Atul Limited, Ahmedabad V. The DY.CIT,(OSD), Ahmedabad Range-1, Ahmedabad

ITA 846/AHD/2006

• Counselvise Citation: [2009] 114 COUNSELVISE.COM (IT) 7762 (ITAT-AHMEDABAD)
• Duration Of Justice: 3 year(s) 3 month(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-07-2009
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: D
• Next Hearing Date: 26-05-2017
• Assessment Year: 2002-2003
• Appeal Filed On: 07-04-2006
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: V K GUPTA; H PATIDAR
• Assessee Lawyers: J P SHAH
• Keywords: Related party transaction; Capital asset; Depreciation; Transfer pricing; Opportunity of being heard; Principle of natural justice; Diversion of income; International transaction; Earning of tax free income; Permanent establishment; Difference of opinion; Corroborative evidences; Onus to prove; Rule 8D; Set aside
• Section: 271(1)(c); 92C; 273B; 92D; 92B; 92F; 92A; 92E; 80HHC; 14A; 80IB; 10B; 195; 80IA; 251; 80HH; 208; 192; 32; 37; 28; 144; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH D AHMEDABAD BEFORE SHRI R.P.GARG, SENIOR VICE PRESIDENT AND SHRI MAHAVIR SINGH, JUDICIAL MEMBER ITA NO.846/AHD/2006 ITA NO.253/AHD.2008 ASSESSMENT YEAR :2002-03 DATE OF HEARING:9.9.08 DRAFTED:20.1.0 9 ATUL LIMITED, 3 RD FLOOR, ASHOKA CHAMBERS, RASALA MARG, ELLISHBRIDGE, AHMEDABAD PAN NO.AABCA2390M V/S . DY. COMM.INCOME TAX (OSD) AHMEDABAD, RANGE-1, AHMEDABAD (APPELLANT) .. (RESPONDENT) APPELLANT BY: SHRI J.P.SHAH RESPONDENT BY: SHRI H. PATIDAR & SHRI V.K.GUPTA, CIT DR ITA NO.157/AHD/2007 ASSESSMENT YEAR : 2003-04 ATUL LIMITED, 3 RD FLOOR, ASHOKA CHAMBERS, RASALA MARG, ELLIS- BRIDGE, AHMEDABAD V/S . DCIT (OSD), RANGE-1, AHMEDABAD (APPELLANT) .. (RESPONDENT) ASSESSEE BY:- SHRI S.N.SOPARKAR & TUSHAR P. HEMANI REVENUE BY:- H. PATIDAR, CIT DR & SHRI V.K. GUPTA ITA NO.951/AHD/2008 ASSESSMENT YEAR:2002-03 ACIT(OSD),RANGE-1, AHMEDABAD V/S . ATUL LIMITED, ASHOKA CHAMBERS, 3 RD FLOOR, RASALA MARG, ITA NO 846/AHD/06, 171/AHD/07, 253 & 91/AHD/08 A.Y.02-03 & 03-04 ATUL LTD. V. ACIT(OSD)RNG-1, ABD PAGE 2 ELLISHBRIDGE, AHMEDABAD (APPELLANT) .. (RESPONDENT) ASSESSEE BY:- SHRI J.P. SHAH REVENUE BY:- H. PATIDAR, CIT DR & SHRI V.K. GUPTA O R D E R PER MAHAVIR SINGH, JUDICIAL MEMBER:- THESE FOUR APPEALS THREE BY THE ASSESSEE AND ONE BY REVENUE ARE ARISING OUT OF THE ORDERS OF COMMISSIONER OF INCOME-TAX (APPEALS)- V & VI AHMEDABAD IN APPEALS NO. CIT(A)-VI/DCIT(SOD)RANGE-1/84/05-06 DATED 27-02 -2006; CIT(A)VI/DC. RANGE-1/110/07-08 DATED 10-01-2008 AND CIT(A)-V/DCI T(OSD)/RANGE-1/57/06-07 DATED 22-11-2006. THE ASSESSMENTS WERE FRAMED BY T HE DCIT(OSD),RANGE-1 AHMEDABAD U/S.143(3) OF THE INCOME-TAX ACT, 1961 (H EREINAFTER REFERRED TO AS THE ACT) FOR THE ASSESSMENT YEAR 2002-03 AND 2003-04 V IDE THEIR ORDERS OF DIFFERENT DATES I.E. 04-03-2005 AND 07-03-2006. THE PENALTY UNDER DISPUTE WAS LEVIED BY THE DY. COMMISSIONER OF INCOME-TAX(OSD) RANGE-1, AHMEDA BAD U/S. 271(1)(C) OF THE ACT VIDE HIS ORDER DATED 29-03-2007 AND PARTLY CONF IRMED BY CIT(A)-VI AHMEDABAD VIDE ORDER DATED 10-01-2008. FIRST WE WILL DEAL WITH THE QUANTUM APPEALS IN ITA NO. 846/AHD/2006 AND 157/AHD/2007 (FOR THE ASSESSMENT YEARS 2002-03 AND 2003-04) 2. THE FIRST COMMON ISSUE IN THESE APPEALS OF THE A SSESSEE IS AS REGARDS TO THE ORDERS OF CIT(A) IN CONFIRMING THE THRUSTING OF DEP RECIATION, WHEN IT WAS NOT CLAIMED BY THE ASSESSEE. THE ASSESSEE HAS RAISED THE FOLLO WING GROUNDS IN RESPECTIVE APPEALS:- 1. THE LEARNED CIT(APPEALS)-VI, AHMEDABAD ERRED IN CONFIRMING THE THRUSTING OF DEPRECIATION, WHEN IT WAS SPECIFICALLY NOT CLAIM ED BY THE ASSESSEE. 1. THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACT S IN CONFIRMING THE ACTION OF AO IN REDUCING THE CLAIM OF DEPRECIATION FROM RS .37,08,10,879/- TO RS.31,05,46,778/-. ITA NO 846/AHD/06, 171/AHD/07, 253 & 91/AHD/08 A.Y.02-03 & 03-04 ATUL LTD. V. ACIT(OSD)RNG-1, ABD PAGE 3 3. AT THE OUTSET, IT WAS BROUGHT TO OUR NOTICE THAT THIS COMMON ISSUE IS RECURRING IN EVERY YEAR AND IN EARLIER ASSESSMENT YEAR 2001-0 2 IN ITA NO.3528/AHD/2004, THE D BENCH OF THIS TRIBUNAL VIDE ORDER DATED 16-05-2 008, FOLLOWING THE SPECIAL BENCH OF THIS TRIBUNAL I.E., THE AHMEDABAD SPECIAL BENCH IN THE CASE OF VAHID PAPER CONVERTERS V. ITO, VAPI WARD-4, DAMAN (2006) 98 ITD 165 (AHD) (SB), WHEREIN UNDER PARA-5 IT WAS HELD AS UNDER:- 5. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSI ONS AND, PERUSED THE MATERIAL ON RECORD. WE FIND THAT THE ISSUE INVOLVED IS DULY COVERED BY THE DECISION OF THE SPECIAL BENCH OF ITAT IN THE CASE O F VAHID PAPER CONVERTERS V. ITO, VAPI WARD-4, DAMAN (1006) 98 ITD 165 (AHD) (SB), IN WHICH IT WAS HELD AS UNDER: IT IS, THUS EVIDENT THAT FOR THE PURPOSE OF CH APTER VI-A, THE ASSESSING OFFICER HAS TO COMPUTE THE PROFITS AND GAINS OF BUS INESS SEPARATELY. OF COURSE, THE COMPUTATION HAS TO BE MADE AS PER THE PROVISION S OF THE ACT MEANING THEREBY, WHILE COMPUTING THE PROFITS AND GAINS OF T HE ELIGIBLE BUSINESS, THE ASSESSING OFFICER HAS TO GIVE EFFECT TO ALL THE REL EVANT PROVISIONS OF THE ACT, WHICH INCLUDE SECTION 32 ALSO. THEREFORE, WHILE COM PUTING THE PROFITS AND GAINS OF THE ELIGIBLE BUSINESS, THE ASSESSING OFFIC ER HAS TO GIVE EFFECT TO THE PROVISIONS OF SECTION 32 ALSO AND WORK OUT THE PROF ITS AND GAINS AFTER ALLOWING THE DEPRECIATION. IT IS TRUE THAT CERTAIN DIVISION BENCHES OF THE TRI BUNAL HAVE TAKEN THE VIEW THAT FOR COMPUTING DEDUCTION UNDER CHAPTER VI-A ALSO, IT IS THE OPTION OF THE ASSESSEE TO CLAIM THE DEPRECIATION OR NOT TO CLAIM. HOWEVER, WHEN THE VIEW CANVASSED BY THE REVENUE IS SUPPORTABLE BY THE DECI SIONS OF THE SUPREME COURT, THE JURISDICTIONAL HIGH COURT AND OTHER HIGH COURTS IN THE SENSE THAT WHILE WORKING OUT THE INCOME FOR THE PURPOSE OF CHAPTER VI-A , THE DEPRECIATION HAS TO BE DEDUCTED WHETHER OPTED TO TH E CLAIMED BY THE ASSESSEE OR NOT; AND THE VIEW CANVASSED BY THE ASSE SSEE WAS ONLY SUPPORTED BY THE DECISIONS OF THE TRIBUNAL THAT IT IS CHOICE OF THE ASSESSEE AS IN THE CASE OF NORMAL COMPUTATION OF INCOME, IT CAN NOT BE SAID THAT BOTH THE VIEWS ARE EQUALLY POSSIBLE OR REASONABLE VIEWS. THE VIEW, WHICH IS SUPPORTED BY THE DECISIONS OF THE SUPREME COURT, JURISDICTIO NAL HIGH COURT AND OTHER HIGH COURTS, HAS TO BE PREFERRED THAN THE VIEW TAKE N BY THE TRIBUNAL. THEREFORE, THE DEPRECIATION, WHICH IS THOUGH ALLOWA BLE BUT NOT CLAIMED IN THE RETURN FOR NORMAL COMPUTATION OF INCOME, HAS TO BE ALLOWED WHILE COMPUTING THE DEDUCTIONS UNDER CHAPTER VI-A VIZ., SECTIONS 80HH, 80IA, 80IB, ETC., OF AN INDUSTRIAL UNDERTAKING. RESPECTFULLY FOLLOWING THE AFORESAID DECISIONS, WE DO NOT FIND ANY ILLEGALITY OR INFIRMITY IN THE ORDER OF THE CIT(A). WE ACCORDINGL Y CONFIRM THE ORDER OF THE CIT(A) ON THIS ISSUE. THUS, THIS GROUND STANDS DI SMISSED. ITA NO 846/AHD/06, 171/AHD/07, 253 & 91/AHD/08 A.Y.02-03 & 03-04 ATUL LTD. V. ACIT(OSD)RNG-1, ABD PAGE 4 4. NOW BEFORE US BOTH THE LD. COUNSEL FOR THE ASSES SEE AND THE LEARNED DR AGREED THAT THE ISSUE IS COVERED AGAINST THE ASSESS EE AND IN FAVOUR OF THE REVENUE. WE FIND FROM THE TRIBUNALS ORDER FOR ASSESSMENT YE AR 2001-02, WHICH HAS CONFIRMED THE ORDERS OF THE LOWER AUTHORITIES ALLOWING THE DE PRECIATION. ACCORDINGLY, IN THESE TWO ASSESSMENT YEARS, THE CIT(A) AS WELL AS THE ASS ESSING OFFICER HAS ALLOWED DEPRECIATION ON CORRECT AMOUNT OF WDV AS WORKED OUT . BEFORE US NO MISTAKE IS POINTED OUT IN THE COMPUTATION OF WDV AND ACCORDING LY WE UPHOLD THE ORDER OF CIT(A). THIS COMMON ISSUE OF THE ASSESSEES APPEAL S IS DISMISSED. 5. THE NEXT ISSUE IN ITA NO.846/AHD/2006 OF ASSESSEES APPEAL IS AS REGARDS TO THE ORDER OF CIT(A) CONFIRMING THE DISALLOWANCE OF INTEREST AND ADMINISTRATIVE EXPENSES BY INVOKING THE PROVISIONS OF SECTION 14A OF THE ACT IN RESPECT TO THE EXEMPT INCOME. FOR THIS, THE ASSESSEE HAS RAISED T HE FOLLOWING GROUND:- 2. THE LEARNED CIT(APPEALS)-VI, AHMEDABAD ERRED IN CONFIRMING DISALLOWANCE OF INTEREST AND ADMINISTRATIVE EXPENSE S BY INVOKING PROVISIONS OF SECTION 14A OF THE ACT IN REGARD TO DIVIDEND INCOME . 6. WE HAVE HEARD THE RIVAL CONTENTIONS ON THIS ISSU E AND GONE THROUGH THE FACTS AND CIRCUMSTANCES OF THE CASE. AT THE OUTSET, THE LD. COUNSEL FOR THE ASSESSEE FAIRLY STATED THAT NONE OF THE AUTHORITIES BELOW HAS GONE INTO THE RULE 8D OF INCOME-TAX RULES, 1962 AS INSERTED BY THE IT (FIFTH AMDT.) RUL ES, 2008 W.E.F. 24-3-2008. ACCORDINGLY, HE REQUESTED THE BENCH TO SET ASIDE TH IS ISSUE TO THE FILE OF THE ASSESSING OFFICER TO RECONSIDER THE WHOLE ISSUE IN THE LIGHT OF RULE 8D. THE LD. DR CONCEDED THE POSITION. ACCORDINGLY, WE SET ASIDE T HIS ISSUE TO THE FILE OF THE ASSESSING OFFICER WITH THE DIRECTION TO RE-ADJUDICA TE THE SAME AFRESH IN ACCORDANCE WITH LAW AFTER PROVIDING REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. THIS ISSUE OF THE ASSESSES APPEAL IS ALLOWED FOR STATIS TICAL PURPOSES. 7. THE NEXT COMMON ISSUE IN BOTH THE APPEALS OF THE ASSESSEE IS AS REGARDS TO THE DISALLOWANCE OF DEDUCTION U/S.80IA OF THE ACT. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS IN RESPECTIVE APPEALS:- 3. THE LEARNED CIT(APPEALS)-VS, AHMEDABAD, ERRED I N NOT RECOGNIZING NEW POWER PLANT AS NEW INDUSTRIAL UNDERTAKING WHOSE PRO FITS ARE ELIGIBLE FOR DEDUCTION UNDER SECTION 80IA OF THE ACT. ITA NO 846/AHD/06, 171/AHD/07, 253 & 91/AHD/08 A.Y.02-03 & 03-04 ATUL LTD. V. ACIT(OSD)RNG-1, ABD PAGE 5 2. THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACT S IN CONFIRMING THE ACTION OF AO IN DISALLOWING THE CLAIM OF DEDUCTION U/S.80I A OF THE ACT ON THE NEW POWER PLANT. 8. AT THE OUTSET, THE LD. COUNSEL FOR THE ASSESSEE FAIRLY STATED THAT THIS ISSUE HAS BEEN DECIDED BY THE TRIBUNAL IN ITA NO.3528/AHD.2004 FOR THE ASSESSMENT YEAR 2001-02 VIDE ORDER DATED 16-05-2008 AGAINST THE ASS ESSEE. WE FIND THAT THE CIT(A) IN BOTH THE YEARS HAS RELIED ON THE APPELLATE ORDER FOR THE ASSESSMENT YEAR 2001-02 AND DECIDED THIS ISSUE FOLLOWING THE SAME. HOWEVER , THE CIT(A) IN ASSESSMENT YEAR 2003-04 HAS ALSO GIVEN A FINDING IN PARA 6.4 OF HIS APPELLATE ORDER 21-11-2006 AS UNDER:- 6.8 THUS THE ISSUE INVOLVED IS NOT THAT ANY OLD MA CHINERY WAS USED, BUT THE ISSUE IS THAT NO NEW INDUSTRIAL UNDERTAKING CAME INTO EXISTENCE. THE ABOVE POSITION CLEARLY SHOWS THAT WHAT HAS BEEN DON E IN THE NAME OF ALLEGED NEW INDUSTRIAL UNDERTAKING IS THAT THE ASSESSEE HAS PURCHASED A TURBINE AND IT HAS BEEN CLAIMED THAT TURBINE INDEPENDENTLY CAN GEN ERATE POWER AND AS SUCH THIS IS A NEW POWER PLANT. IT WAS CLAIMED THAT ASSE SSEE HAD INSTALLED NEW TURBINE AND THIS CAN BE UTILIZED BY USING STEAM FRO M OUTSIDE SOURCES AND SINCE THE ASSESSEE ALREADY HAD A BOILER, THEY HAVE CHARGED FOR CONSUMPTION OF STEAM AT THE RATE OF RS.660/- PER MT. IT APPEARS THAT THE ASSESSEE WANTS TO SAY TURBINE IN ITSELF AMOUNTS TO ESTABLISHING A NEW UNDERTAKING. THIS DOES NOT APPEAL TO REASON BECAUSE TURBINE IN ITSELF CAN NEVE R BE HELD TO BE A NEW POWER PLANT. A NEW POWER PLANT WILL HAVE SEVERAL T HINGS LIKE PROVISION FOR SUPPLY OF STEAM, TRANSMISSION LINES, CONTROLLING TO WERS AND OTHER ITEMS. SIMPLY SAYING THAT A NEW TURBINE IS A NEW INDUSTRIAL UNDER TAKING MEANS THAT IF A NEW ENGINE IS INSTALLED IN AN OLD BODY OF A CAR, THE SA ME IS CONVERTED INTO A NEW CAR. THIS EXAMPLE HAS BEEN GIVEN FOR SIMPLE AND LO GICAL UNDERSTANDING OF THE SITUATION. THE ASSESSEE HAS VEHEMENTLY CLAIMED AT THE TIME OF ASSESSMENT THAT SUPPLY OF POWER IS NOT A PART OF THE POWER PLA NT THEN TURBINE IN ITSELF CAN NEVER BE SAID TO BE A POWER PLANT BECAUSE TURBINE A LONE CAN NEVER BE A UNIT OF GENERATING POWER. AS DISCUSSED EARLIER, AS PER THE C.AS CERTIFICATE WHICH HAS BEEN REPRODUCED IN EARLIER PAT OF THE ORDER, WH ICH WAS TAKEN OUT OF ASSESSMENT ORDER, THAT THIS POWER PLAT WAS AN OLD P LANT. APART FROM THAT IT IS APPARENT THAT TURBINE IN ITSELF CANNOT BE SAID TO B E A NEW POWER PLANT, THEREFORE, THE CLAIM OF DEDUCTION U/S.80IA WAS SIMP LY WITH A VIEW TO REDUCE THE INCIDENCE OF TAX AND THE ASSESSING OFFICER AFTE R INVESTIGATION OF THE ISSUE AS RIGHTLY COME TO THE CONCLUSION THAT THE SAME CAN NOT BE TERMED AS NEW POWER PLANT. THIS GROUND IS THEREFORE DISMISSED. WE FURTHER FIND THAT THIS ISSUE IS RECURRING FROM E ARLIER YEARS AND THE TRIBUNAL IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2001-02 IN ITA NO.3528/AHD.2004 HAS HELD AGAINST THE ASSESSEE BY DISCUSSING THE FACTS A S UNDER:- 7.GROUND NOS.3 AND 4 RELATE TO THE CLAIM OF THE AS SESSEE FOR DEDUCTION U/S 80-IA IN RESPECT OF NEW POWER PLANT. THE ASSESSEE ITA NO 846/AHD/06, 171/AHD/07, 253 & 91/AHD/08 A.Y.02-03 & 03-04 ATUL LTD. V. ACIT(OSD)RNG-1, ABD PAGE 6 CLAIMED THAT DURING THE YEAR HE HAS ESTABLISHED THE NEW POWER PLANT AND ACCORDINGLY CLAIMED THE DEDUCTION ON THAT POWER PLANT U/S 80-IA OF THE ACT. WHEN QUESTIONED BY THE AO, T HE ASSESSEE VIDE LETTER DATED 9/3/2004 POINTED OUT THAT FOR GEN ERATION OF THE POWER WHAT IS REQUIRED IS TURBINE. FOR COMPOSITE PL ANT FOR GENERATION OF POWER WHAT IS REQUIRED IS BOILER AND TURBINE. BOILER MANUFACTURES THE STEAM WHICH IS THE RAW MATERIAL FO R TURBINE. TURBINE IS INDEPENDENTLY KEPT FOR GENERATING POWER. THE ASSESSEE INSTALLED NEW TURBINE WHICH ITSELF IS A NE W INDUSTRIAL UNDERTAKING CAPABLE OF GENERATING ELECTRICITY. THIS TURBINE CAN BE OPERATED BY PURCHASING STEAM FROM OUTSIDE SOURCE BU T THE ASSESSEE SINCE HAD THE SPARE CAPACITY OF STEAM USED THE SAME FOR GENERATING ELECTRICITY IN TURBINE. IT WAS POINT ED OUT THAT THE ASSESSEE HAS CHARGED FOR CONSUMPTION OF STEAM AT TH E RATE OF RS.660 PER MT. RELYING ON THE DECISION 107 ITR 195 (SC), IT WAS POINTED OUT THAT THE ASSESSEE MAY ESTABLISH A NEW U NIT FOR USING THE PRODUCT OF THE OLD BUSINESS AS ITS RAW MATERIAL . THE BUSINESS MAY ESTABLISH NEW UNIT FOR SUPPLYING RAW MATERIAL F OR ITS OLD UNIT. THE ASSESSEE MAY ESTABLISH A DIVISION OF ITS OWN PR ODUCT AS A NEW UNIT AND THE ASSESSEE MAY ESTABLISH ONE OR MORE UNITS. IT WAS ALSO POINTED OUT THAT THE AO HAS PRESUMED THAT THE EXISTING BOILER IS AN INTEGRAL PART OF THE NEW PLANT. THERE IS NO TRANSFER OF PREVIOUSLY USED PLANT AND MACHINERY AND THEREFORE T HE QUESTION OF VALUE OF PREVIOUSLY USED PLANT BEING LESS THAN 2 0% OF THE TOTAL VALUE OF THE NEW PLANT AND MACHINERY DOES NOT SURVI VE. IT WAS ALSO POINTED OUT THAT THE TOTAL VALUE OF THE PLANT AND MACHINERY USED FOR BUSINESS OF GENERATING POWER WORKS OUT TO RS.14,56,44,295/- (1827180 ON PLANT AND MACHINERY A ND 126427115 TURBINE, A NEW INDUSTRIAL UNIT). THE VALU E OF THE BOILER (PRE-EXISTING AND PRE-USED IS RS.1476600/- (PURCHAS ED SECOND- HAND ON 9-11-98). IT WAS ALSO CONTENDED THAT THE BO ILER IS NOT A PART AND PARCEL OF NEW PLANT AND MACHINERY. THE AO DID NOT AGREE WITH THE CONTENTIONS OF THE ASSESSEE THAT THE TURBINE HAS TO BE TREATED AS AN INDEPENDENT POWER GENERATING UNIT AND ULTIMATELY HE HELD THAT NEW POWER PLANT HAS BEEN ES TABLISHED BY WAY OF TRANSFER OF OLD PREVIOUSLY USED MACHINERY AN D ACCORDINGLY DID NOT ALLOW THE DEDUCTION U/S 80-IA IN RESPECT OF THIS POWER PLANT. THE ASSESSEE WENT IN APPEAL BEFORE THE CIT(A ). THE CIT(A) ALSO CONFIRMED THE FINDING OF THE AO BY HOLDING AS UNDER: 4.1 I HAVE CONSIDERED THE FINDINGS OF THE AO, SUB MISSIONS AND ARGUMENTS ADVANCED BY THE LD. COUNSEL FOR THE APPELLANT DURIN G THE COURSE OF ASSESSMENT AS WELL AS APPELLATE PROCEEDINGS AND CAS E LAWS RELIED UPON ON THE ISSUE. I FIND THAT NO INDUSTRIAL UNDERTAKING CA ME INTO EXISTENCE WITHIN THE PROVISIONS OF SECTION 80IA BY TRANSFERRING THE BOIL ER OR BY INSTALLING NEW MACHINERY FOR THE PURPOSE OF GENERATION OF POWER FO R FACTORY CONSUMPTION. I FIND THAT THIS IS NOTHING BUT AN EXERCISE TO CLAIM DEDUCTION TO REDUCE TAXABLE PROFITS. I ALSO FIND THAT THE POWER PLANT IS NOT CA PABLE TO RUN INDEPENDENTLY AND IS DEPENDENT ON THE TRANSFER OF STEAM ETC. FROM THE EXISTING PLANT. I THEREFORE HOLD THAT THE APPELLANT IS NOT ENTITLED TO CLAIM DE DUCTION U/S 80IA ON NEW ITA NO 846/AHD/06, 171/AHD/07, 253 & 91/AHD/08 A.Y.02-03 & 03-04 ATUL LTD. V. ACIT(OSD)RNG-1, ABD PAGE 7 POWER PLANT AMOUNTING TO RS.15,68,40,556/-. THIS GR OUND OF APPEAL IS THEREFORE REJECTED. 8 BEFORE US, THE LEARNED AR VEHEMENTLY CONTENDED TH AT THE INSTALLATION OF A NEW TURBINE IS A NEW INDUSTRIAL U NDERTAKING CAPABLE OF GENERATING ELECTRICITY. THIS UNDERTAKING IS BEING RUN INDEPENDENTLY. MERELY THAT THE ASSESSEE WAS USING T HE STEAM AS RAW MATERIAL FROM THE EXISTING BOILER DOES NOT MEAN THAT A NEW INDUSTRIAL UNDERTAKING HAS COME INTO EXISTENCE. THE ASSESSEE COULD HAVE BOUGHT THE STEAM FROM OUTSIDE ALSO. THE POWER AND PLANT IS A SEPARATE UNIT FROM THE BOILER. THEREFORE , THE ASSESSEE SHOULD HAVE TREATED NEW TURBINE TO BE AN INDUSTRIAL UNDERTAKING. EVEN OTHERWISE ALSO IT WAS CONTENDED THAT THE VALUE OF THE BOILER IN ANY CASE WAS LESS THAN 20% OF THE TOTAL PLANT AN D MACHINERY INSTALLED BY THE ASSESSEE. BOTH THE LEARNED AO AND THE LEARNED CIT(A) COULD NOT BE ABLE TO UNDERSTAND THAT THE POW ER CAN BE GENERATED INDEPENDENTLY. THUS, IT WAS CONTENDED THA T THE ASSESSEE WAS ENTITLED FOR THE DEDUCTION U/S 80IA. THE LEARNED DR, ON THE OTHER HAND, RELIED ON THE ORDER OF THE A O. 9 WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSION S AND PERUSED THE MATERIAL ON RECORD ALONG WITH THE ORDER OF THE TAX AUTHORITIES BELOW. THE DEDUCTION U/S 80IA IS AVAILA BLE TO AN ASSESSEE WHERE THE GROSS TOTAL INCOME OF THE ASSESS EE INCLUDES ANY PROFITS AND GAINS DERIVED BY AN UNDERTAKING OR ENTERPRISE FROM ANY ELIGIBLE BUSINESS AS REFERRED TO IN SUB-SE CTION (4). THE DEDUCTION SHALL BE ALLOWED AN AMOUNT EQUAL TO 100% OF THE PROFITS AND GAINS DERIVED FROM SUCH BUSINESS FOR TEN CONSEC UTIVE YEARS. AS PER SECTION 80IA(4) THIS SECTION APPLIES TO ANY UNDERTAKING WHICH IS SET UP IN ANY PART OF INDIA FOR THE GENERA TION OR GENERATION AND DISTRIBUTION OF POWER IF IT BEGINS T O GENERATE POWER AT ANY TIME DURING THE PERIOD BEGINNING ON THE 1ST DAY OF APRIL, 1993 AND ENDING ON THE 31ST DAY OF MARCH, 2010. SUB -SECTION (3) OF SECTION 80IA REQUIRES THAT SUCH UNDERTAKING MUST FULFILL THE CONDITIONS LAID DOWN THEREIN. THE FIRST CONDITION T HEREIN IS THAT THE UNDERTAKING SHOULD NOT BE FORMED BY SPLITTING UP, O R THE RECONSTRUCTION, OF A BUSINESS ALREADY IN EXISTENCE. THE SECOND CONDITION STATES THAT THE UNDERTAKING IS NOT FORMED BY THE TRANSFER TO A NEW BUSINESS OF MACHINERY OR PLANT PREVIOUSLY USED FOR ANY PURPOSE. EXPLANATION 2 TO THIS SUB-SECTION STATES T HAT WHERE IN THE CASE OF AN UNDERTAKING, ANY MACHINERY OR PLANT OR ANY PART THEREOF PREVIOUSLY USED FOR ANY PURPOSE IS TRANSFER RED TO A NEW BUSINESS AND THE TOTAL VALUE OF THE MACHINERY OR PL ANT OR PART SO TRANSFERRED DOES NOT EXCEED TWENTY PER CENT OF THE TOTAL VALUE OF THE MACHINERY OR PLANT USED IN THE BUSINESS, THEN, FOR THE PURPOSES OF CLAUSE (II) OF THIS SUB-SECTION, THE CO NDITION SPECIFIED THEREIN SHALL BE DEEMED TO HAVE BEEN COMPLIED WITH. THIS IS AN UNDISPUTED FACT THAT IN THIS CASE THE ASSESSEE HAS NOT TRANSFERRED THE EXISTING BOILER TO THE NEW UNDERTAKING FOR GENE RATING THE ITA NO 846/AHD/06, 171/AHD/07, 253 & 91/AHD/08 A.Y.02-03 & 03-04 ATUL LTD. V. ACIT(OSD)RNG-1, ABD PAGE 8 POWER BUT THE CONTENTION OF THE ASSESSEE IS THAT TH E SAME VERY BOILER IS BEING USED FOR SUPPLYING THE STEAM TO BOT H THE TURBINE WHICH WAS ALREADY IN EXISTENCE AND THE NEW ONE ESTA BLISHED BY THE ASSESSEE. THE CLAIM OF THE ASSESSEE IS THAT THE NEW TURBINE ESTABLISHED BY HIM ITSELF IS A NEW UNDERTAKING ENGA GED IN THE BUSINESS OF GENERATING THE POWER. NEW TURBINE ITSEL F CANNOT GENERATE POWER UNTIL AND UNLESS THE STEAM IS PROVID ED TO IT THROUGH BOILER. AN UNDERTAKING WHICH IS ELIGIBLE FO R DEDUCTION U/S 80IA, IN OUR OPINION, MUST ITSELF BE AN INDEPENDENT UNDERTAKING AND SHOULD BE ABLE TO CARRY OUT THE ACTIVITIES FOR WHICH IT HAS BEEN ESTABLISHED. THE NEW TURBINE ESTABLISHED BY TH E ASSESSEE CANNOT ITSELF GENERATE THE POWER. THE UNDERTAKING S O THAT IT MAY GENERATE THE POWER WILL BE COMPLETE ONLY WHEN BOTH NEW TURBINE AND THE BOILER ARE INSTALLED. THE ASSESSEE HAS NOT INSTALLED BOILER BUT IT IS PART OF EXISTING UNDERTAKING GENERATING T HE POWER. THIS, IN OUR OPINION, IS MERELY AN EXPANSION OF THE EXIST ING UNDERTAKING. IF THE EXISTING BOILER IS CARVED OUT FROM THE NEW T URBINE INSTALLED BY THE ASSESSEE, THE NEW TURBINE CLAIMED TO BE ELIG IBLE UNDERTAKING ITSELF CANNOT GENERATE THE POWER. NO MA TERIAL OR EVIDENCE WAS BROUGHT TO OUR KNOWLEDGE WHICH MAY PRO VE THAT THE NEW TURBINE INSTALLED BY THE ASSESSEE CAN INDEPENDE NTLY GENERATE THE POWER. THE ASSESSEE IS ALREADY HAVING THE UNDER TAKING ENGAGED IN THE BUSINESS OF GENERATING THE POWER. TH E ASSESSEE IN THIS CASE HAS MERELY ADDED A NEW TURBINE TO THE EXISTING UNDERTAKING BY WHICH HIS CAPACITY TO GENERATE THE P OWER HAS INCREASED. THIS, IN OUR OPINION, IS MERELY AN EXPAN SION OF THE EXISTING UNDERTAKING. THE NEW UNDERTAKING AS IS ELI GIBLE U/S 80IA, IN OUR OPINION, MUST BE INDEPENDENT AND INTEGRATED UNIT WHICH SHOULD BE ABLE TO CARRY ON THE ACTIVITIES OR TO CAR RY ON THE BUSINESS AS HAS BEEN STIPULATED U/S 80IA INDEPENDEN TLY. IT IS NOT THE CASE OF THE ASSESSEE THAT THE NEW UNIT ESTABLIS HED BY THE ASSESSEE HAS TAKEN THE BOILER FROM THE EXISTING UNI T FOR ITS EXCLUSIVE USE AND GENERATION OF POWER. IT IS ONLY I N THE EXISTING UNIT THE ASSESSEE HAS ADDED NEW TURBINE WHICH, IN O UR OPINION, CANNOT BE REGARDED TO BE ESTABLISHING THE NEW UNDER TAKING QUALIFYING FOR DEDUCTION U/S 80IA. WE, THEREFORE, D O NOT FIND ANY ILLEGALITY OR INFIRMITY IN THE ORDER OF THE CIT(A) IN DENYING DEDUCTION TO THE ASSESSEE U/S 80IA. THUS, GROUND NO S.3 AND 4 STAND DISMISSED. 