BAYER MATERIAL SCIENCE P. LTD, MUMBAI V. ADDL CIT 10(3), MUMBAI

ITA 7977/MUM/2010

• Counselvise Citation: 797719914 RSA 2010
• Duration Of Justice: 1 year(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-12-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 05-12-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 18-11-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: PRAVIN VARMA
• Assessee Lawyers: AASHISH KASAD; M P LOHIA
• Keywords: Business income; Depreciation; Transfer pricing; International transaction; Retrospective amendment; Cost of acquisition; Bad and doubtful debts; Avoidance of tax
• Section: 90; 92C; 143(3); 92F; 234B; 14A; 10B

Judgement Text

IN THE INCOME TAX APPELLATE TRIB UNAL MUMBAI BENCHES B, MUMBAI BEFORE SHRI R.S.SYAL, AM AND SHRI D.K.AGARWAL, JM ITA NO.7977/MUM/2010 : ASST. YEAR 2006-2007 M/S. BAYER MATERIAL SCIENCE P. LTD., BAYER HOUSE, CENTRAL AVENUE, HIRANANDANI GARDENS, POWAI, MUMBAI-400 076. PAN: AAACB2419H. THE ADDL.COMMISSIONER OF INCOME-TAX RANGE 10(3) MUMBAI. (APPELLANT) VS. (RESPONDENT) APPELLANT BY : SHRI M.P.LOHIA & MS.AASHISH KASAD RESPONDENT BY : SHRI PRAVIN VARMA DATE OF HEARING : 08.12.2011 DATE OF PRONOUNCEMENT : 16.12.2011 O R D E R PER R.S.SYAL, AM : THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST ORD ER DATED 14-10-2010 PASSED BY THE ASSESSING OFFICER U/S. 143(3) READ W ITH SEC. 144C(13) OF THE INCOME-TAX ACT, 1961 IN RELATION TO ASSESSMENT YEAR 2006-07. 2. GROUND NOS. 2 TO 8 (EXCEPT GROUND NOS. 4 & 7 WHI CH WERE NOT PRESSED BY THE LD. A.R.) DEAL WITH CONFIRMATION OF ADDITION OF RS.25,56,99,421/- TOWARDS TRANSFER PRICING ADJUSTMENT. 3. THE FACTUAL MATRIX OF THESE GROUNDS IS THAT THE ASSESSEE ENTERED INTO INTERNATIONAL TRANSACTIONS WITH ITS ASSOCIATED ENTE RPRISES (AES). THE AO REFERRED THE MATTER OF DETERMINING THE ARMS LENGTH PRICE (ALP) TO THE TRANSFER PRICING OFFICER (TPO). THE TPO PASSED ORDER U/S. 92 CA(3) BY MAKING AN UPWARD ADJUSTMENT TO ALP OF RS.25.56 CRORES ON ACC OUNT OF TRANSACTIONS WITH THE OVERSEAS AE. THE AO PROPOSED ADDITION OF RS.25. 56 CRORES IN THE DRAFT ASSESSMENT ORDER. THE ASSESSEE FILED OBJECTIONS BEF ORE THE DRP, WHO REJECTED SUCH OBJECTIONS AND CONFIRMED THE STAND OF THE DEPA RTMENT. BASED ON THE TPOS ITA NO.7977/MUM/2010. M/S.BAYER MATERIAL SCIENCE PVT. LTD. 2 ORDER AND THE DRAFT ORDER APPROVED BY THE DRP, THE AO MADE ADDITION OF RS.25.56 CRORES . 4. AT THIS STAGE, IT WOULD BE RELEVANT TO CONSI DER THE ORDER OF TPO PASSED ON 29-10-2009. FROM THIS ORDER IT CAN BE SEEN THAT DUR ING THE YEAR IN QUESTION, THE ASSESSEE ENTERED INTO THE FOLLOWING INTERNATIONAL T RANSACTIONS WITH ITS AES: (FIGURES IN RS. 000) 1. IMPORT OF RAW MATERIALS 57783 TRANSACTION AL NET MARGIN METHOD (TNMM) 2. IMPORT OF FINISHED GOODS 310098 TNMM 3. EXPORT OF FINISHED GOODS 97766 TNMM 4. RECEIPT OF INDENTING COMMISSION 94481 TNMM 5. RECOVERY OF EXPENSES 27520 RECOVERY OF ACTU AL COST (TNMM) 6. REIMBURSEMENT OF EXPENSES 405 REIMBURSEM ENT OF ACTUAL COST (TNMM) 5. THE TPO NOTED THAT THE ACTIVITIES OF THE ASS ESSEE WERE LARGELY CLASSIFIED INTO MANUFACTURING AND TRADING. AS REGARDS THE MANU FACTURING ACTIVITY, HE OBSERVED THAT THE ASSESSEE MANUFACTURED AND SOLD TH ERMO PLASTICS, POLYURETHANE. FOR MANUFACTURING THESE PRODUCTS, THE ASSESSEE IMPO RTED RAW MATERIAL FROM ITS AES AND ALSO EXPORTED SOME OF ITS MANUFACTURED PROD UCTS TO THE OTHER GROUP COMPANIES. THE TPO DID NOT PROPOSE ANY ADJUSTMENT I N SUCH INTERNATIONAL TRANSACTIONS. AS PART OF TRADING, THE ASSESSEE IMPO RTED FINISHED POLYCARBON ETC. FROM BAYER GROUP COMPANIES FOR RESALE IN INDIA. IT ALSO RECEIVED INDENTING COMMISSION FROM BAYER GROUP ENTITIES WHENEVER CERTA IN INDIAN CUSTOMERS PLACED ORDERS DIRECTLY ON BAYER GROUP ENTITIES THRO UGH THE MEDIATION OF THE ASSESSEE. FOR THE PURPOSES OF TRANSFER PRICING, T HE ASSESSEE COMBINED THE ITA NO.7977/MUM/2010. M/S.BAYER MATERIAL SCIENCE PVT. LTD. 3 ACTIVITIES OF TRADING AND INDENTING INTO A SINGLE G ROUP. SINCE IN THE OPINION OF TPO THE FUNCTIONS PERFORMED AND THE RISKS UNDERTAKE N IN RESPECT OF TRADING AND INDENTING ACTIVITIES WERE DIFFERENT AND VARIED, THE ASSESSEE WAS ASKED TO FURNISH SEGMENTAL ACCOUNTS FOR THESE ACTIVITIES DISTINCTLY. ON 13-8-2009, THE ASSESSEE FURNISHED SEGMENTAL ACCOUNTS IN RESPECT OF MANUFACT URING AND TRADING ACTIVITIES SHOWING NET PROFIT MARGIN IN RESPECT OF MANUFACTURI NG AT 13.49% AND TRADING AT 6.41%. AS THE ASSESSEE DID NOT DISCLOSE INDENTING A S A SEPARATE SEGMENT AND THE ENTIRE COMMISSION INCOME ON INDENTING WAS CLUBBED W ITH THE INCOME FROM TRADING SEGMENT, THE TPO REQUIRED THE ASSESSEE TO S HOW REASONS FOR NOT MAKING A BIFURCATION. IT WAS STATED ON BEHALF OF THE ASSES SEE THAT TRADING AND INDENTING WERE UNDERTAKEN BY THE ASSESSEE AS AN INTEGRATED TR ADING BUSINESS WITH COMMON EMPLOYEES, COMMON FACILITIES, COMMON STRATEGIES AND COMMON MANAGEMENT. SINCE THE FUNCTIONS, ASSETS EMPLOYED AND RISKS UNDE RTAKEN IN INDENTING BUSINESS ARE COMPLETELY DIFFERENT FROM TRADING, THE TPO HELD THAT BOTH THE ACTIVITIES COULD NOT BE CLUBBED. IN HIS OPINION, BOTH ACTIVITI ES WERE TO BE BENCHMARKED ON A SEPARATE BASIS KEEPING IN VIEW FAR ANALYSIS. THER EAFTER, THE ASSESSEE FURNISHED DETAILED ACCOUNTS, A COPY OF WHICH IS PLA CED AT PAGE 353 OF THE PAPER BOOK. THE TPO FOUND THAT THESE RESULTS WERE INCOMPL ETE. THE ASSESSEE PRODUCED ANOTHER SPLIT-UP BETWEEN TRADING AND INDEN TING SEGMENTS, A COPY OF WHICH IS PLACED AT PAGE 436 OF THE PAPER BOOK. STIL L THEREAFTER, THE ASSESSEE CAME OUT WITH ONE MORE FINANCIAL SPLIT-UP BETWEEN T HE TRADING AND INDENTING SEGMENT, COPY OF WHICH IS PLACED AT PAGE 510 OF THE PAPER BOOK. THE TPO OBSERVED THAT THE FURNISHING OF FOUR DIFFERENT ALLO CATIONS DURING THE COURSE OF PROCEEDINGS BEFORE HIM ITSELF SHOWED THE RELIABILIT Y OR UNRELIABILITY OF THE ACCOUNTS BEING MAINTAINED AND MARGINS BEING SHOWN B Y THE ASSESSEE. HE ANALYZED THE FINAL SPLIT-UP GIVEN BY THE ASSESSEE ( COPY ON PAGE 510 OF THE PAPER BOOK) BETWEEN TRADING AND INDENTING SEGMENTS AND NO TICED FROM IT THAT THE ASSESSEE HAD BIFURCATED ALL OTHER EXPENSES EXCEPT E MPLOYEE COST AND RENT ON THE BASIS OF TRADING TURNOVER TO THE INDENTING TUR NOVER (I.E. 42:734). EMPLOYEE ITA NO.7977/MUM/2010. M/S.BAYER MATERIAL SCIENCE PVT. LTD. 4 COST WAS BIFURCATED BY THE ASSESSEE IN THE RATIO OF 1:1 BETWEEN TRADING AND INDENTING SEGMENTS. IN THE OPINION OF THE TPO, THE ENTIRE EMPLOYEE COST WAS REQUIRED TO BE BIFURCATED ON THE BASIS OF TRADING A ND INDENTING TURNOVER. HE, THEREFORE, ALLOCATED A SUM OF RS.4.60 CRORES TO TH E INDENTING SEGMENT. SIMILARLY, AS REGARDS RENT TOTALING RS.53.90 LAKHS, THE ASSES SEE ATTRIBUTED EQUAL AMOUNT TO BOTH THE ACTIVITIES. APPLYING THE SAME YARDSTICK OF APPORTIONING IN TURNOVER RATIO, THE TPO ALLOCATED RS.50.94 LAKHS TO INDENTIN G SEGMENT AND RS.2.96 LAKHS TO TRADING SEGMENT. IN THIS WAY, HE REVISED THE SEG MENTAL ACCOUNTS IN RESPECT OF TRADING AND INDENTING ACTIVITIES AS UNDER : (FIGURES IN RS. 000) TRADING INDENTING TOTAL SALES 427,176,242 7,348,320,873 7,775,497,115 OTHER OPERATING INCOME COST RECOVERY 13,627,771 13,627,771 REIMBURSEMENTS 2,560,561 3,452,494 6,013,055 TOTAL 429,736,803 7,365,401,138 7,795,137,941 EXPENDITURE COST OF TRADED GOODS SOLD 396,864,566 7,253,684,515 7,623,549,081 EMPLOYEE COST 2,674,547 46,007,776 48, 682,323 FREIGHT & CLEARING 6,470,721 1,939,505 8,410,226 RENT 296,145 5,094,307 5,390,452 RATES & TAXES 21,769 374,469 396,238 INSURANCE 700,493 0 700,493 OTHERS 18,162 312,421 330, 583 TRAVELLING & CONVEYANCE 969,010 16,668,993 17,638,003 COMMUNICATION 119,977 2,063,854 2,183,831 PRINTING & STATIONARY 20,611 354, 548 375,159 DIRECTORS SITTING FEE 7,504 129 ,080 136,584 ITA NO.7977/MUM/2010. M/S.BAYER MATERIAL SCIENCE PVT. LTD. 5 AUDITORS REMUNERATION 62,281 1,071,366 1,133,647 ADVERTISEMENT & PUBLICITY 175,403 3,017,303 3,192,706 COMMISSION 64,228 1,104,857 1,169,085 BAD DEBTS 321,225 321,225 LEGAL & PROFESSIONAL 221,856 3,816,3 92 4,038,248 COST SHARING EXPENSES 1,626,188 27,973,8 39 29,600,027 EXCHANGE LOSS 4,644,853 4,644,853 MISCELLANEOUS EXPENSES 132,876 2,285,743 2,418,619 DEPRECIATION 182,287 3,135,713 3,318,000 388,594,701 7,369,034,682 7,757,629,383 RECOVERIES 6,566,138 6,566,138 TOTAL EXPENDITURE 388,594,701 7,362,468,544 7,751, 063,245 OPERATING