FURNISHED BEFORE THE A.O. THE CONFIRMATIONS FROM THE PAYERS WHO PROVIDED THE SERV ICES. HOWEVER, THE A.O. IGNORED THAT THE AFORESAID ENTITY TO WHOM PAYMENTS HAS BEEN MADE IS SUBJECT TO ASSESSMENT AND SUBJECT TO ASSESSMENT AT THE MAXIMUM RATE. IT IS A WELL SETTLE D RULE OF LAW THAT THE BURDEN IS ON THE ASSESSEE TO ESTABLISH THA T THE EXPENDITURE HAS BEEN INCURRED AND WHEN THE ASSESSEE LEADS THE PRIMARY EVIDENCE TO ESTABLISH THE SAME, THE BURDEN SHIFTS ON THE REVENUE. THE LD. AR SUBMITTED THAT THE HONBLE DELH I HIGH COURT IN THE CASE OF CIT VS. GENESIS COMMET (P.) LTD. REPORTED IN 163 TAXMAN 482, HAS HELD THAT, IF THE ASSESSING OFFICER WAS NOT INCLINED TO BELIEVE THE MATERIAL PRODUCED BY THE AS SESSEE, HE I.T.A. 4634/DEL/2010 ASSESSMENT YEAR 2006-07 14 COULD HAVE USED THE COERCIVE POWERS AVAILABLE TO HI M. THE LD. AR SUBMITTED THAT THE ASSESSEE WAS NEVER CALLED UPON T O PRODUCE THE PARTIES TO WHOM THE PAYMENTS HAVE BEEN MADE, EA CH OF THEM BEING THE TAX ASSESSEE IN INDIA. 3.09 THE LD. AR RE-EMPHASISED THAT IN THE SUCCEED ING YEAR I.E. IN AY 2007-08, THE ASSESSEE HAD UNDERTAKEN SIMILAR INTERNATIONAL TRANSACTION WITH ITS AE I.E. M/S CITI BANK N.A. HOWEVER, THE LD. TPO FOUND ALL SUCH TRANSACTIONS TO BE AT ARMS LENGTH AND MADE NO ADJUSTMENT IN THE CASE OF THE AS SESSEE SINCE IN THE CASE OF THE RELATED PARTY I.E. AE, THE SAID TRANSACTIONS WERE FOUND TO HAVE BEEN ENTERED AT ARMS LENGTH. 3.1 ON GROUND NO. 2 PERTAINING TO LOSS ON SALE OF R EPOSSESSED ASSETS, LD. AUTHORISED REPRESENTATIVE SUBMITTED THA T THE ISSUE STOOD COVERED IN FAVOUR OF THE ASSESSEE BY THE ORDE R OF THE ITAT AND AFFIRMED BY THE HON'BLE DELHI HIGH COURT IN ASS ESSEES OWN CASE FOR ASSESSMENT YEAR 2005-06 IN I.T.A. NO. 1712 /2010 AND 1714/2010. 3.2 ON GROUND NO. 3 PERTAINING TO DISALLOWANCE ON ACCOUNT OF SALE PROMOTION EXPENSES, IT WAS SUBMITTED THAT THER E WAS AN AD HOC DISALLOWANCE BY THE DEPARTMENT IN THIS RESPECT IN ASSESSMENT I.T.A. 4634/DEL/2010 ASSESSMENT YEAR 2006-07 15 YEAR 2005-06 ALSO AND THE SAME WAS REMANDED TO THE FILE OF THE ASSESSING OFFICER BY THE ITAT. IT WAS ALSO SUBMITT ED THAT THE SALES PROMOTION EXPENSES INCURRED BY THE ASSESSEE F OR ASSESSMENT YEARS 2001-02 TO 2004-05 WERE FULLY ALLO WED BY THE DEPARTMENT WHEREAS IN ASSESSMENT YEARS 2005-06, 200 6-07 AND 2007-08, 10% OF THE EXPENDITURE WAS DISALLOWED ON AD HOC BASIS AND IN ASSESSMENT YEAR 2008-09 AND 2009-10 AGAIN, T HE DEPARTMENT ALLOWED THE ENTIRE EXPENDITURE IN THE YE AR IN WHICH THE EXPENDITURE WAS INCURRED. IT WAS ALSO SUBMITT ED THAT WHEREVER PAYMENTS HAVE BEEN MADE TOWARDS REIMBURSEM ENT OF EXPENSES TO AGENTS FOR PROCURING ORDERS FOR SALE, T AX HAD BEEN DULY DEDUCTED AT SOURCE AT THE RATE APPLICABLE. 3.3 ON GROUND NO. 4 PERTAINING TO DEPRECIATION OF COMPUTER PERIPHERALS, IT WAS SUBMITTED THAT THE SAME STOOD C OVERED BY THE ORDER OF THE ITAT FOR ASSESSMENT YEARS 2003-04 AND 2004-05 IN ASSESSEES OWN CASE WHICH WERE AFFIRMED BY THE HON' BLE DELHI HIGH COURT. 