IPolicy Networks Pvt. Ltd., Noida V. ITO, New Delhi

ITA 5504/DEL/2010

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 3794 (ITAT-DELHI)
• Duration Of Justice: 6 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-06-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Next Hearing Date: 30-05-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 07-12-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: NARENDER K CHAND
• Assessee Lawyers: PALLAV RAGHUVANSHI
• Keywords: Transfer pricing; International transaction
• Section: 92C; 92F; 92A; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH : C : NEW DELHI BEFORE SHRI I.P. BANSAL, JUDICIAL MEMBER AND SHRI SHAMIM YAHYA, ACCOUNTANT MEMBER ITA NO.5504/DEL/2010 ASSESSMENT YEAR : 2006-07 M/S IPOLICY NETWORK PVT. LTD., (SUBSEQUENTLY MERGED WITH TECH MAHINDRA LTD.), SDF B#1, NOIDA SPECIAL ECONOMIC ZONE, NOIDA 201301 (UP). PAN : AAAC1902Q VS. INCOME TAX OFFICER, SECRETARIAT, DISPUTE RESOLUTION PANEL II NEW DELHI. (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI AJAY VOHRA, ADV., SH. NEERAJ K. JAIN, ADV., SH. ABHISHEK AGARWAL, ADV. & SHRI PALLAV RAGHUVANSHI, ADV. REVENUE BY : SHRI NARENDER K. CHAND, SR. DR ORDER PER I.P. BANSAL, JUDICIAL MEMBER THIS IS AN APPEAL FILED BY THE ASSESSEE UNDER THE PROVISI ONS OF SECTION 253 (1) (D) OF THE IT ACT, 1961, AGAINST THE ORDER PASSED BY THE ASSESSING OFFICER DATED 13 TH OCTOBER, 2010 U/S 143 (3) READ WITH SECTION 144C OF THE INCOME-TAX ACT, 1961 (THE ACT). 2. THE MAIN GROUND RAISED IS THAT THE ASSESSING OFFICER H AS ERRED ON FACTS AND IN LAW IN PROPOSING TO COMPLETE THE ASSESSMENT UNDER SECTION 144C/143(3) OF THE IT ACT AT AN INCOME OF ` 75,09,415/-. 3. THE ASSESSEE COMPANY IS 99.96% SUBSIDIARY COMPANY OF IP OLICY NETWORKS INC., USA (IPOLICY INC.) AND IS AN OFFSHORE D EVELOPMENT CENTER ITA NO.5504/DEL/2010 2 DEVELOPING AND EXPORTING THE APPLICATION SOFTWARE TO BE INTEGRATED IN THE SECURITY PRODUCTS MARKED BY IPOLICY INC. IT ENTE RED INTO INTERNATIONAL TRANSACTION WITH ITS ASSOCIATE ENTERPRISES FOR AN AGGREGATE SUM OF `14,33,33,713/-. REFERENCE WAS MADE TO TRANSFER PRICING OFFICER TO DETERMINE THE ARMS LENGTH PRICE OF SUCH TRANSACTION U/S 92CA(1) OF THE ACT. THE TPO VIDE ITS ORDER DATED 8 TH OCTOBER, 2009 HAS COMPUTED THE ARMS LENGTH PRICE OP/TC AT ` 15,08, 43,128/- AND A DIFFERENCE OF ` 75,09,415/- IS ARRIVED AT WHICH HAS B EEN ADDED TO THE INCOME OF THE ASSESSEE ON ACCOUNT OF TRANSFER PRICING AD JUSTMENT. THE ASSESSEE FOR DETERMINING THE ARMS LENGTH PRICE HAS ADOPT ED TNMM METHOD. ACCORDING TO SEARCH AND SCREENING PROCESS BASED ON A REVIEW OF BUSINESS DESCRIPTION 101 COMPANIES WERE SELECTED AS REA SONABLE FUNCTIONAL COMPARABLES AND AVERAGE OF OP/TC ON COMPA RABLE COMPANIES, MEAN MARGIN WAS ARRIVED AT (-) 0.33%. OP/ TC OF THE ASSESSEE COMPANY WAS 10.06% AND, ACCORDINGLY, IN THE TP STUDY, THE ASSESSEE DISCLOSED THE INTERNATIONAL TRANSACTION BEING AT ARMS LENGTH PRICE. 