Atlas Copco (India) Ltd., Pune V. Deputy Commissioner of Income-tax, Pune

ITA 816/PUN/2017

• Counselvise Citation: [2021] 109 COUNSELVISE.COM (IT) 3804 (ITAT-PUNE)
• Duration Of Justice: 3 year(s) 10 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-02-2021
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 24-02-2021
• Assessment Year: 2011-2012
• Appeal Filed On: 06-04-2017
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: AMOL KAMAT
• Assessee Lawyers: R MURLIDHAR
• Keywords: Business income; Depreciation; Transfer pricing; International transaction; Earning of tax free income; Capital expenditure; Rule 8D; Set aside
• Section: 14A; 10B; 201; 13; 22

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH, PUNE BEFORE SHRI R.S.SYAL, VP AND SHRI PARTHA SARATHI CHAUDHURY, JM . / I TA NO. 1356 /PUN/20 15 / ASSESSMENT YEAR : 2010 - 11 ATLAS COPCO (INDIA) LIMITED SEVANAGAR, MUMBAI - PUNE ROAD, DAPODI, PUNE - 411 012. PAN : AAACA4074D ....... / APPELLANT / V/S. THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE - 8, PUNE. / RESPONDENT . / ITA NO. 816/PUN/2017 / ASSESSMENT YEAR : 2011 - 12 ATLAS COPCO (INDIA) LIMITED SEVANAGAR, MUMBAI - PUNE ROAD, DAPODI, PUNE - 411 012. PAN : AAACA4074D ....... / APPELLANT / V/S. THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE - 8, PUNE. / RESPONDENT A SSESSEE BY : SHRI R. MUR LIDHAR REVENUE BY : SHRI AMOL KAMAT / DATE OF HEARING : 2 4 .0 2 .2021 / DATE OF PRONOUNCEMENT : 25 . 02 .2021 2 ITA NO.1356/PUN/2015 ITA NO.816/PUN/2017 A.Y S . 2010 - 11 & 2011 - 12 / ORDER PER PARTHA SARATHI CHAUDHU RY, JM: THESE TWO APPEAL S PREFERRED BY THE ASSESSEE EMANATES FROM THE DIFFERENT ORDERS OF THE LD. CIT(APPEALS) - 13, PUNE DATED 27.07.2015 & 27.01.2017 FOR THE ASSESSMENT YEAR S 201 0 - 1 1 & 2011 - 12 AS PER THE GROUNDS OF APPEAL ON RECORD. 2. BOTH THE PARTIES HEREIN HAVE AGREED THAT THE FACTS AND CIRCUMSTANCES INVOLVED IN BOTH THE ASSESSMENT YEARS OF APPEALS ALONG WITH ISSUES ARE IDENTICAL AND SIMILAR. THEREFORE, CONSIDERING THE SUBMISSIONS MADE BY PARTIES HEREIN, BOTH APPEALS ARE HEARD TOGETHER AND DISPOSED OF VIDE THIS CONSOLIDATED ORDER. FIRST, WE WOULD ADJUDICATE THE APPEAL IN ITA NO.1356/PUN/2015 FOR THE ASSESSMENT YEAR 2010 - 11 AS LEAD CASE. ITA NO.1356/PUN/2015 A.Y.2010 - 11 3. AT THE VERY OUTSET, THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT ALONG WITH GROUNDS OF APPEAL IN THE APPEAL MEMO, THEY HAVE ALSO FILED THREE ADDITIONAL GROUNDS WHICH ARE AS FOLLOWS: CLAIM OF EDUCATION CESS 1 . THE APPELLANT PRAYS THAT THE LIABILITY FOR EDUCATION CE SS ON INCOME TAX PAID FOR THE YEAR OUGHT TO BE ALLOWED AS TAX DEDUCTABLE EXPENSES WHILE COMPUTING THE TAXABLE INCOME. CONSEQUENTIAL CLAIM OF DEPRECIATION ON THE EXPENDITURE OF PREMISES 2 . CONSEQUENT TO THE DECISION OF HONBLE ITAT FOR THE AY 2004 - 05 TO 2007 - 08 IN RELATION TO THE DISALLOWANCE OF EXPENDITURE ON PREMISES TO 3 ITA NO.1356/PUN/2015 ITA NO.816/PUN/2017 A.Y S . 2010 - 11 & 2011 - 12 THE EXTENT OF 40% OF SUCH EXPENSES, BEING HELD TO BE CAPITAL IN NATURE FOR THE RESPECTIVE YEARS UNDER CONSIDERATION, THE APPELLANT PRAYS FOR ALLOWANCE OF THE CONSEQUENTIAL DEPRECIATION ON TH E SAME, IN THE SUBSEQUENT YEARS INCLUDING AY 2010 - 11. CONSEQUENTIAL CLAIM OF DEPRECIATION ON THE EXPENDITURE OF SOFTWARE 3 . CONSEQUENT TO THE DECISION OF HONBLE ITAT IN THE AY 2007 - 08, IN RELATION TO DISALLOWANCE OF EXPENDITURE OF SOFTWARE AMOUNTING TO RS. 15,60,198/ - INCURRED DURING THE YEAR WERE HELD TO BE CAPITAL IN NATURE, THE APPELLANT PRAYS FOR ALLOWANCE OF THE CONSEQUENTIAL DEPRECIATION ON THE SAME, IN THE SUBSEQUENT YEARS INCLUDING AY 2010 - 11. 4. THE LD. DR RECORDED IN HIS SUBMISSION THAT HE DOES NOT HAVE ANY OBJECTION IF THESE ADDITIONAL GROUNDS ARE ADMITTED. TAKING TOTALITY OF FACTS AND CIRCUMSTANCES AND THE SUBMISSIONS MADE, THESE ADDITIONAL GROUNDS ARE ADMITTED FOR ADJUDICATION. ADJUDCIATION OF ADDITIONAL GROUNDS 5. ADDITIONAL GROUND NO.1 PERTAINS TO THE CLAIM OF EDUCATION CESS. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THIS ISSUE HAS BEEN ADDRESSED BY THE PUNE BENCH OF THE TRIBUNAL IN ITA NO.736/PUN/2011 FOR ASSESSMENT YEAR 2005 - 06 IN ASSESSEES OWN CASE AND THEREIN AT PARA 31, THE I SSUE RAISED BEFORE THE TRIBUNAL WAS AS FOLLOWS: 1. CLAIM OF EDUCATION CESS THE APPELLANT PRAYS THAT THE LIABILITY FOR EDUCATION CESS ON INCOME TAX PAID FOR THE YEAR OUGHT TO BE ALLOWED AS TAX DEDUCTABLE EXPENSES WHILE COMPUTING THE TAXABLE INCOME. THE TRIBUNAL ON THIS ISSUE HAS HELD AND OBSERVED AS FOLLOWS: 34. WE HAVE HEARD THE SUBMISSIONS. IT IS SEEN THAT RELYING ON THE CIRCULAR F NO.91/58/66 - ITJ (19) DT. 18 TH MAY, 1967, THE HONBLE RAJASTHAN HIGH COURT IN CHAMBAL FERTILISERS AND CHEMICALS LT D.(SUPRA.) HAS HELD THAT EDUCATION CESS IS NOT DISALLOWABLE U/S.40(A)(II) OF THE ACT. 4 ITA NO.1356/PUN/2015 ITA NO.816/PUN/2017 A.Y S . 2010 - 11 & 2011 - 12 THE SAID JUDGMENT HAS ALSO BEEN FOLLOWED BY THE PUNE BENCH OF THE TRIBUNAL IN DCIT VS. BAJAJ ALLIANZ GENERAL INSURANCE COMPANY LTD. (ITA NO.1111/PUN/2017) VIDE ITS ORDER DATED 25.07.2019, A COPY OF WHICH HAS BEEN PLACED ON RECORD BY THE LD. AR. NO CONTRARY PRECEDENT HAS BEEN BROUGHT TO OUR NOTICE BY THE LD.DR. FOLLOWING THE PRECEDENT, WE ALLOW THIS ADDITIONAL GROUND OF APPEAL. 