3.4 THE LD. AR ALSO SUBMITTED THAT GROUND NO. 6 PER TAINING TO VIOLATION OF PRINCIPLES OF NATURAL JUSTICE WAS NOT BEING PRESSED. I.T.A. 4634/DEL/2010 ASSESSMENT YEAR 2006-07 16 4. IN RESPONSE, THE LD. CIT DR SUBMITTED THAT AS FA R AS GROUND NO. 1 OF THE ASSESSEES APPEAL WAS CONCERNED, THE B URDEN OF DETERMINATION OF ALP AS WELL AS PROPER DOCUMENTATIO N WAS ON THE ASSESSEE WHICH THE ASSESSEE HAD FAILED TO DO. RELI ANCE WAS PLACED ON THE FOLLOWING JUDICIAL PRECEDENTS:- AZTEC SOFTWARE AND TECHNOLOGY VS ACIT 294 ITR 32 (AT) UCB INDIA (P) LIMITED VS. ACIT (2009) 121 ITD 131 , ACIT VS. GOLAWALA DIAMONDS 44 SOT 645 CA COMPUTER ASSOCIATES INDIA PVT. LTD. VS. DCIT- OR DER DATED 28.1.2010 OF ITAT, MUMBAI. 4.1 IT WAS FURTHER SUBMITTED THAT THE TRANSACTIONS ACCEPTED IN THE HANDS OF THE AE WOULD NOT NECESSARILY MEAN THAT ALP HAS BEEN ACCEPTED IN THE CASE OF THE ASSESSEE. IT WAS SUBMITTED THAT BENCHMARKING HAS TO BE DONE SEPARATELY IN BOTH THE CASES. LD. CIT DR SUBMITTED THAT SECTION 37 OF THE INCOME TAX ACT WAS ENTIRELY ON A DIFFERENT FOOTING AS COMPARED TO SECT ION 92 AND, THEREFORE, THIS CONTENTION OF THE ASSESSEE HAD NO F ORCE. RELIANCE WAS PLACED ON THE DECISION OF BANGALORE BENCH OF IT AT IN THE CASE OF FESTO CONTROLS (PVT). VS DCIT REPORTED IN 1 50 ITD 305 (BANG). LD. CIT DR SUBMITTED THAT THE ENTIRE ISSUE RELATING TO THE I.T.A. 4634/DEL/2010 ASSESSMENT YEAR 2006-07 17 DETERMINATION OF ALP NEEDED TO BE RESTORED TO THE F ILE OF THE LD. TPO FOR FRESH DETERMINATION. IT WAS SUBMITTED THAT THE DEPARTMENTS ACCEPTANCE OF ALP IN PRECEDING AND SUC CEEDING ASSESSMENT YEARS DOES NOT MAKE A DIFFERENCE AS THE PRINCIPLE OF RES JUDICATA DO NOT APPLY TO INCOME TAX PROCEEDINGS. 4.2 ON GROUND NOS. 2, 3 AND 4, THE LD. CIT DR PLACE D RELIANCE ON THE ORDER OF THE ASSESSING OFFICER. 5. WE HAVE HEARD THE RIVAL SUBMISSIONS AND HAVE ALS O PERUSED THE RELEVANT RECORDS. AS FAR AS GROUND NO. 1 OF ASS ESSEES APPEAL IS CONCERNED, THE PRIMARY CONTENTION OF THE ASSESSE E IS THAT SIMILAR INTERNATIONAL TRANSACTIONS WERE CONSIDERED TO BE AT ARMS LENGTH IN THE IMMEDIATELY PRECEDING ASSESSMENT YEAR AS WELL AS IN SUCCEEDING ASSESSMENT YEARS AND, THEREFORE, ON I DENTICAL FACTS, THE INTERNATIONAL TRANSACTIONS IN THE YEAR UNDER CO NSIDERATION SHOULD ALSO BE CONSIDERED TO BE AT ARMS LENGTH. TH E ASSESSEES PLEA THAT SINCE THE INTERNATIONAL TRANSACTIONS RELA TING TO THESE SERVICES WERE HELD TO BE AT ARMS LENGTH IN THE PRE VIOUS ASSESSMENT YEAR AS WELL AS IN SUCCEEDING ASSESSMENT YEARS BY THE DEPARTMENT CANNOT SUCCEED AS THERE CAN BE NO PR ESUMPTION THAT IF IN ONE YEAR, THE BUSINESS WITH THE AE IS CA RRIED AT ARMS LENGTH, THEN IT IS CARRIED AT ARMS LENGTH IN OTHER ASSESSMENT I.T.A. 4634/DEL/2010 ASSESSMENT YEAR 2006-07 18 YEARS AS WELL. THE FACTS AND