Nortel Networks India Pvt. Ltd., New Delhi V. Addl. CIT, New Delhi

ITA 4924/DEL/2010

• Counselvise Citation: 492420114 RSA 2010
• Duration Of Justice: 1 year(s) 3 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 02-03-2012
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: E
• Next Hearing Date: 04-10-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 10-11-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: RA J TANDON
• Assessee Lawyers: VIKAS JAIN ADVS
• Keywords: Business income; Transfer pricing; Business expenditure; International transaction; Services rendered outside India; Retrospective amendment; Wholly owned subsidiary; Corroborative evidences; Non compliance; Procedural lapse; Revised return
• Section: 92C; 142(1); 139(5); 10B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH E NEW DELHI) BEFORE SHRI G.E. VEERABHADRAPPA, HON'BLE PRESIDENT AND SHRI RAJPAL YADAV: HONBLE JUDICIAL MEMBER ITA NO. 4924/DEL/2010 ASSESSMENT YEAR: 2006-07 NORTEL NETWORKS INDIA PVT. LTD. VS. ADDITIONAL CIT , C-227, GROUND FLOOR, NEAR GARDEN OF RANGE-13, FIVE SENSES, WESTEND MARG, NEW DELHI. PARYAVARAN COMPLEX, NEW DELHI. (PAN: AABCN1424B) (APPELLANT) (RESPONDENT) APPELLANT BY: S/SHRI SALIL KAPOOR & VIKAS JAIN, ADVS. RESPONDENT BY: SHRI RAJ TANDON, CIT(DR) ORDER PER RAJPAL YADAV: JUDICIAL MEMBER THE ASSESSEE IS IN APPEAL BEFORE US AGAINST THE ORD ER OF LEARNED DISPUTE RESOLUTION PENAL DATED 30.08.2010 PASSED UN DER SECTION 144C(5) OF THE INCOME-TAX ACT, 1961 FOR ASSESSMENT YEAR 2006-0 7. THE ASSESSEE HAS TAKEN 14 GROUNDS OF APPEAL WHICH ARE NOT IN CONSONA NCE WITH RULE 8 OF THE ITAT'S RULES, THEY ARE DESCRIPTIVE AND ARGUMENTATIV E IN NATURE. IN GROUND NOS. 1 TO 8, ASSESSEE HAS CHALLENGED THE ADJUSTMENT MADE IN THE PRICE OF INTERNATIONAL TRANSACTION ENTERED BY THE ASSESSEE W ITH ITS ASSOCIATE ENTERPRISES, ON THE RECOMMENDATION OF LEARNED TRANS FER PRICING OFFICER MADE UNDER SEC. 92CA(3) OF THE INCOME-TAX ACT, 1961 . THE ASSESSEE HAS 2 PLEADED THAT LEARNED ASSESSING OFFICER/DISPUTE RESO LUTION PANEL HAS ERRED IN CONFIRMING THE ORDER PASSED UNDER SEC. 92CA(3) OF T HE ACT MAKING AN ADDITION OF RS.49,37,51,430 TO THE TOTAL INCOME OF THE ASSESSEE ON ACCOUNT OF ADJUSTMENT IN THE ARMS LENGTH PRICE OF THE INTERNA TIONAL TRANSACTION ENTERED BY IT WITH ITS ASSOCIATE ENTERPRISES. IN GROUND NOS . 2 TO 8, IT HAS MENTIONED THE DIFFERENT FOLD OF SUBMISSIONS RAISED BY IT BEFO RE THE LEARNED DRP. WE WILL BE DEALING WITH ALL ITS PROPOSITION IN SERIATI M. 2. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSE E COMPANY HAS FILED ITS RETURN OF INCOME ELECTRONICALLY ON 8.3.2007 DECLARI NG AN INCOME OF RS.124,64,07,885. IT HAS FILED ITR-VI ON 22.3.2007. ACCORDING TO THE ASSESSING OFFICER, THE RETURN WAS FILED BEYOND DUE DATE PRESCRIBED UNDER SECTION 139(1) OF THE ACT. HOWEVER, THE RETURN WAS PROCESSED UNDER SECTION 143(1) OF THE ACT ON 22.2.2008 AT THE RETURNED INCO ME. THE CASE OF THE ASSESSEE WAS SELECTED FOR SCRUTINY ASSESSMENT AND A NOTICE UNDER SEC. 143(2) OF THE ACT WAS ISSUED ON 12.10.2007 WHICH WAS DULY SERVED UPON THE ASSESSEE. ASSESSING OFFICER THEREAFTER ISSUED NOTIC ES UNDER SEC. 142(1) AND 143(2) OF THE ACT ON DIFFERENT DATES, WHEREBY HE CA LLED UPON VARIOUS INFORMATION FROM THE ASSESSEE. ACCORDING TO THE ASS ESSING OFFICER, IN COMPLIANCE WITH THE STATUTORY NOTICE, SHRI ASIM MOW AR, CA AND ORS. 3 APPEARED BEFORE HIM ON TIME TO TIME AND SUBMITTED THE DETAILS. THE ASSESSEE M/S. NORTEL NETWORK INDIA PVT. LTD ( HEREINAFTER RE FERRED TO AS NNIPL) IS A WHOLLY OWNED SUBSIDIARY OF NORTEL NETWORK MAURITIUS LTD. (NNML). THE ASSESSEE IS PRIMARILY ENGAGED IN THE PROFESSION OF MARKETING AND AFTER SALES SUPPORTS SERVICES TO NORTEL GROUP. IT IS ALSO ENGAG ED IN PROVIDING INSTALLATION AND COMMISSIONING SERVICES IN RESPECT OF OPTICAL EQ UIPMENTS SUPPLIED TO GAS AUTHORITY OF INDIA BY NORTEL GROUP. ON SCRUTINY OF ACCOUNTS, IT REVEALED TO THE ASSESSING OFFICER THAT ASSESSEE HAD ENTERED INT O INTERNATIONAL TRANSACTIONS WITH ITS ASSOCIATES ENTERPRISES ON SEV EN COUNTS. HE MADE A REFERENCE UNDER SECTION 92-CA(3) OF THE IT ACT, 196 1TO THE LEARNED TRANSFER PRICING OFFICER FOR DETERMINING THE ARMS LENGTH PR ICE OF THE INTERNATIONAL TRANSACTIONS ENTERED BY THE ASSESSEE WITH ITS ASSOC IATES ENTERPRISES. 3. LEARNED TPO ON RECEIPT OF SUCH REFERENCE HAS EX AMINED ALL THE INTERNATIONAL TRANSACTIONS ENTERED BY THE ASSESSEE WITH ITS ASSOCIATE ENTERPRISES. IN HIS ORDER DATED 26.8.2009, LEARNED TPO HAS NARRATED ALL THE TRANSACTIONS IN PARAGRAPH NO.3 ALONG WITH THE METHO D ADOPTED BY THE ASSESSEE FOR DETERMINING THE ARMS LENGTH PRICES AN D VALUE OF SUCH TRANSACTIONS. THEY ARE SEVEN TRANSACTIONS. ON AN AN ALYSIS OF THESE TRANSACTIONS, LEARNED TPO ARRIVED AT A CONCLUSION T HAT NO ADJUSTMENT IS 4 REQUIRED IN THESE TRANSACTIONS EXCEPT ONE I.E. TRAN SACTION IN RESPECT OF IMPORT OF TELE-COMMUNICATION EQUIPMENTS. THE BRIEF FACTS I N RESPECT OF THIS TRANSACTION ARE THAT DURING AUGUST 2004, NNIPL HAD ENTERED INTO A FIXED PRICE TRUNKEY CONTRACT WITH BSNL FOR ESTABLISHING W IRELESS NETWORK IN INDIA FOR BSNL. IN THIS CONTRACT, THE ASSESSEE WAS RESPON SIBLE FOR SUPPLY, INSTALLATION, TESTING AND COMMISSIONING OF GSM BASE D CELLULAR MOBILE NETWORK ACROSS VARIOUS TELE-COMMUNICATION CIRCLES I N INDIA. ACCORDING TO THE ASSESSEE, THE BSNL CONTRACT WAS AWARDED TO NNIP L ON THE COMPETITIVE BIDDING PROCESS. THE ASSESSEE WANTED TO ENTERED IN INDIAN TELECOMMUNICATION MARKET, THEREFORE, IT HAD GIVEN A BID AT A LOWER PRICE SO AS TO SECURE THE BSNL CONTRACT. FOR THE PURPOSE OF SUPPLY TELECOMMUNICATION EQUIPMENTS UNDER THE BSNL CONTRAC T, ASSESSEE IMPORTED TELECOMMUNICATION NETWORKING EQUIPMENT FROM NORTEL GROUP COMPANIES AND TRANSFER THE OWNERSHIP DURING TRANSIT ON HIGH S EAS TO BSNL. IT WAS ALSO EMPHASIZED BY THE ASSESSEE THAT BSNL CONTRACT IS A LOSS MAKING CONTRACT FOR NORTEL GROUP GLOBALLY. THE LOSSES ARE PRIMARILY DRI VEN BY THE EXISTING CONTRACTUAL TERMS NEGOTIATED IN RESPONSE TO THE PRI CING PRESSURE AS A RESULT OF THE COMPETITIVE NATURE OF THE INDIAS TELECOMMUNICA TION MARKET. THE ASSESSEE FURTHER SUBMITTED THAT THE TOTAL VALUE OF THE INTERNATIONAL TRANSACTION RELATED TO BSNL CONTRACT HAVING AN IMPACT ON THE TA XABLE INCOME OF NORTEL 5 INDIA FOR THE RELEVANT ASSESSMENT YEAR WAS ONLY RS. 54,35,71,422. ACCORDING TO IT, THIS IS THE BALANCE AMOUNT AFTER NORTEL GROU P ISSUED CREDIT NOTE TO THE ASSESSEE AGGREGATING TO RS.454,41,21,331 FOR IMPORT FROM OVERSEAS GROUP ENTITIES FOR THE BSNL CONTRACT. IN ADDITION, NORTEL GROUP ALSO AGREED FOR AN ADDITIONAL TRANSFER PRICING ADJUSTMENT OF RS.221,00 ,74,655 IN ORDER TO REIMBURSE NORTEL INDIA FOR THE LOSSES ON THE BSNL C ONTRACT. IN THIS WAY, ASSESSEE HAS ENSURED AN ARMS LENGTH PRICE ON THE C ONTRACT FOR THE FUNCTION PERFORMED IN CONNECTION WITH EXECUTION OF THE BSNL CONTRACT. AS A RESULT OF THE CREDIT NOTE AND ADDITIONAL TRANSFER PRICING ADJ USTMENT, ASSESSEE HAD OFFERED AN ADDITIONAL INCOME OF RS.221,00,74,655 TO TAX IN THE TAX RETURN ON ACCOUNT OF BSNL CONTRACT. 4. THE LEARNED TPO ON AN ANALYSIS OF THIS CONTRACT FOUND THAT ASSESSEE HAS ADOPTED TRANSACTIONAL NET MARGIN METHOD (TNMM) TO ESTABLISH THE ARMS LENGTH PRICE OF ITS INTERNATIONAL TRANSACTION WITH OVERSEAS GROUP OF COMPANIES. IT HAS ADOPTED OPERATING PROFIT OVER OPE RATING REVENUE (OP/OPR) AS THE PROFIT LEVEL INDICATOR (PLI). IN ITS TRANSFE R PRICING ANALYSIS, THE ASSESSEE HAS IDENTIFIED SEVEN COMPARABLES. THE AVER AGE UNADJUSTED MARGIN OF THE SEVEN COMPANIES WORKED BY THE ASSESSEE AS CO MPARABLE IN ITS TP STUDY REPORT, IS AT 1.21%. THIS AVERAGE WAS WORKED OUT ON THE BASIS OF 6 RESULT SHOWN BY THESE COMPANIES IN THE FINANCIAL YE AR ENDED ON 31.3.2004 AND 2005-06. LEARNED TPO FURTHER FOUND THAT IF THE RESULT FOR FINANCIAL YEAR ENDED ON 31.3.2006, IS TAKEN INTO CONSIDERATION THE N THE AVERAGE PLI OF THOSE SEVEN COMPARABLES COME TO 1.83%. LEARNED TPO HAS ACCEPTED THE METHOD OF TNMM ADOPTED BY THE ASSESSEE AS APPROPRIA TE METHOD TO ESTABLISH THE ARMS LENGTH PRICE OF ITS INTERNATION AL TRANSACTION WITH THE ASSOCIATE CONCERN. HOWEVER, WITH REGARD TO THE SEVE N COMPARABLES IDENTIFIED BY THE ASSESSEE FROM THE DATA AVAILABLE ON PROWESS AND CAPITAL LINE, HE FORMED AN OPINION THAT THREE COMPANIES ARE NOT COMP ARABLE. HE OBSERVED THAT THE HCL COMNET IS NOT A COMPARABLE COMPANY, IF AN ANALYSIS IS MADE IN RESPECT OF FUNCTION PERFORMED, ASSETS EMPLOYED AND RISK ASSUMED (FAR). SIMILARLY, HE POINTED OUT THAT SETCOME BROADBAND EQ UIPMENT LTD. IS ALSO NOT A COMPARABLE BECAUSE DATA IN RESPECT OF THIS COMPAN Y ARE NOT AVAILABLE. HE EXCLUDED ARRAYCOM INDIA LTD. ALSO BECAUSE IT HAS BEEN SHOWING LOSSES FROM THE LAST FOUR YEARS. VIDE ORDER SHEET ENTRY DA TED 17.6.2009, HE DIRECTED THE ASSESSEE TO EXPLAIN AS TO WHY SETCOM BROADBAND EQUIPMENT LTD. SHOULD NOT BE REJECTED AS A COMPARABLE SINCE NO DATA SEEMS TO BE AVAILABLE IN THE PUBLIC DOMAIN. HE ALSO SOUGHT EXPLANATION OF THE AS SESSEE FOR EXCLUSION OF ARRAYCOM INDIA LTD. ON THE GROUND THAT THIS CONCERN HAS SHOWN UNUSUAL DIP IN ITS SALES AND IT IS SHOWING PERSISTENT LOSSES. S IMILARLY, HE SOUGHT 7 EXPLANATION OF THE ASSESSEE WITH REGARD TO EXCLUSIO N HCL COMNET & SHYAM TELECOMMUNICATIONS. THE ASSESSEE HAS MADE DETAILED SUBMISSIONS. LEARNED TPO HAS REPRODUCED THE SUBMISSIONS MADE BY THE ASSE SSEE AND THEREAFTER ON AN ANALYSIS OF ALL THE COMPARABLES HE ACCEPTED FOUR COMPARABLES OUT OF THE SEVEN. THE ARITHMETIC MEAN OF THE COMPARABLES WHICH WERE ACCEPTED BY THE ASSESSING OFFICER COMES TO 6.96%. LEARNED TPO HAS R ECOMMENDED THE ADJUSTMENT BY ADOPTING PLI OF 6.96%. THE WORKING MA DE BY HIM IN PARAGRAPH 11 READS AS UNDER: 11. IN THIS CONTEXT, IT ALSO BECOMES IMPORTANT FOR THE ASSESSEE TO SHOW WHERE EACH OF THE COMPARABLES LIES IN ITS BUSI NESS CYCLE IF THE ASSESSEE INSISTS ON THE USE OF MULTIPLE YEAR DATA. IN THIS CASE, NOTHING HAS BEEN BROUGHT ON RECORD TO SHOW WHERE ANY OF THE COMPARABLE LIE IN THEIR MARKET CYCLE AND THEREFORE, A COMPARISON B ECOMES NECESSARY WITH ONLY THOSE COMPANIES WHOSE DATA IS AVAILABLE F OR THE CURRENT YEAR. THE FINAL LIST OF COMPARABLES, BASED ON THE A BOVE DISCUSSION IS AS UNDER: S.NO. COMPARABLES OPERATING PROFITS ON OPERATING REVENUE (%) REMARKS 1 ARRAYCOM INDIA LTD. (18.73%) REJECTED ON ACCOUNT OF PERSISTENT LOSSES 2 GEMINI COMMUNICATION 11.97% ACCEPTED 8 3 HCL COMNET LTD. NC REJECTED, SINCE IT IS NOT COMPARABLE 4 ORG INFORMATICS LTD. 7.65% ACCEPTED 5 SATCO BROADBAND EQUIPMENT NA REJECTED NO DATA AVAILABLE 6 SHYAM TELECOM LTD (2.06%) ACCEPTED 7 SPANCO TELESYSTEMS AND SOLUTIONS LTD. 10.30% ACCEPTED THE ARITHMETIC MEAN OF THE COMPARABLES FINALLY SELE CTED IS 6.06% WHEREAS NNIPL HAS BEEN COMPENSATED BY THE PARENT CO MPANY (NORTEL GROUP) TO ENSURE A 2% MARGIN ON THIS TRANSACTION. 12. THE ALP BASED ON THE ARMS LENGTH ARITHMETIC ME AN EARNED BY THE ASSESSEE IS AS UNDER: (I) OPERATING PROFIT OF THE ASSESSEE @ (AS REFLECTED IN ANN.14) - RS.19,88,92,822/- (II) OPERATING PROFIT DETERMINED AS PER ALP @6.96% RS.69,26,44,252/- (III) DIFFERENCE - RS.49,37,51,430 THE DIFFERENCE BETWEEN THE ARMS LENGTH PRICE, BASE D ON THE OPERATING PROFIT MARGIN OF 6.96% IS BEYOND THE +/-5 % RANGE. THE ASSESSING OFFICER SHALL THEREFORE, ENHANCE THE TOTA L INCOME OF THE ASSESSEE BY RS.49,37,51,430/-. 