DCIT CENTRAL CIRCLE-1, Ranchi V. M/s Usha Martin Ltd, Kolkata

ITA 85/RAN/2017

• Counselvise Citation: [2019] 117 COUNSELVISE.COM (IT) 9697 (ITAT-RANCHI)
• Duration Of Justice: 1 year(s) 11 month(s) 4 day(s)
• Appeal Type: Income Tax (Transfer Pricing) Appeal
• Pronouncement Date: 05-04-2019
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: DB
• Assessment Year: 2007-2008
• Appeal Filed On: 01-05-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: K E S UNIL BABU CITA DHANBAD
• Keywords: Presumptive income; Gift; Depreciation; Transfer pricing; International transaction; Retrospective amendment; Notional interest; Revised return; TDS
• Section: 92C; 143(3); 92B; 142(1); 40(a)(ia); 10B; 195; 80IA; 37

Judgement Text

1 ITA NOS.68&85/RAN/2017 IN THE INCOME TAX APPELLATE TRIBUNAL, RANCHI BENCH, RANCHI BEFORE SHRI N.S.SAINI , ACCOUNTANT MEMBER & SHRI PAVAN KUMAR GADALE , JUDICIAL MEMBER ITA NO. 68 /RAN/201 7 A.Y. : 200 7 - 200 8 USHA MARTIN LIMITED, (EARLIER KNOWN AS USHA BELTRON LIMITED) 2A, SHAKESP EARE SARANI, KOLKATA - 700071 V S ACIT,CIRCLE - 3, RANCHI P AN NO. : A AACU 2339 M (APPELLANT ) . RESPONDENT AND ITA NO.85/RAN/2017 A.Y. : 2007 - 2008 ACIT,CIRCLE - 3, RANCHI V S USHA MARTIN LIMITED, (EARLIER KNOWN AS USHA BELTRON LIMITED) 2A, SHAKESPEARE SARANI, KOLKATA - 700071 P AN NO. : A AACU 2339 M (APPELLANT ) . RESPONDENT REVENUE BY :SHRI K.E.SUNIL BABU, CIT(A) DHANBAD ASSESSEE BY : NONE DATE OF HEARING : 30 . 05 .201 8 DATE OF PRONOUNCEMENT : 31 . 05 .201 8 O R D E R PER PAVAN KUMAR GADALE, JM : THESE ARE THE APPEALS FILED BY THE ASSESSEE AND REVENUE AGAINST THE ORDER OF CIT(A), RANCHI, DATED 27.01.2017, PASSED IN ITA 2 ITA NOS.68&85/RAN/2017 NO.411/RAN/OTH/10 - 11, U/S.143/144C/250 OF THE ACT FOR THE ASSESSMENT YEAR 2007 - 2008. 2 . AT THE TIME OF HEARING NONE APPEARED ON BEHALF OF THE ASSESSEE AND IT WAS FOUND THAT THE LD. AR OF THE ASSESSEE SOUGHT AN ADJOURNMENT ON 29 TH MAY, 2018 AND THE CASE WAS POSTED TODAY I.E. ON 30.05.2018, HOWEVER, THERE IS NO RESPONSE, THEREFORE, WE CONSIDERED T HAT THE ASSESSEE IS NOT INTERESTED IN PROSECUTING THE APPEAL AND ACCORDINGLY, THE BENCH DECIDED TO DISPOSE OFF THE APPEAL AFTER CONSIDERING THE SUBMISSIONS OF LD. DR AND THE MATERIAL AVAILABLE ON RECORD. 3. SINCE BOTH THE APPEALS ARE INTERCONNECTED AND T HE SIMILAR ISSUES ARE INVOLVED, THEREFORE, FOR THE SAKE OF CONVENIENCE WE CONSIDER THE FACTS AND GROUNDS NARRATED IN ASSSESSEES APPEAL IN ITA NO.68/RAN/2017, WHEREIN THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS : - 1. ON THE FACTS AND CIRCUMSTANCES OF TH E CASE AND IN LAW, THE LD. CIT(A) HAS GROSSLY ERRED IN NOT ACCEPTING THE RETURNED INCOME OF THE APPELLANT AMOUNTING T O RS. 82,84,86,466/ - AND IN PARTIALLY CONFIRMING THE UPWARD ADJUSTMENT OF RS. 46,74,10,794/ - COMPUTED BY THE LEARNED ASSESSING OFFICER (LD. AO) AND LEARNED TRANSFER PRICING OFFICER (LD. TPO) IN THE ASSESSMENT ORDER PASSED UNDER SECTION 143(3) OF THE INCOME - TAX ACT, 1961 (THE ACT). 2. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) GROSSLY ERRED IN UPHOLDING AN ADJUSTME NT OF RS. 40,32,34,839/ - TO THE INCOME OF THE APPELLANT ON ACCOUNT OF THE ALLEGED INTERNATIONAL TRANSACTIONS UNDERTAKEN WITH ITS ASSOCIATED ENTERPRISES (AES) DURING THE YEAR AND IN DOING SO, THE LD. CIT(A) GROSSLY ERRED IN: 3 ITA NOS.68&85/RAN/2017 2.1 DISREGARDING THE TRANSFER P RICING ANALYSIS SUBMITTED BY THE APPELLANT THEREBY PERMITTING THE LD. TPO TO CONDUCT A FRESH SEARCH OF COMPARABLES WITHOUT PROVIDING ANY SPECIFIC AND COGENT FINDING AS REQUIRED UNDER SECTION 92C ( 3) OF THE ACT; 2.2 UPHOLDING AN ADJUSTMENT AMOUNTING RS. 38,9 5,03,560/ - MADE BY THE LD. AO/ LD. TPO WITH REGARD TO THE APPELLANTS INTERNATIONAL TRANSACTION OF SALE OF GOODS TO ITS AES: 2.2.1 BY UPHOLDING THE LD. AO/ LD. TPOS APPROACH OF CONDUCTING A FRESH SEARCH CONSIDERING INAPPROPRIATE FILTERS; 2.2.2 BY INCLUDIN G CERTAIN COMPANIES IN THE FINAL SET OF COMPARABLES IN VIOLATION OF RULE 10B OF THE RULES WHICH SPECIFICALLY PROVIDES FOR COMPARABILITY BASED ON FUNCTIONS PERFORMED, ASSETS EMPLOYED AND RISK ASSUMED IN AN UNCONTROLLED TRANSACTION; 2.2.3 BY CONFIRMING A NUM BER OF FACTUAL/COMPUTATIONAL ERRORS IN SELECTION/ REJECTION OF COMPARABLES AND/ OR IN THE OPERATING PROFIT MARK - UPS OF THE COMPARABLES; 2.2.4 BY REJECTING THE CORROBORATIVE ECONOMIC ANALYSIS PERFORMED BY THE APPELLANT CONSIDERING THE INTERNAL TRANSACTIONAL NET MARGIN METHOD BY COMPARING THE PROFIT MARGIN EARNED FROM THE INTERNATIONAL TRANSACTION TO MARGIN EARNED FROM SALES TO THIRD PARTY CUSTOMERS AS WELL AS BY CONSIDERING THE APPELLANTS OVERSEAS AES AS THE TESTED PARTIES; 2.3 UPHOLDING THE LD. AO/TPOS AC TION OF INCREASING THE ARMS LENGTH RATE OF INTEREST ON LOAN GIVEN TO AE IN THAILAND FROM 7.5% TO 15.5% AND MAKING AN ADJUSTMENT OF RS. 49,51,777/ - , BY REJECTING THE APPELLANTS PLEA THAT THE SAID LOAN IS IN THE NATURE OF SHAREHOLDER SERVICES; 2.3.1 WITHO UT PREJUDICE TO THE AFORESAID, THE LD. CIT(A) ERRED IN UPHOLDING THE LD. AO/TPOS ACTION OF REJECTING THE INTERNAL COMPARABLE UNCONTROLLED PRICE USED BY THE APPELLANT TO BENCHMARK THE CONCERNED TRANSACTION ON A CONSERVATIVE BASIS; 2.4 NOT APPRECIATING THA T THE CORPORATE GUARANTEE GIVEN BY THE APPELLANT TO ITS AES IN THE USA AND SINGAPORE WAS NOT AN INTERNATIONAL TRANSACTION UNDER SECTION 92B OF THE ACT. 4 ITA NOS.68&85/RAN/2017 2.4.1 WITHOUT PREJUDICE TO THE AFORESAID, THE LD. CIT(A) ERRED IN UPHOLDING THE LD. AO/TPOS ACTION OF MAKING AN ADJUSTMENT OF RS. 87,79,502/ - TO THE INCOME OF THE APPELLANT ON ACCOUNT OF ALLEGED CORPORATE GUARANTEE FEE OF 4 %. 3 . THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) ERRED IN UPHOLDING AD - HOC DISALLOWANCE OF 5% OF GENERAL EXPE NSES, AMOUNTING TO RS. 20,53,221/ - . 4 . THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) ERRED IN UPHOLDING DISALLOWANCE OF LEGAL FEES PAID TO M/S HAMMONDS, BELGIUM UNDER SECTION 4O(A)(I) OF THE ACT FOR ALLEGED NON - DEDUCTION OF TAXES AT SOURCE IN COMPLETE DISREGARD OF THE INDO - BELGIUM TAX TREATY. 5 . IN DOING SO, THE LD. CIT(A) DISREGARDED THE PROTOCOL TO INDO - BELGIUM TAX TREATY MANDATING CONSIDERATION OF BENEFICIAL ARTICLE 12 OF THE INDO - US TAX TREATY WHICH REQUIRES SERVICES TO BE MADE AVAI LABLE TO THE RECIPIENT IN ORDER TO BE CONSTRUED AS FEE FOR INCLUDED SERVICES. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) ERRED IN CONFIRMING AD - HOC DISALLOWANCE OF 15% OF FOREIGN EXPENSES, AMOUNTING TO RS. 32,91,583/ - , WITHOUT A PPRECIATING THE FACT THAT SUCH EXPENSES WERE INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS IN TERMS OF SECTION 37 OF THE ACT. 6. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) ERRED IN CONFIRMING THE MARKET VALUE OF R S. 3.90 PER UNIT (I.E. COST + 20% MARK - UP) ADOPTED BY THE ASSESSING OFFICER FOR THE PURPOSE OF COMPUTING CLAIM U/S 80IA OF THE ACT. 7. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) ERRED IN NOT CONSIDERING MARKET VALUE OF POWER AT THE RATES APPLIED BY JHARKHAND STATE ELECTRICITY BOARD (JSEB) FOR SALE OF POWER TO THE APPELLANT. 7.1 WITHOUT PREJUDICE TO THE GROUND OF APPEAL NO. 7, THE LD. CIT(A) ERRED IN NOT APPRECIATING THAT ADOPTION OF LANDED COST METHOD' AS A REPRESENTATIVE VALU E FOR MARKET VALUE IS ONLY AN ALTERNATE ARGUMENT AND NOT ALTERNATIVE CLAIM BARRED FROM BEING RAISED BEFORE THE ASSESSING OFFICER BY VIRTUE OF THE HONBLE SUPREME COURT IN THE CASE OF GOETZE INDIA PVT. LTD. VS CIT 284 ITR 323. 7.2 WITHOUT PREJUDICE TO TH E GROUND OF APPEAL NO. 7 AND 7.1, ASSUMING FOR ARGUMENT SAKE THAT THE SAID ARGUMENT IS AN 5 ITA NOS.68&85/RAN/2017 ALTERNATIVE CLAIM, THE LD. CIT(A) BEING AN APPELLATE AUTHORITY ERRED IN NOT ADJUDICATING THE SAME. THE ABOVE GROUNDS AND SUB - GROUNDS ARE INDEPENDENT, MUTUALLY EXCLUS IVE AND WITHOUT PREJUDICE TO EACH OTHER. THE APPELLANT CRAVES LEAVE TO ADD, ALTER, AMEND OR WITHDRAW ANY OF THE GROUNDS OF APPEAL, AS MAY BE CONSIDERED NECESSARY, EITHER BEFORE OR DURING THE HEARING OF THIS APPEAL. 4. BRIEF FACTS OF THE CASE ARE THAT TH E ASSESSEE IS ENGAGED IN THE BUSINESS OF MANUFACTURE OF STEEL, STEEL WIRE, WIRE RODS, WIRE ROPES, BILLETS ETC. AND FILED AND FILED THE RETURN OF INCOME ELECTRONICALLY FOR THE ASSESSMENT YEAR 2007 - 2008 ON 29.10.2007 DECLARING PROFIT OF RS.79,65,42,571/ - UND ER NORMAL COMPUTATION AND BOOK PROFIT OF RS.1,38,47,90,497/ - UNDER MAT. THE ASSESSEE FILED A REVISED RETURN OF INCOME ON 30.03.2009 DECLARING PROFIT OF RS.82,84,86,466/ - UNDER NORMAL COMPUTATION AND BOOK PROFIT OF RS.1,38,67,15,970/ - AND THE RETURN OF INCO ME WAS DULY PROCESSED U/S.143(1) OF THE ACT AND THE CASE WAS SELECTED FOR SCRUTINY UNDER CASS. SUBSEQUENTLY, NOTICE U/S.143(2) & 142(1) OF THE ACT ALONGWITH QUESTIONNAIRE WERE ISSUED TO THE ASSESSEE. IN COMPLIANCE, THE AR OF THE ASSESSEE APPEARED FROM TIM E TO TIME AND FILED DETAILS AS CALLED FOR AND CASE WAS DISCUSSED AND THE MATTER WAS REFERRED TO THE TPO U/S. 92CA OF THE ACT AND THE ASSESSEE FILED REPORT FORM 3CEB ON INTERNATIONAL TRANSACTIONS. THE LD. TPO PASSED ORDER U/S. 92CA(3) OF THE ACT ON 29.10. 