Honeywell Turbo (India) Pvt. Ltd., Pune V. CIT-I, Pune

ITA 765/PUN/2011

• Counselvise Citation: [2013] 140 COUNSELVISE.COM (IT) 72511 (ITAT-PUNE)
• Duration Of Justice: 2 year(s) 6 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-12-2013
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Assessment Year: 2006-2007
• Appeal Filed On: 03-06-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: S K SINGH
• Assessee Lawyers: R R VORA
• Keywords: Revision of order; Transfer pricing; Opportunity of being heard; International transaction; Advance ruling; Revenue expenditure
• Section: 143(3); 92B; 263

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B, PUNE BEFORE SHRI G.S. PANNU, ACCOUNTANT MEMBER AND SHRI R.S. PADVEKAR, JUDICIAL MEMBER ITA NO.765/PN/2011 A.Y. 2006-07 HONEYWELL TURBO INDIA PVT. LTD. PLOT NO.4A, RAISONI INDUSTRIAL ESTATE, VILLAGE MAAN, TAL. MULSHI, NEAR HINJEWADI, PHASE II, PUNE 411057 PAN: AABCH5865J APPELLANT VS. ASST. COMMISSIONER OF INCOME-TAX CIR. 1(2) PUNE RESPONDENT APPELLANT BY : SHRI R.R. V ORA RESPONDENT BY : SHRI S.K . SINGH ORDER PER G.S. PANNU, A.M: THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST ORD ER OF THE COMMISSIONER OF INCOME-TAX-L PUNE (IN SHORT THE 'CO MMISSIONER') DATED 29-3-2011 PASSED U/S 263 OF THE INCOME-TAX AC T, 1961 (IN SHORT 'THE ACT'), PERTAINING TO THE ASSESSMENT YEAR 2006-07 WHEREBY THE ASSESSMENT ORDER PASSED BY THE ASSTT. C IT CIR 1(2) PUNE U/S 143(3) OF THE ACT DATED 4-12-2008 HAS BEEN FOUND TO BE ERRONEOUS IN SO FAR AS IT IS PREJUDICIAL TO THE INT ERESTS OF REVENUE WITHIN THE MEANING OF SECTION 263(1) OF THE ACT. 2. IN BRIEF, FACTS ARE THAT THE ASSESSEE IS A COMPA NY INCORPORATED UNDER THE PROVISIONS OF COMPANIES ACT, 1956 AND IS PRIMARILY 2 ENGAGED IN THE BUSINESS OF MANUFACTURING TURBO CHAR GERS, PROVIDING APPLICATION FOR ENGINEERING AND SUPPLY BA SE DEVELOPMENT SERVICES. FOR THE ASSESSMENT YEAR UNDER CONSIDERATION, IT FILED A RETURN OF INCOME U/S 139( 1) OF THE ACT ON 30-11-2006 DECLARING A TOTAL LOSS OF RS. 10,25,71,9 55/-. THE RETURN OF INCOME FILED BY THE ASSESSEE WAS SUBJECT TO A SCRUTINY ASSESSMENT U/S 143(3) OF THE ACT WHEREIN THE RETURN ED LOSS WAS ACCEPTED AND THE FINAL LOSS WAS DETERMINED AT RS.10 ,25,71,955/-. SUBSEQUENTLY, THE COMMISSIONER ISSUED NOTICE U/S 26 3 OF THE ACT DATED 14-9-2010 SHOW CAUSING THE ASSESSEE AS TO WHY THE ASSESSMENT ORDER DATED 4-12-2008 (SUPRA) BE NOT CON SIDERED ERRONEOUS IN SO FAR AS IT WAS PREJUDICIAL TO THE IN TERESTS OF REVENUE WITHIN THE MEANING OF SECTION 263(1) OF THE ACT ON THE GROUND THAT THE ASSESSING OFFICER HAD PASSED AN ORD ER U/S 143(3) OF THE ACT ON 4-12-2008 WITHOUT AWAITING A R EPORT OF THE TRANSFER PRICING OFFICER (IN SHORT TPO) U/S 92CA( 3) OF THE ACT WITH REGARD TO COMPUTATION OF ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS CARRIED OUT BY THE ASSES SEE WITH ITS ASSOCIATED ENTERPRISES. AFTER CONSIDERING THE OBJE CTIONS RAISED BY THE ASSESSEE, THE COMMISSIONER HAS HELD THAT THE AS SESSMENT ORDER DATED 4-12-2008 (SUPRA) WITHOUT COMPUTING TOT AL INCOME OF THE ASSESSEE IN CONFORMITY WITH THE ARMS LENGTH PR ICE DETERMINED BY THE TPO AS REQUIRED BY SEC. 92C(4) OF THE ACT WAS ERRONEOUS IN SO FAR AS IT WAS PREJUDICIAL TO THE IN TERESTS OF THE REVENUE, INASMUCH AS THE REFERENCE MADE TO THE TPO AND THE ADJUSTMENT DETERMINED U/S 92CA(3) OF THE ACT BY THE TPO WAS NOT INCORPORATED IN THE ASSESSMENT ORDER DATED 4-12 -2008 (SUPRA), AS REQUIRED BY CBDT INSTRUCTION NO.3 DATED 25-5-2003. IN THIS CONTEXT, THE ULTIMATE CONCLUSION OF THE COM MISSIONER, AS CONTAINED IN THE PENULTIMATE PARAGRAPH NO.4 OF HIS ORDER, IS REPRODUCED HITHERTO IN ORDER TO APPRECIATE THE DISP UTE SOUGHT TO BE RAISED BY THE ASSESSEE IN THE PRESENT APPEAL:- 3 TAKING AN OVERALL VIEW OF THE MATTER, I AM OF THE OPINION THAT THE ASSESSMENT ORDER FOR A.Y. 2006-07 IS ERRONEOUS IN SO FAR AS IT IS PREJUDICIAL TO THE INTERESTS OF REVENUE. THEREFORE, IT IS SET ASIDE AND RESTORED BACK TO THE FILE OF THE ASSE SSING OFFICER WITH A DIRECTION TO PASS AN ORDER AFRESH AN D IN CONFORMITY WITH THE ORDER PASSED U/S 92CA(3) BY THE TRANSFER PRICING OFFICER. THE ASSESSING OFFICER, S HALL GIVE REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESS EE, BEFORE PASSING THE ORDER. 3. BEFORE PROCEEDING FURTHER, WE MAY BRIEFLY NOTE T HE INTERNATIONAL TRANSACTIONS ENTERED BY THE ASSESSEE WITH ITS ASSOCIATED ENTERPRISES, WHOSE INCOME IS LIABLE TO B E DETERMINED AT AN ARMS LENGTH PRICE IN TERMS OF SEC. 92(1) OF THE ACT. HONEYWELL TECHNOLOGIES, SARAL (SWITZERLAND) (HEREIN AFTER REFERRED TO AS HTS) HAD ENTERED INTO A CONTRACT WITH TATA MOTORS LTD. FOR DEVELOPMENT AND SUPPLY OF TURBO CHARGES. THE ASSES SEE, WHICH IS A SUBSIDIARY OF HTS, WAS INCORPORATED WITH THE O BJECTIVE OF MANUFACTURING TURBO CHARGERS FOR SUPPLY IN DOMESTIC MARKET IN INDIA AS WELL AS FOR EXPORTS. THE CONTRACT OBTAINE D BY HTS FOR SUPPLY OF TURBO CHARGERS TO TATA MOTORS LTD. WAS AS SIGNED TO THE ASSESSEE-COMPANY ENABLING THE ASSESSEE COMPANY TO S UPPLY TURBO CHARGERS TO TATA MOTORS LTD. IN CONSIDERATION FOR ASSIGNMENT OF SAID CONTRACT, AN AMOUNT OF RS.40,41, 75,000/- WAS DETERMINED PAYABLE BY THE ASSESSEE TO HTS. THE ASSESSEE- COMPANY TREATED THE AMOUNT OF RS.40,41,75,000/- AS A REVENUE EXPENDITURE, BUT ITS DEDUCTION FOR TAX PURPOSES WAS CLAIMED OVER THE UNEXPIRED PERIOD OF CONTRACT I.E. THE PERIOD OF 48 MONTHS. AS A RESULT, FOR THE ASSESSMENT YEAR UNDER CONSIDERATI ON, AN EXPENDITURE OF RS.83,64,805/- WAS CLAIMED TOWARDS P AYMENT OF ASSIGNMENT FEES. THE SAID TRANSACTION CONSTITUTED AN INTERNATIONAL