6. THE TRIBUNAL HAS FAIRLY CONSIDERED THE LEGAL PRECEDENT AND JUDICIAL PRONOUNCEMENT OF THE HONBLE RAJASTHAN HIGH COURT IN THE CASE OF CHEMBAL FERTILIZERS LTD. AND ANOTHER AND VS. JCIT AND ANOTHER (2018) 102 CCH 0202 RAJ. HC WHICH WAS FOLLOWED BY THE PUNE BENCH OF THE TRIBUNAL IN THE CASE OF DCI T VS. BAJAJ ALLIANZ GENERAL INSURANCE COMPANY LTD. (ITA NO.1111/PUN/2017) DATED 25.07.2019. THE TRIBUNAL HAS ALSO OBSERVED THAT THE DECISION OF THE HONBLE RAJASTHAN HIGH COURT (SUPRA) WAS BASED ON THE CIRCULAR F . NO.91/58/66 - ITJ(19) DATED 18 TH MAY, 1967. IT WAS ALSO SUBMITTED BY THE LD. COUNSEL FOR THE ASSESSEE THAT THE HONBLE BOMBAY HIGH COURT HAS UPH ELD THE SAME VIEW IN THE CASE OF SESA GOA LIMITED VS. JOINT COMMISSIONER OF INCOME TAX, TAX APPEAL NO. 17 OF 2013, 18 OF 2013. THEREFORE, RESPECTFULLY FOLLOWING THE SAME PARITY OF REASONING IN THE ABOVE REFERRED DECISIONS, ADDITIONAL GROUND NO.1 RAISED IN APPEAL BY THE ASSESSEE IS ALLOWED. 7. ADDITIONAL GROUND NO.2 REFERS TO THE CLAIM OF DEPRECIATION ON THE EXPENDITURE OF PREMISES AND AS SUBMITTED BY THE LD. C OUNSEL FOR THE ASSESSEE THAT THIS ISSUE WAS ALSO DEALT IN ASSESSEES OWN CASE BY THE PUNE BENCH OF THE TRIBUNAL IN ITA NO.736 & 732/PUN/2011 FOR THE ASSESSMENT YEAR 2005 - 06. THE QUESTION BEFORE THE TRIBUNAL WAS AS FOLLOWS: 2. CLAIM OF DEPRECIATION : CONSEQUENT TO THE DECISION OF HONBLE ITAT IN THE AY 2004 - 05, IN RELATION TO DISALLOWANCE OF EXPENDITURE OF PREMISE AMOUNTING TO 5 ITA NO.1356/PUN/2015 ITA NO.816/PUN/2017 A.Y S . 2010 - 11 & 2011 - 12 RS.14,18,515, BEING 40% OF THE TOTAL EXPENDITURE INCURRED DURING THE YEAR, WHICH ARE HELD TO BE CAPITAL IN NATURE FOR SUCH YEA R UNDER CONSIDERATION, I.E. AY 2004 - 05, THE APPELLANT PRAYS FOR ALLOWANCE OF THE DEPRECIATION THE SAME, IN THE SUBSEQUENT YEARS, INCLUDING AY 2005 - 06. THE TRIBUNAL ON THIS ISSUE HAS HELD AND OBSERVED AS FOLLOWS : 35. THE SECOND ADDITIONAL GROUND IS AGAINST THE ALLOWING OF DEPRECIATION ON THE AMOUNT OF CAPITAL EXPENDITURE INCURRED BY THE ASSESSEE ON CERTAIN PREMISES, WHICH WAS PARTLY HELD BY THE TRIBUNAL TO BE NOT DEDUCTIBLE IN ITS ORDER FOR THE A.Y. 2004 - 05 36. WE HAVE GONE THROUGH THE RELEVANT DISC USSION MADE IN PARA 16 OF THE TRIBUNAL ORDER DATED 22 - 07 - 2019 IN ITA NO.1302/PUN/2010 FOR THE A.Y. 2004 - 05 IN WHICH THE TRIBUNAL NOTICED THAT THE ASSESSEE PURCHASED A PROPERTY DURING THE YEAR AND CARRIED OUT SUITABLE REPAIRS/RENOVATION TO MAKE IT FIT FOR U SE. THE DECISION OF THE LD. CIT(A) CAPITALIZING 40% OF THE EXPENDITURE AS AGAINST 80% DONE BY THE AO, WAS APPROVED BY THE TRIBUNAL. ONCE A PARTICULAR AMOUNT HAS BEEN HELD TO BE CAPITAL EXPENDITURE ON A BUILDING PURCHASED BY THE ASSESSEE, THE SAME HAS TO BE SUBJECTED TO DEPRECIATION. AS THE TRIBUNAL HAS APPROVED THE CAPITALIZING OF CERTAIN AMOUNT TO BUILDING ACCOUNT, WE, THEREFORE, DIRECT THE AO TO ALLOW DEPRECIATION ON SUCH AMOUNT AS PER LAW. 8. THE LD. COUNSEL FOR THE ASSESSEE, THEREFORE, SUBMITTED THAT SIMILAR DIRECTIONS MAY BE GIVEN FOR THIS YEAR ALSO. CONSIDERING THE SIMILARITY OF FACTS AND CIRCUMSTANCES AND THE VIEW TAKEN BY THE TRIBUNAL IN ASSESSEES OWN CASE (SUPRA.), WE DIRECT THE ASSESSING OFFICER TO FOLLOW THE DIRECTIONS GIVEN AT PARA 36 OF THE ORDER OF THE TRIBUNAL FOR ASSESSMENT YEAR 2005 - 06. THUS, ADDITIONAL GROUND NO.2 RAISED IN APPEAL BY THE ASSESSEE IS ALLOWED. 9. ADDITIONAL GROUND NO.3 PERTAINS TO THE CONSEQUENTIAL CLAIM OF DEPRECIATION ON THE EXPENDITURE OF SOFTWARE WHICH WAS DISALLOWED IN THE ASSESSMENT YEAR 2007 - 08. 9.1 THE FACTS APROPOS TH IS ISSUE ARE THAT THE ASSESSEE, IN ITS RETURN FOR THE A.Y. 2007 - 08, CLAIM ED DEDUCTION OF RS.15,60,198/ - TOWARDS SOFTWARE DEVELOPMENT EXPENSES. THE ASSESSING OFFICER TREATED THE SAME AS CAPITAL IN 6 ITA NO.1356/PUN/2015 ITA NO.816/PUN/2017 A.Y S . 2010 - 11 & 2011 - 12 NATURE . A FTER ALLOWING DEPRECIATION OF RS.4,68,039/ - @30% (HALF OF 60%), T HE ASSESSING OFFICER MADE NET ADDITION OF RS.10,92,139 / - . WHEN THE MATTER CAME UP BEFORE THE TRIBUNAL FOR CONSIDERATION, THE ASSESSEE DID NOT PRESS THIS GROUND . EX CONSEQUENTI, THE ADDITION OF RS.10,92,139/ - CAME TO BE AFFIRMED . ON C E SUCH SOFTWARE DEVELOPMENT HA VE BEEN TREATED AS CAPITAL EXPENDITURE , THEN IT IS BUT NATURAL THAT DEPRECIATION ON THE SAME WILL HAVE TO BE ALLOWED IN THE SUCCEEDING YEARS AS WELL , INCLUDING THE YEAR UNDER CONSIDERATION . HOWEVER, IT IS RELEVANT TO KEEP IN MIND THAT THE ASSESSMENTS OF THE ASSESSEE FOR THE ASSESSMENT YEARS 2008 - 09 AN D 2009 - 10 HAVE BEEN QUASHED BY THE TRIBUNAL ON A LEGAL ISSUE. THUS WHILE GRANTING CONSEQUENTIAL DEPRECIATION ON THE SOFTWARE DEVELOPMENT COST FOR THE YEAR UNDER CONSIDERATION , THE AO SHOULD KEEP IN MIND TO COMPUTE THE OPENING W.D.V. BY REDUCING NOT ONLY TH E DEPRECIATION GRANTED BY HIM FOR THE A.Y. 2007 - 08 BUT ALSO DEEMED DEPRECIATION AT THE RATE OF 60% FOR THE NEXT TWO YEARS, WHOSE ASSESSMENTS HAVE BEEN QUASHED. ONLY THE REMAINING AMOUNT WILL CONSTITUTE OPENING W.D.V. OF THE SOFTWARE DEVELOPMENT COST ON TH IS SCORE. ACCORDINGLY, ADDITIONAL GROUND NO.3 IS ALLOWED TO THIS EXTENT. 