SYMANTEC SOFTWARE, MUMBAI V. ACIT 10(1), MUMBAI

ITA 7894/MUM/2010

• Counselvise Citation: 789419914 RSA 2010
• Duration Of Justice: 6 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-05-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: E
• Next Hearing Date: 12-04-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 15-11-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: HEMANT J LALS KSINGHDR
• Assessee Lawyers: F V IRANICHETAN RAJPUT
• Keywords: Transfer pricing; International transaction; Additional evidence; Reasonable cause; Bad and doubtful debts; Corroborative evidences
• Section: 92C; 92; 92B; 234B; 10B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL IN THE INCOME TAX APPELLATE TRIBUNAL IN THE INCOME TAX APPELLATE TRIBUNAL IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES MUMBAI BENCHES MUMBAI BENCHES MUMBAI BENCHES E EE E, MUMBAI , MUMBAI , MUMBAI , MUMBAI BEFORE BEFORE BEFORE BEFORE SHRI SHRI SHRI SHRI J JJ J SUDHAKAR RDDY, AM & SHRI SUDHAKAR RDDY, AM & SHRI SUDHAKAR RDDY, AM & SHRI SUDHAKAR RDDY, AM & SHRI. VIJAY PAL RAO . VIJAY PAL RAO . VIJAY PAL RAO . VIJAY PAL RAO, JM , JM, JM , JM ITA NO. ITA NO. ITA NO. ITA NO.7894 7894 7894 7894/ // /MUM/ MUM/ MUM/ MUM/2010 2010 2010 2010 ASSESSMENT YEAR ASSESSMENT YEAR ASSESSMENT YEAR ASSESSMENT YEAR : : : : 2 22 2006 006 006 006- -- -2007 2007 2007 2007 M/S. SYMANTEC SOFTWARE SOLUTIONS PRIVATE LTD. UNIT 430, C-WING, 4 TH FLR., FORTUNE 2000, B.K.C., BANDRA (E), MUMBAI 400 051. PAN : AABCH3909H VS VSVS VS. .. . A.C.I.T. 10(1) R.NO.455, 4 TH FLR., AAYAKAR BHAVAN, M.K. RD., MUMBAI 400 020. (APPELLANT) (APPELLANT) (APPELLANT) (APPELLANT) (RESPONDENT) (RESPONDENT) (RESPONDENT) (RESPONDENT) PAN NO.AABCV2624B PAN NO.AABCV2624B PAN NO.AABCV2624B PAN NO.AABCV2624B APPELLANT BY : SHRI F V IRANI/CHETAN RAJPUT RESPONDENT BY : SHRI HEMANT J LAL/S KSINGH/DR O R D E R O R D E R O R D E R O R D E R PER PER PER PER VIJAY PAL RAO VIJAY PAL RAO VIJAY PAL RAO VIJAY PAL RAO, J.M. , J.M. , J.M. , J.M. THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ASSESSMENT ORDER DATED 30.09.2010 PASSED IN PURSUANT TO THE DIRECTIO N OF DISPUTE RESOLUTION PANEL [DRP] DATED 27.07.2010 ISSUED U/S.144C OF THE I.T. ACT FOR THE ASSESSMENT YEAR 2006-07. 2. THE ASSESSEE HAS RAISED FOLLOWING GROUNDS IN THI S APPEAL. 1. GENERAL GROUND CHALLENGING THE TRANSFER PRICING ADJUSTMENT OF ` `` ` 25,427,043/- ERRED IN MAKING TRANSFER PRICING ADJUSTMENT TO ITS INTERNATIONAL TRANSACTION IN THE NATURE OF MARKETING SUPPORT SERV ICES. 2. APPELLANT ALREADY ADEQUATELY REMUNERATED FOR ITS SERVICES ERRED IN MAKING A TRANSFER PRICING ADJUSTMENT TO TH E INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE APPE LLANT WITH ITS ASSOCIATED ENTERPRISE IN RELATION TO RENDERING OF M ARKETING SUPPORT SERVICES EVEN THOUGH, THE APPELLANT HAD EAR NED MORE THAN 50% OF THE SALES REVENUE GENERATED FOR ASSOCIA TED ENTERPRISE DURING THE YEAR ENDED 31 ST MARCH, 2006; WHICH DID NOT WARRANT ANY TRANSFER PRICING ADJUSTMENT. 3. USE OF CONTEMPORANEOUS DATA ERRED IN COMPUTING THE ARMS LENGTH PRICE USING THE FINANCIAL INFORMATION OF THE COMPARABLE COMPANIES AVAILABLE A T THE TIME ITA NO.7894/MUM/2010 ASSESSMENT YEAR : 2006-2007 2 OF ASSESSMENT, ALTHOUGH SUCH INFORMATION WAS NOT AV AILABLE AT THE TIME WHEN THE APPELLANT COMPLIED WITH THESE REG ULATIONS. 4. USE OF MULTIPLE YEAR DATA ERRED IN CONSIDERING THE OPERATING MARGINS EARNED B Y COMPARABLE COMPANIES BASED ON THE FINANCIAL DATA PE RTAINING TO THE YEAR ENDED 31 ST MARCH, 2006 ONLY AND REJECTING THE FINANCIAL DATA OF COMPARABLE COMPANIES FOR PRIOR TW O YEARS. 5. APPLICATION OF TURNOVER FILTER FOR IDENTIFICATION OF COMPARABLE COMPANIES ERRED IN REJECTING APPLICATION OF TURNOVER FILTER F OR IDENTIFICATION OF COMPARABLE COMPANIES THEREBY ACCEPTING COMPARABL E COMPANIES OF ALL SIZES IRRESPECTIVE OF THEIR SCALE OF OPERATIONS. 6. ADJUSTMENT FOR DIFFERENCE IN FUNCTIONAL AND RISK PROFILE OF COMPARABLE COMPANIES VIS--VIS OF THE APPELLANT ERRED IN NOT MAKING ANY ADJUSTMENTS FOR DIFFERENCES IN FUNCTIONAL AND RISK PROFILE OF COMPARABLE COMPANIES VIS--VIS THE APPELLANT THEREBY COMPARING THE OPERATING MARGI NS OF THE COMPARABLE COMPANIES ASSUMING HIGHER BUSINESS RISKS WITH THE APPELLANTS CAPTIVE RISK MITIGATED OPERATIONS W ITHOUT MAKING ANY ADJUSTMENT FOR DIFFERENCES IN FUNCTIONAL AND RISK PROFILE. 7. APPLICABILITY OF +/-5% RANGE ERRED IN COMPUTING THE ARMS LENGTH PRICE AS THE ME AN OF THE COMPARABLE COMPANIES MARGINS FOR MARKETING SUPPORT AND CONSULTANCY SERVICES WITHOUT TAKING INTO ACCOUNT TH E LOWER 5% VARIATION FROM THE MEAN, WHICH IS PERMITTED TO AND WHICH HAS ALSO BEEN OPTED FOR BY THE APPELLANT UNDER THE PROV ISIONS OF SECTION 92C(2) OF THE ACT 8. ERRONEOUS LEVY OF INTEREST U/S.234B OF THE ACT. WITHOUT PREJUDICE TO THE GROUNDS ABOVE, IF THE TRAN SFER PRICING ADJUSTMENT IS SUSTAINED THEN THE LEARNED ASSESSING OFFICER HAS ERRED IN LEVYING INTEREST U/S.234B OF THE ACT TO TH E EXTENT THE ADDITION IS MADE BASED ON THE UPDATED FINANCIAL DAT A FOR THE COMPARABLE COMPANIES. 9. DISALLOWANCE OF BAD DEBTS OF ` `` ` 9,128,790/- U/S.36(1)(VII) OF THE ACT. ERRED IN DISALLOWING THE BAD DEBTS WRITTEN-OFF IN T HE PROFIT AND LOSS ACCOUNT WITHOUT PREJUDICE TO THE ABOVE, THE HONBLE DRP AND THE LEARNED ASSESSING OFFICER SHOULD HAVE APPRECIATED H AT THE CLAIM OF BAD DEBTS IS OTHERWISE ALLOWABLE U/S.28 AS BUSINESS LOSS. 10. DISALLOWANCE OF PROFESSION TAX OF ` `` ` 2,875 U/S.43B OF INCOME TAX ACT. ITA NO.7894/MUM/2010 ASSESSMENT YEAR : 2006-2007 3 ERRED IN NOT TAKING COGNIZANCE OF THE FACT THAT THE OUTSTANDING BALANCE OF PROFESSION TAX WAS PAID ON OR BEFORE FIL ING THE RETURN OF INCOME AND SHOULD NOT HAVE BEEN DISALLOWED U/S.4 3B OF THE ACT. WITHOUT PREJUDICE TO THE ABOVE, THE HONBLE DRP AND THE LEARNED ASSESSING OFFICER SHOULD HAVE APPRECIATED T HAT NO DISALLOWANCE U/S.43B SHOULD ARISE CONSIDERING THAT THE PROFESSION TAX HAS NOT BEEN CLAIMED AS DEDUCTIBLE E XPENSES. 11. DISALLOWANCE OF SUNDRY BALANCE WRITTEN-OFF OF ` `` ` 533,241/- ERRED IN CONCLUDING THAT THE SUNDRY BALANCES WRITTE N-OFF ARE IN THE NATURE OF PRIOR PERIOD EXPENSE AND DISALLOWING THE SAME U/S.37 OF THE ACT. WITHOUT PREJUDICE TO THE ABOVE, THE HONBLE DRP AND THE LEARNED ASSESSING OFFICER SHOULD HAVE APPRECIATED T HAT SUNDRY BALANCES WRITTEN OFF IS OTHERWISE ALLOWABLE U/S.28 AS BUSINESS LOSS. 3. GROUND NO. 1 TO 8 REGARDING TRANSFER PRICE ADJUS TMENT TO THE INTERNATIONAL TRANSACTIONS. 3.1 THE ASSESSEE IS ENGAGED IN THE BUSINESS OF PROV IDING TECHNICAL AND MARKETING, PRE-SALE AND AFTER SALES SUPPORT OF VERI TAS GROUP PRODUCTS IN INDIA. THE ASSESSEE FILED ITS RETURN OF INCOME O N 29.11.2006 DECLARING TOTAL INCOME OF ` 75,88,386/-. SINCE THE ASSESSEE HAD INTERNATIONA L TRANSACTION THE REFERENCE WAS MADE U/S.92CA(1) OF THE ACT TO TH E TRANSFER PRICING OFFICER FOR COMPUTATION OF ARMS LENGTH PRICE IN RELATION TO INTERNATIONAL TRANSACTIONS VIDE ORDER DATED 18.08.2008. THE TRA NSFER PRICING OFFICER MADE TRANSFER PRICING ADJUSTMENT OF ` 2,54,27,043/- VIDE ORDER DATED 15.10.2009. THE ASSESSING OFFICER PREPARED THE DRAFT ORDER U/S. 143(3)(II) R.W.S.144C OF THE I.T. ACT DATED 27.11.2009 WHEREBY PROPOSED DISA LLOWANCE /ADDITION INCLUDING TRANSFER PRICING ADJUSTMENT OF ` 2,54,27,043/-. THE ASSESSEE FILED ITS OBJECTIONS ALONG WITH FORM NO.35A IN RESP ECT OF VARIOUS ADDITIONS AND DISALLOWANCE MADE BY THE ASSESSING OFFICER IN T HE DRAFT ORDER BEFORE THE ITA NO.7894/MUM/2010 ASSESSMENT YEAR : 2006-2007 4 DISPUTE RESOLUTION PANEL (DRP). THE DRP AFTER CON SIDERING THE CONTENTION OF THE ASSESSEE PASSED THE DIRECTION DATED 27.07.20 10. PURSUANT TO THE DIRECTION OF THE DRP, THE ASSESSING OFFICER PASSED THE CONSEQUENTIAL ORDER DATED 30.09.2010. 