4. THE TPO IN ITS ORDER HAD APPLIED VARIOUS ADDITIONA L FILTERS AND HAS REJECTED ALL THE COMPARABLES EXCEPT THREE PARTIES MEN TIONED BELOW AND HAS ARRIVED AT OP/TC PERCENTAGE OF 15.64%:- SL.NO. SL.NO. SL.NO. SL.NO. NAME NAME NAME NAME OF THE COMPANY OF THE COMPANY OF THE COMPANY OF THE COMPANY OP/TC% OP/TC% OP/TC% OP/TC% 1 SOFTPRO SYSTEMS 18.03 2. FORTUNE INFORMATICS LIMITED 8.05 3. SANKHYA INFOTECH 20.84 AVERAGE 15.64 5 ACCORDINGLY, ADDITION WAS MADE OF `75,09,415/- BEI NG THE DIFFERENCE IN THE REVENUE SHOWN BY THE ASSESSEE AND THE ARMS LENGTH PRICE DETERMINED BY THE TPO. ITA NO.5504/DEL/2010 3 6. THE ASSESSEE, APART FROM CHALLENGING THE DETERMINATI ON OF ARMS LENGTH PRICE ON THE BASIS OF REJECTION OF VARIOUS COMP ARABLES BY CONTENDING THAT THOSE COMPANIES HAVE WRONGLY BEEN REJ ECTED BY THE TPO, ALSO HAS ASSAILED THE ADDITION ON THE GROUND THAT UPON APPLICATION OF PROVISO, AS IT STOOD BEFORE AMENDMENT, THE ADDITION WAS NOT CALLED FOR AS THE ADDED AMOUNT FALLS WITHIN THE SAFE HARBOUR OF +/- 5%. A CALCULATION IN THIS REGARD HAS BEEN FURNISHED BY THE A SSESSEE VIDE FOLLOWING TABLE TO SHOW THAT THE ADDITION WAS NOT CAL LED FOR AS THE DIFFERENCE DID NOT EXCEED 5%:- PARTICULARS PARTICULARS PARTICULARS PARTICULARS AS PER THE ASSESSEE AS PER THE ASSESSEE AS PER THE ASSESSEE AS PER THE ASSESSEE AS PER THE TPO AS PER THE TPO AS PER THE TPO AS PER THE TPO TOTAL COST OF THE ASSESSEE 130,442,000 130,442,000 ARMS LENGTH PRICE @ MARGIN OF 15.64% (A) 150,843,128 150,843,128 5% OF THE ALP AS DETERMINED (B) 7,542,156 ALP OF THE INTERNATIONAL TRANSACTIONS AS PER THE PROVISO TO SECTION 92C(2) [(A)- (B)] 143,300,972 REVENUE SHOWN 143,333,713 143,333,713 DIFFERENCE (32741) 7,509,415 7. REFERRING TO THESE FACTS, UPON SHORT ISSUE, IT WAS THE CASE OF LD. AR THAT EVEN IF ONE DOES NOT GO INTO OTHER ASPECTS OF THIS APPEAL I.E., CHALLENGING THE ARMS LENGTH PRICE DETERMINED BY THE TPO REGARDING THE REJECTION OF VARIOUS OTHER COMPARABLES, ETC., THE APPEAL SHOULD BE DECIDED IN FAVOUR OF ASSESSEE AS THE DIFFERENCE IN THE A RMS LENGTH PRICE DETERMINED BY THE TPO AND THE REVENUE RECEIVE D BY THE ASSESSEE DOES NOT EXCEED THE SAFE HARBOUR OF -/+ 5% AS PER PROVISO TO SUB-SECTION (2) OF SECTION 92C OF THE ACT. 8. IT WAS SUBMITTED BY LD. AR THAT THE BENEFIT OF PRO VISO IS AVAILABLE TO THE ASSESSEE ACCORDING TO THE FOLLOWING DECISIONS:- I) DEVELOPMENT CONSULTANTS (P) LTD. VS. DCIT 115 TTJ 5 77 (CAL) ITA NO.5504/DEL/2010 4 II) PHILIPS SOFTWARE CENTRE (P) LTD. VS. ACIT (2008) 26 SOT 226 (BANG.) III) DCIT VS. SONY INDIA PVT. LTD., 114 ITD 448 (DEL ) IV) SKODA AUTO INDIA PVT. LTD. VS. ACIT 122 TTJ 699 (PUNE) V) ELECTROBUG TECHNOLOGIES LTD. VS. ACIT 37 SOT 270 ( DELHI) VI) SAP LABS INDIA PVT. LTD. VS. ACIT 398 & 418/BANG/ 2008 (BANG) VII) ADOBE SYSTEMS INDIA (P) LTD. VS. ACIT [ITA NO.504 3/DEL/2010 (DEL) A Y 2006-07] 9. HE FURTHER SUBMITTED THAT RECENTLY DELHI ITAT IN THE CASE OF HAWORTH (INDIA) PVT. LTD. IN ITA NO.5341/DEL/2010 V IDE ITS ORDER DATED 29 TH APRIL, 2011 HAS HELD THAT THE BENEFIT OF SAFE HARBOU R OF +/- 5% IS AVAILABLE TO THE ASSESSEE IN A CASE WHERE THE ARMS LENGT H PRICE HAS BEEN WORKED OUT BY THE TPO ON THE BASIS OF MORE THAN ONE COMPARABLES. HE, THEREFORE, CONTENDED THAT ON THE SH ORT GROUND, THE AFOREMENTIONED ADDITION SHOULD BE DELETED. 