9. AS THE TRIBUNAL HAS ALREADY DECIDED THIS ISSUE A ND THIS BEING A RECURRING ISSUE AND WHILE DECIDING THIS ISSUE, ONE OF THE MEMBERS, I.E. THE AUTHOR OF THIS ORDER, IS PARTY TO THE ORDER FOR ASSESSMENT YEAR 2001-02, THE FACTS BEING EXACTLY IDENTICAL, WE DECIDE THIS COMMON ISSUE AGAINST THE ASSESSEE. ACCO RDINGLY, THIS COMMON ISSUE OF THE ASSESSEES APPEALS IS DISMISSED. ITA NO 846/AHD/06, 171/AHD/07, 253 & 91/AHD/08 A.Y.02-03 & 03-04 ATUL LTD. V. ACIT(OSD)RNG-1, ABD PAGE 9 10. THE NEXT COMMON ISSUE IN BOTH THE APPEALS OF TH E ASSESSEE IS AS REGARDS TO THE DISALLOWANCE OF DEDUCTION U/S.80IB OF THE ACT O N ACCOUNT OF DEPB CREDIT. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS IN RESPEC TIVE APPEALS ARE UNDER:- 4. THE LEARNED CIT(APPEALS)-VS, AHMEDABAD, ERRED I N CONFIRMING THE DISALLOWANCE OF DEPB INCOME WHILE COMPUTING DEDUCTI ON U/S.80IB OF THE ACT, FORGETTING THAT THE ASSESSING OFFICER DID NOT ASK T HE ASSESSEE-COMPANY TO PROVE THAT DEPB WAS ON EXPORT OF GOODS PRODUCED IN THE PLANT ELIGIBLE TO 80IB RELIEF. 3. THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACT S IN CONFIRMING THE ACTION OF AO IN DENYING THE DEDUCTION U/S.80IB OF THE ACT ON DEPB CREDIT OF RS.4,89,81,959/-. 11. THE BRIEFLY STATED FACTS (IN ASSESSMENT YEAR 20 02-03) ARE THAT THE ASSESSEE HAS CLAIMED DEDUCTION U/S.80IB OF THE ACT ON PAA PL ANT. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER NOTIC ED FROM THE DETAILS FILED BY THE ASSESSEE THAT IT HAD WRONGLY CLAIMED DEPB BENEFIT A S A PART OF THE PROFIT FOR COMPUTATION OF DEDUCTION U/S. 80IB OF THE ACT. THE ASSESSEE ON QUERY FROM THE AO REPLIED THAT THE DEPB INCENTIVES OF RS.3,98,98,792/ - HAS BEEN RECEIVED ON ACCOUNT OF EXPORT OF PRODUCTS MANUFACTURED IN THE PLANT WHI CH IS ELIGIBLE FOR DEDUCTION U/S.80IB OF THE ACT. THE ASSESSING OFFICER RELYING ON THE DECISION OF HON'BLE APEX COURT IN THE CASE OF CIT VS. STERLING FOODS (1999) 237 ITR 579 (SC) DISALLOWED THE CLAIM OF THE ASSESSEE. SIMILARLY, THE CIT(A) RELYI NG ON THE DECISIONS OF HON'BLE APEX COURT ( AS CITED IN THE APPELLATE ORDER BY THE CIT( A) AND NOW REPRODUCED) HAS UPHELD THE ORDER OF THE AO AS UNDER:- 6.3 I HAVE CONSIDERED THE SUBMISSIONS OF THE APPEL LANT AND FACTS BROUGHT ON RECORD BY THE AO CAREFULLY. FROM THE FACTS ON RECOR D, IT IS CLEAR THAT THE APPELLANT HAS WRONGLY CLAIMED THE BENEFIT OF DEPB B ENEFIT AS A PART OF THE CREDIT THAT THE DEPB INCENTIVE WAS RECEIVED ON ACCO UNT OF EXPORT OF PRODUCTS MANUFACTURED IN THE PLANT WHICH WAS ELIGIBLE FOR DE DUCTION U/S.80IB OF THE ACT. FROM THE ABOVE FACTS, IT IS CLEAR THAT THE EXPORT I NCENTIVE IS NOT DERIVED FROM THE INDUSTRIAL UNDERTAKING. THE DEDUCTION U/S.80IB IS TO BE ALLOWED ONLY ON THE PROFITS AND GAINS DERIVED BY AN ELIGIBLE UNDERTAKIN G. THE EXPRESSION DERIVED FROM HAS A DEFINITE, BUT NARROWER MEANING AND IT C AN NOT RECEIVE A FLEXIBLE OR A WIDER CONCEPT. HON'BLE SUPREME COURT IN THE CASE OF STERLING FOODS VS. CIT 237 ITR 579 (SC) HAVE HELD THAT PROFIT FROM SALE OF IMPORT ENTITLEMENT ARE NOT PROFITS DERIVED FROM INDUSTRIAL UNDERTAKING IN THE CASE OF PANDIAN CHEMICALS VS. CIT 262 ITR 278 (SC) ALSO SIMILAR VIEW HAS BEEN TAKEN. HON'BLE DELHI HIGH COURT IN THE CASE OF CIT VS. CEMENT DISTRIBUTORS 208 ITR 355 HAS ALSO HELD THAT DEDUCTION U/S.80HH/80I IS NOT ALLOWABLE O N EXPORT ENTITLEMENT. IN VIEW OF THE ABOVE JUDGMENTS, I AGREE WITH THE AO AN D ACCORDINGLY THE AO WAS ITA NO 846/AHD/06, 171/AHD/07, 253 & 91/AHD/08 A.Y.02-03 & 03-04 ATUL LTD. V. ACIT(OSD)RNG-1, ABD PAGE 10 FULLY JUSTIFIED IN EXCLUDING THIS INCOME OF RS.3,98 ,98,792/- WHILE COMPUTING DEDUCTION U/S.80IB. THEREFORE, THIS GROUND OF THE APPELLANT IS REJECTED. 12. NOW BEFORE US THE LD. COUNSEL FOR THE ASSESSEE, SHRI J.P.SHAH AND SHRI S.N.SOPARKAR RELIED ON THE CASE LAW OF CIT V. ELTEK SGS P.LTD. (2008) 300 ITR 6 (DEL) AND ARGUED THAT THE CASE LAW CITED BY THE LOW ER AUTHORITIES ARE RELATING TO SECTION 80I OR 80IA OF THE ACT AND NOT RELATING TO SECTION 80IB OF THE ACT. BOTH THE COUNSEL STATED THAT ELTEK SGS P.LTD. (SUPRA) HAS VERY CATEGORICALLY ALLOWED THE CLAIM OF THE ASSESSEE ON DUTY DRAWBACK. ON THE OTH ER HAND, THE LD. DEPARTMENTAL REPRESENTATIVE, SHRI H. PATIDAR RELIED ON THE DECIS ION OF HON'BLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF LIBERTY INDIA V. CIT (2007) 293 ITR 520 (P&H) AND ARGUED THAT THE HON'BLE HIGH COURT HAS CLEARLY STATED THAT FOR APPLICATION OF THE WORDS DERIVED FROM THERE MUST BE A DIRECT NEXUS BETWEEN THE PROFITS AND GAINS AND THE INDUSTRIAL UNDERTAKING. ACCORDING TO HIM, THE INCO ME OF THE ASSESSEE FROM DEPB IS NOT ELIGIBLE FOR DEDUCTION IN VIEW OF LANGUAGE USED IN SECTION 80IB OF THE ACT. WE FIND THAT THE HON'BLE HIGH COURT IN THE CASE OF ELTEK SGS P. LTD. (SUPRA) HAS HELD AS UNDER:- THIS ISSUE, PARTICULARLY IN RELATION TO DUTY DRAWB ACK, CAME UP FOR CONSIDERATION IN CIT V. INDIA GELATINE AND CHEMICALS LTD. ([2005] 275 ITR 284 (GUJ). WHILE CONSIDERING THE OBJECT OF THE DUTY DRA WBACK SCHEME, THE GUJARAT HIGH COURT EXPLAINED IT IN THE FOLLOWING TERMS (PAG E 291): THE OBJECT OF THE DUTY DRAWBACK SCHEME IS TO REIMBU RSE EXPORTERS FOR TARIFFS PAID ON THE IMPORTED RAW MATERIALS AND INTE RMEDIATES AND CENTRAL EXCISE DUTIES PAID ON DOMESTICALLY PRODUCED INPUTS WHICH ENTER INTO EXPORT PRODUCTION. CUSTOMS DUTIES AND EXCISE DUTIES ON INPUTS RAISE THE COST OF PRODUCTION IN INDUSTRIES AND THER EBY AFFECT THE COMPETITIVE OF EXPORTS. THEREFORE, EXPORTERS NEED T O BE ASSISTED FOR NEUTRALIZING THE ESCALATION IN THEIR COSTS ATTRIBUT ABLE TO SUCH CUSTOMS AND EXCISE DUTIES. DUTY DRAWBACK IS, THEREFORE, IN TENDED TO REDUCE THE COST OF PRODUCTION. HENCE, DUTY DRAWBACK IS AN INT EGRAL PART OF THE PRICING OF THE GOODS AND, THEREFORE PART OF THE COS T OF PRODUCTION OF THE INDUSTRIAL UNDERTAKING AND, THEREFORE DUTY DRAWBACK HAS TO BE TREATED AS DERIVED FROM THE INDUSTRIAL UNDERTAKING. WE HAVE NO REASON TO DISAGREE WITH THE INTERPRETATI ON GIVEN BY THE GUJARAT HIGH COURT TO THE OBJECT OF THE DUTY DRAWBACK SCHEM E. WHILE DEALING WITH THE MERITS OF THE CASE, THE GUJA RAT HIGH COURT REJECTED THE CONTENTION OF THE REVENUE THAT BENEFITS UNDER THE D UTY DRAWBACK SCHEME ARE NOT DERIVED FROM THE INDUSTRIAL UNDERTAKING BUT MER ELY ATTRIBUTABLE TO IT. THE GUJARAT HIGH COURT OBSERVED AS FOLLOWS (PAGE 29 3): ITA NO 846/AHD/06, 171/AHD/07, 253 & 91/AHD/08 A.Y.02-03 & 03-04 ATUL LTD. V. ACIT(OSD)RNG-1, ABD PAGE 11 THE OBJECT OF THE DUTY DRAWBACK IS TO REIMBURSE CU STOMS DUTIES AND EXCISE DUTIES PAID BY THE ASSESSEE. AS CUSTOMS DUTI ES AND EXCISE DUTIES AND ADMITTEDLY AN INTEGRAL PART OF THE COST OF PRODUCTI ON ANY RECEIPTS BY WAY OF REIMBURSEMENT OF SUCH DUTIES ARE INEXTRICABLY LINKE D WITH THE COST OF PRODUCTION WHICH HAS TO BE REFLECTED IN THE PROFIT AND LOSS ACCOUNT OF THE ASSESSEE AND, THEREFORE, THE REVENUES ARGUMENT CAN NOT BE ACCEPTED FURTHER, THE HON'BLE HIGH COURT HELD AS UNDER:- CONSEQUENTLY, WE ARE OF THE VIEW THAT THE SOURCE O F THE DUTY DRAWBACK IS THE BUSINESS OF THE INDUSTRIAL UNDERTAKING WHICH IS TO MANUFACTURE AND EXPORT GOODS OUT OF RAW MATERIAL THAT IS IMPORTED AND ON W HICH CUSTOMS DUTY CUSTOMS ACT, 1962 READ WITH THE RELEVANT NOTIFICATI ON ISSUED BY THE CENTRAL GOVERNMENT IN THAT REGARD. LEARNED COUNSEL FOR THE REVENUE ALSO DREW OUR ATTEN TION TO PANDIAN CHEMICALS LTD. V. CIT [2003] 262 ITR 278 (SC). HOWEVER, ON A READING OF THE JUDGMENT WE FIND THAT THAT ALSO DEALS WITH SECTION 80HH OF THE ACT AND DOES NOT LAY DOWN ANY PRINCIPLE DIFFERENT FROM STERLING FOODS [1999] 237 ITR 579 (SC). IN FACT, IN PANDIAN CHEMICALS [2003] 262 ITR 278 (SC) RELIANCE HAS BEEN PLACED ON CAMBAY ELECTRIC SUPPLY INDUSTRIAL CO. LTD. [1978] 113 ITR 84 (SC) AND THE DECISION SEEMS TO SUGGEST, AS WE HAVE HELD ABOVE, THAT THE EXPRESSION DERIVED FROM AN INDUSTRIAL UNDERTAKING IS A STEP REMOVED FROM THE BUSINESS OF THE INDUSTRIAL UNDERTAKING. WE FIND THAT THE HON'BLE DELHI HIGH COURT IN THE CA SE OF ELTEK SGS P.LTD. (SUPRA) HAS ALLOWED THE CLAIM ON DUTY DRAWBACK. SINCE THIS HIGH COURT IS IN FAVOUR OF THE ASSESSEE AND ONE HIGH COURT I.E., HON'BLE PUNJAB AN D HARYANA HIGH COURT AGAINST THE ASSESSEE, APPLYING THE CASE LAW OF HON'BLE APEX COURT IN THE CASE OF CIT V. VEGETABLE PRODUCTS LTD. (1973) 88 ITR 192 (SC), THE BENEFICIAL VIEW, WHICH IS IN FAVOUR OF THE ASSESSEE IS TO BE ADOPTED. RESPECTFU LLY FOLLOWING, THE ABOVE, WE ALLOW THE CLAIM OF THE ASSESSEE AND THIS COMMON ISSUE IN BOTH THE APPEALS OF THE ASSESSEE IS ALLOWED. 13. THE NEXT ISSUE IN ITA NO.846/AHD/ 2006, THE APPEAL OF THE ASSESSEE IS AS REGARDS TO THE DISALLOWANCE OF DEDUCTION ON THE AMO UNT OF DEDUCTION U/S 80IA AND 80IB OF THE ACT TO BE REDUCED WHILE CALCULATING THE DEDUCTION U/S 80HHC OF THE ACT. THE ASSESSEE HAS RAISED THE FOLLOWING GROUND IN THI S APPEAL :- 5. THE LEARNED CIT(APPEALS)-VS, AHMEDABAD ERRED IN CONFIRMING THAT THE AMOUNT OF DEDUCTION U/S.80IA AND 80IB BE REDUCED WH ILE CALCULATING THE AMOUNT OF DEDUCTION U/S.80HHC AND IN UPHOLDING BOTH CALCULATION OF 80HC RELIEF BY ASSESSING OFFICER. ITA NO 846/AHD/06, 171/AHD/07, 253 & 91/AHD/08 A.Y.02-03 & 03-04 ATUL LTD. V. ACIT(OSD)RNG-1, ABD PAGE 12 14. AT THE OUT SET IT IS NOTICED THAT THE ISSUE IS SQUARELY COVERED BY THE DECISION OF SPECIAL BENCH OF THIS TRIBUNAL OF MADRAS BENCHES IN THE CASE OF ACIT V. ROGINI GARMENTS (2007) 294 ITR 15 (AT), (CHENNAI) (SB), WHEREIN I T IS HELD AS UNDER:- FROM THE ABOVE, IT IS CLEAR THAT IF RESTRICTIVE CL AUSE NOT IN THE SAME SECTION BUT ION SOME OTHER PROVISION, IS CLEARLY SHOWING TH E MENS LEGIS IT HAS TO BE GIVEN FULL EFFECT. THEREFORE, IF RESTRICTION IS PL ACED ON THE CLAIM OF REPETITIVE DEDUCTION IN SECTION 80IA(9) AND IS MADE APPLICABLE IN RESPECT OF ALL DEDUCTIONS UNDER CHAPTER VI-A, THEN THIS RESTRICTIO N IS TO BE APPLIED. SINCE THE WORDINGS USED ARE ANY OTHER DEDUCTIONS UNDER CHAPT ER VI-A FULL EFFECT IS TO BE GIVEN TO THIS PROVISION AND WHENEVER AN ASSESSEE WANTS TO CLAIM DEDUCTION UNDER SECTION 80-IA(9) RESTRICTION IS TO BE READ IN EVERY OTHER PROVISION PROVIDING FOR DEDUCTION UNDER CHAPTER VI- A. APROPOS THE ARGUMENT THAT THE PROVISION IS COUCHED WITH AMBIGUITIES, AND THEREFORE THE SPIRIT OF THE ACT IS TO BE SEEN AND J USTICE BE DONE WE FIND THAT THE FREEDOM FOR THE SEARCH OF THE SPIRIT OF THE ACT OR THE MISCHIEF AT WHICH IT IS AIMED OPENS THE POSSIBILITY OF LIBERAL INTERPRETATI ON. THIS FINER ASPECT CANNOT BE NARROWLY WATCHED. IT IS THAT DELICATE AND IMPORT ANT BRANCH OF JUDICIAL POWER, THE CONCESSION OF WHICH IS DANGEROUS BUT THE DENIAL IS DISASTROUS. AT ONE STREAM STANDS LORD DENNING WHO SAID : WE DO NOT SIT HERE TO PULL THE LANGUAGE OF PARLIAMENT TO PIECES AND MAKE NON-SENSE OF IT. THAT IS AN EASY THING TO DO. WE SIT HERE TO FIND OUT THE INTENTION OF PARLIAMENT AND CARRY IT OUT. WE DO THIS BETTER BY FILLING IN THE GAPS AND MAKING SENSE OF THE ENACTMENT THAN BY OPENING TO DESTRUCTIVE ANALYSIS. VISCOUNT SIMONDS CALLED IT A NAKED USURPATION OF THE LEGISLATIVE FUNCTION UNDER THE TH ING GUISE OF INTERPRETATION. IN OUR OPINION, THE INTENTION OF LEGISLATURE IS A V ERY SLIPPERY PHASE. WHEN THE LANGUAGE OF THE STATUTE IS TRANSPARENTLY PLAIN, IT IS WRONG TO GIVE IT COLOUR ACCORDING TO THE TEMPER OF TIME. WHEN THE LANGUAGE IMPLIED BY THE ENACTMENT IS CLEAR, THERE IS NO QUESTION OF INTERPRETING THE PROVISIONS IN ANY MANNER EXCEPT BY GIVING THEM THEIR PLAIN AND OBVIOUS MEANI NG. NEBULOUS CONCEPT OF THE LEGISLATIVE INTENT CANNOT BE USED TO CURTAIL TH E EXPLICIT PROVISIONS IN A STATUTE. A STATUTE OR ANY ENACTING PROVISIONS THERE IN MUST BE SO CONSTRUED SO AS TO MAKE IT EFFECTIVE AND OPERATIVE ON THE PRINCI PLE EXPRESSED IN THE MAXIM, UT RES MAGIS VALEAT QUAM PEREAT. THERE IS NO SCOPE FOR IMPORTING INTO THE STATUTE IS THE EDICT OF THE LEGISLATURE AND THE DUT Y OF THE JUDICATURE IS TO ACT UPON THE SENTETIA LEGIS. THERE IS NO ESTOPPEL AGAIN ST THE STATUTE. WE HAVE GONE THROUGH THE CIRCULAR RELIED ON BY LEAR NED COUNSEL FOR THE ASSESSEE. IT NOWHERE SUGGESTS THAT MORE THAN 100 PE R CENT DEDUCTION ON THE SAME PROFIT CAN BE GRANTED TO THE ASSESSEE UNDER VA RIOUS SECTIONS ENUMERATED IN CHAPTER VI-A. SECTION 80HHC IS PART O F CHAPTER VI-A. THE HON'BLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT V. SHARON VANEERS P.LTD.[2007] 294 ITR 18 (MAD.) (T.C.(A) NO.62 OF 20 04 DATED FEBRUARY 26, 2007) , HAS MADE IT CLEAR THAT IT IS NOT CORRECT TO SAY T HAT SECTION 80HHC OF THE ACT IS A SELF-CONTAINED PROVISION. THE DEDUCTION CA NNOT BE ALLOWED IGNORING THE RESTRICTIVE CLAUSE CONTAINED IN SECTION 80-IA(9 ). THE RESTRICTIVE CLAUSE IN ITA NO 846/AHD/06, 171/AHD/07, 253 & 91/AHD/08 A.Y.02-03 & 03-04 ATUL LTD. V. ACIT(OSD)RNG-1, ABD PAGE 13 SECTION 80-IA MAKES IT ABUNDANTLY CLEAR THAT WHEREV ER DEDUCTION UNDER ANY OTHER SECTIONS OF CHAPTER VI-A(C) IS CLAIMED, THE C OMPUTATION WILL BE SUBJECT TO THE RESTRICTIONS LAID DOWN IN SECTION 80-IA(9). IT PRECLUDES PRO TANTO, ALL THE DEDUCTIONS OF SUCH PROFITS AND GAINS CLAIMED UNDER CHAPTER VI-A(C). SECTION 80HHC IS A PART OF CHAPTER VI-A(C). IT IS NOT A SE LF-CONTAINED PROVISION. THERE IS ABSOLUTELY NO AMBIGUITY ON THIS ASPECT. WE ARE THEREFORE OF THE OPINION THAT RELIEF UNDER SECTION 80-IA SHOULD BE D EDUCTED FROM THE PROFITS AND GAINS OF THE BUSINESS BEFORE COMPUTING RELIEF UNDER SECTION 80HHC OF THE ACT. THE LD. COUNSEL FOR THE ASSESSEE RELIED ON THE CASE LAW OF HONBLE MADRAS HIGH COURT IN THE CASE OF M/S. SCM CREATIONS VS. ACIT IN TAX CASE APPEAL NOS. 310 AND 311 OF 2008, WHEREIN BEFORE THE HONBLE HIGH COURT THE QUESTION REFERRED READS AS UNDER:- 3. THE ISSUE INVOLVED IN THESE TWO APPEALS ARE WHE THER THE RELIEF UNDER SECTION 80IA SHOULD BE DEDUCTED FROM PROFITS AND GA INS OF BUSINESS BEFORE COMPUTING RELIEF UNDER SECTION 80HHC. THE HONBLE MADRAS HIGH COURT RELYING ON THE HONBL E MADHYA PRADESH HIGH COURT IN J.P. TOBACCO PRODUCS P. LTD .VS. CIT (1998) 229 ITR 123 (MP), AGAINST WHICH THE SL:P WAS DISMISSED BY THE HONBLE APEX COURT RE PORTED IN (2001) 247 ITR (ST) 36 HAS ALLOWED THE CLAIM OF THE ASSESSEE VIDE PARA- 5 WHICH READS AS UNDER:- 5. FOLLOWING THE SAME, THE APPEALS ARE ALLOWED TO THE EXTENT INDICATED ABOVE. CONSEQUENTLY, CONNECTED MISCELLANEOUS PETITIONS ARE CLOSED. NO COSTS. FROM THE ABOVE REFERRED CASE LAW OF THE HONBLE MAD RAS HIGH COURT IN THE CASE OF M/S. SCM CREATIONS (SUPA), IT IS NOTICED THAT, THE AMENDMENT BROUGHT O UT IN CHAPTER VIA OF THE ACT AND INTRODUCTION OF SECTION 80IA(9) WAS NOT BROUGHT TO THE NOTICE OF THE HONBLE HIGH COURT. THE HONBLE SPEC IAL BENCH OF CHENNAI IN THE CASE OF ROGINI GARMENTS (SUPA) HAS ALREADY CONSIDERED TH E CASE LAW OF J.P. TOBACCO PRODUCTS P.LTD. (SUPRA) AND HAS ALSO CONSIDERED THE AMENDED PROVISIONS OF SECTION 80IA(9) OF THE ACT. RESPECTFULLY FOLLOWING THE SPE CIAL BENCH OF CHENNAI IN THE CASE OF R OGINI GARMENTS (SUPRA), WHICH NOW STANDS CONFIRMED BY A FIVE MEMB ERS SPECIAL BENCH, DELHI, WE ARE OF THE VIEW THAT RELIEF UNDER SECTION 80-IA SHOULD BE DEDUCTED FROM THE PROFITS AND GAINS OF THE BUSINESS BEFORE C OMPUTING RELIEF UNDER SECTION 80HHC OF THE ACT. ACCORDINGLY, THIS ISSUE OF THE A SSESSEES APPEAL IS DECIDED ITA NO 846/AHD/06, 171/AHD/07, 253 & 91/AHD/08 A.Y.02-03 & 03-04 ATUL LTD. V. ACIT(OSD)RNG-1, ABD PAGE 14 AGAINST THE ASSESSEE AND IN FAVOUR OF THE REVENUE. ACCORDINGLY, THIS ISSUE OF THE ASSESSEES APPEAL IS DISMISSED. 15. THE NEXT ISSUE IN ITA NO.846/AHD/2006, THE APPEAL OF THE ASSESSEE IS AGAINST THE ORDER OF CIT(A) IN INCLUDING THE EXCISE DUTY IN THE TOTAL TURNOVER FOR THE PURPOSES COMPUTATION OF DEDUCTION U/S.80HHC OF THE ACT. THE ASSESSEE HAS RAISED THE FOLLOWING GROUND IN THIS APPEAL:- 6. THE LEARNED CIT(APPEALS)-VS, AHMEDABAD, ERRED I N CONFIRMING THAT EXCISE DUTY IS PART OF TOTAL TURNOVER FOR THE PURPOSE OF C ALCULATION OF DEDUCTION U/S.80HHC OF THE ACT. 16. AT THE OUT SET, IT IS NOTICED THAT THE ISSUE IS SQUARELY COVERED IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE BY THE DECISION OF HONBLE APEX COURT IN THE CASE OF CIT VS. LAKSHMI MACHINE WORKS (2007) 290 IT R 667 (SC), WHEREIN THE HONBLE APEX COURT HAS HELD AS UNDER:- 6. THE LEARNED CIT(APPEALS)-V, AHMEDABAD ERRED IN CONFIRMING THAT EXCISE DUTY IS PART OF TOTAL TURNOVER FOR THE PURPOSE OF C ALCULATION OF DEDUCTION U/S.80HHC OF THE ACT. IN FACT, IN CIVIL APPEAL NO.4409 OF 2005, THE ABOV E PROPOSITION HAS BEEN ACCEPTED BY THE ASSESSING OFFICER [SEE : PAGE NO.24 OF THE PAPER BOOK] , IF SO, THEN EXCISE DUTY AND SALES TAX ALSO CANNOT FORM PAR T OF THE TOTAL TURNOVER UNDER SECTION 80HHC(3), OTHERWISE THE FORMULA BECOM ES UNWORKABLE. IN OUR VIEW, SALES TAX AND EXCISE DUTY ALSO DO NOT HAVE AN Y ELEMENT OF TURNOVER WHICH IS THE POSITION EVEN IN THE CASE OF RENT, COM MISSION, INTEREST ETC., IT IS IMPORTANT TO BEAR IN MIND THAT EXCISE DUTY AND SALE S TAX ARE INDIRECT TAXES. THEY ARE RECOVERED BY THE ASSESSEE ON BEHALF OF THE GOVERNMENT. THEREFORE, IF THEY ARE MADE RELATABLE TO EXPORTS, THE FORMULA UNDER SECTION 80HHC WOULD BECOME UNWORKABLE. THE VIEW WHICH WE HAVE TAKEN IS IN THE LIGHT OF THE AMENDMENTS MADE TO SECTION 80HHC FROM TIME TO TIME. AS THE ISSUE IS SQUARELY COVERED IN FAVOUR OF THE A SSESSEE, WE ALLOW THIS ISSUE OF THE ASSESSEES APPEAL. ACCORDINGLY, THIS ISSUE OF THE A SSESSEES APPEAL IS ALLOWED. 