4. BEFORE US THE LEARNED AR OF THE ASSESSEE HAS SUB MITTED THAT DURING THE RELEVANT YEAR THE ASSESSEE HAS PROVIDED TWO TYP ES OF SERVICES TO ITS ASSOCIATE ENTERPRISES. THE SERVICES INCLUDE I) MA RKETING SUPPORT SERVICES, II) CONSULTANCY SERVICES TO ITS ASSOCIATE ENTERPRISES. THE ASSESSEE WAS REMUNERATED AT COST PLUS 2% OF THE NET REVENUE BY I TS AE FOR MARKET SUPPORT SERVICES WHEREAS FOR CONSULTANCY SERVICES THE ASSES SEE WAS REMUNERATED AT COST PLUS 8% MARK UP. THE ASSESSEE HAS BENCHMARKED THE TRANSACTION OF PROVISION OF SERVICES USING TNMM. THE AR HAS POIN TED OUT THAT THE ASSESSEE SELECTED 12 COMPARABLES IN TRANSFER PRICIN G STUDY REPORT AND MADE ADJUSTMENT OF ` 92,15,556/- IN ITS RETURN OF INCOME ON ACCOUNT OF TRANSACTION INVOLVING PROVISION OF MARKETING AND CO NSULTANCY SERVICES. WHILE MAKING THE TRANSFER PRICING ADJUSTMENT THE AS SESSEE CALCULATED ARMS LENGTH PRICE (AVP) MARGIN ON COST OF THE 12 C OMPARABLE BY USING THE DATA FOR 3 FINANCIAL YEARS 2003-04, 2004-05 & 2005- 06 AND THEREBY ARRIVED AT 9.17% ARMS LENGTH MARGIN. THE LEARNED AR FURTH ER SUBMITTED THAT THE TRANSFER PRICING OFFICER ASKED THE ASSESSEE TO FURN ISH THE UPDATED SINGLE YEAR MARGINS OF THE COMPARABLE SELECTED BY THE ASSESSEE IN ITS STUDY REPORT. THE SINGLE YEAR UPDATED MARGINS OF THE COMPARABLES FOR THE F.Y. 2005-06 IS 29.55%. THE LEARNED AR OF THE ASSESSEE HAS SUBMIT TED THAT THE ASSESSEE OBJECTED FOR THE TRANSFER PRICING OFFICER FOR CONSI DERING THE SINGLE YEAR ITA NO.7894/MUM/2010 ASSESSMENT YEAR : 2006-2007 5 UPDATED DATA OF THE COMPARABLE SELECTED BY THE ASSE SSEE INSTEAD OF 3 YEARS DATA AS TAKEN BY THE ASSESSEE IN ITS TRANSFER PRICI NG STUDY. THE LEARNED AR HAD REFERRED PARA 5.1.2 OF THE TRANSFER PRICING ORD ER FOR THE VARIOUS OBJECTIONS TAKEN BY THE ASSESSEE FOR THE SAKE OF CO NVENIENCE OF THE OBJECTIONS ARE REPRODUCED AS UNDER: 5.1.2 IN RESPONSE, THE ASSESSEE SUBMITTED ITS REPL Y VIDE LETTER DATED 10.09.2009. THE MAIN SUBMISSIONS OF THE ASS ESSEE ARE AS FOLLOWS: A. THE ASSESSEE HAS RECEIVED MORE THAN 50% OF THE SALE S REVENUE GENERATED BY IT FOR AE IN THE FORM OF MARKE TING SERVICES, WHICH IS ON THE HIGHER SIDE. B. CONDUCTING AN ANALYSIS BASED ON INFORMATION CURRENT LY AVAILABLE BUT NOT AVAILABLE AT THE TIME OF COMPLYIN G WITH THE REGULATIONS IS NOT THE INTENT OF THE REGULATIONS. C. THE USE OF MULTIPLE YEAR DATA SHOULD BE ALLOWED SIN CE IT WOULD CAPTURE MARKET CYCLES AND REDUCE THE VARIABILITY /D ISTORTIONS IN THE FINANCIAL RESULTS ARISING FROM THE USE OF SINGL E YEAR DATA. D. THERE IS A CHANGE IN THE NATURE OF BUSINESS ACTIVIT IES OF EPIC ENERGY LTD. AND RATA GLITTER INDUSTRIES LTD. DURING FY 2005-06, DUE TO WHICH THESE COMPANIES CANNOT BE CONSIDERED T O BE COMPARABLE FOR FY 2005-06. E. TURNOVER FILTER SHOULD BE APPLIED FOR SELECTION OF COMPARABLE COMPANIES IN LIGHT OF THE JUDICIAL GUIDANCE AVAILAB LE SUBSEQUENT TO THE DATE OF TRANSFER PRICING STUDY. F. ADJUSTMENT FOR DIFFERENCES IN FUNCTIONAL AND RISK P ROFILE SHOULD BE GRANTED IN VIEW OF THE FACT THAT THE ASSESSEE IS A CAPTIVE RISK MITIGATED ENTITY WHEREAS COMPARABLES ARE FULL FLEDGED RISK BEARING ENTITIES. G. DURING THE RELEVANT YEAR THE ASSESSEE HAD REDUCED PROPORTIONATE EXPENSES FOR UPGRADING THE ORACLE SOF TWARE, WHICH IS USED FOR ACCOUNTING PURPOSES. THESE EXPEN SES WERE INCURRED IN EARLIER YEAR. THIS AMOUNT WAS FULLY DE BITED TO PROFIT & LOSS ACCOUNT IN THE EARLIER YEAR AND AS SUCH, IN EARLIER YEAR, THE TPO HAD REDUCED FULL AMOUNT OF EXPENSE DEBITED TO PROFIT AND LOSS ACCOUNT WHILE CALCULATING THE MARGINS EARN ED BY THE ASSESSEE WITHOUT ACCEPTING THE ASSESSEES ARGUMENT THAT BENEFIT IS EXPECTED OVER THE NEXT FEW YEARS. THUS, THE ASSESSEE HAS REQUESTED TO CONSIDER REVISED MARGINS FROM ITS BUSINESS ACTIVITIES FOR THE YEAR UNDER CONSIDERATIO N AFTER ELIMINATING THE EFFECT OF PROPORTIONATE SOFTWARE EX PENSES REDUCED BY IT FOR COMPUTING OPERATING MARGINS AS TH E ENTIRE EXPENDITURE WAS CONSIDERED BY THE TPO IN EARLIER YE AR FOR COMPUTING THE OPERATING MARGIN. H. EFFECT OF VOLUNTARY TRANSFER PRICING ADJUSTMENT ALR EADY OFFERED BY THE ASSESSEE IN THE RETURN OF INCOME SHOULD BE C ONSIDERED IN THE ORDER. I. THE BENEFIT OF +/- 5% SHOULD BE GIVEN TO THE ASSESS EE. ITA NO.7894/MUM/2010 ASSESSMENT YEAR : 2006-2007 6 5. THE AR OF THE ASSESSEE HAS SUBMITTED THAT DURING THE F.Y. UNDER CONSIDERATION THE ASSESSEE HAS RECEIVED MORE THAN 5 0% OF SALES REVENUE GENERATED BY IT FOR ITS AE IN THE FORM OF MARKETING SERVICES, WHICH IS ON HIGHER SIDE. HE HAS SUBMITTED THAT THE REMUNERATION RECE IVED BY THE ASSESSEE AT COST PLUS 2% OF THE NET SALE REVENUE GENERATED BY ITS AE COMES TO MORE THAN 50% OF THE SALE REVENUE OF THE AE. HE HAS FURTHER SUBMIT TED THAT THE ADJUSTMENT MADE BY THE TPO, OVER AND ABOVE, THE FEE RECEIVED BY TH E ASSESSEE FOR MARKETING SUPPORT AND CONSULTANCY SERVICES WOULD BE MORE THAN 50% OF THE SALE REVENUE OF THE AE AND THEREFORE THE SAME IS HIGHER THAN THAT O F THIRD PARTY COULD HAVE EARNED IN SIMILAR BUSINESS. THE LEARNED AR SUBMIT TED THAT THE ADJUSTMENT MADE BY THE TRANSFER PRICING OFFICER IS NOT WARRANTED SI NCE THE ASSESSEE HAS ALREADY EARNED MORE THAN 50% OF THE SALE REVENUE GENERATED BY ITS AE AND OFFER FOR TAX. THE ARGUMENTS OF THE LD AR OF THE ASSESSEE ARE SUMM ARISED AS UNDER: (A) THE ASSESSEE FIRST DETERMINES THE MOST APPROPRIATE METHOD IN RELATION TO THE FIVE METHODS SET OUT IN RULE10B. RULE 10C PROV IDES THAT IN SELECTING THE MOST APPROPRIATE METHOD, REGARD MUST BE GIVEN INTER ALIA TO THE AVAILABILITY, OF THE DATA NECESSARY FOR THE APPLIC ATION OF THE METHOD. THUS, IT IS SUBMITTED THAT THE DATA WHICH IS NOT AV AILABLE FOR THE COMPARISON AT THE TIME OF PREPARATION OF TRANSFER PRICING DOCU MENTATION CANNOT BE USED AFTERWARDS. THE INFORMATION AND DOCUMENTS REQUIRED TO BE KEPT A ND MAINTAINED BY THE ASSESSEE U/S.92B READ WITH 10D OF THE RULES, SHOWS THAT RECORDS MUST BE MAINTAINED OF THE ECONOMIC ANALYSIS, MARKET ANALYSI S, UNCONTROLLED TRANSACTION, EVALUATION OF COMPARABILITY, ACTUAL WO RKING, ETC. THIS DOCUMENTATION REQUIREMENT U/S.92B READ WITH RULE 10 D(1) IS REQUIRED TO BE COMPLIED WITH BEFORE THE DUE DATE FOR FILING OF THE RETURN OF INCOME. IT IS BEYOND ANY PRINCIPLE OF JUSTICE TO REJECT THE ANALY SIS UNDERTAKEN BY THE ASSESSEE MERELY FOR THE REASONS THAT DATA FOR SAME YEAR AS THE INTERNATIONAL ITA NO.7894/MUM/2010 ASSESSMENT YEAR : 2006-2007 7 TRANSACTIONS HAS NOT BEEN USED, WITHOUT REALIZING T HE PRACTICAL DIFFICULTIES THAT COULD ARISE BY SUCH INTERPRETATION OF LAW. (B) THE PROVISIONS OF SECTION 92CA(3) READ WITH SECTION 92C(3), IN TERMS OF WHICH THE TRANSFER PRICING OFFICER IS AUTHORIZED TO DETER MINE THE ARMS LENGTH PRICE ON THE BAIS OF INFORMATION OR DOCUMENT AVAILABLE WI TH HIM. THE VARIOUS CONDITIONS HAVE BEEN SPECIFIED IN SECTION 92C(3), W HICH NEED TO BE SATISFIED IN CASE THE TRANSFER PRICING OFFICER HAS TO DETERMI NE THE INFORMATION AVAILABLE WITH HIM FOR DETERMINING THE ARMS LENGTH PRICE. TH US, EVEN IF THE TRANSFER PRICING OFFICER HAS TO DEVIATE FROM THE ANALYSIS CO NDUCTED BY THE ASSESSEE THE SAME CAN ONLY BE TO THE EXTENT THE ASSESSEE HAS NOT COMPLIED WITH THE TRANSFER PRICING REGULATIONS FOR DETERMINING THE AR MS LENGTH PRICE AND NOT IN ANY OTHER RESPECT WHERE THE ASSESSEE HAS COMPLIED W ITH THE TRANSFER PRICING REGULATIONS. IN CASE THE CONTENTION OF THE LEARNED TRANSFER PRICING OFFICER FOR USE OF LATEST AVAILABLE DATA IS TO BE ACCEPTED THEN THE UNDERLYING CONSIDERATION WOULD BE THAT THE ASSESSEE HAS NOT CO MPILED WITH THE APPLICABLE REGULATIONS, IN WHICH SCENARIO, AS EXPLA INED ABOVE, THERE WOULD BE NON-COMPLIANCE BY ALL THE ASSESSEE SINCE THERE WOUL D BE SOME DATA FOR LATEST YEAR AVAILABLE ONLY POST THE STATUTORY DEADLINE WHI CH WOULD BE RELEVANT FOR DETERMINING THE ARMS LENGTH PRICE. IT CANNOT BE A LEGISLATIVE INTENTION THAT THE REGULATIONS ARE FRAMED IN SUCH A MANNER THAT AL L THE ASSESSEE ARE CONSIDERED NON-COMPLAINT IN ALL PROBABILITIES. (C) BASED ON THE ABOVE, THE ASSESSEE SUBMITS THAT IT HA D CARRIED OUT A PROPER SCREENING OF POTENTIALLY COMPARABLE COMPANIES IN PU BLIC DATABASES AND ADOPTED AN OBJECTIVE SCREENING PROCESS FOR IDENTIFY ING COMPARABLES AND THE COMPARABLES IDENTIFIED BY THE ASSESSEE WERE NEITHER INSUFFICIENT NOR HAD OTHER DEFICIENCY. (D) THE TREND OF OPERATING MARGINS OF COMPARABLE COMPAN IES, CLEARLY INDICATES THAT OPERATING MARGIN EARNED BY THE COMPARABLE COMP ANIES VARIES FROM YEAR ON YEAR BASIS WITH NO ONE SIDE UPWARD/DOWNWARD DIRE CTION. IN VIEW OF THE ITA NO.7894/MUM/2010 ASSESSMENT YEAR : 2006-2007 8 ABOVE, USE OF MULTIPLE YEAR DATA REDUCES THE VARIAT ION/DISTORTION OF THE FINANCIAL RESULTS AS WELL AS CAPTURE THE INDUSTRY/M ARKET CYCLES. (E) IN LIGHT OF THE ABOVE AND GIVEN THE NATURE OF BUSIN ESS ACTIVITIES UNDERTAKEN BY ASSESSEE, ECONOMIC CONDITIONS AND USAGE OF BROAD RANGE OF COMPARABLES, THE USE OF MULTIPLE-YEAR DATA WOULD CAPTURE MARKET CYCLES AND REDCE THE VARIABILITY/DISTORTIONS IN THE FINANCIAL RESULTS AR ISING FROM THE USE OF SINGLE YEAR DATA. SINGLY YEAR DATA WOULD NOT ADEQUATELY C APTURE THE MARKET AND BUSINESS CYCLE OF THE BROAD RANGE OF COMPARABLES. THEREFORE, THE ASSESSEE WISHES TO SUBMIT THAT USE OF MULTIPLE YEAR