TRANSACTION WITHIN THE MEANING OF SEC TION 92B OF THE ACT. THE SECOND INTERNATIONAL TRANSACTION CA RRIED OUT BY THE ASSESSEE WITH ITS ASSOCIATED ENTERPRISE WAS WITH RE GARD TO INCOME EARNED BY PROVISION OF APPLICATION ENGINEERING SERV ICES FOR WHICH 4 THE STATED CONSIDERATION WAS RS.36,11,790/-. THE T PO HAS DETERMINED THE ARMS LENGTH PRICE OF THE AFORESAID INTERNATIONAL TRANSACTIONS VIDE HIS ORDER DATED 30-10-2009 PASSED U/S 92CA(3) OF THE ACT, WHEREBY ADJUSTMENTS OF RS.40,41 ,75,000/- AND RS.9,77,998/- RESPECTIVELY WERE PROPOSED. THIS ORDER OF THE TPO HAS FORMED THE BASIS FOR THE COMMISSIONER TO HO LD THAT THE ASSESSMENT ORDER DATED 4-12-2008 IS ERRONEOUS AND P REJUDICIAL TO THE INTERESTS OF THE REVENUE WITHIN THE MEANING OF SECTION 263 OF THE ACT BECAUSE THE INCOME ASSESSED THEREIN WAS WITHOUT EFFECTUATING THE ADJUSTMENTS PROPOSED BY THE TPO TO DETERMINE THE ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSAC TIONS. 4. BEFORE US, THE LEARNED COUNSEL FOR THE ASSESSEE HAS SUBMITTED THAT THE COMMISSIONER ERRED IN INVOKING S ECTION 263 OF THE ACT AND DIRECTING THE ASSESSING OFFICER TO P ASS AN ASSESSMENT ORDER AFRESH IN CONFORMITY WITH THE TPO S ORDER EVEN WHEN IN THE ORIGINAL ASSESSMENT PROCEEDINGS, THE AS SESSING OFFICER HAD MADE NECESSARY ENQUIRIES WITH RESPECT T O THE TRANSACTION OF PAYMENT OF ASSIGNMENT FEE TO THE ASS OCIATED ENTERPRISE AND AFTER DUE APPLICATION OF MIND, HE HA D FOUND THE SAME TO BE A TAX DEDUCTIBLE EXPENDITURE. AT THIS P OINT, THE LEARNED COUNSEL HAS VEHEMENTLY ARGUED THAT EVEN OTH ERWISE, THE COMMISSIONER IS WRONG IN HOLDING THE ASSESSMENT ORD ER ERRONEOUS BASED ON THE ORDER OF THE TPO DATED 4-12- 2008 (SUPRA), AS THE ORDER OF THE TPO WAS PATENTLY ILLEG AL AND LACKING IN JURISDICTION. IN THIS CONTRACT, IT IS CANVASSED THE TPO HAS EXCEEDED HIS JURISDICTION BY FORMING AN OPINION THA T THE ASSIGNMENT AGREEMENT WAS VOID, AND NO ASSIGNMENT FE E WAS PAYABLE BY THE ASSESSEE. IT IS POINTED OUT THAT TH E JURISDICTION OF THE TPO IS LIMITED TO DETERMINATION OF ARMS LENGTH PRICE OF THE SPECIFIED TRANSACTION AND HE COULD NOT VENTURE INTO THE COMMERCIAL RATIONALE OR THE VALIDITY OF THE TRANSAC TION PERTAINING TO THE PAYMENT OF ASSIGNMENT FEE TO THE ASSOCIATED ENTERPRISE. 5 THE LEARNED COUNSEL HAS ALSO SOUGHT TO DEMONSTRATE THE UNJUST NATURE OF TPOS DIRECTION FOR MAKING AN ADJUSTMENT OF RS.40,41,75,000/- IN RESPECT OF EXPENDITURE TOWARDS ASSIGNMENT FEE BY SUBMITTING THAT THE CLAIM OF THE ASSESSEE TO WARDS SUCH EXPENDITURE IN THIS YEAR WAS MERELY RS.83,64,804/-. IT WAS THEREFORE, CONTENDED THAT THE COMMISSIONER HAS NOT INDEPENDENTLY ANALYZED AS TO WHETHER OR NOT THE TPO S ORDER WAS VALID AND APPROPRIATE SO AS TO RELY ON SUCH ORDER A ND HOLD THAT THE ASSESSMENT ORDER DATED 4-12-2008 (SUPRA) WAS ER RONEOUS