CIRCUMSTANCES OF EACH YEAR ARE TO BE EXAMINED SEPARATELY. WE FIND SUPPORT FOR THIS VIEW FROM THE ORDER OF THE ITAT DELHI BENCH IN ITA NO. 2207/DEL/2005 IN THE CASE OF DCIT VERSUS CARRARO INDIA LTD REPORTED IN 120 TT J 77 WHEREIN THE COORDINATE BENCH HELD THAT THE CONTENTION OF TH E LD. AR THAT SINCE THE TPO ACCEPTED THAT INTERNATIONAL TRANSACTI ONS WERE CARRIED AT ARMS LENGTH IN THE SUBSEQUENT YEARS, TH E INTERNATIONAL TRANSACTIONS FOR THE YEAR UNDER CONSIDERATION SHOUL D ALSO BE ACCEPTED AS SUCH, WAS NOT ACCEPTABLE. ACCORDINGLY, WE ALSO REJECT THE ASSESSEES CONTENTION IN THIS REGARD. 5.01 FURTHER, A PERUSAL OF THE TRANSFER PRICING S TUDY OF THE ASSESSEE SHOWS THAT IT HAS BEEN STATED THEREIN THAT IN RESPECT OF INTERNATIONAL TRANSACTIONS RELATING TO PAYMENT FOR TECHNOLOGY SUPPORT SERVICES, BACK-END PROCESSING AND LOAN PROC ESSING SERVICES, AS PER THE TRANSACTIONAL AND ECONOMIC ANA LYSIS, THESE SERVICES CANNOT BE BENCHMARKED UNDER ANY OF THE MET HODS PRESCRIBED UNDER THE INCOME TAX ACT BECAUSE OF THE FOLLOWING REASONS: CUP METHOD CANNOT BE APPLIED BECAUSE CITIBANK IND IA DOES NOT PROVIDE THE AFORESAID SERVICES TO THIRD PARTIES IN INDIA AND FURTHER CITICORP MARUTI FINANCE LIMITED (CMFL) I.E. THE I.T.A. 4634/DEL/2010 ASSESSMENT YEAR 2006-07 19 ASSESSEE DOES NOT RECEIVE SIMILAR SERVICES FROM ANY THIRD- PARTY. IN ABSENCE OF GROSS PROFIT MARGIN DATA, COST PLUS M ETHOD ALSO CANNOT BE APPLIED. RPM AND PSM COULD ALSO NOT BE APPLIED BECAUSE OF TH E NATURE OF TRANSACTIONS. TNMM WAS ALSO NOT CONSIDERED AS THE MOST APPROPRIAT E METHOD BECAUSE THERE WAS A DECLINE IN THE PROFITABI LITY OF THE ASSESSEE WHICH WAS NOT ON ACCOUNT OF THE PRICIN G OF THE INTERNATIONAL TRANSACTIONS BUT DUE TO EXTERNAL FACT ORS LIKE INCREASED COMPETITION, HIGHER COMMISSION PAYOUT TO THE DEALERS AND BAD DEBTS. 5.02 THE TRANSFER PRICING STUDY WENT ON TO CONCL UDE THAT THE CLIENT, I.E. THE ASSESSEE, WAS SATISFIED THAT THE P AYMENTS MADE TO CITIBANK NA (AE) WAS AT ARMS LENGTH. 5.03 IN RESPECT OF INTERNATIONAL TRANSACTION RE LATING TO PAYMENT OF RENT FOR SHARING OF PREMISES, THE TRANSF ER PRICING REPORT HAS STATED THAT PAYMENT MAY BE CONSIDERED AS REASONABLE BUT HAS REFRAINED FROM MAKING ANY COMMENT OR ANALYS IS AS TO WHETHER THE TRANSACTION SO ENTERED INTO MEETS THE A RMS LENGTH STANDARD OR NOT. I.T.A. 4634/DEL/2010 ASSESSMENT YEAR 2006-07 20 5.04 IT WOULD BE APPROPRIATE TO REFER TO THE LEGAL PROVISIONS AT THIS JUNCTURE. SECTION 92(1) OF THE INCOME TAX ACT, 1961 PROVIDES THAT ANY INCOME ARISING FROM AN INTERNATIONAL TRANS ACTION HAS TO BE COMPUTED HAVING REGARD TO THE ARMS LENGTH PRICE . FURTHER, SECTION 92C PROVIDES THAT THE ARMS LENGTH PRICE IN RELATION TO AN INTERNATIONAL TRANSACTION HAS TO BE DETERMINED BY A NY OF THE PRESCRIBED METHODS, BEING THE MOST APPROPRIATE METH OD, HAVING REGARD TO THE NATURE OF TRANSACTION OR CLASS OF TRA NSACTION OR CLASS OF ASSOCIATED PERSONS OR FUNCTIONS PERFORMED BY SUC H PERSONS OR SUCH OTHER RELEVANT FACTORS AS THE BOARD MAY PRESCR IBE. FURTHER, SECTION 92D OF THE ACT READ WITH RULE 10D OF THE IN COME TAX RULES PROVIDES THAT EVERY PERSON WHO HAS ENTERED IN TO AN INTERNATIONAL TRANSACTION SHALL KEEP AND MAINTAIN S UCH INFORMATION AND DOCUMENT IN RESPECT THEREOF AS MAY BE PRESCRIBED. 