10. THUS, ALL THE ADDITIONAL GROUNDS RAISED BY THE ASSESSEE ARE ALLOWED AS INDICATED ABOVE . ADJUDICATION OF GROUNDS IN APPEAL MEMO 11. NOW, WE WOULD ADJUDICATE GROUNDS REFERRED BEFORE US IN THE APPEAL MEMO WHICH ARE AS FOLLOWS: THE APPELLANT OBJECTS TO THE ORDER OF THE HON'BLE COMMISSIONER OF INCOME TAX (APPEALS) - 13, PUNE ['CIT (APPEALS)'] DATED JULY 27, 2015 FOR THE AF ORESAID ASSESSMENT YEAR ON THE FOLLOWING AMONG OTHER GROUNDS: 7 ITA NO.1356/PUN/2015 ITA NO.816/PUN/2017 A.Y S . 2010 - 11 & 2011 - 12 1 . THE HON'BLE CIT(APPEALS) ERRED ON FOLLOWING GROUNDS FOR MAKING AN ADJUSTMENT TO THE INTERNATIONAL TRANSACTION OF EXPORT OF FINISHED GOODS ON ACCOUNT OF DIFFERENCE IN PRICE OF SIMILAR GOODS SOLD TO ASSOCIATED ENTERPRISES ('AES') AND NON - ASSOCIATED ENTERPRISE S ('NON - AES '): ( A ) THE HON'BLE CIT (APPEALS) ERRED IN FACTS AND CIRCUMST ANCES OF THE CASE IN REJECTING TRANSACTIONAL NET MARGIN METHOD ('TNMM') SELECTED BY THE APPELLANT AS THE MOST APPROPRIATE METHOD FOR DETERMINING THE ARM'S LENG TH PRICE OF EXPORT OF GOODS TO AES. (B ) THE HON'BLE CIT (APPEALS) ERRED IN SELECTING COMPARABLE UNCONTROLL ED PRICE ('CUP') METHOD AS THE MOST APPROPRIATE METHOD WITHOUT CONSIDERING THE S IGNIFICANT DIFFERENCES IN THE VOLUME OF GOODS EXPORTED TO AES AND NON - AES, DIFFERENCE I N THE GEOGRAPHICAL CO NDITIONS IN THE MARKETS AND DIFFERENCES IN' FUNCTION S PERFORMED AND RISKS ASSUMED BY THE APPELLANT IN THE EXPORT OF GOODS TO AES AND NON - AES. (C) WITHOUT PREJUDICE TO THE ABOVE, THE HON'BLE CIT (AP PEALS) ERRED IS NOT ALLOWING ECONOMIC ADJUSTMENTS ON THE B ASIS OF THE DIFFERENCES IN VOL UME AND DIFFERENCES IN GEOGRAPHICAL LOCATIONS IN THE EXPORT OF SIMILAR GOODS TO AES AND NON - AES. 2. THE HON'BLE CIT (APPEALS) ERRED IN MAKING AN AD - HOC DISALLOWANCE OF RS.1,00,000/ - TOWARDS MISCELLANEOUS EXPENSES. 3. THE HON' BLE CIT (APPEALS) ERRED IN DISALLOWING RS.36,30,760 UNDER SECTION 14A OF THE INCOME - TAX ACT, 1961 ('THE ACT'). 4. THE HON'BLE CIT(APPEALS) ERRED IN MAKING FOL L OWING OBSERVATION: 'IT IS A MATTER OF COMMON SENSE THAT THE APPELLANT HAS TO INCUR SOME EXPENDI TURE TO KEEP TRACK OF THE RECEIPT OF TAX - FREE INCOME, FOR ITS ACCOUNTING AS WELL AS ADMINISTRATIVE STAFF, ACCOUNTING STAFF AND OF TREASURY PERSONNEL, STATIONERY, COMMUNICATION AND OTHER MISCELLANEOUS EXPENSES. SUCH EXPENDITURE MAYOR MAY NOT BE SUBSTANTIAL. THE MAGNITUDE OF SUCH EXPENDITURE WOULD DEPEND ON THE FACTS OF THE CASE. HOWEVER, IN NO CIRCUMSTANCES, THE EXPENDITURE CAN BE STATED TO BE NIL. THEREFORE, THE APPELLANTS CLAIM OF NIL EXPENDITURE IS INCORRECT.. THE APPELLANT OBJECTS TO THE ABOVE OBSERV ATION OF THE HONBLE CIT(APPEALS) WHICH IS CONTRARY TO THE FACTS OF THE CASE AND IN LAW. 5. EACH ONE OF THE ABOVE GROUNDS OF APPEAL IS WITHOUT PREJUDICE TO THE OTHER. 6. THE APPELLANT RESERVES THE RIGHT TO AMEND, ALTER OR ADD TO THE GROUNDS OF APPEAL. 12. GROUND NO.1 OF APPEAL MEMO PERTAINS TO THE INAPPROPRIATE APPROACH ADOPTED BY THE TPO FOR BENCHMARKING EXPORT OF FINISHED GOODS TO ASSOCIATED ENTERPRISES AND THE AMOUNT OF ADDITION IS RS.47,00,000/ - . 8 ITA NO.1356/PUN/2015 ITA NO.816/PUN/2017 A.Y S . 2010 - 11 & 2011 - 12 13. THE OBSERVATION OF THE AO/TPO WAS THAT THE ASSESSEE HAS MADE TOTAL SALES OF RS.113.75 CRORES TO ITS AES. THE TPO ACCEPTED THAT TNMM IS THE MOST APPROPRIATE METHOD FOR SALES AGGREGATING RS.106.03 CRORE. HOWEVER, AS REGARDS SALES WORTH RS.7.72 CRORES, HE HELD THAT CUP SHOULD BE ADOPTED AS THE MOST AP PROPRIATE METHOD ON THE BASIS THAT SIMILAR PRODUCTS HAS BEEN SOLD TO NON AES . HE REJECTED THE SUBMISSIONS OF THE ASSESSEE THAT THE SALES TO AES AND NON AES CANNOT BE BENCHMARKED ON CUP BASIS DUE TO GEOGRAPHICAL DIFFERENCE, VOLUME DIFFERENCE, TIMING DIFFERE NCE, RISK DIFFERENCE AND FUNCTIONAL DIFFERENCE. THE TPO TOOK THE SIMILAR VIEW IN THE PREVIOUS YEAR. 14. THE LD. CIT(APPEALS) ON THIS ISSUE AT PARA 2.3.3 OF HIS ORDER HAS PLACED RELIANCE ON THE DECISION OF THE PUNE BENCH OF THE TRIBUNAL IN THE CASE OF HENK EL ADHESIVES TECHNOLOGIES INDIA PRIVATE LIMITED VS. DCIT, ITA NO.1647/PUN/2011 DATED 18.02.2015 FOR THE ASSESSMENT YEAR 2007 - 08 AND HAS HELD THAT ON IDENTICAL FACTS, THE TRIBUNAL HAD REJECTED THE ASSESSEES ARGUMENT ON TNMM APPLIED BY IT AND CONFIRMED THE DECISION OF THE TPO TO APPLY CUP METHOD TO THE ASSESSEES INTERNATIONAL TRANSACTION OF EXPORT OF FINISHED GOODS AND IMPORT OF RAW MATERIAL. THE TRIBUNAL GRANTED RELIEF TO THE ASSESSEE ON ACCOUNT OF RISK ADJUSTMENT @1% ON SALES MADE TO NON AE AND FOR SALES AND MARKETING FUNCTION PERFORMED FOR THE SALES MADE TO NON AE. THEREAFTER, THE LD. CIT(APPEALS) AT PARA 2.3.4 HAS HELD AS FOLLOWS: 2.3.4 THE APPELLANT HAS NOT PROVIDED THESE FIGURES BEFORE ME. THEREFORE, THE LEARNED AO IS DIRECTED TO WORK OUT THE AMOUNT OF THE ADJUSTMENT BY FOLLOWING THE ORDER OF THE ITAT IN THE CASE OF HENKEL ADHESIVES TECHNOLOGIES INDIA PRIVATE LIMITED FOR THE AY 2007 - 08. THE ADJUSTMENT WILL BE RESTRICTED TO THE AMOUNT WORKED OUT BY FOLLOWING THE ABOVE DECISION OF THE HONOURABLE ITAT IN THE CASE OF HENKEL ADHESIVES TECHNOLOGIES INDIA PRIVATE LTD. 9 ITA NO.1356/PUN/2015 ITA NO.816/PUN/2017 A.Y S . 2010 - 11 & 2011 - 12 15. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT ON THIS ISSUE, THE PUNE BENCH OF THE TRIBUNAL IN ASSESSEES OWN CASE IN ITA NO.736 & 732/PUN/2011 FOR ASSESSMENT YEAR 2005 - 06 VIDE ORDER DA TED 05.08.2019 HAS OBSERVED AND HELD AS FOLLOWS : 5. GROUND NO. 4 OF THE ASSESSEES APPEAL IS AGAINST THE CONFIRMATION OF TRANSFER PRICING ADDITION OF RS.2,24,11,726/ - IN THE INTERNATIONAL TRANSACTION OF `EXPORT OF MANUFACTURED FINISHED GOODS WITH TRANS ACTED VALUE OF RS.50,95,90,294/ - . THIS TRANSACTION WAS SHOWN BY THE ASSESSEE AT ALP UNDER THE TNMM IN AN AGGREGATE MANNER CONSIDERING TWO OTHER TRANSACTIONS INCLUDING PAYMENT OF ROYALTY, WHICH HAS BEEN DISCUSSED IN THE EARLIER PART OF THIS ORDER. THE TPO O BSERVED QUA THIS TRANSACTION THAT NUMBER OF ITEMS WERE SOLD BY THE ASSESSEE TO AES AND NON - AES, WHICH INCLUDED ELASTIC PINS, REGULATING ASSEMBLY, RUBBER PACKING, SPRINGS ETC. IT WAS SEEN FROM THE DETAILS FILED BY THE ASSESSEE IN ANNEXURE - 1 THAT FOR THE SAM E PRODUCT THE PRICE CHARGED FROM AES WAS LESS THAN THAT CHARGED FROM NON - AES, GIVING A CUMULATIVE DIFFERENCE OF RS.2,24,11,726/ - . THE TPO, THEREFORE, REJECTED THE APPLICATION OF TNMM ON AGGREGATE BASIS AND APPLIED THE COMPARABLE UNCONTROLLED PRICE (CUP) AS THE MOST APPROPRIATE METHOD FOR DETERMINING THE ALP OF THIS TRANSACTION. ON BEING CALLED UPON TO EXPLAIN ITS POSITION ON SUCH DIFFERENCE IN PRICES, THE ASSESSEE, INTER ALIA, SUBMITTED THAT THERE WAS A VAST DIFFERENCE IN THE QUANTITIES SOLD TO THE AES AND NON - AES. AS AGAINST EXPORT OF MANUFACTURED GOODS TO AES AT RS.50.96 CRORE, THE ASSESSEE SUBMITTED THAT IT MADE SALES TO NON - AES ONLY AT RS.5.25 CRORE. NOT CONVINCED WITH THE ASSESSEES VERSION, THE TPO SEPARATED FIGURE OF EXPORTS IN RESPECT OF THE GOODS WH ICH WERE ALSO SOLD TO NON - AES AT RS.3.09 CRORE. THE REMAINING AMOUNT OF EXPORTS TO AES AT RS. 47.86 CRORE WAS ACCEPTED AT ALP. FOR THE DISPUTED TRANSACTION OF EXPORTS MADE BY THE ASSESSEE TO ITS AE AT RS.3.09 CRORE, THE TPO FOUND THE ASSESSEE TO HAVE CHARG ED ITS AES LESS BY RS.2,24,11,726/ - . HE, THEREFORE, HELD THAT IF THE ASSESSEE HAD SOLD SUCH GOODS TO THIRD PARTIES, THE AMOUNT OF SALES WOULD HAVE BEEN RS.5,33,87,694/ - (RS.3.09 CRORE + RS.2.24 CRORE). AS THE ASSESSEE DELIBERATELY EXPORTED SIMILAR GOODS TO ITS AE AT PRICE LOWER THAN THAT CHARGED FROM NON - AES, THE TPO HELD THAT THE LOWER AMOUNT CHARGED AT RS.2.24 CRORE WAS LIABLE TO BE CONSIDERED AS TRANSFER PRICING ADJUSTMENT. THE AO MADE THIS ADDITION, WHICH GOT SUSTAINED AT THE HANDS OF THE LD. FIRST APPE LLATE AUTHORITY. 6. WE HAVE HEARD BOTH THE SIDES AND GONE THROUGH THE RELEVANT MATERIAL ON RECORD. THE ASSESSEE DECLARED AN INTERNATIONAL TRANSACTION OF `EXPORT OF MANUFACTURED FINISHED GOODS WITH VALUE AT RS.50.95 CRORE, WHOSE ALP WAS DETERMINED BY THE ASSESSEE UNDER TH E TNMM BY AGGREGATING IT WITH OTHER TWO INTERNATIONAL TRANSACTIONS OF `PAYMENT OF ROYALTY AND `IMPORT OF RAW MATERIALS AND COMPONENTS. THE TPO DID NOT ACCEPT THE AGGREGATION OF TRANSACTIONS AND DETERMINED THE ALP OF PAYMENT OF ROYALTY SEPARATELY UNDER TH E CUP METHOD. AS REGARDS THE TRANSACTION OF EXPORT OF SUCH MANUFACTURED FINISHED GOODS WHICH WERE ALSO EXPORTED TO 10 ITA NO.1356/PUN/2015 ITA NO.816/PUN/2017 A.Y S . 2010 - 11 & 2011 - 12 THE NON - AES TO THE TUNE OF RS.3.09 CRORE, THE TPO APPLIED THE CUP METHOD BY CONSIDERING THE INTERNAL COMPARABLE UNCONTROLLED TRANSACTIONS OF THE SALES OF SIMILAR PRODUCTS MADE BY THE ASSESSEE TO ITS NON - AES. THE TRANSFER PRICING ADDITION OF RS.2.24 CRORE IS ONLY IN RESPECT OF SUCH EXPORTED GOODS. 7. THE RAISON D`ETRE GIVEN BY THE TPO FOR RECOMMENDING THE TRANSFER PRICING ADDITION IS THAT THE A SSESSEE CHARGED HIGHER PRICES FOR SALE OF SIMILAR PRODUCTS FROM NON - AES. AS AGAINST THAT, THE ASSESSEE CONTENDED BEFORE THE TPO THAT THERE WAS A VAST DIFFERENCE IN THE QUANTITY SOLD BY THE ASSESSEE TO ITS AES AND FURTHER THE ITEMS WERE SEPARATELY CUSTOMIZE D FOR NON - AES. THE TPO HAS REFERRED TO ANNEXURE - 1, WHOSE COPY HAS BEEN PLACED AT PAGE 559 ONWARDS OF THE PAPER BOOK. THE FIRST ITEM DEALT WITH IN ANNEXURE - 1 IS ELASTIC PIN. SALE OF THIS PRODUCT MADE BY THE ASSESSEE TO ITS AE IN BELGIUM IS AT THE AVERAGE RA TE OF RS.11.52 PER UNIT WITH QUANTITY OF 2855 UNITS AS AGAINST SALE OF 20 UNITS MADE TO A SRI LANKAN NON - AE, NAMELY, BOGALA GRAPHITE LANKA LTD. AT THE AVERAGE RATE OF RS.44 PER UNIT. IT IS THUS SEEN THAT THERE IS A SUBSTANTIAL DIFFERENCE IN THE QUANTITY SO LD TO AE AND NON - AES. PRICE HAS BEEN LESS CHARGED FROM AES WITH SALE OF HIGHER QUANTITY. SECOND ITEM IN THE ANNEXURE IS REGULATING ASSEMBLY. THE ASSESSEE SOLD ITS 100 UNITS TO NON - AE AT A PRICE OF RS.2658 PER UNIT AND 50 UNITS TO AE AT A PRICE OF RS.2683.8 0 PER UNIT. HERE, IT IS SEEN THAT THE POSITION HAS REVERSED IN AS MUCH AS THE ASSESSEE CHARGED HIGHER PRICE FROM ITS AE VIS - VIS NON - AE ON THE SALE OF A LOWER QUANTITY TO AE. THE NEXT ITEM IS RUBBER PACKING. THE ASSESSEE SUPPLIED 10 UNITS OF THIS ITEM TO SRI LANKAN NON - AE AT RS. 23.25 PER UNIT AS AGAINST 1983 UNIT SUPPLIED TO ITS BELGIUM AE AT AN AVERAGE RATE OF RS.6.86 PER UNIT . THERE IS SUBSTANTIAL DIFFERENCE IN RATES CHARGED AS WELL AS QUANTITY SUPPLIED. SALE OF HIGHER QUANTITY IS COUPLED WITH LOWER RATE. THE NEXT ITEM IS PLUNGER PIN. THE ASSESSEE SUPPLIED ITS 8 UNITS TO SRI LANKAN NON AE AT A PRICE OF RS.29.92 PER UNIT AS AGAI NST SUPPLY OF 6472 UNITS TO AE AT A PRICE OF RS.14.02 PER UNIT. SAME RESULT FOLLOWS THAT HIGHER THE QUANTITY, LOWER THE PRICE. THE NEXT ITEM IS REDUCER. THE ASSESSEE SUPPLIED 10 UNITS TO NON - AE AT A PRICE OF RS. 199.02 PER UNIT AS AGAINST 78 UNITS TO