10. ON THE OTHER HAND, THE FIRST AND FOREMOST CONTENT ION RAISED BY LD. DR WAS THAT THE SAFE HARBOUR OF +/- 5% SHOULD BE C OMPUTED ON THE REVENUE SHOWN TO HAVE BEEN RECEIVED BY THE ASSESSEE IN R ESPECT OF INTERNATIONAL TRANSACTION. HE CONTENDED THAT IF IT IS SO DONE, THEN, THE ASSESSEES CASE WILL NOT FALL UNDER THAT SAFE HARBOUR. TH EREFORE, HE CONTENDED THAT THE BENEFIT AS CLAIMED BY THE ASSESSEE IS NOT AVAILABLE TO IT. HE SUBMITTED THAT POST AMENDMENT THE PROVISO T O SUB-SECTION (2) OF SECTION 92C AS INSERTED BY THE FINANCE (NO.2) ACT OF 2009 READ AS UNDER:- PROVIDED THAT WHERE MORE THAN ONE PRICE IS DETERMINED BY THE MOST APPROPRIATE METHOD, THE ARMS LENGTH PRICE SHALL BE TAKEN TO BE THE ARITHMETICAL MEAN OF SUCH PRICES. PROVIDED FURTHER THAT IF THE VARIATION BETWEEN THE ARMS L ENGTH PRICE SO DETERMINED AND PRICE AT WHICH THE INTERNATIONAL TRANSACTION HAS ACTUALLY BEEN UNDERTAKEN DOES NOT EXCEED FIVE PER CENT OF THE LATTER, THE PRICE AT WHICH THE INTERNATIONAL ITA NO.5504/DEL/2010 5 TRANSACTION HAS ACTUALLY BEEN UNDERTAKEN SHALL BE DEEME D TO BE THE ARMS LENGTH PRICE. 11. HE SUBMITTED THAT SO AS IT RELATES TO APPLICABILITY OF THE AFOREMENTIONED AMENDED PROVISO, THE APPLICABILITY OF THE PROVISION HAS BEEN EXPLAINED IN CBDT CIRCULAR NO.F.142/13/2010-SO (TPL) DATED 30.9.2010 (CORRIGENDUM) AS FOLLOWS:- THIS AMENDMENT WILL TAKE EFFECT FROM 1 ST OCTOBER, 2009 AND SHALL ACCORDINGLY APPLY IN RELATION TO ALL CASES IN W HICH PROCEEDINGS ARE PENDING BEFORE THE TRANSFER PRICING OFFICER (TPO) ON OR AFTER SUCH DATE. 12. HE, THEREFORE, CONTENDED THAT THE AMENDED PROVI SO SHOULD BE CONSTRUED RETROSPECTIVELY AND, IN THIS REGARD, LD. DR RELIED UPON THE FOLLOWING DECISIONS:- (I) K. GOVINDAN & SONS VS. CIT 247 ITR 192 (SC) (II) ALLIED MOTORS (P) LTD. VS. CIT (1997) 224 ITR 67 7 (SC) (III) CIT VS. SOFT BEVERAGES P. LTD. 272 ITR 270 (MAD ). 13. THUS, IT WAS PLEADED BY LD. DR THAT THE AMENDMEN T BEING CLARIFICATORY IN NATURE SHOULD BE CONSTRUED RETROSPEC TIVELY. HE ALSO REFERRED TO THE EARLIER DECISION OF THE TRIBUNAL IN THE CASE OF DCIT VS. GLOBAL VANTEDGE PVT. LTD. (2010-TIOL-24-ITAT-DEL) T O CONTEND THAT WHEREVER DIFFERENCE EXCEEDS 5%, THE BENEFIT OF THE P ROVISO CANNOT BE GIVEN TO THE ASSESSEE. 14. IN THE REJOINDER LD. AR SUBMITTED THAT 5% SAFE HA RBOUR HAS TO BE COMPUTED ON THE ARITHMETICAL MEAN ADOPTED BY THE TP O FOR COMPUTING ARMS LENGTH PRICE, HENCE, LD. DR IS WRONG IN CONTEND ING THAT ASSESSEES CASE DOES NOT FALL WITHIN THE SAFE HARBOUR OF +/ - 5%. IT WAS FURTHER SUBMITTED BY LD. AR THAT THE PROVISO IS A SUBSTA NTIVE PROVISION IMPOSING LIABILITY ON THE ASSESSEE, HENCE, IT CAN NOT BE CONSTRUED RETROSPECTIVELY AND, FOR THIS PURPOSE, LD. AR HAS PLACE D RELIANCE UPON THE SPECIAL BENCH DECISION OF DELHI ITAT IN THE CASE OF ITO VS. EKTA ITA NO.5504/DEL/2010 6 PROMOTERS PVT. LTD. 113 ITD 719 AND SPECIFICALLY TO P ARA 56 TO 58 THEREOF. HE ALSO RELIED UPON THE SPECIAL BENCH DECI SION IN THE CASE OF KUBER TOBACCO PRODUCTS PVT. LTD. VS. DCIT 117 ITD 273 (DEL) (SB). 15. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIONS I N THE LIGHT OF THE MATERIAL PLACED BEFORE US. TO RESOLVE THE CONTRO VERSY RAISED BY BOTH THE PARTIES IN THE PRESENT APPEAL, IT WILL BE NE CESSARY TO FIRST EXAMINE THE PRE AND POST AMENDMENT CHANGE IN THE PRO VISO TO SUB- SECTION (2) OF SECTION 92-C. FOR THAT PURPOSE, IT WI LL BE NECESSARY TO REPRODUCE THE PROVISO PRE-AMENDED AND POST AMENDED. THE PRE- AMENDED PROVISO READ AS UNDER:- THE MOST APPROPRIATE METHOD REFERRED IN SUB SECTION (1 ) SHALL BE APPLIED FOR THE DETERMINATION OF ARMS LENGTH PRICE IN THE MANNER AS MAY BE PRESCRIBED. PROVIDED THAT WHERE MORE THAN ONE PRICE IS DETERMINED B Y THE MOST APPROPRIATE METHOD, THE ARMS LENGTH PRICE SHALL BE TAKEN TO BE THE ARITHMETICAL MEAN OF SUCH PRICES OR AT THE OPTIO N OF THE ASSESSEE, A PRICE WHICH MAY VARY FROM THE ARITHMETICAL MEAN BY AN AMOUNT NOT EXCEEDING 5% OF SUCH ARITHMETICAL MEAN. 16. THE POST AMENDED PROVISO WHICH HAS BEEN INSERTED BY THE FINANCE (NO.2) ACT, 2009 READ AS UNDER:- PROVIDED THAT WHERE MORE THAN ONE PRICE IS DETERMINED BY THE MOST APPROPRIATE METHOD, THE ARMS LENGTH PRICE SHALL BE TAKEN TO BE THE ARITHMETICAL MEAN OF SUCH PRICES. PROVIDED FURTHER THAT IF THE VARIATION BETWEEN THE ARMS L ENGTH PRICE SO DETERMINED AND PRICE AT WHICH THE INTERNATIONAL TRANSACTION HAS ACTUALLY BEEN UNDERTAKEN DOES NOT EXCEED FIVE PER CENT OF THE LATTER, THE PRICE AT WHICH THE INTERNATIONAL TRANSACTION HAS ACTUALLY BEEN UNDERTAKEN SHALL BE DEEM ED TO BE THE ARMS LENGTH PRICE. 17. BEFORE GOING INTO THE DETAILS, IT WILL BE RELEVA NT TO MENTION THAT THE FINANCE ACT, 2001 HAD SUBSTITUTED THE EXISTING SEC TION 92 OF THE INCOME-TAX AT BY NEW SECTIONS 92 AND 92A TO 92F. TH US, NEW PROVISIONS LAID DOWN THE NORMS TO ASSESS THE INCOME ARISING FROM AN ITA NO.5504/DEL/2010 7 INTERNATIONAL TRANSACTION BETWEEN ASSOCIATE ENTERPRISES HAVING REGARD TO THE ARMS LENGTH PRICE. VIDE CIRCULAR NO.12 DAT ED 23 RD AUGUST, 2001, KEEPING IN VIEW THE NEW TYPE OF LEGISLATION, I N THE INITIAL YEARS AND ITS IMPLEMENTATION CERTAIN CONCESSIONS WERE GRANTED WHICH READ AS FOLLOWS:- HOWEVER, THIS IS A NEW LEGISLATION. IN THE INITIAL YE ARS OF ITS IMPLEMENTATION, THERE MAY BE ROOM FOR DIFFERENT INTERPRETATIONS LEADING TO UNCERTAINTIES WITH REGARD TO DETERMINATION OF ARM'S LENGTH PRICE OF AN INTERNATIONAL TRANSACTION. WHILE IT WOULD BE NECESSARY TO PROTECT OUR TAX BASE, THERE IS A NEED TO ENSURE THAT THE TAXPAYERS ARE NO T PUT TO AVOIDABLE HARDSHIP IN THE IMPLEMENTATION OF THESE REGULATIONS. IN THIS BACKGROUND THE BOARD HAVE DECIDED THE FOLLOWIN G: (I) THE ASSESSING OFFICER SHALL NOT MAKE ANY ADJUSTME NT TO THE ARM'S LENGTH PRICE DETERMINED BY THE TAXPAYER, IF SUCH PRICE IS UP TO 5 PER CENT LESS OR UP TO 5 PER CENT MORE THAN THE PRICE DETERMINED BY THE ASSESSING OFFICER. IN SUCH EASES THE PRICE DECLARED BY THE TAXPAYER MAY BE ACCEPTED. (II) THE PROVISIONS OF SECTIONS 92 AND 92A TO 92F COM E INTO FORCE WITH EFFECT FROM 1ST APRIL, 2002, AND ARE ACCORD INGLY APPLICABLE TO THE ASSESSMENT YEAR 2002-05 AND SUBSEQUE NT YEARS. THE LAW REQUIRES THE ASSOCIATED ENTERPRISES TO M AINTAIN SUCH DOCUMENTS AND INFORMATION RELATING TO INTERNATIONAL TRANSACTIONS