DATA FOR UNDERTAKING A COMPARABILITY ANALYSIS WILL PRODUCE BETTER RESULTS AND HENCE, USE OF SUCH DATA IS APPROPRIATE. THUS, THE LEARNED TRANSFER PR ICING OFFICER AND THE LEARNED ASSESSING OFFICER HAVE ERRED IN DETERMINING THE ARMS LENGTH PRICE USING THE MARGINS EARNED BY THE COMPARABLE COMPANIE S ONLY DURING FY 2005-06. THUS THE LEARNED AR HAS SUBMITTED THAT BY USING THE UPDATED DATA/INFORMATION THROUGH ONLY FOR THE F.Y.06-07 AS AGAINST 3 FINANCIAL YEARS INFORMATION TAKEN INTO ACCOUNT BY THE ASSESSEE, THE TRANSFER PRICING OFFICER AS WELL AS ASSESSING OFFICER HAS ADDED IN DETERMINI NG THE ARMS LENGTH PRICE. (F) THE AR OF THE ASSESSEE FURTHER CONTENDED THAT THE T PO, THE DRP AS WELL AS ASSESSING OFFICER FAILED TO APPRECIATE AND CONSIDER ED THE CONTENTION OF THE ASSESSEE REGARDING THE ADJUSTMENT FOR DIFFERENCE IN FUNCTIONAL AND RISK PROFILE. THE LEARNED AR HAS SUBMITTED THAT IT WAS C LEAR FROM THE FUNCTIONAL ANALYSIS SUBMITTED TO THE LEARNED TPO THAT THE ASSE SSEE IS A RISK MITIGATED ENTITY SINCE RISKS SUCH AS MARKET RISK, WARRANTY RI SK, CREDIT AND COLLECTION RISK, ETC ARE NOT BORNE BY THE ASSESSEE VIS-A-VIS THE COM PARABLE COMPANIES WHICH TRANSACT WITH INDEPENDENT ENTITIES AND ARE NOT PROT ECTED FROM THESE RISKS. ALTHOUGH IT IS EVIDENT FROM THE FUNCTIONAL ANALYSIS DOCUMENT SUBMITTED THAT THE ASSESSEE IS RISK MITIGATED ENTITY, THE SAME HAS NOT BEEN TAKEN INTO CONSIDERATION BY THE LEARNED TPO. (G) THE NEXT CONTENTION OF THE LEARNED AR IS REGARDING TURNOVER FILTRATION. THE LD AR OF THE ASSESSEE HAS SUBMITTED THAT THE ASSESSEE HAS TAKEN AN OBJECTION BEFORE THE TRANSFER PRICING OFFICER FOR APPLICATIO N OF THE TURNOVER FILTER WHILE SELECTING COMPARABLES AND REQUESTED THE TRANSFER PR ICING OFFICER TO EXCLUDE THE COMPARABLE HAVING LESS THAN 5 CRORES AND MORE T HAN 50 CRORES OF THE ITA NO.7894/MUM/2010 ASSESSMENT YEAR : 2006-2007 9 TURNOVER WHILE COMPUTING THE ALP. HE HAS POINTED OUT THAT THE TPO HAS NOT CONSIDERED AND DISCUSSED THE ARGUMENTS OF THE ASSES SEE REGARDING APPLICATION OF THE TURNOVER FILTER ON MERIT BUT MER ELY BRUSHED THEM ASIDE BY MAKING STATEMENT THAT THE ASSESSEE ITSELF HAS SELEC TED THE COMPARABLE IN ITS TRANSFER PRICING STUDY WITHOUT CONSIDERING THE PRAC TICAL DIFFICULTY FACED BY THE ASSESSEE. THE LEARNED AR HAS SUBMITTED THAT IT IS SETTLED LAW AS PROPOUNDED BY THE HONBLE SUPREME COURT AS WELL AS THIS TRIBUN AL IN VARIOUS DECISIONS WITH TPO SHOULD APPLIES THE RELEVANT PROVISIONS JUD ICIOUSLY INCLUDING THE TURNOVER FILTER WHILE DETERMINING THE ALP FOR TRANS FER PRICING ADJUSTMENT. THE AR HAS SUBMITTED THAT OPERATING REVENUE WITH RE SPECT TO TURNOVER I.E. LESS THAN RS.5 CRORES OR SIGNIFICANTLY HIGH TURNOVE R OF MORE THAN RS 50 CRORES SHOULD BE ELIMINATING AS THE SAME CANNOT BE COMPARE D WITH THE SCALE OF OPERATION OF THE ASSESSEE. (H) HE HAS RELIED UPON THE DECISION OF DELHI BENCH OF T HE TRIBUNAL IN THE CASE OF M/S ADOBE SYSTEMS INDIA PRIVATE LIMITED VS. A.C.I.T . DT.21.01.2011 IN ITA NO.5043/DEL/2010, SUBMITTED THAT THE INCLUSION OF SUPER NORMAL PROFIT MAKING COMPANIES IS NOT JUSTIFIED IN THE COMPARABLE . HE HAS ALSO RELIED UPON THE DECISION OF CHANDIGADH SPECIAL BENCH OF THE TRI BUNAL IN DCIT VS. QURAK SYSTEM PVT. LTD. [38 SOT 307], AND SUBMITTED THAT E VEN IF THE ASSESSEE HAS TAKEN A DATAMATIC AS COMPARABLE IN HIS TRANSFER PRI CING, THE ASSESSEE IS ENTITLED TO POINT OUT THAT ABOVE ENTERPRISE HAS WRO NGLY BE TAKEN AS COMPARABLE THOSE HAVE EARNED EXTREMELY HIGH PROFIT AND SUCH COMPARABLES SHOULD NOT BE TREATED AS COMPARABLE BY TAX AUTHORIT IES. 6. THE LEARNED AR OF THE ASSESSEE HAS THEN ADVANCED THE ARGUMENTS ON APPLICATION FOR THE ADMITTING THE ADDITION EVIDENCE . THE ASSESSEE HAS FILED THE ADDITION EVIDENCE CONTAINING THE DOCUMENTS FROM PAG ES 272 TO 328 OF THE PAPER BOOK. THE INFORMATION CONTAINED IN THE ADDITIONAL E VIDENCE E WAS NOT AVAILABLE IN PUBLIC DOMAIN AT THE TIME OF TP STUDY OF THE ASSESS EE. HE HAS FURTHER CONTENDED THAT THE AUTHENTICITY OF THE ADDITIONAL E VIDENCES CANNOT BE DISPUTE AS THE ASSESSEE HAS TAKEN THE MATERIAL FROM THE OFFICI AL WEBSITE OF MINISTRY OF CORPORATION AFFAIRS. HE HAS RELIED UPON THE DECISIO N OF THE HONBLE JURISDICTIONAL ITA NO.7894/MUM/2010 ASSESSMENT YEAR : 2006-2007 10 HIGH COURT IN THE CASE OF SMT PRABHAVATI S SHAH VS CIT REPORTED IN 231 ITR 1 AND THE DECISION OF THE HONBLE SUPREME COURT IN TH E CASE OF SHRI K VENKATARAMIAH VS A SEETHARAMA REDDY REPORTED IN AIR 1963 (SC) 1526. THE LD AR HAS SUBMITTED THAT THE ADDITIONAL EVIDENCE IS NE CESSARY IN THE INTEREST OF JUSTICE AND FOR PROPER ADJUDICATION OF THE DISPUTE INVOLVED IN GROUNDS OF APPEAL 1 TO 3 AND THEREFORE, THE SAME MAY BE ADMITTED. 6.1 ON THE OTHER HAND, THE LD DR HAS VEHEMENTLY OBJ ECTED TO THE PRAYER OF THE ASSESSEE FOR ADMISSION OF THE ADDITIONAL EVIDENCE A T THIS STAGE. HE HAS SUBMITTED THAT RULE 29 DOES NOT CONFER ANY RIGHT ON THE PARTIES TO PRODUCE ADDITIONAL EVIDENCE. THE ASSESSEE HAS FILED ADDITIO NAL EVIDENCE FIRST TIME BEFORE THE TRIBUNAL IN THE FORM OF PAPER BOOK NO.2 WITHOUT EXPLAINING THE REASONABLE CAUSE AS TO WHY THE SAID EVIDENCE HAS NOT BEEN PROD UCED BEFORE THE LOWER AUTHORITIES. HE HAS FURTHER SUBMITTED THAT THE A DDITIONAL EVIDENCE FILED BY THE ASSESSEE IS REQUIRED TO BE VERIFIED AND EXAMINED AN D THEREFORE, FACTS ARE REQUIRED TO BE INVESTIGATED, WHICH IS NOT POSSIBLE AT THIS STAGE WHILE CONSIDERING THE ADDITIONAL EVIDENCE. HE RELIED ON THE DECISIO N OF THE JURISDICTIONAL HIGH COURT IN THE CASE OF GAMMON INDIA LTD VS CIT REPORT ED IN 214 ITR 50. 7 ON MERITS AS REGARDS TO GROUNDS OF APPEAL NOS. 1 TO 7, THE LD DR HAS SUBMITTED THAT THE ASSESSEE IS A CAPITAL RISK FREE ENTITY BUT STILL INCURRING LOSS WHICH IS BEYOND THE COMPREHENSION. THE LD DR FURTHE R CONTENDED THAT IT IS BEYOND IMAGINATION AS TO HOW THE ASSESSEE INCURRING LOSS WHEN NO CAPITAL RISK IS INVOLVED IN THE BUSINESS OF THE ASSESSEE AND THE SE RVICES PROVIDED BY THE ASSESSEE TO ITS ASSOCIATED ENTERPRISES (AE). THE L D DR HAS CONTENDED THAT ALL THE COMPARABLES ARE SELECTED AND PROVIDED BY THE ASSESS EE ITSELF. THE ASSESSEE ITA NO.7894/MUM/2010 ASSESSMENT YEAR : 2006-2007 11 MADE AN ADJUSTMENT OF RS. 92,15,556/- IN ITS RETURN OF INCOME ON ACCOUNT OF INTERNATIONAL TRANSACTIONS IN THE PROFIT OF MARKE TING AND CONSULTANCY SERVICES WHILE CALCULATING ITS ARMS LENGTH AS PER TRANSFER PRICING REPORT. THE ASSESSEE HAS TAKEN INTO ACCOUNT THE ALP MARGIN ON 12 COMPARA BLES USED AT THREE YEARS DATA I.E. FYS 2003-04, 04-5 AND 05-06 AND IN THIS E XERCISE, THE ASSESSEE HAS DETERMINED THE ALP AT 9.17% WHILE THE MARGIN EARNED BY THE ASSESSEE HAS BEEN CALCULATED AT LOSS OF 0,87%. THE TRANSFER PRICING OFFICER (TPO) ASKED THE ASSESSEE TO FURNISH THE UPDATED SINGLE YEAR MARGIN OF THE COMPARABLES SELECTED BY THE ASSESSEE IN ITS TRANSFER PRICING STUDY REPOR T. ACCORDING TO THE ASSESSEE, THE SINGLE YEAR UPDATED MARGIN OF COMPARABLES FOR T HE AY 2005-06 IS AT 29.55%. THE TPO ISSUED SHOW CAUSE NOTICE DATED 31.1.2009 AS TO WHY THE ALP MARGIN SHOULD NOT BE TAKEN AT 29.50% FOR MARKETING SUPPORT AND CONSULTANCY SERVICES OF THE ASSESSEE BY CONSIDERING THE SINGLE YEAR UPDATED DATA. THE LD DR HAS POINTED OUT THAT THESE COMPARABLES WERE SELECTED BY THE ASSESSEE AND THE TPO HAS ONLY TAKEN INTO ACCOUNT THE CURRENT YEAR UPDATE D DATA INSTEAD OF THREE YEARS UN-UPDATED DATA TAKEN INTO ACCOUNT BY THE ASSESSEE. THEREFORE, THE ASSESSEE CANNOT BE ALLOWED SUBSEQUENTLY TO TAKE A PLEA THAT SOME OF THE COMPARABLES SHOULD HAVE EXCLUDED ON THE GROUND THAT THEY ARE HA VING ABNORMAL PROFIT DUE TO VARIATION IN THE TURNOVER IN COMPARISON TO THE ASSE SSEES TURNOVER AND FUNCTIONAL AND RISK DIFFERENCE. THE LD DR FURTHER CONTENDED THAT THE ASSESSEE HAS RAISED THESE OBJECTIONS ONLY WHEN THE TPO DECIDED TO TAKE THE SINGLE CURRENT YEAR UPDATED DATA AND THE ASSESSEE WAS HAVING NO SUCH OB JECTION, IF THE DATA, WHICH HAS TAKEN INTO ACCOUNT IN THE TP STUDY WOULD HAVE BEEN ACCEPTED BY THE TPO. THE TPO HAS NOT TAKEN INTO CONSIDERATION ANY NEW CO MPARABLE BUT ALL THE COMPARABLES SELECTED BY THE ASSESSEE ARE CONSIDERED WHILE DETERMINING THE ALP EXCEPT USING UPDATED CURRENT YEAR DATA OF THE COMPA RABLES SELECTED BY THE ITA NO.7894/MUM/2010 ASSESSMENT YEAR : 2006-2007 12 ASSESSEE. THUS, THE OBJECTION TAKEN BY THE ASSESSE E IS BASELESS AND AN AFTERTHOUGHT. 