ITS A E AT AN AVERAGE PRICE OF RS.236.22. HERE IT IS FOUND THAT THE PRICE CHARGED FROM AE IS MORE THAN THAT CHARGED FROM NON - AES EVEN FOR MORE QUANTITY. THE ENTIRE CASE IS LIKE THIS. NORMALLY, THE QUANTITY OF SALE OF SIMILAR PRODUCTS TO NON AES IS SEVERAL TIMES H IGHER THAN THAT SOLD TO AES. ON AN OVERVIEW OF ANNEXURE - 1, IT IS FOUND THAT NO DOUBT THE ASSESSEE CHARGED LESS PRICE FROM ITS AES VIS - - VIS NON - AES, BUT SUCH LOWER PRICES ARE INVARIABLY CONJOINED WITH MUCH HIGHER NUMBER OF UNITS SOLD. IN CERTAIN CASES, THE ASSESSEE CHARGED ITS AES AT PRICES HIGHER THAN THAT CHARGED FROM NON - AES FOR SIMILAR PRODUCTS. THE LD. AR EXPLAINED THAT THOUGH THE PRODUCTS ARE SIMILAR BUT THESE WERE CUSTOMIZED AS PER THE REQUIREMENTS OF THE NON - AES, WHICH POSITION HAS NOT BEEN CONTROVE RTED ON BEHALF OF THE REVENUE. THAT APART, IT IS SEEN THAT THERE IS DIFFERENCE IN LOCATIONS OF AES AND NON - AES. WHEREAS THE BIGGEST BUYER AE, NAMELY, POWER TOOLS DISTRIBUTION N.V. IS SITUATED IN BELGIUM; THE BIGGEST BUYER NON - AES, NAMELY, BOGALA GRAPHITE L ANKA LTD. IS SITUATED IN SRI LANKA. 11 ITA NO.1356/PUN/2015 ITA NO.816/PUN/2017 A.Y S . 2010 - 11 & 2011 - 12 8. RULE 10B(2) OF THE INCOME - TAX RULES, 1962 (HEREINAFTER ALSO CALLED `THE RULES) PROVIDES THAT THE COMPARABILITY OF AN INTERNATIONAL TRANSACTION WITH AN UNCONTROLLED TRANSACTION SHALL BE JUDGED, INTER ALIA, WITH THE S PECIFIC CHARACTERISTICS OF PROPERTY TRANSFERRED, ALL THE CONDITIONS PREVAILING IN THE MARKETS IN WHICH THE RESPECTIVE PARTIES TO THE TRANSACTIONS OPERATE, INCLUDING THE GEOGRAPHICAL LOCATION AND SIZE OF THE MARKETS. RULE 10B(3) EMPHATICALLY PROVIDES THAT A N UNCONTROLLED TRANSACTION SHALL BE COMPARABLE TO AN INTERNATIONAL TRANSACTION IF NONE OF THE DIFFERENCES, IF ANY, BETWEEN THE TWO ARE LIKELY TO MATERIALLY AFFECT THE PRICE CHARGED OR PAID ETC. AND FURTHER THAT REASONABLY ACCURATE ADJUSTMENTS CAN BE MADE T O ELIMINATE THE MATERIAL EFFECTS OF SUCH DIFFERENCES. A CLOSE PERUSAL OF SUB - RULE (2) IN JUXTAPOSITION TO SUBRULE (3) OF RULE 10B TRANSPIRES THAT THE COMPARABILITY OF AN INTERNATIONAL TRANSACTION CAN BE PROPERLY DONE WITH A SIMILAR UNCONTROLLED TRANSACTION , IF THE LATTER HAS SIMILAR CHARACTERISTICS, CONTRACTUAL TERMS AND GEOGRAPHICAL LOCATIONS ETC. IN CASE, SOME DIFFERENCES EXIST BETWEEN THE TWO SETS OF TRANSACTIONS, THEN, THE EFFECT OF SUCH DIFFERENCES SHOULD BE IRONED OUT BY GIVING A REASONABLE ADJUSTMENT IN THE PROFIT MARGINS ETC. 9. ADVERTING TO THE FACTS OF THE INSTANT CASE, WE FIND THAT THOUGH DESCRIPTION OF ITEMS SOLD BY THE ASSESSEE TO ITS AE AND NON - AES IS SIMILAR, BUT THERE ARE SEVERAL DIFFERENCES IN THE TWO, SUCH AS, LOCATION OF THE PARTIES, QUAN TITIES LIFTED AND CUSTOMIZATION OF PRODUCTS. SUCH DIFFERENCES HAVE SIGNIFICANT BEARING ON THE PRICE CHARGED BY THE ASSESSEE. NO ADJUSTMENT HAS BEEN ALLOWED BY THE TPO ON ACCOUNT OF SUCH DIFFERENCES. IN THE SAME MANNER, THE LD. DR ALSO COULD POINT OUT ANY M ECHANISM FOR GIVING ADJUSTMENT ON ACCOUNT OF SUCH MATERIAL DIFFERENCES. IN SUCH CIRCUMSTANCES, THE PRICE CHARGED FROM AES AND NON - AES CANNOT BE COMPARED UNDER THE CUP METHOD. THE HONBLE JURISDICTIONAL HIGH COURT IN PR. CIT VS. AMPHENOL INTERCONNECT INDIA PVT. LTD. (2019) 410 ITR 373 (BOM.) CONSIDERED ALMOST A SIMILAR SITUATION IN WHICH THERE WERE DIFFERENCES IN VOLUMES AND LOCATIONS AND THE TPO HAD APPLIED THE CUP METHOD FOR BENCHMARKING THE ASSESSEES INTERNATIONAL TRANSACTION. THE TRIBUNAL DID NOT APPROV E THE APPLICATION OF THE CUP METHOD ON ACCOUNT OF SUCH DIFFERENCE. WHEN THE REVENUE PREFERRED AN APPEAL AGAINST THE TRIBUNAL ORDER, THE HONBLE HIGH COURT HELD THAT THE CUP METHOD IS NOT APPROPRIATE METHOD IN CASE OF GEOGRAPHICAL DIFFERENCE, VOLUME DIFFERE NCE, TIMING DIFFERENCE, RISK DIFFERENCE AND FUNCTIONAL DIFFERENCE. REVERTING TO FACTS OF THE EXTANT CASE, WE FIND THAT SINCE THERE ARE SIGNIFICANT DIFFERENCES IN THE SALES MADE BY THE ASSESSEE TO ITS AES AND NON - AES, THE EFFECT OF WHICH HAS NEITHER BEEN GI VEN BY THE TPO NOR IT HAS BEEN SHOWN THAT HOW IT CAN BE GIVEN, WE HOLD THAT THE ACTION OF THE AUTHORITIES BELOW IN APPLYING THE CUP AS THE MOST APPROPRIATE METHOD CANNOT BE COUNTENANCED. 10. HAVING HELD THAT THE CUP IS NOT THE MOST APPROPRIATE METHOD IN T HE GIVEN CIRCUMSTANCES, THERE IS A NEED TO DETERMINE THE ALP OF THE INTERNATIONAL TRANSACTION UNDER ANOTHER SUITABLE METHOD. THE LD. AR VEHEMENTLY ARGUED THAT IN SUCH A SCENARIO OF THE TRIBUNAL NOT APPROVING THE APPLICATION OF THE CUP METHOD BY THE AUTHORI TIES, THE ALP DETERMINATION BY THE ASSESSEE UNDER THE TNMM WOULD REVIVE NOT CALLING FOR ANY TRANSFER PRICING ADDITION. THIS CONTENTION IN OUR CONSIDERED 12 ITA NO.1356/PUN/2015 ITA NO.816/PUN/2017 A.Y S . 