PROFIT 41,142,102 2,932,594 44,074,696 OPERATING COST 386,034,140 95,156,258 OP/SALES 9.63% 0.04% 6. BY MEANS OF THE ABOVE CALCULATION, THE RAT IO OF OPERATING PROFIT TO SALES IN TRADING SEGMENT WAS WORKED OUT AT 9.63% AND IN I NDENTING SEGMENT AT 0.04%. THE TPO ACCEPTED THE RATIO OF OPERATING PROFIT TO S ALES IN THE TRADING ACTIVITY AS REPRESENTING ALP. HE HOWEVER DID NOT ACCEPT THE OPE RATING PROFIT RATIO IN INDENTING ACTIVITY AS SHOWING ALP. HE NOTICED THA T AS PER THE TERMS OF AGREEMENT BETWEEN THE BAYER GROUP COMPANIES AND THE ASSESSEE, INDENTING COMMISSION WAS PAYABLE TO THE ASSESSEE ONLY ON THE MAKING OF PAYMENT BY THE CUSTOMERS. FOR THE SERVICES RENDERED BY THE ASSESSE E, COMMISSION RATES RANGED BETWEEN 1% TO 3%. IT WAS ALSO OBSERVED THAT THE ASS ESSEE CHANGED ITS AGREEMENT WITH EFFECT FROM 13.1.2006 UNDER WHICH IT WAS TO BE REMUNERATED BY WAY OF REIMBURSAL OF TOTAL COST I.E. DIRECT EXPENSES AND A FAIR ALLOCATION OF INDIRECT ITA NO.7977/MUM/2010. M/S.BAYER MATERIAL SCIENCE PVT. LTD. 6 EXPENSES PLUS 0.6% OF THE SALE VALUE OF THE AES GO ODS INDENTED IN INDIA THROUGH THE ASSESSEE. THE TPO OPINED THAT ARMS LEN GTH INDENTING COMMISSION SHOULD BE BASED AS A PERCENTAGE OF SALE AND NOT AS A PERCENTAGE OF COST INASMUCH AS THE COMPENSATION WAS ONLY FOR THE EFFECTIVE SALE S MADE THROUGH THE ASSESSEE. THE MOST APPROPRIATE METHOD FOR COMPENSATING SUCH K IND OF INDENTING SERVICES, IN HIS OPINION, WAS NOT A COST PLUS BUT A PERCENTAG E OF SALES METHOD. HE NOTICED THAT THE ASSESSEE HAD SHOWN TO HAVE EARNED MARGIN O F 23.73% UNDER INDENTING SEGMENT, WHICH WAS ERRONEOUSLY DEPICTED AS A PERCEN TAGE OF ITS GROSS COMMISSION AND HENCE WAS MEANINGLESS. THE ASSESSEE WAS GIVEN AN OPPORTUNITY TO GIVE THE NAMES OF THE COMPARABLE COMPANIES WHICH WERE INDULGING IN SUCH KIND OF INDENTING BUSINESS IN CHEMICALS TO PROVE TH AT ITS PRICE WAS AT ALP. THE ASSESSEE FAILED TO DISCHARGE THIS BURDEN. TAKING ST RENGTH FROM THE SPECIAL BENCH ORDER IN THE CASE OF AZTEC SOFTWARE & TECHNOLOGY SERVICES LTD. VS. ACIT (2007) 107 ITD 141 (BANG) (SB) , THE TPO CAME TO HOLD THAT, IN THE ABSENCE OF TH E ASSESSEE FORTHCOMING WITH ANY COMPARABLE CASES, HE WILL APPLY A REASONABLE RATE OF COMMISSION CHARGED IN SIMILAR ACTIVITY. IT WAS NOTICED BY HIM THAT THE TRANSACTIONS OF INDENTING IN THE PRODUCTS DEALT WIT H BY THE ASSESSEE, WERE USUALLY BETWEEN TWO AES. AS NO DATA ABOUT THE UNCONTROLLED TRANSACTIONS OF SIMILAR NATURE WAS READILY AVAILABLE, HE CONSIDERED IT APPR OPRIATE TO USE DATA OF CONTROLLED TRANSACTIONS. PROCEEDING ON THIS LINE, H E NOTICED THAT ONE COMPANY, NAMELY, M/S HUNTSMAN INTERNATIONAL PVT. LTD., ASSES SED IN HIS OFFICE, UNDERTOOK IDENTICAL FUNCTIONS AS THOSE OF THE ASSESSEE IN AS MUCH AS, THAT WAS ALSO ENGAGED IN TRADING, INDENTING AND MANUFACTURING POLYURETHAN E PRODUCTS. IT ALSO UNDERTOOK INDENTING SERVICES FOR ITS AE BY PROCURIN G ORDERS FOR ISOCYNATE AND POLYOLS. AS PER THE TERMS OF AGREEMENT, THE AE OF T HIS COMPARABLE COMPANY PAID AN AGENCY COMMISSION EQUAL TO 5% OF THE AGENC Y SALE VALUE OF THE PRODUCTS SOLD IN THE TERRITORY OF THAT COMPANY. TH E TPO FURTHER ANALYZED VARIOUS FACTORS SUCH AS CHARACTERISTICS OF PRODUCTS , ECONOMIC CIRCUMSTANCES, FUNCTIONAL AND RISK PROFILES, BUSINESS STRATEGIES, ETC., OF THE ASSESSEE AND M/S ITA NO.7977/MUM/2010. M/S.BAYER MATERIAL SCIENCE PVT. LTD. 7 HUNTSMAN INTERNATIONAL PVT. LTD. AND FOUND THEM SIM ILAR. THE TPO FOUND ANOTHER COMPARABLE CASE OF M/S INCOS ABS (INDIA) L TD. INDENTING POLYCARBONATE PRODUCTS FOR BAYER MATERIAL SCIENCE L TD., HONGKONG. COMMISSION IN THAT CASE WAS ALSO RECEIVED AT THE RA TE OF 5% OF THE SALES. ANOTHER CASE OF M/S RATHI BROS. MADRAS LTD. WAS NOT ICED HAVING INDENTING COMMISSION @ 5 TO 6%. IN THE LIGHT OF THESE COMPAR ABLE CASES, THE TPO HELD THAT THE ARMS LENGTH COMMISSION EARNED BY THE ASSE SSEE ON INDENTING TURNOVER OF RS.734.83 CRORES @ 5% WOULD BE RS.36,74,16,044/ -. AS THE ACTUAL AMOUNT RECEIVED BY THE ASSESSEE WAS AT RS.11,17,16,623/-, THE TPO PROPOSED ADJUSTMENT OF RS.25,56,99,421./-. IT IS THIS AMOUNT OF RS.25.56 CRORES WHICH WAS ADDED BY THE AO, AGAINST WHICH THE ASSESSEE HAS CO ME UP IN APPEAL BEFORE US. 7. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PER USED RELEVANT MATERIAL ON RECORD. IT IS OBSERVED THAT THE ASSESSEE ENTERED IN TO CERTAIN INTERNATIONAL TRANSACTIONS WITH ITS AES. APART FROM MANUFACTURIN G, THE ASSESSEE ALSO UNDERTOOK THE BUSINESS OF TRADING AND INDENTING. T HERE IS NO DISPUTE AS REGARDS ARMS LENGTH PRICE DECLARED BY THE ASSESSEE IN RESP ECT OF MANUFACTURING ACTIVITY. THE ASSESSEE CONSOLIDATED ITS RESULTS FROM THE OTHE R TWO STREAMS OF ACTIVITIES, NAMELY, TRADING OF FINISHED POLYCARBON ETC., PURCHA SED BY IT FROM BAYER GROUP FOR RESALE AND INDENTING COMMISSION EARNED FROM BAY ER GROUP ON SALES EFFECTED BY THEM THROUGH THE ASSESSEES ASSISTANCE. THE TPO REQUESTED THE ASSESSEE TO SEGREGATE THE RESULTS IN RESPECT OF TRADING AND IND ENTING ACTIVITIES AND FURNISH SEGMENTAL ACCOUNTS SEPARATELY. INITIALLY IT WAS ARG UED BEFORE THE TPO ON BEHALF OF THE ASSESSEE THAT IT WAS NOT PRACTICABLE TO SEGR EGATE THE RESULTS IN RESPECT OF TRADING AND INDENTING ACTIVITIES. THE ASSESSEE REVI SED THE CALCULATIONS OF SUCH PROFIT ONE AFTER THE OTHER, FOR FOUR TIMES, SOMETIM ES VOLUNTARILY AND ON OTHERS AT THE INSTANCE OF THE TPO. FINAL CALCULATION, A COPY OF WHICH IS AVAILABLE ON PAGE 510 OF THE PAPER BOOK, WAS FILED SPLITTING TRADING AND INDENTING ACTIVITIES, WHICH HAS BEEN CONSIDERED BY THE TPO FOR FURTHER ADJUSTME NTS. THUS IT CAN BE SEEN THAT ITA NO.7977/MUM/2010. M/S.BAYER MATERIAL SCIENCE PVT. LTD. 8 THOUGH THE ASSESSEE WAS INITIALLY HESITANT TO GIVE SEGMENTAL ACCOUNTS IN RESPECT OF TRADING AND INDENTING ACTIVITIES SEPARATELY BUT EVENTUALLY COMPLIED WITH AND FURNISHED SUCH DETAILS. 8. THE FIRST QUESTION IN THIS REGARD IS WHETHER THE TPO WAS JUSTIFIED IN PROCEEDING WITH THE EXERCISE OF DETERMINING THE ALP DISTINCTLY IN RESPECT OF TRADING AND INDENTING ACTIVITIES ? THERE CANNOT BE ANY DISPUTE ON THE PROPOSITION THAT IF FUNCTIONS, ASSETS AND RISKS ARE SAME IN MOR E THAN ONE ACTIVITY, THEN THESE CAN BE CLUBBED FOR DETERMINING THE ALP. IF HOWEVER THE FAR ANALYSIS INDICATES DIVERSION IN TWO ACTIVITIES THEN BENCH-MARKING SHOU LD BE DONE ON SEPARATE BASIS. IT IS RELEVANT TO NOTE THAT THERE IS VAST DIFFERENC E IN INDENTING AND TRADING ACTIVITIES. IN A TRADING ACTIVITY, A TRADER FINDS T HE CUSTOMERS, UNDERTAKES THE RISK IN MAINTAINING INVENTORY, REALIZATION OF SALE PROCE EDS, INCURRING INTEREST AND OTHER COSTS IN RESPECT OF MAINTAINING AND KEEPING T HE STOCK. IN SUCH A CASE, THE FUNCTIONS ALSO INCLUDE UNLOADING THE GOODS, BRINGIN G THEM TO ITS WAREHOUSE, LOADING AND UNLOADING AT THE CUSTOMERS PLACE SO ON AND SO FORTH. ON THE OTHER HAND, THE INDENTING ACTIVITY IS CONFINED ONLY IN FI NDING THE CUSTOMERS AND GETTING AN APPROPRIATE PRICE. THERE ARE NO FINANCIA L RISKS INVOLVED IN INDENTING ACTIVITY AND FURTHER THE COSTS INCURRED HEREIN ARE SUBSTANTIALLY LESS WHEN COMPARED WITH THE TRADING ACTIVITY. FROM HERE, IT FOLLOWS THAT TRADING AND INDENTING ACTIVITIES ARE QUITE DISTINCT FROM EACH O THER AND HENCE, BENCHMARKING IS ALSO REQUIRED TO BE DONE SEPARATELY. IN OUR CONS IDERED OPINION, THE TPO WAS JUSTIFIED IN VENTURING TO DETERMINE THE ALP IN RESP ECT OF BOTH THESE ACTIVITIES DISTINCTLY. 