IN SO FAR AS IT WAS PREJUDICIAL TO THE INTERESTS OF RE VENUE WITHIN THE MEANING OF SECTION 263 OF THE ACT. 5. ON THE OTHER HAND, THE LEARNED CIT DR APPEARING FOR THE REVENUE HAS DEFENDED THE ORDER OF THE COMMISSIONER BY POINTING OUT THAT THE ASSESSMENT ORDER WAS CLEARLY ERRONEOUS IN THE EYES OF LAW, INASMUCH AS, THE INCOME IN RELATION TO THE INTERNATIONAL TRANSACTIONS OF THE ASSESSEE WITH ITS ASSOCIATED EN TERPRISES HAS NOT BEEN DETERMINED IN CONFORMITY WITH THE ORDER OF THE TPO, THOUGH IT WAS OF A LATER DATE, BECAUSE THE AFORESAI D WAS A MANDATORY REQUIREMENT AND WAS CONTRARY TO THE CBDT INSTRUCTION NO.3 DATED 25-5-2003. 6. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIO NS. IT IS AN UNDISPUTABLE FACT THAT IN THIS YEAR, ASSESSEE HAS E NTERED INTO CERTAIN INTERNATIONAL TRANSACTIONS WITH ITS ASSOCIA TED ENTERPRISES WHICH FALL WITHIN THE MEANING OF SECTION 92B OF THE ACT. IN THE COURSE OF ASSESSMENT PROCEEDINGS COMPLETED U/S 143( 3) OF THE ACT, THE ASSESSING OFFICER HAS IMPLIEDLY ACCEPTED T HE TRANSFER PRICING IN RESPECT OF THE STATED INTERNATIONAL TRAN SACTIONS CARRIED OUT BY THE ASSESSEE ON THE BASIS OF THE DECLARATION MADE BY THE ASSESSEE. THE COMMISSIONER IN EXERCISE OF HIS POWE RS CONTAINED IN SECTION 263 OF THE ACT HAS SET ASIDE THE ASSESSM ENT ORDER MAINLY ON THE GROUND THAT FINALIZATION OF INCOME WI TH RESPECT OF INTERNATIONAL TRANSACTIONS MADE IN THE ASSESSMENT O RDER DATED 6 4-12-2008 (SUPRA) WAS NOT IN CONFORMITY WITH THE RE PORT OF THE TPO AS MANDATED BY CBDT INSTRUCTION NO.3 DATED 25-5 -2003. ON THIS ASPECT, IN OUR CONSIDERED OPINION, THE JUDG MENT OF HONBLE DELHI HIGH COURT IN THE CASE OF RANBAXY LAB ORATORIES LTD. VS. CIT (2011) 16 TAXMANN.COM 418 (DELHI), COV ERS THE CONTROVERSY AGAINST THE ASSESSEE. AS PER THE HONB LE HIGH COURT, IN VIEW OF INSTRUCTION NO.3 DATED 25-5-2003 ISSUED BY THE CBDT IT IS MANDATORY ON THE PART OF THE ASSESSING OFFICE R TO MAKE A REFERENCE TO THE TPO FOR DETERMINATION OF ARMS LEN GTH PRICE OF THE INTERNATIONAL TRANSACTIONS AND TO THEREAFTER CO MPLETE THE ASSESSMENT IN CONFORMITY WITH THE ARMS LENGTH PRIC E OF INTERNATIONAL TRANSACTIONS DETERMINED BY THE TPO. IN THE PRESENT CASE, IT IS QUITE EVIDENT THAT THE ASSESSMENT HAS B EEN FINALIZED BY THE ASSESSING OFFICER ON 4-12-2008 IN A MANNER CONT RARY TO THE INSTRUCTIONS OF CBDT DATED 25-5-2003 (SUPRA) AND SE CTION 92C(4) R.W.S. 92CA(4) OF THE ACT. THEREFORE, IN PRINCIPLE , WE FIND NO REASON TO INTERFERE WITH INVOKING OF SECTION 263 OF THE ACT BY THE COMMISSIONER IN THE PRESENT CASE. 7. SO HOWEVER, THE ASSESSEE HAS RAISED A PLEA TO TH E EFFECT THAT IN THE PRESENT CASE, THE COMMISSIONER HAS DIRECTED THE ASSESSING OFFICER TO MAKE AN ASSESSMENT OF INCOME BASED ON AN ACTION OF THE TPO, WHICH IS PATENTLY ILLEGAL AND BEYOND HIS