AS MAY BE PRESCRIBED. HOWEVER, THE NECESS ARY RULES COULD BE FRAMED BY THE BOARD ONLY AFTER THE FINA NCE BILL RECEIVED THE ASSENT OF THE PRESIDENT AND HAVE JUST BEEN NOTIFIED. THEREFORE, WHERE AN ASSESSEE HAS FAILED TO MAINTAIN THE PRESCRIBED INFORMATION OR DOCUMENTS IN RESPECT OF TRANSACTIONS ENTERED INTO DURING THE PERIOD 1-4-2001 TO 3 1-8- 2001 THE PROVISIONS OF SECTION 92C(3) SHOULD NOT BE IN VOKED FOR SUCH FAILURE. PENALTY PROCEEDINGS UNDER SECTION 271AA OR 271G SHOULD ALSO NOT BE INITIATED FOR SUCH DEFAULTS. (III) IT SHOULD BE MADE CLEAR TO THE CONCERNED ASSESSI NG OFFICERS THAT WHERE AN INTERNATIONAL TRANSACTION HAS BEEN PUT TO A SCRUTINY, THE ASSESSING OFFICER CAN HAVE RECOURSE TO S UB- SECTION (3) OF SECTION 92C ONLY UNDER THE CIRCUMSTANCES ENUMERATED IN CLAUSES (A) TO (D) OF THAT SUB-SECTION AND IN THE EVENT OF MATERIAL INFORMATION OR DOCUMENTS IN HIS POSSE SSION ON THE BASIS OF WHICH AN OPINION CAN BE FARMED THAT AN Y SUCH CIRCUMSTANCE EXISTS. IN ALL OTHER CASES, THE VALUE OF TH E INTERNATIONAL TRANSACTION SHOULD BE ACCEPTED WITHOUT FURTHE R SCRUTINY. ITA NO.5504/DEL/2010 8 18. LATER ON, THE RELAXATION WITH REGARD TO SAFE HAR BOUR OF +/- 5% WAS BROUGHT INTO THE STATUTE BY THE FINANCE ACT, 2002 W.E.F. 1.4.2002 WHICH HAS BEEN REPRODUCED ABOVE AND WHICH IS A PROVISO PRE- AMENDMENT. 19. THE POST AMENDMENT PROVISO HAS SUBSTITUTED THE EARLI ER PROVISO W.E.F.1.10.2009. THE EXPLANATORY NOTES TO PROVISIONS OF THE FINANCE (NO.2) ACT, 2009 VIDE CIRCULAR NO.5/2010 DATED 3 RD JUNE, 2010 AS PER PARA 37.5 DESCRIBE THE APPLICABILITY OF THE AMENDMEN T IN THE PROVISO AS UNDER:- 37.5 APPLICABILITY THE ABOVE AMENDMENT HAS BEEN MA DE APPLICABLE WITH EFFECT FROM 1 ST APRIL, 2009 AND WILL ACCORDINGLY APPLY IN RESPECT OF ASSESSMENT YEAR 2009-10 AND SUBSE QUENT YEARS. 20. HOWEVER, ACCORDING TO THE CORRIGENDUM DATED 30 TH SEPTEMBER, 2010 ISSUED BY THE GOVERNMENT OF INDIA, M/O FINANCE, DEPTT. OF REVENUE, CENTRAL BOARD OF DIRECT TAXES [F.NO.142/13/ 2010-SO (TPL)], IT WAS DESCRIBED AS UNDER:- F.NO.142/13/2010-S0 (TPL) GOVERNMENT OF INDIA MINISTRY OF FINANCE DEPARTMENT OF REVENUE CENTRAL BOARD OF DIRECT TAXES NEW DELHI, THE 30TH SEPTEMBER, 2010 CORRIGENDUM NO. (F.NO.142/13/2010-S0(TPL). IN PARTIAL MODIFICATIO N OF CIRCULAR NO.5 / 2010 DATED 03.06.2010, (I) IN PARA 37.5 OF THE SAID CIRCULAR, FOR THE LINES 'THE ABOVE AMENDMENT HAS BEEN MADE APPLICABLE WITH EFF ECT FROM 1 ST APRIL, 2009 AND WILL ACCORDINGLY APPLY IN RESPECT OF ASSESSMENT YEAR 2009-10 AND SUBSEQUENT YEARS.' THE FOLLOWING LINES SHALL BE READ; ITA NO.5504/DEL/2010 9 'THE ABOVE AMENDMENT HAS BEEN MADE APPLICABLE WITH EFF ECT FROM 1 ST OCTOBER 2009 AND SHALL ACCORDINGLY APPLY IN RELATION TO ALL CASES IN WHICH PROCEEDINGS ARE PENDING BEFORE TH E TRANSFER PRICING OFFICER (TPO) ON OR AFTER SUCH DATE.' (II) IN PARA 38.3, FOR THE DATE '1 ST OCTOBER, 2009', TH E FOLLOWING DATE SHALL BE READ: '1 ST APRIL, 2009 . ' 21. ON THE BASIS OF THE AFOREMENTIONED DEVELOPMENT AN D CORRIGENDUM, IT IS THE CASE OF LD. DR THAT THE DATE O F ORDER PASSED BY THE TPO IS 8 TH OCTOBER, 2009 AND THE AMENDED PROVISO HAD