2010 AND CONSIDERED THE SUBMISSIONS MADE BY THE ASSESSEE ON TRANSFER PRICING INFORMATION AND FURTHER THE LD. TPO FOUND THAT THE ASSESSEE HAS INTERNATIONAL TRANSACTION S IN RESPECT OF SALE OF 6 ITA NOS.68&85/RAN/2017 MANUFACTURED GOODS TO USHA MARTIN AMERICAS INC . AND OTHER COMPANIE S, RECOVERY OF INTEREST FROM DEBTORS, REIMBURSEMENT OF EXPENSES, RECOVERY OF EXPENSES, DISCOUNT TO DEBTORS, PURCHASE OF GOODS, RECOVERY OF INTEREST ON LOAN, PURCHASE OF FIXED ASSETS, SALES COMMISSION AND THE TOTAL AMOUNT PAYABLE BY THE ASSESSEE HAS BEEN DE TERMINED. THE TPO HAS FOUND THAT IN THE CURRENT FINANCIAL YEAR THE TURNOVER OF THE ASSESSEE IS AT RS. 1422,93,08,000/ - AND PROFIT BEFORE TAX(PBT) IS RS.138,39,60,000/ - AND INTEREST ON FIXED ASSETS EMPLOYED AT RS.1573,92,83,000/ - AND THE TPO FOUND THAT THE A SSESSEE HAS CONSIDERED THE MOST APPROPRIATE METHOD FOR THE PURPOSE OF DETERMINING ARMS LENGTH PRICE (ALP) , WHEREAS T HE ASSESSEE HAS FOLLOWED THE TRANSACTION NET MARGIN METHOD(TNMM) AND COMPARABLE UNCONTROLLED PRICE (CUP) METHOD AND HAS DEALT AT PAGE 4 OF THE ORDER . THE TPO ISSUED SHOW CAUSE NOTICE TO THE ASSESSEE ON 31.08.2010 REFERRED AT PAGE 5 PARA 7 OF THE TPOS ORDER AND THE ASSESSEE SUBMITTED REPLY IN RESPECT OF THE POINTS RAISED IN THE SHOW CAUSE NOTICE AND THE TPO DEALT EXCLUSIVELY ON THE ADJUSTMEN T S TO BE MADE IN RESPECT OF ALP, THE TPO CONSIDER ED THE VARIOUS ASPECTS ON TRANSACTIONS AND CORPORATE GUARANTEE S AND THE NATURE OF TRANSACTION ON THE ALP OF THE CORPORATE GUARANTEE S PROVIDED BY THE ASSESSEE AGAINST LOAN FROM DBS BANK LTD., SINGAPORE BRANCH AND SIAM BANK, THAILAND AND MADE ADJUSTMENT S. T HE TPO OBSERVED THAT THE ASSESSEE PROVIDED CORPORATE GUARANTEE AGAINST DBS BANK LTD., SINGAPORE AT 4% OF RS.35 LACS USD FOR 7 ITA NOS.68&85/RAN/2017 THREE MONTHS AND APPLIED THE RATE OF USD. T HE TPO HAS MADE ADJUSTMENT OF CORPORATE G UARANTEE WITH ADJUSTMENT BENEFIT OF +/ - 5% AND ALSO DETERMINED THE ALP AND MADE UPWARD ADJUSTMENT OF RS.15,38,885/ - . SIMILARLY, THE ASSESSEE COMPANY ALSO PROVIDED CORPORATE GUARANTEE AGAINST THE LOAN FROM ICICI, UK AT 4% OF RS.40 LACS USD FOR ONE YEAR. THE ASSESSEE HAS TAKEN THE CHARGE FOR THE CORPORATE GUARANTEE INCOME AT RS.NIL AND HENCE, THE BENEFIT OF + / - 5% COULD NOT BE GIVEN TO THE ASSESSEE AND THEREFORE CONSIDERING THE SAME, THE TPO MADE UPWARD ADJUSTMENT O F RS.72,40,617/ - IN RESPECT OF LOAN . THE LD. T PO IN RESPECT OF DISCOUNT TO DEBTORS, FOUND THAT 8% DISCOUNT IS CALCULATED BY THE ASSESSEE AND APPLIED VARIATION OF + / - 5% ALLOWABLE RANGE OF ALP, THE TPO FOUND THAT THE TRANSACTION UNDERTAKEN BY THE ASSESSEE IS AT COST AND THEREFORE MADE DOWNWARD ADJUSTME NT OF RS. 5,89,506/ - . SIMILARLY, THE ASSESSEE HAS CONSIDERED THE INTEREST ON LOAN GIVEN TO AE IN THAILAND AT RS.46,46,437/ - WHICH COMES TO 7.5% BUT THE TPO HAS CONSIDERED THE INTEREST RATE OF 15.5% AND ACCORDINGLY MADE UPWARD ADJUSTMENT AT RS.49,51,777/ - A ND FINALLY IN RESPECT OF EXPORT OF GOODS AND THE COMPARABLES SELECTED, THE TPO DEALT ON THE COMPARABLE SELECTED BY THE ASSESSEE IN RESPECT OF RAMSWARUP INDUSTRIES LIMITED, HINDUSTAN COPPER LIMITED AND MOTHERSON SUMI SYSTEMS LIMITED AND CALCULATED THE PROFI T LEVEL INDICATOR(PLI) BEING 26.52% AND THE PLI OF TESTED PARTY IS 16.06% . THEREFORE, ADJUSTED THE ALP WITH PLI DIFFERENCE AND MADE UPPER ADJUSTMENT TO THE EXTENT OF 8 ITA NOS.68&85/RAN/2017 RS. 38,95,03,560/ - AND PASSED THE ORDER U/S.92CA(3) OF THE ACT ON 29.10.2010. 5. THE AO AF TER RECEIPT OF THE TPOS ORDER DATED 29.10.2010, PASSED THE DRAFT ASSESSMENT ORDER AND THE ASSESSMENT WAS COMPLETED U/S.143(3)/144C OF THE ACT. FURTHER, T HE AO ON PERUSAL OF THE FACTS, ISSUED NOTICE U/S.142(1) OF THE ACT AND OTHER DETAILS WHICH WAS CALLED FOR. THE AO DEALT ON THE DISALLOWANCE ON THE ESTIMATION BASED ON GENERAL EXPENSES, ENTERTAINMENT EXPENSES, FEE & SUBSCRIPTION, NON - DEDUCTION OF TDS, PROVISION FOR LEAVE ENCASHMENT, FOREIGN TRAVEL, DEDUCTION CLAIMED U/S.80IA OF THE ACT AND ALSO NON - RECOGNIT ION OF INTEREST, INTEREST DISALLOWANCE, DISALLOWANCE IN LONG TERM CAPITAL GAIN S AND TRANSFER PRICING ADJUSTMENT OF INTERNATIONAL TRANSACTION WITH ASSOCIATE ENTERPRISE (AE) FOR THE YEAR UNDER CONSIDERATION AS PER AUDIT REPORT IN FORM NO. 3CEB FILED. ON RECEI VING THE ORDER OF TRANSFER PRICING OFFICER, KOLKATA , LD. TPO PASSED THE ORDER U/S.92CA(3) OF THE ACT AND THE AO HAS CALCULATED THE ADJUSTMENTS AND ASSESSED THE TOTAL INCOME CONSIDERING THE TRANSFER PRICING ADJUSTMENT AT RS.129,58,97,2 60 / - AND PASSED ORDER 143(3)/ 144C OF THE ACT, DATED 31.12.2010. SUBSEQUENTLY, THE DRAFT ASSESSMENT ORDER WAS SERVED ON THE ASSESSEE AND THE ASSESSEE COMPANY VIDE LETTER DATED 20.01.2011 HAS MADE SUBMISSION AND DECIDED TO PREFER AN APPEAL BEFORE THE CIT(A) AS PER THE CBDT CLARI FICATION NO. 3457 DATED 20.01.2010. ACCORDINGLY, THE AO 9 ITA NOS.68&85/RAN/2017 PASSED THE ASSESSMENT ORDER U/S.143(3)/144C OF THE ACT, DATED 21.01.2011. 6 . AGGRIEVED BY THE ORDER PASSED BY THE AO, THE ASSESSEE PREFERRED APPEAL WITH THE CIT(A). IN THE APPELLATE PROCEEDINGS THE ASS ESSEE ARGUED THE GROUNDS AND REITERATED THE SUBMISSIONS MADE BEFORE THE TPO/ AO. THE TPO HAS PASSED ORDER ON 29.10.2010 AND MADE UPWARD ADJUSTMENT. THE ASSESSEE HAS RAISED THE GROUND FIRST OF BEING THAT THE TPO WAS ERRED IN CONFIRMING THE NET MARGIN OF THE COMPARABLES AND CONSIDERING CERTAIN EXPENSES AND INCOME. BEFORE THE CIT(A) LD. AR OF THE ASSESSEE SUBMITTED THAT THE TPO HAS RE - CASTED THE FINANCIAL STATEMENTS COMPLETELY DIFFERENT FROM THE FINANCIALS BEING PUBLICALLY REPORTED. FURTHER, THERE WERE ALSO TWO VERSIONS TO THE LD. TPO CALCULATION AS PROVIDED IN HIS ORDER, WHEREIN HE CONSIDERED SELECTIVE COSTS FOR COMPUTATION OF NET MARGINS AND AGAIN SELECTIVELY CHOSE N DIFFERENT COSTS FOR COMPUTING THE TOTAL COSTS. FURTHER, SIMILAR TO HIS APPROACH OF CHERRY PICKI NG COMPARABLES IN THE SEARCH PROCESS, THE LD. TPO HAS SELECTIVELY PICKED EXPENSES AND DREW A NEW SET OF ACCOUNTS, CONTRARY TO THE ONE PUBLICALLY REPORTED. IN SPITE OF THE ASSESSEE FURNISHING THE CORRECT WAY OF COMPUTING NET MARGINS, THE LD. TPO SIMPLY IGN ORED THEM AND DID NOT PROVIDE ANY EXPLANATION FOR EXCLUDING MARKETING, DISTRIBUTION, TRAVELLING, RENT, INSURANCE PREMIUM AND AMORTIZED EXPENSES. FURTHER, HE IGNORED COSTS FOR PURCHASE OF FINISHED GOODS AND THE CLOSING INVENTORY FOR FINISHED/SEMI - FINISHED G OODS WHICH ARE 10 ITA NOS.68&85/RAN/2017 OF SUBSTANTIAL COSTS IN THE BOOKS. EVEN THOUGH THE COMPARABLES WERE SELECTED BY THE LD. TPO, THE ASSESSEE HAD FURNISHED THE CORRECT COMPUTATION IN THE COURSE OF HEARINGS. BUT THE LD. TPO MADE NO EFFORTS TO PROVIDE AN EXPLANATION AS TO WHY CE RTAIN EXPENSES HAVE NOT BEEN CONSIDERED. ON THE OTHER HAND, THE ASSESSEE HAD FOLLOWED THE CARDINAL PRINCIPLE OF ADOPTING THE COMPLETE FINANCIAL STATEMENTS AND EXCLUDING SOME EXTRAORDINARY/FINANCIAL INCOME AND EXPENDITURE. THE COMPUTATION OF PROFIT LEVEL IN DICATOR ( PLI ) SHOWN BY THE LD. TPO IN PAGE - 29 OF HIS ORDER DATED OCTOBER 29, 2010 IS , PRIMA FACIE , NOT CORRECT . FURTHER, A DETAILED COMPUTATION OF THE ASSESSEES MARK - UP AND THE MARK - UP OF THE COMPANIES SELECTED BY THE LD. TPO WAS FILED. THE CIT(A) REMAND ED THE MATTER BACK TO THE FILE OF TPO AND THE TPO IN H IS REMA ND REPORT HAS STATED AS FOLLOWS : - 'THE REASON FOR REJECTION OF TP ANALYSIS BY THE ASSESSEE HAS BEEN DULY STATED IN THE SHOW CAUSE NOTICE & THE TPO ORDER ISSUED BY THE TPO. THE ARMS LENGTH PRICE WAS NOT COMPUTED IN ACCORDANCE TO SEC 92(C)(1) & (2) OF THE INCOME TAX ACT, 1961 ('THE ACT) AND BASED ON DATA WHICH IS NOT APPROPRIATE AND CORRECTLY APPLIED. HENCE THE CONTENTION IS WITHOUT BASIS AND ACCORDINGLY REJECTED. THE CIT(A) AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE AND REMAND REPORT OF THE TPO, HAS OBSERVED THAT THE TPO HAS TAKEN THE SET OF EXPENSES AND HAS APPLIED IT ACROSS THE COMPARABLES SELECTED AS WELL AS THE ASSESSEE AND THE CIT(A) DID NOT FIND ANY DEFECT IN THE CALCULATION DONE BY THE TPO. BEFORE THE CIT(A) THE ASSESSEE FURTHER SUBMITTED THAT THE COMPUTATION OF PROFIT LEVEL INDICATOR (PLI) SHOWN BY THE LD. TPO IN PAGE - 29 OF HIS ORDER DATED OCTOBER 29, 2010 (T P ORDER) WAS , PRIMA FACIE , NOT 11 ITA NOS.68&85/RAN/2017 TRUE , A LTHOUGH, THE ASSESSEE HAD FURN ISHED THE CORRECT COMPUTATION FOR REFERENCE OF THE LD. TPO IN THE COURSE OF ITS SUBMISSION S . THE ASSESSEE FURTHER RELIED ON THE SAFE HARBOUR RULES (UNDER SECTION 92CB R.W.S. 295 OF THE ACT) (SAFE HARBOUR RULES) ISSUED BY THE CENTRAL BOARD OF DIRECT TAX ( CBDT) DATED AUGUST, 2013. BASED ON THE ABOVE NOTIFICATION, OPERATING REVENUES AND OPERATING EXPENSES HAVE BEEN CONSIDERED AS FOLLOWS : - OPERATING EXPENSE MEANS THE COSTS OF THE ASSESSEE INCURRED DURING THE COURSE OF ITS NORMAL OPERATIONS AND IN CO NNECTION WITH ELIGIBLE INTERNATIONAL TRANSACTIONS FOR THE PREVIOUS YEAR INCLUDING DEPRECIATION AND AMORTIZATION EXPENSES RELATING TO THE ASSETS USED BY THE ASSESSEE, BUT EXCLUDING THE FOLLOWING, NAMELY A ) INTEREST EXPENSE; B ) PROVISION FOR UNASCERTAINED LIABILIT IES; C ) PRE - OPERATING EXPENSES; D ) LOSS ARISING OUT OF TRANSLATION OF FOREIGN CURRENCY ITEMS; E ) EXTRA - ORDINARY ITEMS; F ) LOSS ON SALE OF ASSETS/INVESTMENTS OF THE ASSESSEE; G ) OTHER ITEMS NOT RELATING TO OPERATING ACTIVITIES OF THE ASSESSEE; OPERATING REVENUE MEANS T HE REVENUE OF THE ASSESSEE EARNED DURING THE COURSE OF ITS NORMAL OPERATIONS AND IN CONNECTION WITH ELIGIBLE INTERNATIONAL TRANSACTIONS FOR THE PREVIOUS YEAR, BUT EXCLUDING THE FOLLOWING, NAMELY: - A ) INTEREST INCOME; B ) INCOME ARISING OUT OF TRANSLATION OF FOREI GN CURRENCY ITEMS; C ) INCOME ON SALE OF ASSETS/INVESTMENTS OF THE ASSESSEE; D ) REFUNDS RELATING TO INCOME TAX EXPENSE OF THE ASSESSEE; E ) PROVISIONS NO LONGER REQUIRED WRITTEN BACK; F ) EXTRA - ORDINARY ITEMS; G ) OTHER ITEMS NOT RELATING TO OPERATING ACTIVITIES OF THE ASSES SEE', 12 ITA NOS.68&85/RAN/2017 7 . THE CIT(A) ON ANALYSIS OF THE SAFE HARBOUR RULES RELIED ON BY THE ASSESSEE HAS CONSIDER ED THE FACTS AND CIRCUMSTANCES OF THE CASE AND DISMISSED THIS GROUND OF ASSESSEE BY OBSERVING AS UNDER : - 7.7 I HAVE CONSIDERED THE SUBMISSIONS OF THE APPELLA NT. THE FINANCE(NO.2) ACT, 2009 INTRODUCED THE PROVISIONS IN THE INCOME TAX LAW THAT EMPOWERED THE CENTRAL BOARD OF DIRECT TAXES (CBDT) TO ISSUE TRANSFER PRICING SAFE HARBOUR RULES. THE CBDT ON 14 TH AUGUST, 2013 RELEASED DRAFT SAFE HARBOUR RULES FOR PUBLIC COMMENTS. AFTER CONSIDERATION COMMENTS OF VARIOUS STAKEHOLDERS ON 18 TH SEPTEMBER, 2013, THE CBDT ISSUED THE FINAL SAFE HARBOUR RULES. 