2010 - 11 & 2011 - 12 OPINION IS SANS MERIT. WE HAVE NOTICED ABOVE THAT THE ASSESSEE AGGREGATED THREE INTERNATIONAL TRANSACTI ONS INCLUDING PAYMENT OF ROYALTY AND THE INSTANT TRANSACTION OF EXPORT OF MANUFACTURED FINISHED GOODS AND PROCESSED THEM UNDER THE TNMM ON AGGREGATE BASIS. THUS THE OPERATING PROFIT COMPUTED BY THE ASSESSEE UNDER THIS DETERMINATION HAD THE CUMULATIVE EFFEC T OF THE OPERATING PROFIT FROM ALL THE THREE TRANSACTIONS. THE TPO DID NOT ACCEPT SUCH AGGREGATION. HE DETERMINED THE ALP OF THE PAYMENT OF ROYALTY TRANSACTION SEPARATELY. THE LD. CIT(A) ALSO DEALT WITH THE DETERMINATION OF THE ALP OF ROYALTY PAYMENT SEPAR ATELY AND WE HAVE ALSO APPROVED THE ACTION OF THE LD. CIT(A) IN THIS REGARD. THE ASSESSEE IS NOWHERE AGGRIEVED BY THE SEGREGATION OF ROYALTY FROM THE AGGREGATED THREE INTERNATIONAL TRANSACTIONS. ONCE ONE OF THE THREE TRANSACTIONS IS TAKEN OUT FROM THE AGGR EGATED THREE TRANSACTIONS, THE DETERMINATION OF ALP DONE BY THE ASSESSEE UNDER THE TNMM IN RESPECT OF SUCH THREE INTERNATIONAL TRANSACTIONS INCLUDING EXPORT OF MANUFACTURED FINISHED GOODS AND PAYMENT OF ROYALTY, AUTOMATICALLY GETS DISTURBED AND CANNOT BE C ONSTRUED AS GIVING A CORRECT PROFIT LEVEL INDICATOR OF THE DISTINCT INTERNATIONAL TRANSACTION OF EXPORT OF MANUFACTURED GOODS SIMPLICITOR. NOT ONLY THE EFFECT OF PROFIT FROM THE TRANSACTION OF PAYMENT OF ROYALTY NEEDS TO BE REMOVED FROM THE AGGREGATED PROF IT LEVEL INDICATOR OF THE ASSESSEE, EVEN THE COMPARABLES AND THEIR PLIS MAY ALSO UNDERGO CHANGE BECAUSE OF SUCH EXCLUSION. THUS, IT IS EVIDENT THAT THE CONTENTION OF THE LD. AR IN THIS REGARD CANNOT BE ACCEPTED. UNDER THE PREVALENT CIRCUMSTANCES, THE ALP O F THE INTERNATIONAL TRANSACTION OF EXPORT OF MANUFACTURED FINISHED GOODS IS REQUIRED TO BE SEPARATELY DONE. WE HAVE HELD ABOVE THAT THE CUP IS NOT THE MOST APPROPRIATE METHOD IN THE GIVEN CIRCUMSTANCES. IN SUCH A CONDITION, THERE IS A NEED FOR RESORTING TO ANOTHER SUITABLE METHOD FOR DETERMINING THE ALP OF INTERNATIONAL TRANSACTION OF EXPORT OF MANUFACTURED FINISHED GOODS. WE, THEREFORE, SET ASIDE THE IMPUGNED ORDER AND REMIT THE MATTER TO THE FILE OF THE AO/TPO FOR A FRESH DETERMINATION OF ALP OF THE INTER NATIONAL TRANSACTION OF EXPORT OF MANUFACTURED FINISHED GOODS BY THE ASSESSEE. IT IS, HOWEVER, MADE CLEAR THAT THE TRANSFER PRICING ADJUSTMENT, IF ANY, RESULTING FROM SUCH FRESH DETERMINATION OF THE ALP SHOULD BE RESTRICTED ONLY TO THE VALUE OF INTERNATION AL TRANSACTIONS OF RS.3.09 CRORE. THE OTHER PART OF THE INTERNATIONAL TRANSACTION OF EXPORT OF MANUFACTURED FINISHED GOODS WITH THE VALUE OF RS.47.86 CRORE, WHICH HAS BEEN ACCEPTED BY THE TPO AT ALP, CANNOT BE NOW INTERFERED WITH. NEEDLESS TO SAY, THE ASSE SSEE WILL BE ALLOWED A REASONABLE OPPORTUNITY OF HEARING IN SUCH FRESH PROCEEDINGS. 16. THE SAME VIEW WAS FOLLOWED BY THE TRIBUNAL IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2006 - 07 IN ITA NO.1470/PUN/2010 DATED 21.08.2019 WHEREIN ON THE ISSUE, THE TRIBU NAL HAS HELD AND OBSERVED AS FOLLOWS: 11. THE FIRST GROUND IS WITH REGARD TO THE SALES TO ASSOCIATED ENTERPRISES (AES) . 13 ITA NO.1356/PUN/2015 ITA NO.816/PUN/2017 A.Y S . 2010 - 11 & 2011 - 12 12. IT WAS CONTENDED BY THE LD. AR OF THE ASSESSEE THAT DURING THE YEAR TOTAL SALES TO AES WAS AT RS.61.38 CRORES, OUT OF WHICH RS.54.10 CRORES IS NOT DISPUTED. IT IS RS.7.28 CRORES WHICH IS THE DISPUTED AMOUNT. THE LD. AR INVITED OUR ATTENTION TO THE TPOS ORDER AT PAGE 15 FOR ASSESSMENT YEAR 2006 - 07 READ WITH TPOS ORDER AT PAGE 8 FOR ASSESSMENT YEAR 2005 - 06 AND DEMONSTRATED THA T THE SUBJECT MATTER AND FACTS FOR BOTH THESE ASSESSMENT YEARS ARE SIMILAR. IT IS SEEN THAT SALES TO AES IS ALWAYS MORE. AT PAGE 661 ONWARDS VOLUME - I OF THE PAPER BOOK, THE ENTIRE DETAILS OF SALES HAVE BEEN PLACED BEFORE US. THE LD. AR FURTHER CONTENDED T HAT FOR ASSESSMENT YEAR 2005 - 06, THE TRIBUNAL IN ASSESSEES OWN CASE (SUPRA.) IN DETAILED HAS DETERMINED THIS ISSUE RESTORING THE MATTER TO THE FILE OF THE AO/TPO FOR DECIDING IT AFRESH GIVING CERTAIN DIRECTIONS. THAT ON SIMILARITY OF FACTS AND CIRCUMSTANC ES, FIRST GROUND IS REMITTED BACK TO THE FILE OF ASSESSING OFFICER/TPO WITH SIMILAR DIRECTIONS AS REFERRED HEREINABOVE. THUS, FIRST GROUND OF APPEAL BY THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES. FOR THIS YEAR ALSO, AS DEMONSTRATED BY THE LD. COUNS EL FOR THE ASSESSEE, SALES TO ITS AE AND NON - AES WHICH WERE EFFECTED, THEY BELONGS TO DIFFERENT GEOGRAPHICAL LOCATION, DIFFERENT QUANTITIES LIFTED AND CUSTOMIZATION OF PRODUCTS. SUCH DIFFERENCES HAVE SIGNIFICANT BEARING ON THE PRICE CHARGED BY THE ASSESSEE . NO ADJUSTMENT HAS BEEN ALLOWED BY THE TPO ON ACCOUNT OF SUCH DIFFERENCES. IN THE SAME MANNER, THE LD. DR ALSO COULD POINT OUT ANY MECHANISM FOR GIVING ADJUSTMENT ON ACCOUNT OF SUCH MATERIAL DIFFERENCES. IN SUCH CIRCUMSTANCES, THE PRICE CHARGED FROM AES A ND NON - AES CANNOT BE COMPARED UNDER THE CUP METHOD. THE HONBLE JURISDICTIONAL HIGH COURT IN PR. CIT VS. AMPHENOL INTERCONNECT INDIA PVT. LTD. (2019) 410 ITR 373 (BOM.) HAS HELD THAT THE CUP METHOD IS NOT APPROPRIATE METHOD IN CASE OF GEOGRAPHICAL DIFFEREN CE, VOLUME DIFFERENCE, TIMING DIFFERENCE, RISK DIFFERENCE AND FUNCTIONAL DIFFERENCE. 17. REVERTING TO FACTS OF THE INS TANT CASE, WE FIND THAT THERE ARE SIGNIFICANT DIFFERENCES IN THE SALES MADE BY THE ASSESSEE TO ITS AES AND NON - AES, THE EFFECT OF WHICH H AS NEITHER BEEN GIVEN BY THE TPO NOR IT HAS BEEN SHOWN THAT 14 ITA NO.1356/PUN/2015 ITA NO.816/PUN/2017 A.Y S . 