COME INTO EXISTENCE ON 19 TH DAY OF AUGUST, 2009 WHEN FINANCE (NO.2) ACT, 2009 HAD RECEIVED THE ASSENT OF THE PRESIDENT, THEREFORE, A CCORDING TO THE CORRIGENDUM THE AMENDED PROVISO WILL BE APPLICABLE I N RELATION TO THE CASES IN WHICH THE PROCEEDINGS WERE PENDING BEFORE THE TRANSFER PRICING OFFICER (TPO) ON OR AFTER SUCH DATE. THUS, I T WAS SUBMITTED BY LD. DR THAT ONLY AMENDED PROVISO IS APPLICABLE IN THE CASE OF THE ASSESSEE AND THE ASSESSEES CASE SHOULD BE DECIDED IN VIEW OF POST AMENDED PROVISO. THIS ARGUMENT HAS BEEN TAKEN BY LD. DR FOR THE REASON THAT IF THE AMENDED PROVISO IS TAKEN INTO CONSID ERATION, THEN, SAFE HARBOUR OF +/- 5% WILL BE RECKONED FROM THE PRI CE RECEIVED/PAID BY AN ASSESSEE TO/FROM ITS ASSOCIATE ENTERPRISE WHEREAS IF T HE CASE OF THE ASSESSEE WILL FALL UNDER THE PRE-AMENDED PROVISO, TH EN, SAFE HARBOUR WILL BE RECKONED FROM THE ARMS LENGTH PRICE DETERMINED BY THE TPO IN A CASE WHERE MORE THAN ONE PRICE IS DETERM INED BY HIM BY THE MOST APPROPRIATE METHOD. THE CASE OF THE ASSESSEE FA LL WITHIN THE MARGINAL LIMIT AND, THEREFORE, IT IS IMPORTANT TO RE SOLVE THIS CONTROVERSY FIRST. 22. THE STATUTE (FINANCE (NO.2) ACT, 2009) WHILE BR INGING SUBSTITUTED PROVISO STATED ITS APPLICABILITY W.E.F. 1 ST OCTOBER, 2009 WHEREAS WHEN EXPLANATORY NOTES TO THE PROVISIONS OF THE FINANCE (NO .2) ACT, 2009 WAS ISSUED VIDE CIRCULAR NO.5/2010 DATED 3 RD JUNE, 2010 IT WAS INCORRECTLY STATED THAT THE ABOVE AMENDMENT HAS BEEN MADE ITA NO.5504/DEL/2010 10 APPLICABLE W.E.F. 1 ST APRIL, 2009 WHEREAS THE STATUTE DESCRIBE THAT IT HAS BEEN BROUGHT W.E.F. 1 ST OCTOBER,2009, SECONDLY, IT EXPLAINED THAT ACCORDINGLY THE AMENDED PROVISO WILL BE APPLICABLE I N RESPECT OF 2009- 10 AND SUBSEQUENT YEARS, BUT, LATER ON THE BOARD HAS CH ANGED ITS STAND AND IT DESCRIBE THAT IT SHALL APPLY IN RELATION TO ALL CASES IN WHICH PROCEEDINGS ARE PENDING BEFORE THE TPO ON OR AFTER SU CH DATE. THEREFORE, TILL CORRIGENDUM IS ISSUED ON 30 TH SEPTEMBER, 2010, THE POSITION EXPLAINED BY THE BOARD WITH REGARD TO THE A MENDED PROVISO WAS THAT IT SHALL BE APPLICABLE IN RESPECT OF ASSESSMENT Y EARS 2009-10 AND SUBSEQUENT YEARS AND IT WAS NOT THE EXPLANATION OF THE CBDT THAT IT SHALL APPLY TO ALL CASES IN WHICH PROCEEDINGS ARE P ENDING BEFORE THE TPO ON OR AFTER SUCH DATE. THE CORRIGENDUM DATED 30 TH SEPTEMBER, 2010 HAS ONLY BROUGHT SUCH POSITION. 23. IT IS DIFFICULT TO ACCEPT THE ARGUMENT OF LD. DR THAT RETROSPECTIVE OR PROSPECTIVE APPLICABILITY OF A PROVISION SHOULD BE DECIDED IN A WAY WHICH HAS BEEN EXPLAINED BY CBDT. THE RETROSPECTIVE APPLICABILITY OF A PROVISION IS TO BE SEEN PURELY IN THE LIGHT OF THE ST ATUTORY PROVISIONS AND THE PARAMETERS LAID DOWN BY THE PRINCIPLES OF INT ERPRETATION. IT CANNOT BE DECIDED SIMPLY ON THE BASIS OF THE VIEW TAKE N BY CBDT IGNORING THE PLAIN STATUTORY LANGUAGE. THE VIEW EXP RESSED BY THE CBDT IN THE EXPLANATORY NOTES MAY IN SOME CIRCUMSTANCE S WORK AS A GUIDANCE, BUT THEY ARE NOT FINAL WORDS. THE STATUTE ITSELF PROVIDE THAT AMENDED PROVISO WILL BE APPLICABLE W.E.F. 1.10.2009 AND THIS POSITION HAS NOT BEEN CHANGED AND HAS BEEN ACCEPTED