9 5. ASSESSING OFFICER HAS ACCEPTED THE RECOMMENDATIO NS MADE BY THE LEARNED TPO IN HIS DRAFT ORDER. THE ASSESSEE HAS FI LED OBJECTION BEFORE THE LEARNED DRP, HOWEVER, LEARNED DRP HAS REJECTED ALL THE OBJECTIONS SUBMITTED BY THE ASSESSEE AND ACCEPTED THE RECOMMEN DATIONS MADE BY THE LEARNED TPO. LEARNED DRP HAS DIRECTED THE ASSESSING OFFICER TO FINALIZE THE ASSESSMENT ORDER BY MAKING AN ADJUSTMENT IN THE AL P AS RECOMMENDED BY THE LEARNED TPO. - 6. WITH THE ASSISTANCE OF LEARNED REPRESENTATIVE, W E HAVE GONE THROUGH THE RECORD CAREFULLY. AS OBSERVED EARLIER, WE ARE R EQUIRED TO EXAMINE WHETHER ASSESSEE HAS SHOWN THE TRANSACTION IN RESPE CT OF IMPORT OF TELECOMMUNICATION EQUIPMENTS AT ARMS LENGTH PRICE OR NOT. AS FAR AS THE OTHER SIX INTERNATIONAL TRANSACTIONS WITH THE A.E. ARE CONCERNED, THEY HAVE BEEN ACCEPTED BY THE ASSESSING OFFICER. THE FIRST A REA OF DISPUTE BETWEEN THE REVENUE AND ASSESSEE COULD BE IN RESPECT OF MOST AP PROPRIATE METHOD REQUIRED TO BE ADOPTED FOR DETERMINATION OF ARMS L ENGTH PRICE AS PROVIDED IN SECTION 92C OF THE ACT READ WITH RULE 10B OF THE IN COME-TAX RULES. THE SECTION 92C PROVIDES FIVE METHODS. THE ASSESSEE HAS DISCUSSED ALL THESE FIVE 10 METHODS IN ITS TP STUDY REPORT IN RESPECT OF ALL TH E INTERNATIONAL TRANSACTIONS. ULTIMATELY, IT SELECTED TRANSACTIONAL NET MARGIN ME THOD AS THE MOST APPROPRIATE METHOD IN RESPECT OF INTERNATIONAL TRAN SACTION RELATING TO IMPORT OF TELECOMMUNICATION EQUIPMENTS. IT HAS POINTED OUT THAT THIS METHOD IS LESS EFFECTED BY TRANSACTIONAL DIFFERENCE THAN CUP METH OD OR ANY OTHER METHOD. THIS METHOD IS GENERALLY APPROPRIATE FOR THE TRANSA CTIONS WHERE OTHER METHODS CANNOT BE ADEQUATELY APPLIED. THE METHOD AD OPTED BY THE ASSESSEE HAS BEEN ACCEPTED BY THE TPO ALSO, THEREFORE, IT IS NOT IN THE AREA OF DISPUTE AND WE ARE NOT REQUIRED TO MAKE MUCH DISCUSSION ON THE ISSUE. 7. THE LEARNED COUNSEL FOR THE ASSESSEE IN HIS FIRS T FOLD OF SUBMISSIONS HAS POINTED OUT THAT TPO AND DRP HAVE FAILED TO SPE CIFY THE BASIS UNDER SECTION 92C FOR REJECTING THE TRANSFER PRICING DOCU MENTATION MAINTAINED BY THE ASSESSEE, THEREFORE, THE ORDER OF THE TPO IS WI THOUT JURISDICTION. ON DUE CONSIDERATION OF THIS ARGUMENT AND PERUSAL OF THE O RDER OF THE LEARNED TPO, WE DO NOT FIND ANY SUBSTANCE IN IT, THE ASSESSEE WA S UNABLE TO GIVE ANY SPECIFIC ARGUMENT IN SUPPORT OF THIS SUBMISSION. TP O HAS CONSIDERED THE TRANSFER PRICING STUDY REPORT SUBMITTED BY THE ASSE SSEE AND THEREAFTER PROCEED TO ELIMINATE SOME OF THE COMPARABLES WHICH IN HIS UNDERSTANDING WERE NOT COMPARABLE. THUS, THERE IS NO FORCE IN THE CONTENTIONS OF THE 11 LEARNED COUNSEL FOR THE ASSESSEE THAT THE ORDER OF THE TPO IS WITHOUT JURISDICTION. IN OUR OPINION, BEFORE PROCEEDING TO EVALUATE THE ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTION, THE REPORT SUBMITTED BY THE ASSESSEE WAS CONSIDERED BY THE LEARNED TPO AND IT WAS NOT A CCEPTABLE TO HIM. THE WHOLE OBJECT OF THE REFERENCE TO THE TPO WAS TO DET ERMINE THE ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTION. THE REASONI NG ASSIGNED IN THE ORDER OF THE TPO FOR NOT ACCEPTING THE PLI SHOWN BY THE ASSE SSEE IS THE BASIS FOR REJECTING THE T.P. STUDY REPORT OF THE ASSESSEE. TH US, IT IS JUST THEORETICAL ARGUMENT WITHOUT ANY SUBSTANCE. 8. IN THE NEXT FOLD OF SUBMISSIONS, LEARNED COUNSEL FOR THE ASSESSEE POINTED OUT THAT BSNL CONTRACT WAS A LOSS MAKING CO NTRACT FOR NORTEL GROUP. IT HAS BEEN SHOWING NET OPERATING MARGIN OF 2% WHIC H IS ABOVE THE ARMS LENGTH PRICE IN THIS LINE OF BUSINESS. THIS ISSUE H AS BEEN PLEADED BY THE ASSESSEE IN GROUND NOS.1 TO 4 OF THE GROUNDS OF APP EAL. LEARNED DR ON THE OTHER HAND RELIED UPON THE ORDERS OF THE LEARNED DR P AS WELL AS THE TPO. HE QUESTIONED THE AUTHENTICITY OF THE CLAIM MADE BY THE ASSESSEE. HE POINTED OUT THAT THE ASSESSEE AT HIS OWN HAS SUBMITTED THAT IT IS A LOSS MAKING CONTRACT FOR NORTEL GROUP GLOBALLY. IF THAT BE SO, THEN ASSESSEE OUGHT TO HAVE SUBSTANTIATED THE CLAIM BY COMPLETE DOCUMENTATION. HE FURTHER SUBMITTED 12 THAT NO PRUDENT BUSINESS WOULD CONTINUE WITH A LOSS MAKING CONTRACT YEAR AFTER YEAR AND NO AE WOULD GIVE A CREDIT NOTE OF MO RE THAN A RS.221 CRORES TO THE ASSESSEE. ON DUE CONSIDERATION OF THE SUBMIS SIONS, WE DO NOT FIND ANY MERIT IN THE CONTENTION OF THE LEARNED COUNSEL FOR THE ASSESSEE. THE OBJECT OF TRANSFER PRICE REGULATION IS TO DETERMINE WHETHER A N ASSESSEE HAS SHIFTED THE PROFIT BASE FROM ONE PART TO THE OTHER PART. THE CO NTENTION OF THE ASSESSEE THAT BSNL CONTRACT IS A LOSS MAKING CONTRACT AND NO RTEL GROUP HAS BEEN COMPENSATING IT FROM THE LOSSES INCURRED ON SUCH CO NTRACT BY GIVING CREDIT NOTE WHICH ARE ON AN ARMS LENGTH BASIS. TO OUR MIN D, THERE COULD BE TWO SITUATIONS WHICH OUGHT TO HAVE BEEN ESTABLISHED BY THE ASSESSEE ON THE RECORD. THE FIRST SITUATION IS THAT THE ASSESSEE SH OULD HAVE ESTABLISHED ON THE RECORD WITH DEMONSTRATIVE PROOF, THE EXACT LOSS IT HAS BEEN SUFFERING ON THIS CONTRACT. THIS COULD BE ESTABLISHED BY BRINGING THE RELEVANT DETAILS ON THE RECORD I.E. VALUE OF IMPORTED ARTICLES BY PRODUCING THEIR INVOICES AND HOW THOSE RATES ARE COMPARABLE IN THE OPEN INTERNATIONA L MARKET. THE SECOND SITUATION WOULD BE BY BRINGING THE DETAILS ON THE R ECORD EXHIBITING THE CONTRACT VALUE WITH OTHER CONCERNS INDULGING IN THE SIMILAR FIELD. BY MERELY SAYING THAT IT IS A LOSS MAKING CONTRACT AND NORTEL GROUP IS COMPENSATING THE LOSS BY GIVING CREDIT NOTE AT A OPERATIVE MARGIN OF 2% IS NOT SUFFICIENT. IT IS A SELF-STYLED DECLARATION OF RESULTS. IT HAS TO BE VE RIFIABLE. THE DECLARATION OF 13 THE ASSESSEE OUGHT TO BE CROSS VERIFIABLE WITH THE RELEVANT DETAILS, OTHERWISE IT IS MEANINGLESS AND THE REVENUE AUTHORITIES HAVE RIGHTLY OBSERVED THAT THIS CLAIM OF EARNING 2% OPERATING MARGIN IS OF NO CONSE QUENCE FOR DETERMINING THE ALP OF THE INTERNATIONAL TRANSACTION IN RESPECT OF IMPORT OF TELECOMMUNICATION EQUIPMENTS. THEREFORE, THIS ARGUM ENT IS OF DE VOID OF ANY MERIT, IT IS REJECTED. 9. IN HIS NEXT FOLD OF SUBMISSIONS, LEARNED COUNSEL FOR THE ASSESSEE POINTED OUT THAT LEARNED TPO HAS ERRED IN REJECTING USE OF MULTIPLE YEAR DATA AND HAS ERRED IN USING SINGLE YEAR DATA FOR FINANCI AL YEAR 2005-06. HE POINTED OUT THAT RULE 10D REQUIRED THE ASSESSEE TO KEEP AND MAINTAIN THE INFORMATION AND DOCUMENTATION FOR THE PURPOSE OF TR ANSFER PRICING REGULATION. RULE 10D(4) CONTEMPLATES THAT INFORMATI ON AND DOCUMENTATION SHOULD BE CONTEMPORANEOUS FOR THAT YEAR, IN THE CAS E OF THE ASSESSEE, IT SHOULD BE 31 ST OCTOBER 2006. THE ASSESSEE HAD USED MULTIPLE YEAR DATA BECAUSE ACCORDING TO IT, SINGLE YEAR DATA WOULD NOT ADEQUATELY CAPTURE THE CHARACTERISTIC OF THE TRANSACTION UNDER THE BSNL CO NTRACT, SUCH CONTRACT WAS ENTERED IN EARLIER YEAR WHICH HAS A LIFE FOR A NUMB ER OF YEARS. THEREFORE, ASSESSEE IN ITS TP STUDY REPORT USED THE DATA OF MU LTIPLE YEARS. HE FURTHER SUBMITTED THAT NO DOUBT RULE 10B(4) SPECIFIES THE M OST APPROPRIATE DATA TO 14 BE USED BUT THAT DOES NOT MEAN THAT MULTIPLE YEARS DATA WOULD NOT BE USED. IF IT IS DIFFICULT TO DETERMINE THE TRANSACTION ON THE BASIS OF SINGLE YEAR DATA THEN MULTIPLE YEARS DATA OUGHT TO BE USED. ACCORDIN G TO THE LEARNED COUNSEL FOR THE ASSESSEE, SOME TIMES MULTIPLE YEAR DATA WOU LD BE USEFUL IN PROVIDING INFORMATION ABOUT THE RELEVANT BUSINESS AND PRODUCT LIKE CYCLES OF COMPARABLES. THE EARLIER YEARS DATA MAY SHOW WHETH ER INDEPENDENT ENTERPRISES ENGAGED IN COMPARABLE TRANSACTION WAS E FFECTED BY COMPARABLE ECONOMIC CONDITION IN A COMPARABLE MANNER. LEARNED DR ON THE OTHER HAND, POINTED OUT THAT LEARNED TPO HAS CONSIDERED THIS AS PECT ELABORATELY AND HAS MADE REFERENCE TO THE SPECIAL BENCHS DECISION OF T HE ITAT IN THE CASE OF AZTC. LTD. REPORTED IN 294 ITR (AT) 32. HE ALSO SUB MITTED THAT IN THE CASE OF MENTOGRAPHIC NOIDA VS. DCIT REPORTED IN 109 ITD 101 , THE ITAT AGAIN HELD THAT COMPARABILITY ANALYSIS IS TO BE CONDUCTED ON THE BASIS OF CURRENT YEAR DATA. 10. ON DUE CONSIDERATION OF THE FACTS AND CIRCUMSTA NCES, WE ARE OF THE VIEW THAT RULE 10B(4) USED AN EXPRESSION SHALL WH ICH MAKE IT CLEAR THAT CURRENT YEAR DATA OF UNCONTROLLED TRANSACTION IS TO BE USED FOR THE PURPOSE OF COMPARABILITY, WHILE EXAMINING THE INTERNATIONAL TR ANSACTION WITH A.E. IN THE PROVISO APPENDED TO THIS SECTION THOUGH AN EXCEPTIO N IS PROVIDED WHICH 15 CONTEMPLATES THAT DATA RELATING TO THE PERIOD OF BE ING MORE THAN TWO YEARS PRIOR TO SUCH FINANCIAL YEAR MAY ALSO BE CONSIDERED , IF SUCH DATA REVEALS FACTS WHICH COULD HAVE AN INFORMATION ON THE DETERM INATION OF TRANSFER PRICE IN RELATION TO THE TRANSACTION OF COMPARISON. THE M AIN SECTION USED THE EXPRESSION SHALL WHICH MAKE IT MANDATORY TO FIRST USE THE CURRENT YEAR DATA. IF CERTAIN OTHER CIRCUMSTANCES PUT AN INFLUEN CE ON THE DETERMINATION OF TRANSFER PRICING IN RELATION TO THE TRANSACTION THE N OTHER DATA FOR PERIOD NOT MORE THAN TWO YEARS PRIOR TO SUCH FINANCIAL YEAR MA Y BE USED. THE ITAT IN A LARGE NUMBER OF CASES HAS OBSERVED THAT CURRENT Y EAR DATA HAS TO BE USED. THE LEARNED COUNSEL FOR THE ASSESSEE HAS NOT POINTE D OUT ANY EXCEPTIONAL CIRCUMSTANCES WHICH COULD PERSUADE US TO LOOK FORWA RD ABOUT THE APPLICABILITY OF PROVISO APPENDED TO RULE 10B(4) OF THE INCOME-TAX RULES, 1962. LEARNED TPO AS WELL AS THE LEARNED DRP HAS C ONSIDERED THIS ASPECT AND WE DO NOT FIND ANY ERROR IN THEIR FINDINGS. 11. IN THE NEXT FOLD OF SUBMISSION, IT WAS CONTENDE D BY THE ASSESSEE THAT LEARNED TPO HAS ERRED IN EXCLUDING M/S. ARRAYCOM NE T LTD. FROM THE LIST COMPARABLES. IT WAS POINTED OUT BY THE LEARNED COUN SEL FOR THE ASSESSEE THAT ACCORDING TO THE LEARNED TPO, M/S. ARRAYCOM SHOWING PERSISTENTLY LOSS, THEREFORE, IT DESERVES TO BE EXCLUDED. THE LOSS IS AN INCIDENCE OF BUSINESS 16 AND THAT CANNOT BE A CRITERIA FOR EXCLUDING A COMPA RABLES, IF SUCH AN ENTITY IS OTHERWISE COMES WITHIN THE AMBIT OF COMPARABLES. HE ALSO POINTED OUT THAT AS FAR AS THE FUNCTION PERFORMED AND THE ASSETS EMP LOYED BY THE ASSESSEE AS WELL AS M/S. ARRAYCOM IS CONCERNED, BOTH ARE INTO T HE DISTRIBUTION OF THE EQUIPMENTS AND THE ASSETS EMPLOYED BY THE ENTITY WE RE SIMILAR. THEY ARE EXPOSED TO THE SIMILAR RISK. M/S. NORTEL INDIA PVT. LTD. WAS ASSURED OF A 2% RETURN ON THE BSNL CONTRACT FROM M/S. NORTEL GROUP, THEREFORE, IT WAS BEARING LESSER RISK WHEN COMPARED WITH M/S. ARRAYCO M AND IN SUBSEQUENT YEAR ARRAYCOM HAS SHOWN PROFIT. 12. LEARNED DR ON THE OTHER HAND, POINTED OUT THAT IN THE DIRECTORS REPORT, AVAILABLE AT PAGE 236 OF THE PAPER BOOK, M/ S. ARRAYCOM ITSELF HAS SHOWN LOSSES IN THIS YEAR. ITS BUSINESS HAS BEEN RE DUCED TO A GREAT EXTENT. IN FINANCIAL YEAR 2004-05, THIS CONCERN HAS DOMESTIC R EVENUE OF RS.4568.07 LACS FOR A PERIOD OF 15 MONTHS BUT IN FINANCIAL YEA R 2005-06, ITS REVENUE HAS BEEN REDUCED TO RS.534.82 LACS WHICH IS ALL TIME LO W SINCE FINANCIAL YEAR 2000-01. IT WAS NOT WORKING WITH ITS FULL POTENTIAL ITY AND ALL THESE ASPECTS HAVE BEEN CONSIDERED BY THE LEARNED TPO WHILE EXCLU DING THIS CONCERN FROM THE COMPARABLES. 