5.05 A PERUSAL OF THE TRANSFER PRICING REPORT SHOW S THAT NO EXERCISE/DOCUMENTATION WAS CARRIED OUT FOR THE PURP OSE OF BENCHMARKING OF THE INTERNATIONAL TRANSACTIONS AND THE TRANSFER PRICING REPORT HAS SIMPLY RELIED ON THE ASSESSEES CONTENTION THAT NONE OF THE METHODS FOR THE PURPOSE OF COMPUTATION OF ARMS LENGTH PRICE, AS PRESCRIBED IN THE INCOME TAX ACT, WERE APPLICABLE I.T.A. 4634/DEL/2010 ASSESSMENT YEAR 2006-07 21 IN THE ASSESSEES CASE AND HAVING REGARD TO THE ECO NOMIC AND COMMERCIAL FACTORS AND ALSO KEEPING THE BENEFITS DE RIVED FROM VARIOUS SERVICES IN PERSPECTIVE, THE PAYMENTS MADE TO THE AE WERE AT ARMS LENGTH. THUS, PRIMARILY, IT IS APPARE NT THAT THE ASSESSEE HAS NOT DULY DISCHARGED THE ONUS CAST UPON IT TO EITHER COMPUTE THE ALP ITSELF OR PROVIDE SUCH DOCUMENTATIO N AS ENVISAGED IN SECTION 92D OF THE INCOME TAX ACT SO A S TO ENABLE THE DEPARTMENT TO COMPUTE THE ARMS LENGTH PRICE OF THE IMPUGNED INTERNATIONAL TRANSACTIONS. 5.06 THE ITAT SPECIAL BENCH IN THE CASE OF AZTEC SOFTWARE AND TECHNOLOGY SERVICES LTD VERSUS ACIT REPORTED IN 294 ITR (AT) 32 (SB) HAS LAID DOWN THAT THE ONUS IS ON THE ASSESSEE TO PROVIDE DETAILS FOR THE DETERMINATION OF THE MOST APPROPRIA TE METHOD IN RESPECT OF INTERNATIONAL TRANSACTIONS. THE SPECIAL BENCH HELD AS UNDER (FROM HEAD NOTES) - COMPUTATION OF ARMS LENGTH PRICE IS ESSENTIALLY A FACTUAL EXERCISE. EACH CASE DEPENDS ON ITS OWN PECULIAR FAC TS AND CIRCUMSTANCES. IN CERTAIN CASES WHERE AN IDENTICAL OR ALMOST SIMILAR UNCONTROLLED TRANSACTION IS AVAILABLE FOR C OMPARISON, DETERMINATION OF THE ARMS LENGTH PRICE IS AN EASY TASK. HOWEVER, IT IS NOT SO IN MOST TRANSACTIONS AND RARE LY IS ONE ABLE TO LOCATE AN IDENTICAL TRANSACTION. IN SUCH CA SES THE ARMS LENGTH PRICE IS DETERMINED BY TAKING THE RESU LTS OF A I.T.A. 4634/DEL/2010 ASSESSMENT YEAR 2006-07 22 COMPARABLE TRANSACTION IN COMPARABLE CIRCUMSTANCES AND MAKING SUITABLE ADJUSTMENTS FOR THE DIFFERENCES. THE FUNDAMENTAL REQUIREMENT, IN ANY OF THE METHOD S ELECTED, IS THE SELECTION OF COMPARABLES, FOR BENCHMARKING INTERNATIONAL TRANSACTIONS. THE SELECTION OF A COMP ARABLE SHOULD BE BASED ON FUNCTIONAL, ASSET, AND RISK ANAL YSIS OF BOTH THE PARTIES AND TRANSACTIONS. WHATEVER METHODO LOGY IS CHOSEN FOR THE PURPOSE OF DETERMINATION OF THE ARM S LENGTH PRICE UNDER SECTION 92C, THESE CRITERIA, AS SPECIFI ED IN THE ACT AND THE RULES HAVE TO FORM A BASIS OF JUDGING THE COMPARABILITY. THUS, THERE SHOULD BE A PROPER ANALYSIS OF SUCH TRA NSACTIONS