J URISDICTION QUA THE INTERNATIONAL TRANSACTION RELATING TO THE PAYME NT OF ASSIGNMENT FEE TO HTS. ACCORDING TO THE APPELLANT, IT IS A PATENT ANOMALY AND THE COMMISSIONER OUGHT TO HAVE CORRECTE D IT WHEN THE ISSUE WAS RAISED BEFORE HIM. 8. IN THIS CONTEXT, WE MAY BRING OUT THE PLEA OF TH E ASSESSEE WHICH IS ON THE FOLLOWING LINES. AS NOTICED EARLIER , ASSESSEE HAD PAID ASSIGNMENT FEE AMOUNTING TO RS.40,41,75,000/- TO ITS ASSOCIATED ENTERPRISE VIZ. HTS AS CONSIDERATION FOR HTS HAVING ASSIGNED TO THE ASSESSEE A CONTRACT FOR SUPPLY OF T URBO CHARGERS 7 TO TATA MOTORS FOR A PERIOD OF 48 MONTHS. THE ASSES SEE CLAIMED DEDUCTION OF SUCH ASSIGNMENT FEE AS A REVENUE EXPEN DITURE SPREAD OVER THE UNEXPIRED PERIOD OF THE UNDERLINING CONTRACT WITH TATA MOTORS LTD. THUS, FOR THE YEAR UNDER CONSIDERA TION, ASSESSEE HAD ONLY CLAIMED DEDUCTION FOR AN EXPENDIT URE OF RS.83,64,805/- ONLY TOWARDS ASSIGNMENT FEE. THE TPO IN HIS ORDER HAS SOUGHT TO MAKE OUT A CASE THAT THE TRANSA CTION WITH ASSOCIATED ENTERPRISE ENCOMPASSING THE ASSIGNMENT O F CONTRACT WAS VOID AND THEREFORE, HE HAS SOUGHT TO MAKE AN UP WARD ADJUSTMENT OF THE ENTIRE ASSIGNMENT FEE OF RS.40,41 ,75,000/-, BY INFERRING THAT THE ARMS LENGTH PRICE OF THE INTERN ATIONAL TRANSACTION OF PAYMENT OF ASSIGNMENT FEE TO HTS WAS NIL. THE FUNDAMENTAL PLEA RAISED BY THE ASSESSEE IS THAT THE TPO CAN ONLY EXAMINE THE QUANTUM OF EXPENDITURE AND CANNOT JUDGE THE COMMERCIAL RATIONALE AND VALIDITY OF THE TRANSACTIO N RELATING TO PAYMENT OF ASSIGNMENT FEE. IN SUPPORT, THE ASSESSEE HAS RELIED UPON THE JUDGMENT OF HON'BLE DELHI HIGH COURT IN TH E CASE OF CIT VS. EKL APPLIANCES LTD. (ITA NO. 1068/2011 AND ITA NO. 1070/2011 DATED 29-3-2012, WHEREIN SIMILAR PROPOSIT ION HAS BEEN UPHELD. 9. IN THIS CONTEXT, WE HAVE PERUSED THE JUDGMENT OF THE HONBLE DELHI HIGH COURT IN THE CASE OF EKL APPLIAN CES LTD. (SUPRA). IN THE SAID CASE, ASSESSEE HAD ENTERED IN TO AN INTERNATIONAL TRANSACTION BY WAY OF PAYMENT OF BRAN D FEE/ROYALTY TO ITS ASSOCIATED ENTERPRISE UNDER AN AGREEMENT. T HE REVENUE WAS REQUIRED TO DETERMINE THE ARMS LENGTH PRICE OF THE TRANSACTION. WHILE DOING SO, THE TPO NOTICED THAT ASSESSEE HAS BEEN INCURRING LOSSES YEAR AFTER YEAR, AND CONSIDER ING SUCH PERPETUAL LOSSES THE TPO HELD THAT THE PAYMENT OF R OYALTY DID NOT APPEAR JUSTIFIED AS THE TECHNICAL KNOWHOW/BRAND FEE AGREEMENT WITH THE ASSOCIATED ENTERPRISE HAD NOT BENEFITED TH E ASSESSEE IN ACHIEVING PROFITS FROM ITS OPERATIONS. FOR THE SAI D REASON, THE 8 TPO HELD THAT THE BRAND FEE PAYMENT MADE BY THE ASS ESSEE TO THE ASSOCIATED ENTERPRISE WAS UNJUSTIFIED AND THE A RMS LENGTH PRICE OF THE TRANSACTION SHOULD BE TAKEN AS NIL. THE HONBLE HIGH COURT DISAPPROVED THE ACTION OF THE TPO, AND A FTER REFERRING TO THE OECDS TRANSFER PRICING GUIDELINES