9. THE TPO WENT AHEAD IN DETERMINING THE ALP IN RES PECT OF TRADING AND INDENTING ACTIVITIES SEPARATELY. OBVIOUSLY THE FIRS T STEP IN THE DETERMINATION OF ALP IS TO FIND OUT THE PERCENTAGE OF PROFIT OF T HE ASSESSEE FROM THE INTERNATIONAL TRANSACTIONS, UNLESS IT RELATES TO TH E INCURRING OF ANY EXPENSE IN AN ITA NO.7977/MUM/2010. M/S.BAYER MATERIAL SCIENCE PVT. LTD. 9 INTERNATIONAL TRANSACTION. NORMALLY IT IS THE PROFI T DECLARED BY THE ASSESSEE FROM THE INTERNATIONAL TRANSACTIONS WHICH IS TAKEN INTO CONSIDERATION, EXCEPT WHERE THE TPO FINDS THAT THE AFFAIRS HAVE BEEN REFLECTED IN SUCH A MANNER SO AS NOT TO DEPICT THE SEGMENT WISE CORRECT PROFIT OR ANY OTHER MEANS HAVE BEEN ADOPTED WHICH HAVE THE EFFECT OF NOT SHOWING THE CORRECT IN COME IN INTERNATIONAL TRANSACTIONS. THEN COMES THE SECOND STEP IN FINDING OUT THE PROFIT RATE OF COMPARABLE CASES AND THEN COMES THE FINAL STAGE OF DETERMINING AS TO WHETHER OR NOT THE PROFIT OF THE ASSESSE REPRESENTS ALP. 10. THE TPO UNDERTOOK THE FIRST STEP OF FINDING OUT THE CORRECTNESS OF PROFIT DECLARED BY THE ASSESSEE WITH REFERENCE TO THE FINA L (FOURTH) CALCULATION SUBMITTED BY THE ASSESSEE SPLITTING THE RESULTS SHO WING NET PROFIT MARGIN AT 3.90% IN THE CASE OF TRADING AND 23.73% IN THE CASE OF INDENTING ACTIVITIES. HERE, IT IS PERTINENT TO NOTE THAT TRADING MARGIN A T 3.90% WAS DETERMINED BY CONSIDERING THE FIGURE OF NET SALES OF RS.42.71 CRO RES AS DENOMINATOR. ON THE OTHER HAND, THE NET PROFIT MARGIN IN THE CASE OF IN DENTING ACTIVITY AT 23.73% WAS COMPUTED BY ADOPTING THE GROSS FIGURE OF INDENTING COMMISSION ALONG WITH COST RECOVERY AS DENOMINATOR INSTEAD OF ACTUAL TURNOVER ON WHICH SUCH INDENTING COMMISSION WAS EARNED. THE FIGURE OF SUCH INDENTING TURNOVER WAS ADMITTED BY THE ASSESSEE AS RS.734.83 CRORES . THE TPO SUBSTIT UTED THE FIGURE OF INDENTING TURNOVER WITH THE GROSS COMMISSION ADOPTED BY THE A SSESSEE FOR THE PURPOSES OF WORKING OUT THE OPERATING PROFIT TO SALES RATIO IN THE INDENTING SEGMENT. IN THE FOURTH AND THE FINAL FINANCIAL SPLIT, THE ASSESSEE BIFURCATED ALL EXPENSES, EXCEPT EMPLOYEE COSTS AND RENT IN THE RATIO OF TRADING TO INDENTING TURNOVER, THAT IS, 42 : 734. HOWEVER, THESE TWO EXPENSES WERE APPORTIONED EQUALLY IN THE RATIO OF 1:1. THE TPO ACCEPTED ALL OTHER FIGURES GIVEN BY THE ASS ESSEE EXCEPT THE BIFURCATION OF THESE EXPENSES. HE APPORTIONED THESE TWO EXPENSE S ALSO IN THE RATIO OF TRADING AND INDENTING TURNOVER. ON MAKING THIS ALTERATION, THE TPO DETERMINED THE RATIO OF OPERATING PROFIT TO SALES AT 9.63% IN THE CASE O F TRADING ACTIVITY AND 0.04% IN ITA NO.7977/MUM/2010. M/S.BAYER MATERIAL SCIENCE PVT. LTD. 10 THE CASE OF INDENTING ACTIVITY AS PER THE TABLE EXT RACTED ABOVE. THE RESULTING RATIO OF OPERATING PROFIT TO SALES IN THE TRADING A CTIVITY WAS ACCEPTED BY THE TPO AS REPRESENTING ALP. THUS IT IS MANIFEST THAT T HE ENTIRE DISPUTE REVOLVES AROUND THE DETERMINATION OF ALP IN RESPECT OF INDEN TING BUSINESS. 11. THE LD. AR OBJECTED TO THE ADOPTION OF FI GURE OF INDENTING TURNOVER AND ALSO THE BIFURCATION OF EMPLOYEE COST AND RENT AS D ONE BY THE TPO. IT WAS ARGUED BY THE LD. AR THAT THE TPO OUGHT TO HAVE CON SIDERED THE GROSS COMMISSION AS THE TURNOVER. WE ARE NOT CONVINCED WI TH THIS SUBMISSION FOR THE SIMPLE REASON THAT INDENTING COMMISSION IS GROSS RE MUNERATION ALLOWED TO THE ASSESSEE ON THE AMOUNT OF TURNOVER ACHIEVED BY THE ASSESSEES A.E. THROUGH ITS EFFORTS. IT IS BEYOND OUR COMPREHENSION AS TO HOW T HE FIGURE OF COMMISSION, WHICH CONSTITUTES A SMALL FRACTION OF THE TURNOVER IN THE INDENTING BUSINESS, CAN BE COMPARED WITH THE TURNOVER IN THE TRADING SEGMEN T. SALES VALUE MINUS THE PURCHASE COST AND DIRECT EXPENSES GIVES THE FIGURE OF GROSS PROFIT. WHEN WE REDUCE THE INDIRECT EXPENSES FROM THE GROSS PROFIT, THE AMOUNT OF NET PROFIT IS DETERMINED. BRINGING GROSS COMMISSION FROM THE IN DENTING SEGMENT AND TURNOVER IN THE TRADING SEGMENT ON ONE PLATFORM FO R COMPARISON IS WHOLLY ABSURD. IN FACT, GROSS COMMISSION FROM THE INDEN TING ACTIVITY CAN BE LIKENED WITH THE GROSS PROFIT FROM TRADING MINUS COSTS RELA TED TO THE MAINTENANCE OF INVENTORY, RISK AND OTHER RELATED COSTS. IF ANY COM PARISON OF THE TRADING TURNOVER IS TO BE CONTEMPLATED WITH THE INDENTING ACTIVITY, THAT CAN BE ONLY WITH ITS TURNOVER. IT IS WHOLLY UNREALISTIC TO COMPARE THE G ROSS INDENTING COMMISSION WITH THE TURNOVER IN THE TRADING ACTIVITY FOR COMPA RING THE RATIO OF OPERATING PROFIT TO TURNOVER. AS THE ASSESSE SHOWED NET PROF IT MARGIN OF 23.73% IN THE INDENTING SEGMENT BY CONSIDERING THE AMOUNT OF GROS S COMMISSION IN THE DENOMINATOR, THE SAME IS NOT CAPABLE OF COMPARISON WITH THE NET PROFIT MARGIN IN THE TRADING SEGMENT WITH THE AMOUNT OF TURNOVER AS DENOMINATOR. ROUNDS CANNOT BE COMPARED WITH THE SQUARES AND VICE VERSA . IT IS ONLY THE TURNOVER AND ITA NO.7977/MUM/2010. M/S.BAYER MATERIAL SCIENCE PVT. LTD. 11 NOT THE GROSS COMMISSION IN THE INDENTING ACTIVITY, WHICH CAN BE COMPARED WITH THE TURNOVER IN THE TRADING ACTIVITY. WE, THEREFORE , REPEL THIS CONTENTION RAISED ON BEHALF OF THE ASSESSE AND APPROVE THE VIEW CANVASSE D BY THE TPO IN ADOPTING THE FIGURE OF TURNOVER IN THE INDENTING SEGMENT AT RS.734.83 CRORES . 12. THE SECOND OBJECTION RAISED BY THE ASSESSEE IS ON THE BIFURCATION OF EMPLOYEE COST BETWEEN TRADING AND INDENTING SEGMENT S. WHEREAS, THE ASSESSEE DIVIDED EMPLOYEE COST IN EQUAL SHARES BETWEEN THE T RADING AND INDENTING ACTIVITIES, THE TPO APPORTIONED IT IN THE RATIO OF TURNOVER. THE LD. AR ARGUED THAT THE BASIS ADOPTED BY THE ASSESSE IN BIFURCATIN G SUCH COST WAS CORRECT. WE ARE AGAIN UNCONVINCED WITH THE SUBMISSIONS TENDERED ON BEHALF OF THE ASSESSEE IN THIS REGARD THAT THE EMPLOYEE COSTS SHOULD BE S EGREGATED IN EQUAL PROPORTION BETWEEN THE TWO SEGMENTS. THE OBVIOUS REASON IS TH AT THE ASSESSEE ITSELF ADMITTED BEFORE THE TPO THAT TRADING AND INDENTING ARE BEING UNDERTAKEN BY THE COMPANY AS AN INTEGRATED TRADING BUSINESS WITH COMMON EMPLOYEES, COMMON FACILITIES AND COMMON STRATEGIES AND COMMON MANAGEMENT . IF ONE OF THE TWO ACTIVITIES CONSUMES A SMALL FRACTION OF THE TOTAL TIME, IT CANNOT BE SAID THAT EXPENDITURE IN BOTH IS SIMILAR. WHEN THE EMPLO YEES WERE COMMON IN BOTH THE SEGMENTS, HOW THE ASSESSEE COULD HAVE BIFURCATE D SUCH EXPENDITURE IN AN AD HOC MANNER IN THE RATIO OF 1:1. IT SHOULD HAVE COME OU T WITH THE EVIDENCE OF TIME SPENT BY EMPLOYEES IN THE RESPECTIVE ACTIVITIE S. IT WILL BE SEEN INFRA WHILE DEALING WITH GROUND NO.10 OF THE APPEAL THAT THE AS SESSEE FURNISHED HOUR-WISE UTILIZATION OF TIME BY THE EMPLOYEES OF BCS IN DIFF ERENT DIVISIONS OF EACH SEGMENT FOR JUSTIFYING THAT IT WAS THE REIMBURSEMEN T OF COST INCURRED WITHOUT HAVING ANY PROFIT ELEMENT. WHEN THE ASSESSEE IS SO METICULOUS IN MAINTAINING AND PROVIDING SUCH MINUTE DETAILS, IT COULD HAVE M AINTAINED SIMILAR DETAILS IN RESPECT OF EACH EMPLOYEE IN TRADING AND INDENTING A CTIVITIES TO JUSTIFY THE APPORTIONMENT OF COST IN A BEFITTING MANNER. AS TH E STAND OF THE ASSESSEE BEFORE THE TPO WAS THAT BOTH THESE ACTIVITIES WERE CONDUCT ED IN AN INTEGRATED MANNER ITA NO.7977/MUM/2010. M/S.BAYER MATERIAL SCIENCE PVT. LTD. 12 WITH COMMON EMPLOYEES AND COMMON MANAGEMENT, NATURA LLY IT DID NOT MAINTAIN ANY SEPARATE RECORD IN RESPECT OF THESE TW O ACTIVITIES. WHEN WE ARE CONSIDERING THE QUESTION OF ALLOCATION OF EMPLOYEES COST BETWEEN TRADING AND INDENTING ACTIVITIES, IN THE ABSENCE OF ANY OTHER R EASONABLE BASIS, THE BIFURCATION IN THE RATIO OF TURNOVER IN THE TWO SEGMENTS, IS QU ITE APPROPRIATE. IT IS FURTHER RELEVANT TO NOTE THAT THE ASSESSEE DIVIDED ALL OTHE R EXPENSES IN THE RATIO OF TURNOVER IN TRADING AND INDENTING SEGMENTS. IN THA T VIEW OF THE MATTER, WE ARE UNABLE TO FIND ANY INFIRMITY IN THE TPOS VIEW IN A LLOCATING EMPLOYEE COST ALSO IN THE SAME RATIO. WHAT HAS BEEN DISCUSSED IN THE C ONTEXT OF EMPLOYEES COST WOULD SQUARELY APPLY TO THE RENT ALSO. HERE AGAIN T HE ASSESSEE DISTRIBUTED TOTAL RENT EXPENDITURE IN THE RATIO OF 1 : 1 BETWEEN THE TWO SEGMENTS, WHICH THE TPO DID NOT ACCEPT AND APPORTIONED IN THE RATIO OF TURN OVER OF THESE SEGMENTS. TO SUM UP, WE HOLD THAT THE TPO HAS RIGHTLY WORKED OUT THE ASSESSEES PROFIT RATE FROM THE INTERNATIONAL TRANSACTIONS IN THE INDENTIN G SEGMENT AT 0.04% OF THE TURNOVER. IF WE CONSIDER THE RATIO OF GROSS COMMI SSION TO THE INDENTING TURNOVER, THE SAME COMES TO AROUND 1.5%. 13. NOW WE MOVE TO THE SECOND STEP OF FINDING OUT T HE PROFIT RATE OF COMPARABLE CASES. WE HAVE APPROVED THE VIEW OF THE TPO IN HOLDING THAT BOTH THE TRADING AND INDENTING ACTIVITIES WERE REQUIRED TO BE BENCHMARKED SEPARATELY. WE HAVE NOTICED ABOVE THAT THE ASSESSEE GAVE COMPAR ABLE CASES SHOWING PROFIT MARGINS IN TRADING AND INDENTING ACTIVITIES TAKEN AS ONE CONSOLIDATED UNIT, WITHOUT THERE BEING ANY SEGREGATION FOR INDENTING A CTIVITY. IN THAT VIEW OF THE MATTER THE COMPARABLE CASES CITED BY THE ASSESSEE L OST THEIR SIGNIFICANCE. LEFT WITH NO COMPARABLE CASE AVAILABLE FOR COMPARISON FR OM THE SIDE OF THE ASSESSEE, THE TPO RIGHTLY REQUESTED THE ASSESSEE TO GIVE NAME S OF COMPANIES INDULGING IN SUCH KIND OF INDENTING BUSINESS IN CHEMICALS TO SHO W THAT ITS PRICE WAS AT ARMS LENGTH. THE ASSESSEE DID NOT FURNISH ANY DETAILS OF THE COMPARABLE CASES. IN THE ABSENCE OF THE ASSESSEE DISCHARGING ITS ONUS THE TP O TOOK UPON HIMSELF THE DUTY ITA NO.7977/MUM/2010. M/S.BAYER MATERIAL SCIENCE PVT. LTD. 13 OF FINDING COMPARABLE CASES. HE NOTICED THAT NO DAT A WAS AVAILABLE ON SUCH ACTIVITY IN THE REALM OF UNCONTROLLED TRANSACTIONS. HE, ACCORDINGLY, TOOK NOTE OF THREE COMPARABLE CASES ENTERING INTO SIMILAR INDENT ING BUSINESS BY WAY OF CONTROLLED TRANSACTIONS, VIZ., M/S HUNTSMAN INTERN ATIONAL PVT. LTD., M/S INEOS ABS (INDIA) LTD. AND M/S RATHI PROPERTIES MADRAS LT D. SHOWING THE PERCENTAGE OF INDENTING COMMISSION TO SALES AT FIVE PERCENT. N OW THE QUESTION ARISES AS TO WHETHER THE TPO WAS JUSTIFIED IN CONSIDERING THESE THREE CASES AS COMPARABLE. 