17. THE NEXT ISSUE IN ITA NO.846/AHD/2006 , THE APPEAL OF THE ASSESSEE IS AS REGARDS TO INTEREST CAPITALIZATION AND NOT ALLOWING DEDUCTION OF SUCH INTEREST. THE ASSESSEE HAS RAISED THE GROUND AS UNDER:- 7. THE LEARNED CIT(APPEALS)-V, AHMEDABAD ERRED IN HOLDING THAT THE INTEREST CAPITALIZED IS A PART OF CAPITAL ASSET AND IS NOT A LLOWING DEDUCTION OF SUCH INTEREST. ITA NO 846/AHD/06, 171/AHD/07, 253 & 91/AHD/08 A.Y.02-03 & 03-04 ATUL LTD. V. ACIT(OSD)RNG-1, ABD PAGE 15 18. AT THE OUTSET, LD. COUNSEL FOR THE ASSESSEE FAI RLY STATED THAT THE ISSUE IS SQUARELY COVERED BY THE DECISIONS OF HON'BLE APEX C OURT IN THE CASE OF DCIT V. CORE HEALTH CARE LTD. [2008] 298 ITR 194 (SC) AND MUNJAL SALES CORPORATION V. CIT AND ANOTHER (2008) 298 ITR 298 (SC) WHEREIN THIS ISSUE WAS DEC IDED BY FOLLOWING THE CASE LAW OF HONBLE JURISDICTIONAL HIGH COURT IN TH E CASE OF DCIT V. CORE HEALTHCARE LTD. [2001] 251 ITR 61 (GUJ) EVEN THE HONBLE APEX COUR T HAS AFFIRMED THE DECISION OF HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF DCIT V. CORE HEALTH CARE LTD. [2008] 298 ITR 194 (SC), WHEREIN IT IS HELD AS UNDE R:- INTEREST ON MONEYS BORROWED FOR THE PURPOSES OF BU SINESS IS A NECESSARY ITEM OF EXPENDITURE IN A BUSINESS. FOR ALLOWANCE O F A CLAIM FOR DEDUCTION OF INTEREST UNDER THE SAID SECTION, ALL THAT IS NECESS ARY IS THAT, FIRSTLY, THE MONEY, I.E., CAPITAL, MUST HAVE BEEN BORROWED BY THE ASSES SEE ; SECONDLY, IT MUST HAVE BEEN BORROWED FOR THE PURPOSE OF BUSINESS ; AN D, THIRDLY, THE ASSESSEE MUST HAVE PAID INTEREST ON THE BORROWED AMOUNT (SEE CALICO DYEING AND PRINTING WORKS V. CIT [1958] 34 ITR 265 (BOM). ALL THAT IS GERMANE IS : WHETHER THE BORROWING WAS, OR WAS NOT, FOR THE PURP OSE OF BUSINESS. THE EXPRESSION FOR THE PURPOSE OF BUSINESS OCCURRING IN SECTION 36(1)(III) INDICATES THAT ONCE THE TEST OF FOR THE PURPOSE OF BUSINESS IS SATISFIED IN RESPECT OF THE CAPITAL BORROWED, THE ASSESSEE WOULD BE ENTITLED TO DEDUCTION UNDER SECTION 36(1)(III) OF THE ACT. THIS PROVISIO N MAKES NO DISTINCTION BETWEEN MONEY BORROWED TO ACQUIRE A CAPITAL ASSET O R A REVENUE ASSET. ALL THAT THE SECTION REQUIRES IS THAT THE ASSESSEE MUST BORROW CAPITAL AND THE PURPOSE OF THE BORROWING MUST BE FOR BUSINESS WHICH IS CARRIED ON BY THE ASSESSEE IN THE YEAR OF ACCOUNT. WHAT CLAUSE (III) EMPHASIZES IS THE USER OF THE CAPITAL AND NOT THE USER OF THE ASSET WHICH COM ES INTO EXISTENCE AS A RESULT OF THE BORROWED CAPITAL UNLIKE SECTION 37 WH ICH EXPRESSLY EXCLUDES AN EXPENSE OF A CAPITAL NATURE. THE LEGISLATURE HAS, THERE4FORE, MADE NO DISTINCTION IN SECTION 36(1)(III) BETWEEN CAPITAL BORROWED FOR A REVENUE PURPOSE AND CAPITAL BORROWED FOR A CAPITAL PURPOS E. AN ASSESSEE IS ENTITLED TO CLAIM INTEREST PAID ON BORROWED CAPITAL PROVIDED THAT CAPITAL IS USED FOR BUSINESS PURPOSE IRRESPECTIVE OF WHAT MAY BE THE RE SULT OF USING THE CAPITAL WHICH THE ASSESSEE HAS BORROWED. FURTHER, THE WORD S ACTUAL COST DO NOT FIND PLACE IN SECTION 36(1)(III) OF THE 1961 ACT WH ICH OTHERWISE FIND PLACE IN SECTIONS 32, 32A, ETC., OF THE 1961 ACT. THE EXPRES SION ACTUAL COST IS DEFINED IN SECTION 43(1) OF THE 1961 ACT WHICH IS ESSENTIAL LY A DEFINITION SECTION WHICH IS SUBJECT TO THE CONTEXT TO THE CONTRARY. AND IN THE CASE OF MUNJAL SALES CORPORATION (SUPRA), WHEREIN THE HEAD-NOTE IS EXTRACTED HEREIN:- UNDER THE INCOME-TAX ACT, 1961, AFTER AMENDMENT OF THE ACT BY THE FINANCE ACT, 1992, IN ORDER THAT INTEREST PAID ON BORROWING S CAN BE ALLOWED AS A DEDUCTION IN COMPUTING THE BUSINESS PROFITS, EVERY ASSESSEE, INCLUDING A FIRM, HAS TO ESTABLISH, IN THE FIRST INSTANCE, THAT IT WA S ALLOWABLE UNDER SECTION ITA NO 846/AHD/06, 171/AHD/07, 253 & 91/AHD/08 A.Y.02-03 & 03-04 ATUL LTD. V. ACIT(OSD)RNG-1, ABD PAGE 16 36(1)(III); AND, IN THE CASE OF A FIRM, FURTHER THA T THE AMOUNT DOES NOT EXCEED THE LIMIT FIXED BY SECTION 40(B)(IV). HELD, HOWEVER, ON THE FACTS, IN THIS CASE, THAT SINCE TH E ASSESSEE HAD BORROWED THE MONEYS FROM ITS PARTNERS AS EARLY AS 1 991, AND THE APPELLATE TRIBUNAL HAD HELD THAT THE LOANS WERE GIVEN BY THE PARTNERS FOR BUSINESS PURPOSES AND THE INTEREST DID NOT EXCEED 18 PER CEN T, PER ANNUM SIMPLE INTEREST, THE ASSESSEE-FIRM WAS ENTITLED TO DEDUCTI ON OF INTEREST ON THE BORROWINGS FOR THE ASSESSMENT YEARS 1993-94 TO 1997 -98. HELD ALSO, THAT SINCE THE OPENING BALANCE OF THE PROFIT S OF THE ASSESSEE-FIRM AS ON APRIL 1, 1994, WAS RS.1.91 CRORES, AND THE PR OFITS WERE SUFFICIENT TO COVER THE LOAN GIVEN TO A SISTER CONCERN OF RS.5 LA KHS ONLY, THE APPELLATE TRIBUNAL OUGHT TO HAVE HELD THAT THE LOAN GIVEN WAS FROM THE ASSESSEES OWN FUNDS. AS THE ISSUE IS SQUARELY COVERED BY THE DECISIONS O F HON'BLE APEX COURT IN THE CASE OF CORE HEALTH CARE LTD. AND MUNJAL SALES CORPORATION (SUPRA) , RESPECTFULLY FOLLOWING THE DECISIONS OF HON'BLE APEX COURT WE AL LOW THE CLAIM OF THE ASSESSEE AND THIS ISSUE OF THE ASSESSEES APPEAL IS ALLOWED. 19. THE NEXT ISSUES IN ITA NO.157/AHD/2007 , THE APPEAL OF THE ASSESSEE IS AS REGARDS TO REDUCE PROFITS OF THE BUSINESS ON ACCOUN T OF SALE PROCEEDS OF DEPB LICENSE WHILE CALCULATING DEDUCTION U/S.80HHC OF TH E ACT. THE ASSESSEE HAS RAISED THE GROUNDS AS UNDER:- 10. THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FAC TS IN REDUCING PROFITS OF THE BUSINESS ON ACCOUNT OF SALE PROCEEDS OF DEPB LI CENSE WHILE CALCULATING DEDUCTION U/S.80HHC OF THE ACT WITHOUT APPRECIATING THE CLAIM OF THE APPELLANT UNDER THE AMENDED PROVISIONS OF S. 80HHC OF THE ACT . 11. ALTERNATIVELY AND WITHOUT PREJUDICE, ONLY 90% OF THE PROFITS AND NOT THE ENTIRE SALE PROCEEDS OF DEPB LICENSE COULD HAVE BEE N REDUCED FROM THE PROFITS OF THE BUSINESS. 12. ALTERNATIVELY AND WITHOUT PREJUDICE, IF PROFIT ON SALE OF DPB LICENSE IS NOT FALLING WITHIN THE PURVIEW OF S.28(IIIA)(IIIB)(IIIC ) OF THE ACT, THE SAME IS NOT LIABLE TO TAX AT ALL AND THEREFORE THE SAME HAS TO BE REDU CED FROM THE TAXABLE INCOME OF THE APPELLANT. 13. ALTERNATIVELY AND WITHOUT PREJUDICE, EVEN AS P ER THE PROVISIONS OF TAXATION LAWS (SECOND AMENDMENT) ACT, 2005, THE SAI D DEPB SALE PROCEED IS ELIGIBLE FOR DEDUCTION U/S.80HHC OF THE ACT. 14. ALTERNATIVELY AND WITHOUT PREJUDICE LD. CIT(A) FAILED TO APPRECIATE THAT THE SAID SALE PROCEEDS OF THE DEPB LICENSE ARE COVERED BY 28(IV) OF THE ACT AND ITA NO 846/AHD/06, 171/AHD/07, 253 & 91/AHD/08 A.Y.02-03 & 03-04 ATUL LTD. V. ACIT(OSD)RNG-1, ABD PAGE 17 THEREFORE DEDUCTION U/S.80HHC OF THE ACT OUGHT TO H AVE BEEN ALLOWED FULLY ON THE SAME. 15. BOTH THE LOWER AUTHORITIES HAVE PASSED THE RES PECTIVE ORDERS WITHOUT PROPERLY APPRECIATING THE FACT AND THAT THEY FURTHE R ERRED IN GROSSLY IGNORING VARIOUS SUBMISSIONS, EXPLANATIONS AND INFORMATION S UBMITTED BY THE APPELLANT FROM TIME TO TIME WHICH OUGHT TO HAVE BEEN CONSIDER ED BEFORE PASSING THE IMPUGNED ORDER. 20. AT THE OUTSET, IT IS NOTICED THAT THIS ISSUE RE LATES TO COMPUTATION OF DEDUCTION U/S.80HHC VIS--VIS THE INCOME FROM DEPB. THE LD. COUNSEL FOR THE ASSESSEE CONTENDED THAT THIS ISSUE CAN BE RESTORED BACK TO T HE FILE OF THE AO IN VIEW OF THE AMENDMENT AS BROUGHT BY TAXATION LAWS (AMENDMENT) A CT, 2005 W.E.F 1-4-1998 BY VIRTUE OF WHICH CLAUSE (IIID) IS INSERTED IN SECTIO N 28 AND ALSO SECOND , THIRD AND FOURTH PROVISOS AS INSERTED BY THIS AMENDMENT. THE LD. COUNSEL FOR THE ASSESSEE STATED THAT NEITHER OF THE AUTHORITIES BELOW HAS GO NE INTO THE AMENDED PROVISIONS AND ACCORDINGLY THIS ISSUE CAN BE SET ASIDE TO THE FILE OF THE ASSESSING OFFICER. THE DR ALSO CONCEDED THIS POSITION. ACCORDINGLY, WE SE T ASIDE THIS ISSUE TO THE FILE OF THE AO WITH THE DIRECTION THAT THE AO SHALL RECOMPUTED THE DEDUCTION U/S.80HHC OF THE ACT, IN VIEW OF THE AMENDMENT BY THE TAXATION LAWS (AMENDMENT) ACT, 2005 W.E.F 1- 4-1998, AFTER GIVING PROPER AND REASONABLE OF BEING HEARD TO THE ASSESSEE. ACCORDINGLY, THIS ISSUE OF THE ASSESSEES APPEAL IS ALLOWED FOR STATISTICAL PURPOSES. 21. THE NEXT COMMON ISSUE IN BOTH THE APPEALS OF TH E ASSESSEE IS AS REGARDS TO THE ORDERS OF CIT(A) CONFIRMING THE ADDITION ON ACC OUNT OF TRANSFER PRICING ADJUSTMENT. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS IN RESPECTIVE APPEALS ARE UNDER:- 8. THE LEARNED CIT(APPEALS)-V, AHMEDABAD ERRED IN CONFIRMING THE ADDITION OF INCOME ON ACCOUNT OF TRANSFER PRICING A DJUSTMENT. 4. THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACT S IN CONFIRMING THE ACTION OF AO IN ADDING RS.1,80,62,067/- ON ACCOUNT OF ADJU STMENTS TO THE ARMS LENGTH PRICE WITHOUT THERE BEING ANY JURISDICTION A S WELL AS LEGAL AND FACTUAL BASIS FOR THE SAME. 5. THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACT S IN CONFIRMING THE ACTION OF AO IN INVOKING THE PROVISIONS OF CHAPTER X WITHO UT PRIMA FACIE DEMONSTRATING THAT THERE WAS SOME TAX AVOIDANCE. ITA NO 846/AHD/06, 171/AHD/07, 253 & 91/AHD/08 A.Y.02-03 & 03-04 ATUL LTD. V. ACIT(OSD)RNG-1, ABD PAGE 18 6. THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACT S IN CONFIRMING THE ACTION OF AO IN MAKING A REFERENCE TO THE TRANSFER PRICING OFFICER (TOP) U/S.92C(3) R.W.S. 92CA(1) OF THE ACT WITHOUT PROVIDING AN OPPO RTUNITY OF BEING HEARD TO THE APPELLANT. 7. IN ANY CASE THE WHOLE REFERENCE AND THE CONSEQU ENT ORDERS ARE BAD AND ILLEGAL BECAUSE THE ALLEGED APPROVAL GRANTED BY CIT U/S.92C(1) OF THE ACT IS VITIATED IN LAW FIRSTLY BECAUSE THE APPELLANT WAS N OT HEARD BEFORE ANY SUCH APPROVAL AND SECONDLY BECAUSE THE SAME HAS BEEN GRA NTED MECHANICALLY, WITHOUT ANY APPLICATION OF MIND AND WITHOUT DUE DIL IGENCE. 8. THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACT S IN CONFIRMING THE ACTION OF AO IN REFERRING THE CASE OF THE APPELLANT TO THE TRANSFER PRICING OFFICER. UNDER THE FACTS AND CIRCUMSTANCES OF THE CASE, THER E WAS NO REASONS TO INTERFERE WITH THE PRICING AS WELL AS METHOD THEREO F ADOPTED BY THE APPELLANT AS THE SAME IS FALLING WITHIN THE PARAMETERS OF TRA NSFER PRICING LAID DOWN UNDER THE SCHEME OF THE ACT. 9. ALTERNATIVELY AND WITHOUT PREJUDICE, THE LEARNE D CIT(A) HAS ERRED IN LAW AND ON FACTS IN CONFIRMING THE ORDER OF THE ADDITIO NAL COMMISSIONER OF INCOME TAX ACTING AS TRANSFER PRICING OFFICER WHICH IS WIT HOUT JURISDICTION AND AGAINST THE EXPRESS PROVISIONS OF LAW INASMUCH AS ADDITIONA L COMMISSIONER OF INCOME TAX COULD NOT HAVE ACTED AS TRANSFER PRICING OFFICER. 22. THE FACTS OF THE CASE RELATING TO THIS GROUND A RE COMMON IN BOTH THE APPEALS. WE, THEREFORE, ARE CONSIDERING THE FACTS OF THE AY 2002-03, WHICH IS A LEAD YEAR. THE BRIEF FACTS ARE THAT THE AO DURING THE COURSE OF AS SESSMENT PROCEEDINGS REFERRED THE INTERNATIONAL TRANSACTIONS TO THE TRANSFER PRICING OFFICER (TPO IN SHORT), TRANSFER PRICING-III, MUMBAI U/S 92CA(1) OF THE ACT. THE TPO AFTER HEARING THE ASSESSEE PASSED AN ORDER U/S 92CA(3) OF THE ACT ON 11-02-200 5 WHEREIN HE HAS COMPARED THE TRANSACTIONS OF THE ASSESSEE WITH THAT OF THE ASSOC IATE ENTERPRISE (AE IN SHORT). THE RELEVANT FACTS GIVEN IN PARA-4 OF THE TPOS ORDER D ATED 11-02-2005, WHICH IS REPRODUCED IN THE ASSESSMENT ORDER, IS BEING REPROD UCED FOR THE SAKE OF CLARITY AND FOR PROPER UNDERSTANDING OF THE ISSUE, AS UNDER: THE DETAILS OF INTERNATIONAL TRANSACTION IN TERMS OF SECTION 92B OF THE ACT BETWEEN THE ASSESSEE AND ITS ASSOCIATE ENTERPRISE A RE GIVEN BELOW: SR. NO. NAME OF THE AE NATURE OF TRANSACTION VALUE OF TRANSACTION IN RS. METHOD USED 1 ATUL AMERICAS INC. CHARLOTTE NORTH CAROLINA, USA SALE OF GOODS RS.43,80,48,008 CUP ITA NO 846/AHD/06, 171/AHD/07, 253 & 91/AHD/08 A.Y.02-03 & 03-04 ATUL LTD. V. ACIT(OSD)RNG-1, ABD PAGE 19 2 ATUL EUROPE LTD. SUMMERFIELDS, VILLAGE CENTRE, DEAN ROW, WILMSLOW, CHESHIRE, SK9 2TB SALE OF GOODS RS.18,06,16,770 CUP IN VIEW OF THE DETAILS OF TRANSACTIONS WITH AE BY T HE ASSESSEE, THE TPO HAS OBSERVED IN PARA-7 AS UNDER: THE ABOVE OBSERVATIONS PROVE THAT THE REASONS NOW ADVANCED BY THE ASSESSEE ARE NOTHING BUT AFTERTHOUGHTS PREPARED WIT HOUT ANY SUPPORTING EVIDENCE. FURTHER, IN THE COMPARABLE UNCONTROLLED P RICE METHOD PRICE CHARGED / PAID FOR PROPERTY TRANSFERRED IN A COMPARABLE UNC ONTROLLED TRANSACTION OR A NUMBER OF TRANSACTIONS IS IDENTIFIED AND ADJUSTED, IF NECESSARY, TO ACCOUNT FOR DIFFERENCES BETWEEN THE INTERNATIONAL TRANSACTION A ND COMPARABLE UNCONTROLLED TRANSACTIONS WHICH COULD MATERIALLY AF FECT THE PRICE IN THE OPEN MARKET. SUCH ADJUSTED PRICE IS TAKEN TO BE AN ALP. IN THE FORM NO.3CEB THERE IS NO REFERENCE REGARDING ADJUSTMENTS MADE, IF ANY, TO THE PRICE CHARGED TO AE TO NON-AE IN THE COMPARABLE UNCONTROLLED TRANSAC TION. THE ASSESSEE COULD NOT FURNISH ANY EVIDENCE OR SUPPORTING DOCUME NTS WITH REGARD TO THE ADJUSTMENTS, THAT WERE WARRANTED TO DETERMINE THE A LP. THE ASSESSEE HAS FURNISHED PRODUCT WISE DETAILS OF SALES MADE TO AE AND NON-AE GIVING THE QUANTUM OF PRICE CHARGED. THESE DETAILS REFLECTED C ERTAIN VARIATION IN THE PRICE CHARGE TO AE VIS--VIS NON-AE. SINCE THE ARMS LENG TH PRICE WAS TO BE DETERMINED EACH TRANSACTION-WISE, INSTANCES WHERE P RICE CHARGED TO THE AE WAS LESS HAVE BEEN CONSIDERED. THE ARMS LENGTH PRI CE OF THESE TRANSACTIONS WAS COMPUTED CONSIDERING (+) 5% WHERE THE PRICE CHA RGED TO THE AE WAS LESS THAN 5% OF THE PRICE CHARGED TO THE NON-AE, THE SAM E HAD BEEN CONSIDERED FOR ADJUSTMENT. THE ASSESSEES ARGUMENT THAT IN SOM E INSTANCES, THE PRICE CHARGED TO THE AES IS MORE THAN THAT CHARGED TO THE NON-AES AND THE CONSEQUENT DEMAND FOR AVERAGING THE PRICE DOES NOT HOLD GOODS AS THE TRANSFER PRICING PROVISION DO NOT PERMIT REDUCTION IN THE INCOME. AND FINALLY HELD AS UNDER: 8. CONSIDERING THE ABOVE FACTS THE EXPLANATION OFF ERED BY THE ASSESSEE IS REJECTED AND UPWARD ADJUSTMENT TO THE SALES TO THE EXTENT OF RS.2,02,39,798/- AS DETAILED IN ANNEXURE-1 TO THIS ORDER IS MADE. AC CORDINGLY, THE ASSESSEES INCOME WILL GET INCREASED BY RS.2,02,39,798/- ON AC COUNT OF TRANSFER PRICE ADJUSTMENT. THE AO HAS SIMPLY MADE ADDITION BASED ON THE ORDER OF THE TPO. AGGRIEVED, THE ASSESSEE PREFERRED APPEAL BEFORE CIT(A). IT IS TO BE MENTIONED HERE THAT THE ASSESSEE ADOPTED THE COMPARABLE UNCONTROLLED PRICE METHOD (CUP IN SHORT) FOR THE ITA NO 846/AHD/06, 171/AHD/07, 253 & 91/AHD/08 A.Y.02-03 & 03-04 ATUL LTD. V. ACIT(OSD)RNG-1, ABD PAGE 20 PURPOSES OF COMPUTATION OF ARMS LENGTH PRICE. BEFO RE THE CIT(A) THE ASSESSEE HAS MADE GENERAL SUBMISSIONS LIKE THE PRICE CHARGED TO THE AE IS LESS THAN THAT TO THE NON-AES. IT WAS ALSO SUBMITTED THAT IN MANY OF THE CASES THE SALES MADE TO AE ARE COMPARED WITH THE SALES MADE TO UNDER-DEVELOPED COU NTRIES AND IN SUCH CASES MARGINS ARE MORE DUE TO VARIOUS RISKS INVOLVED. THE ASSESSEE ALSO SUBMITTED THAT THE AES HAVE NOT BEEN MAKING PROFIT FOR QUITE SOME TIME AND FOR THIS IT HAS GIVEN DATA THAT ONE OF THE AES I.E. ATUL EUROPE LTD. (AEL ) HAS NEGATIVE NET WORTH OF GBP42840 AS ON 31-03-2003 AND ITS LOSSES FOR THE YE ARS 1998-99, 1999-2000 AND 2000-2001, ARE GBP203117, GBP30538 AND GBP64838 RES PECTIVELY. IT WAS REFERRED THAT IN THE YEARS 2001-02 AND 2002-03 AEL HAS MADE NOMINAL PROFITS OF GBP1325 AND GBP1492 RESPECTIVELY. IT WAS STATED THAT THE CO MPANY SELLS THE GOODS TO THE AES AND THE AES IN TURN SELLS THE GOODS TO THEIR CU STOMERS IN NORTH / SOUTH AMERICAS, EUROPE ETC. WHICH ARE HIGHLY COMPETITIVE MARKETS AND AS SUCH IT IS DIFFICULT FOR THE AES TO SUSTAIN. IN VIEW OF THESE ARGUMENTS, IT WAS STATED THAT DESPITE THE CHARGING OF LOWER RATE FROM AES AS COMPARED TO THOS E OF NON-AES, THE AES ARE UNABLE TO MAKE PROFITS AND IF THE COMPANY WILL CHAR GE MORE RATES THAN THOSE CHARGED TO NON-AES, THEN THERE IS A POSSIBILITY THAT THERE WILL BE NO BUSINESS FOR THE ASSESSEE. THE CIT(A) IN VIEW OF THESE FACTS, CONSIDERED THE P LEA OF THE ASSESSEE AND HELD AS UNDER: 9.3 I HAVE THE SUBMISSIONS OF THE APPELLANT AND FA CTS BROUGHT ON RECORD BY THE AO CAREFULLY. FROM THE ORDER OF TPO, IT IS NOT ICED THAT THE APPELLANT HAS RAISED VARIOUS OBJECTIONS IN RESPONSE TO SHOW CAUSE NOTICE, WHICH HAVE BEEN CONSIDERED BY THE TPO IN PARA 6 OF THE ORDER. THE APPELLANT HAS NOT PROVIDED THE EVIDENCE REGARDING VARIOUS REASONS GIVEN FOR VA RIATIONS TO THE TPO. FOR EXAMPLE, TPO HAS CLEARLY MENTIONED THAT INVOICES DO NOT INDICATE THE PRODUCT CODE OR ANY DESCRIPTION INDICATING THAT WHETHER IT IS TRIAL SALE OR OTHERWISE. IT HAS ALSO BEEN MENTIONED THAT WHERE IT WAS CLAIMED T HAT PRODUCT WAS SOLD TO AE FOR INTRODUCTION IN MARKET, IT HAS NOT BEEN MADE CLEAR IN WHICH PART OF THE WORLD THE PRODUCT WAS TO BE INTRODUCED. SIMILARLY, FOR OTHER REASONS ALSO NO EVIDENCE WAS SUBMITTED BY THE APPELLANT. ANOTHER R EASON GIVEN BY THE APPELLANT IS THAT THE VOLUME TO THE AE WAS MUCH LAR GER THAN NON AE AND ALSO AE ACTS AS WHOLE SELLER. THIS IS ALSO NOT FULL SUP PORTED BY THE DATE SUBMITTED BY THE APPELLANT. FOR EXAMPLE, IN RESPECT OF PRODUC T CODE NO.456121, THE QUANTITY TO AE WAS 2000 KG. WHILE TO NON-AE IT WAS 16800 KG. WHILE THE PRICE CHARGED FROM AE IS RS.397.28 PER KG. AS AGAINST FOR NON-AE IT IS RS.610.43. THEREFORE, IN SPITE OF LESSER QUANTITY SOLD TO AE T HE PRICE CHARGED IS LESS. SIMILARLY IF WE SEE THE ITEM OF PRODUCT CODE NO.110 583, THE QUANTITY SUPPLIED TO AE IS 4000 KG. AND TO NON-AE IT IS 6870 KG. WHIL E THE RATE CHARGED FROM AE IS RS.470.56 PER KG. AND THE RATE CHARGED FROM NON- AE IS RS.620.56 PER KG. SIMILARLY IN THE CASE OF PRODUCT CODE 45224, THE QU ANTITY SOLD TO AE IS 156950 KG. @ RS.64.27 WHILE THE QUANTITY SOLD TO NON-AE IS MUCH HIGHER I.E. 334720 ITA NO 846/AHD/06, 171/AHD/07, 253 & 91/AHD/08 A.Y.02-03 & 03-04 ATUL LTD. V. ACIT(OSD)RNG-1, ABD PAGE 21 KG. AT MUCH HIGHER RATE OF RS.73.33 PER KG. THESE F EW INSTANCES SHOW THAT THE APPELLANTS ARGUMENTS THAT THE AE WAS CHARGED AT LE SS RATE BECAUSE OF HIGHER QUANTITY SOLD IS ABSOLUTELY MISPLACED, MISLEADING A ND BEYOND THE FACTS OF THE CASE. IN THE CASE OF OTHER PRODUCT ALSO, WHEN QUANT ITIES ARE COMPARABLE, THE RATE CHARGED FROM AE ARE MUCH LESS. IN SUCH CIRCUM STANCES, THE ONUS WAS TO THE APPELLANT TO PROVE WITH PROPER EVIDENCE THAT TH E RATE CHARGED FROM AE WAS AT ARMS LENGTH AND NO ADJUSTMENT WAS REQUIRED. THE APPELLANT HAS NOT PRODUCED AN EVIDENCE FOR THE FACTORS MENTIONED FOR CHARGING LESS PRICE FROM AE. CONSIDERING THESE FACTS AND CIRCUMSTANCES, TPO AND AO WERE JUSTIFIED IN MAKING UPWARD ADJUSTMENTS IN THE PROFIT OF THE APPE LLANT ON THE BASIS OF ARGUMENTS GIVEN IN THE ORDER. ACCORDINGLY ADDITION OF RS.2,02,39,798/- IS HEREBY CONFIRMED AND THE GROUND OF THE APPELLANT IS HEREBY DISMISSED. 