7.1 THE LD DR HAS THEN REFERRED THE ASSEESSEES CO NTENTION THAT THE ASSESSEE IS GETTING COST +2% NET REVENUE OF THE AE FOR MARK ETING SUPPORT SERVICES AND THAT WOULD BE MORE THAN 50% OF THE SALE REVENUE OF THE AE AND NO FURTHER ADJUSTMENT IS REQUIRED. HE HAS EMPHASIZED THAT IT IS THE MARGIN OF THE ASSESSEE ON THE INTERNATIONAL TRANSACTIONS, WHICH IS RELEVANT AND NOT THE PERCENTAGE OF THE AES REVENUE OUT OF THE TRANSACTI ONS. 7.2 THE LD DR HAS FURTHER POINTED OUT THAT WHILE DE TERMINING THE ALP, TPO HAS THE POWER AND AUTHORITY TO CONSIDER THE DATA WHICH ARE AVAILABLE AT THE TIME OF SUCH CALCULATION. THE DEPARTMENT HAS NOT IMPOSED ITS CHOICE OF COMPARABLE; BUT ALL THE COMPARABLES WERE CHOSEN BY THE ASSESSEE. H E HAS REFERRED TO THE RULE 10B OF THE I T RULES AND SUBMITTED THAT AS PER SUB RULE 4 OF RULES 10B, THE DATA USED IN ANALYSING COMPARABILITY OF THE UNCONTROLLED TRANSACTIONS WITH THE INTERNATIONAL TRANSACTIONS, SHALL BE THE DATA OF TH E FINANCIAL YEAR IN WHICH THE INTERNATIONAL TRANSACTION HAS BEEN ENTERED INTO. 7.3 AS REGARDS TO THE PROVISO TO SUB.RULE 4 OF RULE 10B, THE LD DR HAS SUBMITTED THAT IT GIVES ONLY A LIBERTY TO TAKE INT O ACCOUNT THE DATA RELATING TO THE PERIOD OTHER THAN THE FINANCIAL YEAR IN WHICH THE I NTERNATIONAL TRANSACTION HAS BEEN ENTERED INTO; BUT SUCH PERIOD SHOULD NOT BE MO RE THAN TWO YEARS PRIOR TO SUCH FINANCIAL YEAR. THE LD DR THUS SUBMITTED THAT THE PROVISO TO SUB. SEC. 4 OF RULES 10B HAS A LIMITED APPLICATION. HE HAS REFERRE D TO THE PROVISIONS OF SEC ITA NO.7894/MUM/2010 ASSESSMENT YEAR : 2006-2007 13 92CA(3) AND SUBMITTED THAT THE TPO MAY REQUIRE ANY SPECIFIC POINT AND AFTER TAKEN INTO ACCOUNT ALL RELEVANT MATERIAL, WHICH H E HAS GATHERED, PASS AN ORDER IN WRITING TO DETERMINE THE ALP IN RELATION TO THE INTERNATIONAL TRANSITION. THUS, WHATEVER RELEVANT MATERIAL THE TPO HAS GATHERED CAN BE TAKEN INTO ACCOUNT IRRESPECTIVE OF THE SAME WAS AVAILABLE WITH THE ASS ESSEE AT THE TIME OF TP STUDY. 7.4 THE LD DR THUS SUBMITTED THAT THE TPO CAN GATH ER THE MATERIAL FROM THIRD PARTY IN THE PROCESS OF DETERMINING THE ALP. THE ASSESSEE HAS OBJECTED ONLY FOR TWO COMPARABLES ON THE GROUND OF TURNOVER FILTERING WHEN THE TPO DECIDED TO TAKE INTO ACCOUNT UPDATED CURRENT YEAR DATA. 7.5 THE LD DR THEN SUBMITTED THAT THE ASSESSEE NEVE R QUANTIFIED THE RISK ADJUSTMENT AND FIRST TIME, THE ASSESSEE HAS GIVEN S OME FORMULA BEFORE THE DRP. EVEN BEFORE THE DRP, THE QUANTIFICATION WAS NOT FUR NISHED BY THE ASSESSEE ON ACCOUNT OF RISK AND FOR ADJUSTMENT FOR DIFFERENCE I N FUNCTION AND RISK PROFILE. THE LD DR FURTHER CONTENDED THAT THE ASSESSEE HAS SELEC TED THOSE OBJECTS TO SUIT THE ASSESSEES OWN INTEREST. THE RISK PROFILE AND FUNCT IONAL DIFFERENCE AS WELL AS TURNOVER FILTERING ARE SOME OF THE FACTORS OF FILTE RING WHILE COMPARING THE MARGINS. THE LD DR HAS POINTED OUT THAT WHY ONLY T URNOVER FILTERING HAS BEEN CHOSEN BY THE ASSESSEE WHEN THERE ARE OTHER FACTS L IKE SALARY, WAGES, WORK-IN- CAPITAL ETC. HE HAS FURTHER CONTENDED THAT THIS IS NOT THE FIRST YEAR OF THE TP ADJUSTMENT AND ALP OF THE INTERNATIONAL TRANSACTION . THE ASSESSEE WAS VERY WELL AWARE OF THE COMPARABLES AND FUNCTIONAL SIMILARITY. ITA NO.7894/MUM/2010 ASSESSMENT YEAR : 2006-2007 14 7.6 THE LD DR THUS POINTED OUT THAT IN CASE OF DCI T VS QUARK SYSTEMS P LTD REPORTD IN 38 SOT 307, AS RELIED UPON BY THE LD A R OF THE ASSESSEE , THE CHANDIGARH SPECIAL BENCH OF THE TRIBUNAL HAS OBSE RVED IN PARA 9 THAT THERE WAS AN ERROR ON ACCOUNT OF WHICH THE OPERATING EXPENSES OF RS. 579 CRORES WERE NOT TAKEN INTO ACCOUNT, WHICH RESULTED AN ABNORMAL PROF IT IN CASE OF DATAMATICS TECHNOLOGIES LTD, ONE OF THE COMPARABLES. THUS, TH E SPECIAL BENCH HAS HELD THAT THE SAID COMPANY SHOULD BE EXCLUDED FROM THE COMPARABLES. HE HAS POINTED OUT THAT NO SUCH ABNORMAL PROFIT HAS BEEN P OINTED BY THE ASSESSEE IN CASE OF COMPARABLES SELECTED BY THE ASSESSEE AND OB JECTED BEFORE THE TPO. THEREFORE, THE OBJECTION OF THE ASSESSEE IS ONLY TO EXCLUDE THE COMPARABLES WHICH ARE HAVING HIGHER PROFIT MARGIN. 7.7 THE LD DR THEN POINTED OUT THAT IN CASE OF M/S ABODE SYSTEMS INDIA P LTD VS ACIT., THE DELHI BENCH OF THE TRIBUNAL HAS OBSER VED THAT SOME OF THE CASES OF THE COMPARABLES TAKEN INTO CONSIDERATION BY THE TPO ARE SUPERNORMAL PROFIT MAKING COMPANIES AND SHOULD BE EXCLUDED FROM THE COMPARABLES SET. WHEREAS IN THE CASE IN HAND, IT WAS NOT THE CASE OF THE COM PARABLES ARE HAVING SUPERNORMAL. HE HAS FURTHER POINTED OUT THAT COM PARABLES HAVING HIGHER PROFIT HAVE ALREADY EXCLUDED BY THE TPO THOUGH ON SOME OTH ER CRITERIA. THE OBJECT OF THE TP METHOD AND PROCEDURE AS PROVIDED IN THE PROV ISIONS WOULD BE DEFEATED IF SUCH CRITERIA IS ACCEPTED FOR EXCLUSION OF COMPARAB LES. 8 AS REGARDS THE + 5 % FROM ARITHMETIC MEANS AS PROVIDED UNDER THE SEC OND PROVISO TO SEC. 92C(2). THE LD DR HAS SUBMITTED TH AT THE PROVISO AS EXIST AT THAT POINT OF TIME HAS BEEN SUBSTITUTED BY THE FINANCE A CT, 2009. THEREFORE, THIS IS NOT THE AMENDMENT OF THE PROVISIONS BUT SUBSTITUTIO N OF THE PROVISIONS. HE HAS ITA NO.7894/MUM/2010 ASSESSMENT YEAR : 2006-2007 15 RELIED UPON THE DECISION OF THE HONBLE KARNATAKA H IGH COURT IN THE CASE OF K T VENKATAPPA & ORS VS K N KRISHNAPPA & ORS REPORTED I N 173 ITR 678 AND SUBMITTED THAT PROCEEDINGS PENDING AS ON THE DATE OF SUBSTITUTION WOULD BE GOVERNED BY THE SUBSTITUTED NEW PROVISION. THE LD D R FURTHER CONTENDED THAT WHEN THE SECOND PROVISO HAS BEEN SUBSTITUTED BY THE NEW PROVISO THEN NEW PROVISO SUPERSEDE ALL THE PROVISOS AND THE OLD PROV ISO CEASED TO EXIST. THUS, A NEW PROVISO HAS BECOME THE PART OF LAW JUST AS IF T HE AMENDMENT WAS ALWAYS BEEN THERE. 8.1 AFTER CONSIDERING THE RIVAL CONTENTION AND PERU SAL OF THE ADDITIONAL EVIDENCE FILED BY THE ASSESSEE, WE NOTE THAT THIS A DDITIONAL EVIDENCE IS IN FACT NOT THE MATERIAL FIRST TIME FILED BY THE ASSESSEE B EFORE US; BUT THE SAME WAS FILED BY THE ASSESSEE BEFORE THE TPO BEING THE UPDATED IN FORMATION/DATA REGARDING COMPARABLES. THE ASSESSEE HAS FILED THE EVIDENCE B EFORE US JUST TO SUPPORT THE CONTENTION THAT THE SAME WAS NOT AVAILABLE IN THE P UBLIC DOMAIN AND THEREFORE, WAS NOT ACCESSIBLE TO THE ASSESSEE AT THE TIME OF T P STUDY. IN VIEW OF OUR FINDING ON THE ISSUE OF DETERMINATION OF ALP BY THE AP/TPO AND AFTER CONSIDERING THE UPDATED DATA, WE DECLINE THE REQUEST OF THE ASS ESSEE FOR ADMITTING THE ADDITIONAL EVIDENCE. ON MERITS: 9 WE HAVE CONSIDERED THE RIVAL SUBMISSIONS MADE BY BOTH THE PARTIES AND CAREFULLY CONSIDERED THE RELEVANT MATERIAL ON RECOR D. THE EXPRESSION OF INTERNATIONAL TRANSACTION AS PROVIDED IN THE PROVIS IONS OF SEC. 92B MEANS THE TRANSACTION BETWEEN TWO OR MORE AES, EITHER OR BOTH OF WHOM ARE NON-RESIDENTS. ITA NO.7894/MUM/2010 ASSESSMENT YEAR : 2006-2007 16 SUCH TRANSACTIONS MAY BE IN THE NATURE OF PURCHASE, SALE OR LEASE OF TANGIBLE OR INTANGIBLE PROPERTY OR PROVISION OF SERVICES OR LEN DING OR BORROWING MONEY, OR ANY OTHER TRANSACTIONS HAVING A BEARING ON THE PROF ITS, INCOME, LOSSES OR ASSETS OF SUCH ENTERPRISES. 9.1 SECTION 92C(1) PRESCRIBES THE COMPUTATION OF A LP IN REGARD TO AN INTERNATIONAL TRANSACTION AND HAS TO BE DETERMINED BY ANY OF THE METHOD PRESCRIBED IN THE SAID SECTIONS BEING THE MOST APP ROPRIATE METHOD, HAVING REGARD TO THE NATURE OF THE TRANSACTION OR CLASS OF TRANSACTION. 9.2 SECTION 92F(II) DEFINES ALP, A PRICE WHICH IS APPLIED OR PROPOSED TO BE APPLIED IN REGARD TO THE TRANSACTION BETWEEN PERSON S OTHER THAN AE, IN UNCONTROLLED CONDITIONS. 