17 13. WE HAVE DULY CONSIDERED THE RIVAL CONTENTIONS O F THE LEARNED REPRESENTATIVES. THE OBSERVATIONS OF THE LEARNED TP O IN THIS CONNECTION READ AS UNDER: IN FACTS, ARRAYCOM AND SHYAM TELECOM LTD. WERE COM MENTED UPON IN LAST YEARS TP ORDER ALSO SINCE ARRAYCOM WAS A L OSS MAKING CONCERN AND SHYAM TELECOM LTD. WAS NOT COMPARABLE I N ONE OF THE YEARS. THUS, THE PRIMARY ONUS IS ON THE TAXPAYER TO PROVE THAT THE MARGINS OF THE COMPARABLE COMPANIES ARE AFFECTED BY THE BUSINESS CYCLE AND THEREFORE EARLIER YEARS DATA SHOULD ALSO BE TAKEN INTO CONSIDERATION. THE TAXPAYER HAS NOT POINTED OUT EVE N IN A SINGLE CASE THE CIRCUMSTANCES WHICH MAY WARRANT USE OF EARLIER YEARS DATA. THEREFORE, ONLY THE CURRENT YEAR FINANCIAL DATA OF THE ASSESSEE AND THAT OF THE COMPARABLES ARE TAKEN FOR COMPARABILITY ANAL YSIS. WITH RESPECT TO ARRAYCOM INDIA LTD. WHICH HAS BEEN MAKING PERSISTENT LOSSES THE ASSESSEE HAS STATED THAT LOSS MAKING COMPANIES ARE PART AND PARCEL OF ANY INDUSTRY. THE ASSESSEES CONTENTIONS REGARDING LOSS MAKING COMPANIES CANNOT BE ACCEPTED BECAUSE IF A COMPANY CONTINUES TO MAKE LOSSES OVER A PERIOD OF T IME, AS IN THE CASE OF THIS COMPARABLE, THERE IS NO QUESTION OF USING I T SINCE ANY COMPARISON WITH THIS COMPANYS RESULT WOULD RESULT IN AN ABERRATION AND AN ANOMALOUS SITUATION. IT HAS BEEN HELD IN THE RECENT JUDGMENT OF THE HONBLE ITAT IN THE CASE OF M/S. SONY INDIA (P) LTD. VS. DCIT (2008) 114 ITD 448 (DELHI) THAT WHILE A LOSS MAKING COMPARABLE NEED NOT BE REJECTED BY ITSELF BUT IF THERE IS CUMULATIV E EFFECT THEN IT NEEDS 18 TO BE CONSIDERED WHETHER THE COMPARABLES CAN BE ACC EPTED OR NOT. ARRAYCOM INDIA LTD. HAS BEEN MAKING LOSSES SINCE 20 02 AND AS CAN BE SEEN FROM THE DATA SUBMITTED BY THE ASSESSEE ITSELF . THEREFORE, IT IS BEING REJECTED AS A COMPARABLE. 14. THERE IS NO DISPUTE WITH REGARD TO THE PROPOSIT ION THAT A CONCERN WILL NOT LOSE ITS STATUS OF COMPARABILITY, MERELY BECAUS E IT HAS SHOWN LOSSES. THE PROFIT AND LOSSES ARE THE TWO INCIDENCE OF THE BUSI NESS. EVERY VENTURE MAKES EFFORT FOR EARNING THE PROFIT BUT IT IS NOT NECESSA RY THAT IT WILL GET THE PROFIT EVERY TIME. HOWEVER, ON AN ANALYSIS OF THE COMPARAT IVE DETAILS MADE BY THE LEARNED TPO AS WELL AS BY THE LEARNED DRP, WE FIND THAT LEARNED TPO HAS NOT EXCLUDED M/S. ARRAYCOM SIMPLY FOR THE REASONS T HAT IT HAS SHOWN LOSSES. HE HAS EXCLUDED SUCH CONCERN BECAUSE IT HAS BEEN S HOWING PERSISTENT LOSSES. ITS OPERATION HAS ALSO A REDUCING TENDENCY. THE FUNCTION IN TERMS OF VOLUME ALSO ON THE LOWER SIDE THEN THE ASSESSEE. IT IS SETTING OF ALL THESE FACTORS CUMULATIVELY WHICH MAKE THIS CONCERN AS UNC OMPARABLE, THEREFORE, WE DO NOT FIND ANY ERROR IN THE ORDER OF LEARNED DR P FOR EXCLUDING THIS CONCERNED FROM THE COMPARABLES. 15. IN THE NEXT FOLD OF SUBMISSIONS, ASSESSEE HAS P LEADED THAT LEARNED TPO FAILED TO MAKE NECESSARY ADJUSTMENT ON ACCOUNT OF R ISK PROFILE OF THE 19 ASSESSEE VIS--VIS COMPARABLES. ACCORDING TO THE AS SESSEE, M/S. NORTEL INDIA WAS ASSURED A MINIMUM PROFIT OF 2%. THUS, IT BEARS LESS RISK VIS--VIS COMPARABLES. THE ASSESSEE FURTHER CONTENDED THAT CO MPARABLES SELECTED FOR THE ANALYSIS INCLUDE COMPANIES WHICH HAVE FAIRLY DI VERSIFIED AREA OF SPECIALIZATION AND FUNCTIONING IN MARKETING ETC. TH ERE WAS A LARGE RISK TO THOSE COMPANIES IN COMPARISON TO THE ASSESSEE, THER EFORE, RISK ADJUSTMENT OUGHT TO BE MADE BY THE LEARNED TPO. HE POINTED OUT THAT A RISK ADJUSTMENT FOR CREDIT DIFFERENCE OUGHT TO HAVE BEEN MADE BY TH E LEARNED TPO. LEARNED DR ON THE OTHER HAND SUBMITTED THAT NO SUCH PLEA WA S RAISED BY THE ASSESSEE BEFORE THE LEARNED TPO. LEARNED TPO HAS DULY TAKEN COGNIZANCE OF ALL THE OBJECTIONS RAISED BY THE ASSESSEE. HE RELIED UPON T HE ORDER OF THE LEARNED DRP. 16. WE HAVE DULY CONSIDERED THE RIVAL CONTENTIONS A ND GONE THROUGH THE RECORD CAREFULLY. THE ASSESSEE HAS PLACED ON RECORD THE TP STUDY REPORT ON PAGE NOS. 144 TO 235. IN ITS TP STUDY REPORT, IT HA S ANNEXED THE LIST OF COMPARABLES SELECTED BY IT. THE TWO DATA BASE USED BY THE ASSESSEE I.E. PROWESS AND CAPITAL LINE HAVE GIVEN 587 COMPARABLES , WHICH ON APPLICATION OF FILTERS SHORT LISTED TO SEVEN. LEARNED TPO ON AN ANALYSIS OF ALL THESE SEVEN FURTHER ELIMINATED THREE. THE ASSESSEE HAS OBJECTIO N FOR EXCLUSION OF ONE 20 ONLY. IT HAS BEEN OBSERVED TIME AND AGAIN THAT THE RE CANNOT BE ANY STRAIGHT JACKET FORMULA FOR DETERMINING THE ALP FOR INTERNAT IONAL TRANSACTION. IT IS TO BE DETERMINED BY CONSIDERING THE RESULTS SHOWN BY T HE COMPARABLES WHO ARE FUNCTIONING IN INDEPENDENT AND UNCONTROLLED SITUATI ONS. THE ELEMENT OF ADJUSTMENT AND SOME GUESS WORK WOULD ALWAYS BE THER E. WHENEVER WE MAKE ANALYSIS OF THE DATA WITH DIFFERENT ANGLES, RE SULTS WOULD VARY TO SOME EXTENT. IN THE RULES, AN EFFORT HAS BEEN MADE THAT COMPARABLE WHICH ARE NEARLY SIMILAR TO THE ASSESSEE SHOULD BE IDENTIFIED . THE IMPORTANT FACTOR HAVING INFLUENCE ON THE TRANSACTION AND FUNCTIONING OF THE ASSESSEE AS WELL AS COMPARABLE WORKING IN UNCONTROLLED CONDITIONS AR E TO BE TAKEN. THUS, THE VARIOUS FILTERS ARE PROVIDED FOR ELIMINATING THE SU BJECTIVITY IN DETERMINING THE ALP. IN THE PRESENT CASE, LEARNED TPO HAD MADE AN ANALYSIS FROM DIFFERENT ANGLES AND THEREAFTER SELECTED THE COMPAR ABLES WHICH HAS BEEN UPHELD BY THE LEARNED DRP, WE DO NOT SEE ANY REASON TO DISTURB. 17. THE NEXT ISSUE AGITATED BY THE ASSESSEE WITH R EGARD TO DETERMINATION OF ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACT ION WITH A.E. IS THAT LEARNED TPO/AO HAS ERRED IN NOT PROVIDING THE BENEFIT OF 5% IN RESPECT OF THE ARMS LENGTH RANGE AS PROVIDED UNDER THE PROVISO TO SECTI ON 92C(2) OF THE ACT, PRIOR TO ITS SUBSTITUTION BY THE NEW PROVISO BY THE FINANCE ACT, 2009 W.E.F. 21 OCTOBER 1, 2009. THE LEARNED COUNSEL FOR THE ASSESS EE HAS SUBMITTED THAT THE ASSESSEE IS ENTITLED FOR A STANDARD DEDUCTION OF 5% IN THE PLI DETERMINED BY THE LEARNED TPO. HE RELIED UPON THE ORDER OF ITAT, BANGALORE IN THE CASE OF SAP LAB INDIA (P) LTD. RENDERED IN ITA NO.398/BANG/ 08. HE ALSO RELIED UPON THE DECISION OF THE ITAT IN THE CASE OF UE TRADE CO RPORATION INDIA PVT. LTD. VS. ACIT. ON THE OTHER HAND, LEARNED DR SUBMITTED T HAT THE ITAT IN A LARGE NUMBER OF CASES HAS DECLINED SUCH TYPE OF CLAIM BY THE ASSESSEE. HE RELIED UPON THE ORDER OF THE ITAT IN THE CASE OF S.T. MICR O ELECTRONICS ITA NO. 1806/DEL/08. HE ALSO RELIED UPON THE ORDER OF THE H YDERABAD BENCH IN ITA NO.1082/HYD./2010 IN THE CASE OF DCIT VS. M/S. DELO ITTE CONSULTING INDIA PVT. LTD. 18. WE HAVE DULY CONSIDERED THE RIVAL CONTENTIONS A ND GONE THROUGH THE RECORD CAREFULLY. IN THE CASE OF S.T. MICRO ELECTON ICS, ITAT HAS CONSIDERED AN IDENTICAL ISSUE AND MADE THE FOLLOWING OBSERVATI ONS: 44. WITH THE ASSISTANCE OF LEARNED REPRESENTATIVES , WE HAVE GONE THROUGH THE RECORD CAREFULLY. LEARNED CIT(APPEALS) IN ASSESSMENT YEAR 2003-04 HAS EXAMINED THIS ISSUE IN DETAIL. HE OBSERVED THAT IN ORDER TO AVOID HARDSHIPS TO THE ASSESSEES IN THE IN ITIAL YEARS OF IMPLEMENTATION OF THE TP PROVISIONS, THE GOVERNMENT OF INDIA, 22 THROUGH A PRESS NOTE ISSUED BY THE MINISTRY OF FINA NCE ON 22 ND AUGUST 2001 EXPRESSED ITS INTENTION THAT NO ADJUSTMENT COU LD BE MADE IF THE TRANSFER PRICE ADOPTED BY THE ASSESSEE WAS WITHIN T HE BAND OF 5% OF THE ALP DETERMINED BY THE ASSESSING OFFICER. CBDT H AD ISSUED CIRCULAR NO.12 ON 23.8.2001 SPECIFYING THAT ASSESSI NG OFFICER SHALL NOT MAKE ANY ADJUSTMENT TO THE PRICE SHOWN BY THE A SSESSEE IF IT IS WITHIN THE 5% BAND, THE EFFECT OF THE CIRCULAR WAS THAT TRANS FER PRICE SHOWN BY THE ASSESSEE WAS NOT TO BE DISTURBED IF IT WAS UP TO 5% LESS IN CASE OF RECEIPT AND UP TO 5% MORE IN CASE OF OUT GOING. THE RELAXATION EXTENDED BY THIS CIRCULAR WAS IN SUBSTAN CE BROUGHT ON TO THE STATUTE BY THE FINANCE ACT 2002 BY AMENDING THE PROVISO TO SEC. 92C(2) WITH RETROSPECTIVE EFFECT FROM 1.4.2002. IT PROVIDES A TOLERANCE BAND. IT ALSO SUGGESTS THAT THERE WILL BE NO TP ADJ USTMENT IN CASES OF MARGINAL VARIATION UP TO 5% BUT SUBSTANTIAL VARIATION WOULD RESULT IN APPROPRIATE TP ADJUSTMENT. LEARNED CIT(APPEALS) HAS EXPLAINED THE MEANING OF TOLERANCE BAND WHICH READ AS UNDER: WHETHER THERE IS AN INTERNATIONAL TRANSACTION INVO LVING SALE OF A PRODUCT OR EXPORT OF SERVICES, THERE WOULD BE A C REDIT ENTRY IN THE PROFIT & LOSS ACCOUNT. BY ALLOWING A MARGIN OF (-) 5% FOR SUCH A TRANSACTION, A TAXPAYER IS PERMITTED TO HAVE A CREDIT ENTRY WHICH IS NOT BELOW 95% OF THE ALP SO THAT PROFIT FR OM THE TRANSACTION IS NOT UNDERSTATED BEYOND THE TOLERANCE LEVEL OF (-) 5%. WHENEVER THERE IS AN INTERNATIONAL TRANSACTION INVO LVING PURCHASE OF A PRODUCT OR IMPORT OF SERVICES, THERE WOULD BE A 23 DEBIT ENTRY IN THE PROFIT AND LOSS ACCOUNT. BY ALLO WING A MARGIN OF (+) 5% UNDER SUCH A TRANSACTION, A TAXPAYER IS P ERMITTED TO HAVE A DEBIT ENTRY WHICH IS NOT ABOVE 105% OF THE A LP SO THAT PROFIT FROM THE TRANSACTION IS NOT UNDERSTATED BEYO ND THE TOLERANCE LEVEL OF (+) 5%. 11.18.3 THE DECISION RULE CONTAINED IN THE PROVIS O TO THE SEC. 92C(2) OF THE ACT CONTAINING A TOLERANCE BAND IS AK IN TO A SIMILAR DECISION RULE OF CONFIDENCE INTERVAL USED IN THE TH EORY OF STATISTICAL INFERENCE. UNDER THAT THEORY, A 5% LEVEL OF SIGNIFI CANCE WOULD PROVIDE FOR A TOLERANCE BAND CONSISTING OF 95% & 105% OF TH E ARITHMETICAL MEAN AND THESE POINTS ARE KNOWN AS CRITICAL VALUES . THE RULE IS ONE OF ALL OR NOTHING KIND OF A SITUATION. IF A COM PUTED VALUE FALLS WITHIN THE TOLERANCE BAND, A FAVORABLE INFERENCE IS DRAWN. THE DECISION RULE CONTAINED IN THE PROVISO TO SECTION 9 2C(2) OF THE ACT THUS IS A ALL OR NOTHING KIND OF RULE. AFTER AL L IN THE TRANSFER PRICING ANALYSIS, A SAMPLE SET OF COMPARABLES ALONG WITH THE DISTRIBUTION OF PROFITABILITY OF THIS SET IS EXAMIN ED AND AN INFERENCE IS SOUGHT TO BE DRAWN ABOUT THE APPROPRIATENESS OF PRO FITABILITY SHOWN BY A TAXPAYER. THEREFORE, STATISTICAL INFERENCE THE ORY BASED ON SAMPLING IS DIRECTLY APPLICABLE TO THE BENCHMARKING ANALYSIS CARRIED OUT IN THE TRANSFER PRICING ANALYSIS WITH THE HELP OF A SAMPLE SET OF COMPARABLES. THERE IS NO SCOPE FOR ANY STANDARD DE DUCTION UNDER THIS RULE. IN OTHER WORDS, IF THE ALP FALLS OUTSIDE THE TOLERANCE BAND, TP ADJUSTMENT WOULD HAVE TO BE MADE FOR THE DIFFERE NCE BETWEEN THE 24 ALP DETERMINED BY THE A.O. BASED ON THE ARITHMETICA L MEAN OF THE PRICES AND THE PRICE SHOWN BY THE ASSESSEE 45. THE CONTENTION OF THE LEARNED COUNSEL FOR THE A SSESSEE WAS THAT ARITHMETIC MEAN OF THE COMPARABLE PRICE SHOULD BE R EDUCED BY 5% FOR DETERMINING THE ALP. HE POINTED OUT THAT IN 2009, T HE PROVISO APPENDED TO SECTION 92C HAS BEEN AMENDED BUT THIS A MENDMENT WOULD BE APPLICABLE PROSPECTIVELY, BECAUSE THE BASI S OF DETERMINATION OF ALP IN RESPECT OF INTERNATIONAL TRANSACTION GET CHANGED. THIS AMENDMENT EFFECTS IMPOSING A NEW LIABILITY BY TAKIN G THE OPTION AWAY FROM THE TAXPAYERS. THUS, ACCORDING TO THE LEARNED COUNSEL FOR THE ASSESSEE, THE AMENDED PROVISO IS NOT APPLICABLE. ON THE OTHER HAND, LEARNED DR HAS SUBMITTED THAT UNDER THE PROVISO NO STANDARD DEDUCTION HAS BEEN PROVIDED TO THE ASSESSEE. 46. ON DUE CONSIDERATION OF THE FACTS AND CIRCUMSTA NCES AND PERUSAL OF THE PROVISO INTRODUCED IN 2002 AS WELL AS IN 200 9, WE ARE OF THE VIEW THAT THIS TOLERANCE BAND PROVIDED IN THE PROVI SO IS NOT TO BE CONSTRUED AS A STANDARD DEDUCTION. IN THE PRESENT A PPEALS, LEARNED TPO HAS ADOPTED THE ARITHMETIC MEAN OF SEVERAL COMPARAB LES FOR TAKING OUT A PLI WHICH WOULD BE TESTED WITH THE PLI OF THE ASS ESSEE. IF THAT ARITHMETIC MEAN FALLS WITHIN THE RANGE OF ALLEGED T OLERANCE BAND THEN THERE MAY NOT BE ANY ADJUSTMENT BUT IF IT EXCEEDS T HEN ULTIMATE ADJUSTMENT IS NOT REQUIRED TO BE COMPUTED AFTER RED UCING THE ARITHMETIC MEAN BY 5%. THE ACTUAL WORKING IS TO BE TAKEN. LEARNED FIRST APPELLATE AUTHORITY HAS CONSIDERED THIS ASPEC T ELABORATELY IN ASSESSMENT YEAR 2003-04 AND AFTER GOING THROUGH HIS ORDER, WE DO NOT 25 SEE ANY MERIT IN THE GROUND OF APPEAL RAISED BY THE ASSESSEE IN ALL THESE THREE ASSESSMENT YEARS. 