7.8 SECTION 92CB OF THE ACT DEFINES THE TE RM SAFE HARBOUR AS CIRCUMSTANCES UNDER WHICH THE INCOME - TAX AUTHORITIES SHALL ACCEPT THE TRANSFER PRICING DECLARED BY THE ASSESSEE. THE RULE PROVIDES MINIMUM OPERATING PROFIT MAR GIN IN RELATION TO OPERATING EXPENSES A TAXPAYER IS EXPECTED TO EARN FOR CERTAIN CATEGORIES OF INTERNATIONAL TRANSACTIONS, THAT WILL ACCEPTABLE TO THE INCO ME TAX AUTHORITIES AS ARMS LENGTH PRICE (ALP). THE RULE ALSO PROVIDES ACCEPTABLE NORMS FOR CERTAIN CATEGORIES OF FINANCIAL TRANSACTIONS SUCH AS INTRA - GROUP LOANS MADE OR GUARANTEES PROVIDED TO NON - RESIDENT AFFILIATES OF AN INDIAN TAX PAYERS. THE SAFE HARB OUR RULES, OPTIONAL FOR A TAXPAYER, CONTAINS THE CONDITIONS AND CIRCUMSTANCES UNDER WHICH NORMS/MARGINS WOULD BE ACCEPTED BY THE TAX AUTHORITIES AND THE RELATED COMPLIANCE OBLIGATIONS. [7.9] THE SAFE HARBOUR RULE ARE NOT ARMS LENGTH PRICES, BUT IN THE NA TURE OF PRESUMPTIVE TAXATION, WHICH GENERALLY ENTHUSE TAXPAYERS TO OPT FOR THE SAME, AS A COMPROMISE FOR NOT HAVING TO BE INVOLVED IN PROTRACTED LITIGATION. SAFE HARBOUR TYPICALLY INCLUDE A PREMIUM PAYABLE BY TAXPAYERS FOR AVOIDING DISPUTES AND PROTRACTED LITIGATIONS. SAFE HARBOURS MAY BROADLY TAKE TWO FORMS (A) OUTRIGHT EXCLUSION BY SETTING THRESHOLDS; OR (B) SIMPLIFICATION OF PROVISIONS BY DESIGNATING RANGE, WITHIN WHICH PRICES/PROFITS SHOULD FALL. NEW RULES IOTA TO 10TG CONTAINS THE PROCEDURE FOR ADOPTIN G SAFE HARBOUR, THE TRANSFER PRICE TO BE ADOPTED, THE COMPLIANCE PROCEDURES UPON ADOPTION OF SAFE HARBOURS AND CIRCUMSTANCES IN WHICH A SAFE HARBOUR ADOPTED MAY BE HELD TO BE INVALID. ANY TAXPAYER WHO HAS ENTERED INTO AN ELIGIBLE INTERNATIONAL TRANSACTION AND WHO WISHES TO EXERCISE THE OPTION TO BE GOVERNED BY THE SAFE HARBOUR RULES IS REQUIRED TO FILE A SPECIFIED FORM (FORM 3CEFA). FORM 3CEFA REQUIRES THE TAXPAYER TO DECLARE THE FOLLOWING: TRANSACTION ENTERED WITH AN AE IS AN ELIGIBLE INTERNATIONAL TRANSAC TION; QUANTUM OF THE INTERNATIONAL TRANSACTION; WHETHER THE AES COUNTRY OR TERRITORY IS A 13 ITA NOS.68&85/RAN/2017 NO TAX OR LOW TAX COUNTRY OR TERRITORY; AND OPERATING PROFIT MARGIN/TRANSFER PRICE. THE CONDITION IS THAT THE APPELLANT HAS TO FILE FORM NO.3CEFA FOR OPTING FOR SAFE HARBOUR READ WITH RULES 10TA AND 10TG. THE LAUDATORY PROCEDURE AS PRESCRIBED WAS NOT FOLLOWED BY THE APPELLANT. 7.10 THE AMENDED PROVISO HAS BEEN BROUGHT ON THE STATUTE BY THE FINANCE (NO.2) ACT, 2009 WITH EFFECT FROM 01.10.2009. THE EXPLANATORY NOTES TO THE PROVISIONS OF FINANCE (NO.2) ACT, 2009 CONTAINED IN CIRCULAR NO.5 OF 2010 PROVIDES THE OBJECTIVE BEHIND THE AMENDMENT OF THE PROVISO. THE LEGISLATURE NOTICED THE CONFLICT ING INTERPRETATION OF THE ERSTWHILE PROVISO BY THE ASSESSEE AND THE DEPARTMENT, WITH A VIEW TO RESOLVING THIS CONTROVERSY, THE LEGISLATURE SOUGHT TO AMEND THE PROVISO TO SECTION 92C(2). IN THE SAID CIRCULAR, IT HAS ALSO BEEN ELABORATED THAT THE ABOVE AMENDMENT HAS BEEN MADE APPLICABLE WITH EFFECT FROM 01.04.2009 AND WILL ACCORDINGLY APPLY IN RESPECT OF ASSESSMENT YEAR - 2009 - 10 AND SUBSEQUENT YEARS. IN ANY CASE, THE PROVISO CONTAINS A PRESCRIPTION TO DETERMINE THE ALP AND QUITE CLEARLY IT IS A SUBSTANTIVE PROVISION ENCOMPASSING THE EVENTUAL DETERMINATION OF AN ASSESSEES TAX LIABILITY. T H US, IT CAN BE SAID THAT THE PROVISO IS NOT A PROCEDURAL PIECE OF LEGISLATION AND THEREFORE, UNLESS IT IS SO CLEARLY INTENDED, THE NEWLY AMENDED PROVISO CANNOT BE UNDERSTOOD TO BE RETROSPECTIVE IN NATURE. IN FACT, IT IS A WELL - SETTLED PROPOSITION THAT THE STATUTORY PROVISIONS AS THEY STAND ON THE FIRST DAY OF APRIL OF THE ASSESSMENT YEAR MUST APPLY TO THE ASSESSMENT OF THE YEAR AND THE MODIFICATION OF THE PROVISIONS DURING THE PENDENCY OF ASSESSMENT WOULD NOT GENERALLY PREJUDICE THE RIGHTS OF THE ASSESSEE. THIS VIEW IS FORTIFIED BY THE INTENTION OF THE LEGISLATURE AS FOUND FROM CIRCULAR NO.5 OF 2010 (SUPRA) WHEREBY IN PARA - 37.5, THE APPLICABILITY OF THE ABOVE AMENDMENT HAS BEEN STATED TO BE WITH EFFECT FROM 01.04.2009 SO AS TO APPLY IN RESPECT OF ASSESSMENT YEAR - 2009 - 10 AND SUBSEQUENT YEARS, REGARD, THE DELHI BENCH OF THE TRIBUNAL IN THE CASE OF ACIT V UE TRADE CORPORATION INDIA (P) LTD. VIDE ITA NO.4405(DEL)/2009 DATED 24.12.2010 HAS OBSERVED THAT THE PROVISO INSERTED BY THE FINANCE (NO.2) ACT, 2009 WOULD N OT APPLY TO AN ASSESSMENT YEAR PRIOR TO ITS INSERTION. I MAY ALSO REFER TO A CORRIGENDUM DATED 30.09.2010 BY THE CBDT BY WAY OF WHICH PARA - 37.5 OF THE CIRCULAR NO.5/2010 (SUPRA) HAS BEEN SOUGHT TO BE MODIFIED. THE CORRIGENDUM READS AS UNDER : - CORRIGEN DUM IN PARTIAL MODIFICATION OF CIRCULAR NO. 5/2010 DATED 03.06.2010, (I) IN PARA - 37.5 OF THE SAID CIRCULAR, FOR THE LINES THE ABOVE AMENDMENT HAS BEEN MADE APPLICABLE WITH EFFECT FROM I S ' APRIL, 2009 AND WILL ACCORDINGLY APPLY IN RESPECT OF 14 ITA NOS.68&85/RAN/2017 ASSESSMENT Y EAR - 2009 - 10 AND SUBSEQUENT YEARS. THE FOLLOWING LINES SHALL BE READ; 'THE ABOVE AMENDMENT HAS BEEN MADE APPLICABLE WITH EFFECT FROM 01 ST OCTOBER, 2009 AND SHALL ACCORDINGLY APPLY IN RELATION TO ALL CASES IN WHICH PROCEEDINGS A RE PENDING BEFORE THE TRANS FER PRICING OFFICER (TPO) ON OR AFTER SUCH DATE. (II) IN PARA - 38.3, FOR THE DATE 01 S1 OCTOBER, 2009, THE FOLLOWING DATE SHALL BE READ: 01 S ' APRIL, 2009'. 7.11 IN TERMS THEREOF, IN THE INSTANT CASE THE BENEFIT OF THE ERSTWHILE PROVISO CANNOT BE EXTEN DED TO THE ASSESSEE. THEREFORE, THE PLEA OF THE APPELLANT FOR CONSIDERATION OF SAFE HARBOUR RULES IS DISMISSED. GROUND OF APPEAL IS DISMISSED. 8 . NONE APPEARED ON BEHALF OF THE ASSESSEE, WHEREAS ON THE OTHER HAND, LD. DR RELIED ON THE ORDERS OF LOWER A UTHORITIES AND MADE THE SUBMISSION. 9 . WE HAVE HEARD THE SUBMISSIONS OF LD. DR AND PERUSED THE MATERIAL AVAILABLE ON RECORD. WE FIND THAT THE CIT(A) DID NOT FIND ANY ERROR IN THE CALCULATION DONE BY THE TPO WITH REGARD TO OP/OC FOR PLI, AS THE OP/OC OF THE MOTHERSON SUMI SYSTEMS WAS 17.85%, HCL WAS 36.28% AND RAMSWARUP INDUSTRIES LT. WAS 17.58% AS AGAINST THE SAME SHOWN AT 16.06% BY THE ASSESSEE. THE ASSESSEE HAS RELIED UPON THE SAFE HARBOUR RULES FOR CONSIDERATION OF OPERATING REVENUES AND OPERATING EXPEN SES, WHEREAS THE CIT(A) HAS RELIED ON THE FINANCE (NO.2) ACT, 2009, WHEREIN THE PROVISIONS INTRODUCED IN THE INCOME TAX LAW THAT EMPOWERED THE CENTRAL BOARD OF DIRECT TAXES (CBDT) TO ISSUE TRANSFER PRICING SAFE HARBOUR RULES. THE CIT(A) FURTHER HELD THAT T HE SAFE HARBOUR RULE ARE NOT ARMS LENGTH PRICES, BUT IN THE NATURE OF PRESUMPTIVE TAXATION, WHICH 15 ITA NOS.68&85/RAN/2017 GENERALLY ENTHUSE TAXPAYERS TO OPT FOR THE SAME, AS A COMPROMISE FOR NOT HAVING TO BE INVOLVED IN PROTRACTED LITIGATION. SAFE HARBOUR TYPICALLY INCLUDE A PRE MIUM PAYABLE BY TAXPAYERS FOR AVOIDING DISPUTES AND PROTRACTED LITIGATIONS. SAFE HARBOURS MAY BROADLY TAKE TWO FORMS (A) OUTRIGHT EXCLUSION BY SETTING THRESHOLDS; OR (B) SIMPLIFICATION OF PROVISIONS BY DESIGNATING RANGE, WITHIN WHICH PRICES/PROFITS SHOULD FALL. NEW RULES 10TA TO 10TG CONTAINS THE PROC EDURE FOR ADOPTING SAFE HARBOUR AND THE TRANSFER PRICE TO BE ADOPTED, THE COMPLIANCE PROCEDURES UPON ADOPTION OF SAFE HARBOURS RULE AND CIRCUMSTANCES IN WHICH A SAFE HARBOUR ADOPTED MAY BE HELD TO BE INVALID. A FTER DISCUSSING ELABORATELY, THE CIT(A) DEALT ON THE DISPUTED ISSUE REJECTED THE PLEA OF THE ASSESSEE FOR CONSIDERATION OF SAFE HARBOUR RULES AND DISMISSED THE SAME AS THE BENEFIT OF THE ERSTWHILE PROVISO CANNOT BE EXTENDED TO THE ASSESSEE . FROM THE ABOVE DISCUSSION OF THE CIT(A), WE DO NOT FIND ANY GOOD REASON TO INTERFERE WITH THE FINDINGS OF THE CIT(A) IN THIS REGARD AND ACCORDINGLY, WE UPHOLD THE SAME AND DISMISS THIS GROUND OF APPEAL OF THE ASSESSEE. 