23. AGGRIEVED, THE ASSESSEE PREFERRED APPEAL BEFORE US. BEFORE US, THE LEARNED COUNSEL FOR THE ASSESSEE SHRI J. P. SHAH ARGUED THA T WITHOUT PREJUDICE TO OTHER CONTENTIONS, ONLY THE NET ADDITION OF RS.16,49,955/ - CAN BE ADDED TO TOTAL INCOME UNDER TRANSFER PRICING PROVISIONS. HE CONTENDED THA T THE TRANSFER PRICING OFFICER (TPO) AND CONSEQUENTIALLY THE ASSESSING OFFICER ADD ED RS.2,02,39,798/- BY CONSIDERING ONLY THE TRANSACTIONS, WHERE ACCORDING TO HIM, THE PRICE CHARGED TO AES WAS LESS THAN THAT CHARGED TO NON-AES AND DID NOT TAKE INTO CONSIDERATION THE TRANSACTIONS, WHERE THE PRICE CHARGED TO AE WAS MOR E THAN THAT CHARGED TO NON-AE, SUCH DIFFERENCE IN THE LATTER CLASS BEING RS.1,85,0 7,395/- (RS.1,39,90,705/- AS ON PAGE 7 OF THE PAPER BOOK + RS.45,16,690/- AS ON PAG E 8 OF THE PAPER BOOK). HE ALSO SUBMITTED THAT THE DEPARTMENT COUNTERED THE SUBMISS ION OF THE ASSESSEE TO MAKE THE NET ADDITION OF RS.16,49,955/- (RS.2,01,57,350 RS.1,85,07,395) BY RELYING ON PROVISION OF SECTION 92(3) WHICH IS AS FOLLOWS: (3) THE PROVISIONS OF THIS SECTION SHALL NOT APPLY IN A CASE WHERE THE COMPUTATION OF INCOME UNDER SUB-SECTION (1) OR THE DETERMINATION OF THE ALLOWANCE FOR ANY EXPENSE OR INTEREST UNDER THAT SU B-SECTION, OR THE DETERMINATION OF ANY COST OR EXPENSE ALLOCATED OR A PPORTIONED, OR AS THE CASE MAY BE, CONTRIBUTED UNDER SUB SECTION (2), HAS THE EFFECT OF REDUCING THE INCOME CHARGEABLE TO TAX OR INCREASING THE LOSS, AS THE CASE MAY BE, COMPUTED ON THE BASIS OF ENTRIES MADE IN THE BOOKS OF ACCOUNT IN RESPECT OF THE PREVIOUS YEAR IN WHICH THE INTERNATIONAL TRANSA CTION WAS ENTERED INTO. HE FURTHER ARGUED THAT THIS PROVISION MERELY LAYS D OWN THAT THE RESULT OF THE COMPUTATION OF TRANSFER PRICING INCOME SHOULD NOT R ESULT INTO REDUCTION OF THE TOTAL INCOME OR INCREASE IN THE LOSS COMPUTED UNDER THE O THER PROVISIONS OF THE ACT, THEREFORE THIS PROVISION ON THE CONTRARY SUPPORTS T HE ASSESSEE BECAUSE THE TOTAL INCOME WOULD INCREASE BY RS.16,49,955/-. THIS CONTE NTION WAS ADVANCED WITHOUT ITA NO 846/AHD/06, 171/AHD/07, 253 & 91/AHD/08 A.Y.02-03 & 03-04 ATUL LTD. V. ACIT(OSD)RNG-1, ABD PAGE 22 PREJUDICE TO FOLLOWING CONTENTIONS OF THE ASSESSEE SUBMITTING THAT NO ADDITION CAN BE MADE UNDER TRANSFER PRICING PROVISIONS. HE FURTHER ARGUED THAT ALL CITIZENS OF THE COUNTRY HAVE A FUNDAMENTAL RIGHT TO DO BUSINESS UND ER THE CONSTITUTION. TRANSFER PRICING PROVISIONS MUST NOT BE INTERPRETED IN A MAN NER THAT THIS FUNDAMENTAL RIGHT IS ADVERSELY AFFECTED OR DIMINISHED. SUCH INTERPRETATI ON WILL MAKE THE PROVISIONS FALLING FOUL OF THE CONSTITUTION. THAT IS WHY, RULE 10B(1)( A)(II) PROVIDES THAT THE ALP (ARMS LENGTH PRICE) DETERMINED BY THE CUP METHOD SHALL BE ADJUSTED TO ACCOUNT FOR DIFFERENCES, IF ANY, BETWEEN THE INTERNATIONAL TRAN SACTION AND THE COMPARABLE UNCONTROLLED TRANSACTIONS. HE FURTHER STATED THAT S UCH ADJUSTMENTS ARE PROVIDED BY 10B IN RESPECT OF ALMOST ALL THE METHODS OF DETERMI NING ARMS LENGTH PRICE. NOW, IF ANNEXURE-I TO TPOS ORDER UNDER SEC.92CA(3) IS SEEN , NO MANNER OF ADJUSTMENT IS DONE IN SPITE OF THE FACT THAT IT WAS POINTED OUT T HAT (1) ASSOCIATED ENTERPRISES ARE BIG WHOLE-SELLERS WHO HAVE TO PURCHASE, STORE AND SUPPL Y THE DYES MANUFACTURED BY THE ASSESSEE FURTHER IN HIGHLY DEVELOPED COUNTRIES IN W HICH BOTH THE AES ARE OPERATING, AND THUS, THE PRICES AT WHICH THE SALE IS MADE TO T HEM CANNOT BE COMPARED WITH THE SALE PRICES IN UNDER DEVELOPED OR DEVELOPING ECONOM IES NOR CAN THEY BE COMPARED WITH THE PRICES CHARGED BY THE ASSESSEE TO DIRECT C USTOMERS IN THE SAME REGION OR CANNOT BE COMPARED TO THE PRICES CHARGED TO THE STR AY CUSTOMER WHO COMES TO THE ASSESSEE WHEN THE SUPPLY POSITION IN HIS REGION IS PRECARIOUS OR TO THE CUSTOMER WHO IS IN ALL LIKELIHOOD NOT LIKELY TO RETURN TO THE AS SESSEE WITH A REPEAT ORDER. (2) THE RATIONAL OF THE ENTIRE TRANSFER PRICING CHAPTER IS THAT INSTEAD OF THIS COUNTRY GETTING THE TAXES, SOME OTHER COUNTRY IS GETTING THE TAXES BY T HE MECHANISM OF TRANSFER PRICING. THE ASSESSEE POINTED OUT TO THE TPO IN ITS SUBMISSI ON OF 25 TH JANUARY 2005 THAT THE AES HAVE NOT BEEN MAKING ANY PROFITS FOR QUITE SOM E TIME AND THEIR RESERVES WERE ALSO CUMULATIVELY NEGATIVE. (3) FURTHER, AT THE INS TANCE OF THE ASSESSEE THESE AES HAVE REGULAR ESTABLISHMENTS EXCLUSIVELY SELLING DYE S OF THE ASSESSEE, AND THEREFORE, IT ALSO BECOMES A DUTY OF THE ASSESSEE TO SEE THAT THEY SURVIVE FROM A LONG TERM BUSINESS VIEW POINT SO THAT THE ASSESSEE GETS A FIR M EXPORT BASE AND MARKET IN EUROPE AND AMERICA. SOMEWHERE THE COMPARATIVE SALE PRICES OF THE UNDER DEVELOPED COUNTRIES LIKE AFRICA WERE TAKEN FOR COMP ARISON WHICH MAKES MOCKERY OF THE CUP METHOD. THE ASSESSEE HAS ENCLOSED HEREWITH THE SAID ANNEXURE-I POINTING OUT THE PAGES WHERE FOR EVERY TRANSACTION WHERE THE AE ACCORDING TO THE TPO IS CHARGED LESS THAN NON-AE AND WHICH HAS GONE IN COMP UTATION OF THE SAID AMOUNT OF RS.2 CRORES PLUS, BUT THIS HAS BEEN OF NO AVAIL TO TPO BECAUSE NO ADJUSTMENT HAS ITA NO 846/AHD/06, 171/AHD/07, 253 & 91/AHD/08 A.Y.02-03 & 03-04 ATUL LTD. V. ACIT(OSD)RNG-1, ABD PAGE 23 BEEN MADE. NOW, AS POINTED ABOVE, IF THE ADJUSTMENT S OF ALL THESE FACTORS COME TO BE MADE, IT WILL MORE THAN MAKE UP THE ADDITION MAD E BY TPO AND A.O. HE ALSO REFERRED TO SECTION 92CA(4) AS AMENDED W.E. F. 01.06.07 IS AS FOLLOWS: (4) ON RECEIPT OF THE ORDER UNDER SUB-SECTION (3), THE ASSESSING OFFICER SHALL PROCEED TO COMPUTE THE TOTAL INCOME OF THE AS SESSEE UNDER SUB-SECTION (4) OF SECTION 92C IN CONFORMITY WITH THE ARMS LENGTH PRICE AS SO DETERMINED BY THE TRANSFER PRICING OFFICER. ACCORDING TO HIM, THE ABOVE PROVISION DOES NOT APPL Y TO THE CASE OF THE ASSESSEE BECAUSE THE ASSESSMENT ORDER IS PASSED ON 31.03.200 5. 92CA(4) AS ACTUALLY APPLICABLE TO THE CASE OF THE ASSESSEE IS (4) ON RECEIPT OF THE ORDER UNDER SUB-SECTION (3), THE ASSESSING OFFICER SHALL PROCEED TO COMPUTE THE TOTAL INCOME O F THE ASSESSEE UNDER SUB-SECTION (4) OF SECTION 92C HAVING REGARD TO THE ARMS LENGTH PRICE DETERMINED UNDER SUB-SECTION (3) BY THE TRANS FER PRICING OFFICER. THEREFORE, THE LEARNED COUNSEL FOR THE ASSESSEE FUR THER ARGUED IN VIEW OF THE ABOVE PROVISIONS THAT IT WAS OBLIGATORY ON THE PART OF TH E ASSESSING OFFICER BEFORE PASSING THE ASSESSMENT ORDER TO ISSUE A SHOW CAUSE NOTICE T O THE ASSESSEE ASKING IT TO SHOW CAUSE AS TO WHY HE SHOULD NOT COMPUTE THE TRAN SFER PRICING ADDITION HAVING REGARD TO THE TPOS ORDER. THE DELHI HIGH COURT DEC ISION IN SONY INDIA (P) LTD. VS. C.B.D.T. SUPPORTS THIS CONTENTION OF THE ASSESSEE. NOW, THE FACT OF THE MATTER IS, A.O. DID NOT GIVE ANY SUCH NOTICE, AND THEREFORE, H IS ORDER IS BAD. HE ALSO CONTENDED THAT MORE GUJARAT HIGH COURT IN D ECISIONS REPORTED AT (2001) 251 ITR 541, (2002) 257 ITR 297 AND (2002) 257 ITR 460 HAS HELD THAT THE ASSESSING OFFICER IS NOT ENTITLED TO SECOND INNINGS. FURTHER, INCURABLE INJUSTICE WILL BEFALL THE ASSESSEE IF IT IS TOLD NOW THAT LET THE DEPARTMENT EXAMINE YOUR MATTER OF 2001 OVER AGAIN IN THE YEAR 2009. IN THE SUBMISSION OF THE AS SESSEE, IF SUCH IS GOING TO BE THE RESULT, THE INTEREST OF JUSTICE WILL BE BETTER SERV ED BY QUASHING THE BAD ORDER RATHER THAN BY GIVING A SECOND INNINGS TO THE ASSESSING OF FICER, WHO DID NOT ABIDE BY THE PROVISION OF LAW AND PASSED AN ORDER WITHOUT EVEN G IVING A SHOW CAUSE NOTICE TO THE ASSESSEE. THE SUBMISSION OF ANNULLING RATHER THAN G IVING SECOND INNINGS TO A.O. IS SUPPORTED BY FOLLOWING DECISIONS (1) CIT VS. SHAM LAL (1981) 127 ITR 816 (P&H) AS ITA NO 846/AHD/06, 171/AHD/07, 253 & 91/AHD/08 A.Y.02-03 & 03-04 ATUL LTD. V. ACIT(OSD)RNG-1, ABD PAGE 24 ALSO THE DELHI TRIBUNALS DECISION IN A TRANSFER PR ICING MATTER BY THE NAME MENTOR GRAPHICS (NOIDA) (P) LTD. VS. D.C.I.T. (2007) 109 ITD 101 WHEREIN ON PAGE 145, THE LEARNED MEMBERS QUASHED THE FOLLOWING PASSAGE FROM THE SUPREME COURT DECISION IN PARASHURAM POTTERY WORKS CO. LTD. VS. ITO (1977) 106 ITR 1. IT HAS BEEN SAID THAT THE TAXES ARE THE PRICE THAT WE PAY FOR CIVILIZATION. IF SO, IT IS ESSENTIAL THAT THOSE WHO ARE ENTRUSTED WITH THE TASK OF CALCULATING AND REALIZING THAT PRICE SHOULD FAMILIA RIZE THEMSELVES WITH THE RELEVANT PROVISIONS AND BECOME WELL-VERSED WITH THE LAW ON THE SUBJECT. ANY REMISSNESS ON THEIR PART CAN ONLY BE A T THE COST OF THE NATIONAL EXCHEQUER AND MUST NECESSARILY RESULT IN L OSS OF REVENUE. AT THE SAME TIME, WE HAVE TO BEAR IN MIND THAT THE POL ICY OF LAW IS THAT THERE MUST BE A POINT OF FINALITY IN ALL LEGAL PROC EEDINGS, THAT STALE ISSUES SHOULD NOT BE REACTIVATED BEYOND A PARTICULA R STAGE AND THAT LAPSE OF TIME MUST INDUCE REPOSE IN AND SET AT REST JUDICIAL AND QUASI- JUDICIAL CONTROVERSIES AS IT MUST IN OTHER SPHERES OF HUMAN ACTIVITY. IN VIEW OF THESE ARGUMENTS, THE LEARNED COUNSEL FOR THE ASSESSEE PRAYED TO QUASH THE ABOVE ADDITION AND ALLOW THE APPEAL OF THE ASSE SSEE ON THIS ISSUE 24. THE FACTS BEING SIMILAR IN THE ASSESSMENT YEAR 2003-04 ALSO, WE WILL TAKE UP THE ARGUMENTS MADE BY THE LEARNED COUNSEL F OR THE ASSESSEE, SHRI SOPARKAR IN THIS ASSESSMENT YEAR. HE STARTED THE ARGUMENTS T HAT UNDER SEC.92CA(1) OF THE ACT, LEARNED A.O. WHO FRAMED THE IMPUGNED ASSESSMEN T ORDER REFERRED THE CASE OF THE ASSESSEE TO TRANSFER PRICING OFFICER (TPO FOR S HORT) FOR THE PURPOSE OF FRAMING ORDER UNDER SEC.92CA(3) OF THE ACT. PURSUANT TO THE SAME, THE HEARING TOOK PLACE BEFORE THE TPO FROM TIME TO TIME AND FINALLY VIDE H IS ORDER DATED 20.2.2006, TPO MADE ADJUSTMENTS OF THE ARM'S LENGTH PRICE IN THE S UM OF RS.1,80,62,067/-. PURSUANT TO THE SAID ADJUSTMENT, THE A.O. WHO FRAME D THE IMPUGNED ASSESSMENT ORDER INCORPORATED AND ADDED THE SAID SUM OF RS.1,8 0,62,067/- IN THE INCOME OF THE ASSESSEE. SHRI SOPARKAR FURTHER SUBMITTED THAT AS A SEPARATE REASONED ORDER IS PASSED BY THE TPO UNDER SEC.92CA(3) OF THE ACT, A S EPARATE SUBMISSION IS MADE HEREIN, DEALING WITH THE CONTENTIONS RAISED IN THE IMPUGNED ORDER DATED 20.2.2006. IN THE APPEAL MEMO, THE ASSESSEE HAS CHALLENGED THE AC TION OF THE TPO IN ADDING A SUM OF RS.1,80,62,067/-. AS REGARDS THIS ADDITION O F RS.1,80,62,067, THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ENTIRE ADDITION MADE BY THE TPO IS UNTENABLE BOTH ON FACTS AS WELL AS UNDER THE LAW. F INANCE ACT,2001 INTRODUCED SECTIONS-92A TO 92F WITH A VIEW TO PROVIDE A DETAIL ED STATUTORY FRAMEWORK TO ITA NO 846/AHD/06, 171/AHD/07, 253 & 91/AHD/08 A.Y.02-03 & 03-04 ATUL LTD. V. ACIT(OSD)RNG-1, ABD PAGE 25 CALCULATE AND COMPUTE REASONABLE, FAIR AND EQUITABL E PROFITS AND THE TAXATION THERETO IN INDIA IN THE CASES OF MULTINATIONAL ENTERPRISES HAVING ITS OPERATIONS SPREAD OVER LARGE NUMBER OF NATIONS. ACCORDING TO HIM, THE NEW MECHANISM PROVIDED BY THE FINANCE ACT, 2001 IS IN RESPECT TO COMPUTATION OF I NCOME OF AN INTERNATIONAL TRANSACTION HAVING REGARD TO A ARM'S LENGTH PRICE. THE MECHANISM ALSO PROVIDES FOR FINDING OUT THE TRUE AND CORRECT PROFIT ARISING FRO M THE TRANSACTIONS WITH THE ASSOCIATE ENTERPRISES (AE FOR SHORT) IN ORDER TO FIND OUT THE ARM'S LENGTH PRICE IN RESPECT OF TRANSACTIONS WITH THE AE. THE LEGISLATURE HAS ALSO PROVIDED MECHANISM AS WELL AS PRESCRIBED METHODS FOR THE PURPOSE OF SUCH CALCULAT ION. HE CONTENDED THAT BEFORE COMING TO THE METHODS PER SE, IT MAY BE CLARIFIED T HAT IT IS THE ASSESSEE'S RIGHT TO CHOOSE THE BEST APPLICABLE METHOD FOR THE PURPOSE O F CALCULATION OF ARM'S LENGTH PRICES AND THE SAME CANNOT BE DISTURBED BY THE TPO UNLESS HE SATISFIES THE CONDITIONS PRESCRIBED UNDER SEC.92C(3) OF THE ACT. UNDER THE SCHEME OF THE ACT, THE TPO IS REQUIRED TO FIND OUT THE ARM'S LENGTH PRICE BASED ON ANY OF THE 5 METHODS PRESCRIBED UNDER THE ACT. THE TPO HAS TO GIVE A CLE AR CUT FINDING BEFORE HE CHANGES THE METHOD ADOPTED BY THE ASSESSEE. ONCE HE SATISFI ES THE CONDITIONS AS WELL AS JUSTIFIES HIS CASE FOR ADOPTING A DIFFERENT METHOD THAN WHAT IS FOLLOWED BY THE ASSESSEE, HE HAS TO CALCULATE THE ARM'S LENGTH PRIC ES FOR THE INTERNATIONAL TRANSACTIONS WITH THE AES. THE DIFFERENCE, IF ANY, CAN BE ADDED AS ADJUSTMENT IN ARM'S LENGTH PRICE IN THE HANDS OF THE ASSESSEE. TH E LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT IN THE FACTS OF THE PRESENT CASE, THE ASSESSEE HAS TWO SUBSIDIARIES BASED IN USA AND U.K. VIZ. ATUL AMERIC AS INC. (AAI FOR SHORT) AND ATUL EUROPE LTD., BASED IN UK (AEL FOR SHORT). THE TRANS ACTIONS WITH BOTH THE AES HAVE BEEN ADJUSTED BY THE TPO AT ARM'S LENGTH PRICE AS A CCORDING TO HIM, THE SALES TRANSACTIONS WITH THE SAID AE HAVE BEEN UNDER STATE D TO THE TUNE OF RS.1,80,62,067/- . HE ALSO SUBMITTED THAT BEFORE GOING INTO THE MERI TS OF THE MATTER IT IS NECESSARY TO UNDERSTAND THE METHOD ADOPTED BY THE ASSESSEE FOR T HE PURPOSE OF CALCULATING THE ARM'S LENGTH PRICE AND THE REASONS BEHIND SUCH ADOP TION. THE ASSESSEE HAS ADOPTED COMPARABLE UNCONTROLLED PRICE METHOD (CUP F OR SHORT) AS THE ASSESSEE WAS HAVING SALES OF LARGE NUMBER OF PRODUCTS TO THE SE AE DURING THE YEAR UNDER CONSIDERATION. APART FROM AE, THE ASSESSEE ALSO SOL D DIVERSIFIED PRODUCTS TO VARIOUS UNRELATED ENTERPRISES. THEREFORE CONSIDERING THE CO MPLEXITY OF THE TRANSACTIONS, PRODUCT DIVERSITY AND MULTIPLICITY OF TRANSACTIONS, THE SAID CUP METHOD WAS THE ONLY PRACTICABLE METHOD TO DETERMINE THE MARGINS EARNED BY THE ASSESSEE AS A WHOLE ITA NO 846/AHD/06, 171/AHD/07, 253 & 91/AHD/08 A.Y.02-03 & 03-04 ATUL LTD. V. ACIT(OSD)RNG-1, ABD PAGE 26 WHICH WOULD DULY REFLECT THE COMPARABLE PRICE IN AN UNCONTROLLED TRANSACTION IN THE INTERNATIONAL MARKET, BOTH WITH AES AS WELL AS UNRE LATED ENTERPRISES. UNDER THE SAID METHOD, THE ASSESSEE FOUND OUT THE PRICE OF A PRODU CT IN AN UNCONTROLLED TRANSACTION OF SALE AND COMPARE THE SAME, AFTER MAKING NECESSAR Y ADJUSTMENTS FOR VARIOUS FACTOR ASSOCIATED WITH AES, WITH THE AVERAGE PRICE OF SALES WITH AE. THE ASSESSEE IN ITS REPORTS SUBMITTED AS PER RULE-10D OF THE INCOME -TAX RULES GAVE THE COMPARISON OF VARIOUS SALES INSTANCES WITH OTHER CONCERNS AND IT WAS DEMONSTRATED THAT THE PRICES CHARGES TO AE OF THE ASSESSEE WAS COMPARABLE WITH THAT OF THE OTHER NON-AE OR SUCH SIMILAR CASES. THE LEARNED COUNSEL FOR THE ASSESSEE ALSO SUBMITTED THAT THE ASSESSEE, DURING THE COURSE OF THE ASSESSMENT PROCE EDINGS, HAS GIVEN REASONS FOR VARIATIONS IN THE PRICE CHARGED TO THE AES AND NON -AES WHERE THE PRICE CHARGED TO THE AES IS LESS THAN THAT CHARGED TO THE NON-AES. A CHART SHOWING SUCH INSTANCES IS ANNEXED HERETO AND MARKED AS ANNEXURE A TO THIS SUBMISSION. THE ENTIRE CORRESPONDENCE IS AT PAGES 34 TO 111 OF THE PAPER B OOK II. HE CONTENDED THAT THE TPO HAS NOT CONSIDERED THE REASONS GIVEN BY THE ASS ESSEE IN TRUE SPIRITS. SHE SHOULD HAVE APPLIED HER MIND FOR EACH OF THE REASON S GIVEN AND THAT IN MANY OF THE CASES THE SALES MADE TO AES ARE COMPARED WITH THE SALES MADE TO UNDERDEVELOPED COUNTRIES. HE CONTENDED THAT THE MARGINS IN SUCH CA SES ARE MORE DUE TO VARIOUS RISKS INVOLVED IN DEALING WITH UNDERDEVELOPED COUNT RIES. THE ASSESSEE HAS ALSO SUBMITTED THAT, THE AES HAVE NOT BEEN MAKING PROFI TS FOR QUIET SOME TIME. IN FACT ONE OF THE AES I.E. AEL HAS NEGATIVE NET WORTH OF GBP421840 AS ON 31-03-2003. ITS LOSSES FOR THE YEARS 1998-1999, 1999-2000 AND 2000- 2001, ARE GBP203117, GBP30538 AND GBP64838 RESPECTIVELY. FOR THE YEARS 2 001-2002 AND 2002-2003 AEL HAS MADE NOMINAL PROFITS OF GBP1325 AND GBP1492 RESPECTIVELY. THE LD. COUNSEL FOR THE ASSESSEE FURTHER SUBMITS THAT ITS SALES THE GOODS TO THE AES AND THE AES IN TURN SALE THE GOODS TO THEIR CUSTOMERS IN NORTH / SOUTH AMERICA, EUROPE ETC. WHICH ARE HIGHLY COMPETITIVE MARKETS AND, AS S UCH IT BECOMES DIFFICULT FOR THE AES TO SUSTAIN THEMSELVES. ASSUMING WHILE DENYING THAT THE ASSESSEE HAS CHARGED LOWER RATES FROM AES AS COMPARED TO THOSE OF NON-A ES, THE AES HAVE NOT BEEN ABLE TO MAKE PROFITS. IF THE ASSESSEE HAS CHARGED R ATES, WHICH ARE HIGHER THAN THOSE CHARGED TO NON-AES THERE IS A POSSIBILITY THAT THE AES WILL NOT BE ABLE TO SALE ANYTHING. THE LD. COUNSEL FOR THE ASSESSEE FURTHER SUBMITTED THAT HOWEVER THE A.O. REJECTED THE METHOD FOLLOWED BY THE ASSESSEE ON THE GROUNDS WHICH ARE REPRODUCED HEREIN BELOW TOGETHER WITH THE EXPLANATION AND/OR S UBMISSIONS OF THE ASSESSEE: ITA NO 846/AHD/06, 171/AHD/07, 253 & 91/AHD/08 A.Y.02-03 & 03-04 ATUL LTD. V. ACIT(OSD)RNG-1, ABD PAGE 27 ACCORDING TO THE LEARNED TPO, FORM NO. 3CEB OUGHT TO HAVE CONTAINED ALL THE REASONS WHICH THE APPELLANT ADVANCED BEFORE THE LD. TPO DURING THE COURSE OF THE ASSESSMENT PROCEEDINGS. IF ALL TH E ARGUMENTS WHICH THE APPELLANT ADVANCED BEFORE HER WERE NOT THERE IN THE FORM CEB, I.E. AUDITORS REPORT, ALL THESE ARGUMENTS ARE AFTERTHOUG HT AND CANNOT BE TAKEN INTO CONSIDERATION. THE APPELLANT SUBMITS THAT CUP METHOD IS USED AS IN THE SAID METHOD CONTROLLED TRANSACTIONS ARE BEING C OMPARED WITH UNCONTROLLED TRANSACTIONS WHEREIN THE DEGREE OF COM PARABILITY WITH UNCONTROLLED TRANSACTIONS IS VERY HIGH. IN ANY CASE , IT IS NOT NECESSARY TO GIVE ALL THE REASONS OR GROUNDS FOR JUSTIFICATION O F A PARTICULAR METHOD IN THE AUDIT REPORT ITSELF. IF IT IS STATED THAT A PARTICU LAR METHOD IS FOLLOWED BECAUSE IN MAJORITY OF THE CASES PRICES ARE COMPARABLE BETW EEN AE AND NON-AES, THE APPELLANT HAS EVERY RIGHT TO ADOPT THE CUP METH OD. IN FEW INSTANCES, WHEN PRICES OF OTHER COMPARABLE CASES ARE NOT AVAIL ABLE, THE APPELLANT CAN STATE THAT PRICES CHARGED BY IT TO AE IN SUCH C ASES ARE ALP. THE LEARNED TPO CONTENDED THAT WHOLESALE MARGINS A ND VOLUME DISCOUNTS AS WELL AS POLITICAL RISKS HAVE NOT BEEN SUBSTANTIATED. THE APPELLANT MOST RESPECTFULLY SUBMITS THAT IT HAS PRO VIDED THE INFORMATION AND QUANTIFIED THESE FACTORS AS PROVIDED IN THE RUL ES. HOWEVER IT THE LD. TPO WAS NOT SATISFIED ABOUT ITS REASONABLENESS, SHE SHOULD HAVE CONDUCTED INDEPENDENT INQUIRY AND GIVEN REASONS AS TO HOW THE PERCENTAGES QUANTIFIED BY THE APPELLANT ARE NOT JUS TIFIED. NOW, BOTH THESE MARGINS I.E. WHOLESALE DISCOUNTS AND POLITICAL RISK S VARY FROM PARTY TO PARTY AND COUNTRY TO COUNTRY. IT WAS SUBMITTED THAT IN AF RICAN COUNTRIES WHERE HIGH POLITICAL UNCERTAINTY IS THERE, THE PRICES ARE OBVIOUSLY HIGHER COMPARED TO THE PRICES CHARGED TO A HIGHLY DEVELOPED NATIONS WHERE LAW AND ORDER AND POLITICAL STABILITY ARE THERE. HOWEVER THIS SUB JECTIVE DISCOUNTING FACTOR CANNOT BE REJECTED BY THE LD. TPO WITHOUT BRINGING COGENT MATERIAL ON RECORD. THE LEARNED TPO CONTENDED THAT THE APPELLANT HAS N OT PLACED ON RECORD THE DETAILS OF DEMOGRAPHIC SALES AND QUANTITY OF SA LES TO NON-AES. THIS IS FACTUALLY INACCURATE. THE APPELLANT HAS GIVEN COMPL ETE INFORMATION TO THIS EFFECT AND ALL THESE CHARTS ARE ONCE AGAIN PLACED B EFORE YOUR HONOURS AT ANNEXURE B TO THIS SUBMISSIONS. THE APPELLANT THEREFORE MOST RESPECTFULLY SUBMITS THAT THE