9.3 RULES 10B (1) OF THE I T RULES PRESCRIBED THE MANNER IN WHICH ALP IN RELATION TO INTERNATIONAL TRANSACTION HAS TO BE DET ERMINED BY APPLYING MOST APPROPRIATE METHOD AS PRESCRIBED U/S 92C. RULES 10 B(1)(E) SPECIFICALLY MENTIONED THE METHOD /MANNER FOR DETERMINING ALL TH E ALPS BY APPLYING NET TRANSACTIONAL NET MARGIN METHOD (TNMM). (I) THE NET PROFIT MARGIN REALIZED BY THE ENTERPR ISE FROM AN INTERNATIONAL TRANSACTION ENTERED INTO WITH AN ASSOCIATED ENTERPR ISE IS COMPUTED IN RELATION TO COSTS INCURRED OR ALES EFFECTED OR ASSE TS EMPLOYED OR TO BE EMPLOYED BY THE ENTERPRISE OR HAVING REGARD TO ANY OTHER RELEVANT BASE. (II) THE NET PROFIT MARGIN REALIZED BY THE ENTERPRI SE OR BY AN UNRELATED ENTERPRISE FROM A COMPARABLE UNCONTROLLED TRANSACTI ON OR A NUMBER OF SUCH TRANSACTIONS IS COMPUTED HAVING REGARD TO THE SAME BASE; (III) THE NET PROFIT MARGIN REFERRED TO IN SUB-CLAU SE (II) ARISING IN COMPARABLE UNCONTROLLED TRANSACTIONS IS ADJUSTED T O TAKE INTO ACCOUNT THE ITA NO.7894/MUM/2010 ASSESSMENT YEAR : 2006-2007 17 DIFFERENCES, IF ANY, BETWEEN THE INTERNATIONAL TRAN SACTION AND THE COMPARABLE UNCONTROLLED TRANSACTIONS, OR BETWEEN TH E ENTERPRISES ENTERING INTO SUCH TRANSACTIONS, WHICH COULD MATERI ALLY AFFECT THE AMOUNT OF NET PROFIT MARGIN IN THE OPEN MARKET; (IV) THE NET PROFIT MARGIN REALIZED BY THE ENTERPRI SE AND REFERRED TO IN SUB CLAUSE (I) IS ESTABLISHED TO BE THE SAME AS THE NET PROFIT MARGIN REFERRED TO IN SUB CLAUSE (III) (V) THE NET PROFIT MARGIN THUS ESTABLISHED IS THEN TAKEN INTO ACCOUNT TO ARRIVE AT AN ARMS LENGTH PRICE IN RELATION TO THE INTERNATIONAL TRANSACTI ONS. THUS, AS PER CHAPTER X R.W R 10B ANY INCOME ARISES FROM THE INTERNATIONAL TRANSACTION SHALL BE COMPUTED HAVING REGARD TO ALP. AN INTERNATIONAL TRANSACTION IS REQUIRED TO BE TESTED AT ALP IRRESPECTIVE OF GEN UINENESS OF THE ACTUAL PRICE OF THE TRANSACTION. IN THE CASE OF INTERNATIONAL TRANS ACTION, LEGISLATURE HAS SHIFTED THE BURDEN OF PROVING FROM TAX AUTHORITY TO THE ASS ESSEE TO ESTABLISH AND SHOW THAT THE TRANSACTION WITH THE AE WAS AT ALP ON THE BASIS OF DOCUMENTS MAINTAINED AND FILE BY THE ASSESSEE. IT IS INCUMBEN T UPON THE ASSESSEE TO SATISFY THE TAX AUTHORITIES THAT THE TRANSACTION WITH THE A E WAS AT ALP AND IN SUPPORT OF ITS CLAIM; THE ASSESSEE HAS TO PRODUCE ALL THE RELE VANT RECORDS INCLUDING TP STUDY HAVING MARGIN COMPARABLES TO ARRIVE AT THE ALP. 9.4 IN ORDER TO SATISFY THE REQUIREMENT OF PROVISI ONS OF LAW UNDER TNMM METHOD, THE COMPARISON HAS TO BE MADE BETWEEN THE NET MARGIN REALISED FROM THE OPERATION OF THE UNCONTROLLED PARTIES TRANSACT ION AND NET MARGIN DERIVED BY THE ASSESSEE ON SIMILAR INTERNATIONAL TRANSACTIONS. THUS, THE TNMM METHOD REQUIRES THE COMPARISON OF NET MARGIN REALISED BY T HE AE FROM THE INTERNATIONAL TRANSACTIONS AND NOT THE COMPARISON OF OPERATING MA RGIN OF THE AE WITH THE OPERATING MARGIN OF COMPARABLES AT ENTERPRISE LEVEL . THUS, THE COMPARISON ITA NO.7894/MUM/2010 ASSESSMENT YEAR : 2006-2007 18 SHOULD BE BETWEEN THE NET MARGINS ON TRANSACTION BA SIS AND NOT AT ENTERPRISE LEVEL. 10 IN THE CASE IN HAND, THOUGH COMPARABLES ARE NOT SEGMENT WISE TRANSACTION BASIS BUT ARE COMPARISON OF OPERATING MARGIN OF THE ASSESSEE FROM BOTH TRANSACTIONS WITH OPERATING MARGIN OF THE COMPARABL ES AT ENTERPRISE LEVEL. HOWEVER, THE REVENUE HAS NOT RAISED SUCH OBJECTION WHILE DETERMINING THE ALP AND ADOPTING TNMM METHOD, THE TPO HAS ACCEPTED THE COMPARABLES AS WELL AS THE MARGINS AS PER THE TP REPORT EXCEPT TAKEN INTO ACCOUNT THE UPDATED DATA OF ONLY CURRENT YEAR INSTEAD OF THREE YEARS DATA CONSI DERED BY THE ASSESSEE IN THE TP STUDY. THEREFORE, THIS ISSUE HAS NOT BEEN RAISED BEFORE US AND WE DO NOT PROPOSE TO GO INTO THE CORRECTNESS OF THE COMPARISO N OF OPRATING MARGINS OF THE ASSESSEE WITH THE MARGINS OF THE COMPARABLES EXCEPT THE SPECIFIC ISSUE RAISED BEFORE US. 11 THE MAIN OBJECTION RAISED BY THE ASSESSEE BEFORE US IS AGAINST USE OF FINANCIAL INFORMATION OF THE COMPARABLES AT THE TIM E OF ASSESSMENT BUT SUCH INFORMATION WAS NOT AVAILABLE AT THE TIME OF TP STU DY DONE BY THE ASSESSEE AS WELL AS USE OF FINANCIAL DATA OF THE COMPARABLES FO R THE FY 2005-06 INSTEAD OF THREE YEARS TAKEN BY THE ASSESSEE. IT IS TO BE NOTE D THAT THE UPDATED FINANCIAL INFORMATION AND DATA WERE PROVIDED BY THE ASSESSEE DURING THE ASSESSMENT PROCEEDINGS AND PARTICULARLY DURING THE PROCEEDINGS BEFORE THE TPO. IT IS NOT THE CASE WHERE THE TPO HAS GATHERED SOME INFORMATION, W HICH WAS NOT RELEVANT FOR THE ASSESSMENT YEAR 2005-06 OF THE COMPARABLES. THE INFORMATION WAS VERY MUCH EXISTS, THOUGH, THE ASSESSEE MIGHT HAVE NO ACC ESS TO THE SAID INFORMATION AT THE TIME OF TP STUDY BUT THE INFORMATION, WHICH WAS VERY MUCH RELATED TO THE ITA NO.7894/MUM/2010 ASSESSMENT YEAR : 2006-2007 19 COMPARABLES FOR THE FY 2005-06 WHICH WAS ASKED BY T HE TPO AND PROVIDED BY THE ASSESSEE. THEREFORE, CONSIDERING THE SAID INFOR MATION BY THE TPO WHILE DETERMINING THE ALP, DOES NOT AMOUNT TO VIOLATION O F ANY PROVISIONS OF LAW. 11.1 SECTION 92CA(3) EMPOWER THE TPO TO CONSIDER SU CH EVIDENCE AS HE MAY REQUIRE ON ANY SPECIFIED POINT AND AFTER TAKING IN TO ACCOUNT ALL RELEVANT MATERIALS WHICH HE HAS GATHERED, HE SHALL DETERMIN E THE ALP IN RELATION TO THE INTERNATIONAL TRANSACTION IN ACCORDANCE WITH THE P ROVISIONS OF SEC. 92C. THUS, IF THE INFORMATION GATHERED BY THE TPO IS RELEVANT MAT ERIAL FOR THE PURPOSE OF DETERMINING THE ALP IN RELATION TO THE INTERNATIONA L TRANSACTION THEN WE DO NOT FIND ANY WRONG IN USING THE UPDATED DATA WHEN THE C ORRECTNESS AND RELEVANCE OF THE SAME IS NOT OBJECTED. 11.2 IT IS NOT THE CASE OF THE ASSESSEE THAT THE DA TA WERE NOT AVAILABLE IN THE PUBLIC DOMAIN BUT THE OBJECTION OF THE ASSESSEE IS THAT THE DATA WAS NOT ACCESSIBLE TO THE ASSESSEE AT THE TIME OF TP STUDY WHEN THERE IS NO BAR IN USING THE COMPLETE DATA OF THE COMPARABLES FOR DETERMININ G THE ALP IN RELATION TO THE INTERNATIONAL TRANSACTION THEN THE OBJECTION RAISED BY THE ASSESSEE IS BASELESS AND WITHOUT ANY SUBSTANCE. FURTHER, IT APPEARS THA T THE ASSESSEE RAISED THE OBJECTION OF USING THE DATA BECAUSE IT TURNOUT TO B E UNFAVOURABLE TO THE ASSESSEE AND WHEN THE CORRECTNESS AND AUTHENTICITY IS NOT D OUBTED, THE OBJECTION OF THE ASSESSEE IS NOT SUSTAINABLE. 11.3 AS REGARDS THE OBJECTION FOR CONSIDERING THE S INGLE YEAR/CURRENT YEAR DATA INSTEAD OF THREE YEARS TAKEN BY THE ASSESSEE, THE L D AR OF THE ASSESSEE HAS ITA NO.7894/MUM/2010 ASSESSMENT YEAR : 2006-2007 20 MAINLY EMPHASISED THE PROVISO TO SUB.RULE (4) OF RU LE 10B AND SUBMITTED THAT AS PER THE SAID PROVISO, THE DATA RELATING TO A PERIOD NOT MORE THAN TWO YEARS PRIOR TO SUCH FINANCIAL YEAR MAY ALSO BE CONSIDERED. 11.4 THE PROVISIONS OF SEC. 92C(III) AUTHORISES THE TPO TO USE THE INFORMATION AVAILABLE TO HIM. THE TPO CALL UPON THE INFORMATION FROM THE ASSESSEE AND THE ASSESSEE FURNISHES THE SAME. AS PER RULE 10B (4) FO R DETERMINING ALL THE ALP U/S 92C, THE DATA TO BE USED IN ANALYSING ANY COMPARABI LITY OF UNCONTROLLED TRANSACTION WITH AN INTERNATIONAL TRANSACTION SHALL BE THE DATA RELATING TO THE FINANCIAL YEAR IN WHICH THE INTERNATIONAL TRANSACTI ON HAS BEEN ENTERED INTO. THUS, IT IS MANIFEST FROM THE SUB RULE (4) OF RULE 10B THAT GENERALLY THE DATA OF THE FINANCIAL YEAR IN WHICH THE INTERNATIONAL TRANS ACTION HAS BEEN ENTERED INTO TO BE USED FOR ANALYSING COMPARABILITY OF UNCONTROLLE D TRANSACTION IN ORDER TO DETERMINE THE ALP. THE PROVISO TO SUB. RULE (4) OF RULE 10B PROVIDES THE OPTION FOR CONSIDERING THE DATA RELATING TO THE PERIOD OTH ER THAN THE FINANCIAL YEAR IN WHICH THE INTERNATIONAL TRANSACTION HAS BEEN ENTERE D INTO; BUT NOT BEING MORE THAN TWO YEARS PRIOR TO SUCH FINANCIAL YEAR. AS PER PROVISO TO RULE 10B, THE DATA OF EARLIER YEARS REVEAL FACTS WHICH COULD HAVE IN FLUENCE ON THE CURRENT YEAR/SINGLE YEAR DATA OF THE COMPARABLES THEN THE DATE OF OTHER TWO PRIOR YEARS MAY ALSO BE TAKEN INTO CONSIDERATION TO DETERMINE T HE TP. 11.5 THE PROVISO TO SUB. RULE 4 OF RULE 10B DOES NO T MANDATE TO ALWAYS CONSIDER TWO MORE YEARS DATA OF COMPARABLES IN SUC H ANALYSIS; BUT HAS A LIMITED ROLE ONLY WHEN THE DATA OF EARLIER YEARS REVEAL F ACTS WHICH COULD HAVE INFLUENCED ON DETERMINATION OF THE TP IN RELATION T O THE TRANSACTION BEING COMPARED. ITA NO.7894/MUM/2010 ASSESSMENT YEAR : 2006-2007 21 11.6 WHEN THE ASSESSEE HAS NOT MADE OUT A CASE TAKI NG THE DATA FOR ONLY CURRENT FINANCIAL YEAR DOES NOT PRESENT THE CORRECT AND FAIR FINANCIAL RESULT OF THE COMPARABLES THEN THERE IS NO MISTAKE IN CONSIDERING THE DATA FOR THE FINANCIAL YEAR IN WHICH THE INTERNATIONAL TRANSACTION HAS BEE N ENTERED INTO. THERE IS A RATIONALE FOR USING THE DATA OF THE COMPARABLES PER TAINING TO THE SAME PERIOD DURING WHICH THE INTERNATIONAL TRANSACTIONS TOOK PL ACE BECAUSE IT WILL RULE OUT THE EFFECT OF DIFFERENCE IN ECONOMIC AND MARKET CONDITI ONS PREVAILING/EXIST AT DIFFERENT TIME PERIOD. THEREFORE, WE DO NOT FIND AN Y ERROR OR ILLEGALITY BY TAKING INTO CONSIDERATION ONLY THE DATA OF THE FINANCIAL Y EAR IN WHICH THE INTERNATIONAL TRANSACTION HAS BEEN ENTERED INTO. 12 NEXT OBJECTION OF THE ASSESSEE IS REGARDING TURN OVER FILTERING AS WELL AS DIFFERENCE IN FUNCTIONS AND RISK PROFILE OF COMPARA BLES. 13 THE MAIN CONTENTION OF THE LD AR OF THE ASSESSEE IS THAT THE COMPARABLES HAVING MORE THAN 50 CRORES AND LESS THAN 5 CRORES O F TURNOVER SHOULD BE EXCLUDED FOR DETERMINING THE ALP BECAUSE THE ASSESS EES REVENUE FROM MARKETING SUPPORT SERVICES IS ABOUT RS. 20 CRORES. HE HAS POINTED OUT THAT AS PER RULE 10B(3), IF THERE ARE MATERIAL