19. SIMILAR VIEW HAS BEEN TAKEN BY THE ITAT, DELHI BENCHES IN THE CASE OF CRM SERVICES INDIA. NO DOUBTS, A DIFFERENT OPINI ON HAS ALSO BEEN TAKEN BY THE ITAT IN SOME OF THE CASES REFERRED BY THE LE ARNED COUNSEL FOR THE ASSESSEE. WE HAVE BEEN INFORMED THAT APPEALS ARE PE NDING AGAINST SUCH CONCLUSION BEFORE THE HONBLE HIGH COURT. IN THE CA SE OF S.T. MICRO ELECTRONICS, ONE OF US IS THE AUTHOR I.E. JUDICIAL MEMBER WHEREAS IN THE CASE OF M/S. MARUBENI INDIA (P) LTD. IN ITA NO.809/DEL/0 9, BOTH OF US HAS TAKEN A SIMILAR VIEW. IN VIEW OF THE ABOVE DISCUSSION, WE DO NOT FIND ANY MERIT IN THE CONTENTIONS RAISED BY THE LEARNED COUNSEL FOR T HE ASSESSEE. 20. IN GROUND NO.5, ASSESSEE HAS PLEADED THAT LEARN ED ASSESSING OFFICER HAS ERRED IN NOT RESTRICTING THE TRANSFER PRICING A DJUSTMENT IN PROPORTIONATE TO THE VALUE OF IMPUGNED INTERNATIONAL TRANSACTION WIT H THE A.E. THE BRIEF FACTS OF THE CASE ARE THAT ASSESSEE HAS SHOWN THE VALUE OF INTERNATIONAL TRANSACTION WITH THE A.E. AT RS.54,35,71,422. LEARNED TPO HAS A LSO TAKEN COGNIZANCE OF THIS FIGURE IN PARAGRAPH NO.3 OF THE ORDER PASSED U NDER SEC. 92C(A)(III) OF THE ACT. HE HAS DETERMINED THE PLI AT 6.96%. ACCORDING TO THE TPO, THE ASSESSEE MUST HAVE EARNED THIS MUCH OF THE PROFIT O N THE INTERNATIONAL 26 TRANSACTION IN RESPECT OF IMPORT OF TELECOMMUNICATI ON EQUIPMENTS WITH THE A.E. LEARNED TPO HAS OBSERVED THAT ASSESSEE HAS SH OWN THE OPERATING PROFIT AT RS.19,88,92,822. THIS AMOUNT WAS COMPUTED @ 2% OF THE TOTAL COST. LEARNED TPO HAS COMPUTED THE PROFIT ON THAT V ERY COST FIGURE BY ADOPTING THE RATE OF 6.96% WHICH GAVE AN AMOUNT OF RS.69,26,44,252. HE MADE THE ADDITION OF THE DIFFERENCE AT RS.49,37,51, 430. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE TOTAL VALUE OF THE IMPORTED ITEMS CONSIDERED BY THE TPO IN PARAGRAPH 3 IS RS.54,35,71 ,422. LEARNED TPO OUGHT TO HAVE RESTRICTED THE ADJUSTMENT QUA THE VAL UE OF THE IMPORTED EQUIPMENTS AND NOT ON THE TOTAL COST WHICH BEARS TH E COST OF EQUIPMENTS PROCURED FROM UNRELATED PARTIES. LEARNED DR HAS RAI SED TWO OBJECTIONS. HE SUBMITTED THAT THIS ISSUE WAS NOT RAISED BEFORE THE TPO OR BEFORE THE LEARNED DRP. THIS HAS BEEN RAISED FOR THE FIRST TIME IN THE ITAT. HE FURTHER MADE A REFERENCE TO ANNEXURE 14 AVAILABLE AT PAGE 235 OF T HE PAPER BOOK WHICH IS ANNEXED WITH THE TRANSFER PRICING STUDY REPORT OF T HE ASSESSEE. IN THIS ANNEXURE, ASSESSEE ITSELF HAS WORKED OUT TOTAL EXPE NDITURE OF RS.974,57,48,266 AND SHOWN ALP AT 2% OF THIS FIGURE . ASSESSING OFFICER HAS JUST REPLACED THE RATE OF PLI AND WORKED OUT TH E DIFFERENCE. THERE IS NO ERROR IN THE WORKING OF THE ASSESSING OFFICER. ON D UE CONSIDERATION OF THE FACTS AND CIRCUMSTANCES, WE ARE OF THE VIEW THAT TH IS ISSUE EFFECTS THE 27 TAXABILITY OF THE ASSESSEE. THEREFORE, WE PERMIT TH E ASSESSEE TO RAISE THIS PLEA BEFORE THE ITAT FOR THE FIRST TIME. ACCORDING TO TH E ASSESSEE, IN THE TOTAL EXPENDITURE, CERTAIN COST RELATES TO THE EQUIPMENTS PROCURED DIRECTLY FROM THE UNRELATED PARTIES UPON WHICH NO ADJUSTMENT WILL BE MADE. SINCE SPECIFIC DETAILS ARE NOT AVAILABLE ON THE RECORD, LEARNED TP O TOOK INTO CONSIDERATION THE VALUE OF IMPORTED ITEMS FROM THE A.E. AT RS.54, 35,71,422. WHILE NOTICING THE FACTS. THEREFORE, IN OUR OPINION, ENDS OF JUSTICE WOULD MEET IF WE REMIT THIS ISSUE TO THE FILE OF THE ASSESSING OF FICER FOR READJUDICATION. WE MAKE IT CLEAR THAT WE UPHOLD THE DETERMINATION OF P LI AT 6.96% AS ADOPTED BY THE LEARNED TPO. THE ONLY LIMITED ISSUE UNDER TH IS GROUND, WE ARE REMITTING TO THE ASSESSING OFFICER IS THE QUANTIFIC ATION OF THE ARMS LENGTH PRICE. LEARNED ASSESSING OFFICER SHALL CARRY OUT TH IS EXERCISE AFTER PROVIDING AN OPPORTUNITY OF HEARING TO THE ASSESSEE. ACCORDIN GLY, GROUND NOS. 1 TO 8 ARE REJECTED EXCEPT GROUND NO.5 WHICH IS PARTLY ALL OWED FOR STATISTICAL PURPOSES. 21. GROUND NO.9 IS GENERAL IN NATURE. IN THIS GROUN D, ASSESSEE HAS SUBMITTED THAT LEARNED DRP HAS ERRED IN CONCURRING WITH THE FINDING OF THE LEARNED ASSESSING OFFICER WITHOUT APPRECIATING THE SUBMISSIONS FILED BY THE ASSESSEE. THIS GROUND WAS TAKEN REGARDING CORPORATE ISSUES. IT IS GENERAL IN 28 NATURE AND IT DOES NOT REQUIRE ANY SPECIFIC FINDING TO BE RECORDED, HENCE IT IS REJECTED. 22. IN GROUND NO.10, ASSESSEE HAS PLEADED THAT LEAR NED ASSESSING OFFICER HAS ERRED IN RECOGNIZING EXCESS REVENUE TO THE EXTE NT OF RS.55,46,10,230 ON ACCOUNT OF PROJECT WITH BSNL. WITHOUT PREJUDICE TO THIS GROUND, ASSESSEE HAS FURTHER PLEADED THAT ASSESSING OFFICER HAS ERRE D IN RECOGNIZING REVENUE UNDER THE BSNL CONTRACT WHICH WOULD INCREASE THE PR OFIT MARGIN EVEN THOUGH THE PROFIT MARGIN UNDER THIS CONTRACT HAS AL READY BEEN DETERMINED BY THE LEARNED TPO. AT THE COST OF REPETITION, IT IS OBSERVED THAT ASSESSEE HAD ENTERED INTO A CONTRACT WITH BSNL FOR SUPPLY OF TEL ECOMMUNICATION NETWORK SYSTEM ON A TURNKEY BASIS. UNDER THE CONTRACT, IT WAS RESPONSIBLE FOR PLANNING, ENGINEERING, SUPPLY, INSTALLATION, TESTIN G AND COMMISSIONING OF GSM BASED CELLULAR MOBILE NETWORK ACROSS NORTH EAST AND SOUTHERN TELECOMMUNICATION REGION IN INDIA. THE ASSESSEE HA S RECOGNIZED THE REVENUE UNDER THE PROJECT AS PER PERCENTAGE COMPLETION METH OD. THE ACTUAL COST OF CONTRACT UPTO 31.3.2006 WAS RS.200,322,34,055/-. T HE ASSESSEE HAS ESTIMATED THE REVENUE AT RS.1603,25,61,432/-. IT H AS REDUCED AN AMOUNT OF RS.44,36,24,596/- ON ACCOUNT OF AMC REVENUE. IT HA S FURTHER REDUCED A SUM 29 OF RS.38,09,31,081/- UNDER THE HEAD OTHER REVENUE . ASSESSING OFFICER IN THE DRAFT ASSESSMENT ORDER HAS CALLED FOR THE FOLLO WING INFORMATION :- 1. TO PROVIDE THE PROJECT REPORT WITH BSNL ON THE BASIS OF WHICH TOTAL COST AND REVENUES TO THE PROJECTS WERE RECOGNIZED/P ROJECT WAS AWARDED BY BSNL TO NORTEL. 2. TO GIVE DETAILS OF GROSS BSNL CURRENT YEAR PRO JECT COST SHOWN AT 12,867,518,097/-. ALSO TO GIVE SUPPORTING LEDGER C OPIES. 3. ALSO, TO GIVE NATURE AND BREAKUP OF THE DEFERRED COSTS AND WHY THE SAME HAS BEEN REDUCED FROM COSTS. 4. ALSO TO EXPLAIN ANNEXURE-1 OF SUBMISSION DATED 09.11.2009 HOW THE TOTAL SALES HAVE BEEN DISTRIBUTED - SHOW WORKI NG. 23. IN RESPONSE TO THE QUERY OF THE ASSESSING OFFIC ER, ASSESSEE HAS SUBMITTED CERTAIN DETAILS. HOWEVER, ACCORDING TO T HE ASSESSING OFFICER, THOSE ARE NOT SUFFICIENT. HE REJECTED THE CONTENTI ONS OF THE ASSESSEE BY OBSERVING AS UNDER:- 9.9 HOWEVER, IT WAS SEEN THAT FROM THE TOTAL REVEN UE RECOGNIZABLE THE ASSESSEE COMPANY HAS SOUGHT TO REDUCE THE FOLLOWING :- 30 1. AMC REVENUE REDUCTION 443,624,597 2. REVENUE REDUCTION ON ACCOUNT OF REDUCTION OF REVENUE ON IN EAST ZONE 131,869,433 3. REVENUE REDUCTION ON ACCOUNT OF TOWERS 45,458,38 5 4. REVENUE REDUCTION DUE TO TAX IMPACT FOR NON E1 1V-BOOKED IN Q4 61,056,749 5. REVENUE REDUCTION DUE TO TAX IMPACT FOR NON E1 INV. 87,250,681 6. REVENUE REDUCTION DUE TO TAX IMPACT ON HEPA 10,4 35,743 7. ADDITIONAL TAX DUE TO NON COMPLIANCE OF E1 PROCESS 26,776,059 8. ADDITIONAL SALES TAX ON SALE OF ELECTRICAL SUPPLIES BSNL. 18,084,031 REVENUE RECOGNIZABLE 824,555,678 9.10 THUS, AS CAN BE SEEN FROM THE ABOVE, THE TOTAL REVENUE RECOGNIZABLE WAS TAKEN TO BE DERECOGNIZED TO THE EXTENT OF RS.82 ,455,678/- BY THE ASSESSEE COMPANY FOR COMPUTING THE REVENUE RECOGNIZ ABLE ON A PERCENTAGE COMPLETION METHOD. THUS, AS INDICATED ABOVE PERCEN TAGE COMPLETION OF 84.06% (AS WORKED OUT ABOVE) WAS APPLIED ON A TOTAL ESTIMATED REVENUE FOR BSNL PROJECT OF RS.15,208,005,754/- INSTEAD OF REVE NUE RECOGNIZABLE OF RS.16,032,561,432/- THUS DERECOGNIZING REVENUES TO THE EXTENT OF RS.824,555,678/-. EXCEPT FOR THE NARRATIONS AS IND ICATED ABOVE NO JUSTIFICATION WAS GIVEN BY THE ASSESSEE COMPANY DES PITE REPEATED OPPORTUNITIES OF SUBMITTING ALL DOCUMENTS IN SUPPOR T OF THEIR CONTENTIONS BY 31 REPEATED HEARINGS OF THE CASE U/S 142(1)/143(2) OF THE ACT. BOOKS OF ACCOUNTS WERE ALSO CALLED FOR IN A CD FORM, WHICH W AS ALSO NOT PROVIDED. 9.11 AS INDICATED IN PARA 9.5 ABOVE, THE ASSESSEE C OMPANY WAS SPECIFICALLY ASKED TO PRODUCE ALL DETAILS, LEDGER COPIES, EXPLAN ATIONS AND JUSTIFICATIONS FOR WORKING THE BASIS OF THE TOTAL ESTIMATED REVENUES A ND COST. IN RESPONSE ONLY A MATHEMATICAL WORKING WAS ENCLOSED WITHOUT GIVING JUSTIFICATIONS, LEDGER COPIES, BASIS. NO REASONS WERE GIVEN TO JUSTIFY TH E DERECOGNIZITION OF REVENUES AS INDICATED ABOVE. 9.12 THE ASSESSEE COMPANY WAS BEING ASKED CONTINUOU SLY SINCE QUERY U/S 142(1) DATED 10.07.2009 TO JUSTIFY THE CLAIM OF REV ENUE RECOGNITION ON THE BASIS OF PERCENTAGE COMPLETION METHOD ALONG WITH OT HER ISSUES. REPEATED OPPORTUNITIES WERE GIVEN TO THE ASSESSEE COMPANY BY FIXING CASES FOR HEARING ON 22.07.09, 10.08.2009, 20.08.2009, 03.09.2009, 15 .09.2009, 23.09.2009, 06.10.2009, 08.10.2009, 15.10.2009, 28.10.2009, 09. 11.2009, 18.11.2009 AND THEREAFTER FINAL SHOW CAUSE WAS ISSUED VIDE QUE RY DATED 19.11.2009 FIXING DATED FOR COMPLIANCE ON 23.11.2009. AS SUFF ICIENT OPPORTUNITIES HAVE BEEN PROVIDED TO THE ASSESSEE COMPANY TO SUPPORT IT S CLAIM ON REVENUE RECOGNITION, THE SAME IS DECIDED ON THE BASIS OF TH E MATERIAL BROUGHT ON RECORD BY THE ASSESSEE DURING THE COURSE OF THE ASS ESSMENT. 9.13 AS REGARDS, AMC REVENUE REDUCTION OF RS.443,62 4,597/-, IT WAS CLAIMED THAT SINCE THE SOFTWARE UPGRADES/PATCHES WE RE TO BE PROVIDED POST CONTRACT, REVENUE IN RESPECT OF THE SAME WAS NOT IN CLUDED IN THE ESTIMATED REVENUE UNDER BSNL CONTRACT. THIS ARGUMENT OF THE ASSESSEE IS NOT ACCEPTABLE ON TWO ACCOUNTS: 32 (1) NO COPY OF THE AGREEMENT WITH BSNL WAS PRODUCED DESPITE REPEATED OPPORTUNITIES WHICH COULD SHOW THE VERACITY OF THE CLAIM AND (2) AMC FOR AN INITIAL PERIOD IS ALWAYS IN-BUILT IN TO THE COST AND HENCE ON MATCHING PRINCIPAL NEEDS NECESSARILY TO BE PROVIDED IN THE REVENUES. AS SUCH THE REDUCTION OF AMC REVENUES IS NOT ACCEPTABL E AND HENCE REJECTED. 9.14 SO FAR AS THE OTHER ITEMS WHICH ARE REDUCED FR OM THE REVENUES RECOGNIZABLE IS CONCERNED, NO JUSTIFICATION, DETAIL S, SUPPORTING DOCUMENTS, LEDGER COPIES WERE PROVIDED DESPITE SPECIFICALLY BE ING ASKED FOR ON THESE ISSUES AND REPEATED OPPORTUNITIES PROVIDED DURING T HE COURSE OF ASSESSMENT PROCEEDING. NO BOOKS OF ACCOUNTS AS ASKED FOR VIDE FINAL SHOW CAUSE DATED 19.11.2009 WERE PROVIDED. AS SUCH, THE DE-RECOGNIT ION OF REVENUES TOTALING RS.82,45,55,678/- WAS DISALLOWED UNDER THE CALCULAT ION OF REVENUE TO BE RECOGNIZED UNDER BSNL PROJECT WAS DONE AS UNDER: CALCULATED OF REVENUE TO BE RECOGNIZED UNDER BSNL P ROJECT DESCRIPTION AMOUNT (INR) AS PER ASSESSEE AMOUNT DETERMINED TOTAL ESTIMATED REVENUE FOR BSNL PROJECT (K) 15,208 ,005,754 16,032,561,432 RECOGNIZABLE REVENUE BASED ON % COMPLETION (J*K) = L 12,783,569,472 13476971139 LESS : REVENUE RECOGNIZED TILL LAST YEAR (M) 5,060, 879,020 5,19,96,70,457 REVENUE RECOGNIZED DURING CURRENT YEAR (N=L-M) 7,722,690,452 827,73,00,682 9.15 THUS, REVENUES RECOGNIZED DURING CURRENT YEAR IS WORKED OUT AT RS.827,73,00,682/- AS AGAINST RS.772,26,90,452/- SH OWN BY THE ASSESSEE. 33 THE DIFFERENCE BEING RS.55,46,10,230/- IS ADDED TO THE TOTAL INCOME OF THE ASSESSEE. 