2010 - 11 & 2011 - 12 HOW IT CAN BE GIVEN, WE HOLD THAT THE ACTION OF THE AUTHORITIES BELOW IN APPLYING THE CUP AS THE MOST APPROPRIATE METHOD CANNOT BE SUSTAINED . FOLLOWING THE VIEW TAKEN BY THE TRIBUNAL IN THE EARLIE R YEAR IN ASSESSEES OWN CASE AND PLACING RELIANCE ON THE DECISION OF THE HONBLE JURISDICTIONAL HIGH COURT, WE SET ASIDE THE IMPUGNED ORDER AND REMIT THE MATTER BACK TO THE FILE OF THE AO/TPO WITH SIMILAR DIRECTIONS AS GIVEN IN OUR EARLIER ORDER (SUPRA.). THUS, GROUND NO.1 RAISED IN APPEAL MEMO BY THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES. 18. GROUND NO.2 PERTAINS TO THE ADHOC DISALLOWANCE OF MISCELLANEOUS EXPENSES. THE ASSESSING OFFICER FOR WANT OF EVIDENCES IN RESPECT OF EXPENSES OF RS.2.59 LAKHS, DISALLOWED THE SAME. WHEREAS, THE LD. CIT(APPEALS) RESTRICTED SUCH DISALLOWANCE TO RS.1 LAKHS. 19. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED BECAUSE OF PETTINESS OF THE GRIEVANCE, HE IS NOT PRESSING THIS GROUND. AFTER RECORDING THE SUBMISSIONS OF THE LD. COUNSEL FOR THE ASSESSEE, GROUND NO.2 IS DISMISSED AS NOT PRESSED. 20. GROUND NO.3 PERTAINS TO THE DISALLOWANCE U/S.14A OF THE INCOME TAX ACT, 1961 (HEREINAFTER REFERRED TO AS THE ACT) OF RS.36,30,760/ - . 21. THE BRIEF FACTS ON THIS ISSUE ARE THAT THE ASSESSING OFFICER HAS MADE DISALLOWANCE OF RS.40,80,379/ - U/S.14A R.W.R.8D COMPRISING OF INTEREST EXPENSES OF RS.32,92,953/ - AND DISALLOWANCE UNDER RULE 8D @0.5% OF THE AVERAGE INVESTMENT YIELDING EXEMPT INCOME. THE LD. CIT(APPEALS) OBSERVED VIDE PARA 2.8.1 TO 2.8.10, PAGE 36 TO 42 OF HIS ORDER THAT THE COMPANY HAS NOT FURNISHED ANY EVIDENCE THAT THE INVESTMENTS HAVE BEEN MADE OUT OF SHORT TERM SURPLUS FUNDS AVAILABLE WITH THEM. THE LD. CIT(APPEALS) FURTHER 15 ITA NO.1356/PUN/2015 ITA NO.816/PUN/2017 A.Y S . 2010 - 11 & 2011 - 12 OBSERVED THAT THE ASSESSEE HAS TO INCUR S OME EXPENDITURE TO KEEP TRACK OF TAX FREE INCOME. THEREFORE, THE LD. CIT(APPEALS) CONFIRMED THE DISALLOWANCE MADE BY THE ASSESSING OFFICER AND RESTRICTED THE SAME TO RS.36,30,760/ - BY OBSERVING THAT DISALLOWANCE U/S.14A CANNOT EXCEED THE AMOUNT OF EXEMPT I NCOME. 22. AT THE TIME OF HEARING, THE LD. COUNSEL FOR THE ASSESSEE INVITED OUR ATTENTION AT PAGE 8 OF THE PAPER BOOK COMPILATION WHEREIN THE COMPANY HAS OWN FUNDS OF RS.493.14 CRORES AND PAGE 18 OF THE PAPER BOOK COMPILATION REFLECTING AN INVESTMENT AS O N MARCH 31, 2009 OF RS.31.49 CRORES AND THAT AS ON MARCH 31, 2010 OF RS. NIL. THE ASSESSEE THEREFORE, HAS OWN FUND EXCEEDING INVESTMENT MADE AND THE BORROWINGS AND THEREFORE, BASED ON THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. REL IANCE UTILITIES AND POWER LTD. (313 ITR 340) AND HDFC BANK (366 ITR 505), THERE SHOULD NOT BE ANY DISALLOWANCE OF INTEREST EXPENSES U/S.14A OF THE ACT. THIS VIEW HAS BEEN UPHELD BY THE PUNE BENCH OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR THE ASSESSMENT YE AR 2002 - 03 AND DISALLOWANCE ON INTEREST HAS BEEN DELETED. THE TRIBUNAL IN ITA NO.1311/PUN/2011 FOR THE ASSESSMENT YEAR 2002 - 03 DATED 16.07.2019 VIDE PARA 7 OF ITS ORDER PLACING RELIANCE ON THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS . RELIANCE UTILITIES AND POWER LTD. (SUPRA.) HAS DECIDED THIS ISSUE IN FAVOUR OF THE ASSESSEE BY OBSERVING AS FOLLOWS: 7. WE HAVE PERUSED THE CASE RECORDS AND HEARD THE RIVAL CONTENTIONS. WE HAVE ALSO GIVEN THOUGHTFUL CONSIDERATION TO THE JUDICIAL PRONOU NCEMENTS PLACED BEFORE US. WITH REGARD TO THE DISALLOWANCE MADE U/S.14A OF THE ACT, IT IS QUITE ASCERTAINABLE AND ACCEPTABLE FACTS ON RECORD AS PLACED BEFORE US AT PAGE 19, VOLUME - 1 OF THE PAPER BOOK THAT THE ASSESSEE HAD OWN FUNDS FAR IN EXCESS OF INVESTM ENT MADE DURING THE YEAR. THE ASSESSEE HAD RESERVE AND SURPLUS OF RS.115.27 CRORES AS ON 31.03.2002 AND PROFIT BEFORE TAX DURING THE CURRENT YEAR OF RS.15.26 CRORES. THE HON BLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. RELIANCE 16 ITA NO.1356/PUN/2015 ITA NO.816/PUN/2017 A.Y S . 2010 - 11 & 2011 - 12 UTILITIES AND POWER LTD.(SUP RA.) ANALYSED THE SITUATION THAT WHEN IT IS ESTABLISHED THAT THE ASSESSEE IS HAVING SUFFICIENT FUNDS THEN PRESUMPTION WOULD ARISE THAT INVESTMENTS WAS MADE OUT OF SUCH FUNDS AVAILABLE WITH THE COMPANY. IN THAT CASE, THE ASSESSEE HAD INTEREST FREE FUNDS OF RS.398.19 CRORES COMPRISING SHARE CAPITAL, RESERVE & SURPLUS, DEPRECIATION RESERVES. THEREFORE, ENTIRE INVESTMENT MADE IN THE SISTER CONCERN WAS OUT OF THE OWN FUNDS OF THE COMPANY AND THE PRESUMPTION TILTED IN FAVOUR OF THE ASSESSEE AS PER THE OBSERVATION OF THE HON BLE JURISDICTIONAL HIGH COURT. 7.1 REVERTING TO THE FACTS OF THE PRESENT CASE, IT IS ALREADY ANALYZED THAT THE ASSESSEE WAS HAVING SUFFICIENT OWN FUNDS AND THEREFORE, WHATEVER INVESTMENT WAS MADE, THE LEGAL PRESUMPTION IS THEY WERE FROM THE S AID OWN FUNDS OF THE ASSESSEE. THEREFORE, NO DISALLOWANCE U/S.14A OF THE ACT IS CALLED FOR. 23. THEREFORE, OUT OF THE TOTAL DISALLOWANCE OF RS.40,80,379/ - MADE BY THE ASSESSING OFFICER U/S.14A R.W.R.8D, THE DISALLOWANCE IN RESPECT OF INTEREST EXPENDITURE OF RS.32,92,953/ - IS , THEREFORE, DELETED FOLLOWING THE AFORESAID ORDER OF THE TRIBUNAL IN ASSESSEES OWN CASE AND PLACING RELIANCE ON THE DECISION OF THE HONBLE JURISDICTIONAL HIGH COURT (SUPRA.). THAT HOWEVER, ON DISALLOWANCE OF RS.7,87,426/ - UNDER RU LE 8D @ 0.5% OF THE AVERAGE INVESTMENT YIELDING EXEMPT INCOME TOWARDS ADMINISTRATIVE EXPENSES , THE VIEW OF THE TRIBUNAL AT PARA 7.2 OF ITS ORDER IN ITA NO.1311 & 1414/PUN/2011 FOR THE ASSESSMENT YEAR 2002 - 03 HAS BEEN AS FOLLOWS: 7.2 WITH REGARD TO THE DISALLOWANCE ON ADMINISTRATIVE EXPENSES, CONSIDERING THE ENTIRETY OF FACTS AND CIRCUMSTANCES IN THE CASE OF THE ASSESSEE, WE DIRECT THE ASSESSING OFFICER TO SUSTAIN % OF THE DISALLOWANCE ON ADMINISTRATIVE EXPENSES ATTRIBUTABLE TO E XEMPT INCOME. IN VIEW OF OUR ABOVE FINDINGS ON THIS ISSUE, WE SET ASIDE THE ORDER OF THE LD. CIT(APPEALS) AND PARTLY ALLOW THIS GROUND. HENCE, GROUND NO.1 RAISED IN APPEAL BY THE ASSESSEE IS PARTLY ALLOWED. THAT RESPECTFULLY FOLLOWING OUR DECISION FOR ASSESSMENT YEAR 2002 - 03 IN RESPECT OF THIS ISSUE, WE DIRECT THE ASSESSING OFFICER TO SUSTAIN % OF THE DISALLOWANCE ON A DMINISTRATIVE EXPENSES ATTRIBUTABLE TO EXEMPT INCOME (I.E 17 ITA NO.1356/PUN/2015 ITA NO.816/PUN/2017 A.Y S . 