M/s. Bechtel India Pvt. Ltd., New Delhi V. DCIT, New Delhi

ITA 882/DEL/2014

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 97633 (ITAT-DELHI)
• Duration Of Justice: 1 year(s) 7 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-10-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I1
• Next Hearing Date: 19-06-2015
• Assessment Year: 2009-2010
• Appeal Filed On: 17-02-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Related party transaction; Transfer pricing; International transaction; Services rendered outside India; Retrospective amendment; Wholly owned subsidiary; Speculation loss
• Section: 244A; 37(1); 43(5); 10B; 92

Judgement Text

ITA NO.882/D/2014 ASSTT.YEAR: 2009-10 1 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH `I NEW DELHI BEFORE SHRI S.V. MEHROTRA, ACCOUNTANT MEMBER AND SHRI CHANDRA MOHAN GARG, JUDICIAL MEMBER I.T.A.NO.882/DEL/2014 ASSESSMENT YEAR : 2009-10 BECHTEL INDIA PVT. LTD., VS DCIT, 418, NAURANG HOUSE, CIRCLE-2(1), 21, K.G. MARG, NEW DELHI. NEW DELHI. (PAN: AAACB0298A) (APPELLANT) (RESPONDENT) APPELLANT BY: S/SHRI S.D. KALIPA, R.R.MAURYA, PRAV EEN SHARMA, SANJAY KUMAR, ADVOCATES RESPONDENT BY : S/SHRI RAVI JAIN, CIT DR, SUBHAK ANT SAHOO, SR. DR DATE OF LAST HEARING: 12.10.2015 DATE OF PRONOUNCEMENT: 14.10.2015 O R D E R PER CHANDRAMOHAN GARG, J.M. THIS APPEAL BY THE ASSESSEE HAS BEEN PREFERRED AGAI NST THE ORDER OF DCIT, CIRCLE 2(1), NEW DELHI DATED 6.1.2014 PASSED U/S 14 3(3) R/W SECTION 144C OF THE INCOME TAX ACT, 1961 (FOR SHORT THE ACT) IN PUR SUANCE TO THE DIRECTIONS OF THE DISPUTE RESOLUTION PANEL-I (DRP), NEW DELHI DAT ED 26.11.2013 U/S 144C(5) OF THE ACT FOR AY 2009-10. 2. IN THE BEGINNING OF THE ARGUMENT, LD. COUNSE L APPEARING FOR THE ASSESSEE SUBMITTED THAT THE ASSESSEE DOES NOT WANT TO PRESS GROUND NO. 1, 2, 3.6, 3.7, 3.8 ITA NO.882/D/2014 ASSTT.YEAR: 2009-10 2 AND 4, THEREFORE, WE DISMISS THE SAME AS NOT PRESSE D. REMAINING GROUNDS FOR ADJUDICATION READ AS UNDER:- 3. THAT ON FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO/LD. TPO/LD. DISPUTE RESOLUTION PANEL ('D RP') ERRED IN MAKING AN ADDITION OF RS. 57,46,70,024/- TO THE RETURNED INCOME OF THE APPELLANT BY RE-COMPUTING THE ARM'S L ENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS UNDER SECTION 92 OF THE ACT. THUS, IN PASSING THE ORDER, THE LD. AO/LD. TPO/LD. DRP ERRED IN: 3.1 REJECTING THE COMPARABLE COMPANIES SET ADOPTED BY THE APPELLANT IN ITS TRANSFER PRICING DOCUMENTATION ON THE BASIS OF ADDITIONAL/MODIFIED QUANTITATIVE FILTERS WHICH L ACKED VALID AND SUFFICIENT REASONING. 3.2 IGNORING THE COMPARABLE SET PROPOSED BY APPELLA NT AS A RESULT OF FRESH BENCHMARKING STUDY WITHOUT ASSIGN ING ANY REASONING. 3.3 ACCEPTING COMPANIES WHICH WERE FUNCTIONALLY NOT COMPARABLE TO THE APPELLANT IN TERMS OF FUNCTIONS, ASSETS AND RISK PROFILE. 