24. THE ASSESSEE HAS SUBMITTED THAT A SUM OF RS.44, 36,24,597 REPRESENTS AMC REVENUE WHICH RELATES TO REVENUE FROM POST CONT RACT CUSTOMER SUPPORT TO BSNL, WHICH INCLUDES THE PROVISIONS FOR SOFTWARE UPGRADATION OR PATCHES REQUIRED FOR MAINTENANCE OF THE SYSTEM SUPPLY. AS P ER THE AGREED ARRANGEMENT SUCH UPGRADATION SHALL BE IMPLEMENTED F REE OF COST AT EACH SITE FOR A SEVEN YEARS BY NORTEL INDIA. ACCORDING TO THE ASSESSEE, ASSESSING OFFICER HAS OBSERVED THAT AMC FOR INITIAL PERIOD IS ALWAYS BUILT INTO THE COST AND HENCE MATCHING PRINCIPLES NEED NECESSARILY TO B E PROVIDED IN THE REVENUE. ACCORDING TO THE ASSESSEE, AMC IS A POST C ONTRACT CUSTOMER SUPPORT AND, THEREFORE, AMC COST IS SEPARATELY RECO GNIZED BY NORTEL INDIA RATHER THAN BEING BUILT INTO THE PROJECT COST. BEFO RE LEARNED DRP, IT IS SUBMITTED THAT AMC REVENUE IS A POST CONTRACT CUSTO MERS SUPPORT. IT SHOULD NOT BE INCLUDED FOR COMPUTING REVENUE RECOGNIZABLE UNDER BSNL PROJECT BUT IF THE PROPOSAL MADE BY THE ASSESSING OFFICER IS BE ING ACCEPTED, FOLLOWING THE CONCEPT OF MATCHING REVENUE WITH THE COST THEN EVEN THE COST RELATING TO AMC REVENUE HAVE BEEN DEFERRED BY NORTEL INDIA AND A DEDUCTION SHOULD BE ALLOWED ON ACCOUNT OF DEFERMENT OF SUCH COST. THE L EARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ASSESSEE HAS GIVEN THE BREAK UP OF COST. IT HAS 34 ALSO GIVEN THE ESTIMATED FIGURE AS TO HOW REVENUE H AS BEEN RECOGNIZED ON PROJECT COMPLETION METHOD, SUCH CALCULATIONS HAVE B EEN REPRODUCED BY THE ASSESSING OFFICER IN THE FINAL ASSESSMENT ORDER ON PAGE NOS. 16 & 17 OF THE ASSESSMENT ORDER. HE EMPHASIZED THAT THE LEARNED AS SESSING OFFICER FAILED TO TAKE NOTE OF THE FACT THAT AMC IS A SEPARATE REVENU E AND IT WOULD BE A COST TO THE ASSESSEE WHICH REQUIRED TO BE REDUCED FROM THE PROJECT COST. IT SHOULD NOT BE RECOGNIZED AS REVENUE. LEARNED DR ON THE OTHER H AND POINTED OUT THAT THE ASSESSING OFFICER HAS DIRECTED THE ASSESSEE TO FILE THE AMC CONTRACT BUT ASSESSEE FAILED TO FILE SUCH CONTRACT. IN THE ADVAN CE PURCHASE ORDER, PLACED ON RECORD BY THE ASSESSEE ON PAGE NOS. 360 OF THE P APER BOOK, IT HAS BEEN PROVIDED IN CLAUSE 17 THAT SUPPLIER SHALL ENTER INT O A YEAR WISE COMPREHENSIVE ANNUAL MAINTENANCE CONTRACT FOR THREE YEARS TO BE SIGNED AT THE END OF WARRANTY PERIOD. LEARNED ASSESSING OFFIC ER RESTRAINED THE ASSESSEE FROM EXCLUDING SUCH REVENUE ON THE FAILURE OF ASSESSEE FOR SUBMITTING THE RELEVANT DETAILS. 25. THE NEXT ITEM POINTED OUT BY THE LEARNED COUNSE L FOR THE ASSESSEE FOR EXCLUSION FROM THE REVENUE IS AN AMOUNT OF RS.13,18 ,69,433. HE SUBMITTED THAT THIS REVENUE RELATES TO EQUIPMENT NOT SUPPLIED AND RETURNED BY THE BSNL. THE NEXT ITEM IS OF RS.4,54,58,385. THIS REVE NUE RELATES TO 246 35 TOWERS WHICH WERE CANCELLED BY THE BSNL. THUS ACCOR DING TO THE ASSESSEE, THIS REVENUE NEVER ACCRUED TO THE ASSESSEE AND IT O UGHT NOT BE INCLUDED IN THE ESTIMATED REVENUE, SIMULTANEOUSLY CORRESPONDING COS T OF RS.4,01,36,000 WAS ALSO DEFERRED ON THE PRINCIPLES OF MATCHING COST WI TH THE REVENUE. THE SALES- TAX OF RS.20,36,02,262 WAS BOOKED SEPARATELY BY THE ASSESSEE. HE POINTED OUT ESTIMATED REVENUE IS ARRIVED AT ON THE BASIS OF PO VALUE WHICH INCLUDES SALES-TAX ALSO. SINCE, SALES TAX IS NOT REVENUE IN THE HANDS OF THE ASSESSEE, THE SAME IS TO BE REDUCED TO ARRIVE NET ESTIMATED REVEN UE OF THE ASSESSEE. THE LEARNED COUNSEL FOR THE ASSESSEE FURTHER PLACED ON RECORD COMPUTATION OF PERCENTAGE COMPLETION OF THE CONTRACT AND THE REVEN UE UNDER THIS PROJECT. LEARNED DR ON THE OTHER HAND RELIED UPON THE ORDER OF THE ASSESSING OFFICER. 26. WE HAVE DULY CONSIDERED THE RIVAL CONTENTIONS A ND GONE THROUGH THE RECORD CAREFULLY. THE ASSESSEE HAS MADE REFERENCE T O PAGE NO. 458 OF THE PAPER BOOK WHEREIN DETAILS OF ESTIMATED COST UNDER THIS PROJECT HAS BEEN FILED BY THE ASSESSEE. IN THESE DETAILS, IT HAS POI NTED OUT THE CANCELLATION OF TOWER UNDER THE P.O. REPRESENTING A SUM OF RS.401,3 6,000. ACCORDING TO THE ASSESSEE, THIS FIGURE HAS TOTALLY BEEN IGNORED. SIM ILARLY, ADDITIONAL COST POINTED OUT BY THE ASSESSEE HAS ALSO NOT BEEN GONE INTO. THE LEARNED COUNSEL 36 FOR THE ASSESSEE THEREAFTER MADE REFERENCE TO PAGE NO.465 OF THE PAPER BOOK WHICH EXHIBITS DETAILS OF DEFERRED COST. ON DUE CON SIDERATION OF ALL THESE MATERIAL, WE FIND THAT ASSESSING OFFICER REFUSED TO REDUCE THE REVENUE ALLEGED TO BE REPRESENTING AMC AND OTHER AMOUNTS CL AIMED BY THE ASSESSEE ON THE BASIS THAT ASSESSEE FAILED TO SUBMIT REQUISI TE DETAILS WHICH CAN ENABLE THE ASSESSING OFFICER TO CROSS-VERIFY THIS CLAIM. W E ALSO FIND THAT ASSESSEE HAS FILED DETAILS IN DIFFERENT TABULAR FORM WHICH A RE BASED ON ITS OWN CALCULATION. FOR EXAMPLE, THE MAJOR AMOUNT IT WANTS IT TO EXCLUDE IS AMC VALUE AMOUNTING TO RS.44,36,24,597. THE ASSESSEE HA S NOT PLACED ON RECORD AMC CONTRACT, HOW THAT REVENUE HAS BEEN CALCULATED. LEARNED DRP IN ITS ORDER HAS OBSERVED THAT CERTAIN BASIC DETAILS WERE NOT SUBMITTED BY THE ASSESSEE, HENCE IT IS QUITE DIFFICULT TO WORK OUT C OMPREHENSIVE FIGURE. THE OPERATIVE FORCE OF ASSESSEES ARGUMENT IS TO PERSUA DE THE REVENUE AUTHORITIES TO ACCEPT WHATEVER CLAIM IT IS MAKING. IT IS HIGHLY DEPLORABLE. THEREFORE, IT IS QUITE DIFFICULT FOR US TO RECORD A SPECIFIC FINDING ABOUT EXCLUSION OR INCLUSION OF THE SPECIFIC AMOUNT. WE HAVE GONE THROUGH THE OB JECTIONS OF THE ASSESSEE SUBMITTED BEFORE THE LEARNED DRP UNDER GROUND OF OB JECTION 4, ANNEXURE B- 5. IN THOSE OBJECTIONS, THE ASSESSEE HAS NOWHERE TA KEN THE FIGURE OF RS.13,18,69,433 ON THE GROUND THAT EQUIPMENTS OF TH IS MUCH VALUE WERE RETURNED BACK BY THE BSNL. SIMILAR IS THE CANCELLAT ION OF TOWERS AND ALSO 37 THE SALES-TAX. CONSIDERING THIS ASPECT, WE DEEM IT APPROPRIATE TO SET ASIDE THE ORDER OF THE LEARNED DRP AS WELL AS OF THE ASSESSIN G OFFICER AND REMIT THIS ISSUE TO THE FILE OF THE ASSESSING OFFICER FOR READ JUDICATION. THE ASSESSEE SHALL PROVIDE THE NECESSARY DETAILS AND THE WORKING OF ESTIMATED REVENUE. IT SHALL ALSO PROVIDE THE BASIS OF SUCH WORKING WHICH COULD BE CROSSED VERIFIED LOGICALLY BY THE LEARNED ASSESSING OFFICER OTHERWIS E THIS EXERCISE WOULD BE FUTILE. IT IS ALSO PERTINENT TO NOTE HERE THAT BEFO RE LEARNED DRP ASSESSEE HAS SUBMITTED THAT IT HAS DEFERRED THE AMC COST BUT DID NOT PROVIDED ANY SUPPORTING EVIDENCE HOW IT WAS RECOGNIZED HOW IT WA S DEFERRED. LEARNED ASSESSING OFFICER SHALL DECIDE THE ISSUE AFRESH IN ACCORDANCE WITH LAW WITHOUT GETTING INFLUENCED BY OUR OBSERVATIONS. GRO UND NO.10 IS PARTLY ALLOWED. 27. IN GROUND NO.11, GRIEVANCE OF THE ASSESSEE IS T HAT ASSESSING OFFICER HAS ERRED IN DISALLOWING THE DEDUCTION IN RESPECT O F PROVISIONS FOR WARRANTY AMOUNTING TO RS.14,42,47,994. THE BRIEF FACTS OF TH E CASE ARE THAT THE ASSESSEE COMPANY HAS MADE A PROVISION FOR WARRANTY OF RS.14,42,47,994 IN RELATION TO THE PROJECT UNDERTAKEN BY IT FOR BSNL. THE ASSESSEE HAS DEBITED THE ABOVE AMOUNT IN THE PROFIT AND LOSS ACCOUNT. LE ARNED. ASSESSING OFFICER VIDE ORDER SHEET ENTRY DATED 15.10.2009 DIRECTED TH E ASSESSEE TO JUSTIFY THE 38 STAGE FOR RECOGNITION OF WARRANTY EXPENSES AND TO G IVE ITS WORKING SO AS TO ARRIVE AT THE FIGURE OF PROVISIONS FOR WARRANTY CLA IMED BY IT. IN RESPONSE TO THE QUERY OF THE ASSESSING OFFICER, IT WAS SUBMITTE D BY THE ASSESSEE THAT PROVISIONS FOR WARRANTY HAS BEEN MADE BY IT @ 3.5% OF THE VALUE OF IMPORTED EQUIPMENT FOR BSNL PROJECT. THIS PERCENTAG E HAS BEEN ADOPTED BY THE ASSESSEE ON THE BASIS OF THE RATES EXPERIENCED BY THE NOTEL GROUP COMPANIES IN THE ASIA PACIFIC REGION ON SALE OF SIM ILAR OR SAME- EQUIPMENTS. THUS, ACCORDING TO THE ASSESSEE, IT WAS IN ACCORDANCE WITH STANDARD PRACTICE APPLIED FOR SEVERAL YEARS (SINCE THE LATE 1990) IN THE ASIA PACIFIC REGION FOR THE GSM BUSINESS LINE. ACCORDING TO IT, BSNL WAS THE FIRST BIG GSM CONTRACT FOR NORTEL INDIA, IT WAS PRU DENT FOR THE ASSESSEE TO USE THE WARRANTY PERCENTAGE USED BY NORTEL GROUP FOR TH E OTHER COUNTRIES IN THE ASIA PACIFIC REGION. IT EMPHASIZED THAT PERCENTAGE WAS WORKED OUT ON THE AVERAGE WARRANTY USAGES PATTERN OBSERVED BY NORTEL GROUP COMPANIES IN ASIAN COUNTRIES, NAMELY, PAKISTAN, SINGAPORE AND TH AILAND ETC. THE AVERAGE UTILIZATION RATE IN THE PAST HAS BEEN IN THE RANGE OF 3.3% TO 3.6%. LEARNED ASSESSING OFFICER REQUESTED THE ASSESSEE TO FURNISH COPY OF WARRANTY AGREEMENT WITH THE BSNL AND TO PROVIDE THE DETAILS OF USAGE OF WARRANTY IN CASE OF BSNL PROJECT FOR ALL YEARS. LEARNED ASSESSI NG OFFICER FURTHER 39 OBSERVED THAT VIDE ORDER SHEET ENTRY DATED 9.11.200 9,HE DIRECTED THE ASSESSEE SPECIFICALLY TO PROVIDE FOLLOWING DETAILS: (A) COPY OF WARRANTY AGREEMENT (ALSO ASKED FOR VID E ORDER SHEET DATED 15.10.2009); (B) COST OF GSM EQUIPMENTS SUPPLIED TO BSNL WITH SUPPOR TING BILLS/VOUCHERS (FOR EVIDENCING THE BASIS OF THE SAL ES FIGURE TO BSNL); (C) TO GIVE A COPY OF THE LEDGER ACCOUNT SHOWING COST O F IMPORTED EQUIPMENTS SUPPLIED TO SOUTH ZONE & EAST ZONE; (D) TO GIVE A COPY OF THE SO CALLED EMPIRICAL STUDY OF THE NORTEL GROUP ON THE BASIS OF WHICH 2.5% OF COST OF SALES HAVE BE EN TAKEN AS THE BASIS FOR PROVISION FOR WARRANTY FAILING WHICH SHOW CAUSE WHY NOT THE ENTIRE PROVISION FOR WARRANTY BE DISALLOWED AS BEING MADE WITHOUT ANY SCIENTIFIC BASIS PARTICULARLY IN VIEW O F THE FACT THAT THE INSTALLATION PROJECT WAS NOT COMPLETED DURING THE Y EAR, THE PROJECT WAS NOT FUNCTIONAL, AS SUCH THEY CANNOT BE ANY CLAI M FOR WARRANTY. 28. IN RESPONSE TO THE ABOVE QUERY, THE ASSESSEE HA S SUBMITTED THAT THERE IS NO SEPARATE AGREEMENT ENTERED WITH THE BSNL IN RESP ECT OF WARRANTY. IN THE ADVANCE PURCHASE ORDER (APO), A PROVISION FOR WARRA NTY HAS BEEN MADE AT CLAUSE 8 OF THE AGREEMENT. THUS, WARRANTY LIABILITY IS INCURRED BY THE ASSESSEE AT THE POINT OF SALES TO MAKE GOOD ANY DEF ECT OR DAMAGE THAT MAY OCCUR IN FUTURE DURING THE WARRANTY PERIOD. WITH RE GARD TO THE QUANTIFICATION OF THE WARRANTY, IT WAS POINTED OUT THAT IT HAS BEE N QUANTIFIED @ 3.5% OF THE 40 SALES AND IT IS ON THE BASIS OF ITS EXPERIENCE IN A SIA PACIFIC REGION IN THIS LINE OF BUSINESS. IT WAS FURTHER SUBMITTED THAT WHE N THE EQUIPMENT IS SOLD TO BSNL UNDER WARRANTY, THE LIABILITY IS INCURRED AT T HE POINT OF SALES TO MAKE GOOD ANY DEFECT OR DAMAGE. THUS, IT IS NOT A CONTIN GENT LIABILITY RATHER LIABILITY HAS ACCRUED. LEARNED ASSESSING OFFICER DI D NOT FIND MERIT IN THIS EXPLANATION OF THE ASSESSEE ON THE GROUND THAT IT I S GENERAL IN NATURE, ASSESSEE FAILED TO SUBMIT FULL SUPPORTING EVIDENCE IN SUPPORT OF ITS CLAIM. HENCE, ON 19.11.2009, HE AGAIN ISSUED A NOTICE UNDE R SEC. 142 OF THE INCOME-TAX ACT, 1961. IN THIS NOTICE, HE CALLED FOR THE DETAILS EXHIBITING USAGE OF WARRANTY IN CASE OF BSNL PROJECT FOR ALL Y EARS. HE CALLED FOR THE SO CALLED EMPIRICAL STUDY OF THE NORTEL GROUP DEMONST RATING ITS EXPERIENCE OF WARRANTY EXPENSES AT 3.5% OF COST OF SALES IN THIS AREA. HE ALSO CALLED FOR COST OF GSM EQUIPMENT TO BSNL WITH SUPPORTING BILLS AND VOUCHERS, COPY OF THE LEDGER ACCOUNT SHOWING COST OF IMPORTED EQUI PMENTS SUPPLIED TO SOUTH ZONE AND EAST ZONE. ASSESSING OFFICER THEREAF TER ISSUED A FINAL SHOW- CAUSE NOTICE ON 23 RD NOVEMBER 2009. LEARNED ASSESSING OFFICER HAS REJEC TED THE CLAIM OF ASSESSEE BY OBSERVING AS UNDER: (I) NO COPY OF THE WARRANTY AGREEMENT WITH BSNL WA S FILED. INSTEAD A COPY OF THE ADVANCE PURCHASE ORDER RAISED BY BSNL ON NORTEL INDIA WAS ATTACHED. AS PER THIS DOCUMENT IT WAS STATED THAT THE WARRANTY SHALL BE AS PER SECTION-III CLAUSE-108 SE CTION JV OF THE 41 TENDER DOCUMENT. NO TENDER DOCUMENT WAS FILED. EVEN AS PER THIS APO PARA 8.2 LAID DOWN AS UNDER: THE WARRANTY OF THE STORE EQUIPMENTS SUPPLIED FOR EACH SERVICE AREA SHOULD BE FOR A PERIOD OF MINIMUM 12 M ONTHS FROM THE DATE OF COMMISSIONING OF THE COMPLETE NETWORK IN TH AT SERVICE AREA (TELECOM CIRCLE) AS INDICATED ABOVE, THE WARRANTY PERIOD OF 12 MONTH S WOULD COMMENCE FROM THE DATE OF THE COMMISSIONING OF THE COMPLETE NETWORK IN THAT SERVICE AREA. SINCE, DURING THE SUB JECT ASSESSMENT YEAR SUCH COMMISSIONING DID NOT TAKE PLACE THE WARRANTY CLAIMS COULD NOT HAVE ARISEN DURING THE YEAR. AS SUCH THE PROVISION MADE FOR WARRANTY WAS NOT AS PER THE APO. (II) COPY OF THE SO CALLED EMPIRICAL STUDY OF THE N ORTEL GROUP ON THE BASIS OF WHICH 3.5% OF THE COST OF SALES HAV E BEEN TAKEN AS BASIS FOR THE PROVISION FOR WARRANTY WAS NOT PRO VIDED DESPITE REPEATED OPPORTUNITIES DURING THE COURSE OF THE ASS ESSMENT PROCEEDINGS. IT MAY BE MENTIONED THAT SIMILAR OPPOR TUNITIES WERE PROVIDED TO THE ASSESSEE DURING THE COURSE OF THE ASSESSMENT PROCEEDINGS FOR THE ASSESSMENT YEAR 2005 -06. AS SUCH, IT IS HELD THAT THERE IS NO SUCH REPORT AT AL L AND AS SUCH THE CLAIM AT 3.5% IS WITHOUT ANY BASIS. (III) NO BILLS AND VOUCHERS WERE PRODUCED FOR THE C OST OF GSM EQUIPMENTS TO BSNL. 42 (IV) NO COPIES OF THE LEDGER ACCOUNTS SHOWING COST OF IMPORTED EQUIPMENTS SUPPLIED TO SOUTH ZONE AND EAST ZONE WER E PRODUCED DESPITE SPECIFIC REQUIREMENT. (V) NO WARRANTY EXPENSE WAS ACTUALLY INCURRED DURIN G THE YEAR UNDER CONSIDERATION. 