10 . NEXT GROUND RELATES TO SELECTING HCL AS A COMPA RABLE COMPANY TO THE ASSESSEE . THE ASSESSEE SUBMITTED BEFORE THE CIT(A) THAT COPPER AND STEEL BELONGED TO THE DIFFERENT INDUSTR IES AND COULD NOT BE COMPARED. THE LD. TPO IN HIS ORDER DID NOT DISCUSS OR DELIBERATE ON THE ASSESSEES ARGUMENT S , THAT THE INDUS TRY PROFILE, CUSTOMER USE AND REALISATION PATTERN OF HCL WAS DIFFERENT FROM THAT OF THE ASSESSEE. HCL IS PRIMARILY INTO 16 ITA NOS.68&85/RAN/2017 PRODUCTION OF COPPER PRODUCTS WHEREAS THE ASSESSEES RELATED PARTY SEGMENT WAS PRIMARILY INTO PRODUCTION AND EXPORT OF STEEL WIRE ROPES. HENCE, HCL SHOULD NOT HAVE BEEN SELECTED BY THE LD. TPO AS A COMPARABLE TO THE ASSESSEE, AS THE PRODUCT PROFILE OF HCL WAS COMPLETELY DIFFERENT FROM THAT OF THE ASSESSEE. THE PRODUCTS MANUFACTURED BY THE ASSESSEE AND HCL FALL WITHIN DIFFERENT INDIAN TARIF F CODES (ITC). F URTHER THE DIFFERENCE IN THE GENERAL PROPERTIES OF STEEL AND COPPER, WHICH ALTERS ITS USE AND APPLICATION, HENCE VIEWED BY THE MARKET AS TWO SEPARATE PRODUCTS. FURTHER, THE TOTAL VOLUME OF COPPER AND STEEL BEING TRADED GLOBALLY IS NOT COM PARABLE. THE PRICE REALIZATION PER METRIC TON BY HCL ON ITS SALES AND THE PRICE REALIZATION PER METRIC TON BY THE ASSESSEE ON ITS SALES, WHEN COMPARED, FURTHER SUBSTANTIATE THE DIFFERENCE BETWEEN THE TWO PRODUCTS. IT WAS ALSO SUBMITTED THAT COPPER AND STEE L FOLLOW A DIFFERENT MANUFACTURING PROCESS, AND HENCE THE COST PER MT FOR THE PRODUCTS ARE SIGNIFICANTLY DIFFERENT. FOR EXAMPLE, THE MANUFACTURING COST OF HCLS PRODUCTS FOR THE YEAR 2006 - 07 IS RS.306,410/ - PER MT WHEREAS THE WEIGHTED AVERAGE COST OF ALL S TEEL PRODUCTS INCLUDING STEEL WIRE ROPES FOR THE ASSESSEE IS RS.35,057/ - PER MT. THUS THE MANUFACTURING PROCESS AS WELL AS THE COST OF MANUFACTURING COPPER AND STEEL WERE NOT COMPARABLE. AS AN INDUSTRY PRACTICE, SUCH COPPER PRODUCTS ARE SOLD GLOBALLY AT HA RMONIOUS PRICES, BEING LINKED TO THE LONDON METAL EXCHANGE (LME).WHEREAS THE ASSESSEE S RANGE OF STEEL PRODUCTS, BEING STEEL WIRE 17 ITA NOS.68&85/RAN/2017 ROPES, STRANDS INCLUDING LOCKED WIRE ROPE, STEEL WIRES AND STEEL WIRE RODS, HAD NO SUCH LME DRIVEN PRICING, AND INSTEAD WERE DRIVEN BY THE FREE MARKET FORCES OF NEGOTIATION, CUSTOMIZATION AND VALUE ADDITION FOR THE CUSTOMER. THE ASSESSEE FURTHER SUBMITTED THAT HCL IS GOVERNMENT OWNED COMPANY. GOVERNMENT COMPANIES LIKE FICL HAVE RECEIVED PREFERENTIAL TREATMENT AND THUS SHOULD NO T BE COMPARED TO PRIVATE AND PUBLIC LIMITED COMPANIES LIKE THE ASSESSEE . THE ANNUAL REPORT DISCLOSES THE FACT THAT HCL IS OWNED BY THE GOVERNMENT OF INDIA (GOI), WITH THE GOVERNMENT OWNING 99.59% OF HCLS SHARE CAPITAL. T HE LD. TPO IN THIS REGARD HAS SUB MITTED THAT THE PRINCIPLE OF TNMM CLASS FOR FUNCTIONAL COMPATIBILITY AND NOT PRODUCT COMPATIBILITY. THE INDUSTRIAL SECTOR IN WHICH THE ASSESSEE PERFORMED THE SEARCH WAS NON ELECTRICAL MACHINERY AND BASE METALS AND FICL ALSO BELONGS TO THE SAME CATEGORY O F I NDUSTRY. IT DID NOT MATTER WHETHER IT MANUFACTURED STEEL OR COPPER. THE ASSESSEE HAD ITSELF SELECTED BASE METAL AS A SEARCH CRITERIA AND NOW IT WANTED TO MODIFY AND RESTRICT IT TO STEEL WHICH WAS NOT ACCEPTABLE. COPPER AND STEEL BOTH ARE BASE METAL CA TEGORY AND COMPANIES ENGAGED IN MANUFACTURING OF EITHER PRODUCT COULD BE CONSIDERED AS COMPARABLE. FURTHER, THE ASSESSEE DID NOT HIGHLIGHT ANY INSTANCE AS TO HOW SUCH SPECIFIC DIFFERENCE IN PRODUCT WOULD RESULT IN SIGNIFICANT DIVERGENCE IN PROFITABILITY OF THE TWO COMPANIES. ALSO, THE TP PROVISIONS ENSHRINED IN THE ACT AND THE RULES DID NOT ANYWHERE BAR FROM 18 ITA NOS.68&85/RAN/2017 TAKING GOVERNMENT COMPANY AS COMPARABLE. THE ARGUMENT WAS THUS A GENERALIZED ONE AND LACKED CONVICTION AND ACCEPTABILITY. 11 . THE CIT(A) AFTER CONSIDER ING THE SUBMISSIONS OF THE ASSESSEE AND FINDINGS OF THE TPO HAS OBSERVED AS UNDER : - 8.6 1 HAVE CONSIDERED THE SUBMISSIONS OF THE APPELLANT AND HAVE ALSO PERUSED THE ORDER AND THE REMAND REPORT. IN THIS CONNECTION, IT MAY BE RECALLED THAT THE METHOD CHOSE N BY THE TPO WAS TNMM AND THE PRINCIPLE OF TNMM CLASS FOR FUNCTIONAL COMPATIBILITY AND NOT PRODUCT COMPATIBILITY. THE INDUSTRIAL SECTOR IN WHICH THE ASSESSEE PERFORMED THE SEARCH WAS NON ELECTRICAL MACHINERY' AND BASE METALS AND HCL ALSO BELONGED TO THE SAME CATEGORY OF INDUSTRY. IT DID NOT MATTER WHETHER IT MANUFACTURED STEEL OR COPPER. THE APPELLANT ITSELF SELECTED BASE METAL AS A SEARCH CRITERIA. COPPER AND STEEL BOTH ARE BASE METAL CATEGORY AND COMPANIES ENGAGED IN MANUFACTURING OF EITHER PRODUCT CO ULD BE CONSIDERED AS COMPARABLE. FURTHER, THE APPELLANT DID NOT HIGHLIGHT ANY INSTANCE AS TO HOW SUCH SPECIFIC DIFFERENCE IN PRODUCT WOULD RESULT IN SIGNIFICANT DIVERGENCE IN PROFITABILITY OF THE TWO COMPANIES. ALSO, THE TP PROVISIONS ENSHRINED IN THE ACT AND THE RULES DO NOT ANYWHERE BAR FROM TAKING GOVERNMENT COMPANY AS COMPARABLE. THE SUBMISSION OF THE APPELLANT IS DISMISSED. 12 . LD. DR SUPPORTED THE ORDER OF LOWER AUTHORITIES. 13 . WE HAVE HEARD THE SUBMISSIONS OF LD. DR AND PERUSED THE MATERIAL ON RE CORD. PRIMA FACIE WE FIND THAT AS PER THE OBSERVATION OF CIT(A) THE METHOD CHOSEN BY THE TPO WAS TNMM AND THE PRINCIPLE OF TNMM CLASS FOR FUNCTIONAL COMPATIBILITY AND NOT PRODUCT COMPATIBILITY. THE INDUSTRIAL SECTOR IN WHICH THE ASSESSEE PERFORMED THE SEAR CH WAS NON ELECTRICAL MACHINERY' AND BASE METALS AND HCL ALSO BELONGED TO THE SAME CATEGORY OF INDUSTRY. IT DID NOT MATTER WHETHER IT MANUFACTURED STEEL OR COPPER. THE ASSESSEE ITSELF SELECTED BASE METAL AS A SEARCH CRITERIA. COPPER AND STEEL BOTH ARE BASE METAL CATEGORY AND COMPANIES ENGAGED IN 19 ITA NOS.68&85/RAN/2017 MANUFACTURING OF EITHER PRODUCT COULD BE CONSIDERED AS COMPARABLE. ACCORDINGLY, WE ARE IN AGREEMENT WITH THE FINDINGS RECORDED BY THE CIT(A) ON THIS GROUND NO.2.2 AND WE UPHOLD THE SAME AND DISMISS THIS GROUND OF APPEAL OF THE ASSESSEE. 1 4 . NEXT GROUND NO.2.3 RELATES TO INCREASING THE ARMS LENGTH RATE OF INTEREST ON LOAN GIVEN TO ITS ASSOCIATE ENTERPRISE IN THAILAND AND MADE UPWARD ADJUSTMENT. AS PER THE RECORDS THE ASSESSEE IS A PUBLIC LIMITED COMPANY HAVING A SSOCIATE ENTERPRISE IN THAILAND, THEREFORE, THERE WAS FINANCIAL CRISIS IN THAILAND IN RESPECT OF DOING BUSINESS, THE ASSESSEE HAS PROVIDED THE LOAN TO ITS ASSOCIATE ENTERPRISES. THE CONTENTION OF LD. DR IS THAT THE TPO HAS RIGHTLY CONSIDERED THE UPPER ADJU STMENT TO THE EXTENT OF 15.5% AND MADE ADDITION. HOWEVER, THE FACT REMAINS THAT THE ASSESSEE COMPANY HAS MADE THIS ADVANCES FOR THE PURPOSE OF ITS BUSINESS . THE CIT(A) HAS OBSERVED THAT T HE TPO HAS BROUGHT OUT CLEARLY THAT THERE ARE HUGE DIFFERENCES IN THE TERMS AND CONDITIONS OF THE TWO TRANSACTIONS SOUGHT TO BE COMPARED FOLLOWING CUP METHOD. THE LOAN TRANSACTIONS OF SIAM BANK TO THE THAILAND AE HAVE ALTOGETHER DIFFERENT TERMS AND CONDITIONS AND CANNOT BE USED WITHOUT MAKING ADJUSTMENTS. WE FIND THAT THE C IT(A) FURTHER OBSERVED THAT IT IS AN ADMITTED FACT THAT THE BORROWER WAS SITUATED IN THAILAND AND THERE WAS AN ECONOMIC TURMOIL IN THE REGION WHICH AFFECTED BORROWERS CAPACITY TO BORROW. IT HAS BEEN STATED BY THE TAXPAYER THAT SIAM 20 ITA NOS.68&85/RAN/2017 BANK AGREED TO GIVE LOA N ONLY AFTER FUNDS WERE INFUSED BY THE ASSESSEE . THE OBSERVATIONS OF THE CIT(A) IN THIS REGARD ARE AS UNDER : - 12.8.1 IT HAS BEEN NOTED THAT APPELLANT HAS CLAIMED ACCEPTANCE OF 7.5% INTEREST BENCHMARKING OF THE LOAN BY USING CUP METHOD. IT IS ELEMENTARY T HAT THE CUP REQUIRES HIGH DEGREE OF COMPARABILITY WITH THE TRANSACTIONS COMPARED. THE FAR OF THE TWO TRANSACTIONS SHOULD MATCH IN ORDER TO MAKE THE CUP ACCEPTABLE. THE TPO HAS BROUGHT OUT CLEARLY THAT THERE ARE HUGE DIFFERENCES IN THE TERMS AND CONDITIONS OF THE TWO TRANSACTIONS SOUGHT TO BE COMPARED FOLLOWING CUP METHOD. THE LOAN TRANSACTIONS OF SIAM BANK TO THE THAILAND AE HAVE ALTOGETHER DIFFERENT TERMS AND CONDITIONS AND CANNOT BE USED WITHOUT MAKING ADJUSTMENTS. THE TPO HAS BROUGHT OUT THE ADDITIONAL R ISKS WHICH NEED TO BE FACTORED INTO FOR BENCHMARKING THE LOAN. THE TPO HAS VERY CLEARLY BROUGHT OUT THAT THE LOAN BY THE APPELLANT TO THE THAILAND AE IS UNSECURED AND SUBORDINATED TO THE LOAN BY SIAM BANK TO THE AE IN THAILAND. THEREFORE, REASONS EXIST FOR MAKING ADJUSTMENT TO THE BASE RATE OF 7.5% WHICH REPRESENTED LOAN BY SIAM BANK TO THE AE IN THAILAND AFTER THE TAXPAYER INFUSED UNSECURED LOAN TO THE AE. IT IS ALSO TRUE THAT THE RATE OF INTEREST TO BE CHARGED ON THE LOAN IS DEPENDENT UPON VARIOUS TERMS A ND CONDITIONS WHICH INCLUDE THE CURRENCY IN WHICH LOAN IS GIVEN, SECURITY EXTENDED, THE COUNTRY IN WHICH THE LOAN IS GIVEN, TENURE OF THE LOAN, THE CREDIT RATING OF THE BORROWER. IT IS AN ADMITTED FACT THAT THE BORROWER WAS SITUATED IN THAILAND AND THERE W AS AN ECONOMIC TURMOIL IN THE REGION WHICH AFFECTED BORROWERS CAPACITY TO BORROW. IT HAS BEEN STATED BY THE TAXPAYER THAT SIAM BANK AGREED TO GIVE LOAN ONLY AFTER FUNDS WERE INFUSED BY THE APPELLANT. IN OTHER WORDS, IN ADDITION TO LOAN OF SIAM BANK BEING SECURED BY THE ASSETS OF THE APPELLANT, ADDITIONAL SECURITY IN THE FORM OF INFUSION OF FUNDS WAS ALSO OBTAINED. THIS WOULD HAVE INCREASED THE CREDIT WORTHINESS AND CREDIT RATING OF THE AE IN THAILAND, ENABLING THE AE IN THAILAND TO BORROW FROM SIAM BANK AT A LESSER RATE. THEREFORE, CHARGING OF PREMIUM OVER AND ABOVE THE RATE OF INTEREST CHARGED BY SIAM BANK TO ITS AE IN THAILAND, IS JUSTIFIED. 12.19 IN VIEW OF THE AFORESAID DISCUSSION, AND ALSO CONSIDERING THE DETAILED DISCUSSION MADE BY THE TPO THE GROUND OF APPEAL IS DISMISSED. WE ARE IN AGREEMENT WITH THE DECISION OF THE CIT(A) ON THIS GROUND AND ACCORDINGLY WE UPHOLD THE SAME AND DISMISS THIS GROUND OF APPEAL OF THE ASSESSEE. 