OBSERVED THAT THE TPO WAS EXPECTED TO EXAMINE THE INTERNATIONAL TRANSACTI ONS AS HE ACTUALLY FOUND THEM. IN OUR CONSIDERED OPINION, TH E AFORESAID PARITY OF REASONING LAID DOWN BY THE HONBLE DELHI HIGH COMES INTO PLAY IN THE PRESENT FACT-SITUATION ALSO, AS OU R FOLLOWING DISCUSSION WOULD SHOW. 10. IN THE CASE BEFORE THE HONBLE DELHI HIGH COURT , THE TPO HAD APPLIED THE CUP METHOD WHILE EXAMINING THE PAYM ENT OF BRAND FEE/ROYALTY, WHICH ALSO IS THE POSITION IN TH E CASE BEFORE US. THE HONBLE HIGH COURT REFERRED TO THE OECDS TRANSFER PRICING GUIDELINES FOR MULTINATIONAL ENTERPRISES A ND TAX ADMINISTRATIONS, AND REPRODUCED PARAS 1.36 TO 1.41 OF SUCH GUIDELINES, WHICH PROVIDE FOR RECOGNITION OF THE ACTUAL TRANSACTIONS UNDERTAKEN . THEREAFTER, THE HONBLE HIGH COURT OPINED AS UNDER :- 17. THE SIGNIFICANCE OF THE AFORESAID GUIDELINES L IES IN THE FACT THAT THEY RECOGNISE THAT BARRING EXCEPTION AL CASES, THE TAX ADMINISTRATION SHOULD NOT DISREGARD THE ACT UAL TRANSACTION OR SUBSTITUTE OTHER TRANSACTIONS FOR TH EM AND THE EXAMINATION OF A CONTROLLED TRANSACTION SHOULD ORDI NARILY BE BASED ON THE TRANSACTION AS IT HAS BEEN ACTUALLY UN DERTAKEN AND STRUCTURED BY THE ASSOCIATED ENTERPRISES. IT IS OF FURTHER SIGNIFICANCE THAT THE GUIDELINES DISCOURAGE RESTRUC TURING OF LEGITIMATE BUSINESS TRANSACTIONS. THE REASON FOR CHARACTERISATION OF SUCH RESTRUCTURING AS AN ARBITR ARY EXERCISE, AS GIVEN IN THE GUIDELINES, IS THAT IT HA S THE POTENTIAL TO CREATE DOUBLE TAXATION IF THE OTHER TAX ADMINIST RATION DOES NOT SHARE THE SAME VIEW AS TO HOW THE TRANSACTION S HOULD BE STRUCTURED. 18. TWO EXCEPTIONS HAVE BEEN ALLOWED TO THE AFORESAID PRINCIPLE AND THEY ARE (I) WHERE THE ECON OMIC SUBSTANCE OF A TRANSACTION DIFFERS FROM ITS FORM; A ND (II) 9 WHERE THE FORM AND SUBSTANCE OF THE TRANSACTION ARE THE SAME BUT ARRANGEMENTS MADE IN RELATION TO THE TRANS ACTION, VIEWED IN THEIR TOTALITY, DIFFER FROM THOSE WHICH W OULD HAVE BEEN ADOPTED BY INDEPENDENT ENTERPRISES BEHAVING IN A COMMERCIALLY RATIONAL MANNER. 11. FROM THE AFORESAID, IT FOLLOWS THAT THE EXAMINA TION OF A CONTROLLED TRANSACTION SHOULD ORDINARILY BE BASED O N THE TRANSACTION AS IT HAS BEEN ACTUALLY UNDERTAKEN AND STRUCTURED BY THE ASSOCIATED ENTERPRISES. THUS, THE TPO SHOULD N OT DISREGARD THE ACTUAL TRANSACTION OR SUBSTITUTE OTHER TRANSACT IONS FOR THEM. THE TWO EXCEPTIONS WHICH HAVE BEEN PRESCRIBED ARE ( I) WHERE THE ECONOMIC SUBSTANCE DIFFERS FROM ITS FORM; AND, (II) WHERE THE FORM AND SUBSTANCE OF THE TRANSACTION IS THE SAME BUT AR RANGEMENTS MADE IN RELATION TO THE TRANSACTION, VIEWED IN ITS TOTALITY, DIFFER FROM THOSE WHICH WOULD HAVE BEEN ADOPTED BY INDEPEN DENT ENTERPRISES BEHAVING IN A COMMERCIALLY RATIONAL MAN NER. 12. IN THIS BACKGROUND, WE HAVE PERUSED THE ORDER O F TPO