WITH RESPECT TO THE FUNCTIONS PERFORMED, THE ASSETS EMPLOYED AND THE RISK ASSUMED BY THE RESPECTIVE PARTIES WITH REFERENCE TO THE TRANSACTION IN QUESTION. THIS CAN BE TERMED AS FUNCTIONAL, ASSET, RISK ANALYSIS, I.E., FAR ANALYSI S. ALL THE THREE INGREDIENTS OF FAR HAVE A DIRECT BEARING ON T HE PRICING OF PRODUCTS/SERVICES. THE PROVISION ALSO PROVIDES S COPE FOR CARRYING OUT ADJUSTMENTS IN CASES WHERE THERE ARE S OME DIFFERENCES OR VARIATIONS TO MAKE TWO TRANSACTIONS COMMERCIALLY COMPARABLE, FOR THE PURPOSE OF BENCHMA RKING. THE ADJUSTMENTS ARE SUGGESTED TO ACHIEVE THE OBJECT OF TESTING AND TRYING TO SEE IF BOTH THE PARTIES OR/AN D THE TRANSACTIONS ARE SIMILAR OR NEARLY SIMILAR. THE SELECTION OF THE MOST APPROPRIATE METHOD (MAM) IS BASED ON THE NATURE OF TRANSACTION, THE AVAILABILITY OF R ELEVANT DATA AND THE POSSIBILITY OF MAKING APPROPRIATE ADJUSTMEN TS. THE BURDEN IS ON THE ASSESSEE TO SELECT THE MOST APPROP RIATE I.T.A. 4634/DEL/2010 ASSESSMENT YEAR 2006-07 23 METHOD (MAM). THIS DECISION OF SELECTING THE MAM IS TO BE SUBSTANTIATED BY THE ASSESSEE BY AN APPROPRIATE DOCUMENTATION AS WELL AS BY SUBSTANTIATING WHY A PA RTICULAR METHOD IS CONSIDERED BEST SUITED TO THE FACTS AND CIRCUMSTANCES OF THE INTERNATIONAL TRANSACTION AND AS TO HOW IT PROVIDES THE MOST RELIABLE RESULT OF THE ARMS L ENGTH PRICE. THE PURPOSE OF PROVIDING PENAL CONSEQUENCES FOR NOT MAINTAINING OR NOT PRODUCING THE REQUISITE DOCUMENT ATION SECTIONS 271AA AND 271G EMPHASISES LEGISLATIVE INTE NTION TO INSIST UPON AND ENSURE COMPLIANCE BY THE ASSESSEE T O PRODUCE THE NECESSARY INPUTS. THE BURDEN TO ESTABLI SH THAT THE INTERNATIONAL TRANSACTION WAS CARRIED OUT AT TH E ARMS LENGTH PRICE IS ON THE TAXPAYER. HE HAS ALSO TO FUR NISH COMPARABLE TRANSACTIONS, APPLY THE APPROPRIATE METH OD FOR DETERMINATION OF THE ARMS LENGTH PRICE AND JUSTIFY THE SAME BY PRODUCING RELEVANT MATERIAL AND DOCUMENTS BEFORE THE REVENUE AUTHORITIES. IN CASE THE REVENUE AUTHORITIE S ARE NOT SATISFIED WITH THE ARMS LENGTH PRICE AND THE SUPPO RTING DOCUMENTS/INFORMATION FURNISHED BY THE TAXPAYER, TH E AUTHORITIES HAVE AMPLE POWER TO DETERMINE THE SAME AND MAKE SUITABLE ADJUSTMENTS. IN SUCH A SITUATION, THI S RESPONSIBILITY OF DETERMINATION OF THE ARMS LENGTH PRICE IS SHIFTED TO THE REVENUE AUTHORITIES WHO ARE TO DETER MINE THE SAME IN ACCORDANCE WITH THE STATUTORY REGULATIONS. THE TAXPAYER AS A PARTY TO THE TRANSACTION HAS FULL KNOWLEDGE OF THE TRANSACTION CARRIED OUT AND THE PROFIT EARNE D BY HIM. AS A PERSON ASSOCIATED WITH THAT PARTICULAR LINE OF BUSINESS ACTIVITY, THE ASSESSEE IS REASONABLY EXPECTED TO BE NOT ONLY I.T.A. 4634/DEL/2010 ASSESSMENT YEAR 2006-07 24 AWARE ABOUT NUANCES OF THAT BUSINESS, BUT ALSO ABOU T ECONOMIC CONDITIONS AND PECULIAR CIRCUMSTANCES, IF ANY, OF THAT BUSINESS. HE IS LIKELY TO BE KNOW EVEN ABOUT C OMPARABLE UNCONTROLLED TRANSACTIONS. THE