21 ITA NOS.68&85/RAN/2017 15 . WITH REGARD TO THE GROUND NO.2.4 OF IMPUTING A CHARGE ON THE ASSESSEE FOR CORPORATE GUARANTEE PROVIDED TO ITS AES IN USA AND SINGAPORE, THE CONTENTION OF THE ASSESSEE BEFORE THE CIT(A) IS THAT IT IS N OT AN INTERNATIONAL TRANSACTION. LD. AR FURTHER SUBMITTED THAT USHA MARTIN AMERICAS INC. IS A COMPANY INCORPORATED IN THE UNITED STATES OF AMERICA. THE COMPANY IS PRIMARILY ENGAGED IN SALES, MARKETING AND DISTRIBUTION ACTIVITIES FOR THE WIRE ROPE MANUFACTURED BY THE ASSESSEE . USHA MARTIN AMERICA INC. ENABLED THE ASSESSEE TO ESTABLISH ITS PRESENCE IN THE AMERICAS REGION. THE GUARANTE E WAS PROVIDED AS PART OF THE ASSESSEE S BUSINESS NEED WHERE IT WOULD REMUNERATE USHA MARTIN AMERICA WITH LIMITED BETWEEN 4% TO 6% NET MARGINS AND A CORPORATE GUARANTEE TO MEET ITS WORKING CAPITAL REQUIREMENT FOR DISTRIBUTING ITS PRODUCTS IN THE AMERICAS R EGION. LD. AR FURTHER CONTENDED THAT IT HAD PROVIDED CORPORATE GUARANTEE ON BEHALF OF ITS AE IN USA FOR FURTHERING ITS OWN TRADE OBJECTIVE I.E. ESTABLISHING PRESENCE IN USA MARKET. THE AE WAS NOT ENGAGED IN ANY FURTHER BUSINESS OPERATION APART FROM DISTRIB UTING THE GROUPS FINISHED PRODUCT AND ESTABLISHING THE ASSESSEES PRESENCE IN USA. THEREFORE, THE EXTENSION OF CORPORATE GUARANTEE FOR THE PURPOSE OF WORKING CAPITAL FINANCING IN ORDER TO UNDERTAKE BUYING AND SELLING OF GROUP FINISHED PRODUCTS COULD NOT B E SEEN IN ISOLATION FOR THE PURPOSE OF DETERMINATION OF ARMS LENGTH PRICE. THE RETURN FOR PROVIDING CORPORATE GUARANTEE WAS ALREADY IN - BUILT WITH THE BENEFITS FLOWING TO THE ASSESSEE IN TERMS OF 22 ITA NOS.68&85/RAN/2017 GROWING PRESENCE IN USA MARKET, LOW PROFITABILITY OUTSIDE IN DIA, LOW LEVEL OF FUNDS FLOWING FROM INDIA IN THE FORM OF LOAN OR EQUITY. THEREFORE, NO SEPARATE CHARGE WAS WARRANTED IN THE BOOKS OF ASSESSEE FOR PROVISION OF GUARANTEE IN THE COURSE OF FURTHERANCE ITS OWN BUSINESS OBJECTIVES AND INSTEAD SHOULD BE TREATED AS SHAREHOLDER SERVICES. THE CIT(A) CALLED FOR REMAND REPORT AND DEALT ON THE DISPUTED ISSUE AT PARA 14.20 PAGE 59 AND ALSO CONSIDERED DECISION OF BHARTI AIRTEL AND THE PROVISIONS OF THE ACT AND OBSERVED THAT ISSUANCE OF CORPORATE GUARANTEE IS AN INTERNA TIONAL TRANSACTION WITHIN THE PROVISIONS OF SEC.92B R.W. EXPLANATION (I)(C). IT IS HELD THAT EXPLANATION (I)(E) DOES NOT HAVE AN APPLICATION AND, ACCORDINGLY, TPO IS NOT REQUIRED TO DEMONSTRATE BEARING ON PROFITS, INCOME, LOSSES OR ASSETS OF SUCH ENTERPRIS ES. FURTHER, THE DECISION IN THE CASE OF BHARTI AIRTEL IS DISTINGUISHABLE AND IS NOT APPLICABLE. MOREOVER, IN A SUBSEQUENT DECISION VIZ. XCHANGING SOLUTIONS (BANG. ITAT), HAS HELD THAT ISSUANCE OF CORPORATE GUARANTEE IMPACTS THE ASSETS OF THE ENTERPRISES. THEREFORE, IT IS HELD THAT ALP IS REQUIRED TO BE COMPUTED. WITHOUT PREJUDICE, THE ISSUANCE OF CORPORATE GUARANTEE CAN ALSO BE TERMED AS SERVICE AS DISCUSSED ABOVE REQUIRING DETERMINATION OF ALP. FURTHER, FOR THE DETAILED REASONS DISCUSSED ABOVE CORPORATE GUARANTEE CANNOT BE HELD TO BE SHAREHOLDER ACTIVITY AS CLAIMED AND DISMISSED THE GROUND OF APPEAL OF THE ASSESSEE. W E FIND THAT THE CORPORATE GUARANTEE PROVIDED BY THE ASSESSEE IN RESPECT OF TWO AES AS CONTESTED BY THE ASSESSEE IS NOT AN INTERNATIONAL TR ANSACTION. WE RELY 23 ITA NOS.68&85/RAN/2017 ON THE DECISION OF COORDINATE BENCH OF THE TRIBUNAL IN THE CASE OF BARTRONICS INDIA LTD. VS. DCIT, IN ITA NO.259/HYD/2017, ORDER DATED 27.09.2017 WITH RESPECT TO PROVIDING OF CORPORATE GUARANTEE IS NOT AN INTERNATIONAL TRANSACTION WHEREI N THE TRIBUNAL HAS HELD AS UNDER : - 17. CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL FACTS ON RECORD AS WELL AS VARIOUS CASE LAWS SUBMITTED BY THE ASSESSEE. ASSESSEE HAS PROVIDED CORPORATE GUARANTEE TO ITS AE IN THE CURRENT AY WITHOUT CHARGIN G ANY FEES FOR THE SAME. THE TERM 'GUARANTEE' WAS INSERTED IN THE DEFINITION OF INTERNATIONAL TRANSACTION BY INSERTING AN EXPLANATION IN THE FINANCE ACT , 2012 WITH RETROSPECTIVE EFFECT FROM 01/04/2002. T HERE IS NO DISPUTE THAT THE CORPORATE GUARANTEE IS AN INTERNATIONAL TRANSACTION AND DIFFERENT ASSESSEES ARE ADOPTING DIFFERENT METHODS OF TREATMENT. SOME ASSESSEES CHARGES NOMINAL RATE TO THE AES, WHEREAS OTHER ASSESSEES ARE TREATING THIS AS SHAREHOLDER SE RVICE. HERE, THE ASSESSEE HAS OBJECTED TO INCLUDE THIS TRANSACTION AS INTERNATIONAL TRANSACTION FOR THE REASON THAT THE FINANCE ACT , 2012, WHICH HAS INSERTED AN EXPLANATION, WHICH WILL BE APPLICABLE PROS PECTIVELY FROM AY 2013 - 14 AND THE CORPORATE GUARANTEE TRANSACTION WILL NOT BE APPLICABLE TO THE CURRENT AY. THE SAME VIEW WAS UPHELD BY THE COORDINATE BENCH IN THE CASE OF DR. REDDY LABORATORIES AND OTHER BENCHES OF TRIBUNAL. THE FINDINGS GIVEN BY THE COOR DINATE BENCH IN THE CASE OF DR. REDDY LABORATORIES (SUPRA) ARE EXTRACTED BELOW: 29. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE RECORD. THE ITAT, DELHI BENCH IN THE CASE OF BHARATI AIRTEL LTD. (SUPRA) HAS CONSIDERED AN IDENTICAL ISSU E WHICH WAS RE - AFFIRMED IN THE CASE OF SIRO CLINPHARMA PVT. LTD., VS. DCIT (ORDER DATED 31 ST MARCH, 2016). THE BENCH OBSERVED THAT TRANSFER PRICING IS A LEGISLATION SEEKING THE TAX - PAYERS TO ORGANISE THEIR AFFAIRS IN A MANNER COMPLIANT WITH THE NORMS SET - OUT. IN SHORT, IT IS AN ANTI ABUSE LEGISLATION WHICH TELLS YOU AS TO WHAT IS THE ACCEPTABLE BEHAVIOUR BUT IT DOES NOT TRIGGER LEVY OF TAX IN A RETROSPECTIVE MANNER BECAUSE NO PARTY CAN BE ASKED TO DO AN IMPOSSIBILITY.. ANALYSING FURTHER THE BENCH OBSERVED THAT THOUGH EXPLANATION TO SECTION 92B IS STATED TO BE C1ARIFICATORY, IT HAS TO BE NECESSARILY TREATED AS EFFECTIVE FROM THE A.Y. 2013 - 2014 AND IN THIS REGARD, RELIED UPON THE OBSERVATIONS OF THE HON'B LE DELHI HIGH COURT IN THE CASE OF SKIES SATELLITE. WE HAVE ALSO ANALYSED THE CASE LAW RELIED UPON BY THE LD. D.R. AND ALSO THE PROVISIONS OF THE ACT. IN OUR CONSIDERED OPINION, THE VIEW TAKEN BY THE DELHI BENCH OF ITAT IN THE CASE OF BHARATI AIRTEL LTD., (SUPRA) IS ONE OF THE POSSIBLE VIEWS 24 ITA NOS.68&85/RAN/2017 ON THE MATTER AND SO LONG AS THERE IS NO BINDING DECISION OF ANY OTHER HIGHER FORUM TAKING A CONTRARY VIEW, THE ONE WHICH IS FAVOURABLE TO THE ASSESSEE HAS TO BE ADOPTED EVEN THOUGH OTHER BENCHES HAVE TAKEN A DIFFERENT VIEW. WE, THEREFORE, HOLD THAT THE EXPLANATION TO SECTION 92B CANNOT BE APPLIED RETROSPECTIVELY AND FOR THE YEARS UNDER CONSIDERATION THE ASSESSEE HAVING NOT INCURRED ANY COSTS IN PROVIDING CORPORATE GUA RANTEE IT WOULD NOT CONSTITUTE 'INTERNATIONAL TRANSACTION' WITHIN THE MEANING OF SECTION 92B OF THE ACT AND CONSEQUENTLY, ALP ADJUSTMENT IS NOT WARRANTED ON THIS ASPECT.' RESPECTFULLY FOLLOWING THE ABOVE DECISION, WE REJECT THE TREATMENT OF CORPORATE GUARANTEE AS INTERNATIONAL TRANSACTION AND CONSEQUENTLY, ALP ADJUSTMENT IS NOT WARRANTED ON THIS ASPECT. ACCORDINGLY, THE GROUND RAISED BY ASSESSEE IS ALLOWED. WE RESPECTFULLY FOLLOW THE ORDER OF THE COORDIN ATE BENCH OF THE TRIBUNAL WHEREIN CORPORATE GUARANTEE HAS BEEN CONSIDERED AS NOT AN INTERNATIONAL TRANSACTION AND ALLOW THIS GROUND OF APPEAL OF THE ASSESSEE . 16 . GROUND NO.3 RELATES TO ADHOC DISALLOWANCE OF 5% OF GENERAL EXPENSES. THE ASSESSEE BEFORE THE CIT(A) STATED THAT THE ASSESSEE HAD INCURRED GENERAL EXPENSES WHICH WAS BOOKED UNDER THE HEAD MANUFACTURING, SELLING AND ADMINISTRATIVE EXPENSES UNDER SUB - HEAD MISCELLANEOUS EXPENSES IN THE FINANCIAL ACCOUNTS. T HE ASSESSING OFFICER DID NOT GRANT ANY OPPOR TUNITY TO THE ASSESSEE TO EXPLAIN WHY THE ABOVE EXPENSES SHOULD NOT BE DISALLOWED AND HENCE THE ADDITION MADE BY THE ASSESSING OFFICER WITHOUT GIVING PROPER OPPORTUNITY TO THE ASSESSEE IS ITSELF BAD IN LAW. FURTHER IT WAS SUBMITTED THAT ADDITIONS MADE ONLY ON THE BASIS OF SURMISES AND CONJECTURES WILL NOT HOLD IN THE EYES OF THE LAW. ACCORDINGLY, IT WAS SUBMITTED THAT IF THE DISALLOWANCE ON THIS ACCOUNT IS TO BE RETAINED, DIRECTIONS MAY BE GIVEN TO THE ASSESSING OFFICER TO RESTRICT THE 25 ITA NOS.68&85/RAN/2017 SAME TO RS. 20,53,221/ - , BEING 5% OF THE GENERAL EXPENSES ACTUALLY INCURRED DURING THE YEAR ( RS. 4,10,64,429/ - ). THE ASSESSING OFFICER IN THE ASSESSMENT ORDER HAS HELD THAT THE EXPENSES IN THE NATURE OF GIFTS/GREETINGS, ENTERTAINMENT, PUJA EXPENSES AND CLUB PAYMENTS ARE NOT WHOL LY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS AND HENCE DISALLOWED 5% OF GENERAL EXPENSES ON AD - HOC BASIS. 17 . THE CIT(A) OBSERVED THAT T HE ISSUE OF DISALLOWANCE OUT OF GENERAL EXPENSES HAS BEEN DECIDED AGAINST THE ASSESSEE BY THE ITAT FOR THE ASSESSME NT YEARS - 1998 - 99, 2002 - 03 AND 2003 - 04. FOR THE ASSESSMENT YEAR - 2004 - 05, IN THE APPELLATE PROCEEDINGS THE ASSESSEE HAD SUBMITTED THAT NO APPEAL WAS PREFERRED BY THE ASSESSEE AGAINST THE SAID ORDER. THE GROUND OF APPEAL WAS NOT PRESSED BY THE ASSESSEE AND A CCORDINGLY, THE CIT(A) DISMISSED THE GROUND. HOWEVER, THE CIT(A) FOUND THAT THAT THE EXPENSES UNDER THE HEAD GENERAL EXPENSES UNDER THE HEAD MISCELLANEOUS EXPENSES WAS BOOKED AT RS.4,10,64,429/ - AND NOT THE AMOUNT OF RS.6,61,00,053/ - AS TAKEN BY THE AO. ACCORDINGLY, HE DISALLOWED 5% OF THE EXPENSES BOOKED UNDER THE HEAD GENERAL EXPENSES. WE ARE IN AGREEMENT WITH THE OBSERVATIONS MADE BY THE CIT(A) IN THIS REGARD AND WE FIND THAT THE FINDING GIVEN BY THE CIT(A) ON THIS DISPUTED ISSUE IS JUST AND PROPER AN D THEREFORE, WE DO NOT FIND ANY NECESSITY TO INTERFERE WITH THE ORDER OF THE CIT(A) AND ACCORDINGLY WE UPHOLD THE SAME AND DISMISS THE GROUND OF APPEAL OF THE ASSESSEE. 