5.8 SINCE THE ASSESSEE COMPANY HAD FAILED TO PRODUCE AN Y WORKING TO JUSTIFY THAT THE PROVISION WAS MADE ON A SCIENTIFIC BASIS AND THAT NO ACTUAL EXPENSES HAD AC TUALLY BEEN INCURRED IN RESPECT OF THE SAME, THE PROVISION FOR WARRANTY TO THE EXTENT OF RS.14,42,47,994 WAS PROPO SED TO BE DISALLOWED IN THE DRAFT ASSESSMENT ORDER. 5.9 THE ASSESSEE FILED ITS OBJECTIONS ON THIS ISSUE BEF ORE THE DRP-II, DELHI VIDE ORDER DATED 30.08.2010, D.R.P.II ALSO OBSERVED THAT THE ASSESSEE FAILED TO FURNISH THE RE LEVANT DOCUMENTS/EVIDENCE/DETAILED WORKING OF THE PROVISIO N FOR WARRANTY EVEN BEFORE THEM. THE ASSESSEE FAILED TO ESTABLISH THAT THE PROVISION HAD BEEN MADE ON A SCI ENTIFIC BASIS AND THAT THE LIABILITY FOR THE WARRANTY HAS A RISEN DURING THE RELEVANT YEAR. IT WAS FURTHER OBSERVED T HAT THE COMMENCEMENT OF THE WARRANTY DEPENDED UPON COMMISSIONING OF COMPLETE NETWORK IN THE TELECOM CIRCLE, WHICH ITSELF WAS AN UNCERTAIN EVENT. THE OBJECTIONS OF THE ASSESSEE WERE ACCORDINGLY REJECTE D. IN 43 DOING SO, D.R.P-II ALSO DISTINGUISHED THE RATIO AS LAID DOWN IN THE HON'BLE DELHI HIGH COURT ORDER IN THE C ASE OF CIT VS. VINITEC CORPORATION PVT. LTD. (2005) 278 ITR 0337 AND THE APEX COURT DECISIONS IN ROTORK CONTROL S INDIA PVT. LTD. (2009 TIOL 64) AND BHARAT EARTH MOV ERS (245 ITR 428) IN THAT BEFORE ALLOWING CLAIM OF THE PROVISION FOR WARRANTY, IT WAS NECESSARY THAT VARIO US CONDITIONS SUCH AS FORMATION OF RELIABLE ESTIMATE O F OBLIGATION AND ARISING OF LIABILITY MUST BE SATISFI ED. 5.10 AS HAS BEEN DISCUSSED IN THE PRECEDING PARAGRAPH, T HE ASSESSEE COMPANY HAS FAILED TO PRODUCE ANY WORKING TO JUSTIFY THAT THE PROVISION WAS MADE ON A SCIENTIFIC BASIS . FURTHER THE FACT THAT THE ASSESSEE COMPANY HAS MADE A PROVISION FOR WARRANTY FOR THE YEAR TO THE EXTENT O F RS.14.42 CRORES AS AGAINST AN ACTUAL INCURRING OF T HE EXPENSE OF NIL AGAINST THE ACCOUNT DURING THE YEAR PROVES THE POINT THAT THE PROVISION MADE IS HIGHLY EXCESSI VE. NO ACTUAL EXPENSES HAVE BEEN ACTUALLY INCURRED BY THE ASSESSEE COMPANY TOWARDS WARRANTY CLAIM DURING THE YEAR AND THE PROVISION MADE HAS NOT BEEN PROVED TO BE MADE ON A SCIENTIFIC BASIS AND IS CERTAINLY EXCESSI VE. IT IS ALSO HELD THAT AS THE PROVISION HAS BEEN MADE ON TH E BSNL SALES AND THE PROJECT WAS NOT COMPLETED DURING THE YEAR, AS SUCH THERE COULD NOT HAVE BEEN ANY CLAIM A GAINST THE WARRANTY. THE ENTIRE PROVISION FOR WARRANTY TO THE EXTENT OF RS.14,42,47,994 IS THEREFORE DISALLOWED A ND ADDED TO THE TAXABLE INCOME OF THE ASSESSEE COMPANY . 44 PENALTY U/S 271(1)(C) OF THE ACT IS ALSO BEING INIT IATED SEPARATELY FOR FILING INACCURATE PARTICULARS AND CONCEALMENT OF INCOME. 29. THE LEARNED COUNSEL FOR THE ASSESSEE WHILE IMPU GNING THE ORDER OF ASSESSING OFFICER CONTENDED THAT NO DOUBT NO SEPARA TE WARRANTY AGREEMENT WAS ENTERED BY THE ASSESSEE WITH BSNL BUT WARRANTY CLAUSE IS AVAILABLE IN THE APO. HE MADE REFERENCE TO CLAUSE 8 OF THE APO A T PAGE 364 WHICH READS AS UNDER: 8. WARRANTY WARRANTY SHALL BE AS PER SECTION-III CLAUSE-10 AND CLAUSE 108 OF SECTION IV OF THE TENDER DOCUMENT. THE WARRANTY OF THE STORES/EQUIPMENT SUPPLIED FOR E ACH SERVICE AREA SHOULD BE FOR A PERIOD OF MINIMUM 12 MONTHS FROM TH E DATE OF COMMISSIONING OF THE COMPLETE NETWORK IN THAT SERVI CE AREA (TELECOM CIRCLE). DURING THE WARRANTY THE SUPPLIER SHALL PERFORM ALL THE FUNCTIONS AS ENUNCIATED UNDER THE AMC FREE OF COST. ALL THE PENA LTY CLAUSES SHALL BE APPLICABLE DURING THE PERIOD OF WARRANTY ALSO IN CA SE OF FAILURE ON PART OF SUPPLIER. REPLACEMENT UNDER WARRANTY CLAUSE SHALL BE MADE BY THE SUPPLIER FREE OF ALL CHARGES AT SITE INCLUDING FREIGHT, INSURANCE AN D OTHER INCIDENTAL CHARGES. 45 30. HE FURTHER SUBMITTED THAT WARRANTY LIABILITY IS INCURRED AT THE POINT OF SALES TO MAKE GOOD ANY DEFECT OR DAMAGE THAT MAY OC CURS IN FUTURE DURING THE WARRANTY PERIOD. ACCORDING TO THE ASSESSEE, REV ENUE PERTAINING TO THE SALES OF EQUIPMENT ARE RECOGNIZED ON THE PERCENTAGE COMPLETION BASIS CORRESPONDING WARRANTY EXPENSES TO THE COST NEEDS T O BE ALLOWED ON THE BASIS OF MATCHING PRINCIPLES. HE RELIED UPON THE DE CISION OF HON'BLE SUPREME COURT IN THE CASE OF ROTORK CONTROLS INDIA PVT. LTD. VS. CIT REPORTED IN 114 ITR 62. HE POINTED OUT THAT IN THIS CASE, HON'BLE SUPREME COURT HAS CONSIDERED A LARGE NUMBER OF CASES ON THI S ISSUER, NAMELY, CALCUTTA COMPANY LTD. VS. CIT REPORTED IN 37 ITR 1, METAL BOX CO. OF INDIA LTD. 73 ITR 53 AND BHARAT EARTH MOVERS VS. CI T, KARNATAKA REPORTED IN 245 ITR 428. HE ALSO RELIED UPON THE ORDERS OF T HE ITAT IN THE CASE OF HERO HONDA MOTORS VS. JCIT REPORTED IN 95 TTJ 782, JCIT VS. SONY INDIA REPORTED IN 4 SOT 30. HE FURTHER SUBMITTED THAT THE ASSESSEE HAS PRODUCED THE DETAILS EXHIBITING THE WARRANTY UTILIZATION FOR THE ASIA PACIFIC REGION FOR THE YEAR 2006 WHICH WAS BROUGHT TO THE NOTICE OF LE ARNED DISPUTE RESOLUTION PANEL ALSO. HE MADE A REFERENCE TO PAGE 359 OF THE PAPER BOOK-2. ON THE OTHER HAND, LEARNED DR RELIED UPON THE ORDER OF THE ASSESSING OFFICER. HE POINTED OUT THAT AS PER APO, THE WARRANTY PERIOD OF 12 MONTHS WOULD COMMENCE FROM THE DATE OF THE COMMISSIONING OF THE COMPLETE NETWORK IN 46 THAT SERVICE AREA. IN THE PRESENT YEAR, SUCH COMMIS SIONING DID NOT TAKE PLACE, THEREFORE, WARRANTY CLAIM COULD NOT HAVE ARISEN DUR ING THE YEAR. THUS, THE PROVISION IS NOT AS PER APO. HE ALSO POINTED OUT TH AT THE LEARNED DISPUTE RESOLUTION PANEL HAS OBSERVED THAT WARRANTY LIABILI TY DEPENDS COMMISSIONING OF THE COMPLETE NETWORK IN THE ENTIRE CIRCLE WHICH ITSELF IS AN UNCERTAIN EVENT. WITH REGARD TO THE ALLEGED EMPIRIC AL STUDY REPORT AVAILABLE AT PAGE 359 OF THE PAPER BOOK IS CONCERNED, HE SUBM ITTED THAT THESE DETAILS DO NOT GOAD ANY AUTHORITY TO DRAW ANY LOGICAL CONCL USION. 31. WE HAVE DULY CONSIDERED THE RIVAL CONTENTIONS A ND GONE THROUGH THE RECORD CAREFULLY. THE ASSESSEE HAS MADE A PROVISION FOR WARRANTY. IT HAS DEBITED THAT PROVISION IN THE P & L ACCOUNT AND CLA IMED THE DEDUCTION. SUCH DEDUCTION CAN BE ALLOWED AS AN BUSINESS EXPENDITURE . IN ORDER TO CLAIM ANY EXPENDITURE, NOT BEING EXPENSES DESCRIBED IN SEC. 3 0 TO 36 AND NOT BEING IN THE NATURE OF CAPITAL EXPENSE OR PERSONAL EXPENSE L AID OUT AND SPEND WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE BUSINESS, ON ES CLAIM HAS TO BE EXAMINED UNDER RESIDUARY PROVISIONS OF SEC. 37 OF T HE ACT. HENCE, IN ORDER TO BE ELIGIBLE FOR AN EXPENSE UNDER THIS SECTION, O NE HAS TO FULFILL THE CONDITIONS, (I) THE EXPENDITURE MUST NOT BE GOVERNE D BY THE PROVISIONS OF SEC. 30 TO 36; (II) EXPENDITURE MUST HAVE BEEN LAID OUT WHOLLY AND 47 EXCLUSIVELY FOR THE PURPOSE OF THE BUSINESS OF THE ASSESSEE; (III) THE EXPENDITURE MUST NOT BE PERSONAL IN NATURE AND (IV) THE EXPENDITURE MUST NOT BE CAPITAL IN NATURE. THE EXPRESSION WHOLLY EMPLO YED IN SECTION 37 REFERS TO THE QUANTUM OF EXPENDITURE WHILE THE WORD EXCLU SIVELY REFERS TO THE MOTIVE, OBJECTIVE AND PURPOSE OF THE EXPENDITURE. H ON'BLE SUPREME COURT IN THE CASE OF ROTORK CONTROLS INDIA PVT. LTD. HAS CON SIDERED THIS ISSUE AND OBSERVED THAT PRESENT VALUE OF A CONTINGENT LIABILI TY, LIKE THE WARRANTY EXPENSE, IF PROPERLY ASCERTAINED AND DISCOUNTED ON ACCRUAL BASIS THEN IT CAN BE AN ITEM OF DEDUCTION UNDER SEC. 37. HONBLE COUR T HAS EXPLAINED THE EXPRESSION WHAT IS A PROVISION. ACCORDING TO THE HONBLE COURT, A PROVISION IS A LIABILITY WHICH CAN BE MEASURED ONLY BY USING A SUBSTANTIAL DEGREE OF ESTIMATION. A PROVISION IS RECOGNIZED WHE N AN ENTERPRISE HAS A PRESENT OBLIGATION AS A RESULT OF PAST EVENT; (B) I T IS PROBABLE THAT AN OUT FLOW OF RESOURCES WILL BE REQUIRED TO SETTLE THE OBLIGAT ION AND (C) A RELIABLE ESTIMATE CAN BE MADE OF THE AMOUNT OF THE OBLIGATIO N. IF THESE CONDITIONS ARE NOT MET, NO PROVISION CAN BE RECOGNIZED. ON AN ANAL YSIS OF A LARGE NUMBER OF JUDGEMENT, HON'BLE SUPREME COURT CONCLUDED THAT IF THE HISTORICAL TREND DEMONSTRATES THAT A LARGE NUMBER OF SOPHISTICATED G OODS WERE BEING MANUFACTURED AND SOLD BY AN ASSESSEE IN THE PAST AN D IN THE PAST IF THE FACTS ESTABLISHED INDICATE THAT DEFECTS EXISTED IN SOME O F THE ITEMS MANUFACTURED 48 AND SOLD, THEN THE PROVISION MADE FOR WARRANTY IN R ESPECT OF THOSE LARGE NUMBER OF SOPHISTICATED GOODS WOULD BE ENTITLED TO DEDUCTION FROM THE GROSS RECEIPTS UNDER SECTION 37 OF THE INCOME-TAX ACT, 19 61. HONBLE COURT FURTHER OBSERVED THAT IT WOULD ALL DEPEND ON THE DATA SYSTE MATICALLY MAINTAINED BY THE ASSESSEE. HON'BLE SUPREME COURT THEREAFTER EXPL AINED THE CONCEPT OF PRODUCT WARRANTY BY GIVING AN EXAMPLE ON PAGE 72 OF THE REPORT. THE DISCUSSION MADE BY THE HONBLE COURT AS UNDER: 13. IN THIS CASE WE ARE CONCERNED WITH PRODUCT WARRANT IES. TO GIVE AN EXAMPLE OF PRODUCT WARRANTIES, A COMPANY DE ALING IN COMPUTERS GIVES WARRANTY FOR A PERIOD OF 36 MONTHS FROM THE DATE OF SUPPLY. THE SAID COMPANY CONSIDERS FOLLOWIN G OPTIONS : ( A ) ACCOUNT FOR WARRANTY EXPENSE IN THE YEAR IN WHICH IT IS INCURRED; ( B ) IT MAKES A PROVISION FOR WARRANTY ONLY WHEN THE CUSTOMER MAKES A CLAIM; AND ( C ) IT PROVIDES FOR WARRANTY AT 2 PER CENT OF TURNOVER OF THE COMPANY BASED ON PAST E XPERIENCE (HISTORICAL TREND). THE FIRST OPTION IS UNSUSTAINAB LE SINCE IT WOULD TANTAMOUNT TO ACCOUNTING FOR WARRANTY EXPENSES ON C ASH BASIS, WHICH IS PROHIBITED BOTH UNDER THE COMPANIES ACT AS WELL AS BY THE ACCOUNTING STANDARDS WHICH REQUIRE ACCRUAL CONC EPT TO BE FOLLOWED. IN THE PRESENT CASE, THE DEPARTMENT IS IN SISTING ON THE FIRST OPTION WHICH, AS STATED ABOVE, IS ERRONEOUS A S IT RULES OUT THE ACCRUAL CONCEPT. THE SECOND OPTION IS ALSO INAP PROPRIATE SINCE IT DOES NOT REFLECT THE EXPECTED WARRANTY COS TS IN RESPECT 49 OF REVENUE ALREADY RECOGNIZED (ACCRUED). IN OTHER W ORDS, IT IS NOT BASED ON MATCHING CONCEPT. UNDER THE MATCHING C ONCEPT, IF REVENUE IS RECOGNIZED THE COST INCURRED TO EARN THA T REVENUE INCLUDING WARRANTY COSTS HAS TO BE FULLY PROVIDED F OR. WHEN VALVE ACTUATORS ARE SOLD AND THE WARRANTY COSTS ARE AN INTEGRAL PART OF THAT SALE PRICE THEN THE