14. THE LD. COUNSEL ARGUED THAT THE TPO ER RED IN REJECTING THE COMPARABLE CASES GIVEN BY THE ASSESSEE AND CHOOSING COMPARAB LE CASES AT HIS OWN. FROM THE FACTS RECORDED ABOVE, WE FIND THAT THE ASSESSEE DID NOT GIVE ANY COMPARABLE CASE IN THE INDENTING ACTIVITY ALONE. SINCE THE BEN CHMARKING WAS TO BE DONE IN RESPECT OF SUCH ACTIVITY ALONE, IT WAS FOR THE ASSE SSEE TO INITIALLY SUBMIT A LIST OF COMPARABLE CASES. NOT HAVING DONE SO, THE TPO WAS LEFT WITH NO OPTION BUT TO FIND OUT SUITABLE COMPARABLE CASES AT HIS OWN. BUT FOR THE COMPARABLE CASES CHOSEN BY THE TPO, THE DETERMINATION OF ALP IN RES PECT OF INDENTING ACTIVITY WOULD HAVE BECOME IMPOSSIBLE. IN OUR CONSIDERED OPI NION THE FOLLOWING ARE THE ESSENTIAL STEPS IN THE SELECTION OF COMPARABLE CASE S :- I. AS THE ASSESSEE KNOWS THE NATURE OF ITS BUSINESS W ELL, IT IS HE WHO ALWAYS HAS THE PREROGATIVE OF CHOOSING THE COMPARABLE CAS ES. II. ONCE THE ASSESSEE HAS CHOSEN THE COMPARABLE CASES, THEN IT BECOMES THE DUTY OF THE TPO TO FIND WHETHER THESE CASES ARE, IN FACT, COMPARABLE OR NOT. IF HE FINDS THAT THE CASES GIVEN BY THE ASSESS EE ARE COMPARABLE ON THE BASIS OF FAR ANALYSIS, THE MATTER ENDS. HE WILL ACC EPT THEM AND THEN DETERMINE THE AVERAGE PROFIT. III. IF THE TPO IS NOT SATISFIED AS TO THE COMPARABILITY OF SOME OF THE CASES GIVEN BY THE ASSESSEE, HE WILL EXCLUDE SUCH CASES F ROM THE FINAL LIST OF COMPARABLES, AFTER GIVING COGENT REASONS. ITA NO.7977/MUM/2010. M/S.BAYER MATERIAL SCIENCE PVT. LTD. 14 IV. THE TPO MAY POSSIBLY FIND THAT THE ASSESSEE HAS DON E CHERRY PICKING AND IGNORED THE COMPARABLE CASES GIVING HIGHER PROFIT M ARGINS. IN SUCH A CASE HE MAY HIMSELF FIND OUT SUCH COMPARABLE CASES AND AFTER TAKING OBJECTIONS FROM THE ASSESSEE INCLUDE THEM ALSO IN T HE FINAL LIST OF COMPARABLES ALONG WITH THOSE LEFT OUT OF THE ASSESS EES LIST AS PER STEP III. ABOVE. HERE IT IS IMPORTANT TO MENTION THAT THE VOL UNTARY SELECTION OF COMPARABLE CASES BY THE TPO IS HIS POWER AND NOT THE DUTY . HE MAY OR MAY NOT EXERCISE HIS POWER IN GIVEN CIRCUMSTANCES. IF HE GETS SATISFIED WITH THE CASES LEFT OUT FROM THE ASSESSEES LIST, H E MAY SKIP THE EXERCISE OF VOLUNTARILY FINDING THE COMPARABLE CASES AT HIS END . THUS IT IS THE AGGREGATE OF SUCH CASES BEING THOSE SHORT-LISTED FR OM THE ASSESSEES LIST AND THOSE VOLUNTARILY INCLUDED BY THE TPO, WHICH AR E CONSIDERED TO FIND OUT THE AVERAGE PROFIT FOR THE PURPOSES OF COMPARIS ON. V. IT MAY ALSO HAPPEN THAT ALL THE CASES CHOSEN BY THE ASSESSEE TURN OUT TO BE INCOMPARABLE AND AS SUCH THE BASKET OF COMPARABLE C ASES IS EMPTIED. AS THE EXERCISE OF DETERMINING ALP IS INCONCEIVABLE WI THOUT ANY COMPARABLE CASE, THE TPO WILL HAVE TO AFFORD ONE MO RE OPPORTUNITY TO THE ASSESSEE ENABLING IT TO GIVE CERTAIN OTHER CASES WH ICH ARE REALLY COMPARABLE. ON THE RECEIPT OF DETAILS OF SUCH COMPA RABLE CASES, THE STEPS AT II. TO IV. SHALL BE UNDERTAKEN BY THE TPO. VI. IF DESPITE BEING PUT TO NOTICE AS PER STEP V., THE ASSESSEE FAILS TO GIVE ANY LIST OF COMPARABLE CASES OR THE CASES GIVEN ARE AGA IN FOUND TO BE INCOMPARABLE, THEN THE POWER OF THE TPO IN VOLUNTARILY SELECTING COMPARABLE CASES AS DISCUSSED IN STEP IV. ABOVE SHA LL GET CONVERTED IN TO HIS DUTY . HE WILL HAVE TO UNDERTAKE THE EXERCISE OF FINDING COMPARABLE CASES SO AS TO COMPLETE HIS JOB. ITA NO.7977/MUM/2010. M/S.BAYER MATERIAL SCIENCE PVT. LTD. 15 15. ADVERTING TO THE FACTS OF THE INSTANT CASE , IT IS NOTED THAT THE ASSESSEE INITIALLY GAVE LIST OF COMPARABLE CASES. ALL SUCH C ASES WERE FOUND TO BE INCOMPARABLE AS HAVING BEEN GIVEN FOR COMBINED TRAD ING AND INDENTING ACTIVITIES. SINCE THE TPO WAS TO BENCHMARK ONLY IN DENTING ACTIVITY AND NONE OF THE CASES GIVEN BY THE ASSESSEE SATISFIED THIS FUN CTIONAL TEST OF COMPARABILITY, THE TPO REQUESTED THE ASSESSEE TO GIVE A LIST OF CO MPARABLE CASES INDULGING INTO THE INDENTING OF THE RELATED PRODUCT. THE ASSESSEE FAILED TO CITE ANY SUCH CASE. IN ORDER TO UNDERTAKE THE EXERCISE OF DETERMINING THE ALP, THE TPO WAS LEFT WITH NO OPTION BUT TO FIND OUT COMPARABLE CASES AT HIS O WN. IN OUR CONSIDERED OPINION, THE TPO WAS FULLY JUSTIFIED IN SELECTING COMPARABLE CASES AT HIS OWN FOR THE PURPOSES OF MAKING COMPARISON WITH THE ASSE SSEES RESULTS. 16. THE LD. COUNSEL FOR THE ASSESSEE RAISED ONE MOR E OBJECTION BY CONTENDING THAT THE TPO WAS NOT JUSTIFIED IN CONSIDERING CONTR OLLED TRANSACTIONS AS COMPARABLE DATA IN RESPECT OF M/S HUNTSMAN INTERNAT IONAL P. LTD., M/S INEOS(ABS) INDIA LTD. AND M/S RATHI BROS. MADRAS L TD. IT WAS ARGUED THAT THERE ARE CATENA OF ORDERS IN WHICH IT HAS BEEN HEL D THAT ONLY UNCONTROLLED COMPARABLE CASES CAN BE CONSIDERED FOR THE PURPOSE OF BENCHMARKING. IT WAS, THEREFORE, URGED THAT AS THE ABOVE MENTIONED THREE CASES WERE CONTROLLED TRANSACTIONS (I.E. BETWEEN TWO ASSOCIATED ENTERPRIS ES), THE SAME BE EXCLUDED. 17. SECTION 92(1) PROVIDES THAT ANY INCOME ARISING FROM AN INTERNATIONAL TRANSACTION SHALL BE COMPUTED HAVING REGARD TO THE ARMS LENGTH PRICE. EXPLANATION TO SEC. 92(1) CLARIFIES THAT ALLOWANCE FOR ANY EXPENSE OR INTEREST ARISING FROM AN INTERNATIONAL TRANSACTION SHALL ALS O BE DETERMINED HAVING REGARD TO THE ARMS LENGTH PRICE. SECTION 92C(1) STATES TH AT THE ARMS LENGTH PRICE IN RELATION TO AN INTERNATIONAL SHALL BE DETERMINED BY ANY OF THE METHODS PRESCRIBED IN THE PROVISION, BEING THE MOST APPROPRIATE METHOD , HAVING REGARD TO THE NATURE OF THE TRANSACTION OR CLASS OF TRANSACTION ETC. SEC TION 92F(II) DEFINES ARMS ITA NO.7977/MUM/2010. M/S.BAYER MATERIAL SCIENCE PVT. LTD. 16 LENGTH PRICE TO MEAN A PRICE WHICH IS APPLIED OR PROPOSED TO BE APPLIED IN A TRANSACTION BETWEEN PERSONS OTHER THAN ASSOCIATED E NTERPRISES, IN UNCONTROLLED CONDITIONS . A PERUSAL OF THIS DEFINITION AMPLY BRINGS OUT T HAT ALP IS A PRICE WHICH IS APPLIED BETWEEN PERSONS OTHER THAN ASSOCI ATED ENTERPRISES. THE EXPRESSION OTHER THAN ASSOCIATED ENTERPRISE IMPLI ES TWO INDEPENDENT ENTITIES WHICH ARE NOT ASSOCIATED TO EACH OTHER. SECTION 92C (1) PRESCRIBES CERTAIN METHODS, OUT OF WHICH ONE WHICH IS MOST APPROPRIATE SHOULD BE CHOSEN FOR COMPUTING ALP. THE MANNER OF DETERMINATION OF ALP A S PER THESE METHODS HAS BEEN SET OUT IN RULE 10B OF THE I.T. RULES, 1962. T HERE IS REFERENCE TO UNCONTROLLED TRANSACTION IN THIS RULE. RULE 10A ( A) DEFINES UNCONTROLLED TRANSACTION TO MEAN A TRANSACTION BETWEEN ENTERPRISES OTHER THAN ASSOCI ATED ENTERPRISES, WHETHER RESIDENT OR NON-RESIDENT . WHEN WE READ SECTIONS 92C(1) AND 92F(II) IN CONJUNCTION WITH RULES 10A AND 10B, IT BECOMES OSTENSIBLE THAT ALP IS TO BE DETERMINED WITH REFERENCE TO UNCONTROL LED TRANSACTIONS OR, IN OTHER WORDS, THE PRICE APPLIED OR PROPOSED TO BE APPLIED IN A TRANSACTION BETWEEN OTHER THAN ASSOCIATED ENTERPRISES IN UNCONTROLLED C ONDITIONS. 