DATED 30-010-2009 (SUPRA). THE TPO CONSIDERED THE TRANSA CTION OF PAYMENT OF ASSIGNMENT FEE BY THE ASSESSEE TO HTS AS CONSIDERATION OF HAVING OBTAINED THE CONTRACT FOR S UPPLY OF TURBO CHARGES TO TATA MOTORS LTD. IN THE COURSE OF DETER MINING ITS ARMS LENGTH PRICE, THE TPO HAS COME TO A FINDING T HAT THE ASSESSEE-COMPANY HAD NO CAPACITY TO PERFORM THE RIG HTS ASSIGNED TO IT IN TERMS OF THE AGREEMENT. THEREFOR E, AS PER HIS PERCEPTION, THE TRANSACTION ENTERED INTO BY THE ASS ESSEE WITH HTS FOR PAYMENT OF ASSIGNMENT FEE WAS VOID. IN THI S CONTEXT, THE FOLLOWING DISCUSSION IN THE ORDER OF TPO IS RELEVAN T TO PERUSE:- 'IN VIEW OF THE ABOVE, ARM'S LENGTH PRICE OF THE IN TERNATIONAL TRANSACTION RELATING TO PAYMENT OF ASSIGNMENT FEES IS CONSIDERED AS NIL. THE ASSESSEE COMPANY HAS NO CAPA CITY TO PERFORM IN TERMS OF AGREEMENT THE RIGHTS OF WHICH P URPORTEDLY BEEN ASSIGNED TO THE ASSESSEE AND, THEREFORE, IT IS CLEAR THAT THERE ARE NO ASSIGNMENT OF ANY WORTHWHILE RIGHTS WH ICH EITHER HAVE BEEN ASSIGNED TO THE ASSESSEE OR WHICH HAVING 10 BEEN ASSIGNED TO IT, THE ASSESSEE HAS THE CAPACITY TO DISCHARGE. FURTHER, FAILURE ON THE PART OF THE ASSE SSEE TO BENCHMARK THE SAME LEADS TO THE INEVITABLE CONCLUSI ON THAT THE ARM'S LENGTH PRICE OF THE INTERNATIONAL TRANSAC TION RELATING TO PAYMENT OF ASSIGNMENT FEES CAN ONLY BE TAKEN AS NIL.' 13. OSTENSIBLY, THE TPO HAS DISREGARDED THE ASSIGNM ENT AGREEMENT WITH HTS AS ACCORDING TO HIM, THERE WAS N O CAPACITY ON THE PART OF THE ASSESSEE TO HAVE CARRIED OUT ITS SHARE OF FUNCTIONS ENVISAGED IN THE ASSIGNMENT AGREEMENT. I N OUR CONSIDERED OPINION, THE TPO WAS EXPECTED TO EXAMINE THE INTERNAL TRANSACTION OF PAYMENT OF ASSIGNMENT FEE A S HE ACTUALLY FOUND IT OR IN OTHER WORDS, AS IT WAS TRANSACTED BE TWEEN THE PARTIES; AND, THEN MAKE SUITABLE ADJUSTMENTS, IF RE QUIRED IN ORDER TO DETERMINE ITS ARMS LENGTH PRICE, BUT IT W AS IMPERMISSIBLE FOR HIM TO TREAT THE AGREEMENT AS VOI D BASED ON HIS OWN UNDERSTANDING OF THE COMMERCIAL FEASIBILITY OF THE TRANSACTION. 14. THE HONBLE DELHI HIGH COURT HAS ALSO EMPHASISE D THAT THE EXAMINATION OF A CONTROLLED TRANSACTION SHOULD ORDI NARILY BE BASED ON THE TRANSACTION AS IT HAS BEEN ACTUALLY UN DERTAKEN AND STRUCTURED BY THE ASSOCIATED ENTERPRISES EXCEPT IN TWO EXCEPTIONS WHICH WE HAVE DISCUSSED ABOVE. IN THE FACTS OF THE PRESENT CASE, WE ARE UNABLE TO APPRECIATE AS TO HOW THE SAME FALL S INTO ANY OF THE AFORESAID EXCEPTIONS. 