3.4 INCLUDING COMPANIES WITH HIGH/SUPERNORMAL MARGI NS IN THE COMPARABLE SET ADOPTED. 3.5. INCLUDING GOVERNMENT HELD ENTERPRISES IN THE F INAL COMPARABLE SET ADOPTED. 3.6 NOT PROVIDING THE BENEFIT OF ECONOMIC ADJUSTM ENT ON ACCOUNT OF DIFFERENCE IN WORKING CAPITAL PROFILE AND THUS NOT FOLLOWING THE BINDING DIRECTIONS OF HON'BLE DRP. 3.7 DENIED THE BENEFIT OF ECONOMIC ADJUSTMENTS ON ACCOUNT OF DIFFERENCE IN RISK PROFILE IN ARRIVING A T THE ARM'S LENGTH MEAN MARGIN. 3.8 CONSIDERED REIMBURSEMENTS AS PART OF THE OPERATING COST AND RECOMPUTED THE PROFIT MARGIN OF THE APPELLANT. FURTHER, THE LD. TPO DID NOT FOLLOW A CO NSISTENT APPROACH BY NOT CONSIDERING REIMBURSEMENT RECEIVED AS PART OF OPERATING REVENUE ON THE SAME PRINCIPLE. FURTHER, T HE LD. DRP HAS NOT GIVEN ITS DIRECTIONS AGAINST THE SPECIFIC P LEA RAISED BY THE APPELLANT ON THE SAID ISSUE. 5. THAT IN THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO ERRED IN DISALLOWING THE LOSS OF IN R 21,80,46,325/- INCURRED BY THE ASSESSEE ON RE-MEASU RING THE FOREIGN EXCHANGE FORWARD CONTRACT I.E. 'MARK TO MAR KET LOSSES' AS ON BALANCE SHEET DATE. ITA NO.882/D/2014 ASSTT.YEAR: 2009-10 3 5.1 THAT THE LD. AO ERRED IN HOLDING THAT THE MARK TO MARKET LOSSES IN RESPECT OF RE-MEASURING THE FOREIG N EXCHANGE FORWARD CONTRACT AS ON BALANCE SHEET DATE ARE NOTIO NAL AND CONTINGENT IN NATURE. 5.2 THAT THE LD. AO ERRED IN PLACING RELIANCE ON INSTRUCTION NO. 3/2010 DATED 23 MARCH 2010 ISSUED B Y THE CENTRAL BOARD OF DIRECT TAXES, AS THIS INSTRUCTION IS ISSUED WITH RESPECT TO ASSESSEES TRADING IN FOREX-DERIVATIVES. ALSO, THE INSTRUCTION IS ISSUED AFTER THE YEAR UNDER CONSIDER ATION. THUS, ACCORDINGLY THE SAME IS NOT APPLICABLE TO THE ASSES SEE. FURTHER, THE SAID THIS INSTRUCTION IS ULTRA VIRES TO THE SCO PE OF SECTION 119 OF THE INCOME-TAX ACT, 1961 BEING PREJUDICIAL TO TH E INTEREST OF THE ASSESSEE. 5.3 THAT THE LD. AO ERRED IN HOLDING THAT MARK TO MARKET LOSSES IN RESPECT OF RE-MEASURING THE FOREIG N EXCHANGE FORWARD CONTRACT AS ON BALANCE SHEET DATE IS NOT AL LOWABLE AS THE FORWARD CONTRACTS HAVE NOT BEEN TAKEN FOR THE PURPO SE OF BUSINESS ON RAISING OF EXPORT INVOICE BUT TAKEN WIT HOUT DUE EXPOSURE. 5.4 THAT THE LD. AO ERRED IN DISREGARDING THE ORDE R PASSED BY THE HON'BLE DELHI BENCH OF THE INCOME TAX APPELLATE TRIBUNAL IN THE APPELLANT'S OWN CASE FOR THE ASSESS MENT YEAR 2008-09 REPORTED AS BECHTEL INDIA (P.) LTD. VS. ACI T [2013] 33 TAXMANN.COM 213 WHEREIN THE MARK TO MARKET LOSSES I N RESPECT OF FOREIGN EXCHANGE FORWARD CONTRACTS AS ON THE BALANC E SHEET DATE WAS ALLOWED TO THE APPELLANT. 6. THAT THE LD. AO HAS ERRED IN CHARGING INTEREST UNDER SECTION 234B, 2340 AND 244A OF THE ACT AMOUNT ING TO INR 13,40,39,006. 7. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF TH E CASE AND IN LAW, THE LD. AO HAS ERRED IN INITIATING PENALTY PROCEEDINGS UNDER SECTION 271(1)(C) OF THE ACT. GROUND NO. 3 TO 3.5 OF THE ASSESSEE 3. APROPOS THESE GROUNDS, WE HAVE HEARD ARGUMENTS O F BOTH THE SIDES AND CAREFULLY PERUSED THE RELEVANT MATERIAL PLACED ON R ECORD. 4. LD. COUNSEL OF THE ASSESSEE SUBMITTED THAT THE L D. DRP AND THE AO ERRED IN MAKING AN ADDITION OF RS. 57,46,70,024 TO THE RE TURNED INCOME OF THE ITA NO.882/D/2014 ASSTT.YEAR: 2009-10 4 ASSESSEE BY RECOMPUTING ALP OF THE INTERNATIONAL TR ANSACTION U/S 92 OF THE ACT. LD. COUNSEL FURTHER CONTENDED THAT THE TPO WAS NOT JUSTIFIED IN REJECTING THE COMPARABLE COMPANIES SET ADOPTED BY THE APPELLANT I N ITS TRANSFER PRICING DOCUMENTATION ON THE BASIS OF ADDITIONAL/MODIFIED Q UANTITATIVE FILTERS WHICH LACKED VALID AND SUFFICIENT REASONING. LD. COUNSEL FURTHER CONTENDED THAT THE TPO WAS NOT CORRECT IN IGNORING THE COMPARABLE SET PROPOSED BY APPELLANT AS A RESULT OF FRESH BENCHMARKING STUDY WITHOUT ASSIGNIN G ANY REASONING AND ACCEPTING COMPANIES WHICH WERE FUNCTIONALLY NOT COM PARABLE TO THE APPELLANT IN TERMS OF FUNCTIONS, ASSETS AND RISK PROFILE. LD . COUNSEL VEHEMENTLY CONTENDED THAT TPO/DRP AND THE AO WERE INCORRECT ON FACTS AND IN LAW IN INCLUDING COMPANIES WITH HIGH/SUPERNORMAL MARGINS I N THE COMPARABLE SET ADOPTED FOR BENCHMARKING IMPUGNED TRANSACTION OF TH E ASSESSEE AND IN INCLUDING GOVERNMENT HELD ENTERPRISE IN THE FINAL C OMPARABLE SET ADOPTED FOR BENCHMARKING INTERNATIONAL TRANSACTION OF THE ASSES SEE AND FOR MAKING IMPUGNED SAID ADDITION TO THE RETURNED INCOME OF TH E ASSESSEE BY RECOMPUTING THE ALP OF THE ALLEGED INTERNATIONAL TRANSACTION U/ S 92 OF THE ACT. 5. LD. COUNSEL FURTHER ELABORATED THE BACKGROUND AN D FACTUM OF THE CASE AND SUBMITTED THAT THE ASSESSEE COMPANY IS A CAPTIVE SE RVICE PROVIDER, PROVIDING ENGINEERING DESIGN AND RELATED SERVICES TO ITS ASSO CIATED ENTERPRISES (AES) TO SUPPORT THE OVERSEAS OFFICES TURNKEY PROJECT EXECU TION. REFERRING TO PAPER BOOK PAGES 382-481, LD. COUNSEL SUBMITTED THAT AS P ER BRIEF OVERVIEW OF THE ACADEMIC ANALYSIS CONDUCTED IN THE TP STUDY, A PROV ISION OF ENGINEERING DESIGN ITA NO.882/D/2014 ASSTT.YEAR: 2009-10 5 RELATED SERVICE REVENUE WAS RS.43.46 CRORE AND BY A PPLYING TRANSACTIONAL NET MARGIN METHOD (TNMM), THE APPELLANTS PLI WAS 12.57 % BY TAKING OP/OR AS PLI AFTER UNDERTAKING ADJUSTMENT FOR IDEAL CAPACITY AND FOREIGN EXCHANGE FLUCTUATION AND AFTER CONSIDERING THE MARGIN OF COM PARABLE IN TP STUDY I.E. - 4.49%, THE FINAL ADJUSTMENT WAS CAPTURED AS RS.6,22 ,45,957/-, WHEREBY THE TPO PROPOSED MARGIN OF 32.47% WITHOUT PROVIDING ADJUSTM ENT TOWARDS WORKING CAPITAL, RISK AND IDEAL CAPACITY. LD. COUNSEL FURT HER POINTED OUT THAT AFTER LD. DRP RULING, THE MARGIN AFTER PROVIDING WORKING CAPI TAL ADJUSTMENT WAS 15.34% WHEREIN RISK AND IDEAL CAPACITY ADJUSTMENT WAS NOT PROVIDED BY DRP/TPO FOR MAKING IMPUGNED ADDITION. 