ONLY REASON WHY THE LEARNED TPO HAS REJECTED ITS CUP METHOD WAS ON THE GROUND THAT THE NECESSARY INFORMATION WITH RESPECT TO EXPORTS TO AE S AND NON-AES IS NOT AVAILABLE. HOWEVER SINCE THE INFORMATION WAS ALREAD Y AVAILABLE, THIS GROUND FOR REJECTING THE CUP METHOD GOES AWAY AND T HEREFORE THE METHOD ADOPTED BY THE APPELLANT MAY KINDLY BE ACCEPTED. THE LEARNED COUNSEL FURTHER SUBMITTED THAT THE ASSE SSEE THAT THE OECD GUIDELINES HELPS THE CASE OF THE ASSESSEE INASMUCH AS THAT IT HAS BEEN VERY SPECIFICALLY STATED ITA NO 846/AHD/06, 171/AHD/07, 253 & 91/AHD/08 A.Y.02-03 & 03-04 ATUL LTD. V. ACIT(OSD)RNG-1, ABD PAGE 28 IN THE SAID GUIDELINES THAT IF THE PRICES OF UNCONT ROLLED TRANSACTIONS VIS-A-VIS CONTROLLED TRANSACTIONS CAN BE COMPARED, THEN CUP I S THE BEST METHOD TO FIND OUT THE ARM'S LENGTH PRICE. AS STATED EARLIER THE SAME INFORMATION IS VERY MUCH AVAILABLE AND PLACED ON RECORD BEFORE THE TPO,AO AS WELL AS CIT(A). HE, THEREFORE CONTENDED THAT IF THAT BE SO, THERE IS NO REASON TO REJECT THE CUP METHOD FOLLOWED BY THE ASSESSEE OR MAKE ADJUSTMENTS TO THE ALP AS DONE BY LD. TPO. 25. HE SUBMITTED THAT IN ANY CASE THE SAID CUP METH OD IS MOST SUITABLE FOR THE PURPOSE OF FINDING OUT ARM'S LENGTH PRICE IN THE HA NDS OF THE ASSESSEE. AS STATED EARLIER FOR THE PURPOSE OF REJECTING THE METHOD ADO PTED BY THE ASSESSEE AND TO SUBSTITUTE THE SAME WITH ANOTHER METHOD, IT HAS TO BE CONCLUSIVELY ESTABLISHED BY THE TPO THAT THE METHOD ADOPTED BY THE ASSESSEE IS PATE NTLY ERRONEOUS AND THE SAME CAN NEVER TRULY AND FAIRLY STATE THE ARM'S LENGTH P RICE. IN ANY CASE WHILE ADOPTING ANOTHER METHOD OR ADJUSTING ALP, IT IS ALSO NECESSA RY ON THE PART OF THE TPO TO ESTABLISH THAT WHY THE METHOD SELECTED BY HER IS SU PERIOR TO THE METHOD FOLLOWED BY THE ASSESSEE. IN THIS RESPECT HE SUBMITTED THAT CIR CULAR NO.14 OF 2001 ISSUED BY THE CBDT EXPLAINING NOTES OF PROFITS IN THE FINANCE ACT ,2001 DATED 22.11.2001 IS RELEVANT AND THEREFORE THE RELEVANT EXTRACT OF THE SAME IS REPRODUCED HEREIN BELOW: CIRCULAR NO.14/2001 FINANCE ACT, 2001 - EXPLANATORY NOTES ON PROVISIONS RELATING TO DIRECT TAXES. DATE : 22-11-2001 55.3 WITH A VIEW TO PROVIDE A DETAILED STATUTORY FR AMEWORK WHICH CAN LEAD TO COMPUTATION OF REASONABLE, FAIR AND EQUITABLE PROFI TS AND TAX IN INDIA, IN THE CASE OF SUCH MULTINATIONAL ENTERPRISES, THE ACT HAS SUBSTITUTED SECTION 92 WITH A NEW SECTION, AND HAS INTRODUCED NEW SECTIONS 92A TO 92F IN THE INCOME-TAX ACT, RELATING TO COMPUTATION OF INCOME F ROM AN INTERNATIONAL TRANSACTION HAVING REGARD TO THE ARM'S LENGTH PRICE , MEANING OF ASSOCIATED ENTERPRISE, MEANING OF INTERNATIONAL TRANSACTION, C OMPUTATION OF ARM'S LENGTH PRICE, MAINTENANCE OF INFORMATION AND DOCUMENTS BY PERSONS ENTERING INTO INTERNATIONAL TRANSACTIONS, FURNISHING OF A REPORT FROM AN ACCOUNTANT BY PERSONS ENTERING INTO INTERNATIONAL TRANSACTIONS AN D DEFINITIONS OF CERTAIN EXPRESSIONS OCCURRING IN THE SAID SECTIONS. 55.4 THE NEWLY SUBSTITUTED SECTION 92 PROVIDES THAT INCOME ARISING FROM AN INTERNATIONAL TRANSACTION BETWEEN ASSOCIATED ENTERP RISES SHALL BE COMPUTED HAVING REGARD TO THE ARM'S LENGTH PRICE. ANY EXPENS E OR OUTGOING IN AN INTERNATIONAL TRANSACTION IS ALSO TO BE COMPUTED HA VING REGARD TO THE ARM'S ITA NO 846/AHD/06, 171/AHD/07, 253 & 91/AHD/08 A.Y.02-03 & 03-04 ATUL LTD. V. ACIT(OSD)RNG-1, ABD PAGE 29 LENGTH PRICE. THUS IN THE CASE OF A MANUFACTURER, F OR EXAMPLE, THE PROVISIONS WILL APPLY TO EXPORTS MADE TO THE ASSOCIATED ENTERP RISE AS ALSO TO IMPORTS FROM THE SAME OR ANY OTHER ASSOCIATED ENTERPRISE. T HE PROVISION IS ALSO APPLICABLE IN A CASE WHERE THE INTERNATIONAL TRANSA CTION COMPRISES ONLY AN OUTGOING FROM THE INDIAN ASSESSEE. 55.5 THE NEW SECTION FURTHER PROVIDES THAT THE COST OR EXPENSES ALLOCATED OR APPORTIONED BETWEEN TWO OR MORE ASSOCIATED ENTERPRI SES UNDER A MUTUAL AGREEMENT OR ARRANGEMENT SHALL BE AT ARM'S LENGTH P RICE. EXAMPLES OF SUCH TRANSACTIONS COULD BE WHERE ONE ASSOCIATED ENTERPRI SE CARRIES OUT CENTRALIZED FUNCTIONS WHICH ALSO BENEFIT ONE OR MOR E OTHER ASSOCIATED ENTERPRISES, OR TWO OR MORE ASSOCIATED ENTERPRISES AGREE TO CARRY OUT A JOINT ACTIVITY, SUCH AS RESEARCH AND DEVELOPMENT, FOR THE IR MUTUAL BENEFIT. 55.5 THE NEW PROVISION IS INTENDED TO ENSURE THAT P ROFITS TAXABLE IN INDIA ARE NOT UNDERSTATED (OR LOSSES ARE NOT OVERSTATED) BY D ECLARING LOWER RECEIPTS OR HIGHER OUTGOINGS THAN THOSE WHICH WOULD HAVE BEEN D ECLARED BY PERSONS ENTERING INTO SIMILAR TRANSACTIONS WITH UNRELATED P ARTIES IN THE SAME OR SIMILAR CIRCUMSTANCES. THE BASIC INTENTION UNDERLYI NG THE NEW TRANSFER PRICING REGULATIONS IS TO PREVENT SHIFTING OUT OF P ROFITS BY MANIPULATING PRICES CHARGED OR PAID IN INTERNATIONAL TRANSACTIONS, THER EBY ERODING THE COUNTRY'S TAX BASE. THE NEW SECTION 92 IS, THEREFORE, NOT INT ENDED TO BE APPLIED IN CASES WHERE THE ADOPTION OF THE ARM'S LENGTH PRICE DETERMINED UNDER THE REGULATIONS WOULD RESULT IN A DECREASE IN THE OVERA LL TAX INCIDENCE IN INDIA IN RESPECT OF THE PARTIES INVOLVED IN THE INTERNATIONA L TRANSACTION. 55.6 THE SUBSTITUTED NEW SECTIONS 92A AND 92B PROVI DE MEANINGS OF THE EXPRESSIONS 'ASSOCIATED ENTERPRISE' AND 'INTERNATIO NAL TRANSACTION' WITH REFERENCE TO WHICH THE INCOME IS TO BE COMPUTED UND ER THE NEW SECTION 92. WHILE SUB-SECTION (1) OF SECTION 92A GIVES A GENERA L DEFINITION OF ASSOCIATED ENTERPRISES, BASED ON THE CONCEPT OF PARTICIPATION IN MANAGEMENT, CONTROL OR CAPITAL, SUB-SECTION (2) SPECIFIES THE CIRCUMSTANCE S UNDER WHICH THE TWO ENTERPRISES SHALL BE DEEMED TO BE ASSOCIATED ENTERP RISES. 55.7 SECTION 92B PROVIDES A BROAD DEFINITION OF AN INTERNATIONAL TRANSACTION, WHICH IS TO BE READ WITH THE DEFINITION OF TRANSACT ION GIVEN IN SECTION 92F. AN INTERNATIONAL TRANSACTION IS ESSENTIALLY A CROSS BO RDER TRANSACTION BETWEEN ASSOCIATED ENTERPRISES IN ANY SORT OF PROPERTY, WHE THER TANGIBLE OR INTANGIBLE, OR IN THE PROVISION OF SERVICES, LENDIN G OF MONEY, ETC. AT LEAST ONE OF THE PARTIES TO THE TRANSACTION MUST BE A NON-RES IDENT. THE DEFINITION ALSO COVERS A TRANSACTION BETWEEN TWO NON-RESIDENTS, WHE RE FOR EXAMPLE, ONE OF THEM HAS A PERMANENT ESTABLISHMENT WHOSE INCOME IS TAXABLE IN INDIA. 55.8 SUB-SECTION (2) OF SECTION 92B EXTENDS THE SCO PE OF THE DEFINITION OF INTERNATIONAL TRANSACTION BY PROVIDING THAT A TRANS ACTION ENTERED INTO WITH AN UNRELATED PERSON SHALL BE DEEMED TO BE A TRANSACTIO N WITH AN ASSOCIATED ITA NO 846/AHD/06, 171/AHD/07, 253 & 91/AHD/08 A.Y.02-03 & 03-04 ATUL LTD. V. ACIT(OSD)RNG-1, ABD PAGE 30 ENTERPRISE, IF THERE EXISTS A PRIOR AGREEMENT IN RE LATION TO THE TRANSACTION BETWEEN SUCH OTHER PERSON AND THE ASSOCIATED ENTERP RISE, OR THE TERMS OF THE RELEVANT TRANSACTION ARE DETERMINED BY THE ASSO CIATED ENTERPRISE. AN ILLUSTRATION OF SUCH A TRANSACTION COULD BE WHER E THE ASSESSEE, BEING AN ENTERPRISE RESIDENT IN INDIA, EXPORTS GOODS TO AN U NRELATED PERSON ABROAD, AND THERE IS A SEPARATE ARRANGEMENT OR AGREEMENT BE TWEEN THE UNRELATED PERSON AND AN ASSOCIATED ENTERPRISE WHICH INFLUENCE S THE PRICE AT WHICH THE GOODS ARE EXPORTED. IN SUCH A CASE THE TRANSACTION WITH THE UNRELATED ENTERPRISE WILL ALSO BE SUBJECT TO TRANSFER PRICING REGULATIONS. 55.9 THE NEW SECTION 92C PROVIDES THAT THE ARM'S LE NGTH PRICE IN RELATION TO AN INTERNATIONAL TRANSACTION SHALL BE DETERMINED BY (A) COMPARABLE UNCONTROLLED PRICE METHOD; OR (B) RESALE PRICE METH OD; OR (C) COST PLUS METHOD; OR (D) PROFIT SPLIT METHOD; OR (E) TRANSACT IONAL NET MARGIN METHOD; OR (F) ANY OTHER METHOD WHICH MAY BE PRESCRIBED BY THE BOARD. FOR THE PRESENT, NO ADDITIONAL METHOD HAS BEEN PRESCRIBED. ONE OF THE FIVE SPECIFIED METHODS SHALL BE THE MOST APPROPRIATE MET HOD IN RESPECT OF A PARTICULAR INTERNATIONAL TRANSACTION, AND SHALL BE APPLIED FOR COMPUTATION OF ARM'S LENGTH PRICE IN THE MANNER SPECIFIED BY THE R ULES. RULES 10A TO 10E, WHICH HAVE BEEN SEPARATELY NOTIFIED VIDE S.O. 808(E ), DATED 21ST AUGUST, 2001, INTER ALIA, PROVIDE FOR THE FACTORS WHICH ARE TO BE CONSIDERED IN SELECTING THE MOST APPROPRIATE METHOD. THE MAJOR CO NSIDERATIONS IN THIS REGARD HAVE BEEN SPECIFIED TO BE THE AVAILABILITY, COVERAGE AND RELIABILITY OF DATA NECESSARY FOR APPLICATION OF THE METHOD, THE E XTENT AND RELIABILITY OF ASSUMPTIONS REQUIRED TO BE MADE, AND THE DEGREE OF COMPARABILITY EXISTING BETWEEN THE INTERNATIONAL TRANSACTION AND THE UNCON TROLLED TRANSACTION. THE RULES ALSO LAY DOWN IN DETAIL THE MANNER IN WHICH T HE METHODS ARE TO BE APPLIED IN DETERMINING THE ARM'S LENGTH PRICE. 55.10 APPLYING THE MOST APPROPRIATE METHOD TO DIFFE RENT SETS OF COMPARABLE DATA CAN POSSIBLY RESULT IN COMPUTATION OF MORE THA N ONE ARM'S LENGTH PRICE. WITH A VIEW TO AVOID UNNECESSARY DISPUTES, THE PROV ISO TO SECTION 92C(2) PROVIDES THAT IN SUCH A CASE THE ARITHMETIC MEAN OF THE PRICES SHALL BE ADOPTED AS THE ARM'S LENGTH PRICE. IN THE NORMAL CO URSE, IF THE DIFFERENT SETS OF COMPARABLE DATA ARE EQUALLY RELIABLE THERE MAY N OT BE ANY SIGNIFICANT DIVERGENCE BETWEEN THE VARIOUS ARM'S LENGTH PRICES DETERMINED. 55.11 UNDER THE NEW PROVISIONS THE PRIMARY ONUS IS ON THE TAXPAYER TO DETERMINE AN ARM'S LENGTH PRICE IN ACCORDANCE WITH THE RULES, AND TO SUBSTANTIATE THE SAME WITH THE PRESCRIBED DOCUMENTA TION. WHERE SUCH ONUS IS DISCHARGED BY THE ASSESSEE AND THE DATA USED FOR DETERMINING THE ARM'S LENGTH PRICE IS RELIABLE AND CORRECT, THERE CAN BE NO INTERVENTION BY THE ASSESSING OFFICER. THIS IS MADE CLEAR BY SUB-SECTIO N (3) OF SECTION 92C WHICH PROVIDES THAT THE ASSESSING OFFICER MAY INTER VENE ONLY IF HE IS, ON THE BASIS OF MATERIAL OR INFORMATION OR DOCUMENT IN HIS POSSESSION, OF THE OPINION THAT THE PRICE CHARGED IN THE INTERNATIONAL TRANSACTION HAS NOT BEEN ITA NO 846/AHD/06, 171/AHD/07, 253 & 91/AHD/08 A.Y.02-03 & 03-04 ATUL LTD. V. ACIT(OSD)RNG-1, ABD PAGE 31 DETERMINED IN ACCORDANCE WITH SUB-SECTIONS (1) AND (2), OR INFORMATION AND DOCUMENTS RELATING TO THE INTERNATIONAL TRANSACTION HAVE NOT BEEN KEPT AND MAINTAINED BY THE ASSESSEE IN ACCORDANCE WITH THE P ROVISIONS CONTAINED IN SUB-SECTION (1) OF SECTION 92D AND THE RULES MADE T HEREUNDER; OR THE INFORMATION OR DATA USED IN COMPUTATION OF THE ARM' S LENGTH PRICE IS NOT RELIABLE OR CORRECT; OR THE ASSESSEE HAS FAILED TO FURNISH, WITHIN THE SPECIFIED TIME, ANY INFORMATION OR DOCUMENT WHICH HE WAS REQU IRED TO FURNISH BY A NOTICE ISSUED UNDER SUB-SECTION (3) OF SECTION 92D. IF ANY ONE OF SUCH CIRCUMSTANCES EXISTS, THE ASSESSING OFFICER MAY REJ ECT THE PRICE ADOPTED BY THE ASSESSEE AND DETERMINE THE ARM'S LENGTH PRICE I N ACCORDANCE WITH THE SAME RULES. HOWEVER, AN OPPORTUNITY HAS TO BE GIVEN TO THE ASSESSEE BEFORE DETERMINING SUCH PRICE. THEREAFTER, AS PROVIDED IN SUB-SECTION (4) OF SECTION 92C, THE ASSESSING OFFICER MAY COMPUTE THE TOTAL IN COME ON THE BASIS OF THE ARM'S LENGTH PRICE SO DETERMINED BY HIM. 55.12 THE FIRST PROVISO TO SECTION 92C(4) RECOGNIZE S THE COMMERCIAL REALITY THAT EVEN WHEN A TRANSFER PRICING ADJUSTMENT IS MAD E UNDER THAT SUB- SECTION, THE AMOUNT REPRESENTED BY THE ADJUSTMENT W OULD NOT ACTUALLY HAVE BEEN RECEIVED IN INDIA OR WOULD HAVE ACTUALLY GONE OUT OF THE COUNTRY. THEREFORE IT HAS BEEN PROVIDED THAT NO DEDUCTIONS U NDER SECTION 10A OR 10B OR UNDER CHAPTER VI-A SHALL BE ALLOWED IN RESPECT O F THE AMOUNT OF ADJUSTMENT. 55.13 THE SECOND PROVISO TO SECTION 92C(4) REFERS T O A CASE WHERE THE AMOUNT INVOLVED IN THE INTERNATIONAL TRANSACTION HA S ALREADY BEEN REMITTED ABROAD AFTER DEDUCTING TAX AT SOURCE AND SUBSEQUENT LY, IN THE ASSESSMENT OF THE RESIDENT PAYER, AN ADJUSTMENT IS MADE TO THE TRANSFER PRICE INVOLVED AND, THEREBY, THE EXPENDITURE REPRESENTED BY THE AM OUNT SO REMITTED IS PARTLY DISALLOWED. UNDER THE INCOME-TAX ACT, A NON- RESIDENT IN RECEIPT OF INCOME FROM WHICH TAX HAS BEEN DEDUCTED AT SOURCE H AS THE OPTION OF FILING A RETURN OF INCOME IN RESPECT OF THE RELEVANT INCOM E. IN SUCH CASES, A NON- RESIDENT COULD CLAIM A REFUND OF A PART OF THE TAX DEDUCTED AT SOURCE, ON THE GROUND THAT AN ARM'S LENGTH PRICE HAS BEEN ADOPTED BY THE ASSESSING OFFICER IN THE CASE OF THE RESIDENT AND THE SAME PR ICE SHOULD BE CONSIDERED IN DETERMINING THE TAXABLE INCOME OF THE NON-RESIDE NT. HOWEVER, THE ADOPTION OF THE ARM'S LENGTH PRICE IN SUCH CASES WO ULD NOT ALTER THE COMMERCIAL REALITY THAT THE ENTIRE AMOUNT CLAIMED E ARLIER WOULD HAVE ACTUALLY BEEN RECEIVED BY THE ENTITY LOCATED ABROAD . IT HAS THEREFORE BEEN MADE CLEAR IN THE SECOND PROVISO THAT INCOME OF ONE ASSOCIATED ENTERPRISE SHALL NOT BE RECOMPUTED MERELY BY REASON OF AN ADJU STMENT MADE IN THE CASE OF THE OTHER ASSOCIATED ENTERPRISE ON DETERMIN ATION OF ARM'S LENGTH PRICE BY THE ASSESSING OFFICER. 55.14 THE NEW SECTION 92D PROVIDES THAT EVERY PERSO N WHO HAS UNDERTAKEN AN INTERNATIONAL TRANSACTION SHALL KEEP AND MAINTAI N SUCH INFORMATION AND DOCUMENTS AS MAY BE SPECIFIED BY RULES MADE BY THE BOARD. THE BOARD MAY ALSO SPECIFY BY RULES THE PERIOD FOR WHICH THE INFORMATION AND DOCUMENTS ARE REQUIRED TO BE RETAINED. THE DOCUMENT ATION REQUIRED TO BE ITA NO 846/AHD/06, 171/AHD/07, 253 & 91/AHD/08 A.Y.02-03 & 03-04 ATUL LTD. V. ACIT(OSD)RNG-1, ABD PAGE 32 MAINTAINED HAS BEEN PRESCRIBED UNDER RULE 10D. SUCH DOCUMENTATION INCLUDES BACKGROUND INFORMATION ON THE COMMERCIAL E NVIRONMENT IN WHICH THE TRANSACTION HAS BEEN ENTERED INTO, AND INFORMAT ION REGARDING THE INTERNATIONAL TRANSACTION ENTERED INTO, THE ANALYSI S CARRIED OUT TO SELECT THE MOST APPROPRIATE METHOD AND TO IDENTIFY COMPARABLE TRANSACTIONS, AND THE ACTUAL WORKING OUT OF THE ARM'S LENGTH PRICE OF THE TRANSACTION. THE DOCUMENTATION SHOULD BE AVAILABLE WITH THE ASSESSEE BY THE SPECIFIED DATE DEFINED IN SECTION 92F AND SHOULD BE RETAINED FOR A PERIOD OF EIGHT YEARS. DURING THE COURSE OF ANY PROCEEDINGS UNDER THE ACT, AN ASSESSING OFFICER OR COMMISSIONER (APPEALS) MAY REQUIRE ANY PERSON WHO H AS UNDERTAKEN AN INTERNATIONAL TRANSACTION TO FURNISH ANY OF THE INF ORMATION AND DOCUMENTS SPECIFIED UNDER THE RULES WITHIN A PERIOD OF THIRTY DAYS FROM THE DATE OF RECEIPT OF A NOTICE ISSUED IN THIS REGARD, AND SUCH PERIOD MAY BE EXTENDED BY A FURTHER PERIOD NOT EXCEEDING THIRTY DAYS. 55.15 THE NEW SECTION 92E PROVIDES THAT EVERY PERSO N WHO HAS ENTERED INTO AN INTERNATIONAL TRANSACTION DURING A PREVIOUS YEAR SHALL OBTAIN A REPORT FROM AN ACCOUNTANT AND FURNISH SUCH REPORT ON OR BEFORE THE SPECIFIED DATE IN THE PRESCRIBED FORM AND MANNER. RULE 10F, AND FORM NO. 3CEB HAVE BEEN NOTIFIED IN THIS REGARD, THE ACCOUNTANT'S REPORT ON LY REQUIRES FURNISHING OF FACTUAL INFORMATION RELATING TO THE INTERNATIONAL T RANSACTION ENTERED INTO, THE ARM'S LENGTH PRICE DETERMINED BY THE ASSESSEE AND T HE METHOD APPLIED IN SUCH DETERMINATION. IT ALSO REQUIRES AN OPINION AS TO WHETHER THE PRESCRIBED DOCUMENTATION HAS BEEN MAINTAINED. 55.16 THE NEW SECTION 92F DEFINES THE EXPRESSIONS ' ACCOUNTANT', 'ARM'S LENGTH PRICE', 'ENTERPRISE', 'SPECIFIED DATE' AND ' TRANSACTION' USED IN SECTIONS 92, 92A, 92B, 92C, 92D AND 92E, THE DEFINI TION OF ENTERPRISE IS BROAD AND INCLUDES A PERMANENT ESTABLISHMENT, EVEN THOUGH A PE IS NOT A SEPARATE LEGAL ENTITY. CONSEQUENTLY, TRANSACTIONS B ETWEEN A FOREIGN ENTERPRISE AND ITS PF, FOR EXAMPLE, BETWEEN THE HEA D OFFICE ABROAD AND A BRANCH IN INDIA, ARE ALSO SUBJECT TO THESE TRANSFER PRICING REGULATIONS. ALSO, THE REGULATIONS 33 WOULD APPLY TO TRANSACTIONS BETW EEN A FOREIGN ENTERPRISE AND A PE OF ANOTHER FOREIGN ENTERPRISE. THE TERM PE RMANENT ESTABLISHMENT HAS NOT BEEN DEFINED IN THE PROVISIONS BUT ITS MEAN ING MAY BE UNDERSTOOD WITH REFERENCE TO THE TAX TREATIES ENTERED INTO BY INDIA. 55.17 WITH A VIEW TO ENSURE THAT MULTINATIONAL ENTE RPRISES COMPLY WITH THE REQUIREMENTS OF THE NEW REGULATIONS, THE ACT HAS AL SO AMENDED SECTION 271 AND INSERTED NEW SECTIONS 271AA, 271BA AND 271G IN THE INCOME-TAX ACT, SO AS TO PROVIDE FOR PENALTY TO BE LEVIED IN CASES OF NON-COMPLIANCE WITH PROCEDURAL REQUIREMENTS, AND IN CASES OF UNDERSTATE MENT OF PROFITS THROUGH FRAUD OR WILFUL NEGLIGENCE. 55.18 THE NEW EXPLANATION 7 TO SUB-SECTION (1) OF S ECTION 271 PROVIDES THAT WHERE IN THE CASE OF AN ASSESSEE WHO HAS ENTERED IN TO AN INTERNATIONAL TRANSACTION, ANY AMOUNT IS ADDED OR DISALLOWED IN C OMPUTING THE TOTAL INCOME UNDER SUB-SECTIONS (1) AND (2) OF SECTION 92 , THEN, THE AMOUNT SO ADDED OR DISALLOWED SHALL BE DEEMED TO REPRESENT IN COME IN RESPECT OF ITA NO 846/AHD/06, 171/AHD/07, 253 & 91/AHD/08 A.Y.02-03 & 03-04 ATUL LTD. V. ACIT(OSD)RNG-1, ABD PAGE 33 WHICH PARTICULARS HAVE BEEN CONCEALED OR INACCURATE PARTICULARS HAVE BEEN FURNISHED. HOWEVER, NO PENALTY UNDER SECTION 271(1) (C) SHALL BE LEVIED WHERE THE ASSESSEE PROVES TO THE SATISFACTION OF TH E ASSESSING OFFICER OR THE COMMISSIONER (APPEALS) THAT THE PRICE CHARGED O R PAID IN SUCH TRANSACTION HAS BEEN DETERMINED IN ACCORDANCE WITH SECTION 92C IN GOOD FAITH AND WITH DUE DILIGENCE. 55.19 THE NEW SECTION 271AA PROVIDES THAT IF ANY PE RSON WHO HAS ENTERED INTO AN INTERNATIONAL TRANSACTION FAILS TO KEEP AND MAINTAIN ANY SUCH INFORMATION AND DOCUMENTS AS SPECIFIED UNDER SECTIO N 92D, THE ASSESSING OFFICER OR COMMISSIONER (APPEALS) MAY DIRECT THAT S UCH PERSON SHALL PAY, BY WAY OF PENALTY, A SUM EQUAL TO TWO PER CENT. OF THE VALUE OF THE INTERNATIONAL TRANSACTION ENTERED INTO BY SUCH PERSON. 55.20 THE NEW SECTION 271BA PROVIDES THAT IF ANY PE RSON FAILS TO FURNISH A REPORT FROM AN ACCOUNTANT AS REQUIRED BY SECTION 92 E, THE ASSESSING OFFICER MAY DIRECT THAT SUCH PERSON SHALL PAY BY WAY OF PEN ALTY, A SUM OF ONE LAKH RUPEES. 55.21 THE NEW SECTION 271G PROVIDES THAT IF ANY PER SON WHO HAS ENTERED INTO AN INTERNATIONAL TRANSACTION FAILS TO FURNISH ANY INFORMATION OR DOCUMENTS AS REQUIRED UNDER SUB-SECTION (3) OF SECT ION 92D, THE ASSESSING OFFICER OR THE COMMISSIONER (APPEALS) MAY DIRECT TH AT SUCH PERSON SHALL PAY, BY WAY OF PENALTY, A SUM EQUAL TO TWO PER CENT . OF THE VALUE OF THE INTERNATIONAL TRANSACTION. 55.22 THE ACT HAS ALSO AMENDED SECTION 273B TO PROV IDE THAT THE ABOVE MENTIONED PENALTIES UNDER SECTION 271AA, 271BA AND 271G SHALL NOT BE IMPOSABLE IF THE ASSESSEE PROVES THAT THERE WAS REA SONABLE CAUSE FOR SUCH FAILURES. 