18. IN ORDER TO APPRECIATE THE RIVAL CONTENTIONS IN THIS REGARD, IT WILL BE PERTINENT TO NOTE THAT SECTIONS 92 TO 92F DEALING W ITH COMPUTATION OF INCOME FROM INTERNATIONAL TRANSACTIONS HAVING REGARD TO TH E ALP ARE PLACED IN CHAPTER X WITH THE MARGINAL NOTE : SPECIAL PROVISIONS RELA TING TO AVOIDANCE OF TAX. THE VERY PURPOSE OF INTRODUCING THESE PROVISIONS UN DER CHAPTER X IS TO CURB THE TENDENCY OF AVOIDING THE PAYMENT OF LAWFUL TAX IN C ERTAIN CIRCUMSTANCES. WHEN TWO ASSOCIATED ENTERPRISES ENTER INTO TRANSACTIONS WITH EACH OTHER, THE POSSIBILITY OF ARRANGING THE AFFAIRS IN SUCH A MANN ER THAT DUE TAX IS NOT PAID IN INDIA CANNOT BE RULED OUT. ALBEIT SUCH A TENDENCY I S NOT OMNIPRESENT, YET IT IS NOT DIFFICULT TO FIND OUT THE INSTANCES WHERE THE AFFAI RS ARE COOKED UP BETWEEN THE ASSOCIATED ENTERPRISES IN SUCH A WAY THAT DUE TAX D OES NOT COME INTO THE COFFERS OF THE EXCHEQUER IN INDIA. IN ORDER TO CURB SUCH EV IL PRACTICE AND PROTECT THE ITA NO.7977/MUM/2010. M/S.BAYER MATERIAL SCIENCE PVT. LTD. 17 INTEREST OF OUR COUNTRY, THESE SECTIONS HAVE BEEN I NSERTED TO ENSURE THAT INCOME IN RESPECT OF INTERNATIONAL TRANSACTIONS IS OFFERED AT THE ARMS LENGTH PRICE. IN OTHER WORDS, THE MECHANISM IS TO DISREGARD THE APPA RENT CONSIDERATION RECORDED IN THE BOOKS OF ACCOUNT AND SUBSTITUTE IT WITH THE CONSIDERATION WHICH WOULD HAVE BEEN AGREED UPON IF THE ENTITIES HAD BEEN INDE PENDENT OF EACH OTHER, IF THE LATTER IS HIGHER. THIS EXERCISE IS PRECISELY CALLE D THE DETERMINATION OF ALP IN WHICH TRANSFER PRICING OFFICER FINDS OUT THE AMOUNT OF INCOME EARNED OR EXPENDITURE INCURRED WHICH WOULD HAVE BEEN ACTUALLY EARNED OR INCURRED IF THE TWO ENTERPRISES HAD BEEN INDEPENDENT OF EACH OTHER, THEREBY RULING OUT THE POSSIBILITY OF CAMOUFLAGING. IT IS THIS PURPOSE WHI CH IS BEHIND THE ENACTMENT OF THESE PROVISIONS. THE END RESULT IN THIS REGARD CAN BE ACHIEVED MOST APPROPRIATELY BY COMPARING THE PROFIT ON ACCOUNT OF TRANSACTIONS BETWEEN TWO ASSOCIATED ENTERPRISES WITH THAT OF THE TWO INDEPEN DENT ENTITIES. THAT IS WHY THE TRANSACTION BETWEEN TWO INDEPENDENT ENTITIES IS CAL LED UNCONTROLLED TRANSACTION. IT IS WITH THIS AVOWED OBJECT THAT TH E COMPARABLE UNCONTROLLED TRANSACTIONS ARE CONSIDERED FOR DETERMINING THE ALP IN A TRANSACTION BETWEEN TWO ASSOCIATED ENTERPRISES. 19. IT IS POSSIBLE THAT THE NATURE OF INTERNATIONAL TRANSACTION BETWEEN TWO ASSOCIATED ENTERPRISES MAY BE SUCH WHICH, IN NORMAL COURSE, IS UNUSUAL BETWEEN INDEPENDENT ENTERPRISES. IN SUCH A CASE THERE WILL BE HARDLY ANY COMPARABLE UNCONTROLLED CASE FOR THE PURPOSES OF BENCHMARKING OF SUCH TRANSACTION. THE QUESTION WILL ARISE AS TO WHETHER IN SUCH A SITUATI ON, THE TRANSFER PRICING PROVISIONS WILL FAIL AND CEASE TO BE APPLICABLE AND AS SUCH THE TPO WILL BE COMPELLED TO ACCEPT THE MANOEUVRED PRICE DECLARED B Y THE ASSESSEE. THE FURTHER QUESTION WILL BE AS TO WHETHER ANY COGNIZANCE CAN B E TAKEN OF SUCH CONTROLLED TRANSACTIONS FOR BENCHMARKING. WE HAVE OBSERVED ABO VE THAT A MAJORITY OF ASSESSES DO NOT INTEND TO PLAY FOUL WITH THE REVENU E BY UNNECESSARILY ATTEMPTING TO REDUCE THE TAX LIABILITY. IN SUCH CIR CUMSTANCES THE DECLARED INCOME ITA NO.7977/MUM/2010. M/S.BAYER MATERIAL SCIENCE PVT. LTD. 18 FROM SUCH INTERNATIONAL TRANSACTIONS WILL ITSELF RE PRESENT THE ARMS LENGTH PRICE. THUS, WHERE IT IS AN ADMITTED POSITION BETWEEN THE TAX PAYER AND THE TAX COLLECTOR THAT THERE IS NO COMPARABLE UNCONTROLLED TRANSACTION DUE TO THE NATURE OF TRANSACTION BEING SUCH THAT IT IS ORDINARILY BET WEEN ASSOCIATED ENTERPRISES, IN SUCH A CASE, A TRANSACTION BETWEEN TWO ASSOCIATED E NTERPRISES AT ARMS LENGTH PRICE, THOUGH TECHNICALLY CALLED CONTROLLED TRANSA CTION, WOULD PARTAKE OF THE CHARACTER OF `UNCONTROLLED TRANSACTION FOR THE PUR POSES OF DETERMINING THE ALP IN A LATER INTERNATIONAL TRANSACTION BETWEEN TWO AE S. IN SUCH A SITUATION, NO FETTERS CAN BE PLACED ON THE POWERS OF THE TPO TO C ONSIDER SUCH COMPARABLE CONTROLLED TRANSACTION HAVING ADORNED THE GARB OF UNCONTROLLED TRANSACTION - FOR THE PURPOSES OF BENCHMARKING. IF THE CONTENTION OF THE LD. A.R. IS ACCEPTED THAT CONTROLLED TRANSACTION SHOULD BE ALTOGETHER SH UNTED OUT FOR THE PURPOSE OF TRANSFER PRICING PROVISION, EVEN IN RARE CIRCUMSTAN CES AS ARE PRESENTLY PREVAILING, THEN THE VERY RATIONALE AND PURPOSE OF SECTIONS 92 TO 92F, BEING THE DETERMINATION OF ALP, WHICH IS OTHERWISE ACHIEVED F ROM THE CONTROLLED TRANSACTION, WILL BE DEFEATED. IT IS IN SUCH EXCEPT IONAL CIRCUMSTANCES THAT THE PRINCIPLE OF PURPOSIVE INTERPRETATION WILL COME INT O PLAY TO SET FREE THE HANDS OF THE TPO TIED WITH DETERMINING ALP ONLY ON THE BASIS OF UNCONTROLLED TRANSACTIONS. 20. WE HAVE NOTICED ABOVE THAT THE PURPOSE BEHI ND THESE PROVISIONS IS TO PREVENT THE AVOIDANCE OF TAX IN THE INTERNATIONAL T RANSACTIONS BY ASCERTAINING THE ARMS LENGTH PRICE. THESE PROVISIONS ARE BASICALLY FOR THE ASSISTANCE OF THE REVENUE AS IS EVIDENT FROM SEC. 92(3) WHICH MANDATE S THAT THE PROVISIONS OF THIS SECTION SHALL NOT APPLY IN A CASE WHERE THE COMPUTA TION OF INCOME UNDER SUB- SECTION (1) OR THE DETERMINATION OF ALLOWANCE FOR A NY EXPENSE OR INTEREST UNDER THAT SUB-SECTION OR DETERMINATION OF ANY COST OR E XPENSE ALLOCATED OR APPORTIONED HAS THE EFFECT OF REDUCING THE INCOME C HARGEABLE TO TAX COMPUTED ON THE BASIS OF ENTRIES MADE IN THE BOOKS OF ACCOUN T IN RESPECT OF THE PREVIOUS ITA NO.7977/MUM/2010. M/S.BAYER MATERIAL SCIENCE PVT. LTD. 19 YEAR IN WHICH THE INTERNATIONAL TRANSACTION WAS ENT ERED INTO. THE EFFECT OF SECTION 92(3) IS THAT IF THE DETERMINATION OF INCOM E FROM INTERNATIONAL TRANSACTION AT ARMS LENGTH PRICE RESULTS INTO A LO WER INCOME THAN WHAT HAS BEEN DECLARED BY THE ASSESSEE AS PER THE ENTRIES IN THE BOOKS OF ACCOUNT, THEN NO COGNIZANCE SHOULD BE TAKEN OF SUCH DETERMINATION OF ALP, WHICH SHALL BE IGNORED AND THE INCOME SHALL BE COMPUTED ON THE BAS IS OF ENTRIES MADE. ON THE OTHER HAND, IF THE INCOME DETERMINED AT ARMS LENGT H PRICE IS HIGHER THAN THAT EMANATING FROM ENTRIES IN THE BOOKS OF ACCOUNT, THE N SUCH INCOME AT ARMS LENGTH PRICE, BEING HIGHER THAN THAT FROM THE ENTRI ES IN THE BOOKS OF ACCOUNT, SHALL BE INCLUDED IN THE TOTAL INCOME OF THE ASSESS EE. IT IS, THEREFORE, MANIFEST THAT THE HIGHER OF INCOME DETERMINED AT ARMS LENGT H PRICE OR AS EMERGING FROM THE ENTRIES MADE IN THE BOOKS OF ACCOUNT, IS TAKEN INTO CONSIDERATION FOR COMPUTING THE TOTAL INCOME OF AN ASSESSEE. THIS SUB -SECTION (3) OF SECTION 92 WHEN SEEN IN JUXTAPOSITION TO THE CHAPTER X IN WHIC H THE RELEVANT SECTIONS HAVE BEEN RESIDED TITLED AS `PROVISIONS RELATING TO AVO IDANCE OF TAX, MAKES IT APPARENT THAT THE PURPOSE BEHIND SUCH PROVISIONS IS TO UNCOVER THE ARRANGEMENT MADE BY THE ASSOCIATED ENTERPRISES IN NOT REFLECTIN G THE TRUE PROFIT FROM THE INTERNATIONAL TRANSACTIONS. IF WE ACCEPT THE CONTEN TION RAISED BY THE LD. A.R. THAT THE CONTROLLED TRANSACTIONS SHOULD BE COMPLETELY IG NORED IN SUCH A SITUATION WHEN THERE ARE NO UNCONTROLLED TRANSACTIONS AT ALL, IT WOULD AMOUNT TO DEFEATING THE OBJECT OF THESE PROVISIONS. WHEN THE VERY PURPO SE OF THESE PROVISIONS IS TO DETERMINE ARMS LENGTH PRICE AND THERE IS ADMITTEDL Y NO RECORD OF ANY UNCONTROLLED TRANSACTION, IN OUR CONSIDERED OPINION , IT IS PERFECTLY IN ORDER TO CONSIDER A CONTROLLED TRANSACTION GENUINELY ENTERED IN AN UNCONTROLLED MANNER BETWEEN SOME OTHER ASSOCIATED ENTERPRISES, FOR THE PURPOSES OF BENCHMARKING OF SUCH A TRANSACTION. 21. REVERTING TO THE FACTS OF THE INSTANT CASE, IT IS SEEN THAT THE LIST OF COMPARABLE CASES INITIALLY GIVEN BY THE ASSESSEE WA S MEANINGLESS FOR ITA NO.7977/MUM/2010. M/S.BAYER MATERIAL SCIENCE PVT. LTD. 20 BENCHMARKING THE TRANSACTIONS IN THE INDENTING BUSI NESS. DESPITE THE TPOS REQUEST, THE ASSESSEE FAILED TO FURNISH THE NAMES O F ANY COMPARABLE CASES. THE TPO DID NOT FIND ANY DATA OF UNCONTROLLED TRANSACTI ONS IN THIS ACTIVITY BECAUSE OF ITS PECULIAR NATURE. IT WAS ONLY THEREAFTER, THA T HE PROCEEDED WITH THE THREE CASES, NAMELY, M/S HUNTSMAN INTERNATIONAL PVT. LTD ., M/S INEOS ABS (INDIA) LTD. AND M/S RATHI BROTHERS MADRAS LTD. IN OUR CONS IDERED OPINION THE TPO, IN THE ABSENCE OF HAVING BEEN POINTED OUT ANY COMPARAB LE UNCONTROLLED CASE BY THE ASSESSEE OR HIMSELF FINDING ANY SUCH CASE, WAS RIGH T ON THE QUESTION OF PICKING UP THE CASES HAVING CONTROLLED TRANSACTIONS FOR DET ERMINING THE ALP OF THE ASSESSEES INTERNATIONAL TRANSACTIONS. 