15. AT THIS POINT, IT MAY ALSO BE RELEVANT TO OBSER VE THAT IN THE COURSE OF HEARING, IT WAS STATED BY THE APPELLANT T HAT THE IMPUGNED ASSIGNMENT AGREEMENT WAS ALSO BEFORE THE A UTHORITY FOR ADVANCE RULINGS (AAR) WITH REGARD TO THE TAXABI LITY OF THE ASSIGNMENT FEE IN INDIA, ON BEING APPROACHED BY HTS . THE AAR IN ITS ORDER DATED 07-10-2005 CONCLUDED THAT NONE O F THE CLAUSES OF THE PROVISO TO SECTION 245R(2) ARE ATTRACTED IN THE PRESENT 11 CASE. NOTABLY, ONE OF THE CLAUSES IN THE PROVISO T O SECTION 245R(2) OF THE ACT STIPULATE THAT THE TRANSACTION S HOULD NOT BE DESIGNED PRIMA-FACIE FOR AVOIDANCE OF INCOME-TAX. WE ARE ONLY POINTING OUT THIS TO SAY THAT SUCH AGREEMENT WAS NO T FOUND TO BE IN-GENUINE OR NON-BONAFIDE OR AS BEING DESIGNATED F OR AVOIDANCE OF THE TAXES BY THE AAR. THUS, THE ACTION OF THE T PO BECOMES UNTENABLE. 16. THEREFORE, CONSIDERED IN THE CONTEXT OF OECD GU IDELINES WHICH HAVE BEEN REFERRED TO BY THE HONBLE DELHI HI GH COURT IN THE EKL APPLIANCES LTD (SUPRA), THE IMPUGNED ACTION OF THE TPO DOES NOT FIT INTO THE EXCEPTIONS WHICH WOULD EMPOWE R HIM TO DISREGARD THE ACTUAL TRANSACTION AS MANIFESTED BY T HE ASSIGNMENT AGREEMENT WITH HTS. THEREFORE, THE INFERENCE OF TH E TPO TO DISREGARD THE ASSIGNMENT AGREEMENT, IN OUR VIEW, IS BEYOND HIS JURISDICTION, WHEREBY, THE TPO OUGHT NOT TO HAVE VE NTURED INTO THE COMMERCIAL RATIONALE AND VALIDITY OF THE TRANSA CTION. QUITE CLEARLY, THE AFORESAID ACTION OF THE TPO WOULD NOT RENDER THE ASSESSMENT ORDER ERRONEOUS IN SO FAR AS IT IS PREJU DICIAL TO THE INTEREST OF THE REVENUE WITHIN THE MEANING OF SECTI ON 263 OF THE ACT IN SO FAR AS IT RELATES TO THE PAYMENT OF THE A SSIGNMENT FEE TO HTS. THE COMMISSIONER, THEREFORE, HAS ERRED IN DIR ECTING THE ASSESSING OFFICER TO MAKE AN ASSESSMENT ON THE SAID BASIS. 17. IN THIS BACKGROUND, WE MAY NOW CONSIDER THE ULT IMATE DIRECTIONS OF THE COMMISSIONER TO THE ASSESSING OFF ICER WHICH WE HAVE ALREADY REPRODUCED IN THE EARLIER PART OF THIS ORDER. IN OUR VIEW, THE SAME WOULD REQUIRE MODIFICATION ON THE BA SIS OF AFORESAID DISCUSSION WITH RESPECT TO THE INTERNATIO NAL TRANSACTION OF PAYMENT OF ASSIGNMENT FEE. 18. THEREFORE, WHILE UPHOLDING IN PRINCIPLE, THE IN VOKING OF SECTION 263 BY THE COMMISSIONER, WE MODIFY HIS DIRE CTIONS TO THE 12 ASSESSING OFFICER TO THE EXTENT THAT HIS DIRECTIONS WOULD CONFINE TO THAT PORTION OF THE ORDER OF TPO U/S 92CA(3) OF THE ACT WHICH RELATES TO ADJUSTMENT PROPOSED IN RELATION TO THE I NCOME BY WAY OF PROVISION OF APPLICATION ENGINEERING SERVICES AM OUNTING TO RS.9,77,998/-. ACCORDINGLY, THE ASSESSING OFFICER IS DIRECTED TO PASS THE ENSUING ASSESSMENT ORDER IN THE LIGHT OF T HE AFORESAID DIRECTIONS. 19. THUS, IN FINAL ANALYSIS, THE APPEAL OF THE ASSE SSEE IS PARTLY ALLOWED. DECISION PRONOUNCED IN THE OPEN COURT ON THIS 31 ST DAY OF DECEMBER 2013. SD/- SD/- (R.S. PADVEKAR) (G.S. PANNU) JUDICIAL MEMBER ACCOUNTANT MEMBER PUNE, DATED: 31 ST DECEMBER, 2013 ANKAM / GCVSR COPY TO:- 1) ASSESSEE 2) DEPARTMENT 3) THE DRP, PUNE 4) THE DR, B BENCH, I.T.A.T., PUNE. 5) GUARD FILE BY ORDER //TRUE COPY// SENIOR PRIVATE SECRETARY, I.T.A.T., PUNE