55.23 THESE AMENDMENTS WILL TAKE EFFECT FROM 1ST AP RIL, 2002 AND WILL ACCORDINGLY APPLY TO THE ASSESSMENT YEAR 2002-2003 AND SUBSEQUENT YEARS. THE LEARNED COUNSEL FURTHER SUBMITTED THAT RULE-10C GIVES GUIDELINES FOR THE SELECTION OF MOST APPROPRIATE METHOD. FOR READY REF ERENCE THE SAME IS REPRODUCED HEREIN BELOW:- RULE 10C - MOST APPROPRIATE METHOD. - (1) FOR THE PURPOSES OF SUB- SECTION (1) OF SECTION 92C, THE MOST APPROPRIATE METHOD SHALL BE THE METHOD WHICH IS BEST SUITED TO THE FACTS AND ITA NO 846/AHD/06, 171/AHD/07, 253 & 91/AHD/08 A.Y.02-03 & 03-04 ATUL LTD. V. ACIT(OSD)RNG-1, ABD PAGE 34 CIRCUMSTANCES OF EACH PARTICULAR INTERNATIONAL TRAN SACTION, AND WHICH PROVIDES THE MOST RELIABLE MEASURE OF AN ARM'S LENGTH PRICE IN RELATION TO THE INTERNATIONAL TRANSACTION. (2) IN SELECTING THE MOST APPROPRIATE METHOD AS SPE CIFIED IN SUB-RULE (1), THE FOLLOWING FACTORS SHALL BE TAKEN INTO ACCOUNT, NAME LY :- (A) THE NATURE AND CLASS OF THE INTERNATIO NAL TRANSACTION; (B) THE CLASS OR CLASSES OF ASSOCIATED ENTERPRI SES ENTERING INTO THE TRANSACTION AND THE FUNCTIONS PERFORMED BY THEM TAKING INTO ACCOUNT ASSETS EMPLOYED OR TO BE EMPLOYED AND RIS KS ASSUMED BY SUCH ENTERPRISES; (C) THE AVAILABILITY, COVERAGE AND RELIABILITY OF D ATA NECESSARY FOR APPLICATION OF THE METHOD; (D) THE DEGREE OF COMPARABILITY EXISTING BETWEEN THE INTERNATIONAL TRANSACTION AND THE UNCONTROLLED TRANSACTION AN D BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS; (E) THE EXTENT TO WHICH RELIABLE AND ACCUR ATE ADJUSTMENTS CAN BE MADE TO ACCOUNT FOR DIFFERENCES, IF ANY, B ETWEEN THE INTERNATIONAL TRANSACTION AND THE COMPARAB LE UNCONTROLLED TRANSACTION OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS; (F) THE NATURE, EXTENT AND RELIABILITY OF ASSUMPTI ONS REQUIRED TO BE MADE IN APPLICATION OF A METHOD. IN VIEW OF THE ABOVE RULE, THE LD. COUNSEL FOR THE ASSESSEE STATED THAT IT IS VERY APPARENT THAT FOR THE PURPOSE OF SEC.92C(1), MOST A PPROPRIATE METHOD SHALL BE THE ONE WHICH IS BEST SUITED TO THE FACTS AND CIRCUMSTA NCES OF EACH PARTICULAR INTERNATIONAL TRANSACTIONS AND WHICH PROVIDES THE M OST RELIABLE MEASURE OF ARM'S LENGTH PRICE IN RELATION TO THE INTERNATIONAL TRANS ACTIONS. HE FURTHER SUBMITS THAT THE PERUSAL TO THE PROVISIONS OF TRANSFER PRICING MAKES IT ABUNDANTLY CLEAR THAT NO METHOD IS GIVEN PREFERENCE OVER ANOTHER METHOD. IN FACT RU LES PROVIDES DIFFERENT CRITERIA FROM CLAUSES-(A) TO CLAUSES-(F) AND BASED ON THE SAME, M OST APPROPRIATE METHOD SHALL HAVE TO BE DETERMINED BY THE ASSESSEE FIRST AND APP ROVED BY THE TPO LATER. HE FURTHER SUBMITTED THAT EVEN IN CUP METHOD, THE MECH ANISM FOR CALCULATING ARMS LENGTH PRICE IS AS FOLLOWS: (A) COMPARABLE UNCONTROLLED PRICE METHOD, BY WHICH, :- (I) THE PRICE CHARGED OR PAID FOR PROPERTY T RANSFERRED OR SERVICES PROVIDED IN A COMPARABLE UNCONTROLLED TRANSACT ION, OR A NUMBER OF SUCH TRANSACTIONS, IS IDENTIFIED; ITA NO 846/AHD/06, 171/AHD/07, 253 & 91/AHD/08 A.Y.02-03 & 03-04 ATUL LTD. V. ACIT(OSD)RNG-1, ABD PAGE 35 (II) SUCH PRICE IS ADJUSTED TO ACCOUNT FOR DIFFERENCES, IF ANY, BETWEEN THE INTERNATIONAL TRANSACTION AND THE COMP ARABLE UNCONTROLLED TRANSACTIONS OR BETWEEN THE ENTER PRISES ENTERING INTO SUCH TRANSACTIONS, WHICH COULD MATERIALLY AF FECT THE PRICE IN THE OPEN MARKET; (III) THE ADJUSTED PRICE ARRIVED AT UNDER SUB-C LAUSE (II) IS TAKEN TO BE AN ARM'S LENGTH PRICE IN RESPECT OF THE PROPERTY TRA NSFERRED OR SERVICES PROVIDED IN THE INTERNATIONAL TRANSACTION; IN VIEW OF THIS HE STATED THAT THE SAID METHOD CAN ONLY BE APPLIED AFTER TAKING INTO CONSIDERATION VARIOUS FACTORS AND MATERIAL DIFFEREN CES ARISING ON ACCOUNT OF RISK, FINANCIAL SUPPORT, MARKETING SUPPORT, TECHNICAL SUP PORT, GEOGRAPHICAL PRESENCE, READY SET UP, RECOGNITION, ASSETS EMPLOYED AND CURR ENCY FLUCTUATIONS. THE LEARNED COUNSEL FOR THE ASSESSEE FURTHER SUBMITTED THAT, AS PRESCRIBED UNDER THE SAID CUP METHOD, THE ADJUSTMENTS ON ACCOUNT OF DIFFERENCES B ETWEEN THE INTERNATIONAL TRANSACTIONS AND COMPARABLE UNCONTROLLED TRANSACTIO NS, OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS, WHICH COULD MATERI ALLY AFFECT THE PRICES IN THE OPEN MARKET, ARE VERY DIFFICULT TO QUANTIFY. IN FACT TPO HAS NOT MADE AN ATTEMPT TO MAKE ANY ADJUSTMENT ON ACCOUNT OF THE FACTORS VIZ. FINAN CIAL SUPPORT, MARKETING EFFORTS, STORAGE OF GOODS FOR READY DELIVERY AND ALL OTHER R ELEVANT AND MATERIAL FACTORS. IN FACT, THE LEARNED COUNSEL SUBMITTED THAT IT HAS ALR EADY DISCOUNTED AND ADJUSTED ITS PRICES FOR THESE FACTORS BUT THE SAID ADJUSTMENTS H AVE BEEN SIMPLY IGNORED AND BRUSHED ASIDE BY THE TPO WITHOUT GIVING ANY COGENT REASONS. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT NO ADJUSTMENT TO TH E ARM'S LENGTH PRICE IS CALLED FOR AND THE ADJUSTMENTS MADE BY THE TPO MAY KINDLY BE D ELETED. 1 FURTHER RELIANCE IS PLACED ON THE FOLLOWING DECISIO NS: (I) 107 ITD 141 (BANG)(SB) AT PAGES 229-234, 242, 2 47-48. (II) 109 ITD 101 (DEL) (III) 110 ITD 428 (DEL) (IV) OECD GUIDELINES (ALREADY PLACED ON RECORD) (V) GUIDANCE NOTE ISSUED BY ICAI (ALREADY PLACED ON RECORD) ITA NO 846/AHD/06, 171/AHD/07, 253 & 91/AHD/08 A.Y.02-03 & 03-04 ATUL LTD. V. ACIT(OSD)RNG-1, ABD PAGE 36 26. WE HAVE HEARD THE RIVAL CONTENTIONS AND GONE TH ROUGH THE FACTS AND CIRCUMSTANCES OF THE CASE. THE FACTS IN DETAIL ARE AVAILABLE IN ASSESSMENT YEAR 2003-04 IN ITA NO.157/AHD/2007 , HENCE, WE WILL DISCUSS THIS APPEAL FIRST. 27. WE FIND THAT THE ASSESSEE IS ENGAGED IN THE BUS INESS OF MANUFACTURING & SALE OF INTERMEDIATES, DIES, COLOURS ETC. THE ASSES SEE HAS TWO SUBSIDIARIES BASED IN USA AND UK NAMELY, AAI AND AEL. THE TRANSACTION WITH BOTH THE AES HAVE BEEN ADJUSTED BY THE TPO AT ARMS LENGTH PRICE, REA SON BEING THE SAID TRANSACTION WITH THESE AES HAVE BEEN UNDERSTATED TO THE EXTENT OF RS.1,80,62,067/-. FOR THIS PURPOSE, THE ASSESSEE H AS OPTED FOR CUP METHOD AS THE ASSESSEE WAS HAVING SALES OF LARGE NUMBER OF PR ODUCTS TO THESE AES DURING THE YEARS UNDER CONSIDERATION. THE ASSESSEE, APART FROM THE AES, ALSO SOLD DIVERSIFIED PRODUCTS TO VARIOUS OTHER ENTERPRISES W HO ARE NOT RELATED TO THE ASSESSEE. THE ASSESSEE IN VIEW OF THESE FACTS, OPT ED FOR CUP METHOD, CONSIDERING THE COMPLEXITY OF THE TRANSACTIONS, PRO DUCT DIVERSITY AND MULTIPLICITY OF TRANSACTIONS, AND THIS WAS ONLY THE PRACTICABLE MET HOD TO DETERMINE THE PROFITS EARNED BY THE ASSESSEE, AS A WHOLE, AS WELL AS TO T HE TRANSACTIONS TO WHICH THE COMPARABLE PRICE APPLIES IN AN UNCONTROLLED TRANSAC TIONS IN THE INTERNATIONAL MARKET, BOTH THE AES AS WELL AS NON-AES. THE ASSES SEE CLAIMED DURING THE COURSE OF HEARING BEFORE TPO, BEFORE THE AO DURING THE COURSE OF ASSESSMENT PROCEEDINGS AND BEFORE CIT(A) SUBMITTED THE DETAILS OF PRICE CHARGED TO AES AND NON-AES AND THE REASONS FOR VARIATION. THE SAME DE TAILS WERE EVEN PRODUCED BEFORE US AS ANNEXURE-A, WHICH IS AVAILABLE AT PAGE S 34 TO 111 OF THE ASSESSEES PAPER BOOK-II. THE ASSESSEE HAS MADE COMPARISON IN MANY OF THE CASES WITH THE SALES MADE WITH AES IN THE DEVELOPED COUNTRIES AND THE SALES MADE TO UNDER- DEVELOPED COUNTRIES TO NON-AES. THE MAIN CONTENTIO N OF THE ASSESSEE IS THAT THE ASSESSEE HAS MORE MARGINS IN THE SALES MADE TO UNDE R-DEVELOPED COUNTRIES DUE TO VARIOUS RISKS INVOLVED IN DEALING WITH THE UNDER -DEVELOPED COUNTRIES. ACCORDINGLY, IT WAS THE CONTENTION THAT ITS SALES G OODS TO THE AES AND THE AES IN TURN SALE THE GOODS TO THEIR CUSTOMERS IN NORTH / S OUTH AMERICA, EUROPE ETC., WHICH ARE HIGHLY COMPETITIVE MARKETS AND AS SUCH IT BECOMES DIFFICULT TO SUSTAIN. THE ASSESSEE HAS DENIED THAT IT HAS CHARGED LOWER R ATES FROM AES AS COMPARED TO THOSE OF NON-AES, THE AES HAVE NOT BEEN ABLE T O MAKE PROFITS. AS PER ITA NO 846/AHD/06, 171/AHD/07, 253 & 91/AHD/08 A.Y.02-03 & 03-04 ATUL LTD. V. ACIT(OSD)RNG-1, ABD PAGE 37 ASSESSEE, IF THE ASSESSEE HAS CHARGED RATES, WHICH ARE HIGHER THAN THOSE CHARGED TO NON-AES THERE IS A POSSIBILITY THAT THE AES WI LL NOT BE ABLE TO SALE ANYTHING. ACCORDING TO ASSESSEE, THE CUP METHOD IS USED, AS I N THE SAID METHOD, CONTROLLED TRANSACTIONS ARE BEING COMPARED WITH UNCONTROLLED T RANSACTIONS WHEREIN THE DEGREE OF COMPARABILITY WITH UNCONTROLLED TRANSACTI ONS IS VERY HIGH. ACCORDING TO ASSESSEE, IN ANY CASE, IT IS NOT NECESSARY TO GIVE ALL THE REASONS OR GROUNDS FOR JUSTIFICATION OF A PARTICULAR METHOD IN THE AUDIT R EPORT ITSELF. IF IT IS STATED THAT A PARTICULAR METHOD IS FOLLOWED BECAUSE IN MAJORITY O F THE CASES PRICES ARE COMPARABLE BETWEEN AE AND NON-AES, AS PER THE ASSES SEE, IT HAS EVERY RIGHT TO ADOPT THE CUP METHOD. THE ASSESSEE ALSO ADMITS THAT IN FEW INSTANCES, WHEN PRICES OF OTHER COMPARABLE CASES ARE NOT AVAILABLE, IN THE ASSESSEES CASE, THE PRICES CHARGED BY IT TO AE IN SUCH CASES CAN BE ADO PTED AS AN ALP. AS PER THE TPO THE WHOLESALE MARGINS AND VOLUME DISCOUNTS AS W ELL AS POLITICAL RISKS HAVE NOT BEEN SUBSTANTIATED BY THE ASSESSEE. NOW AS PER THE ASSESSEE, BOTH THESE MARGINS I.E. WHOLESALE DISCOUNTS AND POLITICAL RISK S VARY FROM PARTY TO PARTY AND COUNTRY TO COUNTRY AND IN AFRICAN COUNTRIES WHERE H IGH POLITICAL UNCERTAINTY IS THERE, THE PRICES ARE OBVIOUSLY HIGHER COMPARED TO THE PRICES CHARGED TO A HIGHLY DEVELOPED NATIONS WHERE LAW AND ORDER AND POLITICAL STABILITY IS THERE. 28. WHETHER THE INFORMATION SUBMITTED BY THE ASSESS EE IS ENOUGH IN THE CASE OF TRANSACTIONS RECORDED AS PER THE CUP METHOD. WE AR E OF THE VIEW THAT THE CUP METHOD COMPARES THE PRICE CHARGE FOR PROPERTY TRANS FERRED IN A CONTROLLED TRANSACTION TO THE PRICE CHARGED FOR PROPERTY TRANS FERRED IN A COMPARABLE UNCONTROLLED TRANSACTION IN COMPARABLE CIRCUMSTANCE S. IF THERE IS ANY DIFFERENCE BETWEEN THE TWO PRICES, THIS MAY INDICATE THAT THE CONDITIONS OF THE COMMERCIAL AND FINANCIAL RELATIONS OF THE ASSOCIATED ENTERPRISES A RE NOT AT ARMS LENGTH AND, THAT THE PRICE IN THE UNCONTROLLED TRANSACTION MAY NEED TO B E SUBSTITUTE FOR THE PRICE IN THE CONTROLLED TRANSACTION. IN THE CASES, WHERE CONTRO LLED AND UNCONTROLLED TRANSACTIONS ARE COMPARABLE, THEN REGARD SHOULD BE HAD TO THE EF FECT ON PRICE OF BORDER BUSINESS FUNCTION OTHER THAN JUST PRODUCT COMPARABILITY. TH E EXAMPLES PROVIDED IN THE OECD GUIDELINES OF TRANSFER PRICING GUIDELINES FOR MULTI NATIONAL ENTERPRISES AND TAX ADMINISTRATION HAS DISCUSSED HOW THE CUP METHOD IS TO BE APPLIED. THE RELEVANT PARA 2.10 TO 2.13 READ AS UNDER:- ITA NO 846/AHD/06, 171/AHD/07, 253 & 91/AHD/08 A.Y.02-03 & 03-04 ATUL LTD. V. ACIT(OSD)RNG-1, ABD PAGE 38 2.10 THE FOLLOWING EXAMPLES ILLUSTRATE THE APPLICA TION OF THE CUP METHOD, INCLUDING SITUATION WHERE ADJUSTMENTS MA NEED TO BE MADE TO UNCONTROLLED TRANSACTIONS TO MAKE THEM COMPARABLE UNCONTROLLED T RANSACTIONS. 2.11 THE CUP METHOD IS A PARTICULARLY RELIABLE METH OD WHERE AN INDEPENDENT ENTERPRISE SELLS THE SAME PRODUCT AS IS SOLD BETWEE N TWO ASSOCIATED ENTERPRISE. FOR EXAMPLE, AN INDEPENDENT ENTERPRISE SELLS UNBRANDED COLOMBIAN COFFEE BEANS OF A SIMILAR TYPE, QUALITY, AND QUANTITY AS THOSE SOLD BETWEEN TWO ASSOCIATED ENTERPRISES, ASSUMING THAT T HE CONTROLLED AND UNCONTROLLED TRANSACTIONS OCCUR AT ABOUT THE SAME T IME, AT THE SAME STAGE IN THE PRODUCTION / DISTRIBUTION CHAIN, AND UNDER SIMI LAR CONDITIONS. IF THE ONLY AVAILABLE UNCONTROLLED TRANSACTION INVOLVED UNBRAND ED BRAZILIAN COFFEE BEANS, IT WOULD BE APPROPRIATE TO INQUIRE WHETHER THE DIFF ERENCE IN THE COFFEE BEANS HAS A MATERIAL EFFECT O THE PRICE. OF EXAMPLE, I CO ULD BE ASKED WHETHER THE SOURCE OF COFFEE BEANS COMMANDS A PREMIUM OR REQUIR ES A DISCOUNT GENERALLY IN THE OPEN MARKET. SUCH INFORMATION MA BE OBTAINAB LE FROM COMMODITY MARKETS OR MAY BE DEDUCED FROM DEALER PRICES. IF TH IS DIFFERENCE DOES HAVE A MATERIAL EFFECT ON PRICE, SOME ADJUSTMENTS WOULD BE APPROPRIATE. IF A REASONABLY ACCURATE ADJUSTMENT CANNOT BE MADE, HERE LIABILITY OF THE CUP METHOD WOULD BE REDUCED, AND IT MIGHT BE NECESSARY TO COMBINE THE CUP METHOD WITH OTHER LESS DIRECT METHODS, OR TO USE SU CH METHODS INSTEAD. 2.12 ONE ILLUSTRATIVE CASE WHERE ADJUSTMENTS MAY BE REQUIRED IS WHETHER THE CIRCUMSTANCES SURROUNDING CONTROLLED AND UNCONTROLL ED SALES ARE IDENTICAL, EXCEPT FOR THE FACT THAT THE CONTROLLED SALES PRICE IS A DELIVERED PRICE AND THE UNCONTROLLED SALES ARE MADE F.O.B. FACTORY. THE DI FFERENCES IN TERMS OF TRANSPORTATION AND INSURANCE GENERALLY HAVE A DEFIN ITE AND REASONABLY ASCERTAINABLE EFFECT ON PRICE. THEREFORE, TO DETERM INE THE UNCONTROLLED SALES PRICE, ADJUSTMENT SHOULD BE MADE TO THE PRICE FOR T HE DIFFERENCE IN DELIVERY TERMS. 2.13 AS ANOTHER EXAMPLE, ASSUME A TAXPAYER SELLS 10 00 TONS OF A PRODUCT FOR $9=80 PER TON TO AN ASSOCIATED ENTERPRISE IN ITS MN E GROUP, AND AT THE SAME TIME SELLS 500 TONS OF THE SAME PRODUCT FOR $100 PE R TON TO AN INDEPENDENT ENTERPRISE. THIS CASE REQUIRES AN EVALUATION OF WHE THER THE DIFFERENT VOLUMES SHOULD RESULT IN AN ADJUSTMENT OF THE TRANSFER PRIC E. THE RELEVANT MARKET SHOULD BE RESEARCHED BY ANALYZING TRANSACTIONS IN S IMILAR PRODUCTS TO DETERMINE TYPICAL VOLUME DISCOUNTS. 29. SIMILARLY THE BANGALORE SPECIAL BENCH OF THIS T RIBUNAL IN THE CASE OF AZTEC SOFTWARE & TECHNOLOGY SERVICES LTD. V. ACIT , CIRCLE-11(1), BANGALORE (2007) 107 ITD 141 (BANG) ((SB) HAS HELD THAT THE BURDEN TO ES TABLISH THAT INTERNATIONAL TRANSACTION CARRIED BY THE ASSESSEE IS AT ALP IS ON THE TAXPAYER. THE SPECIAL BENCH HELD AS UNDER:- 127. HAVING REGARD TO ABOVE STATUTORY PROVISIONS, IT IS CLEAR THAT BURDEN TO ESTABLISH THAT INTERNATIONAL TRANSACTION WAS CARRIE D AT ALP IS ON THE TAXPAYER. ITA NO 846/AHD/06, 171/AHD/07, 253 & 91/AHD/08 A.Y.02-03 & 03-04 ATUL LTD. V. ACIT(OSD)RNG-1, ABD PAGE 39 HE HAS ALSO TO FURNISH COMPARABLE TRANSACTIONS, APP LY APPROPRIATE METHOD FOR DETERMINATION OF ALP AND JUSTIFY THE SAME BY PRODUC ING RELEVANT MATERIAL AND DOCUMENTS BEFORE THE REVENUE AUTHORITIES. IN CASE R EVENUE AUTHORITIES ARE NOT SATISFIED WITH THE ALP AND THE SUPPORTING DOCUM ENTS/INFORMATION FURNISHED BY THE TAXPAYER, THE AUTHORITIES HAVE AMPLE POWER T O DETERMINE THE SAME AND MAKE SUITABLE ADJUSTMENTS. IN SUCH A SITUATION, AS RIGHTLY ADMITTED IN THE GROUND OF APPEAL BY THE REVENUE, THIS RESPONSIBILIT Y OF DETERMINATION OF ALP IS SHIFTED TO THE REVENUE AUTHORITIES WHO ARE TO DE TERMINE THE SAME IN ACCORDANCE WITH STATUTORY REGULATIONS. 128. THERE IS CRITICISM THAT LEGISLATURE IS NOT JU STIFIED IN PLACING ONEROUS BURDEN ON THE TAXPAYER TO MAINTAIN DETAILED DOCUMEN TS AND TO JUSTIFY THAT TRANSACTION WAS CARRIED AT ALP. IT IS CONTENDED/ARG UED THAT THIS IS LIKE INSISTING UPON PRODUCTION OF SELF-INCRIMINATING EVIDENCE AND IS UNCALLED FOR. THIS CRITICISM, IN OUR OPINION, IS WITHOUT ANY VALID BAS IS. IT IS TO BE REMEMBERED THAT INTERNATIONAL TRANSACTIONS CARRIED OUT BY TAXPAYER ARE CROSS-BORDER TRANSACTIONS. DEPARTMENTAL AUTHORITIES IN INDIA ARE REQUIRED TO DEAL WITH AND DETERMINE ALP OF TRANSACTIONS CARRIED IN ASIA, EURO PE, AMERICA, AUSTRALIA, OTHER DEVELOPED AND UNDER-DEVELOPED COUNTRIES IN AF RICA, ETC. IT IS VERY DIFFICULT, IF NOT IMPOSSIBLE FOR THEM TO FIND RELEV ANT DATA OF AN EXACT OR OF A SIMILAR TRANSACTION OR PROFIT MADE NOT ONLY BY THE TAXPAYER, BUT ALSO BY OTHER SIMILARLY SITUATED UNCONTROLLED ENTERPRISES. KNOWLE DGE OF ECONOMIC CONDITIONS PREVAILING AT THE PLACE WHERE TRANSACTIONS ARE CARR IED IS ALSO ESSENTIAL. THE VERY NATURE OF THIS JOB OF COLLECTION OF DATA IS SU CH THAT THE ASSESSEE IS IN THE BEST POSITION TO GATHER THE REQUISITE INFORMATION. 129. THE TAXPAYER, ON THE OTHER HAND, AS A PARTY TO THE TRANSACTION HAS FULL KNOWLEDGE OF THE TRANSACTION CARRIED AND PROFIT EAR NED BY HIM. AS A PERSON ASSOCIATED WITH THAT PARTICULAR LINE OF BUSINESS AC TIVITY, THE ASSESSEE IS REASONABLY EXPECTED TO BE NOT ONLY AWARE ABOUT NUAN CES OF THAT BUSINESS, BUT ALSO ABOUT ECONOMIC CONDITIONS AND PECULIAR CIRCUMS TANCES, IF ANY, OF THAT BUSINESS. HE IS LIKELY TO KNOW EVEN ABOUT COMPARABL E UNCONTROLLED TRANSACTIONS. OTHERWISE TOO AS PER THE SETTLED LAW EVERY ATTEMPT TO COLLECT BEST EVIDENCE HAS TO BE MADE. EVIDENCE OF SITUATION HAS TO BE CALLED FROM A PERSON POSSESSING SPECIAL MEANS TO KNOW THAT SITUAT ION. THEREFORE, IT IS REASONABLE TO CALL UPON THE TAXPAYER TO FURNISH EVI DENCE OF CONTROLLED/UNCONTROLLED TRANSACTIONS WHICH ARE WITH IN TAXPAYERS SPECIAL KNOWLEDGE. HOWEVER, TAX AUTHORITIES CANNOT INSIST U PON THE TAXPAYER TO FURNISH INFORMATION HE DOES NOT POSSESS OR IS NOT REQUIRED TO MAINTAIN UNDER RULES. GUIDELINES GIVEN IN CIRCULARS OF CBDT ARE TO BE FOL LOWED. WE, THEREFORE, HOLD THAT BURDEN OF PROOF TO ESTABLISH ALP AND TO FURNIS H RELEVANT INFORMATION HAS RIGHTLY BEEN PLACED ON THE ASSESSEE. 130. IT WOULD NOT BE OUT OF PLACE TO MENTION THAT A LMOST ALL COUNTRIES WORLD OVER ARE FACING PROBLEM OF DIVERSION OF INCOME BY M ULTINATIONAL COMPANIES AND OTHER ENTERPRISES TO JURISDICTIONS WHERE THE TA X BURDEN IS LEAST OR THE LOWEST. THEREFORE, ALMOST ALL COUNTRIES HAVE SIMILA R ENACTMENTS TO TACKLE THIS MENACE. WE QUOTE BELOW THE POSITION OF 'BURDEN OF P ROOF' IN SOME OF IMPORTANT COUNTRIES; IT BEING NOT POSSIBLE AND PRAC TICAL TO NOTE IN FULL DETAILS OF PROVISION OF ALL THE COUNTRIES. THIS INFORMATION IS BEING EXTRACTED FROM ITA NO 846/AHD/06, 171/AHD/07, 253 & 91/AHD/08 A.Y.02-03 & 03-04 ATUL LTD. V. ACIT(OSD)RNG-1, ABD PAGE 40 COMMENTARIES ON TRANSFER PRICING, 2006 PUBLISHED BY PRICE WATER HOUSE : 'BURDEN OF PROOF DENMARK THE QUESTION OF BURDEN OF PROOF HAS BEEN ONE OF THE MOST IMPORTANT ISSUE IN RELATION TO THE DEVELOP MENT OF TRANSFER PRICING IN DENMARK. IN THE TEXACO AND BP DENMARK COURT CASES T HE HIGH COURT AND SUPREME COURT CONFIRMED THAT THE BURDEN OF PROOF LI ES WITH THE TAX AUTHORITIES AND THAT THE TAXPAYER IS REQUIRED TO DISCLOSE INFOR MATION RELEVANT TO THE QUESTION OF WHETHER THE ARM S LENGTH PRINCIPLE HA S BEEN VIOLATED. THIS INFORMATION WOULD INCLUDE ITEMS SUCH AS PRICES AND GROSS PROFIT EARNED BY THE PARENT COMPANY WHEN DEALING WITH OTHER GROUP COMPAN IES AND WITH UNRELATED CUSTOMERS. WHERE THIS INFORMATION IS NOT DISCLOSED, THE COURT CONCLUDES THAT THE BURDEN OF PROOF ON THE DANISH TAX AUTHORITIES I S REDUCED. FRANCE AS A RULE, THE BURDEN OF PROOF LIES WITH THE TAX AUTHORITIES, UNLESS THE TRANSFER OF PROFITS CONCERNS A TAX HAVEN, IN WHICH CASE THE BURDEN OF P ROOF IS TRANSFERRED TO THE TAXPAYER. RECENT DEVELOPMENTS MEAN THAT THERE IS NO W A LEGAL REQUIREMENT FOR TAXPAYERS TO PROVIDE DOCUMENTATION SUPPORTING T HEIR TRANSFER PRICING POLICIES. THOUGH IN THEORY THE BURDEN OF PROOF LIES WITH THE TAX ADMINISTRATION, IN PRACTICAL TERMS THE BURDEN OF PROOF HAS ALWAYS F ALLEN ON THE TAXPAYER WHERE THE TAX AUTHORITIES HAVE DEEMED A PROFIT SHIFT TO H AVE TAKEN PLACE OR INAPPROPRIATE TRANSFER PRICING TO EXIST. INDONESIA INDONESIA OPERATES ON A SELF- ASSESSMENT SYSTEM WITH COMPANIES SETTING THEIR OWN TRANSFER PRICES. THE BURDEN OF PROOF LIES WITH THE TAXPAYER TO PROVE THA T THE ORIGINAL PRICE HAS BEEN SET AT ARM S LENGTH. IRELAND UNDER IRELAND S SE LF-ASSESSMENT SYSTEM, THE BURDEN OF PROOF IN THE EVENT OF A REVENUE AUDIT WIL L FALL ON THE TAXPAYER. ITALY THE GENERAL PRINCIPLE IS THAT THE BURDEN OF PROOF L IES WITH THE TAX AUTHORITIES. WHERE THE TAX AUTHORITIES ISSUE AN ASSESSMENT TO AD DITIONAL TAX, HOWEVER, THE TAXPAYER MUST PROVE THERE IS NO LIABILITY FOR THE A DDITIONAL TAX. THERE ARE OTHER CIRCUMSTANCES IN WHICH THE BURDEN OF PROOF LIES WIT H THE TAXPAYER. THE MOST IMPORTANT OF THESE ARE THE FOLLOWING : IF AN ENTERPRISE THAT IS TAX RESIDENT IN ITALY WANTS TO CLAIM A DEDUCTION FOR THE COSTS OF T RANSACTIONS WITH PARTIES THAT ARE RESIDENT IN CERTAIN TAX HAVENS, THEN THE ITALIA N TAXPAYER MUST PROVIDE EVIDENCE THAT THE FOREIGN PARTY IS A GENUINE COMMER CIAL UNDERTAKING OR THAT THE TRANSACTIONS WERE EFFECTED IN CONNECTION WITH A REAL ECONOMIC