22. NOW WE WILL EXAMINE THE COMPARABILITY OF THESE CASES WITH THAT OF THE ASSESSEE. THE FIRST CASE IS M/S HUNTSMAN INTERNATIO NAL PVT. LTD. WHICH IS ENGAGED IN TRADING, INDENTING AND MANUFACTURING POL YURETHANE PRODUCTS. IT ALSO UNDERTOOK INDENTING SERVICES FOR ITS A.E. BY PROCUR ING ORDERS AND AS PER THE TERMS OF AGREEMENT, IT WAS GIVEN COMMISSION EQUAL T O 5% OF THE PRODUCTS SOLD BY THE A.E. TO THE CUSTOMERS IN THE TERRITORY OF TH AT COMPANY. COMMISSION OF RS.3.74 CRORES WAS SHOWN BY M/S HUNTSMAN INTERNATIO NAL PVT. LTD. FROM ITS A.E. AT THE RATE OF 5% ON THE TURNOVER. IT CAN BE S EEN THAT FUNCTIONALLY BOTH THE ASSESSEE AS WELL AS THE M/S HUNTSMAN INTERNATIONAL PVT. LTD. ARE QUITE SIMILAR AND DEALING IN IDENTICAL PRODUCTS NAMELY POLYURETHA NE AND ISOCYNATES. BOTH THE COMPANIES UNDERTOOK THE PAYMENT OF COMMISSION AFTER THE REALIZATION OF SALE PROCEEDS FROM THE CUSTOMERS. BECAUSE OF SIMILARITY IN THE NATURE OF ACTIVITY, THERE WAS HARDLY ANY RISK INVOLVED IN BOTH THE CASE S. THE LEARNED A.R.S SOLE OBJECTION AS TO ITS COMPARABILITY WAS THE DIFFERENC E IN THE AMOUNT OF TURNOVER. HE STATED THAT ASSESSEES TURNOVER FROM THE INDENT ING ACTIVITY WAS RS.734.83 CRORES, WHEREAS THAT OF M/S HUNTSMAN INTERNATIONAL PVT. LTD. WAS ONLY RS.74.8 CRORES GOING BY THE COMMISSION OF RS.3.74 CRORES @ 5% OF TURNOVER. THE SECOND CASE IS THAT OF M/S INEOS ABS (INDIA) LTD. W HICH WAS ALSO ENGAGED IN ITA NO.7977/MUM/2010. M/S.BAYER MATERIAL SCIENCE PVT. LTD. 21 THE INDENTING BUSINESS OF POLYCARGO NET PRODUCTS FO R BAYER MATERIAL SCIENCE LTD. HONGKONG. THIS COMPANY ALSO RECEIVED COMMISSIO N @ 5% OF THE SALES. THE LEARNED A.R. HAS REFERRED TO THE BALANCE SHEET OF THIS COMPANY (COPY PLACED AT PAGE 821 OF THE PAPER BOOK) TO DEMONSTRATE THAT THE TURNOVER FROM INDENTING ACTIVITY WAS ONLY TO THE TUNE OF RS.79.19 CRORES . HERE ALSO THE ONLY OBJECTION AS TO COMPARABILITY WAS THE VOLUME OF TURNOVER. DUE TO SIMILARITY IN THE NAMES OF BAYER MATERIAL SCIENCE LTD. HONGKONG WITH THAT OF T HE ASSESSEE, NAMELY, BAYER MATERIAL SCIENCE LTD., IT WAS INQUIRED FROM THE BEN CH IF THERE WAS ANY RELATION BETWEEN THESE TWO COMPANIES. THE LD. AR WAS FAIR EN OUGH TO INFORM THAT BOTH ARE GROUP CONCERNS. ON FURTHER INQUIRY, IT TRANSPIR ED THAT M/S INEOS ABS LTD. WAS EARLIER A GROUP CONCERN OF THE ASSESSEE ITSELF, BUT IT CEASED TO BE SO SOMEWHERE IN THE CALENDAR YEAR 2004. IT, THEREFORE, BECOMES PATENT THAT THAT IN THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR U NDER CONSIDERATION M/S INEOS ABS (INDIA) LTD. WAS NOT AN ASSOCIATED ENTERP RISE OF M/S BAYER MATERIAL SCIENCE LTD. HONGKONG, AND HENCE, SATISFI ES THE TEST OF UNCONTROLLED TRANSACTION. THE THIRD COMPANY NAMELY M/S RATHI BRO THERS MADRAS LTD. ALSO DID THE BUSINESS OF INDENTING AND RECEIVED COMMISSION @ 5% TO 6%. THE LEARNED A.R. WHILE REFERRING TO PAGES 848 OF THE PAPER BOOK , BEING THE BALANCE SHEET OF THIS COMPANY DISTINGUISHED IT AGAIN ON THE BASIS OF ITS LOW TURNOVER OF ONLY RS.10.65 CRORES . 23. THUS IT IS EVIDENT THAT THE SIMILARITY IN THE NATURE OF BUSINESS AND OTHER RELEVANT FACTS IN THESE CASES WITH THAT OF THE ASSE SSEE, EXCEPT THE VOLUME OF TURNOVER, IS NOT IN DOUBT. NOW THE QUESTION IS WHET HER THESE CASES, WHICH ARE OTHERWISE COMPARABLE, SHOULD BE DISREGARDED SIMPLY ON THE GROUND OF SMALLNESS OF TURNOVER WHEN COMPARED WITH THAT OF THE ASSESSEE . CONSIDERING THE FACT THAT THE ASSESSEE DID NOT COME OUT WITH ANY COMPARABLE C ASE TO JUSTIFY ITS PRICE AT ARMS LENGTH AND FURTHER THE TPO FOUND OUT THESE CA SES HAVING FUNCTIONALLY IDENTICAL ACTIVITIES DULY CONFRONTED TO THE ASSESSE , IT IS NOT POSSIBLE TO DISREGARD ITA NO.7977/MUM/2010. M/S.BAYER MATERIAL SCIENCE PVT. LTD. 22 SUCH CASES MERELY ON THE GROUND THAT THE VOLUME OF TURNOVER IS LOWER IN COMPARISON TO THAT HANDLED BY THE ASSESSE. ONE MORE IMPORTANT FACTOR WHICH CANNOT BE LOST SIGHT OF IS THAT IN THE CASE OF M/S RATHI BROTHERS MADRAS LTD. INDENTING COMMISSION IS 5% TO 6% WITH TURNOVER OF R S.10.65 CRORES . THE SAME RATE OF COMMISSION OF 5% PREVAILS IN THE CASE OF M/ S HUNTSMAN INTERNATIONAL PVT. LTD. AND M/S INEOS ABS (INDIA) LTD. WITH TURNO VER OF AROUND RS.75 CRORES AND AROUND RS.80 CRORES RESPECTIVELY. IT SHOWS THA T THE RATE OF COMMISSION IN SUCH BUSINESS DOES NOT VARY ON THE BASIS OF TURNOVE R. 24. FINDING A CASE EXACTLY IDENTICAL TO ANOTH ER IN ALL ASPECTS IS VERY DIFFICULT, IF NOT IMPOSSIBLE. IF THE FAR ANALYSIS INDICATES TH AT THE MATCHING FACTORS IN TWO CASES CONSIDERABLY OVERSHADOW THOSE WHICH MAKE THEM AS DISTINGUISHABLE, THEN SUCH CASES HAVE TO BE CONSIDERED AS COMPARABLE. FUR THER, RULE 10B(3) PROVIDES THAT AN UNCONTROLLED TRANSACTION SHALL BE COMPARABL E IF NONE OF THE DIFFERENCES, IF ANY, BETWEEN THE TRANSACTIONS BEING COMPARED ARE LIKELY TO MATERIALLY AFFECT THE PRICE OR COST CHARGED OR PAID IN OR THE PROFIT ARISING FROM SUCH TRANSACTIONS IN THE OPEN MARKET. IT INDICATES THAT TWO CASES ARE TO BE CONSIDERED AS INCOMPARABLE WHEN THE DIFFERENCE BETWEEN THEM IS SU CH AS TO MATERIALLY AFFECT THE PROFIT ETC. THE MERE FACT THAT THERE IS DIFF ERENCE IN THE VOLUME OF TURNOVER OF THE CASE UNDER CONSIDERATION AND THOSE BEING COMPARED, CANNOT BE CONSIDERED AS MATERIALLY AFFECTING THE PROFIT ARISI NG FROM SUCH TRANSACTIONS, MORE SO WHEN THE CIRCUMSTANCES ARE SUCH AS ARE PREV AILING IN THE PRESENT CASE. IN OUR CONSIDERED OPINION, THE TPO WAS JUSTIFIED IN CONSIDERING THESE THREE CASES AS COMPARABLE FOR BENCHMARKING THE PROFITS FR OM THE ASSESSEES INDENTING ACTIVITY. THE FURTHER CONTENTION OF THE LD. AR THAT THE DATA OF THESE THREE CASES WAS NOT IN PUBLIC DOMAIN AND HENCE THE ASSESSEE COU LD NOT PROPERLY DISTINGUISH SUCH CASES IS SANS MERITS. FIRSTLY, IT IS NOTED THA T THE TPO CONFRONTED AND THE ASSESSEE DULY DEALT WITH SUCH CASES IN ITS WRITTEN SUBMISSIONS BEFORE THE TPO. FURTHER GROUND NO. 14 CHALLENGING THE LACK OF ADEQU ATE OPPORTUNITY GIVEN BY THE ITA NO.7977/MUM/2010. M/S.BAYER MATERIAL SCIENCE PVT. LTD. 23 AO AND TPO, SET OUT IN THE MEMORANDUM OF APPEAL, HA S SPECIFICALLY BEEN NOT PRESSED BY THE LD. AR. 25. WHEN THE RATE OF ARMS LENGTH INDENTING COMMISSION AT 5% IS APPLIED TO THE TURNOVER OF RS.734.83 CRORES, THE AMOUNT OF ARM S LENGTH COMMISSION COMES TO RS.36.74 CRORES . AS AGAINST THAT, THE ASSESSEE SHOWED ONLY A SUM OF RS.11.17 CRORES AS INDENTING COMMISSION. IN OUR CONSIDERED OPINION, THE AO WAS RIGHT IN MAKING ADDITION OF RS.25.56 CRORES . 26. THE LEARNED A.R. HAS RAISED ONE MORE OBJECTION BY CONTENDING THAT THE TPO WAS NOT CORRECT IN REJECTING THE TRANSACTIONAL NET MARGINAL METHOD (TNMM) APPLIED BY THE ASSESSEE AND CHOOSING THE COM PARABLE UNCONTROLLED PRICE METHOD (CUP) FOR DETERMINING THE ALP. AGAIN WE ARE UNABLE TO ACCEPT THIS CONTENTION ADVANCED ON BEHALF OF THE ASSESSE. THE TNMM COMPARES NET PROFIT MARGIN REALIZED BY AN ENTERPRISE FROM AN INT ERNATIONAL TRANSACTION IN RELATION TO COST INCURRED OR SALES EFFECTED OR ASSE TS EMPLOYED OR HAVING REGARD TO ANY OTHER RELEVANT BASE. HERE THE COMPARISON IS THA T OF NET PROFIT MARGIN AND NOT THE GROSS INCOME WITH THE SALES EFFECTED ETC. AS WE ARE DEALING WITH A CASE OF COMMISSION INCOME WHICH IS NORMALLY ALLOWED AS A PE RCENTAGE OF TURNOVER EFFECTED, THE RATIO OF NET PROFIT TO SALES CANNOT B E HELD AS APPROPRIATE. ON THE OTHER HAND, THE CUP METHOD IS USEFUL WHERE THE A.ES BUY OR SELL SIMILAR GOODS OR SERVICES. IN THE PRESENT CASE, WE ARE CONCERNED WITH THE RENDERING OF SERVICES BY ONE A.E. TO ANOTHER. IN THAT VIEW OF THE MATTER, CUP METHOD APPEARS TO BE THE MOST APPROPRIATE METHOD IN THE GIVEN CIRCUMSTAN CES. IT IS FURTHER RELEVANT TO NOTE THAT THE QUESTION OF APPLYING ONE METHOD OR TH E OTHER CAN ARISE IF THE DATA OF THE COMPARABLE CASES CONCERNING SUCH METHOD IS AVAILABLE. THE ASSESSEE IS AGITATING THAT TNMM SHOULD HAVE BEEN APPLIED, BUT IT FAILED TO PROVIDE ANY DATA OF COMPARABLE CASES IN THAT RESPECT. IT HAS NOT BEEN SHOWN BY THE LD. AR THAT THE ASSESSEES NET MARGIN OF 0.04% (UNDER TNMM ) COMPARES FAVORABLY ITA NO.7977/MUM/2010. M/S.BAYER MATERIAL SCIENCE PVT. LTD. 24 WITH THAT OF THE COMPARABLE CASES CHOSEN BY THE TPO DESPITE THE FACT THAT THE ANNUAL ACCOUNTS OF THESE CASES ARE AVAILABLE IN THE PAPER BOOK FILED BY THE ASSESSE. ON THE OTHER HAND, THE RATIO OF GROSS COMM ISSION TO TURNOVER OF THE ASSESSEE AT 1.5% (UNDER CUP) IS FAR LESS THAN 5% O F THE COMPARABLE CASES. AS SUCH WE ARE UNABLE TO ACCEPT THIS ARGUMENT ADVANCE D ON BEHALF OF THE ASSESSEE. 27. IN VIEW OF THE FOREGOING DISCUSSION, WE A RE SATISFIED THAT THE ASSESSING OFFICER WAS FULLY JUSTIFIED IN MAKING ADDITION OF R S.25.56 CRORES AND ODD TOWARDS ADJUSTMENT UNDER SECTION 92CA(4) OF THE ACT . 28. GROUND NO. 9 RAISED BY THE ASSESSEE IS AGAINST THE CONFIRMATION OF DISALLOWANCE U/S.14A AMOUNTING TO RS.66,91,085/-. 29. BRIEFLY STATED FACTS OF THE GROUND ARE THAT THE ASSESSEE EARNED DIVIDEND INCOME OF RS.86,45,948/- WHICH WAS CLAIMED AS EXEMP T. THE ASSESSEE OFFERED DISALLOWANCE U/S 14A FOR A SUM OF 7,708/- BEING PRO PORTIONATE ADMINISTRATIVE COST OF THE TREASURY DEPARTMENT. NOT CONVINCED WITH THE ASSESSEES CALCULATION, THE AO WORKED OUT THE DISALLOWANCE AMOUNTING TO RS. 66,91,085/- BY APPLYING RULE 8D. THIS DECISION WAS TAKEN BY THE AO AFTER G ETTING THE DRAFT ASSESSMENT ORDER APPROVED U/S.144C(1) BY THE DISPUTE RESOLUTIO N PANEL (DRP). THE ASSESSEE IS AGGRIEVED AGAINST THIS ADDITION. 30. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND PER USING THE RELEVANT MATERIAL ON RECORD, WE FIND THAT THE ISSUE RAISED THROUGH TH IS GROUND IS NO MORE RES INTEGRA IN VIEW OF THE JUDGMENT OF THE HONBLE JURISDICTIO NAL HIGH COURT IN GODREJ & BOYCE MFG. LTD. VS. DCIT (2010) 328 ITR 81 (BOM) IN WHICH IT HAS BEEN HELD THAT DISALLOWANCE IS CALLED FOR U/S.14A I N SUCH CIRCUMSTANCES. HOWEVER, THE MANNER OF COMPUTATION OF SUCH DISALLOW ANCE HAS BEEN RESTORED TO THE FILE OF AO FOR MAKING ON SOME `REASONABLE BASIS . IT HAS FURTHER BEEN HELD IN THIS CASE THE PROVISIONS OF RULE 8D ARE PROSPECTIVE . RESPECTFULLY FOLLOWING THE ITA NO.7977/MUM/2010. M/S.BAYER MATERIAL SCIENCE PVT. LTD. 25 PRECEDENT, WE SET ASIDE THE IMPUGNED ORDER AND DIRE CT THE AO TO COMPUTE DISALLOWANCE U/S.14A IN ACCORDANCE WITH THE RATIO LAID DOWN BY THE HONBLE JURISDICTIONAL HIGH COURT IN THE AFORENOTED CASE OF GODREJ & BOYCE LTD. 31. GROUND NO. 10 IS AGAINST THE CONFIRMATION OF DI SALLOWANCE AMOUNTING TO RS.2,96,26,000/- MADE BY THE AO U/S.40(A)(IA) OF TH E ACT. 32. ON THE PERUSAL OF THE PROFIT AND LOSS ACCOUNT OF THE ASSESSEE, IT WAS OBSERVED BY THE AO THAT THE ASSESSEE HAD CLAIMED DE DUCTION FOR A SUM OF RS.2.96 CRORES UNDER THE HEAD COST SHARING EXPENSE S. ON BEING CALLED UPON TO EXPLAIN AS TO WHY THE DEDUCTION OF TAX AT SOURCE WA S NOT MADE BEFORE MAKING THE PAYMENT, THE ASSESSEE STATED THAT IT WAS ONLY R EIMBURSEMENT OF COSTS TO ITS GROUP CONCERN, NAMELY, BAYER CORP SCIENCE LTD. (BCS ) AND NO PROFIT ELEMENT WAS INVOLVED IN SUCH PAYMENT. NOT CONVINCED, THE AO HELD THAT THE PAYMENT MADE BY THE ASSESSEE WAS LIABLE TO SUFFER DEDUCTION OF TAX AT SOURCE U/S.194C. AS THE ASSESSEE HAD NOT DEDUCTED TAX AT SOURCE FROM SUCH PAYMENT, THE AO DISALLOWED THE AMOUNT OF RS.2.96 CRORES U/S.40(A)(I A) OF THE ACT. 33. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. IT IS NOTICED THAT THE ASSESSEE IS A MANUFA CTURER OF HIGH PERFORMANCE MATERIAL SUCH AS POLYURETHANE ETC. APART FROM ENGA GED IN TRADING OF POLYCARBONATE. BCS IS SISTER CONCERN OF THE ASSESSE E ENGAGED IN MANUFACTURING AND DISTRIBUTION OF CROP PROTECTION PRODUCTS, FUNGI CIDES AND NON-AGRICULTURAL BASED CONTROL AND RELATED PRODUCTS. THEY ARE AFFILI ATES OF BAYER AG, GERMANY. BOTH BCS AND THE ASSESSEE COMPANY ENTERED INTO TWO SEPARATE AGREEMENTS DATED 18-4-2005 EFFECTIVE FROM 1-4-2005 UNDER WHICH IT WA S AGREED TO SHARE PERSONNEL AND FACILITIES OF EACH OTHER AS PER REQUI REMENT ON COST TO COST BASIS WITHOUT HAVING ANY MARK UP TOWARDS PROFIT. IN THIS REGARD, THE ASSESSEE MADE PAYMENT OF RS.2.96 CRORES TO BCS FOR UTILIZING THE IR EMPLOYEES AND SERVICES ITA NO.7977/MUM/2010. M/S.BAYER MATERIAL SCIENCE PVT. LTD. 26 DURING THE YEAR. COPIES OF BOTH THE AGREEMENTS ARE AVAILABLE ON PAGES 874 AND 887 ONWARDS OF THE PAPER BOOK. IN THESE AGREEMENTS, IT HAS BEEN PROVIDED THAT THE PARTIES SHALL SHARE THE COSTS IN RESPECT OF IDE NTIFIED PERSONNEL UTILIZED BY THEM AND THE IDENTIFIED FACILITIES USED BY THEM ON THE BASIS SPECIFIED IN ARTICLE 3 OF THESE AGREEMENTS. IT HAS BEEN STIPULATED THAT TH E IDENTIFIED PERSONNEL WHEN ACTING FOR THE OTHER COMPANY WILL ACT UNDER THE DIR ECTION AND/OR WITH THE SUPPORT OF THE MANAGEMENT AND PERSONNEL OF SUCH OTH ER COMPANY, BUT WILL CONTINUE TO REMAIN EMPLOYEES OF ITS BASE COMPANY. FURTHER THE EMPLOYER COMPANY SHALL AT ALL TIMES REMAIN RESPONSIBLE FOR A LL THE STATUTORY COMPLIANCES OR COMMITMENTS RELATING TO EMPLOYMENT OF THE IDENTI FIED PERSONNEL. IN SO FAR AS THE PAYMENT TOWARDS USING OF FACILITIES IS CONCERNE D, IT HAS BEEN PROVIDED IN THE SECOND AGREEMENT THAT BOTH THE COMPANIES WOULD SHAR E THE IDENTIFIED FACILITIES DEPENDING ON THEIR REQUIREMENTS. THE IDENTIFIED FAC ILITIES SHALL ALWAYS REMAIN THE PROPERTY OF THE FACILITATING COMPANY WHICH OWNS THEM. CLAUSE 3.4 OF THE EMPLOYEES SHARING AGREEMENTS PROVIDES : THE BASIS OF COST SHARING SHALL BE AN EXACT REIMBURSAL OF THE PROPORTIONAL TIME, COST OF THE IDENTIFIED PERSONNEL, WITHOUT ANY MARK UP, MARGIN OR ADDITION. SIMILARLY , CLAUSE 3.4 OF THE SECOND AGREEMENT PROVIDING FACILITIES TO EACH OTHER STATES THAT : THE BASIS OF COST SHARING SHALL BE AN EXACT REIMBURSAL OF THE PROPORT IONAL COST OF THE IDENTIFIED FACILITIES, WITHOUT ANY MARK UP, MARGIN OR ADDITION . FROM THE PROFIT AND LOSS ACCOUNT OF THE ASSESSEE, IT IS SEEN UNDER SCHEDULE 18 THAT THE ASSESSEE INDEPENDENTLY INCURRED VARIOUS EXPENSES SUCH AS STO RES AND SPARES CONSUMED, POWER AND FUEL, FREIGHT, RENT, REPAIRS AND TRAVELLI NG, ETC., APART FROM PAYING COST SHARING EXPENSES OF RS.2.96 CRORES. THE P & L ACCOUNT OF BCS IS ALSO AVAILABLE ON RECORD. IT CAN BE SEEN FROM IT THAT TH E AMOUNT RECOVERED BY BCS FROM THE ASSESSEE AND OTHER GROUP COMPANIES TOWARDS COST SHARING HAS BEEN EXCLUDED FROM THE EXPENDITURE INCURRED BY IT. THE N ET EFFECT OF THESE TRANSACTIONS IS THAT BCS PROVIDED ITS PERSONNEL AND SERVICES TO THE ASSESSEE ON COST TO COST BASIS WHICH THE ASSESSEE INCLUDED IN I TS EXPENDITURE, WHEREAS THE ITA NO.7977/MUM/2010. M/S.BAYER MATERIAL SCIENCE PVT. LTD. 27 BCS REDUCED THE AMOUNT RECOVERED FROM THE ASSESSEE AND OTHER GROUP CONCERNS FROM ITS EXPENSES. THE CONTENTION THAT THERE WAS NO PROFIT ELEMENT IN SUCH REIMBURSEMENT OF EXPENSES WAS ALSO RAISED BEFORE TH E AO, WHICH REMAINED UNCONTROVERTED. NOW, THE POSITION WHICH EMERGES IS THAT BCS INCURRED CERTAIN COSTS ON EMPLOYEES AND FACILITIES WHICH WERE UTILIZ ED BY THE ASSESSEE AND THE OTHER GROUP CONCERNS FOR WHICH THERE WAS REIMBURSEM ENT OF ACTUAL EXPENDITURE INCURRED TO BCS WITHOUT ANY PROFIT ELEMENT. THE LD. DR ALSO FAILED TO LEAD ANY MATERIAL TO SHOW THAT THERE WAS ANY PROFIT ELEMENT IN SUCH PAYMENT. THE HONBLE JURISDICTIONAL HIGH COURT IN CIT VS. SIMON AKTIONGTSELLSCHAFT (2009) 310 ITR 320 (BOM) HAS HELD THAT PAYMENT BY WAY OF REIMBURSEMENT OF E XPENSES INCURRED ON BEHALF OF PAYER IS NOT AN INCOME CHARGE ABLE TO TAX IN THE HANDS OF PAYEE. SIMILAR VIEW HAS BEEN TAKEN BY THE SPECIAL B ENCH OF THE TRIBUNAL IN MAHINDRA & MAHINDRA LTD. VS. DCIT (2009) 122 TTJ (B OM) (SB) 577 . IN VIEW OF THE AFORENOTED PRECEDENTS, IT BECOMES CLEAR THAT WHERE PAYMENT IS MADE TOWARDS REIMBURSEMENT OF EXPENSES, THERE CANNOT BE ANY ELEMENT OF INCOME IN SUCH PAYMENT IN THE HANDS OF THE PAYEE. ONCE THE EL EMENT OF INCOME IS MISSING, NATURALLY, THERE CANNOT BE ANY QUESTION OF DEDUCTIN G TAX AT SOURCE FROM SUCH PAYMENT MADE, WHICH PRE-SUPPOSES THE TAXABILITY OF SUCH SUM IN THE HANDS OF PAYEE. IT IS FURTHER RELEVANT TO NOTE THAT BCS ENTE RED INTO COST SHARING AGREEMENT NOT ONLY WITH THE ASSESSEE BUT OTHER GROU P CONCERNS AS WELL. WHEREAS THE ASSESSEE PAID RS.2.96 CRORES TO BCS, M/ S. BAYER PHARMACEUTICAL PVT. LTD. PAID RS.2.81 CRORES, M/S. BAYER BIOCIDES PVT. LTD. PAID RS.4.02 CRORES AND OTHER ASSOCIATED CONCERNS ALSO PAID TO BCS FOR SIMILAR SERVICES. THE LD. A.R. HAS PLACED ON RECORD COPIES OF THE ASSESSMENT ORDERS PASSED U/S 143(3) OF THESE CONCERNS TO DEMONSTRATE THAT NO DISALLOWANCE HAS BEEN MADE IN ANY OF THE ABOVE REFERRED CONCERNS U/S.40(A)(IA). IN VIEW OF T HE ABOVE DISCUSSED PRINCIPLE EMANATING FROM THE JUDGMENT OF HONBLE JURISDICTION AL HIGH COURT AND THE SPECIAL BENCH THAT REIMBURSEMENT OF COST DOES NOT R EQUIRE DEDUCTION OF TAX AT SOURCE AND FURTHER FOLLOWING THE PRINCIPLE OF CONSI STENCY, WE HOLD THAT THE AO ITA NO.7977/MUM/2010. M/S.BAYER MATERIAL SCIENCE PVT. LTD. 28 WAS NOT JUSTIFIED IN MAKING THE SAID ADDITION OF RS .2.96 CRORES AND ODD U/S.40(A)(IA).WE, THEREFORE, ORDER FOR THE DELETION OF THIS ADDITION. THIS GROUND IS ALLOWED. 34. GROUND NO. 11 IS AGAINST NOT ALLOWING THE ADJUSTMENT TO THE VALUE OF THE OPENING STOCK AMOUNTING TO RS.33,23,889/-. THE ASSE SSEE ARGUED BEFORE THE DRP THAT IN THE IMMEDIATELY PRECEDING YEAR, THE AO MADE ADDITION TO THE VALUE OF CLOSING STOCK ON ACCOUNT OF CENVAT CREDIT TO TH IS EXTENT AND HENCE THE VALUE OF THE CURRENT YEARS OPENING STOCK BE CORRES PONDINGLY INCREASED. THE DRP DIRECTED THE AO TO ALLOW THE CORRESPONDING ADJU STMENT IN THE VALUE OF THE OPENING STOCK TO THE ASSESSEE U/S.145A OF THE ACT T O THE EXTENT SUCH ADDITION IN THE VALUE OF THE CLOSING STOCK OF LAST YEAR WAS FIN ALLY SUSTAINED. BEFORE THE AO, IT WAS STATED ON BEHALF OF THE ASSESSEE THAT THE AP PELLATE PROCEEDINGS FOR THE IMMEDIATELY PRECEDING ASSESSMENT YEAR I.E. 2005-06 WERE STILL PENDING. THE AO, THEREFORE, REFUSED TO ALLOW ANY ADJUSTMENT ON T HIS SCORE. 35. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND PER USING THE RELEVANT MATERIAL ON RECORD WE FIND THAT THERE CANNOT BE ANY DOUBT ON THE PROPOSITION THAT IF THE VALUE OF CLOSING STOCK OF THE IMMEDIATELY PRECEDING YEAR HAS BEEN INCREASED U/S 145A BY CENVAT CREDIT IN THE SHAPE OF ADDITION IN THE ASSESSMENT U/S.143(3), THE CORRESPONDING INCREASE IS ALSO REQUIRED TO BE A LLOWED IN THE VALUE OF OPENING STOCK FOR THE CURRENT YEAR. THE LOGIC IS SIMPLE THA T THE VALUE OF THE CLOSING STOCK OF ONE YEAR BECOMES OPENING STOCK FOR THE NEXT YEA R. THE LD. A.R. HAS ADMITTED THAT THE ADDITION MADE IN THE IMMEDIATELY PRECEDING YEAR ON THIS ISSUE HAS BEEN CHALLENGED BY IT BEFORE THE LD. CIT(A) AND THE MATT ER IS STILL PENDING. THE EFFECT OF ALLOWING THIS ADJUSTMENT IN THE VALUE OF THE OPE NING STOCK AT THIS STAGE WILL BE LEAD TO THE PRESUMPTION THAT THE VALUE OF CLOSING S TOCK HAS BEEN FINALLY DETERMINED AT THIS FIGURE. BUT AS THE ISSUE OF ADDI TION U/S.145A IN THE IMMEDIATELY PRECEDING YEAR HAS NOT ATTAINED FINALIT Y, IN OUR CONSIDERED OPINION, ITA NO.7977/MUM/2010. M/S.BAYER MATERIAL SCIENCE PVT. LTD. 29 THE ASSESSEE CANNOT BE ALLOWED TO HAVE THE BENEFIT OF THE INCREASED VALUE OF THE OPENING STOCK BY SIMULTANEOUSLY ASSAILING THE ADDIT ION IN THE PRECEDING YEAR AS WELL. IF INCREASE IN THE VALUE OF THE OPENING STOC K FOR THE CURRENT YEAR IS ALLOWED AND THE ASSESSEE ALSO SUCCEEDS IN THE DELETION OF A DDITION IN THE LAST YEAR, IT WILL GIVE NEEDLESSLY DEFLATE THE INCOME FOR THE CURRENT YEAR. THE RIGHT COURSE IS TO ALLOW THE BENEFIT OF INCREASE IN THE VALUE OF OPENI NG STOCK OF THE CURRENT YEAR ONLY WHEN THE ISSUE OF ADDITION TO THE VALUE OF THE CLOSING STOCK OF LAST YEAR ATTAINS FINALITY AND THAT TOO, TO THE EXTENT THE AD DITION IS UPHELD. WE, THEREFORE, DIRECT THE AO TO ALLOW CONSEQUENTIAL RELIEF ON THIS ISSUE AS AND WHEN THE MATTER IS FINALLY DECIDED FOR THE IMMEDIATELY PRECEDING YE AR. THIS GROUND IS DISPOSED OF ACCORDINGLY. 36. GROUND NO. 13 IS AGAINST THE LEVY OF INTEREST U NDER SECTION 234B AND 234D. THE LEARNED COUNSEL FOR THE ASSESSEE CONTENDE D THAT THE A.O. ERRED IN LEVYING INTEREST UNDER SECTIONS 234B AND 234D FOR T HE REASON THAT THE ADDITION ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT COULD NOT HAVE BEEN CONTEMPLATED BY THE ASSESSEE AT THE TIME OF PAYMENT OF ADVANCE TAX. THE SUM AND SUBSTANCE OF HIS SUBMISSIONS WAS THAT THE ADVANCE TAX CAN BE CHA RGED ONLY WHEN THE ASSESSEE KNOWS ABOUT THE LIABILITY TO PAY ADVANCE TAX AND TH ERE IS FAILURE TO PAY IT. HE MAINLY RELIED ON THE JUDGMENT OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF PRIME SECURITIES LTD. VS. ACIT (2011) 333 ITR 464 ( BOM.) . IN THE OPPOSITION, THE LEARNED D.R. CONTENDED THAT THE INTEREST BEING MANDATORY IN NATURE HAS BEEN RIGHTLY CHARGED. 37. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PE RUSED THE RELEVANT MATERIAL ON RECORD. SECTION 234B (1) PROVIDES THAT WHERE IN ANY FINANCIAL YEAR AN ASSESSEE WHO IS LIABLE TO PAY ADVANCE TAX, HAS F AILED TO PAY IT AND SUCH ADVANCE TAX PAID IS LESS THAN 90% OF THE ASSESSED T AX, THE ASSESSEE SHALL LIABLE TO ITA NO.7977/MUM/2010. M/S.BAYER MATERIAL SCIENCE PVT. LTD. 30 PAY SIMPLE INTEREST AT THE PRESCRIBED RATE FROM 1ST APRIL NEXT FOLLOWING SUCH FINANCIAL YEAR TO THE DATE OF DETERMINATION OF TOTA L INCOME UNDER SECTION 143(1) AND WHERE THE REGULAR ASSESSMENT IS MADE TO THE DAT E OF SUCH REGULAR ASSESSMENT ON AN AMOUNT EQUAL TO ASSESSED TAX OR AS THE CASE MAY BE ON THE AMOUNT BY WHICH THE ADVANCE TAX PAID FALLS SHORT OF THE ASSES SED TAX . EXPLANATION 1 TO SECTION 234B(1) DEFINES ` ASSESSED TAX TO MEAN ` THE TAX ON THE TOTAL INCOME DETERMINED UNDER SUB-SECTION (1) OF SECTION 143 AN D WHERE REGULAR A ASSESSMENT IS MADE, THE TAX ON THE TOTAL INCOME DET ERMINED UNDER SUCH REGULAR ASSESSMENT AS REDUCED BY THE AMOUNT OF TAX DEDUCTED OR COLLECTED AT SOURCE OR ANY RELIEF U/S 90 OR 90A ETC. FROM THE ABOVE PRESCR IPTION OF SECTION 234B(1) READ WITH EXPLANATION (1) IT BECOMES APPARENT THAT THE INTEREST UNDER THIS SECTION IS CHARGED WITH REFERENCE TO THE `ASSESSED TAX OR THE AMOUNT OF ASSESSED TAX AS REDUCED BY THE ADVANCE TAX PAID, IF ANY, AS THE CAS E MAY BE. THE ASSESSED TAX HAS BEEN DEFINED TO MEAN TAX ON TOTAL INCOME DETERM INED UNDER REGULAR ASSESSMENT IN CASE SUCH ASSESSMENT IS MADE. WE ARE CONCERNED WITH A CASE IN WHICH A REGULAR ASSESSMENT HAS BEEN MADE UNDER SECT ION 143(3). IN SUCH A CASE, ASSESSED TAX CAN ONLY MEAN THE TAX ON THE TOTAL INC OME DETERMINED BY THE A.O. UNDER SECTION 143(3) AS REDUCED BY THE ADVANCE TAX ETC. THERE IS NO REFERENCE WHATSOEVER TO THE PROPOSITION THAT THE ADDITIONS WH ICH COULD NOT HAVE BEEN FORESEEN BY THE ASSESSEE AT THE TIME OF FILING RETU RN, SHOULD NOT BE CONSIDERED AS PART OF ASSESSED INCOME FOR THE PURPOSES OF CHARGIN G INTEREST U/S 234B. IF THE CONTENTION OF THE LD. AR IS BROUGHT TO LOGICAL CONC LUSION, THEN PROBABLY THE INTEREST PROVISION WOULD LARGELY BECOME REDUNDANT A S IN EVERY CASE WHERE THE ADDITION IS CORRECTLY MADE BY THE ASSESSEE AND FURT HER WHICH, WHEN CHALLENGED, HAS ALSO BEEN FINALLY SUSTAINED, THE ASSESSEE WILL CONTEND THAT HE HAD NOT PREDICTED THIS ADDITION AND AS SUCH NO INTEREST BE LEVIED. THE RELIANCE OF THE LEARNED A.R. ON THE JUDGMENT OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF PRIME SECURITIES LTD. (SUPRA) IS MISCONCEIVED FOR THE REASON THAT IN THAT CASE THERE WAS A CHANGE IN LAW WITH RETROSPECTIVE EFFECT . UNDER THOSE SPECIAL ITA NO.7977/MUM/2010. M/S.BAYER MATERIAL SCIENCE PVT. LTD. 31 CIRCUMSTANCES, THE HONBLE BOMBAY HIGH COURT HELD T HAT THE ASSESSEE COULD NOT HAVE ANTICIPATED HIS LIABILITY UNDER THE PROVISIONS CHANGED SUBSEQUENTLY WITH RETROSPECTIVE EFFECT. THIS JUDGMENT IS CONFINED TO ITS FACTS AND IS NOT OF UNIVERSAL APPLICATION EVEN TO A CASE OF A LAWFUL ADDITION MAD E BY THE AO ON THE BASIS OF PROVISIONS OF LAW EXISTING AND CONTINUING AS SUCH B EFORE AND AFTER THE FILING THE RETURN OF INCOME. AS THE CHARGING OF INTEREST UNDER SECTION 234B IS COMPENSATORY AND MANDATORY, IT HAS TO BE CHARGED WI TH REFERENCE TO THE ASSESSED TAX ON THE TOTAL INCOME DETERMINED UNDER REGULAR AS SESSMENT AS REDUCED BY THE ADVANCE TAX, IF ANY. 38. WE FIND THAT THERE IS A DIRECT JUDGMENT OF THE HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. INSILCO LTD. (2010) 321 ITR 105 (DEL.) HOLDING THAT LEVY OF INTEREST UNDER SECTION 234B IS COMPENSATORY AND INTEREST IS CHARGEABLE NOTWITHSTANDING THE FACT THAT THE DEFAULT IS BONA FIDE . IN THAT CASE, THE ASSESSEE TOOK A PLEA THAT IT WAS UNDER A BONA FIDE BELIEF THAT A PARTICULAR INCOME WAS NOT CHARGEABLE TO TAX WHICH BELIEF WAS TURNED DOWN BY T HE ASSESSING AUTHORITY. THE ASSESSEE RESORTED TO THE WEAPON OF ITS BONA FIDE BELIEF ABOUT NON-TAXABILITY OF INCOME AS A TOOL TO ESCAPE FROM THE LEVY OF INTERES T UNDER SECTION 234B. REPELLING THIS CONTENTION, THE HONBLE DELHI HIGH C OURT HELD THAT THE INTEREST HAS TO BE CHARGED NOTWITHSTANDING THE BONA FIDE BELIEF OF THE ASSESSEE THAT A PARTICULAR INCOME WAS NOT CHARGEABLE TO TAX. IT IS STILL FURTHER NOTED THAT THE HONBLE SUPREME COURT IN CIT VS. ANJUM M.H. GHASWALA & OTHERS (2001) 252 ITR 1 (SC) HAS HELD THAT INTEREST IS MANDATORY AND CHARGEABLE. IN VIEW OF THE FOREGOING DISCUSSION, WE ARE SATISFIED THAT THE ASS ESSING OFFICER WAS JUSTIFIED IN CHARGING INTEREST. THIS GROUND IS NOT ALLOWED. 39. OTHER GROUNDS ARE EITHER GENERAL OR PRE-MAT URE OR NOT PRESSED, NOT REQUIRING ANY ADJUDICATION. ITA NO.7977/MUM/2010. M/S.BAYER MATERIAL SCIENCE PVT. LTD. 32 40. IN THE RESULT, APPEAL IS PARTLY ALLOWED. ORDER PRONOUNCED ON THIS 16 TH DAY OF DECEMBER, 2011. SD/- SD/- (D.K.AGARWAL) (R.S.SYAL) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI : 16 TH DECEMBER, 2011. NG: COPY TO : 1. THE APPELLANT. 2. THE RESPONDENT. 3. THE CIT CONCERNED 4. THE CIT(A), MUMBAI. 5. THE DR/ITAT, MUMBAI. 6. GUARD FILE. TRUE COPY. BY ORDER ASSISTANT REGISTRAR, ITAT, MUMBAI.