6. LD. COUNSEL OF THE ASSESSEE REITERATING ITS WRIT TEN SUBMISSIONS DATED 17.6.2015 SPREAD OVER 7 PAGES SUBMITTED THAT IN THE TRANSFER PRICING STUDY, THE ASSESSEE SELECTED 7 COMPARABLES WHILE THE TPO ACCEP TED THAT THE ASSESSEE IS IN THE BUSINESS OF PROVIDING ENGINEERING SUPPORT SERVI CES AND ACCEPTED TNMM AS MAM AND OP/TC AS PLI THE ASSESSEE AS A TESTED PARTY . LD COUNSEL SUBMITTED THAT THE ASSESSEE MAINLY DISPUTES SELECTION OF CERT IFICATION ENGINEERS INTERNATIONAL LTD. (CEIL) AND NTPC ELECTRICAL SUPPL Y CO. LTD. (NTPCES) WITHOUT ANY BASIS AND THE DRP HAS CONSIDERED THE IS SUE OF RELATED PARTY TRANSACTION (RPT) EVEN THOUGH SPECIFIC OBJECTIONS W ERE RAISED BY THE ASSESSEE. LD. COUNSEL FURTHER POINTED OUT THAT THE TPO APPLIE D THIS FILTER MECHANICALLY BY TAKING INTO ACCOUNT MONETARY TRANSACTION BETWEEN TH E HOLDING COMPANY AND CEIL BY IGNORING VARIOUS NON-MONETARY BENEFITS LIKE FREE OR LEVEL-BASIS OF ITA NO.882/D/2014 ASSTT.YEAR: 2009-10 6 OFFICE FACILITIES AND SECONDMENTS OF EMPLOYEES BY T HE HOLDING COMPANY. LD. COUNSEL CONTENDED THAT IN THE CASE OF NTPCES, LD. D RP FAILED TO NOTE THAT THIS COMPANY DOES NOT EVEN DISCUSS RPT IN ITS RELEVANT A NNUAL REPORT AND IT IS PERTINENT TO NOTE THAT SCHEDULE 9 OF ANNUAL REPORT CLEARLY STATES THAT THE AMOUNT PAYABLE TO NTPC UNDER THE HEAD CURRENT LIABILITY AS ON 31.3.2009 WAS RS.12.87 CRORES WHICH ALONE IS 18% OF ITS OPERATING REVENUE. 7. LD. COUNSEL FURTHER POINTED OUT THAT WHILE EVALU ATING COMPARABLES OF THESE TWO IMPUGNED COMPANIES, THE DRP HAS IGNORED T HE MATERIAL DIFFERENCE IN FUNCTIONAL, GEOGRAPHICAL LOCATION OF PARTY AND RELA TED PARTY TRANSACTION (RPT) AND THE SOLE CRITERIA ADOPTED BY THE LD. DRP FOR TR EATING NTPCES AND CEIL AS SUITABLE COMPARABLES IS ONLY WITH BECHTEL INDIA PRI VATE LTD. THESE TWO COMPANIES EMPLOY HIGH-END TECHNOLOGICAL AND ENGINEE RING RESOURCES AND PERSONNEL. LD. COUNSEL VEHEMENTLY CONTENDED THAT T HE DRP ERRED IN ANALYZING THE FUNCTION OF THESE ENTITIES IN TERMS OF RESOURCE S EMPLOYED AND FAILED TO CONSIDER THE WIDE VARIATION IN SKILLS AND QUALIFICA TION OF EMPLOYEES. IN THE LIGHT OF BROAD FUNCTIONAL PROFILE OF THESE COMPANIES WHIC H CANNOT BE HELD AS COMPARABLE FOR BENCHMARKING INTERNATIONAL TRANSACTI ON OF THE PRESENT ASSESSEE COMPANY FOR THE YEAR UNDER CONSIDERATION, LD. COUNS EL POINTED OUT THAT IF THESE COMPANIES VIZ. CEIL AND NTPCES ARE DELETED FROM THE FINAL SET OF COMPARABLES, THEN THE INTERNATIONAL TRANSACTION OF THE ASSESSEE WOULD FALL WITHIN THE AMBIT OF ZERO ADJUSTMENT AND, THEREFORE, THE SA ME MAY KINDLY BE DELETED FROM THE FINAL SET OF COMPARABLES ADOPTED BY THE LD . TPO/DRP AND AO. LD. ITA NO.882/D/2014 ASSTT.YEAR: 2009-10 7 COUNSEL IN THE WRITTEN SUBMISSIONS SUBMITTED A TABL E HIGHLIGHTING THE DIFFERENCE BETWEEN THE ASSESSEE COMPANY AND THE IMPUGNED COMPA RABLE I.E. NTPCES AND CEIL WHICH IS BEING REPRODUCED BELOW FOR THE SAKE O F CLARITY AND TRANSPARENCY IN OUR FINDINGS:- SR. NO. BECHTEL INDIA NTPCES PG. 810/VOL.IV CEIL PG. 765/VOL.