DIFFERENCE B ETWEEN THE TRANSACTION BEING COMPARED, THEN, REASONABLY ACCURATE ADJUSTMENTS SHO ULD BE MADE TO ELIMINATE THE MATERIAL DIFFERENCE. THE LD AR ASSERTED THAT S INCE THE TPO HAS NOT MADE ANY SUCH ADJUSTMENT; THEREFORE, THE COMPARABLES, WHICH ARE HAVING MORE THAN 50 CRORES AND LESS THAN 5 CRORES OF TURNOVER SHOULD BE DISCARDED. ITA NO.7894/MUM/2010 ASSESSMENT YEAR : 2006-2007 22 14 UNDISPUTEDLY, THE COMPARABLES CONSIDERED BY THE TPO ARE SELECTED BY THE ASSESSEE AND IN ITS TP STUDY; THE ASSESSEE DID NOT EXCLUDE THE COMPARABLES ON SUCH BASIS OF TURNOVER. THE ASSESSEES CONTENTION IS THAT THE ASSESSEE IS A RISK FREE ENTITY WHEREAS THE COMPARABLES ARE NOT FREE FR OM VARIOUS RISKS AND THEREFORE APPROPRIATE ADJUSTMENT ON ACCOUNT OF DIFF ERENCE IN FUNCTION AND RISK PROFILE SHOULD BE MADE. WE NOTE THAT THE ASSESSEE D ID NOT MAKE ANY SUCH ADJUSTMENT OF DIFFERENCE IN FUNCTION AND RISK PROFI LE OF THE COMPARABLES IN THE TP STUDY. IT IS ONLY WHEN THE TPO PROPOSED TO EXCLUDE SOME OF THE COMPARABLES AS AGREED BY THE ASSESSEE AND TO TAKE ONLY CURRENT YEA R UPDATED DATA INTO CONSIDERATION FOR DETERMINING THE ALP, THE ASSESSEE RAISED THESE OBJECTIONS. THERE IS NO QUARREL ON THE POINT THAT IF THE COMPAR ABLES PROPOSED TO BE TAKEN INTO CONSIDERATION BY THE TPO ARE HAVING AN ABNORMA L DIFFERENCES OF TURNOVER IN COMPARISON TO THE TURNOVER OF THE ASSESSEE, AND IF IT IS APPARENT DUE TO SUCH ABNORMAL DIFFERENCE IN THE TURNOVER, THE OPERATING PROFITS OF THE COMPARABLES IS GOT DISTORTED THEN IN SUCH A CASE, THOSE COMPARABLE S SHOULD BE EXCLUDED FROM THE LIST OF THE ALP. 15 IN THE CASE IN HAND, THE ASSESSEE RAISED THESE O BJECTIONS ONLY BECAUSE SOME OF THE COMPARABLES ARE HAVING HIGH PROFIT AND ALSO HIGH DIFFERENCE IN THE TURNOVER AND NOT BECAUSE OF THE HIGH OR LOW TURNOV ER HAS INFLUENCED THE OPERATING MARGIN OF THE COMPARABLES. ALL THE OBJE CTIONS AND CONTENTIONS RAISED BY THE ASSESSEE IN RESPECT OF THIS ISSUE ARE GENERA L IN NATURE AND NO SPECIFIC FACT HAS BEEN BROUGHT ON RECORD TO SHOW THAT DUE TO THE DIFFERENCE IN TURNOVER THE COMPARABLES BECOME NON-COMPARABLES. THE ASSESSEE H AS NOT DEMONSTRATED AS TO HOW THE DIFFERENCE IN THE TURNOVER HAS INFLUENCE D THE RESULT OF THE COMPARABLES. IT IS ACCEPTED ECONOMIC PRINCIPLES AN D COMMERCIAL PRACTICE THAT IN ITA NO.7894/MUM/2010 ASSESSMENT YEAR : 2006-2007 23 HIGHLY COMPETITIVE MARKET CONDITION, ONE CAN SURVIV E AND SUSTAIN ONLY BY KEEPING LOW MARGIN BUT HIGH TURNOVER. THUS, HIGH TU RNOVER AND LOW MARGIN ARE NECESSITY OF THE HIGHLY COMPETITIVE MARKET TO SURVI VE. 15.1 SIMILARLY, LOW TURNOVER DOES NOT NECESSARILY M EAN HIGH MARGIN IN COMPETITIVE MARKET CONDITION. THEREFORE, UNLESS AN D UNTIL IT IS BROUGHT ON RECORD THAT THE TURNOVER OF SUCH COMPARABLES HAS UNDUE INF LUENCE ON THE MARGINS, IT IS NOT THE GENERAL RULE TO EXCLUDE THE SAME THAT TOO W HEN THE COMPARABLES ARE SELECTED BY THE ASSESSEE ITSELF. 16 AS REGARDS THE DIFFERENCE IN FUNCTION AND RISK L EVEL ADJUSTMENT; THE ASSESSEE HAS RAISED THIS ISSUE WITHOUT QUANTIFICATI ON OF SUCH ADJUSTMENT ON THIS ACCOUNT. EVEN OTHERWISE UNTIL AND UNLESS SUCH DIFFE RENCE RESULTS IN DEFLATION OR INFLATION OF FINANCIAL RESULT OF THE COMPARABLES, I T IS NOT GENERAL RULE OF STANDARD ADJUSTMENT. THE ASSESSEE HAS NOT BROUGHT ON RECOR D HOW SUCH FUNCTIONAL DIFFERENCE AND RISK HAS INFLUENCED THE RESULT OF TH E COMPARABLES WITH QUANTIFIED DATA TO THE SATISFACTION OF THE AUTHORITIES. THE A SSESSEE DID NOT QUANTIFY THE ALLEGED ADJUSTMENTS ON ACCOUNT OF DIFFERENCE IN RIS K. HOWEVER, THE ASSESSEE, FIRST TIME FILED CERTAIN CALCULATION BEFORE THE DRP IN SUPPORT OF ITS CLAIM. THE SAID CALCULATION IS ALSO NOT ON THE BASIS OF ANY FORMUL A OR PRINCIPLE RATHER IT IS GENERAL IN NATURE. IN OUR OPINION, SECOND PROVISO TO SUB.SEC. 2 OF SEC. 92C COVER AND TAKE CARE OF THESE ASPECTS. SINCE IT IS IMPOS SIBLE TO HAVE A PERFECT COMPARABLE WITHOUT ANY DIFFERENCE OR VARIATION REGA RDING TURNOVER RISK PROFILE AND FUNCTIONAL DIFFERENCES; THEREFORE, THE LEGISLAT URE HAS PROVIDED A MARGIN OF + 5% WHILE DETERMINING THE ALP. THEREFORE, WHEN THE A SSESSEE IS HAVING BENEFIT OF CHOICE/OPTION AS PER THE SAID PROVISION AS EXISTED AT THE RELEVANT POINT OF TIME, ITA NO.7894/MUM/2010 ASSESSMENT YEAR : 2006-2007 24 NO SEPARATE ADJUSTMENT IS REQUIRED ON ACCOUNT OF RI SK AND FUNCTIONAL DIFFERENCES. THEREFORE, WE DO NOT FIND ANY MERIT AND SUBSTANCE I N THE CLAIM OF THE ASSESSEE FOR ADJUSTMENT IN RESPECT OF RISK AND FUNCTIONAL DI FFERENCES. 17 BEFORE PARTING WITH THE ISSUE, WE CLARIFY THAT T HE MARGIN OF THE ASSESSEE ON INTERNATIONAL TRANSACTION IS RELEVANT AND NOT TH E PERCENTAGE OF THE AES REVENUE IN REMUNERATING THE ASSESSEE. THE INCOME FROM INTERNATIONAL TRANSACTION IS COMPUTED HAVING REGARD TO ONLY ALP A ND NOTHING ELSE. THEREFORE, THE ARGUMENTS ADVANCED BY THE ASSESSEE THAT THE REM UNERATION FOR MARKETING SUPPORT SERVICES IS MORE THAN 60% OF THE SALE REVEN UE OF THE AE IS TOTALLY IRRELEVANT BECAUSE THE ALP IS A DEEMED PRICE AS, IF THE TRANSACTION BETWEEN THE TWO UNRELATED AND UNCONTROLLED PARTIES. THE PRICE I S COMPARED IN THE CONTEST OF MARGIN/PROFIT OF THE ASSESSEE IN RELATION TO INTERN ATIONAL TRANSACTION AND NOT THE SHARE IN THE REVENUE OF THE AE. IF NET REVENUE OF T HE AE IS NEGATIVE THEN THE ASSESSEE WOULD GET NO REMUNERATION, WHICH IS HOWEVE R, IRRELEVANT FOR THE PURPOSE OF ALP DETERMINATION. THUS, WHAT IS RELEV ANT IS THE MARGIN/PROFIT THE ASSESSEE EARNED FROM INTERNATIONAL TRANSACTION AND COMPARISON OF THE SAME WITH THE UNCONTROLLED TRANSACTIONS. 20 NEXT ISSUE RELATES TO APPLICABILITY OF + 5% VARIATION FROM THE ARITHMETIC MEAN OF THE ALP. 21 THE LOWER AUTHORITIES DENIED THE CLAIM OF THE AS SESSEE ON THE GROUND THAT THE AMENDMENT MADE IN THE SAID PROVISION W.E..1.10. 2009 IS CLARIFICATORY AND PROCEDURAL IN NATURE. ITA NO.7894/MUM/2010 ASSESSMENT YEAR : 2006-2007 25 22 WE HAVE HEARD THE LD AR OF THE ASSESSEE AND LD D R AND CONSIDERED THE RELEVANT RECORDS AVAILABLE ON RECORD. SINCE THE P ROVISIONS HAS BEEN AMENDED AND SUBSTITUTED BY FINANCE ACT 2009 W.E.F 1.10.2009 ; THEREFORE, THE LEGISLATURE HAS SPECIFICALLY GIVEN THE DATE FROM WHICH THE AMEN DMENT HAS BEEN EFFECTED; HOWEVER, THE SAME CANNOT BE TREATED AS CLARIFICAT ORY AND PROCEDURAL IN NATURE BEING RETROSPECTIVE. THE HONBLE SUPREME COURT IN THE CASE OF CIT VS WOODWARD GOVERNOR INDIA P LTD. REPORTED IN 312 ITR 254. LASTLY, WE ARE OF THE VIEW THAT THE AMENDMENT OF S ECTION 43A BY THE FINANCE ACT, 2002, WITH EFFECT FROM APRIL 1, 2OO3, IS AMENDATORY AND NOT CLARIFICATORY. THE AMENDMENT IS IN COMPLETE SUBSTIT UTION OF THE SECTION AS IT EXISTED PRIOR THERETO. UNDER THE UN-AMENDED SECT ION 43A ADJUSTMENT TO THE ACTUAL COST TOOK PLACE ON THE HAPPENING OF CHAN GE IN THE RATE OF EXCHANGE WHEREAS UNDER THE AMENDED SECTION 43A THE ADJUSTMENT IN THE ACTUAL COST IS MADE ON CASH BASIS. THIS IS INDICATE D BY THE WORDS AT THE TIME OF MAKING PAYMENT. IN OTHER WORDS, UNDER THE UN-AMENDED SECTION 43A, ACTUAL PAYMENT WAS NOT A CONDITION PRECEDENT FOR MAKING NECESSARY ADJUSTMENT IN THE CARRYING COST OF THE FI XED ASSET ACQUIRED IN FOREIGN CURRENCY, HOWEVER, UNDER THE AMENDED SECTIO N 43A WITH EFFECT FROM APRIL 1, 23, SUCH ACTUAL PAYMENT OF THE DECREA SED/ENHANCED LIABILITY IS MADE A CONDITION PRECEDENT FOR MAKING ADJUSTMENT IN THE CARRYING AMOUNT OF THE FIXED ASSET. THIS INDICATES A COMPLET E STRUCTURAL CHANGE BROUGHT ABOUT IN SECTION 43A, VIDE THE FINANCE ACT, 2002. THEREFORE, THE AMENDED SECTION IS AMENDATORY AND NOT CLARIFICATORY IN NATURE. 23 RESPECTFULLY FOLLOWING THE DECISION OF THE HONB LE SUPREME COURT CITED SUPRA AND THE DECISION OF THE TRIBUNAL IN THE CASE OF M/ TECHIMOUNT ICB PVT LTD VS ACIT IN ITA NO.7098/MUM/ 2010 VIDE ORDER DATED 2 5.2.2011 WHERE ONE OF US (JUDICIAL MEMBER) IS THE PARTY TO THE DECISION, WE HOLD THAT THE AMENDMENT IN THE SECOND PROVISO TO SEC. 92C(III) IS NOT RETROSPECTI VE BUT IS PROSPECTIVE FROM THE DAY FROM WHICH THE AMENDMENT IS EFFECTED I.E. 1.10. 