26 ITA NOS.68&85/RAN/2017 1 8 . GROUND NOS. 4 & 5 PERTAINS TO NON - DEDUCTION OF TDS IN RESPECT OF PAYMENT MADE TO M /S HAMMONDS, BELGIUM U/S.40(A)(IA) OF THE ACT IN COMPLETE DISREGARD OF THE INDO - BELGIUM TAX TREATY. THE ASSESSEE BEFORE THE CIT(A) SUBMITTED THAT SINCE THE PAYMENTS MADE TO M/S HAMMONDS, BELGIUM, WOULD NOT BE TAXABLE IN INDIA IN VIEW OF THE PROTOCOL TO IND IA - BELIGUM TREATY AND READ WITH INDIA - US TREATY, THE ASSESSEE WAS NOT REQUIRED TO DEDUCT ANY TAXES FROM SUCH PAYMENTS AS PER THE PROVISIONS OF SECTION 195 OF THE ACT. THE AO HELD THAT SINCE THE ASSESSEE HAD NOT DEDUCTED TAX AT SOURCE IN TERMS OF SECTION 19 5 OF THE ACT, THE PAYMENT ATTRACTED DISALLOWANCE U/S.40(A)(IA) OF THE ACT. THE CIT(A) AFTER CONSIDERING THE SUBMISSIONS AND FINDINGS OF AO AND AFTER DISCUSSING ELABORATELY ON THE DISPUTED ISSUE DISMISSED THE GROUND OF ASSESSEE HOLDING THAT BY NOT DEDUCTING TDS ON THE SUM OF FTS PAID TO M/S HAMMONDS, BELGIUM THE ASSESSEE HAD BREACHED THE PROVISIONS OF SECTION 40(A)(IA) OF THE ACT. THE OBSERVATIONS OF THE CIT(A) ARE AS UNDER : - 19.27 THE APPELLANT IN THIS CASE HAD MADE PAYMENT OF FTS TO A NON - RESIDENT IN TE RMS OF SECTION 195(1) OF THE ACT. THE APPELLANT HAD NEITHER MADE AN APPLICATION BEFORE THE ASSESSING OFFICER U/S.195(2) NOR HAD FILED THE REQUISITE DETAILS AS MANDATED U/S.195(6). UNDER, THESE CIRCUMSTANCES, IT IS HELD THAT BY NOT DEDUCTING TDS ON THE SUM OF FTS PAID TO M/S HAMMONDS THE APPELLANT HAD BREACHED THE PROVISIONS OF SECTION 40(A)(IA) AND THE DISALLOWANCE WAS CORRECTLY MADE. GROUND OF APPEAL IS DISMISSED. ON PERUSAL OF THE OBSERVATIONS OF THE CIT(A) WE FIND THAT ASSESSEE HAD NEITHER MADE AN AP PLICATION BEFORE THE ASSESSING OFFICER U/S.195(2) NOR HAD FILED THE REQUISITE DETAILS AS MANDATED U/S.195(6) , THEREFORE, IN OUR 27 ITA NOS.68&85/RAN/2017 OPINION, THE CIT(A) RIGHTLY UPHELD THE ACTION OF AO. ACCORDINGLY, WE DO NOT SEE ANY GOOD REASON TO INTERFERE IN THE ORDER OF CIT (A) IN THIS REGARD AND THE SAME IS UPHELD AND THE GROUND OF APPEAL OF THE ASSESSEE IS DISMISSED. 19 . NEXT GROUND RELATES TO DISALLOWANCE OF FOREIGN TRAVEL EXPENSES. THE ASSESSING OFFICER DISALLOWED 15% OF THE FOREIGN TRAVEL EXPENSES ON AD - HOC BASIS AMOUNTI NG TO RS. 32,91, 583 / - . WHILE DISALLOWING THE EXPENSES HE HELD THAT THE DIRECTORS WERE ACCOMPANIED BY THEIR WIVES AND ALSO THE COMPANY GUESTS WHEN THEY TRAVELLED TO COUNTRIES LIKE SWITZERLAND, AUSTRALIA, NEW ZEALAND AND DUBAI WHERE THE ASSESSEE HAS NO SUBSID IARIES AND THEREFORE HE QUESTIONED THE BUSINESS EXPEDIENCY OF SUCH EXPENSES. THE ASSESSEE BEFORE THE CIT(A) SUBMITTED THAT FOREIGN TRAVEL BY ITS EMPLOYEES WAS FOR OFFICIAL PURPOSES AND THE DESIGNATION OF THE PERSONS TRAVELLING WAS ALSO PROVIDED. THE ATTACH MENT ANNEXED TO THE LETTER FILED BEFORE THE LD. ASSESSING OFFICER SHOWING THE FOREIGN TRAVEL EXPENSES FOR THE YEAR UNDER CONSIDERATION AND THE DESIGNATION OF OFFICERS FOR WHOM THE EXPENDITURE WAS INCURRED WAS FILED . THE ASSESSEE FURTHER SUBMITTED THE FOLLO WING REASONS FOR FOREIGN TRAVEL: - O EXPLORING NEW MARKETS O CREATE AWARENESS OF THE ASSESSEE S PRODUCTS IN NEW REGIONS O DEVELOP POTENTIAL CUSTOMERS AND CONVERT THEM TO REGULAR CUSTOMERS O UNDERSTAND THE NEEDS OF THE CUSTOMER AND TO MAKE PRODUCTS MORE COMPATIBLE WITH SUCH REQUIREMENTS. O NEGOTIATE WITH AGENTS O TO CONTINUE WITH THE ENHANCEMENT OF THE EXISTING BUSINESS 28 ITA NOS.68&85/RAN/2017 THE CIT(A) AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE AND THE FINDINGS OF THE AO, HAS DISMISSED THE GROUND OF ASSESSEE. CONSIDERING THE FACTS AND CIRCUMSTANCES OF THE CASE, WE RESTRICT THE DISALLOWANCE ON FOREIGN TRAVEL EXPENSES TO 10% AS AGAINST 15% MADE BY THE AO AND CONFIRMED BY THE CIT(A) . ACCORDINGLY, THIS GROUND OF APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. 20 . NEXT GROUND RELATES TO DISALLOWA NCE OF CLAIM U/S.80IA OF THE ACT. T HE LD. ASSESSING OFFICER DID NOT AGREE WITH THE METHOD OF COMPUTATION OF MARKET VALUE OF POWER CAPTIVELY CONSUMED IN THE MANUFACTURING PLANTS OF THE ASSESSEE . THE LD. ASSESSING OFFICER STATED THAT JSEB PUBLISHED RATES WAS NOT THE TRUE REFLECTION OF MARKET VALUE OF POWER PRODUCED BY THE ASSESSEES CAPTIVE PLANTS SINCE THOSE RATES DID NOT INCORPORATE VARIOUS PARAMETERS RELEVANT FOR CAPTIVE PLANTS OF THE ASSESSEE . THE LD. ASSESSING OFFICER ALSO TOOK NOTE OF THE RATES AT WHICH DAMODAR VALLEY CORPORATION (DVC) SOLD POWER IN JHARKHAND AND HELD THAT THE SAME WERE NOT APPROPRIATE CITI NG SAME REASONS ON WHICH HE REJ ECTED THE RATES OF JSEB. THE LD. ASSESSING OFFICER, IN ORDER TO ARRIVE AT THE MOST APPROPRIATE MARKET VALUE, ALLOWED FO R A MARGIN OF 20% ON COST OF PRODUCTION OF POWER BY SUCH CAPTIVE POWER UNITS OF THE ASSESSEE WHICH WORKED OUT TO RS. 3.90 PER UNIT (3.25 * 120%). WHILE COMPUTING THIS VALUE OF RS. 3.90, THE LD. ASSESSING OFFICER ASSUMED THE COST OF PRODUCTION AT RS. 3.25 PER UNIT ON THE CONTENTION THAT DETAILS OF COST OF PRODUCTION OF POWER WERE NOT FURNISHED BY 29 ITA NOS.68&85/RAN/2017 THE ASSESSEE . ACCORDINGLY T HE AO HAS RE - WORKED THE REVENUE OF THE CAPTIVE POWER UNITS AND REDUCED THE PROFITS BY RS. 2,79,08,870/ - IN AGGREGATE. HE FURTHER SUPPORTED TH IS METHOD BY OBSERVING THAT SECTION 80IA(10) PERMITS THE LD. ASSESSING OFFICER TO TAKE A REASONABLE BASIS WHEN THE SALE VALUE COMPUTED WAS MORE THAN THE ORDINARY PROFITS. THE CIT(A) AFTER CONSIDERING THE FINDINGS OF AO AND SUBMISSIONS OF THE ASSESSEE, HAS DISMISSED THE CLAIM OF THE ASSESSEE. 21 . WE FIND THAT THE ASSESSEE BEFORE THE CIT(A) HAS SUBMITTED THAT THE ASSESSEE HAD ESTABLISHED TWO POWER PLANTS WHICH ARE USED EXCLUSIVELY FOR CAPTIVE CONSUMPTION. THE TWO PLANTS ARE (1) 25MW PLANT AND (2) 15 MW PLANT . THE ASSESSEE MAINTAINED SEPARATE SET OF BOOKS OF ACCOUNTS FOR THE CAPTIVE PLANTS AND ACCORDINGLY ASCERTAINED THE COSTS OF EACH OF THE UNDERTAKINGS. THE ASSESSEE ALSO ON A CONSERVATIVE BASIS COMPUTED THE SALE VALUE ON THE BASIS OF TARIFF SCHEDULE PUBLIS HED BY THE JHARKHAND STATE ELECTRICITY BOARD (JSEB). THE TOTAL SALE VALUE THUS, WAS DETERMINED AT RS. 101,90,14,388/ - . THE ASSESSEE COMPANY ACCORDINGLY ARRIVED AT THE PROFITS DERIVED FROM THESE PLANTS AS CONTEMPLATED BY SECTION 80 - IA OF THE ACT. NECESSARY A UDIT CERTIFICATES AND COPIES OF THE ACCOUNTS DULY SIGNED BY THE CHARTERED ACCOUNTANTS WERE ALSO FILED WITH THE RETURN OF INCOME. THE ASSESSEE FURTHER SUBMITTED THAT THE CAPTIVE POWER PLANTS WAS A SEPARATE AND DISTINCT UNIT AS COMPARED TO THE EXISTING SET U P OF STEEL RODS AND WIRE MILLS. THE ELECTRICITY GENERATED BY THE NEW POWER UNIT WAS MARKETABLE, 30 ITA NOS.68&85/RAN/2017 HOWEVER THE COMPANY HAD INTERNALLY CONSUMED SUCH POWER IN ITS MANUFACTURING PROCESS OF THE FINAL PRODUCT BY ONCE OFFLOADING THE SAME TO JSEB GRID AND AGAIN WITH DRAWING THE SAME FROM THE GRID. THE FACT THAT THE ASSESSEE COMPANY CONSUMED THE ELECTRICITY GENERATED BY THE POWER UNIT INTERNALLY DID NOT DISENTITLE THE SAID UNIT FROM THE BENEFITS ENVISAGED UNDER SECTION 80 IA OF THE ACT. IN FACT, SUCH INTERNAL CONSUMPTI ON OF THE PRODUCTS OF THE ELIGIBLE UNDERTAKING IS RECOGNISED BY THE STATUTE ITSELF, MORE SPECIFICALLY BY SECTION 80IA (8) OF THE ACT, THE ASSESSEE CONTENDED. THE SAID SECTION INTER - ALIA PROVIDES THAT WHERE ANY GOODS MANUFACTURED BY THE ELIGIBLE UNDERTAKING IS TRANSFERRED TO THE OTHER UNDERTAKINGS OF THE SAME ASSESSEE THEN FOR THE PURPOSE OF COMPUTING THE PROFITS AND GAINS OF THE ELIGIBLE UNDERTAKING WHICH WOULD BE ALLOWABLE AS DEDUCTION U/S.80IA OF THE ACT. ACCORDINGLY, WE REMIT THE DISPUTED ISSUE TO THE FI LE OF AO, WHO SHALL EXAMINE AND VERIFY THE ISSUE AFRESH AFTER PROVIDING ADEQUATE OPPORTUNITY OF HEARING TO THE ASSESSEE AND THE ASSESSEE SHALL COOPERATE IN SUBMITTING THE INFORMATION BEFORE THE AO. THUS, THIS GROUND OF APPEAL OF THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES. 22 . IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. 23 . NOW, WE SHALL TAKE UP APPEAL OF THE REVENUE IN ITA NO.85/RAN/2017, WHEREIN THE REVENUE HAS RAISED THE FOLLOWING GROUNDS : - 1. THE LD.CIT(A)S DECISION IN DELETING THE ADJUSTMENT OF RS.5,89,506/ - SUGGESTED BY THE TPO IS NOT ACCEPTABLE AS THE 31 ITA NOS.68&85/RAN/2017 ALLOWANCE OF DISCOUNT ON EARLY PAYMENT AND CHARGING OF INTEREST ON LATE PAYMENTS ARE INDEPENDENT TRANSACTIONS. 2. IN RESPECT OF ADDITION MADE U/S.40(A)(IA), LD CIT(A)S DECISION IN DELETING THE ADDITION IS NOT ACCEPTABLE AS SECTION 194J DOES NOT ALLOW FOR ANY EXCEPTION ON CONSIDERATION OF NATURE OF TRANSACTION. THE ASSESSEE COMPANY HAD FAILED TO DEDUCT TDS ON THE LEGAL EXPENSES OF RS.37,75,584/ - TO FIGHT ANTI - DUMPING MEASURES IMPOSED BY EUROPEAN UNION. IT HAD ALSO FAILED TO DEDUCT TDS ON PAYMENT OF RS.30,83,280/ - PAID TO UM CABLES ON ACCOUNT OF MAINTENANCE OF STORES AND MACHINERIES. 3. IN RESPECT' OF DISALLOWANCE OF NOTIONAL INTEREST ON LOANS AND INVESTMENT WI TH OTHER CORPORATE WHEREAS IT HAS DEBITED INTEREST ON ITS BORROWING, LD. CIT(A) HAS CITED SOME JUDICIAL PRONOUNCEMENTS BUT THEY ARE NOT OF THE JURISDICTIONAL COURTS. 