IN THE COR RIGENDUM ITSELF THAT THIS AMENDMENT HAS BEEN MADE APPLICABLE W.E.F. 1 ST OCTOBER, 2009 IN PLACE OF 1 ST APRIL, 2009 MENTIONED IN THE EARLIER CIRCULAR. NO W, IT IS A QUESTION THAT WHETHER BY WAY OF CORRIGENDUM C AN IT BE SAID THAT THE AMENDED PROVISO WILL BE APPLICABLE IN RELATION T O ALL CASES IN WHICH THE PROCEEDINGS ARE PENDING BEFORE TPO ON OR AFTER SU CH DATE. THIS CORRIGENDUM HAS BEEN ISSUED ON 30 TH SEPTEMBER, 2010. IF IT HAS TO BE ITA NO.5504/DEL/2010 11 DECIDED ONLY BY THE CBDT, THEN, IT CAN BE SAID THAT ON THE DATE WHEN TPO PASSED HIS ORDER, THIS CORRIGENDUM DID NOT EXIST. T HEREFORE, WE FIND NO FORCE IN THE ARGUMENT OF LD. DR THAT THE CA SE OF THE ASSESSEE SHOULD BE CONSIDERED IN THE LIGHT OF THE POST AMENDED PROVISO, BECAUSE OF THE REASON THAT IN THE AFOREMENTIONED CORRIGENDUM , IT HAS BEEN STATED SO. 24. OTHERWISE ALSO AS PER WELL SETTLED LAW, THE FIRST A ND FOREMOST RULE OF CONSTRUCTION OF INTERPRETATION IS THAT IN THE ABSEN CE OF ANYTHING IN THE ENACTMENT TO SHOW THAT IT IS TO HAVE RETROSPECTIVE OPERATION AND WHEN AMENDMENT RELATES TO A PROCEDURAL PROVISION RESUL TING INTO CREATING A NEW DISABILITY OR APPLICATION AND WHICH I MPOSES NEW DUTY IN RESPECT OF TRANSACTIONS ALREADY COMPLETED, THEN, THE SA ID PROCEDURAL PROVISION ALSO CANNOT BE APPLIED RETROSPECTIVELY. SIM ILAR IS THE POSITION WHERE THE STATUTE NOT ONLY CHANGES THE PROCEDURE, BUT ALSO CRATES NEW RIGHTS AND LIABILITIES, THE SAME SHALL BE CONSTRUED TO B E PROSPECTIVE IN OPERATION UNLESS OTHERWISE PROVIDED FOR EITHER EXPRESSLY OR BY NECESSARY IMPLICATION. THIS HAS SO BEEN HELD BY THE SPE CIAL BENCH IN THE CASE OF KUBER TOBACCO PRODUCTS (P) LTD. (SUPRA). 25. IN THE CASE OF ITO VS. EKTA PROMOTORS PVT. LTD. (SU PRA), IT IS HELD THAT IN THE FISCAL LEGISLATION, IF A PROVISION IS BROUG HT FOR IMPOSING ANY LIABILITY, THE NORMAL PRESUMPTION WILL BE THAT IT HA S NO RETROSPECTIVE OPERATION AND IT IS A CARDINAL PRINCIPLE OF TAX LAW THAT LAW TO BE APPLIED IS THE LAW WHICH IS IN FORCE IN THE ASSESSMENT YEAR UNLESS OTHERWISE PROVIDED EXPRESSLY OR BY NECESSARY IMPLICATION. 26. IF THE UNAMENDED PROVISO IS COMPARED WITH THE AME NDED PROVISO, THEN, IT IS CLEARLY NOTICED THAT THERE IS A SU BSTANTIAL CHANGE IN THE RELIEF GIVEN TO THE ASSESSEE. BY THE UNAMENDED PRO VISO, AN OPTION WAS GIVEN TO THE ASSESSEE TO HAVE ITS PRICE OF INTERNATIO NAL TRANSACTION IN VARIATION OF (+/-) 5% OF ARITHMETICAL MEAN THROU GH WHICH THE ARMS ITA NO.5504/DEL/2010 12 LENGTH PRICE IS DETERMINED BY THE TPO BY ADOPTING MO ST APPROPRIATE METHOD IN A CASE WHERE MORE THAN ONE PRICE IS DETERMI NED BY THE SAID APPROPRIATE METHOD. BY THE AMENDED PROVISO, FIRSTLY IT HAS BEEN PROVIDED THAT IN A CASE WHERE MORE THAN ONE PRICE IS DETERMINED BY THE MOST APPROPRIATE METHOD, THE ARMS LENGTH PRICE W ILL BE THE PRICE AS DETERMINED BY ADOPTING ARITHMETICAL MEAN OF SUCH P RICES. IT IS FURTHER PROVIDED THAT IF THE VARIATION BETWEEN ARM S LENGTH PRICE SO DETERMINED AND PRICE AT WHICH INTERNATIONAL TRANSACT ION HAS ACTUALLY BEEN UNDERTAKEN AND IT DOES NOT EXCEED 5% OF THE LAT TER, THEN, THE PRICE AT WHICH THE