2009. THE TRIBUNAL IN THE SAID DECISION HAS HELD AS UNDER: ITA NO.7894/MUM/2010 ASSESSMENT YEAR : 2006-2007 26 33. WE HAVE HEARD THE RIVAL SUBMISSIONS PERUSED THE ORDERS OF THE LOWER AUTHORITIES AND THE MATERIALS AVAILABLE ON RECORD. WE FIND THAT THIS ISSUE IS COVERED BY THE DECISION OF SONY INDIA P LTD (SUPRA) RELIED ON BY THE ASSESSEE WHEREIN IT HAS BEEN HELD AS UNDER: CIRCULAR NO. 12 DT 23 RD AUG 2001 DOES NOT HELP TO SOLVE THE PROBLEM. THE SAID CIRCULAR WAS ISSUED PRIOR TO INTR ODUCTION OF THE PROVISO. HOWEVER, IT IS A SETTLED LAW THAT WHEN A P ROVISO IS INTRODUCED, THE COURTS HAVE TO LOOK AT THE LANGUAGE IN WHICH THE PROVISO IS EXPRESSED. ONLY IN CASES OF AMBIGUITY, I T IS PERMITTED TO GO BEYOND THE LANGUAGE AND CONSIDER THE INTENTION O F THE LEGISLATION. AS FAR AS THE FIRST LIMB OF PROVISO IS CONCERNED, THE SAME HAS GENERAL APPLICATION. THE CONTROVERSY IS RELATIN G TO THE SECOND LIMB/PORTION OF THE PROVISO TO SEC. 92C(2) WHERE A N OPTION IS GIVEN TO THE TAXPAYER TO TAKE ALP WHICH MAY VARY FROM THE ARITHMETIC MEAN BY AN AMOUNT NOT EXCEEDING 5% OF SUCH ARITHMET IC MEAN. HENCE AGAIN, THERE IS NO CONTROVERSY THAT TAXPAYE R CAN TAKE ALP WHICH IS NOT EXCEEDING 5 PERCENT OF THE ARITHMETIC MEAN. THE OPTION, AS IS CLEAR FROM THE LANGUAGE IS TO TAKE ALP WHICH IS NOT IN EXCESS OF 5 PERCENT OF THE SAID MEAN. THE WORD OPT ION AS PER THE LAW LEXICON IS SYNONYMOUS WITH CHOICE OR PREFERE NCE. THEREFORE, IT IS THE CHOICE OF THE ASSESSEE TO TAKE ALP WITH A MARGINAL BENEFIT AND NOT THE ARITHMETICAL MEAN DETERMINED BY THE MOS T APPROPRIATE METHOD. THERE IS NOTHING IN THE LANGUAGE TO RESTRIC T THE APPLICATION OF THE PROVISION ONLY TO MARGINAL CASES WHERE PRICE DISCLOSED BY THE ASSESSEE DOES NOT EXCEED 5 PERCENT OF THE ARITHMETI C MAN. THE ALP DETERMINED ON APPLICATION OF MOST APPROPRIATE METHO D IS ONLY AN APPROXIMATION AND IS NOT A SCIENTIFIC EVALUATION. THEREFORE, THE LEGISLATURE THOUGHT IT PROPER TO ALLOW MARGINAL BEN EFIT TO CASES WHO OPT FOR SUCH BENEFIT. BOTH IN THE FIRST AS ALSO IN THE SECOND LIMB, IMPLICATIONS OF DETERMINATION /ALP ARE THE SAME EXC EPT FOR THE MARGINAL BENEFIT ALLOWED TO THE ASSESSEE UNDER THE SECOND LIMB. HENCE, SECOND LIMB IS APPLICABLE EVEN TO CASES WHER E THE TAXPAYER INTENDS TO CHALLENGE ALP TAKEN AS ARITHMETIC MEAN A ND DETERMINED THROUGH THE MOST APPROPRIATE METHOD. OPTION IS GIVE N TO THE ASSESSEE AS IN SOME CASES, VARIATION NOT EXCEEDING 5 PERCENT OF ARITHMETIC MEAN MIGHT NOT SUIT THE ASSESSEE AND, TH EREFORE, ASSESSEE IN SUCH CASES SHOULD NOT BE PUT TO A PREJU DICE. OTHERWISE, THERE IS NO DIFFERENCE BETWEEN THE FIRST AND THE SE COND LIMB OF THE PROVISION AS FAR AS RIGHT OF THE ASSESSEE TO CHALLE NGE THE DETERMINED PRICE IS CONCERNED. THE SECOND LIMB ONLY ALLOWS MARGINAL RELIEF TO THE ASSESSEE AT HIS OPTION TO TA KE ALP NOT EXCEEDING 5 PERCENT OF THE ARITHMETIC MEAN. THEREFO RE, BENEFIT OF THE SECOND LIMB OF THE PROVISO TO S. 92C(2) IS AVAI LABLE TO ALL ASSESSES IRRESPECTIVE OF THE FACT THAT PRICE OF INT ERNATIONAL TRANSACTION DISCLOSED BY THEM EXCEEDS THE MARGIN PR OVIDED IN THE PROVISO. DEVELOPMENT CONSULTANTS P LTD D DCIT (2008 ) 115 TTJ (KOL) 577 (208-TII-03-ITAT-KOL-TP) RELIED ON. ITA NO.7894/MUM/2010 ASSESSMENT YEAR : 2006-2007 27 34 RESPECTFULLY FOLLOWING THE AFORESAID DECISION, T HESE GROUNDS OF APPEAL ARE ALLOWED. HOWEVER, IN THE ARMS LENGTH PRICE, TO BE DETERMINED BY THE ASSESSING OFFICER, AN ADJUSTMENT IS CONTEMPLATED IN THE PROVISO, IS TO BE MADE AT THE OPTION OF THE ASSESSEE. 24 IN VIEW OF THE ABOVE DISCUSSION, WE DECIDE THE I SSUE IN FAVOUR OF THE ASSESSEE. 25 NEXT OBJECTION IS REGARDING LEVY OF INTEREST U/S 234B. 26 WE HAVE HEARD THE LD AR OF THE ASSESSEE AS WELL AS THE LD DR AND CONSIDERED THE RELEVANT MATERIAL ON RECORD. THE LD AR HAS RELIED ON THE DECISION OF THE JURISDICTIONAL HIGH COURT IN THE CASE OF PRI ME SECURITIES LTD IN INCOME TAX APPEAL NO.711 OF 2004 AND THE LD DR ON THE OTHER H AND HAS SUBMITTED THAT THE INTEREST U/S 234B IS MANDATORY AND CONSEQUENTIAL IN NATURE; THEREFORE, THE SAME IS LEVYABLE. 27 THE JURISDICTIONAL HIGH COURT IN THE CASE OF PRI ME SECURITIES LTD (SUPRA) HAS HELD THAT THE INTEREST U/S 234B IS NOT PAYABLE WHEN THE ASSESSEE HAS PAID THE ADVANCE TAX ON THE ESTIMATED INCOME IN ACCORDANCE W ITH LAW THAT WAS IN FORCE AT THAT POINT OF TIME. THE RELEVANT PORTION OF THE SA ID DECISION OF THE JURISDICTIONAL HIGH COURT IN PARAS 7 TO 9 READ AS UNDER: NOW, IF IN THE LIGHT OF THESE RIVAL SUBMISSIONS TH E PROVISIONS OF LAW ARE PERUSED, IT BECOMES CLEAR THAT THE APPELLANT WOULD NOT B LIABLE TO PAY INTEREST /S 234B OF THE ACT. SECTION 234B, ESPECIAL LY SUB.SEC. 1 THEREOF WHICH IS RELEVANT FOR OUR PURPOSE READS AS UNDER: 234B(1) SUBJECT TO THE OTHER PROVISIONS OF THIS S ECTION, WHERE, IN ANY FINANCIAL YEAR, AN ASSESSEE WHO IS LIABLE TO PA Y ADVANCE TAX U/S 208 HAS FAILED TO PAY SUCH TAX OR, WHERE THE ADVANC E TAX PAID BY SUCH ASSESSEE UNDER THE PROVISIONS OF SEC 210 IS LE SS THAN NINETY PERCENT OF THE ASSESSED TAX, THE ASSESSEE SHALL BE LIABLE TO PAY ITA NO.7894/MUM/2010 ASSESSMENT YEAR : 2006-2007 28 SIMPLE INTEREST AT THE RATE OF (ONE) PERCENT FOR VE RY MONTH OR PART OF A MONTH COMPRISED IN THE PERIOD FROM THE 1 ST DAY OF APRIL NEXT FOLLOWING SUCH FINANCIAL YEAR (TO THE DATE OF DETER MINATION OF TOTAL INCOME UNDER SUB.SEC (1) OF SECTION 143 (AND WHERE A REGULAR ASSESSMENT IS MADE, TO THE DATE OF SUCH REGULAR ASS ESSMENT, ON AN AMOUNT) EQUAL TO THE ASSESSED TAX OR, AS THE CASE M AY BE, ON THE AMOUNT BY WHICH THE ADVANCE TAX PAID AS AFORESAID F ALLS SHORT OF THE ASSESSED TAX.: PERUSAL OF THE ABOVE PROVISIONS SHOWS THAT LIABILIT Y TO PAY INTEREST ARISES ON FAILURE OF THE ASSESSEE TO PAY ADVANCE TAX U/S 2 08 OR ADVANCE TAX PAYABLE U/S 210 IS PAID LESS THAN 90%. PERUSAL OF T HE PROVISIONS OF SEC 208 AND 209 SHOWS THAT FOR THE PURPOSE OF PAYMENT OF AD VANCE TAX THE ASSESSEE HAS TO ESTIMATE HIS CURRENT INCOME AND THE N HE HAS TO CALCULATE INCOME TAX ON THAT INCOME AT THE RATE IN FORCE IN T HE FINANCIAL YEAR. THUS, THE AMOUNT OF ADVANCE TAX IS TO BE DECIDED BY THE A SSESSEE AFTER ESTIMATING HIS CURRENT INCOME AND THEN APPLYING LAW IN FORCE FOR DECIDING THE AMOUNT OF TAX. IT IS AN ADMITTED POSITION IN TH E PRESENT CASE THAT THE DATE ON WHICH THE APPELLANT PAID THE ADVANCE TAX HE HAD ESTIMATED HIS INCOME AND LIABILITY FOR PAYMENT F ADVANCE TAX IN A CCORDANCE WITH LAW THAT WAS IN FORCE. THEREFORE, IT IS OBLIVIOUS THAT THER E WAS NO FAILURE ON THE PART OF THE APPELLANT TO PAY ADVANCE TAX IN ACCORDA NCE WITH THE PROVISIONS OF SEC 208AND 209. SO FAR AS THE JUDGMENT OF THE SU PREME COURT IN THE CASE OF GHASWAA IS CONCERNED, THE SUPREME COURT WAS CONCERNED WITH THE POWERS OF THE SETTLEMENT COMMISSIONER IN GRANTING W AIVER OF INTEREST AND FOR THAT PUR5PSOE THE SUPREME COURT CONSIDERED THE PROVISIONS OF SECTIONS 234A, 234B AND 234C. THE SUPREME COURT IN NO UNCERT AIN TERMS HELD THAT THE INTEREST IS COMPENSATORY IN NATURE. THE COURT R EAD THE PROVISIONS OF SECTION234A, 234B AND 234C AS MANDATORY IN CHARACTE R HOLDING THAT AFTER THE AMENDMENT IN THE PROVISIONS IN THE FINANCE ACT, 1987, THAT WITH THE USE OF THE EXPRESSION SHALL THEREIN THE LEGISLATU RE CLEARLY INDICATED THAT ITS INTENTION TO MAKE THE COLLECTION OF STATUTORY I NTEREST MANDATORY. IT IS FOR THIS PURPOSE THAT THE COURT PROCEEDED TO DECIDE THA T EVEN THE SETTLEMENT COMMISSIONER WHO WAS VESTED WITH THE VAST POWER HAD NO POWER TO WAIVE THE INTEREST PAYABLE UNDER THESE PROVISIONS. GOING BY THIS INTERPRETATION OF SECTIONS 234A, 234B AND 234C AS GIVEN BY THE CONSTI TUTION BENCH OF THE SUPREME COURT, IT IS CLEAR THAT THE INTEREST IS PAY ABLE IN CASE THE ADVANCE TAX IS NOT PAID IN CONSONANCE WITH THE LAW IN FORCE AT THE TIME WHEN THE ADVANCE TAX IS PAID AND THERE IS A DEFAULT. THEREFO RE, FOR CHARGING INTEREST U/S 234B COMMITTING OF DEFAULT IN PAYMENT OF ADVANC E TAX IS CONDITION PRECEDENT. PERUSAL OF THE JUDGMENT OF THE DELHI HIG H COURT, WHICH IS RELIED ON BY THE LD COUNSEL APPEARING FOR THE RESPONDENT, SHOWS THAT IN THAT CASE ALSO THE DELHI HIGH COURT HAS HELD THAT FOR CHARGIN G OF INTEREST ESTABLISHMENT OF DEFAULT IN PAYMENT OF ADVANCE TAX IS NECESSARY. IN THE PRESENT CASE, IT IS NOBODYS CASE THAT THE APPELLAN T AT THE TIME OF PAYMENT OF ADVANCE TAX HAS COMMITTED ANY DEFAULT OR THAT PA YMENT OF ADVANCE TAX MADE BY THE APPELLANT WAS NOT IN CONSONANCE WITH LA W. THE DIVISION ITA NO.7894/MUM/2010 ASSESSMENT YEAR : 2006-2007 29 BENCH OF THIS COURT IN ITS JUDGMENT IN THE CASE OF THE APPELLANT, REFERRED TO ABOVE, HAS HELD THAT THE RETURN FILED BY THE APPELL ANT WAS IN CONSONANCE WITH LAW AND THERE WAS ONLY A FORMAL DEFECT AND THE MOMENT THAT DEFECT WAS CURED, THE RETURN RELATED BACK TO THE ORIGINAL DATE. IN OUR OPINION, WHEN THE SUPREME COURT IN GHASWALAS CASE SAYS THAT CHARGING OF INTEREST U/S 234B IS MANDATORY, WHAT IT REALLY MEANS IS THAT ONCE THE ASSESSEE IS FOUND LIABLE TO PAY INTEREST, THEN RECOVERY