FOLLOWING ARE CERTAIN FUNDAMENTAL FEATURES RELA TING TO BURDEN OF PROOF: (I) THE BURDEN TO ESTABLISH THAT AN INTERNATIONAL T RANSACTION IS CARRIED OUT AT THE ARMS LENGTH PRICE, IS ON THE TA XPAYER WHO IS TO DISCLOSE ALL THE RELEVANT INFORMATION AND DOC UMENTS RELATING TO PRICES CHARGED AND PROFIT AND WITH RELA TED AND UNRELATED CUSTOMERS. (II) IF THE ASSESSING OFFICER HAS DETERMINED THE AR MS LENGTH PRICE, HE HAS TO PROVE THAT THE PRICE DETERMINED BY HIM IS RELIABLE AND REASONABLE AND CONFORMS TO THE STATUTO RY REQUIREMENT EXCEPT IN CASE OF FAILURE ON THE PART O F THE TAXPAYER TO COMPLY WITH THE STATUTORY PROVISIONS. (III) WHERE THE TAX AUTHORITIES DETERMINE THE ARMS LENGTH PRICE THE BURDEN OF PROOF ON THE TAX AUTHORITIES IS MUCH REDUCED. ADJUSTMENTS MADE ON ACCOUNT OF THE ARMS LENGTH PRIC E BY THE TAX AUTHORITIES CAN BE DELETED IN APPEAL ONLY IF TH E APPELLATE AUTHORITIES ARE SATISFIED AND RECORD A FINDING THAT THE ARMS LENGTH PRICE SUBMITTED BY THE ASSESSEE IS REASONABL E. MERELY BY FINDING FAULT WITH THE TRANSFER PRICE DETERMINED BY THE REVENUE AUTHORITIES ADDITIONS ON ACCOUNT OF ADJUSTM ENTS CANNOT BE DELETED. THIS IS BECAUSE THE MANDATE OF S ECTION 92 (1) IS THAT IN EVERY CASE OF INTERNATIONAL TRANSACT ION, INCOME HAS TO BE DETERMINED HAVING REGARD TO THE ARMS LEN GTH PRICE. THEREFORE, UNLESS THE ARMS LENGTH PRICE FURNISHED BY THE I.T.A. 4634/DEL/2010 ASSESSMENT YEAR 2006-07 25 TAXPAYER IS SPECIFICALLY ACCEPTED, APPELLATE AUTHOR ITY ON THE BASIS OF MATERIAL AVAILABLE ON RECORD HAS TO DETERM INE THE ARMS LENGTH PRICE ITSELF. SUBJECT TO THE STATUTORY PROVISIONS, THE APPELLATE AUTHORITY CAN DIRECT THE LOWER REVENU E AUTHORITIES TO CARRY OUT THIS EXERCISE IN ACCORDANC E WITH LAW. THERE WOULD BE CASES WHERE THE TAXPAYER DOES NOT CO OPERATE AND FAILS TO FURNISH THE ARMS LENGTH PRICE OR DISC LOSE FULLY INFORMATION, RELEVANT FOR DETERMINATION OF THE ARM S LENGTH PRICE WHEN CALLED UPON TO DO SO BY THE TAX AUTHORIT IES. THE TAXPAYER FAILS TO DISCHARGE THE BURDEN BASED ON THE TAXPAYER. THE TAX AUTHORITIES THEREFORE, HAVE TO RESORT TO TH E PROVISIONS OF SECTION 144 OF THE INCOME TAX ACT AND DETERMINE THE ARMS LENGTH PRICE ON THE BASIS OF MATERIAL COLLECTED OR AVAILABLE ON RECORD. IN SUCH CIRCUMSTANCES, THE ARMS LENGTH PRI CE DETERMINED SHOULD BE ON PARITY WITH THE BEST JUDGEM ENT ASSESSMENT. SUCH ASSESSMENT (DETERMINATION OF THE A RMS LENGTH PRICE) WOULD HAVE SOME APPROXIMATIONS AND ESTIMATIONS. BUT EVEN SUCH APPROXIMATION AND ESTIMA TIONS CANNOT BE ARBITRARY AND CAPRICIOUS. THE ORDER OF TH E TRANSFER PRICING OFFICER IS APPEALABLE AND THEREFORE, IT MUS T BE OBJECTIVE, CONTAIN DETAILED REASONS, CONFORM TO REG ULATIONS AND SHOULD BE SEEN AS JUST AND FAIR. 5.07 THEREFORE, ON THE FACTS OF THE CASE, IT IS OUR CONSIDERED OPINION THAT THE ASSESSEE HAS NOT BEEN ABLE TO DISC HARGE THE ONUS COST UPON IT FOR THE