24 . WITH REGARD TO GROUND NO.1, LD. DR SUBMITTED THAT THE CIT(A) HAS ERRED IN DELETING THE ADJUSTMENT OF RS.5,89,506/ - SUGGESTED BY THE TPO. THE TPO WAS OF THE VIEW THAT THE EXPLANATION TO SECTION 92B OF THE ACT, CLARIFIES THAT THE INSTANT DISCOUNT ALLOWED TO THE AES DURING THE COURSE OF BUSINESS WAS IN THE NATURE OF FINANCING TRANSACTION WHICH HAD A BEARING ON INCOME OF THE ASSESSEE AND THE ALP OF DISCOUNT GIVEN SHOULD HAVE BEEN 6.83% INSTEAD OF 8%. BEFORE THE CIT(A), THE ASSESSEE SUBMITTED THAT AS PER THE TPO THE ASSESSEE HAD BENCHMARKED THE INSTANT TRANSACTION USING TNMM. HOWEVER, THE TPO COR RECTLY BENCHMARKED USING CUP METHOD AS TNMM IS A METHOD OF LAST RESORT WHICH IS TO BE PRESSED ONLY WHEN THE TRADITIONAL METHODS SUCH AS CUP, CPM & RPM CANNOT BE REASONABLY APPLIED. ACCORDINGLY, THE INSTANT DISCOUNT ALLOWED TO THE AES DURING THE SOURCE OF BUSINESS WAS IN THE NATURE OF FINANCING TRANSACTION WHICH HAD A 32 ITA NOS.68&85/RAN/2017 BEARING ON INCOME OF THE ASSESSEE AND THE ALP OF DISCOUNT GIVEN SHOULD HAVE BEEN 6.83% INSTEAD OF 8% AS COMPUTED BY THE TPO . 25 . THE CIT(A) AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE A ND FINDINGS OF THE TPO HAS OBSERVED THAT THE POLICY OF THE ASSESSEE WAS TWO WAY I.E. CHARGING INTEREST @9% FOR THE DELAY IN RECEIPT OF PAYMENT AND GRANT OF DISCOUNT @8% FOR EARLY PAYMENT OF DUES BEFORE THE DUE DATE. IT HAS BEEN EXPLAINED IN THE SUBMISSIONS THAT IT HAD MADE RECOVERY OF RS.111,40,203/ - FROM THE AE AS RECOVERY OF INTEREST. HOWEVER, THE DISCOUNT WAS PROVIDED OF RS.40,30,809/ - FOR THE EARLY RECEIPT OF DUE PAYMENTS. IN THIS WAY, THERE WAS A NET EARNING OF RS.71,09,394/ - . THE OBSERVATIONS OF THE C IT(A) IN THIS REGARD ARE AS UNDER : - 13.6 I HAVE CONSIDERED THE SUBMISSIONS OF THE APPELLANT AND HAVE PERUSED THE TP ORDER AS WELL AS THE REMAND REPORT. IN TERMS OF THE PROVISIONS OF RULE 10C(1), THE MOST APPROPRIATE METHOD OF ASCERTAINING THE ARMS LENGT H PRICE IS THE METHOD WHICH IS BEST SUITED TO THE FACTS AND CIRCUMSTANCES OF EACH PARTICULAR TRANSACTION, AND WHICH PROVIDES THE MOST RELIABLE MEASURE OF AN ARMS LENGTH PRICE IN RELATION TO THE INTERNATIONAL TRANSACTION THOUGH IN RELATIVELY MORE SPECIFI C TERMS. RULE 10C(2) PROVIDES THAT WHILE SELECTING THE MOST APPROPRIATE METHOD, FOLLOWING FACTORS ARE TO BE TAKEN INTO ACCOUNT: - (A) THE NATURE AND CLASS OF INTERNATIONAL TRANSACTION; (B) THE CLASS OR CLASSES OF ASSOCIATED ENTERPRISES ENTERING INTO TRAN SACTIONS AND THE FUNCTIONS PERFORMED BY THEM TAKING INTO ACCOUNT ASSETS EMPLOYED OR TO BE EMPLOYED AND RISKS ASSUMED BY SUCH ENTERPRISES; (C) THE AVAILABILITY, COVERAGE AND RELIABILITY OF DATA NECESSARY FOR APPLICATION OF THE METHOD; (D) THE DEGREE OF CO MPARABILITY EXISTING BETWEEN THE INTERNATIONAL TRANSACTION AND THE UNCONTROLLED TRANSACTION AND BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS; (E) THE EXTENT TO WHICH RELIABLE AND ACCURATE ADJUSTMENTS CAN BE MADE TO ACCOUNT FOR DIFFERENCES, IF A NY, BETWEEN THE INTERNATIONAL TRANSACTION AND THE 33 ITA NOS.68&85/RAN/2017 COMPARABLE UNCONTROLLED TRANSACTION OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS; AND F) THE NATURE, EXTENT AND RELIABILITY OF ASSUMPTIONS REQUIRED TO BE MADE FOR APPLICATION OF THE METHOD. 13.7 THE FACTUAL MATRIX OBTAINING IN THE CASE, SUBMISSIONS OF THE APPELLANT AND ORDER OF THE TPO HAS BEEN PERUSED. IT IS SEEN THAT THE APPELLANT HAS GIVEN DISCOUNT TO DEBTORS (AE) OF RS. 40,30,809/ - ON EARLY PAYMENT OF DUES FROM AES. THIS DISCOUNT HAS BEEN COMPUTED @8% P.A. FOR THE PERIOD OF DAYS FOR WHICH PAYMENT HAS BEEN RECEIVED FROM AES BEFORE THE AGREED DATE OR DUE DATE. THE APPELLANT HAS ALSO SUBMITTED THAT IT HAS CHARGED @9% P.A. FOR THE DELAYED PERIOD OF RECEIVABLES FROM THE AE. THE POLICY OF THE AP PELLANT WAS TWO WAY I.E. CHARGING INTEREST @9% FOR THE DELAY IN RECEIPT OF PAYMENT AND GRANT OF DISCOUNT @8% FOR EARLY PAYMENT OF DUES BEFORE THE DUE DATE. IT HAS BEEN EXPLAINED IN THE SUBMISSIONS THAT IT HAD MADE RECOVERY OF RS. 111,40,203/ - FROM THE AE AS RECOVERY OF INTEREST. HOWEVER, THE DISCOUNT WAS PROVIDED OF RS. 40,30,809/ - FOR THE EARLY RECEIPT OF DUE PAYMENTS. IN THIS WAY, THERE WAS A NET EARNING OF RS. 71,09,394/ - . CONSIDERING THAT BOTH SIDES OF THE TRANSACTIONS WERE ENTERED IN CONJUNCTION WITH EACH OTHER. I AM INCLINED TO ACCEPT THE CONTENTIONS OF THE APPELLANT THAT THE CHARGING OF INTEREST ON DELAYED RECEIVABLES AND DISCOUNT TO THE DEBTORS IS TO BE CONSIDERED TOGETHER. IN VIEW OF THE ABOVE, THE ADJUSTMENT MADE BY THE TPO OF RS. 5,89,506/ - IN RESPECT OF TRANSACTION OF DISCOUNT TO DEBTORS DESERVES TO BE DELETED AND IS ORDERED ACCORDINGLY. THE TAXPAYER GETS A RELIEF OF RS. 5,89,506/ - . GROUND OF APPEAL IS ALLOWED. FROM THE ABOVE OBSERVATION OF THE CIT(A), WE ARE OF THE VIEW THAT THE CIT(A) HAS PASSED A REASONED ORDER AND THE LD. DR COULD NOT BRING ANY NEW MATERIAL FACT BEFORE US TO CONTROVERT THE ABOVE FINDING OF THE CIT(A), THEREFORE, WE UPHOLD THE SAME AND DISMISS THIS GROUND OF APPEAL OF THE REVENUE . 26 . THE GRIEVANCE OF THE REVENUE IN GROUND NO.2 IS THAT THE CIT(A) HAS ERRED IN DELETING THE ADDITION MADE U/S.40(A)(IA) OF THE ACT ON ACCOUNT OF PAYMENT MADE TO UM CABLES. T HE L D. ASSESSING OFFICER HELD THAT SINCE THE PAYMENT HAS NOT BEEN SUBJECTED TO TDS, THE SAME WOULD BE DISALLOWED. 34 ITA NOS.68&85/RAN/2017 THE L D. ASSESSING O FFICER ALSO RELIED ON THE BOARDS CIRCULAR STATING THAT TDS BE MADE ON REIMBURSEMENT OF EXPENSES. IN THE ASSESSMENT ORDER, HE HAS HELD THAT THE ASSESSEE WAS REQUIRED TO DEDUCT TAXES FROM SUCH PAYMENTS AND SINCE NO TAX HAS BEEN DEDUCTED, HE DISALLOWED THE A MOUNT U/S.40(A)(IA). BEFORE THE CIT(A), THE ASSESSEE SUBMITTED THAT IN ITS FINANCIAL ACCOUNTS HAS UNDER THE HEAD OPERATION MANAGEMENT CHARGES AMONGST OTHERS IT HAD DEBITED EXPENSES AMOUNTING TO RS. 30,83,280/ - ON ACCOUNT OF COMPENSATION PAID TO UM CABLES F OR A MACHINERY LEASED TO THE THEM, AND SUBSEQUENTLY DISCOVERED TO BE OPERATIONALLY DEFECTIVE. M/S. UM CABLES INCURRED THE EXPENDITURE ON MAKING GOOD THE DEFECT IN THE SAID MACHINERY. DURING T HE COURSE OF ASSESSMENT, THE LD. ASSESSING OFFICER HAD ASKED THE ASSESSEE TO FURNISH THE DETAILS OF SUCH EXPENSES. IN RESPONSE TO SUCH DIRECTION, THE ASSESSEE SUBMITTED THAT IT HAD GIVEN SOME ASSETS ON LEASE TO UM CABLES LTD. FOR WHICH UM CABLES PAID TO THE ASSESSEE 5% OF THE W DV OF THE ASSETS EQUIVALENT TO RS. 11,06,602 / - PER ANNUM. A COPY OF THE AGREEMENT ENTERED INTO BETWEEN THE ASSESSEE AND UM CABLES WAS FILED. THE ASSESSEE HAS BOOKED THE SAID INCOME IN ITS PROFIT AND LOSS ACCOUNT. THE ASSETS GIVEN ON LEASE REQUIRED RETROFITTING TO BRING THE SAME TO THE ORIGINALLY AGR EED SPECIFICATIONS. THE SAME WAS MENTIONED IN THE REPLY DATED 26 TH NOVEMBER, 2010. IT WAS AGREED BETWEEN THE ASSESSEE AND UM CABLES THAT THE LATTER WOULD INCUR THE NECESSARY EXPENSES WHICH WOULD BE REIMBURSED BY THE ASSESSEE AS, IN AN ALTERNATE SCENARIO, I T WOULD HAVE 35 ITA NOS.68&85/RAN/2017 BEEN VERY COSTLY AND COMM ERCIALLY ILLOGICAL TO BRING THE MACHINE TO RANCHI AND DO THE NECESSARY REPAIRS. THE ASSESSEE SUBMITTED THAT TDS WAS NOT REQUIRED TO BE DEDUCTED ON SUCH REIMBURSEMENT OF EXPENSES. 27 . LD. CIT(A) AFTER CONSIDERING THE SU BMISSIONS OF THE ASSESSEE AND FINDINGS OF AO OBSERVED AS UNDER : - 20.3 I HAVE CONSIDERED THE SUBMISSIONS OF THE APPELLANT AND HAVE ALSO PERUSED THE ASSESSMENT ORDER AND THE RELEVANT AGREEMENT AS WELL AS THE LETTER OF THE APPELLANT ADDRESSED TO THE - LD. ASS ESSING OFFICER DATED 26.11.2010. THE LD. ASSESSING OFFICER AGREES THAT THE EXPENSES WERE IN THE FORM OF REIMBURSEMENT BUT IS OF THE VIEW THAT THE APPELLANT OUGHT TO HAVE DEDUCTED TAX AT SOURCE ON THE AMOUNT OF REIMBURSEMENT. ON PERUSAL OF THE CONTRACT IT I S CLEAR THAT THE APPELLANT HAD GIVEN MACHINES ON HIRE TO M/S. UM CABLES LTD. SILVASSA. THE APPELLANT HAD BOOKED THE SAID INCOME IN ITS PROFIT AND LOSS ACCOUNT. SURELY, AS PER THE TERMS OF THE CONTRACT IT WAS FOR THE APPELLANT TO KEEP THE MACHINE IN GOOD WO RKING CONDITION. AS EXPLAINED TO THE LD. ASSESSING OFFICER THE MACHINE REQUIRED SOME RETROFITTING. AS A BUSINESS EXPEDIENCY THE APPELLANT ASKED UM CABLES TO BEAR THE COST OF RETROFITTING AND THE SAME WAS PAID BY THE APPELLANT AS REIMBURSEMENT. OTHERWISE, T HE APPELLANT WOULD HAVE HAD TO GET THE MACHINE BACK TO ITS PLANT IN RANCHI OR WOULD HAVE HAD TO DEPUTE PERSONNEL TO SILVASSA TO GET THE JOB DONE. THE HONBLE PATNA HIGH COURT IN THE CASE OF SRI NILKANTHA NARAYAN SINGH V CIT 20 ITR 8 HAS HELD THAT BUT IN T HE APPLICATION OF THE LAW RELATING TO INCOME - TAX, THE PRINCIPLE IS WELL ESTABLISHED THAT THE NAME GIVEN TO A TRANSACTION BY THE PARTIES DOES NOT NECESSARILY DECIDE THE NATURE OF THE TRANSACTION. IT IS THE SUBSTANCE AND NOT THE FORM OF THE CONTRACT THAT SHO ULD BE REGARDED. IN ANALYSING THE TRANSACTION IT IS NOT NECESSARY THAT THE DOCUMENTS SHOULD BE CONSTRUED FROM THE PURELY LEGAL ASPECT.' AS STATED IN TRANSMISSION CORPORATION (SUPRA) THE APEX COURT HELD THE SUM WHICH IS TO BE PAID MAY BE INCOME OUT OF DIFF ERENT HEADS OF INCOME PROVIDED UNDER SECTION 14, THAT IS TO SAY, INCOME FROM SALARIES, INCOME FROM HOUSE PROPERTY, PROFITS AND GAINS OF BUSINESS OR PROFESSION, CAPITAL GAINS AND INCOME FROM OTHER SOURCES. THE SCHEME OF TAX DEDUCTION AT SOURCE APPLIES NOT O NLY TO THE AMOUNT PAID WHICH WHOLLY BEARS 'INCOME' CHARACTER SUCH AS SALARIES, DIVIDENDS, INTEREST OF SECURITIES ETC., BUT ALSO TO GROSS SUMS, THE WHOLE OF WHICH MAY NOT BE INCOME OR PROFITS OF THE RECIPIENT, SUCH AS PAYMENTS TO CONTRACTORS AND SUB - CONTRAC TORS AND THE PAYMENT OF INSURANCE COMMISSION. IT IS TRUE THAT IN SOME CASES, A TRADING RECEIPT MAY CONTAIN A FRACTION OF SUM AS TAXABLE INCOME, BUT IN OTHER CASES SUCH AS INTEREST, COMMISSION, 36 ITA NOS.68&85/RAN/2017 TRANSFER OF RIGHTS OF PATENTS, GOODWILL OR DRAWINGS FOR PLANT A ND MACHINERY AND SUCH OTHER TRANSACTIONS, IT MAY CONTAIN LARGE SUM AS TAXABLE INCOME UNDER THE PROVISIONS OF THE ACT. ' IT CANNOT BE SAID THAT THE AMOUNT PAID BY THE APPELLANT TO UM CABLES WAS IN THE NATURE OF INCOME IN ITS HANDS. THE APPELLANT, IN ITS BOO KS DISCLOSED THE INCOME AS WELL AS THE EXPENSES. CONSIDERING THE FACTS OF THE CASE, THE GROUND OF APPEAL IS ALLOWED. WE FIND THAT THE CIT(A) DEALT ON THE DISPUTED ISSUE AFTER RELYING ON THE JUDICIAL DECISIONS AND OBSERVED THAT IN SOME CASES, A TRADING R ECEIPT MAY CONTAIN A FRACTION OF SUM AS TAXABLE INCOME, BUT IN OTHER CASES SUCH AS INTEREST, COMMISSION, TRANSFER OF RIGHTS OF PATENTS, GOODWILL OR DRAWINGS FOR PLANT AND MACHINERY AND SUCH OTHER TRANSACTIONS, IT MAY CONTAIN LARGE SUM AS TAXABLE INCOME UND ER THE PROVISIONS OF THE ACT. IT CANNOT BE SAID THAT THE AMOUNT PAID BY THE ASSESSEE TO UM CABLES WAS IN THE NATURE OF INCOME IN ITS HANDS. WE ARE IN AGREEMENT WITH THE FINDINGS RECORDED BY THE CIT(A) ON THIS DISPUTED ISSUE AND THE LD. DR COULD NOT CONTROV ERT THE FINDINGS OF THE CIT(A) AND ACCORDINGLY WE UPHOLD THE SAME AND DISMISS THE GROUND OF APPEAL OF THE REVENUE . 