INTEREST; AND AN ITALIAN TAXPAYER WOULD ALSO HAVE TO BE ABLE TO PROVE THAT THE RELEVANT TRANSACTION ACTUALLY TOOK PLACE. MALAYSIA IN THE SELF-ASSESSMENT SYSTEM, THE BURDEN OF PROOF LIES WITH THE TAXPAYER TO CLEAR ANY TAX AVOIDANCE ALLEGATION AND/OR ALLEGED TRANSFER PRICING ABUSE. T HE INTENTION OF THE MALAYSIAN TRANSFER PRICING GUIDELINES IS TO ASSIST THE TAXPAYER IN THEIR EFFORTS TO DETERMINE ARM S LENGTH TRANSFER PRICES AND AT THE SAME TIME COMPLY WITH THE LOCAL TAX LAWS AND THE ADMINISTRATIVE REQUIREME NTS OF THE MALAYSIAN TAX AUTHORITIES. IN THIS CONNECTION, UPON A FIELD AUDIT OR ENQUIRY, THE RELEVANT TAXPAYERS WITH RELATED PARTY TRANSACTIONS MUST BE A BLE TO SUBSTANTIATE WITH DOCUMENTS, AND TO THE TAX AUTHORITIES SATISFACTIO N, THAT ITS TRANSFER PRICES HAVE BEEN DETERMINED IN ACCORDANCE WITH THE ARM S LENGTH PRINCIPLE AND THAT THERE HAS NOT BEEN ANY ABUSE OF THE TRANSFER PRICES RESULTING IN AN ALTERATION OF THE INCIDENCE OF TAX IN MALAYSIA. NETHERLANDS AS INDICATED PREVIOUSLY, THERE IS A LEGAL OBLIGATION FOR THE TAXPAYER TO MAINTAIN CERTAIN TRANSFER PRICING DOCUMENTATION. TO THE EXTENT THAT THIS REQUIREMENT IS NOT MET, THE BURDEN OF PROOF IS ULTIMATELY TRANSFERRED TO THE TAXPAYER. IN GENERAL, THERE ARE NO STATUTORY PROVISIONS TO INDICATE HOW THE BURDEN OF PROOF IS DIVIDED BETWEEN THE TAXPAYER AND THE TAX AUTHORITIES. THE ALLOCATION OF THE BURDEN OF PROOF ITA NO 846/AHD/06, 171/AHD/07, 253 & 91/AHD/08 A.Y.02-03 & 03-04 ATUL LTD. V. ACIT(OSD)RNG-1, ABD PAGE 41 BETWEEN THE PARTIES IS AT THE DISCRETION OF THE COU RT. HOWEVER, IN PRACTICE AND AS A RESULT OF DUTCH CASE LAW, IF THE COMPANY S R EVENUE IS ADJUSTED UPWARDS BECAUSE OF TRANSFER PRICING ISSUES, THE BURDEN OF P ROOF USUALLY LIES WITH THE TAX AUTHORITIES. ON THE OTHER HAND, THE BURDEN LIES WIT H THE TAXPAYER TO PROVE THE DEDUCTIBILITY OF EXPENSES. IN TRANSFER PRICING CASE S THE BURDEN OF PROOF TRANSFERS TO THE TAXPAYER IF THE PRICING ARRANGEMEN TS ARE VERY UNUSUAL, FOR EXAMPLE IF COMPARABLE UNCONTROLLED PRICES (CUP) ARE AVAILABLE BUT NOT USED, OR GOODS OR SERVICES ARE PROVIDED AT COST OR BELOW COST. THE BURDEN OF PROOF IS ALSO TRANSFERRED TO THE TAXPAYER, AND WILL BE MORE ONEROUS, IF S/HE REFUSES TO PROVIDE INFORMATION REQUESTED BY THE TAX AUTHORITIE S WHERE THERE IS A LEGAL OBLIGATION TO PROVIDE THAT INFORMATION, OR IF THE R EQUISITE TAX RETURN IS NOT FILED. FINALLY, THE COURT SOMETIMES ALLOCATES THE BURDEN O F PROOF TO THE PARTY BEST ABLE TO PROVIDE THE EVIDENCE. NEW ZEALAND IN NEW ZE ALAND, THE BURDEN OF PROOF NORMALLY LIES WITH THE TAXPAYER, NOT THE COMM ISSIONER. HOWEVER, S. GD13(9) PLACES THE BURDEN OF PROOF ON THE COMMISSIO NER WHERE THE TAXPAYER HAS DETERMINED ITS TRANSFER PRICES IN ACCORDANCE WI TH SS. 13(6) TO 13(8) OF THE NEW ZEALAND TAX ACT. WHERE THE COMMISSIONER SUBSTIT UTES AN ARM S LENGTH PRICE FOR THE ACTUAL PRICE, THEN THE COMMISSIONER M UST PROVE THAT EITHER : (1) THIS IS A MORE RELIABLE MEASURE : OR (2) THE TAXPAY ER HAS NOT CO-OPERATED WITH THE COMMISSIONER. THE GUIDELINES PROVIDE GUIDANCE O N WHAT IS CONSIDERED TO BE NON-COOPERATION : WHERE THE TAXPAYER DOES NOT PROVIDE THE REQUESTED RELEVANT INFORMATION TO THE COMMISSIONER : OR IF A TAXPAYER DOES NOT PREPARE ADEQUATE DOCUMENTAT ION, AND PROVIDE IT TO THE INLAND REVENUE IF REQUESTED. UNITED KINGD OM THE POSITION AFTER THE 1999 RULES IS THAT THE BURDEN FOR PROVING THAT TRANSFER PRICES ARE AT ARM S LENGTH FALLS SQUARELY ON THE TAXPAYE R S SHOULDERS. THE ACT OF SUBMITTING THE RETURN UNDER SELF- ASSESSMENT IMPLICITLY ASSUMES THAT THE TAXPAYER HAS MADE ALL NECESSARY ADJUSTMENT S TO TAXABLE PROFITS TO TAKE ACCOUNT OF NON-ARM S LENGTH PRICING. SWIT ZERLAND THE BURDEN OF PROOF WITHIN SWITZERLAND LIES WITH : THE TAXPAYER REGARDING THE JUSTIFICATION OF TAX DE DUCTIBLE EXPENSES; AND THE TAX AUTHORITIES REGARDING ADJUSTMENTS, WHICH I NCREASE TAXABLE INCOME. THIS EFFECTIVELY MEANS THAT A TAXPAYER HAS TO PROVE TO THE SWISS TAX AUTHORITIES THAT THE PRICE IT HAS PAID FOR ITS TANG IBLES, INTANGIBLES AND ANY SERVICE IT HAS RECEIVED FROM A RELATED PARTY SATISF IES THE ARM S LENGTH PRINCIPLE (I.E., JUSTIFIES THEIR TAX DEDUCTIBILITY) . ON THE OTHER SIDE, THE SWISS TAX AUTHORITIES RES PONSIBILITY IS TO PROVE THAT THE COMPENSATION FOR ANY SERVICE RENDERED BY T HE TAXPAYER OR ANY TANGIBLES OR INTANGIBLES TRANSFERRED TO A RELATED P ARTY DOES NOT REACH AN ARM S LENGTH LEVEL. HOWEVER, IF A TAXPAYER FAILS TO PRO DUCE THE DOCUMENTS REQUIRED BY THE TAX AUTHORITIES, THIS BURDEN OF PROOF ALSO R EVERTS TO THE TAXPAYER. THEREFORE, IT IS RECOMMENDED THAT SWISS TAXPAYERS M AINTAIN APPROPRIATE DOCUMENTATION TO JUSTIFY ALL INCOME AND EXPENSES RE SULTING FROM RELATED PARTY TRANSACTIONS. THIS IS SPECIFICALLY ALSO TRUE WITH R EGARD TO LICENCE FEES CHARGED TO A SWISS ENTITY OR SUPPORT AND DEFENSE OF LOW PRO FITS IN CONNECTION WITH LIMITED RISK TYPE ENTITIES. UNITED STATES NON-US TA X AUTHORITIES AND PRACTITIONERS ALIKE HAVE TENDED TO BE CRITICAL OF T HE LEVEL OF DETAIL INCLUDED IN ITA NO 846/AHD/06, 171/AHD/07, 253 & 91/AHD/08 A.Y.02-03 & 03-04 ATUL LTD. V. ACIT(OSD)RNG-1, ABD PAGE 42 THE US REGULATIONS AND PROCEDURES. HOWEVER, IN CONS IDERING THE US REGIME, IT IS IMPORTANT TO BEAR IN MIND THAT UNLIKE MANY OF IT S MAJOR TRADING PARTNERS, THE US CORPORATE TAX SYSTEM IS A SELF-ASSESSMENT SYSTEM WHERE THE BURDEN OF PROOF IS GENERALLY PLACED ON THE TAXPAYER, AND WHER E THERE IS AN ADVERSARIAL RELATIONSHIP BETWEEN THE GOVERNMENT AND THE TAXPAYE R. THIS ADDITIONAL COMPLIANCE BURDEN IS NOT UNIQUE TO THE FIELD OF TRA NSFER PRICING.' 131. SIMILAR PROVISIONS ARE AVAILABLE IN THE LAWS OF OTHER COUNTRIES. IT WOULD BE SEEN THAT EVEN A MOST ADVANCED COUNTRY LIKE UNIT ED KINGDOM HAS PROVISIONS PLACING ON THE TAXPAYER THE BURDEN OF PR OVING THAT INTERNATIONAL TRANSACTION IS CARRIED AT ALP. 132. A DISPASSIONATE STUDY OF PROVISIONS OF VARIOUS COUNTRIES ON BURDEN OF PROOF, WOULD SHOW, THE FOLLOWING FUNDAMENTAL FEATUR ES : (I) THAT THE BURDEN TO ESTABLISH THAT INTERNATIONAL TRANSACTION IS CARRIED AT ALP, IS ON THE TAXPAYER WHO IS TO DISCLOSE ALL THE RELEVANT INFORMATION AND DOCUMENTS RELATING TO PRICES CHARGED AND PROFIT EARNED WITH RELATED AND UNRELATE D CUSTOMER. (II) IF THE AO HAS DETERMINED AN ALP, OTHER THAN THE PRICE DECLARE D BY THE ASSESSEE, AO HAS TO PROVE THAT THE PRICE DETERMINED BY HIM IS RE LIABLE AND REASONABLE AND CONFIRMS THE STATUTORY REQUIREMENT UNLESS THE CASE IS COVERED BY SITUATION NO. (III) BELOW. (III) IN CASE OF FAILURE ON THE PART O F THE TAXPAYER TO COMPLY WITH THE STATUTORY PROVISIONS, THE TAX AUTHORITIES WOULD HAV E TO DETERMINE THE ALP. IN SUCH A SITUATION, BURDEN OF PROOF ON TAX AUTHORITIE S IS MUCH REDUCED. 133. HAVING REGARD TO THE STATUTORY PROVISIONS, PA RTICULARLY THE MANDATE OF SS. 92(1) AND 92D READ WITH RELEVANT RULES, WE HOLD THA T IT IS OBLIGATORY ON THE PART OF THE TAXPAYER TO FURNISH INFORMATION RELATING TO CONTROLLED INTERNATIONAL TRANSACTIONS, SELECT A SUITABLE METHOD FOR DETERMIN ATION AND FURNISH ALP OF SUCH INTERNATIONAL TRANSACTIONS CARRIED BY IT AND G IVE BASIS AND SUPPORTING AUTHENTIC EVIDENCE OF ALP AND ADJUSTMENTS MADE. THE TAXPAYER HAS FURTHER TO CO-OPERATE IN THE DETERMINATION OF THE ALP BY THE T AX AUTHORITIES BY FURNISHING ALL RELEVANT INFORMATION. THE TAX AUTHORITIES IN CA SES WHERE THEY ARE OF THE OPINION THAT ALP HAS NOT BEEN CORRECTLY DETERMINED BY THE TAXPAYER, CAN SUBSTITUTE THEIR OWN ALP ON THE BASIS OF MATERIAL O R INFORMATION FURNISHED BY THE ASSESSEE OR COLLECTED BY THEM. HOWEVER, SUCH AL P HAS TO BE DETERMINED HAVING IN MIND PROVISIONS OF SS. 92 AND 92C AND OTH ER RULES AND REGULATIONS. WHILE DETERMINING ALP, TAX AUTHORITIES ARE BOUND TO FOLLOW PRINCIPLES OF NATURAL JUSTICE AND BE FAIR AND REASONABLE TO THE T AXPAYER. ANY MATERIAL COLLECTED TO BE USED AGAINST THE TAXPAYER IS TO BE PUT TO TAXPAYER TO EXPLAIN. HAVING REGARD TO THE PURPOSE OF THE LEGISLATION AND APPLICATION OF SIMILAR ENACTMENT WORLD OVER, IT MUST FURTHER BE HELD THAT ADJUSTMENTS MADE ON ACCOUNT OF ALP BY TAX AUTHORITIES CAN BE DELETED IN APPEAL ONLY IF THE APPELLATE AUTHORITIES ARE SATISFIED AND RECORD A FI NDING THAT ALP SUBMITTED BY THE ASSESSEE IS FAIR AND REASONABLE. MERELY BY FIND ING FAULTS WITH THE TRANSFER PRICE DETERMINED BY THE REVENUE AUTHORITIES (AO/TPO ), ADDITION ON ACCOUNT OF 'ADJUSTMENTS' CANNOT BE DELETED. THIS IS BECAUSE THE MANDATE OF S. 92(1) IS THAT IN EVERY CASE OF INTERNATIONAL TRANSACTION, IN COME HAS TO BE DETERMINED HAVING REGARD TO ALP. THEREFORE, UNLESS ALP FURNISH ED BY THE TAXPAYER IS SPECIFICALLY ACCEPTED, THE APPELLATE AUTHORITIES ON THE BASIS OF MATERIAL AVAILABLE ON RECORD HAVE TO DETERMINE ALP ITSELF. S UBJECT TO STATUTORY ITA NO 846/AHD/06, 171/AHD/07, 253 & 91/AHD/08 A.Y.02-03 & 03-04 ATUL LTD. V. ACIT(OSD)RNG-1, ABD PAGE 43 PROVISIONS, APPELLATE AUTHORITIES CAN DIRECT LOWER REVENUE AUTHORITIES TO CARRY THIS EXERCISE IN ACCORDANCE WITH LAW. THE MATTER CA NNOT BE LEFT HANGING IN BETWEEN. ALP OF INTERNATIONAL TRANSACTION HAS TO BE DETERMINED IN EVERY CASE. 134. THERE WOULD BE CASES, WHERE TAXPAYER DOES NOT CO-OPERATE AND FAILS TO FURNISH ALP OR DISCLOSE FULL INFORMATION, RELEVANT FOR DETERMINATION OF ALP WHEN CALLED UPON TO DO SO BY TAX AUTHORITIES. THE T AXPAYER FAILS TO DISCHARGE BURDEN PLACED ON THE TAXPAYER. IN SIMILAR ENACTMENT S OF OTHER COUNTRIES, IT IS PROVIDED THAT BURDEN ON THE REVENUE AUTHORITIES IN SUCH A CASE WOULD BE REDUCED. WE HAVE NOT COME ACROSS SIMILAR PROVISION IN CHAPTER X OF THE ACT. THE TAX AUTHORITIES THEREFORE, HAVE TO RESORT TO PR OVISION OF S. 144 OF THE IT ACT AND DETERMINE THE ALP ON THE BASIS OF THE MATERIAL COLLECTED OR AVAILABLE ON RECORD. IN SUCH CIRCUMSTANCES, THE ALP DETERMINED W OULD BE ON THE PARITY WITH A BEST JUDGMENT ASSESSMENT. SUCH ASSESSMENT (D ETERMINATION OF ALP) WOULD HAVE SOME APPROXIMATIONS AND ESTIMATIONS. BUT EVEN SUCH APPROXIMATIONS AND ESTIMATIONS MUST SATISFY DICTATE S OF JUSTICE AND FAIR PLAY AND LOOK REASONABLE. IT CANNOT BE ARBITRARY AND CAP RICIOUS. THE ORDER OF TPO IS APPEALABLE AND THEREFORE, IT MUST BE OBJECTIVE, CONTAIN DETAILED REASONS, CONFORM TO REGULATIONS AND SHOULD BE SEEN AS JUST A ND FAIR. 135. ON CONSIDERATION OF THE RELEVANT PROVISIONS, I T IS EVIDENT THAT IN THE PROCESS OF DETERMINING ALP, THE FIRST IMPORTANT FAC TOR TO CONSIDER IS THE SPECIFIC CHARACTERISTICS OF SERVICES RENDERED BOTH IN THE INTERNATIONAL TRANSACTION AS ALSO IN THE UNCONTROLLED TRANSACTION . NEXT IMPORTANT ASPECT REQUIRED TO BE CONSIDERED IS AMOUNT OF ASSETS EMPLO YED, RISK INVOLVED, BOTH IN CONTROLLED AND UNCONTROLLED TRANSACTIONS. IF THERE ARE SUCH DIFFERENCES BETWEEN TRANSACTIONS TAKEN FOR COMPARISON, WHICH AR E LIKELY TO AFFECT THE PRICE OR COST CHARGE ETC. IN THE OPEN MARKET THEN REASONA BLE AND ACCURATE EVALUATION IS TO BE DONE AND ADJUSTMENT MADE. RELIA BILITY OF UNCONTROLLED TRANSACTION WOULD DEPEND UPON THE DEGREE OF COMPARA BILITY. THE UNCONTROLLED TRANSACTION MAY NOT BE TAKEN 'AS COMPARABLE' IF THE RE ARE SUCH MATERIAL DIFFERENCES AS CANNOT BE ADJUSTED. IF DATA FOUND SA TISFIES ABOVE REQUIREMENTS THEN FURTHER PROCEEDINGS TO FIND THE MOST APPROPRIA TE METHOD, BEST SUITED TO THE FACTS AND CIRCUMSTANCES OF A PARTICULAR INTERNA TIONAL TRANSACTION IS TO BE SELECTED. IN OTHER WORDS, MOST APPROPRIATE METHOD W OULD BE THE METHOD WHICH PROVIDES MOST REASONABLE RESULTS HAVING REGAR D TO THE DATA AVAILABLE FOR DETERMINING ARM S LENGTH PRICE. IF THERE ARE MORE THAN ONE ALPS DETERMINED ON THE APPLICATION OF MOST APPROPRIATE METHOD THEN ARITHMETICAL MEAN OF SUCH PRICES OR PRICE AT OPTION OF THE ASSESSEE WITHIN 5 PER CENT VARIATION IS TO BE ADOPTED [PROVISO TO S. 92C(2)]. 136. IN THE LIGHT OF ABOVE GENERAL OBSERVATIONS, WE NOW PROCEED TO CONSIDER VARIOUS OBJECTIONS OF THE PARTIES FIRST BEING CLUBB ING OF INTERNATIONAL TRANSACTIONS FOR REFERENCE TO THE TPO. THE TAXPAYER , BEFORE THE LEARNED CIT(A), HAD CONTENDED THAT CLUBBING OF ALL TRANSACT IONS WITH MERE MENTION OF AGGREGATE VALUE OF ALL TRANSACTIONS IN REFERENCE TO TPO WAS WRONG. A SEPARATE REFERENCE IN RESPECT OF EACH INTERNATIONAL TRANSACTION SHOULD HAVE BEEN MADE. LIKEWISE APPROVAL GRANTED BY THE LEARNED CIT HAS ALSO BEEN CHALLENGED AS MECHANICAL AND ILLEGAL. SUCH AN OBJEC TION HAS ALSO BEEN RAISED IN THE GROUNDS OF APPEAL. WHILE ANSWERING SEVEN QUE STIONS REFERRED TO THE ITA NO 846/AHD/06, 171/AHD/07, 253 & 91/AHD/08 A.Y.02-03 & 03-04 ATUL LTD. V. ACIT(OSD)RNG-1, ABD PAGE 44 SPECIAL BENCH, WE HAVE DISCUSSED THIS OBJECTION REL ATING TO APPROVAL OF CIT IN DETAIL. IN THE LIGHT OF ABOVE DISCUSSION, WE DO NOT FIND ANY SUBSTANCE IN THE TECHNICAL OBJECTIONS RAISED BY THE ASSESSEE AND ACC EPTED BY THE LEARNED CIT(A) IN THE IMPUGNED ORDER. IT IS FURTHER TO BE N OTED THAT IN THE AUDIT REPORT FILED BY THE TAXPAYER IN FORM NO. 3CEB IT WAS STATE D THAT THE TAXPAYER HAD PAID RS. 28,32,20,103 TO AZTEC US TOWARDS ONSITE SO FTWARE SERVICES. LIKEWISE SUM PAID FOR MARKETING SERVICES WAS ALSO STATED. TA KING ABOVE DETAILS FROM THE AUDIT REPORT, A REFERENCE WAS MADE BY THE AO TO TPO TO DETERMINE ALP OF INTERNATIONAL TRANSACTIONS. THE TAXPAYER AND TPO HA D FULLY AND CLEARLY UNDERSTOOD WHAT INTERNATIONAL TRANSACTIONS WERE REF ERRED FOR THE DETERMINATION OF THE ALP. IN THE LIGHT OF CIRCULAR NO. 3 OF 2003, APPROVAL WAS RIGHTLY GIVEN BY THE CIT AS AGGREGATE VALUE OF TRANSACTIONS EXCEEDED RS. 5 CRORES. THE CIRCULAR BEING BINDING WAS REQUIRED TO BE FOLLOWED. THE TAXPAYER FILED ALL CONCEIVABLE OBJECTIONS BEFORE THE TPO. ALTHOUGH EAC H TRANSACTION SHOULD BE SEPARATELY MENTIONED, BUT NO PREJUDICE IS SHOWN TO HAVE BEEN CAUSED TO THE TAXPAYER ON ACCOUNT OF NON-MENTION OF EACH TRANSACT ION SEPARATELY. THEREFORE, IN OUR OPINION, THIS CONTENTION IS TO BE REJECTED. 30. IN VIEW OF THE ABOVE DICTATES PROVIDED IN THE G UIDELINES OF TRANSFER PRICE FOR MULTI-NATIONAL ENTERPRISES AND TAX ADMINISTRATION I N THE CASE OF CUP METHOD INCLUDING THE SITUATION WHERE ADJUSTMENTS NEED TO B E MADE TO UNCONTROLLED TRANSACTIONS TO MAKE THEM COMPARABLE UNCONTROLLED T RANSACTION. THE ASSESSEE HAS NOT FILED THE DETAILS OF FUNCTIONAL ANALYSIS OF THE SE ENTERPRISES TAKING INTO ACCOUNT ASSETS USED AND RISK ASSUMED. SIMILARLY, THE HON'B LE ITAT BANGALORE SPECIAL BENCH IN THE CASE OF AZTEC SOFTWARE & TECHNOLOGY SERVICES LTD. (SUPRA) HAS PLACED BURDEN OF THE TAXPAYER TO JUSTIFY THE TRANSACTIONS CARRIED AT ALP BY MAINTAINING THE DOCUMENTS AND OTHER DETAILS. THE HON'BLE BANAGALOR E SPECIAL BENCH HAS ALSO HELD THAT TAXPAYER AS A PARTY TO THE TRANSACTION HAS FUL L KNOWLEDGE OF TRANSACTION CARRIED OUT AND AS A PERSONAL ASSOCIATE WITH THAT PARTICULA R LINE OF BUSINESS, THE ASSESSEE REASONABLY ACCEPTED TO BE NOT ONLY AWARE ABOUT NUIS ANCE OF THAT BUSINESS AND BUT ALSO ECONOMIC CONDITIONS AND PECULIAR SITUATION OF THAT BUSINESS. THE BENCH FURTHER HELD THAT THE ASSESSEE KNEW EVEN ABOUT THE COMPARAB LE UNCONTROLLED TRANSACTION, AND THEREFORE IT IS REASONABLE TO CALL UPON THE TAX PAYER TO FURNISH CONTROLLED / UN- CONTROLLED TRANSACTIONS WHICH ARE WITHIN TAXPAYERS SPECIAL KNOWLEDGE. ACCORDINGLY, THE BURDEN PLACED ON THE ASSESSEE IS NOT DISCHARGED IN THE PRESENT CASE BEFORE US AS THE ASSESSEE HAS NOT FILED THE DETAILS BEFORE TP O OR THE ASSESSING OFFICER. THE RELEVANT DETAILS, I.E. THE TRANSACTION CARRIED OUT OF COMPARABLE CONTROLLED AND UNCONTROLLED TRANSACTIONS. IN VIEW OF THESE FACTS, AND IN THE ABSENCE OF MATERIAL, WE HAVE NO ALTERNATIVE BUT TO EXPECT TO SET ASIDE THIS ISSUE TO THE FILE OF THE ASSESSING ITA NO 846/AHD/06, 171/AHD/07, 253 & 91/AHD/08 A.Y.02-03 & 03-04 ATUL LTD. V. ACIT(OSD)RNG-1, ABD PAGE 45 OFFICER TO DECIDE THE ISSUE AFRESH AFTER GIVING REA SONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. THE ASSESSEE MAY SHOW THAT SALE PR ICE OF THE CONTROLLED TRANSACTIONS ARE AT ARMS LENGTH. IF THERE ARE DIF FERENCES BETWEEN THE CONTROLLED AND UNCONTROLLED TRANSACTIONS, THEN THE ASSESSEE IS ENT ITLED TO THE BENEFIT OF ADJUSTMENT FOR SUCH DIFFERENCES UNDER THE T.P. RULES. THE AO/T PO IS DIRECTED TO PASS A FRESH ORDER IN THE LIGHT OF THE ABOVE OBSERVATIONS. THIS MATER IS SET ASIDE IN THE ENTIRELY TO THE FILE OF THE AO OF THIS ISSUE. NOW WE SHALL TAKE UP ASSESSEES APPEAL IN ITA NO.25 3/AHD/2008 & REVENUES APPEAL IN ITA NO.951/AHD/2008 BOTH A.Y. 2002-03. 31. THE ONLY ISSUE IN THESE APPEALS OF THE ASSESSEE AND OF THE REVENUE IS REGARDING PARTLY UPHOLDING THE PENALTY LEVIED BY TH E ASSESSING OFFICER U/S.271(1) OF THE ACT. THE ASSESSEE HAS CHALLENGED THE UPHOLDING THE PENALTY ON THE DISALLOWANCE OF CLAIM U/S.80IA AND ADDITION OF TRAN SFER PRICING DIFFERENCE OF ALP. FOR THIS THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS: - 1. THE C.I.T.(APPEALS) ERRED IN UPHOLDING THE PENA LTY UNDER SEC. 271(1) ON A DISALLOWANCE OF CLAIM UNDER SEC.80IA AMOUNTING TO RS.S12,91,95,094/- AND ON ACCOUNT OF ADDITION OF TRANSFER PRICING DIFFEREN CE AMOUNTING TO RS.2,02,39,798/- 2. THE CIT(APPEALS) OUGHT TO HAVE ALLOWED THE APPEA L OF THE ASSESSEE PRAYING FOR QUASHING OF THE TOTAL PENALTY. 3. THE C.I.T.(APPEALS) FAILED TO APPRECIATE THAT TH E ASSESSING OFFICER HAD NOT RECORDED HIS SATISFACTION DURING THE COURSE OF ASSE SSMENT PROCEEDINGS FOR LEVY OF PENALTY UNDER SEC. 271(1) AND ALSO THE FAC T THAT THE NOTICE UNDER SEC.271(1) ALSO DID NOT RECORD ITS SATISFACTION CO RRECTLY. 