OF INTE REST IS MANDATORY AND RECOVERY OF THAT INTEREST CANNOT BE WAIVED FOR ANY REASON. BUT FOR CHARGING INTEREST UNDER THAT SECTION, IT HAS TO BE ESTABLISH ED THAT THE ASSESSEE AS COMMITTED DEFAULT IN PAYMENT OF ADVANCE TAX. IN OUR OPINION, AS IN THE PRESENT CASE IT IS NOBODYS CASE THAT THE APPELLANT HAS COMMITTED DEFAULT IN PAYMENT OF ADVANCE TAX WHEN HE ACTUALLY PAID IT, THE APPELLANT CANNOT BE HELD LIABLE TO PAY INTEREST U/S 234B IN SO FAR A S OBSERVATIONS IN THE ORDER OF THE TRIBUNAL, THAT THE APPELLANT SHOULD HA VE ANTICIPATED THE EVENTS THAT TOOK PLACE IN MARCH, 1992, IN OUR OPINI ON, HAVE NO SUBSTANCE. IN OUR OPINION, IT IS RIGHTLY SUBMITTED THAT IT WAS NOT POSSIBLE FOR THE APPELLANT TO ANTICIPATE THE EVENTS THAT WERE TO TAK E PLACE IN THE NEXT FINANCIAL YEAR AND PAY ADVANCE TAX ON THE BASIS OF THOSE ANTICIPATED EVENTS. IN THE RESULT, THEREFORE, THE PRESENT APPEAL SUCCEE DS AND IS ALLOWED. IT IS HELD THAT IN THE FACTS AND CIRCUMSTANCES OF THE CAS E THE TRIBUNAL WAS NOT JUSTIFIED IN LAW IN HOLDING THAT THE INTEREST WAS P AYABLE U/S 234B. 28 SINCE THERE IS NO SUCH CHANGE IN THE LAW WHICH H AS RESULTED ENHANCEMENT OF THE TAX LIABILITY OF THE ASSESSEE WHICH WOULD NO T BE IN FORCE AT THE TIME OF PAYMENT OF ADVANCE PAYMENT; THEREFORE, THE DECISION OF THE HONBLE JURISDICTIONAL HIGH COURT (SUPRA) RELIED UPON BY T HE ASSESSEE WOULD NOT APPLY TO THE FACTS OF THE CASE OF THE ASSESSEE. ACCORDINGLY, WE HOLD THAT THE PROVISIONS OF SEC. 234B ARE MANDATORY AND CONSEQUENTIAL IN NATURE . 29 GROUND NO.8 REGARDING DISALLOWANCE OF BAD DEBTS WRITTEN OFF OF RS. 91,28,790/-. ITA NO.7894/MUM/2010 ASSESSMENT YEAR : 2006-2007 30 29.1 THE ASSESSEE HAS WRITTEN OFF THE BAD DEBTS OF RS. 91,28,790/- WHICH REPRESENTS THE COMMISSION CHARGED TO FOREIGN ASSOCI ATE ENTERPRISES OF THE ASSESSEE NAMELY VSIL. THE AO DISALLOWED THE CLAIM OF THE ASSESSEE ON THE GROUND THAT THE DEBTS HAVE NOT BECOME BAD. DRP HAS ALSO CONFIRMED THE DISALLOWANCE MADE BY THE AO BY HOLDING THAT NO DETA ILS AND SUPPORTING EVIDENCE HAS BEEN PRODUCED BY THE ASSESSEE WITH RESPECT TO T HIS SETTLEMENT EFFECTED BETWEEN THE ASSESSEE AND THE AE. 30 BEFORE US, THE LD AR OF THE ASSESSEE HAS SUBMITT ED THAT THE AMOUNT WRITTEN OFF RELATES TO THE VSIL, AN ASSOCIATED ENTE RPRISE OF THE ASSESSEE, WHICH WAS AVAILING THE SERVICES FROM THE ASSESSEE FOR ITS PRODUCT, AGAINST WHICH THE ASSESSEE HAS EARED COMMISSION INCOME. THE SAID AMOU NT HAS BEEN WRITTEN OFF BY THE ASSESSEE BECAUSE SUBSEQUENTLY IT WAS FOUND T HAT THE EXCESS COMMISSION WAS CHARGED BY THE ASSESSEE TO ITS AE. THUS, THE LD AR OF THE ASSESSEE SUBMITTED THAT THE CLAIM OF THE ASSESSEE IS ALLOWAB LE AS BUSINESS LOSS. 30.1 THE LD AR OF THE ASSESSEE FURTHER POINTED OUT THAT SINCE THE COMMISSION WAS ALREADY TAKEN INTO ACCOUNT IN THE P&L ACCOUNT A ND OFFERED FOR TAXATION IN EARLIER YEAR. THEREFORE, THE ASSESSEE HAS OTHERWISE FULFILLED THE CONDITIONS U/S 36(1)(VII) OF THE I T ACT. 30.2 THE LD DR ON THE OTHER HAND SUPPORTED THE ORDE RS OF THE AUTHORITIES BELOW. ITA NO.7894/MUM/2010 ASSESSMENT YEAR : 2006-2007 31 31 WE HAVE CONSIDERED THE RIVAL ARGUMENTS OF BOTH T HE PARTIES AND PERUSED THE RELEVANT MATERIAL ON RECORD. THE COMMISSION REC EIVED HAS BEEN OFFERED BY THE ASSESSEE FOR TAXATION WAS SUBJECTED TO THE PROV ISIONS OF CHAPTER X AND PARTICULARLY SEC 92 FOR COMPUTATION OF INCOME FROM INTERNATIONAL TRANSACTION. THEREFORE, WHETHER THE ASSESSEE CHARGED THE EXCESS COMMISSION OR LESS IS NOT RELEVANT AND MATERIAL ONCE THE INCOME IS SUBJECTED TO THE PROVISIONS OF CHAPTER X BEING RELATED TO THE INTERNATIONAL TRANSACTION. I F THE CLAIM OF THE ASSESSEE IS ALLOWED, IT WILL DEFEAT THE VERY OBJECT AND PURPOSE OF THE PROVISIONS OF CHAPTER X. IT IS IRRELEVANT FOR THE PURPOSES OF ALV FOR INTERN ATIONAL TRANSACTION WHETHER THE ACTUAL PRICE CHARGED BY THE ASSESSEE IN RELATION TO THE INTERNATIONAL TRANSACTION IS LESS OR EXCESSIVE. THE INCOME FROM INTERNATIONA L TRANSACTION IS COMPUTED HAVING REGARD ONLY TO THE ALP AND NOTHING ELSE. THU S, EVEN IF THE INCOME FROM COMMISSION RECEIVED FROM THE AE IN RELATION TO THE INTERNATIONAL TRANSACTION TURNOUT TO BE EXCESS, IF THE SAME HAS BEEN COMPUTED BY APPLYING THE PROVISIONS OF CHAPTER X, SUBSEQUENT CLAIM OF BAD DEBT OR BUSIN ESS LOSS WOULD BE AGAINST THE VERY PURPOSE AND OBJECT OF THE PROVISIONS OF CHAPTE R X OF THE ACT. THEREFORE, WE HOLD THAT THE CLAIM OF BAD DEBT AS CLAIMED BY THE A SSESSEE IN RESPECT OF THE COMMISSION FROM AE SUBJECTED TO THE PROVISIONS CHAP TER X OF THE I T ACT IS NOT ALLOWABLE. HOWEVER, WE CLARIFY THAT, IF THE ASSESS EE HAS CLAIMED THE DEDUCTION OF BAD DEBTS AFTER THE MARGINS ARE ARRIVED AT ON THE B ASIS OF ALP THEN THE DISALLOWANCE OF THE CLAIM IS JUSTIFIED. THEREFORE, THE ASSESSING OFFICER HAS TO VERIFY AND CONSIDER WHETHER THE MARGINS ARE DETERMI NED ON THE BASIS OF ALP AFTER DISALLOWANCE OF BAD DEBTS THEN NO ADDITION CAN BE M ADE ON THIS ACCOUNT. 32 GROUND NO.10 IS REGARDING DISALLOWANCE OF PROFES SIONAL TAX. ITA NO.7894/MUM/2010 ASSESSMENT YEAR : 2006-2007 32 33 AT THE TIME OF HEARING, THE LD AR OF THE ASSESSE E STATED THAT DUE TO SMALLNESS OF THE AMOUNT, THE ASSESSEE DOES NOT PRES S THIS GROUND AND THE SAME MAY BE DISMISSED AS NOT PRESSED. THE LD DR HAS NO O BJECTION, IF THE GROUND IS DISMISSED AS NOT PRESSED. 34 IN VIEW OF THE SUBMISSION OF BOTH THE PARTIES, W E DISMISS THE GROUND AS NOT PRESSED. 35 GROUND NO.11 REGARDING DISALLOWANCE OF SUNDRY BA LANCES WRITTEN OFF OF RS,.5,33,241/- 36 THE ASSESSEE HAS WRITTEN OFF A SUM OF RS. 8,90,1 98/- AND DEBITED TO P&L ACCOUNT. THE ASSESSEE HAS SUBMITTED BEFORE THE AO T HAT OUT OF THIS WRITTEN OFF AMOUNT OF RS. 8,90,198/- RS. 3,52,090 HAS BEEN WRIT TEN OFF IN RESPECT OF THE COMPENSATION PAID BY THE ASSESSEE TO WIPRO INFOTECH BANGALORE DUE TO THE SERVICES PROVIDED BY THE ASSESSEE WHICH WERE FOUND UNSATISFACTORY AND THE ASSESSEE COULD NOT REVIEW THE DEFECT. THE BALANCE AMOUNT OF RS. 5,33,241/- REPRESENTS THE DIFFERENCE IN CLOSING BALANCE OF PAR TYWISE BALANCES IN THE BOOKS OF ACCOUNT BECAUSE EARLIER YEARS AS DUE AGAINST VSIL. THE ASSESSEE EXPLAINED BEFORE THE AO THAT THE OBLIGATION IS PAYABLE TO TH E CREDITORS ON RECONCILIATION OF THE BALANCE WAS ACCEPTED BY THE ASSESSEE DURING THE YEAR 2006-07 AND ADJUSTED IN THE BALANCE PAYABLE TO THE PARTIES ACCOUNT THER EFORE, SUNDRY BALANCE HAS BEEN WRITTEN OFF. SINCE IT WAS ACCEPTED OBLIGATIO N DUE TO SOME OMISSION OR ERROR IN THE BALANCE PAYABLE AND SO TO THE SAID EXPENSES AS DEDUCTION UNDER THE ACT. DRP ALLOWED THE CLAIM OF THE ASSESSEE WITH RESPECT TO WIPRO AMOUNTING TO RS. 3,52,090/-. HOWEVER, THE BALANCE CLAIM OF RS. 5,33, 241/- RELATES TO VSIL WAS FOUND IN THE NATURE OF PRIOR PERIOD EXPENSES AND DI SALLOWANCE WAS ACCORDINGLY CONFIRMED. ITA NO.7894/MUM/2010 ASSESSMENT YEAR : 2006-2007 33 37 BEFORE US, THE LD AR HAS SUBMITTED THAT THE SUN DRY AMOUNTING WRITTEN OFF BY THE ASSESSEE IS BASED ON THE ADJUSTMENT OF CLOSI NG BALANCE WITH RESPECT TO THE VSIL WHICH IS AN OBLIGATION ACCEPTED BY THE AS SESSEE DURING THE FY 2005-06 AND THEREFORE, CANNOT BE TREATED AS PRIOR PERIOD EX PENSES. HE RELIED ON THE DECISION OF THE HONBLE GUJARAT HIGH COURT IN THE C ASE OF SAURASHTRA CEMENT & CHEMICAL INDUSTRIES LTD VS CIT REPORTED IN 213 ITR 523. 37.1 THE LD DR ON THE OTHER HAND RELIED ON THE ORDE RS OF THE AUTHORITIES BELOW. 38 WE HAVE CONSIDERED THE RIVAL SUBMISSIONS MADE BY BOTH THE PARTIES AND PERUSED THE RELEVANT MATERIAL AVAILABLE ON RECORD. WE HAVE ALREADY DISCUSSED THE ISSUE OF BAD DEBTS IN RESPECT OF COMMISSION INC OME FROM AE OF THE ASSESSEE IN RELATION TO INTERNATIONAL TRANSACTION. THIS CLAI M OF THE ASSESSEE IS ALSO PERTAINS TO THE INTERNATIONAL TRANSACTION AND IT SEEMS THAT THE SAME HAS ALREADY BEEN SUBJECTED TO THE PROVISIONS OF CHAPTER X OF I T ACT . IN VIEW OF OUR FINDINGS ON THE ISSUE OF BAD DEBTS, THIS CLAIM IS ALSO DISALLOWED, 39. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PA RTLY ALLOWED. ORDER PRONOUNCED ON THIS DAY OF 31 ST MAY 2011 SD/ ( J JJ J SUDHAKAR REDDY SUDHAKAR REDDY SUDHAKAR REDDY SUDHAKAR REDDY) (ACCOUNTANT MEMBER) SD/- (VIJAY PAL RAO VIJAY PAL RAO VIJAY PAL RAO VIJAY PAL RAO) (JUDICIAL MEMBER) MUMBAI, DATED 31 ST MAY 2011 RAJ COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. COMMISSIONER OF INCOME TAX (APPEALS)- , MUM BAI 4. COMMISSIONER OF INCOME TAX, CITY- , MUMBAI 5. DEPARTMENTAL REPRESENTATIVE, BENCH E, MUMBAI //TRUE COPY// BY ORDER ASSTT. REGISTRAR, ITAT, MUMBAI