28 . NEXT GROUND RAISED BY THE REVENUE IS WITH REGARD TO DELETING THE DISALLOWANCE OF NOTIONAL INTEREST ON LOANS AND INVESTMENT WITH OTHER COR PORATE. 29 . WITH REGARD TO ADDITION OF NOTIONAL INTEREST OF RS. 7,39,700/ - , THE TPO REJECTED THE SUBMISSION OF THE ASSESSEE AND ADDED THE SAME REPRESENTING NOTIONAL INTEREST @10% ON LOANS GIVEN TO USHA COM. THE CIT(A) RELYING ON THE DECISION OF HONBLE SU PREME COURT IN THE CASE OF CIT VS. SHOORJI VALLABHDAS & CO., 46 ITR 144(SC) AND DECISION OF HONBLE GUWAHATI HIGH 37 ITA NOS.68&85/RAN/2017 COURT IN THE CASE OF B AND A PLANTATIONS & INDUSTRIES LTD. VS. CIT [2000 ] 242 22/[2001] 117 TAXMAN 323, HAS ALLOWED THIS GROUND OF APPEAL OF T HE ASSESSEE BY OBSERVING AT PARA 24.5 IN THE APPELLATE ORDER AS UNDER : - 24.5 THIS JUDGMENT HAS BEEN FOLLOWED IN THE CASE OF SHIVNANDAN BUILDCON (P) LTD. V CIT [2015] 60 TAXMAN.COM 347 (DEL). CONSIDERING THE FACTS AND CIRCUMSTANCES OF THE CASE AND THE JUD GMENTS CITED ABOVE THE ADDITION CANNOT BE SUSTAINED IN APPEAL. GROUND OF APPEAL IS ALLOWED. FROM THE ABOVE OBSERVATION OF THE CIT(A), WE FIND THAT THE CIT(A) HAS PASSED THE ORDER AFTER CONSIDERING THE JUDGMENT OF THE HONBLE SUPREME COURT AND HIGH COURT, THEREFORE, WE DO NOT FIND ANY ERROR IN THE FINDINGS OF CIT(A) IN THIS REGARD AND ACCORDINGLY, WE UPHOLD THE SAME AND DISMISS THIS GROUND OF APPEAL OF THE REVENUE. 30 . W ITH REGARD TO DISALLOWANCE OF NOTATIONAL INTEREST OF RS. 86,18,225/ - , T HE AO DISALLOWED 10% OF SUCH LOANS AND ADVANCE ALONG WITH INVESTMENTS AGGREGATING TO RS. 86,18,225/ - ON NOTIONAL BASIS. THE ASSESSING OFFICER STATED THAT THE CASE LAWS CITED WERE DIFFERENT IN FACTS AND CIRCUMSTANCES AND HENCE WERE NOT APPLICABLE. THE ASSESSING OFFICER ALLE GED THAT NO PART OF PROFIT AFTER TAXES HAD BEEN APPORTIONED FOR THESE INVESTMENTS/ADVANCES AND HENCE DISALLOWED 10% OF SAME ON THE GROUND THAT IT WAS NOT INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. THE CIT(A) AFTER CONSIDERING THE SUBMISSI ONS OF THE ASSESSEE AND FINDINGS OF THE AO HAS ALLOWED THE GROUND OF APPEAL OF THE ASSESSEE. L D. DR SUBMITTED THAT THE ASSESSEE HAD NOT APPORTIONED ANY PART OF PROFIT AFTER TAXES FOR THE INVESTMENTS/ADVANCES IN QUESTION AND THE AO RIGHTLY DISALLOWED 10% OF THE 38 ITA NOS.68&85/RAN/2017 SAME ON THE GROUND THAT IT WAS NOT INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS AND PRAYED FOR ALLOWING THE APPEAL. 31 . WE FIND THAT THE CIT(A) DEALT ON THE DISPUTED ISSUE AFTER RELYING ON THE JUDICIAL DECISIONS AND OBSERVED THAT I T IS NOW WELL SETTLED LAW THAT IF A QUESTION ARISES AS TO WHETHER A PARTICULAR PAYMENT MADE FROM THE COMPOSITE ACCOUNT WAS OUT OF THE OVERDRAFT FUND OR OUT OF THE ACCUMULATED PROFITS EMBEDDED IN THE COLLECTION OF SALE PROCEEDS AND OTHER INCOMES DEPOSITED THEREI N, IT CANNOT BE SAID THAT THE PAYMENT WAS MADE OUT OF THE OVERDRAFT. THE OBSERVATIONS OF THE CIT(A) IN THIS REGARD ARE AS UNDER : - I HAVE CONSIDERED THE SUBMISSIONS OF THE APPELLANT AND HAVE ALSO PERUSED THE ASSESSMENT ORDER AS WELL AS THE BALANCE SHEET E XTRACT WHICH READS : - FREE RESERVES AVAILABLE AT THE END OF THE YEAR GENERAL RESERVE (A S ON 31.3.07) 194.12 CRORES P& L (AN ON 31.3.07) 20.91 CRORES 215.03 CRORES LESS: ADVANCES TO SUBSIDIARIES AND GROUP COMPANIES (AS ON 31.03.07) 23.07 CRORES 191.96 CRORES LESS: AGGREGATE OF INVESTMENTS AS ON 31.03.07 160.08 CRORES AVAILABLE FREE RESERVE AS ON 31.03.2007 31.88 CRORES 25.4 IT IS NOW WELL SETTLED LAW THAT IF A QUESTION ARISES AS TO WHETHER A PARTICULA R PAYMENT MADE FROM THE COMPOSITE ACCOUNT WAS OUT OF THE OVERDRAFT FUND OR OUT OF THE ACCUMULATED PROFITS EMBEDDED IN THE COLLECTION OF SALE PROCEEDS AND OTHER INCOMES DEPOSITED THEREIN, IT CANNOT BE SAID THAT THE PAYMENT WAS MADE OUT OF THE OVERDRAFT. ON THE CONTRARY, THE PRESUMPTION SHOULD BE THAT THE PAYMENT WAS MADE OUT OF THE PROFITS GENERATED OVER THE YEARS AND EMBEDDED IN THE OVERDRAFT ACCOUNTS. IT IS ALSO A SETTLED LAW THAT IN THE EVENT OF A DOUBT REGARDING THE SOURCE OF A PARTICULAR PAYMENT FROM A COMMON POOL OF FUNDS IN WHICH RECEIPTS FROM VARIOUS SOURCES ARE DEPOSITED, THE ASSESSEE IS ENTITLED TO ADOPT THE SOURCE MOST BENEFICIAL TO IT. IN THIS CONNECTION, RELIANCE IS PLACED ON THE FOLLOWING DECISIONS OF HON'BLE CALCUTTA HIGH COURT: WOOLCOMBERS OF INDIA LIMITED VS CIT 134 ITR 219 (CAL); RECKITT & COLMAN OF INDIA LIMITED VS. CIT 135 ITR 698 (CAL); INDIAN EXPLOSIVES LIMITED VS. 39 ITA NOS.68&85/RAN/2017 CIT 147 ITR 392 (CAL); ALKALI & CHEMICAL COIPORATION OF INDIA LIMITED VS CIT 161 ITR 820 (CAL); BRITISH PAINTS (INDIA) LIMITE D VS CIT 190 ITR 196 (CAL) AND CIT VS. HOTEL SAVERA [1999] 239 ITR 795 (MAD) AND THE THIRD MEMBER BENCH OF CHANDIGARH IN MALWA COTTON SPINNING MILLS VS ACIT 89ITD 65. 25.5 IN THIS REGARD THE JUDGMENT OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT REL IANCE UTILITIES AND POWER 313 ITR 340 ( BOM) IS RELEVANT. IN THAT CASE THE ASSESSEE - COMPANY WAS ENGAGED IN THE BUSINESS OF GENERATION OF POWER. IT HAD MADE CERTAIN INVESTMENTS IN THE SISTER CONCERNS DURING JANUARY, 2000 TO MARCH, 2000. THE ASSESSING OFFICE R WAS OF THE VIEW THAT THE SUM OF 213 CRORES WAS INVESTED OUT OF ITS OWN FUNDS AND RS. 147 CRORES WAS INVESTED OUT OF BORROWED FUNDS. ACCORDINGLY, HE DISALLOWED INTEREST AMOUNTING TO RS. 4.40 CRORES, CALCULATED AT THE RATE OF 12 PER CENT PER ANNUM FOR THREE MONTHS FROM JANUARY, 2000 TO MARCH, 2000. IN THIS CONTEXT IT WAS HELD THAT IF THERE ARE FUNDS AVAILABLE BOTH, INTEREST - FREE AND OVERDRAFT AND/OR LOANS ARE TAKEN, THEN A PRESUMPTION WOULD ARISE THAT INVESTMENTS WOULD BE OUT OF THE INTEREST - FREE FUND GENERA TED OR AVAILABLE WITH THE COMPANY, IF THE INTEREST - FREE FUNDS ARE SUFFICIENT TO MEET THE INVESTMENTS. 25.6 THIS JUDGMENT WAS FOLLOWED BY THE SAME HIGH COURT IN THE CASE OF CIT V HDFC BANK 366 ITR 505 IN THE CONTEXT OF DISALLOWANCE U / S .14A OF THE ACT. IT W AS HELD THAT IN THE CASE AT HAND, AS RECORDED BY THE ITAT, UNDISPUTEDLY THE ASSESSEE'S OWN FUNDS AND OTHER NON - INTEREST BEARING FUNDS WERE MORE THAN THE INVESTMENT IN THE TAX FREE SECURITIES. THE ITAT THEREFORE HELD THAT THERE WAS NO BASIS FOR DEEMING THA T THE ASSESSEE HAD USED THE BORROWED FUNDS FOR INVESTMENT IN TAX FREE SECURITIES. ON THIS FACTUAL ASPECT, THE ITAT DID NOT FIND ANY MERIT IN THE CONTENTION RAISED BY THE REVENUE AND THEREFORE, ACCORDINGLY ANSWERED THE QUESTION IN FAVOUR OF THE ASSESSEE. ON GOING THROUGH THE ORDER OF THE CIT (APPEALS) DATED 28 TH MARCH, 2005 AS WELL AS THE IMPUGNED ORDER, WE DO NOT FIND THAT THE CIT (APPEALS) OR THE ITAT ERRED IN HOLDING IN FAVOUR OF THE ASSESSEE. IN THIS REGARD, THE SUBMISSION OF MR MIST R Y, THE LEARNED SENIO R COUNSEL APPEARING ON BEHALF OF THE ASSESSEE, THAT THIS ISSUE IS SQUARELY COVERED BY A JUDGMENT OF THIS COURT IN THE CASE OF CIT V. RELIANCE UTILITIES & POWER LTD. [2009] 313 ITR 340/178 TAXMAN 135 (BOM.) IS WELL FOUNDED . THE HONBLE GUJARAT HIGH COURT TO O IN THE CASE OF CIT V AMOD STAMPING (P) LTD. 45 TAXMANN.COM 427 (GUJ) HAS TAKEN THE SAME VIEW. ACCORDINGLY, THE ADDITION MADE BY THE LD. ASSESSING OFFICER IS DELETED. GROUND OF APPEAL IS ALLOWED. ON PERUSAL OF THE ORDER OF THE CIT(A), WE FIND THAT THE CI T(A) HAS DEALT ON THE DISPUTED ISSUE AFTER RELYING UPON THE PLETHORA OF JUDICIAL DECISIONS AND 40 ITA NOS.68&85/RAN/2017 THE LD. DR COULD NOT BRING ANY NEW MATERIAL FACT TO CONTROVERT THE ABOVE FINDINGS OF THE CIT(A) . ACCORDINGLY, WE SEE NO GOOD REASON TO INTERFERE IN THE ORDER OF CIT(A) AND THE SAME IS UPHELD AND THIS GROUND OF APPEAL OF THE REVENUE IS DISMISSED. 32 . THUS, THE APPEAL OF THE REVENUE IS DISMISSED. 33 . IN THE RESULT, APPEAL OF THE ASSESSEE I.E ITA NO.68/RAN/2017 IS PARTLY ALLOWED FOR STATISTICAL PURPOSES AND APPEA L OF REVENUE I.E ITA NO.85/RAN/2017 IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 31 / 05 /201 8 SD/ - SD/ - ( N.S.SAINI ) ( PAVAN KUMAR GADALE ) ACCOUNTANT MEMBER JUDICIAL MEMBER RANCHI, DATED 31 / 05 /201 8 PRAKASH KUMAR MISHRA , SR. PS COPY OF THE ORDER FORWARDED TO : BY ORDER, //TRUE COPY// SR.PS, ITAT, RANCHI 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A) CONCERNED 4. CIT , CONCERNED 5. DR, ITAT, RANCHI 6. GUARD FILE.