32. AFTER HEARING THE RIVAL CONTENTIONS, WE FIND TH AT THE TRIBUNAL HAS UPHELD THE DISALLOWANCE OF CLAIM OF DEDUCTION U/S.80IA OF THE ACT, IN THE QUANTUM APPEAL IN ITA NO.846/AHD/2006 BY RELYING ON THE EARLIER YEARS DECISION, (THE SA ME IS BEING REPRODUCED EVEN THOUGH AT THE COSTS OF DUPLICITY, B UT FOR THE SAKE OF CLARITY) BY GIVING FOLLOWING FINDINGS:- 8. AT THE OUTSET, THE LD. COUNSEL FOR THE ASSESSEE FAIRLY STATED THAT THIS ISSUE HAS BEEN DECIDED BY THE TRIBUNAL IN ITA NO.3528/AHD.2004 FOR THE ASSESSMENT YEAR 2001-02 VIDE ORDER DATED 16-05-2008 AGAINST THE ASSESSEE. WE FIND THAT THE CIT(A) IN BOTH THE YEARS HAS RELIE D ON THE APPELLATE ORDER FOR ITA NO 846/AHD/06, 171/AHD/07, 253 & 91/AHD/08 A.Y.02-03 & 03-04 ATUL LTD. V. ACIT(OSD)RNG-1, ABD PAGE 46 THE ASSESSMENT YEAR 2001-02 AND DECIDED THIS ISSUE FOLLOWING THE SAME. HOWEVER, THE CIT(A) IN ASSESSMENT YEAR 2003-04 HAS ALSO GIVEN A FINDING IN PARA 6.4 OF HIS APPELLATE ORDER 21-11-2006 AS UNDER :- 6.8 THUS THE ISSUE INVOLVED IS NOT THAT ANY OLD MA CHINERY WAS USED, BUT THE ISSUE IS THAT NO NEW INDUSTRIAL UNDERTAKING CAME IN TO EXISTENCE. THE ABOVE POSITION CLEARLY SHOWS THAT WHAT HAS BEEN DONE IN T HE NAME OF ALLEGED NEW INDUSTRIAL UNDERTAKING IS THAT THE ASSESSEE HAS PUR CHASED A TURBINE AND IT HAS BEEN CLAIMED THAT TURBINE INDEPENDENTLY CAN GENERAT E POWER AND AS SUCH THIS IS A NEW POWER PLANT. IT WAS CLAIMED THAT ASSESSEE HAD INSTALLED NEW TURBINE AND THIS CAN BE UTILIZED BY USING STEAM FROM OUTSID E SOURCES AND SINCE THE ASSESSEE ALREADY HAD A BOILER, THEY HAVE CHARGED FO R CONSUMPTION OF STEAM AT THE RATE OF RS.660/- PER MT. IT APPEARS THAT THE ASSESSEE WANTS TO SAY TURBINE IN ITSELF AMOUNTS TO ESTABLISHING A NEW UND ERTAKING. THIS DOES NOT APPEAL TO REASON BECAUSE TURBINE IN ITSELF CAN NEVE R BE HELD TO BE A NEW POWER PLANT. A NEW POWER PLANT WILL HAVE SEVERAL T HINGS LIKE PROVISION FOR SUPPLY OF STEAM, TRANSMISSION LINES, CONTROLLING TO WERS AND OTHER ITEMS. SIMPLY SAYING THAT A NEW TURBINE IS A NEW INDUSTRIAL UNDER TAKING MEANS THAT IF A NEW ENGINE IS INSTALLED IN AN OLD BODY OF A CAR, THE SA ME IS CONVERTED INTO A NEW CAR. THIS EXAMPLE HAS BEEN GIVEN FOR SIMPLE AND LO GICAL UNDERSTANDING OF THE SITUATION. THE ASSESSEE HAS VEHEMENTLY CLAIMED AT THE TIME OF ASSESSMENT THAT SUPPLY OF POWER IS NOT A PART OF THE POWER PLA NT THEN TURBINE IN ITSELF CAN NEVER BE SAID TO BE A POWER PLANT BECAUSE TURBINE A LONE CAN NEVER BE A UNIT OF GENERATING POWER. AS DISCUSSED EARLIER, AS PER THE C.AS CERTIFICATE WHICH HAS BEEN REPRODUCED IN EARLIER PAT OF THE ORDER, WH ICH WAS TAKEN OUT OF ASSESSMENT ORDER, THAT THIS POWER PLAT WAS AN OLD P LANT. APART FROM THAT IT IS APPARENT THAT TURBINE IN ITSELF CANNOT BE SAID TO B E A NEW POWER PLANT, THEREFORE, THE CLAIM OF DEDUCTION U/S.80IA WAS SIMP LY WITH A VIEW TO REDUCE THE INCIDENCE OF TAX AND THE ASSESSING OFFICER AFTE R INVESTIGATION OF THE ISSUE AS RIGHTLY COME TO THE CONCLUSION THAT THE SAME CAN NOT BE TERMED AS NEW POWER PLANT. THIS GROUND IS THEREFORE DISMISSED. WE FURTHER FIND THAT THIS ISSUE IS RECURRING FROM E ARLIER YEARS AND THE TRIBUNAL IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2001-02 IN ITA NO.3528/AHD.2004 HAS HELD AGAINST THE ASSESSEE BY DISCUSSING THE FAC TS AS UNDER:- 7.GROUND NOS.3 AND 4 RELATE TO THE CLAIM OF THE AS SESSEE FOR DEDUCTION U/S 80-IA IN RESPECT OF NEW POWER PLANT. THE ASSESSEE CLAIMED THAT DURING THE YEAR HE HAS ESTABLISHED THE NEW POWER PLANT AND ACCORDINGLY CLAIMED THE DEDUCTION ON THAT POWER PLANT U/S 80-IA OF THE ACT. WHEN QUESTIONED BY THE AO, T HE ASSESSEE VIDE LETTER DATED 9/3/2004 POINTED OUT THAT FOR GEN ERATION OF THE POWER WHAT IS REQUIRED IS TURBINE. FOR COMPOSITE PL ANT FOR GENERATION OF POWER WHAT IS REQUIRED IS BOILER AND TURBINE. BOILER MANUFACTURES THE STEAM WHICH IS THE RAW MATERIAL FO R TURBINE. TURBINE IS INDEPENDENTLY KEPT FOR GENERATING POWER. THE ASSESSEE INSTALLED NEW TURBINE WHICH ITSELF IS A NE W INDUSTRIAL UNDERTAKING CAPABLE OF GENERATING ELECTRICITY. THIS TURBINE CAN BE OPERATED BY PURCHASING STEAM FROM OUTSIDE SOURCE BU T THE ASSESSEE SINCE HAD THE SPARE CAPACITY OF STEAM USED THE SAME FOR GENERATING ELECTRICITY IN TURBINE. IT WAS POINT ED OUT THAT THE ITA NO 846/AHD/06, 171/AHD/07, 253 & 91/AHD/08 A.Y.02-03 & 03-04 ATUL LTD. V. ACIT(OSD)RNG-1, ABD PAGE 47 ASSESSEE HAS CHARGED FOR CONSUMPTION OF STEAM AT TH E RATE OF RS.660 PER MT. RELYING ON THE DECISION 107 ITR 195 (SC), IT WAS POINTED OUT THAT THE ASSESSEE MAY ESTABLISH A NEW U NIT FOR USING THE PRODUCT OF THE OLD BUSINESS AS ITS RAW MATERIAL . THE BUSINESS MAY ESTABLISH NEW UNIT FOR SUPPLYING RAW MATERIAL F OR ITS OLD UNIT. THE ASSESSEE MAY ESTABLISH A DIVISION OF ITS OWN PR ODUCT AS A NEW UNIT AND THE ASSESSEE MAY ESTABLISH ONE OR MORE UNITS. IT WAS ALSO POINTED OUT THAT THE AO HAS PRESUMED THAT THE EXISTING BOILER IS AN INTEGRAL PART OF THE NEW PLANT. THERE IS NO TRANSFER OF PREVIOUSLY USED PLANT AND MACHINERY AND THEREFORE T HE QUESTION OF VALUE OF PREVIOUSLY USED PLANT BEING LESS THAN 2 0% OF THE TOTAL VALUE OF THE NEW PLANT AND MACHINERY DOES NOT SURVI VE. IT WAS ALSO POINTED OUT THAT THE TOTAL VALUE OF THE PLANT AND MACHINERY USED FOR BUSINESS OF GENERATING POWER WORKS OUT TO RS.14,56,44,295/- (1827180 ON PLANT AND MACHINERY A ND 126427115 TURBINE, A NEW INDUSTRIAL UNIT). THE VALU E OF THE BOILER (PRE-EXISTING AND PRE-USED IS RS.1476600/- (PURCHAS ED SECOND- HAND ON 9-11-98). IT WAS ALSO CONTENDED THAT THE BO ILER IS NOT A PART AND PARCEL OF NEW PLANT AND MACHINERY. THE AO DID NOT AGREE WITH THE CONTENTIONS OF THE ASSESSEE THAT THE TURBINE HAS TO BE TREATED AS AN INDEPENDENT POWER GENERATING UNIT AND ULTIMATELY HE HELD THAT NEW POWER PLANT HAS BEEN ES TABLISHED BY WAY OF TRANSFER OF OLD PREVIOUSLY USED MACHINERY AN D ACCORDINGLY DID NOT ALLOW THE DEDUCTION U/S 80-IA IN RESPECT OF THIS POWER PLANT. THE ASSESSEE WENT IN APPEAL BEFORE THE CIT(A ). THE CIT(A) ALSO CONFIRMED THE FINDING OF THE AO BY HOLDING AS UNDER: 4.1 I HAVE CONSIDERED THE FINDINGS OF THE AO, SUB MISSIONS AND ARGUMENTS ADVANCED BY THE LD. COUNSEL FOR THE APPELLANT DURIN G THE COURSE OF ASSESSMENT AS WELL AS APPELLATE PROCEEDINGS AND CAS E LAWS RELIED UPON ON THE ISSUE. I FIND THAT NO INDUSTRIAL UNDERTAKING CA ME INTO EXISTENCE WITHIN THE PROVISIONS OF SECTION 80IA BY TRANSFERRING THE BOIL ER OR BY INSTALLING NEW MACHINERY FOR THE PURPOSE OF GENERATION OF POWER FO R FACTORY CONSUMPTION. I FIND THAT THIS IS NOTHING BUT AN EXERCISE TO CLAIM DEDUCTION TO REDUCE TAXABLE PROFITS. I ALSO FIND THAT THE POWER PLANT IS NOT CA PABLE TO RUN INDEPENDENTLY AND IS DEPENDENT ON THE TRANSFER OF STEAM ETC. FROM THE EXISTING PLANT. I THEREFORE HOLD THAT THE APPELLANT IS NOT ENTITLED TO CLAIM DE DUCTION U/S 80IA ON NEW POWER PLANT AMOUNTING TO RS.15,68,40,556/-. THIS GR OUND OF APPEAL IS THEREFORE REJECTED. 8 BEFORE US, THE LEARNED AR VEHEMENTLY CONTENDED TH AT THE INSTALLATION OF A NEW TURBINE IS A NEW INDUSTRIAL U NDERTAKING CAPABLE OF GENERATING ELECTRICITY. THIS UNDERTAKING IS BEING RUN INDEPENDENTLY. MERELY THAT THE ASSESSEE WAS USING T HE STEAM AS RAW MATERIAL FROM THE EXISTING BOILER DOES NOT MEAN THAT A NEW INDUSTRIAL UNDERTAKING HAS COME INTO EXISTENCE. THE ASSESSEE COULD HAVE BOUGHT THE STEAM FROM OUTSIDE ALSO. THE POWER AND PLANT IS A SEPARATE UNIT FROM THE BOILER. THEREFORE , THE ASSESSEE SHOULD HAVE TREATED NEW TURBINE TO BE AN INDUSTRIAL UNDERTAKING. ITA NO 846/AHD/06, 171/AHD/07, 253 & 91/AHD/08 A.Y.02-03 & 03-04 ATUL LTD. V. ACIT(OSD)RNG-1, ABD PAGE 48 EVEN OTHERWISE ALSO IT WAS CONTENDED THAT THE VALUE OF THE BOILER IN ANY CASE WAS LESS THAN 20% OF THE TOTAL PLANT AN D MACHINERY INSTALLED BY THE ASSESSEE. BOTH THE LEARNED AO AND THE LEARNED CIT(A) COULD NOT BE ABLE TO UNDERSTAND THAT THE POW ER CAN BE GENERATED INDEPENDENTLY. THUS, IT WAS CONTENDED THA T THE ASSESSEE WAS ENTITLED FOR THE DEDUCTION U/S 80IA. THE LEARNED DR, ON THE OTHER HAND, RELIED ON THE ORDER OF THE A O. 9 WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSION S AND PERUSED THE MATERIAL ON RECORD ALONG WITH THE ORDER OF THE TAX AUTHORITIES BELOW. THE DEDUCTION U/S 80IA IS AVAILA BLE TO AN ASSESSEE WHERE THE GROSS TOTAL INCOME OF THE ASSESS EE INCLUDES ANY PROFITS AND GAINS DERIVED BY AN UNDERTAKING OR ENTERPRISE FROM ANY ELIGIBLE BUSINESS AS REFERRED TO IN SUB-SE CTION (4). THE DEDUCTION SHALL BE ALLOWED AN AMOUNT EQUAL TO 100% OF THE PROFITS AND GAINS DERIVED FROM SUCH BUSINESS FOR TEN CONSEC UTIVE YEARS. AS PER SECTION 80IA(4) THIS SECTION APPLIES TO ANY UNDERTAKING WHICH IS SET UP IN ANY PART OF INDIA FOR THE GENERA TION OR GENERATION AND DISTRIBUTION OF POWER IF IT BEGINS T O GENERATE POWER AT ANY TIME DURING THE PERIOD BEGINNING ON THE 1ST DAY OF APRIL, 1993 AND ENDING ON THE 31ST DAY OF MARCH, 2010. SUB -SECTION (3) OF SECTION 80IA REQUIRES THAT SUCH UNDERTAKING MUST FULFILL THE CONDITIONS LAID DOWN THEREIN. THE FIRST CONDITION T HEREIN IS THAT THE UNDERTAKING SHOULD NOT BE FORMED BY SPLITTING UP, O R THE RECONSTRUCTION, OF A BUSINESS ALREADY IN EXISTENCE. THE SECOND CONDITION STATES THAT THE UNDERTAKING IS NOT FORMED BY THE TRANSFER TO A NEW BUSINESS OF MACHINERY OR PLANT PREVIOUSLY USED FOR ANY PURPOSE. EXPLANATION 2 TO THIS SUB-SECTION STATES T HAT WHERE IN THE CASE OF AN UNDERTAKING, ANY MACHINERY OR PLANT OR ANY PART THEREOF PREVIOUSLY USED FOR ANY PURPOSE IS TRANSFER RED TO A NEW BUSINESS AND THE TOTAL VALUE OF THE MACHINERY OR PL ANT OR PART SO TRANSFERRED DOES NOT EXCEED TWENTY PER CENT OF THE TOTAL VALUE OF THE MACHINERY OR PLANT USED IN THE BUSINESS, THEN, FOR THE PURPOSES OF CLAUSE (II) OF THIS SUB-SECTION, THE CO NDITION SPECIFIED THEREIN SHALL BE DEEMED TO HAVE BEEN COMPLIED WITH. THIS IS AN UNDISPUTED FACT THAT IN THIS CASE THE ASSESSEE HAS NOT TRANSFERRED THE EXISTING BOILER TO THE NEW UNDERTAKING FOR GENE RATING THE POWER BUT THE CONTENTION OF THE ASSESSEE IS THAT TH E SAME VERY BOILER IS BEING USED FOR SUPPLYING THE STEAM TO BOT H THE TURBINE WHICH WAS ALREADY IN EXISTENCE AND THE NEW ONE ESTA BLISHED BY THE ASSESSEE. THE CLAIM OF THE ASSESSEE IS THAT THE NEW TURBINE ESTABLISHED BY HIM ITSELF IS A NEW UNDERTAKING ENGA GED IN THE BUSINESS OF GENERATING THE POWER. NEW TURBINE ITSEL F CANNOT GENERATE POWER UNTIL AND UNLESS THE STEAM IS PROVID ED TO IT THROUGH BOILER. AN UNDERTAKING WHICH IS ELIGIBLE FO R DEDUCTION U/S 80IA, IN OUR OPINION, MUST ITSELF BE AN INDEPENDENT UNDERTAKING AND SHOULD BE ABLE TO CARRY OUT THE ACTIVITIES FOR WHICH IT HAS BEEN ESTABLISHED. THE NEW TURBINE ESTABLISHED BY TH E ASSESSEE CANNOT ITSELF GENERATE THE POWER. THE UNDERTAKING S O THAT IT MAY GENERATE THE POWER WILL BE COMPLETE ONLY WHEN BOTH NEW TURBINE ITA NO 846/AHD/06, 171/AHD/07, 253 & 91/AHD/08 A.Y.02-03 & 03-04 ATUL LTD. V. ACIT(OSD)RNG-1, ABD PAGE 49 AND THE BOILER ARE INSTALLED. THE ASSESSEE HAS NOT INSTALLED BOILER BUT IT IS PART OF EXISTING UNDERTAKING GENERATING T HE POWER. THIS, IN OUR OPINION, IS MERELY AN EXPANSION OF THE EXIST ING UNDERTAKING. IF THE EXISTING BOILER IS CARVED OUT FROM THE NEW T URBINE INSTALLED BY THE ASSESSEE, THE NEW TURBINE CLAIMED TO BE ELIG IBLE UNDERTAKING ITSELF CANNOT GENERATE THE POWER. NO MA TERIAL OR EVIDENCE WAS BROUGHT TO OUR KNOWLEDGE WHICH MAY PRO VE THAT THE NEW TURBINE INSTALLED BY THE ASSESSEE CAN INDEPENDE NTLY GENERATE THE POWER. THE ASSESSEE IS ALREADY HAVING THE UNDER TAKING ENGAGED IN THE BUSINESS OF GENERATING THE POWER. TH E ASSESSEE IN THIS CASE HAS MERELY ADDED A NEW TURBINE TO THE EXISTING UNDERTAKING BY WHICH HIS CAPACITY TO GENERATE THE P OWER HAS INCREASED. THIS, IN OUR OPINION, IS MERELY AN EXPAN SION OF THE EXISTING UNDERTAKING. THE NEW UNDERTAKING AS IS ELI GIBLE U/S 80IA, IN OUR OPINION, MUST BE INDEPENDENT AND INTEGRATED UNIT WHICH SHOULD BE ABLE TO CARRY ON THE ACTIVITIES OR TO CAR RY ON THE BUSINESS AS HAS BEEN STIPULATED U/S 80IA INDEPENDEN TLY. IT IS NOT THE CASE OF THE ASSESSEE THAT THE NEW UNIT ESTABLIS HED BY THE ASSESSEE HAS TAKEN THE BOILER FROM THE EXISTING UNI T FOR ITS EXCLUSIVE USE AND GENERATION OF POWER. IT IS ONLY I N THE EXISTING UNIT THE ASSESSEE HAS ADDED NEW TURBINE WHICH, IN O UR OPINION, CANNOT BE REGARDED TO BE ESTABLISHING THE NEW UNDER TAKING QUALIFYING FOR DEDUCTION U/S 80IA. WE, THEREFORE, D O NOT FIND ANY ILLEGALITY OR INFIRMITY IN THE ORDER OF THE CIT(A) IN DENYING DEDUCTION TO THE ASSESSEE U/S 80IA. THUS, GROUND NO S.3 AND 4 STAND DISMISSED. 9. AS THE TRIBUNAL HAS ALREADY DECIDED THIS ISSUE A ND THIS BEING A RECURRING ISSUE AND WHILE DECIDING THIS ISSUE, ONE OF THE MEMBERS, I.E. THE AUTHOR OF THIS ORDER, IS PARTY TO THE ORDER FOR ASS ESSMENT YEAR 2001-02, THE FACTS BEING EXACTLY IDENTICAL, WE DECIDE THIS COMMO N ISSUE AGAINST THE ASSESSEE. ACCORDINGLY, THIS COMMON ISSUE OF THE ASS ESSEES APPEALS IS DISMISSED. 33. IN VIEW OF THE ABOVE FACTS, WE FIND THAT THE AS SESSEE HAS MADE A CLAIM FOR DEDUCTION U/S.80IA OF THE ACT ON THE BASIS THAT IT HAD SET UP A NEW INDUSTRIAL UNDERTAKING AND ACCORDINGLY IS ELIGIBLE FOR DEDUCTI ON. THE ASSESSING OFFICER DISALLOWED THE CLAIM MADE BY THE ASSESSEE BY STATIN G THAT THE NEW POWER PLANT WHICH WAS THE NEW INDUSTRIAL UNDERTAKING FOR WHICH THE ASSESSEE WAS CLAIMING DEDUCTION UNDER SEC. 80IA OF THE ACT WAS USING THE SERVICES OF ONE OLD BOILER AND HENCE, THE REQUIREMENTS OF THE SECTION WERE NOT BEI NG FULFILLED. THE ASSESSEE FILED EXPLANATION AND TOOK THE CONTENTIONS, WHICH WERE TW O FOLDS IN NATURE I.E. (I) THAT THE VALUE OF THE BOILER WHICH IS THE SO-CALLED OLD MACH INERY USED B THE ASSESSEE IN THIS NEW INDUSTRIAL UNDERTAKING IS LESS THAN 20% OF THE OVERALL EXPENDITURE OF THE NEW MACHINERY AND (II) THAT THE NEW TURBINE IS BY ITSEL F A NEW INDUSTRIAL UNDERTAKING AND ITA NO 846/AHD/06, 171/AHD/07, 253 & 91/AHD/08 A.Y.02-03 & 03-04 ATUL LTD. V. ACIT(OSD)RNG-1, ABD PAGE 50 THE STEAM WHICH WAS TAKEN FROM THE BOILER WOULD HAV E BEEN EITHER PURCHASED FROM OUTSIDE AGENCY AS A FUEL OR LIKE IT HAS BEEN DONE I T WOULD TAKE THE SAME FROM THE IN- HOUSE BOILER AND USED IT AS FUEL. THERE WAS NO QUES TION OF THIS BEING CONSIDERED AS A PART OF THE TURBINE AS A NEW INDUSTRIAL UNDERTAKING FOR THE PURPOSES OF GRANTING DEDUCTION UNDER SECTION 80IA. IN VIEW OF THE ABOVE EXPLANATION, THE ASSESSEE HAS STATED IN HIS EXPLANATION THAT VERY SAME ASSESSING OFFICER HAD SCRUTINIZED THE RETURN FOR ASSESSMENT YEAR 2001-02 AND HAD MADE DISALLOWAN CE OF THE ASSESSEES CLAIM AND HENCE, WAS AWARE ABOUT THE LEGAL STAND OF THE A SSESSEE. THE ASSESSEE IS MERELY CANVASSING THE SAME STAND IN THE SUBSEQUENT ASSESSMENT YEAR IE. ASSESSMENT YEAR 2002-03 AND HENCE, THERE IS NO QUES TION OF ANY CONCEALMENT OR FILING OF INACCURATE PARTICULARS IN THE RETURN OF I NCOME. THE ASSESSEE ALSO PUT THE CERTIFICATE OF THE CHARTERED ACCOUNTANT AS REQUIRED U/S.80IA(7) OF THE ACT WHICH ALSO CLEARLY DEMONSTRATE THE BONA FIDE OF THE ASSESSEE I N MAKING THIS CLAIM. IN VIEW OF THE ABOVE EXPLANATION OF THE ASSESSEE, WE FIND THAT THAT IT IS A DIFFERENCE OF OPINION ON LEGAL POINT OF VIEW AND THE ASSESSEES EXPLANATI ON HAS NEVER BEEN HELD TO BE FALSE AND WITHOUT THAT THE PENALTY U/S.271(1) OF T HE ACT CANNOT BE LEVIED. IN THE SIMILAR CIRCUMSTANCES, (FROM UNREPORTED DECISION), THE HON'BLE JURISDICTIONAL HIGH COURT IN TAX APPEAL NO.430 TO 432 OF 2006 IN THE CA SE OF J.C.I.T. V. KIRAN SYTEX PRIVATE LTD. HELD THAT PENALTY LEVIED FOR CLAIM OF DEDUCTION U/ S.80HHC OF THE ACT, WHICH WAS DISALLOWED WHILE THE CLAIM OF THE ASSESSE E WAS THAT IT WAS UNDER A BONA FIDE LEGAL BELIEF THAT IT WAS ENTITLED TO THE DEDUC TION. THE HON'BLE HIGH COURT AFFIRMED THE FINDINGS OF TRIBUNAL QUASHING THE PENALTY U/S.2 71(1) OF THE ACT. SINCE THE FACTS BEING SIMILAR, WE RESPECTFULLY FOLLOWING THE HON'BL E JURISDICTIONAL HIGH COURT DELETE THE PENALTY U/S.271(1) OF THE ACT ON THIS ISSUE. 34. AS REGARDS TO CONFIRMATION OF PENALTY ON ACCOUN T OF ADDITION OF TRANSFER PRICING DIFFERENCE ON ALP, THE MATTER IN QUANTUM APPEAL HAS BEEN SET ASIDE TO THE FILE OF ASSESSING OFFICER, THE PENALTY CANNOT SURVIVE AT TH IS STAGE. HOWEVER, THE ASSESSING OFFICER IS FREE TO INITIATE THE PENALTY U/S.271(1) OF THE ACT IF THE FACTS WARRANT SO DURING THE COURSE OF ASSESSMENT OF SET ASIDE PROCEE DINGS AND AS PER LAW. 35. ACCORDINGLY, THIS APPEAL OF THE ASSESSEE IS ALL OWED AS INDICATED ABOVE. 36. THE NEXT ISSUE IN REVENUES APPEAL IS AS UNDER: - ITA NO 846/AHD/06, 171/AHD/07, 253 & 91/AHD/08 A.Y.02-03 & 03-04 ATUL LTD. V. ACIT(OSD)RNG-1, ABD PAGE 51 THE CIT(A) ERRED IN LAW AND ON FACTS IN DIRECTING TO DELETE PENALTY ON THE FOLLOWING ISSUES:- I) EXCESS DEPRECIATION CLAIMED II) NON-INCLUSION OF SALES TAX AND EXCISE DUTY IN T HE TOTAL TURNOVER FOR THE PURPOSE OF DEDUCTION U/S.80HHC. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE CIT(A) OUGHT TO HAVE UPHELD THE ORDER OF THE ASSESSING OFF ICER. 37. AS REGARDS TO THE FIRST ISSUE, I.E. THE DELETIO N OF LEVY OF PENALTY BY THE CIT(A) ON ACCOUNT OF EXCESS DEPRECIATION CLAIMED. WE FIND THAT THE CIT(A) HAS DISCUSSED THIS ISSUE FACTUALLY IN PARA-8 OF HIS APPELLATE ORDER AS UNDER:- 8. COMING TO THE MERITS OF THE CASE, THE FIRST ITE M ON WHICH PENALTY HAS BEEN LEVIED IS ON ACCOUNT OF EXCESS DEPRECIATION CLAIMED . THE FACTS ARE THAT FOR A.Y. 201-02, THE ASSESSEE HAD NOT CLAIMED DEPRECIAT ION RELYING ON GUJARAT HIGH COURT DECISIONS AS WELL AS SUPREME COURT DECIS ION IN THE CASE OF MAHENDA MILLS LTD. . THE AO, HOWEVER, ALLOWED DEPRECIATION IN THAT YEA R AT THE TIME OF ASSESSMENT. IN THE MEANWHILE, RETURN FOR TH IS YEAR WAS FILED AND THE ASSESSEE CLAIMED DEPRECIATION THIS YEAR ON THE ORIG INAL COST OF ASSETS BECAUSE CLAIM OF DEPRECIATION HAD BECOME MANDATORY. THIS DISALLOWANCE, IS BASICALLY FOR THE REASON THAT AFTER ALLOWING DEPREC IATION IN A.Y. 2001-02, THE WDV HAD REDUCED AND CLAIM OF THE ASSESSEE FOR THIS YEAR WAS REDUCED. SINCE THE EARLIER YEARS CLAIM OF THE ASSESSEE THAT NO DE PRECIATION WAS TO BE ALLOWED WAS BASED ON A LEGAL DECISION, HENCE THE ISSUE IN T HAT YEAR WAS DEBATABLE. THIS YEAR, THE CLAIM HAS BEEN DISALLOWED BECAUSE WD V HAS CHANGED AND THE ASSESSEE CANNOT BE FASTENED WITH LIABILITY OF PENAL TY FOR THIS DISALLOWANCE BECAUSE THE DISALLOWANCE IS BECAUSE OF CHANGE IN WD V ON ACCOUNT OF ALLOWANCE OF DEPRECIATION IN A.Y. 2001-02, THE ORDE R IN WHICH THE ASSESSEE DID NOT CHOOSE TO CLAIM DEPRECIATION ON THE BASIS O F VARIOUS JUDICIAL PRONOUNCEMENTS. SINCE THIS ISSUE WAS HIGHLY DEBATAB LE, MERE DISALLOWANCE OF DEPRECIATION DUE TO CHANGE OF WDV WOULD NOT AUTOMAT ICALLY RESULT IN LEVY OF PENALTY. THEREFORE, PENALTY IN RESPECT OF EXCESS CL AIM OF DEPRECIATION IS NOT LEVIABLE AT ALL. 38. WE FIND FROM THE ABOVE THAT THE CIT(A) HAS DELE TED THE PENALTY ON THE PREMISE THAT THIS DISALLOWANCE OF DEPRECIATION IS B ASICALLY FOR THE REASON THAT AFTER ALLOWING DEPRECIATION IN ASSESSMENT YEAR 2001-02, T HE WDV HAS REDUCED AND ACCORDINGLY THE CLAIM OF THE ASSESSEE FOR THIS YEAR WAS REDUCED. THE FINDING OF THE CIT(A) ARE THAT THE EARLIER YEARS CLAIM OF THE ASS ESSEE WAS THAT NO DEPRECIATION WAS ALLOWED ACTUALLY ON THE BASIS OF A LEGAL DECISION, HENCE, THE ISSUE IN THAT YEAR WAS DEBATABLE. IN VIEW OF THIS FINDING OF THE CIT(A), WE FIND NO INFIRMITY IN THE SAME AND ACCORDINGLY WE UPHOLD THE SAME. THIS ISSUE OF THE REVENUES APPEAL IS DISMISSED. ITA NO 846/AHD/06, 171/AHD/07, 253 & 91/AHD/08 A.Y.02-03 & 03-04 ATUL LTD. V. ACIT(OSD)RNG-1, ABD PAGE 52 39. AS REGARDS TO NON-INCLUSION OF SALES TAX AND EX CISE DUTY IN THE TOTAL TURNOVER FOR THE PURPOSE OF DEDUCTION U/S.80HHC OF THE ACT, THE CIT(A) DELETED THE PENALTY LEVIED BY THE ASSESSING OFFICER U/S.271(1)(C) OF TH E ACT. WE FIND THAT THIS ISSUE IS SQUARELY COVERED IN FAVOUR OF THE ASSESSEE AND AGAI NST THE REVENUE EVEN IN QUANTUM BY THE DECISION OF THE HON'BLE APEX COURT I N THE CASE OF LAKSHMI MACHINE WORKS (SUPRA). ACCORDINGLY, THE CIT(A) HAS RIGHTLY DELE TED THE PENALTY AND WE CONFIRM THE SAME. THIS ISSUE OF THE REVENUES APPE AL IS DISMISSED. 40. IN THE RESULT, THE APPEALS OF ASSESSEES IN ITA NO. 846/AHD/2006, 253/AHD/2008 AND ITA NO.157/AHD/2007 ARE ALLOWED FO R STATISTICAL PURPOSES AND THAT OF REVENUES APPEAL IN ITA NO.951/AHD/2008 IS DISMISSED. ORDER PRONOUNCED IN OPEN COURT ON 24/07/2009 SD/- SD/- (R.P.GARG) (MAHAVI R SINGH) (VICE PRESIDENT) (JUDICIAL MEMBER) AHMEDABAD, DATED :24/07/2009 *DKP COPY OF THE ORDER FORWARDED TO :- 1. THE APPELLANT. 2. THE RESPONDENT. 3. THE CIT(APPEALS)- V & VI, AHMEDABAD 4. THE CIT CONCERNS. 5. THE DR, ITAT, AHMEDABAD 6. GUARD FILE. BY ORDER, /TRUE COPY/ DEPUTY / ASSTT.REGISTRAR ITAT, AHMEDABAD