-IV 1. OPERATING REVENUE RS. 178.36 CR. RS.71.72 CR. RS. 24.75 CR. 2. STATUS PRIVATE COMPANY- INCORPORATED IN 1994 AS 100% SUBSIDIARY OF BECHTEL CORPORATION, USA. GOVERNMENT COMPANY 100% SUBSIDIARY OF NATIONAL THERMAL POWER CORPORATION (NTPC), WHICH IS A GOVERNMENT COMPANY. GOVERNMENT COMPANY. TILL 1994, IT WAS A DIVISION OF ENGINEERS INDIA LTD. (EIL), ( A GOVERNMENT COMPANY) FROM WHICH IT WAS DEMERGED AS A 100% SUBSIDIARY COMPANY. 3. FUNCTION RENDERING ENGINEERING A SUPPORT SERVICE INCLUDING RELATED DESIGN AND DRAWINGS AS PER SPECIFICATIONS OF FOREIGN AES. AS PER WEBSITE NTPC. COM: THE COMPANY WAS FORMED ON AUGUST 21, 2002. IT IS A WHOLLY OWNED SUBSIDIARY COMPANY OF NTPC WITH THE OBJECTIVE OF MAKING A FORAY INTO THE BUSINESS OF DISTRIBUTION AND SUPPLY OF ELECTRICAL POWER, AS A SEQUEL TO REFORMS INITIATED IN THE POWER SECTOR. THE COMPANY WAS ALSO MANDATED TO TAKE UP CONSULTANCY AND OTHER ASSIGNMENTS IN THE AREA OF ELECTRICAL DISTRIBUTION MANAGEMENT SYSTEM. (COPY OF SCREENSHOT AT ANNEXURE 1A) AS PER SCHEDULE 17 OF AR (PG. 843 OF VOL.-IV/AR) THE COMPANY IS OPERATING IN A SINGLE SEGMENT, THAT IS, PROVIDING CONSULTANCY, PROJECT MANAGEMENT AND SUPERVISION SERVICES. EXTRACTS FROM AR: IT EXECUTES TURNKEY CONTRACTS FOR XITH PLAN ELECTRICITY SUPPLY PROJECTS ENTRUSTED/AWARDED TO THIRD PARTY INSPECTION (TPI), & CERTIFICATION OLF EQUIPMENT SUPPLIED BY VENDORS AND FABRICATION OR INSTALLATION WORK OF CONTRACTORS OF ONGC UNDER A MOU BETWEEN EIL & ONGC DT. 11/4/1985 ON NOMINATION BASIS. (REF. PG. 765-773, 803-805/VOL.-IV). TERMS OF MOU ARE NOT KNOWN. ALSO CARRIES ON SIMILAR TPI & CERTIFICATION WORK INDEPENDENTLY FOR OTHER PSUS. ITA NO.882/D/2014 ASSTT.YEAR: 2009-10 8 IT BY GOVERNMENT COM PANIES AND DEPARTMENTS. HAS JV FOR RETAIN DISTRIBUTION OF POWER IN KERALA. IT IS ENTRUSTED THE WORK OF RURAL ELECTRIFICATION OF 4107 VILLAGES PAN INDIA RURAL ELECTRIFICATION UNDER RAJIV GANDHI GRAMEEN VIDYUTIKARNA YOJANA (RGGVY)-ACHIEVED ELECTRIFICATION OF 4107VILLAGES EXECUTION OF TURN KEY PROJECTS, PROVIDING THIRD PARTY INSPECTION SERVICES. JV FOR RETAIL DISTRIBUTION OF POWER & PROJECT MANAGEMENT CONSULTANCY TO DISCOMS AND POWER GENERATING COMPANIES. ITS FUNCTIONAL PROFILE IS SIMILAR TO BECHTEL USA, HOLDING COMPANY (PG.1/DRP ORDER). THE CONTRACTS/PROJECTS ENTRUSTED (PG. 811/VOL.- IV). (REF. PG. 810-812, 835-838, 843/VOL.-IV.) 4. GEOGRAPHICAL MARKET INTERNATIONAL - 100% EXPORTER OF SERVICE. DOMESTIC CUSTOMERS - NIL EXPORT DOMESTIC CUSTOMERS - INSIGNIFICANT EXPORT OF SERVICE. 5. FOREX FLUCTUATION RISK YES NIL INSIGNIFICANT FOREX EARNING 3.75% OF OPERATING REVENUE. (SCHD. 3(3) AT PG. 803/VOL.