PURPOSE OF PROPER DETERMI NATION OF ARMS LENGTH PRICE OF THE IMPUGNED INTERNATIONAL TR ANSACTIONS. I.T.A. 4634/DEL/2010 ASSESSMENT YEAR 2006-07 26 FOR DETERMINATION OF ALP UNDER THE ACT, THE PROVISI ONS PRESCRIBE THAT THE ASSESSEE HAS TO ADOPT ONE OF THE METHODS L AID DOWN IN SECTION 92C (1) OF THE ACT AND THE ASSESSEE HAS TO SUBSTANTIATE THE PRICE THAT IS PAID TO ITS AE IS AT ARMS LENGTH WITHIN ONE OF THE METHODS SO PRESCRIBED. FURTHER, WE FIND THAT THE TP STUDY OF THE ASSESSEE IS NOT IN TUNE WITH THE PROVISIONS OF SECT ION 92C OF THE ACT AS IT HAS SIMPLY RELIED ON THE CONTENTIONS OF T HE ASSESSEE THAT THE PAYMENTS MADE TO THE AE WERE AT ARMS LENGTH. 5.08 IT IS FURTHER SEEN THAT THE LD. TPO HAS APP LIED THE CUP METHOD WHILE DETERMINING THE ALP OF THE IMPUGNED IN TERNATIONAL TRANSACTIONS AND HAS DETERMINED THE VALUE BY APPLYI NG THE CUP METHOD AT NIL. HOWEVER, THIS APPROACH OF THE LD. TP O IS ALSO NOT AS PER THE MANDATE OF LAW. THE LD. AR IS ABSOLUTELY CORRECT IN CONTENDING THAT WHERE CUP IS CONSIDERED AS THE MOST APPROPRIATE METHOD, THE VALUE CANNOT BE NIL. A PERUSAL OF THE O RDER OF THE LD. TPO SHOWS THAT NO BASIS HAS BEEN GIVEN BY THE LD. T PO TO HOLD THAT THE ALP WAS NIL. ITAT BANGALORE BENCH IN THE C ASE OF FESTO CONTROLS PRIVATE LIMITED VERSUS DCIT REPORTED IN 15 0 ITD 305 HAS HELD THAT THE TPO HAS TO WORK OUT THE ALP OF TH E INTERNATIONAL TRANSACTION BY APPLYING THE METHODS R ECOGNISED UNDER THE ACT. THE BENCH HELD THAT THE TPO IS NOT C OMPETENT TO I.T.A. 4634/DEL/2010 ASSESSMENT YEAR 2006-07 27 HOLD THAT THE EXPENDITURE IN QUESTION HAS NOT BEEN INCURRED BY THE ASSESSEE OR THAT THE ASSESSEE HAS NOT DERIVED A NY BENEFITS FOR THE PAYMENT MADE BY THE ASSESSEE AND, THEREFORE, HE CANNOT CONSIDER THE ALP AS NIL. THEREFORE, IN THE GIVEN CI RCUMSTANCES, WE DEEM IT FIT TO SET ASIDE THE ORDER OF THE HONBLE D RP AND RESTORE THE ISSUE OF DETERMINATION OF ARMS LENGTH PRICE TO THE FILE OF THE TRANSFER PRICING OFFICER. THE TAXPAYER IS DIRECTED TO FURNISH THE ARMS LENGTH PRICE AS MAY BE CALCULATED BY THE TAX PAYER AS PER THE PROVISIONS OF THE ACT AND ALL THE MATERIAL AND INFORMATION/DOCUMENT WHICH THE TAXPAYER IS OBLIGED TO MAINTAIN UNDER RULE 10D OF THE INCOME TAX RULES. THE TPO WIL L ALSO BE AT LIBERTY TO COLLECT INDEPENDENT RELEVANT INFORMATION OF COMPARABLE UNCONTROLLED TRANSACTIONS. THE TPO IS TO DETERMINE THE FRESH ARMS LENGTH PRICE IN LIGHT OF OUR OBSERVATIONS AND IN ACCORDANCE WITH THE REGULATIONS AFTER GIVING A REASONABLE OPPO RTUNITY TO THE ASSESSEE. THUS, GROUND NUMBERS 1, 1.1 AND 1.2 STAND ALLOWED FOR STATISTICAL PURPOSES. 5.1 AS FAR AS GROUND NO. 2 PERTAINING TO LOSS ON SA LE OF REPOSSESSED ASSETS IS CONCERNED, IT IS SEEN THAT TH E SAME IS COVERED IN FAVOUR OF THE ASSESSEE ORDER OF THE ITAT DELHI BENCH FOR ASSESSMENT YEAR 2005-06 WHICH WAS ALSO SUBSEQUE NTLY I.T.A. 4634/DEL/2010 ASSESSMENT YEAR 2006-07 28 AFFIRMED BY THE HONBLE DELHI HIGH COURT VIDE ORDER DATED 09/11/2010 IN ITA 1712/2010 AND ITA 1714/2010. RESP ECTFULLY FOLLOWING THE SAME WE ALLOW GROUND NUMBERS 2, 2.1 A ND 2.2 OF THIS APPEAL. 