INTERNATIONAL TRANSACTION HAS ACTU ALLY BEEN UNDERTAKEN SHALL BE DEEMED TO BE THE ARMS LENGTH PRI CE. THUS, A DEEMING PROVISION HAS BEEN CREATED TO ADOPT AN ARMS L ENGTH PRICE IF THE PRICE ACTUALLY UNDERTAKEN BY THE ASSESSEE DOES NOT E XCEED 5% OF THE AMOUNT AT WHICH INTERNATIONAL TRANSACTION HAS ACT UALLY BEEN UNDERTAKEN. THUS, 5% DIFFERENCE HAS TO BE RECKONED F ROM THE PRICE AT WHICH INTERNATIONAL TRANSACTION HAS ACTUALLY BEEN UND ERTAKEN INSTEAD OF RECKONING FROM PRICE WHICH IS DETERMINED BY THE T PO, WHICH WAS THE POSITION UNDER UNAMENDED PROVISO. THUS, THERE IS A BASIC DIFFERENCE IN BOTH THE PROVISOS I.E., PRE-AMENDED AND POST AMENDED. 27. A BARE READING OF THE PRE AMENDED PROVISO WILL C LEARLY REVEAL THAT IN A CASE WHERE MORE THAN ONE PRICE IS DETERMINE D BY THE MOST APPROPRIATE METHOD, THE ARMS LENGTH PRICE SHALL BE T AKEN TO BE THE ARITHMETICAL MEAN OF SUCH PRICES, OR AT THE OPTION OF THE ASSESSEE, A PRICE WHICH MAY VARY FROM THE ARITHMETICAL MEAN FOR AN AMOUNT NOT EXCEEDING 5% OF SUCH ARITHMETICAL MEAN. THE ARITHME TICAL MEAN IN THE PRESENT CASE IS 15.64% AND BY ADOPTING THE SAME, TH E ARMS LENGTH PRICE HAS BEEN DETERMINED AT ` 15,08,43,128/- . THE ARITHMETICAL MEAN IN THE PRESENT CASE HAS BEEN COMPUTE D ON THE BASIS OF THREE COMPARABLES, THEREFORE, IT IS A CASE WHERE MO RE THAN ONE PRICE IS DETERMINED BY THE MOST APPROPRIATE METHOD WHICH IS TNMM. IF IT IS ITA NO.5504/DEL/2010 13 SO, THEN, 5% OF A PRICE WHICH IS DETERMINED BY CALCUL ATING THE ARITHMETICAL MEAN IS TO BE TAKEN AS THE RELEVANT DIFF ERENCE FOR COMPUTING THE BENEFIT OF SAFE HARBOUR OF +/- 5%. IN OTHER WORDS, THE SAFE HARBOUR HAS TO BE COMPUTED WITH REFERENCE TO ARM S LENGTH PRICE DETERMINED BY THE TPO. THE 5% DIFFERENCE OF ARMS L ENGTH PRICE DETERMINED BY THE TPO COMES TO `75,42,156/- AND IF T HE SAME IS INCLUDED IN THE REVENUE SHOWN TO BE RECEIVED BY THE ASSESSEE, THE TOTAL WILL COME TO ` 15,08,75,869/-, WHICH IS IN EXC ESS OF ARMS LENGTH PRICE DETERMINED BY THE TPO. THEREFORE, THE DIFFER ENCE IN THE ARMS LENGTH PRICE DETERMINED BY THE TPO AND CHARGED BY T HE ASSESSEE IS LESS THAN 5%. THEREFORE, APPLYING THE UNAMENDED PROV ISO THE ADDITION ON THAT VERY GROUND HAS TO BE DELETED AND IS ACCORDIN GLY DELETED. 28. AS WE HAVE DELETED THE ADDITION BY GIVING THE BE NEFIT OF THE PROVISO, WE DO NOT CONSIDER IT JUST AND PROPER TO GO I NTO THE OTHER ASPECTS ON WHICH ALSO THE ASSESSEE HAS ASSAILED THE ADDITION AS ADJUDICATION OF OTHER ISSUES WILL BE OF ACADEMIC IN NA TURE. 29. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS AL LOWED IN THE MANNER AFORESAID. THE ORDER PRONOUNCED IN THE OPEN COURT ON 17.06.20 11. SD/- SD/- [SHAMIM YAHYA] [I.P. BANSAL] ACCOUNTANT MEMBER JUDICIAL MEMBER DATED, 17.06.2011. DK ITA NO.5504/DEL/2010 14 COPY FORWARDED TO: - 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT DEPUTY REGISTRAR, ITAT, DELHI BENCHES ITA NO.5504/DEL/2010 15 DATE OF DICTATION 30.05.2011 DATE OF PRESENTATION OF THE DRAFT ORDER TO THE MEMBER 31.05.2011 DATE OF RETURN FROM THE BENCH AFTER PRONOUNCEMENT &SIGNING 17.06.2011 DATE OF DISPATCH OF THE ORDER TO THE BENCH 17.06.2011