-IV 6. RPT (DRP HAS FAILED TO CONSIDER OBJECTION) 100% 1)RPT NOT REPORTED IN A.R TRANSACTIONS MAINLY WITH RELATED PARTIES (OTHER GOVERNMENT COMPANY/GOVT. DEPARTMENTS) SCHD. 9 OF A.R CURRENT LIABILITY I)AMOUNT PAYABLE TO NTPC LTD. RS. 12.87 CRORES (PG. 835/IV.) II) SCHD. 17, NOTES ON ACCOUNTS: 5) ALL THE EMPLOYEES OF THE COMPANY ARE ON SECONDMENT FROM THE HOLDING COMPANY, 9) THE COMMON SERVICES BEING UTILIZED BY THE COMPANY FOR ITS OFFICE AT NOIDA ARE PROVIDED WITHOUT ANY CHARGES 1)RPT DECLARED ARE ONLY MONETARY TRANSACTIONS WITH HOLDING CO. ONLY (19.60%) TRANSACTIONS WITH OTHER AES LIKE ONGC, IOCL ETC. NOT QUANTIFIED, (PG. 215/VOL-II/DRP SUBMISSION) SCHEDULE J (NOTES ON ACCOUNTS) 5) THE JOBS AWARDED BY ONGC ON NOMINATION BASIS ARE BEING GOVERNED BY THE MOU SIGNED BETWEEN EIL & ONGC ITA NO.882/D/2014 ASSTT.YEAR: 2009-10 9 BY THE HOLDING COMPANY. (PG. 844/VOL-IV) ALL EMPLOYEES ON SECONDMENT FROM NTPC AT COST. BENEFITS RECEIVED FROM HOLDING COMPANY NOT MONETISED IN THE A.R. REVENUES ARE FROM GOVERNMENT COMPANIES/ DEPARTMENTS, WHICH MUST BE CONSIDERED AS RELATED PARTIES. RELIANCE PLACED ON ITAT ORDER IN THYSEEN KRUPP PG. 678 AT 694/VOL-III. NOTE: CONTRACTS/PROJECTS FOR RURAL ELECTRIFICATION SCHEMES ENTRUSTESD/ SANCTIONED TO NTPCES UNDER RAJIV GANDHI VIDYUTIDARAN YOJANA ARE NOT AWARDED UNDER OPEN TENDER AS PER CVC CIRCULAR DT. 3/3/2007. DATED 11/4/1985. 6) THE COMPANY HAS A MEMORANDUM OF UNDERSTANDING WITH ENGINEERS INDIA LTD. (THE HOLDING COMPANY) FOR PROVIDING MANPOWER SERVICES, OFFICE SPACE AND FACILITIES ETC. THE MOU PROVIDES LEVEL BASESD FIXED MAN HOUR/MAN-DAY RATES FOR EIL EMPLOYEES, INCLUSIVE OF OVERHEADS AND FIXED ANNUAL COST TOWARDS SPACE, INFRASTRUCTURE AND FACILITIES ETC. PROVIDED BY EIL. THE COMPANY ALSO HAS A MEMORANDUM OF UNDERSTANDING WITH ENGINEERS INDIA LIMITED FOR PROVIDING MANPOWER SERVICES TO EIL AT ACTUAL COST PLUS 10% MARGIN. CEOS SALARY PAID BY EIL. REF. (804/VOL-IV) NOTE: CONTRACTS AWARDED TO CEIL BY ONGC ON NOMINATION BASIS UNDER MOU WITH EIL ARE NOT ENTERED INTO OPEN TENDER AS PER CVC CIRCULAR DATED 3/3/2007. 8. FIRST OF ALL, WE FIND IT APPROPRIATE TO CONSIDER THE COMPARABILITY OF NTPCES AND CEIL WITH THE ASSESSEE COMPANY I.E. BECH TEL INDIA PVT. LTD. AS PER AFORESAID CONTENTION OF THE ASSESSEE, BOTH THES E COMPANIES ARE NOT A SUITABLE COMPARABLE FOR BENCHMARKING INTERNATIONAL TRANSACTI ON OF THE ASSESSEE BECHTEL ITA NO.882/D/2014 ASSTT.YEAR: 2009-10 10 INDIA PVT. LTD., THEREFORE, THE AO/TPO MAY BE DIREC TED TO DELETE THE SAME FROM THE FINAL SET OF COMPARABLES. LD. COUNSEL ALSO POI NTED OUT THAT AFTER DELETION OF THESE IMPUGNED COMPARABLES, THE INTERNATIONAL TRANS ACTION OF THE ASSESSEE COMPANY WOULD FALL WITHIN 5% + - LIMIT AND THERE WO ULD BE NO REQUIREMENT OF MAKING ANY TRANSFER PRICING ADJUSTMENT TO THE RETUR NED INCOME OF THE ASSESSEE. 