APPELLANT HAS TO P ROVIDE FOR SUCH WARRANTY COSTS IN ITS ACCOUNT FOR THE RELEVANT YEAR , OTHERWISE THE MATCHING CONCEPT FAILS. IN SUCH A CASE THE SECOND O PTION IS ALSO INAPPROPRIATE. UNDER THE CIRCUMSTANCES, THE THIRD O PTION IS MOST APPROPRIATE BECAUSE IT FULFILS ACCRUAL CONCEPT AS W ELL AS THE MATCHING CONCEPT. FOR DETERMINING AN APPROPRIATE HI STORICAL TREND, IT IS IMPORTANT THAT THE COMPANY HAS A PROPE R ACCOUNTING SYSTEM FOR CAPTURING RELATIONSHIP BETWEEN THE NATUR E OF THE SALES, THE WARRANTY PROVISIONS MADE AND THE ACTUAL EXPENSES INCURRED AGAINST IT SUBSEQUENTLY. THUS, THE DECISIO N ON THE WARRANTY PROVISION SHOULD BE BASED ON PAST EXPERIEN CE OF THE COMPANY. A DETAILED ASSESSMENT OF THE WARRANTY PROV ISIONING POLICY IS REQUIRED PARTICULARLY IF THE EXPERIENCE S UGGESTS THAT WARRANTY PROVISIONS ARE GENERALLY REVERSED IF THEY REMAINED UNUTILIZED AT THE END OF THE PERIOD PRESCRIBED IN T HE WARRANTY. THEREFORE, THE COMPANY SHOULD SCRUTINIZE THE HISTOR ICAL TREND OF WARRANTY PROVISIONS MADE AND THE ACTUAL EXPENSES IN CURRED AGAINST IT. ON THIS BASIS A SENSIBLE ESTIMATE SHOUL D BE MADE. THE WARRANTY PROVISION FOR THE PRODUCTS SHOULD BE B ASED ON THE ESTIMATE AT YEAR END OF FUTURE WARRANTY EXPENSES. S UCH ESTIMATES NEED REASSESSMENT EVERY YEAR. AS ONE REAC HES CLOSE TO THE END OF THE WARRANTY PERIOD, THE PROBAB ILITY THAT THE 50 WARRANTY EXPENSES WILL BE INCURRED IS CONSIDERABLY REDUCED AND THAT SHOULD BE REFLECTED IN THE ESTIMATION AMOUNT. WHETHER THIS SHOULD BE DONE THROUGH A PRO RATA REVERSAL OR OTHERWISE WOULD REQUIRE ASSESSMENT OF HISTORICAL TREND. IF WARRANTY PROVISIONS ARE BASED ON EXPERIENCE AND HISTORICAL TREND(S) AND IF THE WORKING IS ROBUST THEN THE QUESTION OF REVERSAL IN THE SUBSEQUENT TWO YEARS, IN THE ABOVE EXAMPLE, MAY NOT ARISE IN A SIGNIFICANT WAY. IN OUR VIEW, ON THE FACTS AND CIRC UMSTANCES OF THIS CASE, PROVISION FOR WARRANTY IS RIGHTLY MADE B Y THE APPELLANT-ENTERPRISE BECAUSE IT HAS INCURRED A PRES ENT OBLIGATION AS A RESULT OF PAST EVENTS. THERE IS ALS O AN OUTFLOW OF RESOURCES. A RELIABLE ESTIMATE OF THE OBLIGATION WA S ALSO POSSIBLE. THEREFORE, THE APPELLANT HAS INCURRED A L IABILITY, ON THE FACTS AND CIRCUMSTANCES OF THIS CASE, DURING THE RE LEVANT ASSESSMENT YEAR WHICH WAS ENTITLED TO DEDUCTION UND ER SECTION 37 OF THE 1961 ACT. THEREFORE, ALL THE THREE CONDIT IONS FOR RECOGNIZING A LIABILITY FOR THE PURPOSES OF PROVISI ONING STANDS SATISFIED IN THIS CASE. IT IS IMPORTANT TO NOTE THA T THERE ARE FOUR IMPORTANT ASPECTS OF PROVISIONING. THEY ARE - PROVI SIONING WHICH RELATES TO PRESENT OBLIGATION, IT ARISES OUT OF OBL IGATING EVENTS, IT INVOLVES OUTFLOW OF RESOURCES AND LASTLY IT INVOLVE S RELIABLE ESTIMATION OF OBLIGATION. KEEPING IN MIND ALL THE F OUR ASPECTS, WE ARE OF THE VIEW THAT THE HIGH COURT SHOULD NOT T O HAVE INTERFERED WITH THE DECISION OF THE TRIBUNAL IN THI S CASE. 51 32. IN THE LIGHT OF HON'BLE SUPREME COURTS DECISIO N, LET US EXAMINE THE FACTS OF THE PRESENT CASE. ACCORDING TO THE ASSESSE E, IT IS IMPORTING TELECOMMUNICATION EQUIPMENTS MANUFACTURED BY ITS AS SOCIATE ENTERPRISES. THESE EQUIPMENTS ARE COMMISSIONED BY THE ASSESSEE. IN THE ADVANCE PURCHASE ORDER, A CONDITION FOR PROVIDING WARRANTY AFTER COMMISSIONING THESE EQUIPMENTS HAS BEEN PROVIDED IN CLAUSE 8, WHI CH WE HAVE NOTICED IN PARAGRAPH 29 OF THIS ORDER. FROM PERUSAL OF CLAUSE 8, IT WOULD REVEAL THAT POSSIBILITY OF DAMAGE AND DEFECTS IN THE GOODS SUPP LIED BY THE ASSESSEE CANNOT BE RULED OUT. THE ASSESSEE IS BOUND TO MAKE UP THE DAMAGE BY REPLACEMENT ETC. ACCORDING TO THE REVENUE, IT IS CO NTINGENT LIABILITY, BECAUSE THE COMMISSIONING OF THE TELECOMMUNICATION NETWORK IS UNCERTAIN. ON THE OTHER HAND, STAND OF THE ASSESSEE IS THAT SINCE REV ENUE IS BEING RECOGNIZED ON PERCENTAGE COMPLETION OF THE CONTRACT, THE EXPENSES IN THE SHAPE OF OUTFLOW OF RESOURCES HAS TO BE ALLOWED UNDER THE MATCHING P RINCIPLES OF ACCOUNTANCY. ASSESSING OFFICER HAS DISALLOWED THE CLAIM OF ASSES SEE ON THE GROUND IT FAILED TO PRODUCE CONCERNED DATA WHICH CAN ENABLE T HE ASSESSING OFFICER TO VERIFY ITS CLAIM LOGICALLY, HOW IT HAS MADE THE PRO VISIONS FOR WARRANTY EXPENSES. THE ASSESSEE FAILED TO PROVIDE ALLEGED EM PIRICAL STUDY REPORT OF ASIA PACIFIC REGION. IT IS HARPING UPON THE DETAILS PLACED AT PAGE 359 OF THE PAPER BOOK-II WHICH WAS FILED AS ANNEXURE 3 BEFORE THE LOWER AUTHORITIES. 52 ON GOING THROUGH THESE DETAILS, WE FIND THAT ASSESS EE HAS SUBMITTED THE COST OF SALES IN US $ AND USAGE IN QUARTER 2, QUARTER 3 AND QUARTER 4 OF 2006. IT POINTED OUT THAT USAGE RATE IS 3.3%, 3.6% AND 3.3% IN THESE THREE QUARTERS. BUT THESE DETAILS CANNOT GOAD ANY AUTHORITY TO REAC H ANY CONCLUSION I.E. THE BASIS OF THIS CLAIM THAT HAS TO BE POINTED OUT BY T HE ASSESSEE. THESE INFORMATION ARE NEITHER HERE NOR THERE. IT IS SELF- STYLED DECLARATION AS IS APPEARING IN THE PROVISIONS FOR THE WARRANTY. WHAT IS THE BASIS FOR THESE DETAILS IS MISSING. THE SYSTEMATIC DATA BASED ON PA ST EXPERIENCE OUGHT TO HAVE BEEN FILED BY THE ASSESSEE IN SUPPORT OF PROVI SION MADE BY IT. 33. SINCE WE HAVE ALREADY SET ASIDE TWO ISSUES TO T HE FILE OF THE ASSESSING OFFICER FOR READJUDICATION BECAUSE COMPLETE INFORMA TION ARE NOT AVAILABLE ON THE RECORD. WE DEEM IT APPROPRIATE TO SET ASIDE THI S ISSUE ALSO TO THE FILE OF THE ASSESSING OFFICER FOR READJUDICATION BECAUSE IT MIGHT BE NECESSARY FOR THE ASSESSEE TO MAKE A PROVISION FOR WARRANTY AS PE R CLAUSE 8 OF THE APO BUT IT IS THE DUTY OF THE ASSESSEE TO JUSTIFY THAT CLAI M ON THE BASIS OF DATA SYSTEMATICALLY MAINTAINED BY IT, WHICH SUGGESTS THA T THE ALLEGED CONTINGENT LIABILITY HAS BEEN WORKED OUT ON THE BASIS OF PAST EXPERIENCE AND IT IS AKIN TO A REAL EVENT. THEREFORE, WE ALLOW THIS GROUND OF AP PEAL FOR STATISTICAL PURPOSES AND REMIT THE ISSUE TO THE FILE OF THE ASS ESSING OFFICER. THE 53 ASSESSEE SHALL SUBMIT REQUISITE DETAILS AND THE ISS UE WILL BE ADJUDICATED IN THE LIGHT OF HON'BLE SUPREME COURTS DECISION IN THE CA SE OF ROTORK CONTROLS INDIA PVT. LTD.(SUPRA). 34. GROUND NOS. 12 AND 13 ARE INTER-CONNECTED WITH EACH OTHER. THEY READ AS UNDER: 12. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED A.O. HAS ERRED IN NOT ALLOWING DEDUCTION FO R EXPENSES OF RS.12,493,042 WHICH WERE CLAIMED BY THE APPELLANT D URING THE COURSE OF ASSESSMENT PROCEEDINGS. 13. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED A.O. HAS ERRED IN NOT ALLOWING DEDUCTION FO R EXPENSES OF RS.130,932,301 WHICH WERE ERRONEOUSLY NOT CHARGED T O PROFIT AND LOSS ACCOUNT FOR SUBJECT ASSESSMENT YEAR AND WERE HENCE CLAIMED BY THE APPELLANT DURING THE COURSE OF ASSESSMENT PROCEEDIN GS. 35. THE BRIEF FACTS IN RESPECT OF THESE GROUNDS ARE THAT ASSESSEE HAD CLAIMED A DEDUCTION FOR EXPENSES AMOUNTING TO RS.40 0,96,607 UNDER THE HEAD PRIOR PERIOD EXPENSES. THIS CLAIM WAS MADE I N THE FINANCIAL STATEMENT ON THE GROUND THAT THESE EXPENSES PERTAIN ED TO ASSESSMENT YEAR 2005-06 BUT HAD ERRONEOUSLY NOT BEING ACCOUNTED FOR IN THE FINANCIAL STATEMENT FOR ASSESSMENT YEAR 2005-06. ACCORDING TO THE ASSESSEE, THIS ASPECT WAS DULY VERIFIED DURING THE COURSE OF ASSES SMENT PROCEEDINGS FOR 54 ASSESSMENT YEAR 2005-06. OUT OF THESE TOTAL EXPENSE S OF RS.400,96,607, TDS ON THE EXPENSES OF 124,93,042 WAS REQUIRED TO BE DE DUCTED WHICH ACCORDING TO THE ASSESSEE WAS DULY DEDUCTED AND DEPOSITED BY THE ASSESSEE DURING THE FINANCIAL YEAR RELEVANT TO ASSESSMENT YEAR 2006-07. IT CLAIMED THAT IN ACCORDANCE WITH SEC. 40(A)(IA), THE DEDUCTION OF TH IS AMOUNT IS TO BE CLAIMED IN THE YEAR IN WHICH TDS WAS PAID. THE ASSESSEE DID NOT DISPUTE WITH REGARD TO DISALLOWANCE ITS CLAIM OF BALANCE AMOUNT OF RS.2 76,03,565. THE CLAIM WAS MADE BY THE ASSESSEE VIDE LETTER DATED MARCH 28 , 2008 DURING THE ASSESSMENT PROCEEDINGS. ASSESSING OFFICER HAS REJEC TED THE CLAIM OF ASSESSEE ON THE GROUND THAT THIS WAS NOT MADE IN THE RETURN FILED UNDER SEC. 139(1) OR IN THE REVISED RETURN UNDER SEC. 139(5) OF THE ACT. LEARNED ASSESSING OFFICER MADE REFERENCE TO THE JUDGMENT OF HON'BLE SUPREME C OURT IN THE CASE OF GEOTZE INDIA LTD. VS. CIT REPORTED IN 284 ITR 0323. THIS ISSUE HAS BEEN DISPUTED BY THE ASSESSEE IN GROUND NO.12. 36. THE NEXT ITEM IS OF RS.1309,32,301. THE FACTS I N RESPECT OF THIS ITEM ARE THAT ASSESSEE HAS INCURRED EXPENSES OF RS.1576, 77,055 DURING THE FINANCIAL YEAR RELEVANT TO ASSESSMENT YEAR 2006-07. HOWEVER, THE INVOICES WERE RECEIVED BY THE ASSESSEE ONLY AFTER THE CLOSE OF THE FINANCIAL YEAR I.E. AFTER MARCH 31, 2005. THE ASSESSEE DID NOT CHARGE T HESE AMOUNTS TO THE P & 55 L ACCOUNT. IT HAS DISCLOSED SUCH EXPENSES AS A PRI OR PERIOD EXPENSES IN THE FINANCIAL STATEMENT OF NORTEL INDIA FOR SUBSEQUENT FINANCIAL YEAR I.E. FINANCIAL YEAR RELEVANT TO ASSESSMENT YEAR 2007-08. THE ASSES SEE HAS FURTHER SUBMITTED THAT OUT OF THE TOTAL EXPENSES OF RS.1576,77,055 EX PENSES AMOUNTING TO RS.267,44,754 WERE LIABLE TO DEDUCTION OF TAX AT SO URCE. IT HAS SUBMITTED THAT SUCH TAX WAS DULY DEDUCTED AND DEPOSITED IN ASSESSM ENT YEARS 2007-08 AND 2008-09. THUS, THE EXPENSES TO THE ABOVE EXTENT WIL L BE ALLOWABLE IN THOSE ASSESSMENT YEARS AS PER SEC. 40(A)(I) OF THE INCOME -TAX ACT, 1961. THE ASSESSEE HAS CLAIMED THE BALANCE AMOUNT OF RS.1309, 32,301 IN THE PRESENT YEAR. SUCH CLAIM WAS MADE BY THE ASSESSEE DURING TH E ASSESSMENT PROCEEDINGS VIDE LETTER DATED 6.10.2009. ASSESSING OFFICER DISALLOWED THE CLAIM OF ASSESSEE BY OBSERVING THAT SUCH CLAIM WAS NOT MADE IN THE RETURN FILED EITHER UNDER SEC. 139(1) OR UNDER SEC. 139(5) OF THE ACT. HE MADE REFERENCE TO THE DECISION OF HON'BLE SUPREME COURT IN THE CASE OF GEOTZE INDIA LTD. (SUPRA) 37. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ITAT IN THE CASE OF CHICAGO PNEMATIC INDIA LTD. VS. DCIT REPORT ED IN 15 SOT 252 HAD CONSIDERED A SIMILAR SITUATION WHEREIN JUDGMENT OF HON'BLE SUPREME COURT IN THE CASE OF GEOTZE INDIA WAS ALSO QUOTED BY THE DEPARTMENT. THESE TWO 56 AMOUNTS ARE DIRECTLY EFFECTING THE TAX LIABILITY OF THE ASSESSEE AND, THEREFORE, THE ADMISSIBILITY OF DEDUCTION OUGHT TO HAVE BEEN D ECIDED ON MERIT BY THE ASSESSING OFFICER WHILE EXAMINING THE ACCOUNTS. LEA RNED DR ON THE OTHER HAND RELIED UPON THE ORDER OF ASSESSING OFFICER AND SUBMITTED THAT ONCE THE ASSESSEE FAILED TO CLAIM DEDUCTION OF ANY AMOUNT IN THE RETURN FILED BY IT OR BY WAY OF A REVISED RETURN AS PROVIDED IN SEC. 139( 5) OF THE ACT. IT CANNOT BE PERMITTED TO CLAIM THE DEDUCTION OF SUCH AMOUNT. LE ARNED ASSESSING OFFICER HAS RIGHTLY MADE A REFERENCE TO THE JUDGMENT OF HON 'BLE SUPREME COURT IN THE CASE OF GEOTZE INDIA. 