5.2 AS FAR AS GROUND NO. 3 PERTAINING TO AD HOC DISALLOWANCE ON ACCOUNT OF SALES PROMOTION EXPENSES IS CONCERNED, I T IS SEEN THAT IDENTICAL ISSUE WAS BEFORE THE ITAT DELHI BENCH FOR ASSESSMENT YEAR 2005 06 AND THE ITAT HAD REMITTED THIS ISSUE BACK TO THE FILE OF THE AO TO VERIFY THE CLAIM OF THE ASSESSEE IN RESPECT OF SERVICES RENDERED BY THE AGENTS AND THE PAYMENTS MA DE THEREOF BY THE ASSESSEE. THE ITAT IN ASSESSEES APPEAL FOR AY 05-06 IN GAVE DIRECTIONS WHILE REMITTING THE ISSUE TO THE FI LE OF THE AO THAT IN CASE THE ASSESSEE WAS ABLE TO DEMONSTRATE THAT T HE EXPENDITURE WAS INCURRED TOWARDS SERVICES RENDERED BY THE AGENTS/DEALERS FOR THE BUSINESS OF THE ASSESSEE, TH E AO WOULD ALLOW THE ENTIRE CLAIM OF THE ASSESSEE AND IN CASE THE ASSESSEE WAS UNABLE TO SUBSTANTIATE ITS CLAIM THEN IN THAT E VENTUALITY THE DISALLOWANCE AT THE RATE OF 10%, AS MADE BY THE AO, WOULD REMAIN CONFIRMED. SINCE THE IMPUGNED DISALLOWANCE W AS ON IDENTICAL FACTS, WE DEEM IT FIT TO RESTORE THIS ISS UE TO THE FILE OF THE AO WITH THE SIMILAR DIRECTIONS AS CONTAINED IN PARA 16 OF THE I.T.A. 4634/DEL/2010 ASSESSMENT YEAR 2006-07 29 ORDER OF THE ITAT DELHI BENCH FOR ASSESSMENT YEAR 0 5-06. THEREFORE, GROUND NO. 3 ALSO STANDS ALLOWED FOR STA TISTICAL PURPOSES. 5.3 AS FAR AS GROUND NO. 4 OF THE ASSESSEES APPEAL IS CONCERNED, THIS APPEAL IS ALSO COVERED IN FAVOUR OF THE ASSESSEE BY THE ORDER OF THE ITAT DELHI BENCH IN ASSESSEES OWN CASE FOR AY 2005 06 (SUPRA) WHEREIN THE ASSESSEE WAS ALLOW ED EXTRA DEPRECIATION ON COMPUTER PERIPHERALS/ACCESSORIES IN PARA 7 OF THE TRIBUNALS ORDER WHEREIN THE ITAT HAS FOLLOWED THE JUDGEMENT OF THE HONBLE DELHI HIGH COURT IN THE CASE OF CIT VERSUS BSES YAMUNA PRIVATE LIMITED IN ITA NO. 1267/2010 DECIDED ON 31/08/2010. FOLLOWING THE SAME, WE ALLOW GROUND NUM BERS 4 AND 4.1 OF ASSESSEES APPEAL IN THIS YEAR ALSO. 5.4 GROUND NO. 5 CHALLENGES THE INITIATION OF PENAL TY PROCEEDINGS UNDER SECTION 271(1) (C) OF THE ACT WHI CH IS BEING DISMISSED AS BEING PREMATURE. 5.5 GROUND NO. 6 CHALLENGES THE VIOLATION OF PRINCI PLES OF NATURAL JUSTICE BUT THE LD. AR HAS SUBMITTED THAT T HIS GROUND IS NOT BEING PRESSED. HENCE, THIS GROUND IS DISMISSED AS NOT PRESSED. 6. IN THE FINAL RESULT, THE APPEAL OF THE ASSESSEE STANDS PARTLY I.T.A. 4634/DEL/2010 ASSESSMENT YEAR 2006-07 30 ALLOWED IN TERMS OF OUR OBSERVATIONS CONTAINED IN T HE PRECEDING PARAGRAPHS. ORDER IS PRONOUNCED IN THE OPEN COURT ON 11.05.2017 . SD/- SD/- (N.K. SAINI) (SUDHANSHU SR IVASTAVA) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 11 TH MAY, 2017 GS COPY FORWARDED TO : 1. APPELLANT 2. RESPONDENT 3. CIT(A) 4. CIT 5. DR BY ORDER ASSTT. REGISTRAR