9. REPLYING TO THE ABOVE, LD. DR CONTENDED THAT FOR AY 2009-10, THE TPO/AO RIGHTLY HELD THAT IMPUGNED TWO COMPANIES ARE SUITABLE COMPARABLE FOR BENCHMARKING INTERNATIONAL TRANSACTION OF THE ASSES SEE COMPANY AS FUNCTIONAL PROFILE OF THESE COMPANIES ARE SIMILAR TO THE ASSES SEE COMPANY AND MERE POINTING OUT SOME MICRO DIFFERENCES DO NOT LOSE THE TITLE OF COMPARABILITY WITH THE ASSESSEE COMPANY. LD. AR ALSO CONTENDED THAT T HE ASSESSEE COMPANY RENDERING ENGINEERING DESIGN, PROJECT SUPPORT INC LUDING DESIGN AS PER SPECIFICATION OF FOREIGN AE AND IMPUGNED TWO COMPAN IES NTPCES AND CEIL ARE ALSO RENDERING SERVICES IN THE SIMILAR FIELD, T HEREFORE THEIR SUITABILITY AND COMPARABILITY CANNOT BE CHALLENGED ON THE FRIVOLOUS AND PETTY GROUNDS. ADJUDICATION OF COMPARABILITY OF NTPCES WITH THE A SSESSEE COMPANY 10. ON CAREFUL CONSIDERATION OF ABOVE SUBMISSIONS O F BOTH THE SIDES, WE FIND IT APPROPRIATE TO CONSIDER THE ISSUE OF COMPARABILI TY OF NTPCES AND CEIL ONE BY ONE WITH THE ASSESSEE COMPANY BECHTEL INDIA PVT. LTD. LD. COUNSEL REITERATING ITS WRITTEN SUBMISSIONS AND COMPARABILI TY TABLE THEREIN SUBMITTED THAT THE ASSESSEE COMPANY IS A PRIVATE COMPANY INCORPORA TED IN 1994 AS 100% SUBSIDIARY OF BECHTEL CORP USA. ELABORATING THE FU NCTIONAL PROFILE OF THE ITA NO.882/D/2014 ASSTT.YEAR: 2009-10 11 ASSESSEE COMPANY, LD. COUNSEL SUBMITTED THAT THE MA IN FUNCTION OF THE ASSESSEE COMPANY IS RENDERING ENGINEERING SUPPORT SERVICES BY WAY OF PREPARING AND SUPPLYING DESIGNS AND DRAWINGS AS PER THE SPECIFICA TIONS OF THE FOREIGN AES I.E. BECHTEL CORPORATION USA. LD. COUNSEL FURTHER POINT ED OUT THAT THE ASSESSEE COMPANY IS SECURING OPERATING REVENUE OF RS.178.36 CRORE FROM ITS 100% EXPORT OF SERVICES TO ITS AE HAVING FOREX FLUCTUATION RIS K AND 100% RELATED PARTY TRANSACTIONS (RPT) AND DRP HAS FAILED TO CONSIDER T HESE IMPORTANT FACTUAL ASPECTS WHILE REJECTING THE OBJECTIONS OF THE ASSES SEE COMPANY TO THE COMPARABILITY OF NTPCES. 11. LD. COUNSEL FURTHER POINTED OUT THAT NTPCES IS A 100% GOVERNMENT OWNED COMPANY SUBSIDIARY TO THE NATIONAL THERMAL PO WER CORPORATION (NTPC). LD. COUNSEL FURTHER POINTED OUT THAT NTPCE S WAS FORMED ON 21.8.2002 IS WHOLLY OWNED SUBSIDIARY OF NTPC WITH T HE OBJECTIVE OF MAKING A FORAY INTO THE BUSINESS OF DISTRIBUTION AND SUPPLY OF ELECTRIC POWER AS A SEQUEL TO REFORMS INITIATED IN THE POWER SECTOR. LD. COUNSEL ALSO SUBMITTED THAT NTPCES WAS ALSO MANDATED TO TAKE UP CONSULTANCY AND OTHER ASSIGNMENTS IN THE AREA OF ELECTRIC DISTRIBUTION MANAGEMENT SYSTEM AND THE COM PANY IS ALSO OPERATING IN A SINGLE SEGMENT OF PROVIDING CONSULTANCY, PROJECT MA NAGEMENT AND SUPERVISION SERVICES. 