38. WE HAVE DULY CONSIDERED THE RIVAL CONTENTIONS A ND GONE THROUGH THE RECORD CAREFULLY. THE ITAT IN THE CASE OF CHICAGO P NEMATIC INDIA LTD. HAS CONSIDERED THE JUDGMENT OF THE HON'BLE SUPREME COUR T IN THE CASE OF GEOTZE INDIA AND MADE A REFERENCE TO THE CIRCULAR OF THE B OARD ISSUED WAY BACK IN 1955. THE DISCUSSION MADE BY THE ITAT READS AS UNDE R: 49. THE ASSESSEE CLAIMED DEDUCTION IN THE ORIGINAL RET URN OF INCOME. THOUGH THE ASSESSEE REVISED ITS ORIGINAL RE TURN, HOWEVER, CLAIM UNDER SECTIONS 80HH AND 80-I WAS NOT REVISED. SUBSEQUENTLY, DURING THE COURSE OF ASSESSMENT PROCE EDINGS, THE ASSESSEE REVISED ITS CLAIM, WHICH THE ASSESSING OFFICER DID NOT TAKE INTO COGNISANCE AS THE ASSESSEE HAD NOT FI LED REVISED RETURN TO THIS EFFECT. THE LEARNED CIT(A) ALSO CONF IRMED THE 57 ACTION OF ASSESSING OFFICER. PRIMA FACIE, THE RATIO OF THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE O F GOETZE (INDIA) LTD. ( SUPRA ) IS SQUARELY APPLICABLE TO THE FACTS OF THE CASE BECAUSE AS PER THE LAW, THE ONUS LIES ON THE A SSESSEE TO MAKE RIGHT CLAIM AND SUCH CLAIM MUST BE MADE WITHIN THE FRAMEWORK OF PROVISIONS OF ACT. HOWEVER, THIS SITUA TION, THOUGH, IT IS PERFECTLY IN CONSONANCE WITH THE POSITION OF LAW MAY RESULT INTO GENUINE HARDSHIP TO THE ASSESSEES AS THE ASSES SEE WOULD BE LEFT WITH THE OPTION ONLY TO PROCEED UNDER SECTI ON 264 THAT TOO IN CASE THEY HAVE NOT GONE INTO APPEAL BEFORE T HE LEARNED CIT(A) ON THE SAME ISSUE OR THE LEARNED CIT(A) HAS NOT ADMITTED THOSE ISSUE. OTHER OPTION WOULD BE TO APPR OACH CENTRAL BOARD OF DIRECT TAXES UNDER SECTION 119 OF THE ACT FOR GETTING THE SPECIFIC RELIEF. BOTH THESE OPTIONS INV OLVE TIME AS WELL AS ENGAGEMENT OF OTHER ADMINISTRATIVE AUTHORIT IES WHICH CAN BE OTHERWISE DEVOTED TO OTHER IMPORTANT ISSUES. THIS SITUATION HAS COMPELLED US TO LOOK INTO THE DUTIES OF THE ASSESSING AUTHORITIES RATHER THAN POWERS OF ASSESSI NG AUTHORITIES BECAUSE GOVERNMENT IS ENTITLED TO COLLE CT ONLY THE TAX LEGITIMATELY DUE TO IT OTHERWISE THE TAX NOT SO COLLECTED WOULD BE VIOLATIVE OF THE ARTICLE 265 TO THE CONSTI TUTION OF INDIA. IN SUCH PURSUIT, WE HAVE FOUND THAT THE CBDT AS BAC K AS IN 1955 ISSUED CIRCULAR NO. 14 (XL-35), DATED 11TH APR IL, 1955 AS TO WHAT SHOULD BE A DEPARTMENTAL ATTITUDE TOWARDS R EFUND AND RELIEFS TO THE ASSESSEES. THE SUBJECT CIRCULAR IS R EPRODUCED BELOW FOR THE PURPOSE OF READY REFERENCE : 58 'V. MISCELLANEOUS - REFUND AND RELIEFS DUE TO ASSESSEES - DEPARTMENTAL ATTITUDE TOWARDS - THE BOARD HAVE ISSUED INSTRUCTIONS FROM TIME TO TIME IN REGARD TO THE ATT ITUDE WHICH THE OFFICERS OF THE DEPARTMENT SHOULD ADOPT IN DEALING WITH ASSESSEES IN MATTERS AFFECTING THEIR INTEREST AND C ONVENIENCE. IT APPEARS THAT THESE INSTRUCTIONS ARE NOT BEING UNIFO RMLY FOLLOWED. 2. COMPLAINTS ARE STILL BEING RECEIVED THAT WHILE I NCOME-TAX OFFICERS ARE PROMPT IN MAKING ASSESSMENTS LIKELY TO RESULT INTO DEMANDS AND IN EFFECTING THEIR RECOVERY, THEY ARE L ETHARGIC AND INDIFFERENT IN GRANTING REFUNDS AND GIVING RELIEFS DUE TO ASSESSEES UNDER THE ACT. DILATORINESS OR INDIFFEREN CE IN DEALING WITH REFUND CLAIMS (EITHCR UNDER SECTION 48 OR DUE TO APPELLATE, REVISIONAL, ETC. ORDERS) MUST BE COMPLETELY AVOIDED SO THAT THE PUBLIC MAY FEEL THAT THE GOVERNMENT ARE ACTUALLY PR OMPT AND CAREFUL IN THE MATTER OF COLLECTING TAXES AND GRANT ING REFUNDS AND GIVING RELIEFS. 3. OFFICERS OF THE DEPARTMENT MUST NOT TAKE ADVANTA GE OF IGNORANCE OF AN ASSESSEE AS TO HIS RIGHTS. IT IS ON E OF THEIR DUTIES TO ASSIST A TAXPAYER IN EVERY REASONABLE WAY , PARTICULARLY IN THE MATTER OF CLAIMING AND SECURING RELIEFS AND IN THIS REGARD THE OFFICERS SHOULD TAKE THE INITIATIVE IN GUIDING A TAXPAYER WHERE PROCEEDINGS OR OTHER PARTICULARS BEFORE THEM INDICATE THAT SOME REFUND OR RELIEF IS DUE TO HIM. THIS ATTI TUDE WOULD, IN 59 THE LONG RUN, BENEFIT THE DEPARTMENT FOR IT WOULD I NSPIRE CONFIDENCE IN HIM THAT HE MAY BE SURE OF GETTING A SQUARE DEAL FROM THE DEPARTMENT. ALTHOUGH, THEREFORE, THE RESPO NSIBILITY FOR CLAIMING REFUNDS AND RELIEFS RESTS WITH ASSESSEES O N WHOM IT IS IMPOSED BY LAW, OFFICERS SHOULD : ( A )DRAW THEIR ATTENTION TO ANY REFUNDS OR RELIEFS TO WHICH THEY APPEAR TO BE CLEARLY ENTITLED BUT WHICH THEY HAVE O MITTED TO CLAIM FOR SOME REASON OR OTHER; ( B )FREELY ADVISE THEM WHEN APPROACHED BY THEM AS TO T HEIR RIGHTS AND LIABILITIES AND AS TO THE PROCEDURE TO B E ADOPTED FOR CLAIMING REFUNDS AND RELIEFS; ( C )PUBLIC RELATION OFFICERS HAVE BEEN APPOINTED AT IM PORTANT CENTRES, BUT BY THE VERY NATURE OF THEIR DUTIES, TH EIR FIELD OF ACTIVITY IS BOUND TO BE LIMITED.' THE FOLLOWING EXAMPLES (WHICH ARE : BY NO MEANS EXH AUSTIVE) INDICATE THE ATTITUDE WHICH OFFICERS SHOULD ADOPT : '( A ) SECTION 17(1) : WHILE DEALING WITH THE ASSESSMENT OF A NON- RESIDENT ASSESSEE THE OFFICER SHOULD BRING TO HIS N OTICE THAT HE MAY EXERCISE THE OPTION TO PAY TAX ON HIS INDIAN IN COME WITH REFERENCE TO HIS TOTAL WORLD INCOME IF IT IS TO HIS ADVANTAGE. ( B ) SECTION 18(3), (3A), (3B) AND (3D) : THE OFFICER SHOULD IN EVERY APPROPRIATE CASE BRING TO THE ASSESSEES NOTI CE THE POSSIBILITY OF OBTAINING A CERTIFICATE AUTHORISING DEDUCTION OF INCOME-TAX AT A RATE LESS THAN THE MAXIMUM OR DEDUC TION OF SUPER TAX AT A RATE LOWER THAN THE FLAT RATE, AS TH E CASE MAY BE. 60 ( C ) SECTION 25(3) AND 25(4) : THE MANDATORY RELIEF ABOUT EXEMPTION FROM TAX MUST BE GRANTED WHETHER CLAIMED OR NOT; THE OTHER RELIEF ABOUT SUBSTITUTION, IF NOT TIME-BA RRED, MUST BE BROUGHT TO THE NOTICE OF TAXPAYER. ( D ) SECTION 26A : THE BENEFIT TO BE OBTAINED BY REGISTRATION SHOULD BE EXPLAINED IN APPROPRIATE CASES. WHERE AN APPLICATION FOR REGISTRATION PRESENTED BY A FIRM IS FOUND DEFECTIVE, THE OFFICER SHOULD POINT OUT THE DEFECT TO IT AND GIVE IT AN OPPORTUNITY TO PRESENT A PROPER APPLICATION. ( E ) SECTION 33A : CASES IN WHICH THE INCOME-TAX OFFICER (NOW ASSESSING OFFICER) OR ASSISTANT COMMISSIONER (NOW D EPUTY COMMISSIONER) THINKS THAT AN ASSESSMENT SHOULD BE R EVISED, MUST BE BROUGHT TO THE NOTICE OF THE COMMISSIONER O F INCOME- TAX. ( F ) SECTION 35 : MISTAKES SHOULD BE RECTIFIED AS SOON AS THEY ARE DISCOVERED WITHOUT WAITING FOR AN ASSESSEE TO POINT THEM OUT. ( G ) SECTION 60(2) : CASES WHERE RELIEF CAN PROPERLY BE GIVEN UNDER THIS SUB-SECTION SHOULD BE REPORTED TO THE BO ARD.' IN THIS CIRCULAR, THE BOARD HAS RECOGNISED THE FACT THAT RESPONSIBILITY FOR CLAIMING REFUNDS AND RELIEFS RES TS WITH THE ASSESSEE. AS IMPOSED BY LAW EVEN THEN THE BOARD HAS DIRECTED THE OFFICERS TO DRAW THE ATTENTION OF THE ASSESSEES IN RESPECT OF ANY REFUNDS OR RELIEFS TO WHICH THEY ARE ELIGIBLE, WHICH THEY HAVE NOT CLAIMED FOR SOME REASON OR THE OTHER. THE 61 BOARD HAS ALSO GIVEN FEW EXAMPLES IN THIS REGARD AN D HAS SPECIFICALLY CLARIFIED THAT, THESE EXAMPLES ARE NOT EXHAUSTIVE. FURTHER, THE BOARD ALSO ISSUED CIRCULAR F. NO. 81/2 7/65-IT(B), DATED 18TH MAY, 1965 DEFINING THE DUTIES OF P.R.OS. IN PROVIDING ASSISTANCE TO THE PUBLIC . IN THIS CIRCUL AR, THE BOARD HAS ALSO ADVISED THE P.R.O. TO VISIT THE GOVERNMENT/COMMERCIAL ESTABLISHMENTS TO PROVIDE THE M ASSISTANCE IN FILING CORRECT RETURNS AND MAKING ELI GIBLE CLAIMS. THESE CIRCULARS ISSUED BY THE BOARD ALMOST 4-5 DECA DES BEFORE CAST A DUTY ON THE ASSESSING AUTHORITIES TO COLLECT ONLY THE LEGITIMATE TAX. STARTING FROM LATE 1980S, THE GOVER NMENT HAS FOCUSSED AS VOLUNTARY COMPLIANCE BY THE ASSESSEES A ND, THEREFORE, GOVERNMENT HAS REDUCED THE NUMBER CASES SELECTED FOR COMPULSORY SCRUTINY AND HAS ALSO REDUCED THE TA X RATES. THIS POLICY OF THE GOVERNMENT HAS RESULTED INTO HIG HER TAX REVENUES AND SIMPLIFICATION OF LAWS. IT IS A SETTLE D POSITION THAT THE CIRCULARS ISSUED BY THE BOARD ARE BINDING ON TH E SUBORDINATE INCOME- TAX AUTHORITIES AND IF C.B.D.T. ISSUES DIRECTIONS WHICH ARC BENEFICIAL TO THE ASSESSEES AL THOUGH THE SAME MAY NOT BE DIRECTLY IN CONSONANCE WITH THE PRO VISIONS OF 62 LAW, EVEN THEN THESE INSTRUCTIONS HAVE TO BE GIVEN EFFECT AND ADHERED TO BY THE CONCERNED AUTHORITIES. THUS, THER E IS A STRONG CASE FOR RECIPROCITY TO BE SHOWN BY THE REVENUE AUT HORITIES WHILE COMPLETING ASSESSMENTS AND TO AVOID ADMINISTR ATIVE HARDSHIPS TO THE ASSESSEE. AS FAR AS THE DECISION O F THE HONBLE APEX COURT IN THE CASE OF GOETZE (INDIA) LTD. ( SUPRA ) IS CONCERNED, THERE IS NO DISPUTE THAT THE SAME IS BIN DING ON EVERYBODY CONCERNED. IN THE SAID DECISION, THE HON BLE APEX COURT HAS ALSO RULED THAT APPELLATE TRIBUNAL MAY AD JUDICATE THE ISSUE IF A CLAIM IS MADE BY ANY PARTY SUBJECT TO SA TISFACTION OF PRESCRIBED RULES, HENCE, EVEN THE HONBLE APEX COUR T HAS NOT BARRED THE ASSESSEE RAISE ITS LEGAL CLAIM BEFORE A PPELLATE AUTHORITIES. HOWEVER, SUCH PROCESS WOULD RESULT INT O UNDUE HARDSHIPS, DELAY AND MULTIPLICITY OF PROCEEDINGS. T HE HONBLE APEX COURT, ON NUMEROUS OCCASIONS HAS LAID THE PROP OSITION THAT THE ASSESSING AUTHORITIES ARE BOUND TO COMPUTE THE CORRECT INCOME ONLY AND COLLECT ONLY LEGITIMATE TAX, HENCE, MERELY FOR A PROCEDURAL LAPSE OR TECHNICALITIES, IN OUR OPINION, THE ASSESSEE SHOULD NOT BE COMPELLED TO PAY MORE TAX THAN WHAT I S DUE FROM HIM. THEREFORE, THIS SITUATION HAS NECESSARILY TO B E LOOKED UPON 63 FROM THE ANGLE OF DUTIES OF ASSESSING AUTHORITIES A S STATED EARLIER, CBDT IS THE APEX BODY FOR TAX ADMINISTRATI ON AND IT CAN ALSO ISSUE DIRECTIONS WHICH ARE FOR THE BENEFIT OF THE ASSESSEES THOUGH SUCH DIRECTIONS MAY NOT BE INCONSONANCE WITH THE PROVISIONS OF LAW, HENCE, IF A CIRCULAR IS NOW ISSU ED DIRECTING THE ASSESSING AUTHORITIES TO GRANT RELIEFS/REFUNDS WHIL E COMPLETING THE ASSESSMENT PROCEEDINGS, EVEN THOUGH SUCH CIRCUL AR MAY BE AT VARIANCE WITH THE LAW, AS PRONOUNCED BY THE HON BLE SUPREME COURT, BUT THE SAME WOULD BE BINDING ON THE SUBORDINATE INCOME-TAX AUTHORITIES. IN OUR OPINION, THEREFORE, CIRCULARS OF SAME NATURE WHICH HAVE BEEN ALREADY IS SUED WOULD NOT BECOME IRRELEVANT OR CAN BE IGNORED. ADMITTEDLY , THE CIRCULAR ISSUED IN 1995 HAS NOT BEEN WITHDRAWN, HEN CE, IT HAS GOT BINDING FORCE ON THE SUBORDINATE AUTHORITIES EV EN AS ON DATE. ACCORDINGLY, WE HOLD THAT THE ASSESSING OFFIC ER IS BOUND TO ASSESS THE CORRECT INCOME AND FOR THIS PURPOSE, THE ASSESSING OFFICER MAY GRANT RELIEFS/REFUNDS SUO MOTU OR CAN DO SO ON BEING POINTED OUT BY THE ASSESSEE IN THE COUR SE OF ASSESSMENT PROCEEDINGS FOR WHICH ASSESSEE HAS NOT F ILED REVISED RETURN, ALTHOUGH, AS PER LAW, THE ASSESSEE IS REQUIRED TO 64 FILE THE REVISED RETURN. HAVING STATED SO, IN OUR V IEW, THE LEARNED CIT(A), HAVING CO-TERMINUS POWERS WITH THE POWERS O F ASSESSING OFFICER AND THE FACT THAT APPELLATE PROCE EDINGS ARE THE CONTINUATION OF ORIGINAL PROCEEDINGS, SHOULD HA VE ENTERTAINED THE CLAIM OF ASSESSEE AND ALLOWED IF OT HER CONDITIONS OF THE PROVISIONS OF THE LAW WERE SATISF IED. IN THIS VIEW OF THE MATTER, WE ACCEPT BOTH THE GROUNDS OF T HE ASSESSEE AND DIRECT THE LEARNED CIT(A) TO CONSIDER THE CLAIM OF THE ASSESSEE AT THE REVISED FIGURES ON MERITS AND DECID E THE SAME ACCORDING TO THE PROVISIONS OF SECTIONS 80HH AND 80 -I OF THE ACT AFTER HEARING THE ASSESSEE. THUS, THIS GROUND OF TH E ASSESSEE STANDS ACCEPTED. 39. RESPECTFULLY FOLLOWING THE ORDER OF THE CO-ORDI NATE BENCH, WE ENTERTAIN THESE GROUNDS OF APPEAL AND REMIT THESE I SSUES TO THE FILE OF THE ASSESSING OFFICER FOR VERIFICATION AND READJUDICATI ON. 40. IN GROUND NO.14, ASSESSEE HAS PLEADED THAT LEAR NED ASSESSING OFFICER HAS ERRED IN INITIATING PENALTY PROCEEDINGS UNDER S EC. 271(1)(C) OF THE ACT AGAINST THE ASSESSEE. THIS GROUND IS PRE-MATURE IN NATURE. NO ARGUMENTS 65 WERE ADVANCED BY THE LEARNED COUNSEL FOR THE ASSESS EE. THE DEFENCE OF THE ASSESSEE QUA THE PENALTY UNDER SEC. 271(1)(C) OF TH E ACT WOULD BE ENTERTAINED IN THE PENALTY PROCEEDINGS, IF ANY, COM MENCED BY THE ASSESSING OFFICER WHICH IS A SEPARATE PROCEEDINGS. HENCE, THI S GROUND OF APPEAL IS REJECTED. 12. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS AL LOWED FOR STATISTICAL PURPOSES. DECISION PRONOUNCED IN THE OPEN COURT ON 02.03.201 2. SD/- SD/- ( G.E. VEERABHADRAPPA) ( RAJPAL YADA V ) PRESIDENT JUDICIAL MEMBER DATED: 02/03/2011 MOHAN LAL COPY FORWARDED TO: 1) APPELLANT 2) RESPONDENT 3) CIT 4) CIT(APPEALS) 5) DR:ITAT ASSISTANT REGISTRAR