2010 - 11 & 2011 - 12 % OF RS.7,87,426/ - ) . THUS, GROUND NO.3 RAISED IN APPEAL BY THE ASSESSEE IS PARTLY ALLOWED. 24. IN THE RESULT, APPEAL OF THE ASSESSEE IN ITA NO. 1356/PUN/2015 FOR T HE ASSESSMENT YEAR 2010 - 11 IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ITA NO.816/PUN/2017 A.Y. 2011 - 12 25. BOTH THE PARTIES ARE UNANIMOUS IN SUBMITTING THAT ADDITIONAL GROUNDS AS WELL AS GROUNDS IN APPEAL MEMO RAISED IN THIS APPEAL ARE SAME AND IDENTICAL AS RAISED IN ITA NO.1356/PUN/2015 FOR THE ASSESSMENT YEAR 2010 - 11. BOTH THE PARTIES HAVE ALSO AGREED THAT THE FACTS AND CIRCUMSTANCES ARE ALSO SIMILAR. THEREFORE, WITH REGARD TO ADDITIONAL GROUND S NO.1, 2 AND 3 RAISED IN THIS APPEAL, OUR DECISION RENDERED WHILE ADJUDICATING THE ADDITIONAL GROUNDS IN ITA NO.1356/PUN/2015 FOR ASSESSMENT YEAR 2010 - 11 SHALL MUTATIS - MUTANDIS APPLY . HENCE, ALL THE ADDITIONAL GROUNDS RAISED BY THE ASSESSEE IN THIS APPEAL ARE ALLOWED MUTATIS MUTANDIS AS IN ITA NO.1356/PUN/2015 FOR ASSESSMENT YEAR 2010 - 11 . 26. BOTH THE PARTIES ALSO UNANIMOUSLY ADMITTED THAT THE GROUNDS IN APPEAL MEMO ARE ABSOLUTELY IDENTICAL AND SIMILAR AND ALSO FACTS AN D CIRCUMSTANCES WITH THE APPEAL OF ASSESSEE IN ITA NO.1356/ PUN/2015 FOR ASSESSMENT YEAR 2010 - 11. GROUND NO.1 RAISED IN THE APPEAL MEMO IN THIS APPEAL IS IDENTICAL TO GROUND NO.1 RAISED IN ITA NO.1356/PUN/201 5 FOR THE ASSESSMENT YEAR 2010 - 11. THEREFORE OUR DECISION RENDERED WHILE ADJUDICATING GROUND NO.1 IN ITA NO.1356/PUN/201 5 FOR ASSESSMENT YEAR 2010 - 11 SHALL MUTATIS MUTANDIS APPLY IN THIS APPEAL ALSO. THUS, GROUND NO.1 RAISED IN THIS APPEAL BY THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES. 18 ITA NO.1356/PUN/2015 ITA NO.816/PUN/2017 A.Y S . 2010 - 11 & 2011 - 12 27. GROUND NO.2 RAISED IN THIS APPEAL PERTAINS TO THE ADHOC DISALLOWANCE OF MISCELLANEOUS EXPENSES. THE ASSESSING OFFICER FOR WANT OF EVIDENCES IN RESPECT OF EXPENSES OF RS.2 LAKHS, DISALLOWED THE SAME. WHEREAS, THE LD. CIT(APPEALS) RESTRICTED SUCH DISALLOWANCE TO RS.1 LAKHS. 28. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED BECAUSE OF PETTINESS OF THE GRIEVA NCE, HE IS NOT PRESSING THIS GROUND. AFTER RECORDING THE SUBMISSIONS OF THE LD. COUNSEL FOR THE ASSESSEE, GROUND NO.2 IS DISMISSED AS NOT PRESSED. 29. GROUND NO.3 PERTAINS TO THE DISALLOWANCE OF RS.12,86,118/ - U/S.14A OF THE ACT. AT THE TIME OF HEARING, THE LD. COUNSEL FOR THE ASSESSEE INVITED OUR ATTENTION TO PAGE 7 OF THE PAPER BOOK COMPILATION WHEREIN THE COMPANY HAS OWNED FUNDS OF RS.649.23 CRORES AND PAGE 18 OF THE PAPER BOOK CO MPILATION REFLECTING AN INVESTMENT AS ON MARCH 31, 2010 OF RS. NIL AND THAT AS ON MARCH 31, 2011 OF RS.32 CRORES AND THEREFORE, THE ASSESSEES OWN FUNDS EXCEEDS THE INVESTMENTS MADE AND THE BORROWING S . FURTHER, THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THA T THE DISALLOWANCE TOWARDS ADMINISTRATIVE EXPENSES BEING 0.5% OF INVESTMENT YIELDING EXEMPT INCOME IS EXCESSIVE. SINCE FACTS AND ISSUE RAISED IN THIS GROUND ARE IDENTICAL TO GROUND NO.3 IN ITA NO.1356/PUN/2015 FOR THE ASSESSMENT YEAR 2010 - 11, THEREFORE, OU R DECISION RENDERED IN ITA NO.1356/PUN/2015 SHALL MUTATIS MUTANDIS APPLY FOR THIS GROUND ALSO. THUS, GROUND NO.3 RAISED IN THIS APPEAL IS PARTLY ALLOWED. 30. IN THE RESULT, APPEAL OF THE ASSESSEE IN ITA NO.816/PUN/2017 FOR THE ASSESSMENT YEAR 2011 - 12 IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. 19 ITA NO.1356/PUN/2015 ITA NO.816/PUN/2017 A.Y S . 2010 - 11 & 2011 - 12 31. IN THE COMBINED RESULT, BOTH THE APPEALS OF THE ASSESSEE ARE PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRO NOUNCED ON 25 TH DAY OF FEBR UARY , 20 2 1 . SD/ - SD/ - R.S.SYAL PARTHA SARATHI CHAUDHURY VICE PRESIDENT JUDICIAL MEMBER / PUNE; / DATED : 25 TH FEBRU ARY , 202 1 . SB / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT. 2. / THE RESPONDENT. 3. THE CIT(APPEALS) - 13, PUNE. 4. THE PR. CIT - 5, PUNE. 5 . , , , / DR, ITAT, C BENCH, PUNE. 6. / GUARD FILE. / BY ORDER, // TRUE COPY // / PRIVATE SECRETARY , / ITAT, PUNE . 20 ITA NO.1356/PUN/2015 ITA NO.816/PUN/2017 A.Y S . 2010 - 11 & 2011 - 12 DATE 1 DRAFT DICTATED ON 2 4 .02 .2021 SR.PS/PS 2 DRAFT PLACED BEFORE AUTHOR 24 .0 2 .202 1 SR.PS/PS 3 DRAFT PROPOSED AND PLACED BEFORE THE SECOND MEMBER JM/AM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER AM/JM 5 APPROVED DRAFT COMES TO THE SR. PS/PS SR.PS/PS 6 KEPT FOR PRONOUNCEMENT ON SR.PS/PS 7 DATE OF UPLOADING OF ORDER SR.PS/PS 8 FILE SENT TO BENCH CLERK SR.PS/PS 9 DATE ON WHICH THE FILE GOES TO THE HEAD CLERK 10 DATE ON WHICH FILE GOES TO THE A.R 11 DATE OF DISPATCH OF ORDER