12. LD. COUNSEL FURTHER POINTED OUT THAT NTPCES EXE CUTED TURNKEY CONTRACTS FOR XITH PLAN ELECTRICITY SUPPLY PROJECTS ENTRUSTED /AWARDED TO IT BY GOVERNMENT COMPANIES AND DEPARTMENTS UNDER JOINT VENTURE FOR R ETAINING DISTRIBUTION OF ITA NO.882/D/2014 ASSTT.YEAR: 2009-10 12 POWER IN KERALA. LD. COUNSEL FURTHER POINTED OUT T HAT THIS COMPANY WAS ALSO ENTRUSTED THE WORK OF RURAL ELECTRIFICATION OF 4107 VILLAGES UNDER RAJIV GANDHI GRAMEEN VIDUTIKARANA YOJANA (RGGVY) FOR ACHIEVING E LECTRIFICATION OF THESE VILLAGES AND EXECUTION OF TURN KEY PROJECTS PROVIDI NG THIRD PARTY INSPECTION SERVICE. LD. COUNSEL ALSO POINTED OUT AS PER PAGE OBSERVATIONS IN THE DRP ORDER, NTPCES ALSO GOT JOINT VENTURE ASSIGNMENT FOR RETAIL DISTRIBUTION OF POWER MANAGEMENT CONSULTANCY TO DISCOMS AND POWER GENERAT ING COMPANY. LD. COUNSEL ALSO POINTED OUT THAT NTPCES HAS ALL DOMEST IC CUSTOMERS SPECIALLY GOVERNMENT COMPANIES AND DEPARTMENT HAVING NO EXPOR T SERVICES AND THE SAME CANNOT BE HELD AS COMPARABLE WITH THE ASSESSEE COMP ANY HAVING 100% EXPORT OF SERVICES OUTSIDE INDIA TO ITS AE ONLY. 13. LD. COUNSEL ALSO POINTED OUT THAT THE ASSESSEE COMPANY IS HAVING 100% RPT WITH ITS AE WHEREAS RPT OF NTPCES HAS NOT BEEN REPORTED IN THE ANNUAL REPORT AND THIS COMPANY HAS UNDERTAKEN TRANSACTION MAINLY WITH THE RELATED PARTIES SUCH AS GOVERNMENT COMPANIES AND GOVERNMENT DEPARTMENTS. LD. COUNSEL ALSO POINTED OUT THAT AS PER ANNUAL REPORT OF THE NTPCES DURING THE FINANCIAL PERIOD UNDER CONSIDERATION THE AMOUNT OF RS.12.87 CRORE WAS PAYABLE TO THE NTPC LTD. AND AS PER NOTES ON ACCOUNT, ALL T HE EMPLOYEES OF NTPCES ARE ON SETTLEMENT FROM THE HOLDING COMPANY AND THE NTPCES WAS UTILISING COMMON SERVICES FOR ITS OFFICE AT NOIDA PROVIDED WI THOUT ANY CHARGES BY THE HOLDING COMPANY. LD. COUNSEL VEHEMENTLY CONTENDED THAT ALL THE EMPLOYEES OF NTPCES ARE ON SECONDMENT FROM THE HOLDING COMPANY A T COST AND BENEFITS ITA NO.882/D/2014 ASSTT.YEAR: 2009-10 13 RECEIVED FROM HOLDING NTPCES ARE NOT MONETISED IN T HE ANNUAL REPORT. PLACING RELIANCE ON THE JUDGMENT OF ITAT IN THE CASE OF THYSEEN KRUPPS INDIA (PVT.) LTD. VS ACIT (2013) 33 TAXMAN.COM 107 (MUMBAI TRIBU NAL) . LD. COUNSEL SUBMITTED THAT WHEN A COMPARABLE HAS TWO SEGMENTS A ND ITS REVENUE FROM COMPARABLE SEGMENT IS COMPLETE IN ITSELF AND IS NOT INFLUENCED BY INTER-SEGMENT REVENUE, COMPARABILITY IN SUCH A CASE HAS TO BE EXA MINED AT SEGMENTAL LEVEL AND NOT ENTITY LEVEL. LD. COUNSEL ALSO POINTED OUT PAR A 12.8.1 AND 12.8.2 OF THE ORDER OF THE ITAT IN THE CASE OF THYSEEN KRUPPS (SU PRA) AND SUBMITTED THAT IF RELATED PARTY TRANSACTIONS ARE MUCH MORE, THEN THE FILTER OF 25%, IS NOT A SUITABLE COMPARABLE AND THEREFORE, THE ORDER FOR THE EXCLUSI ON OF THE SAME WOULD BE APPROPRIATE. 14. LD. COUNSEL OF THE ASSESSEE POINTED OUT THAT TP O WAS NOT CORRECT IN APPLYING THE FILTERS BY TAKING COMPANIES WHOSE INCO ME IS LESS THAN RS.5 CRORE AS THE ANALYSIS WOULD NOT LEAD TO A PROPER COMPARABILI TY AND MOREOVER THEIR LOW COST/SALES BASE MAKES THEIR RESULT UNRELIABLE. LD. COUNSEL ALSO POINTED OUT THAT COMPANIES WHOSE REVENUE FROM ENGINEERING SUPPORT SE RVICES IS LESS THAN 75% OF THE TOTAL OPERATIVE REVENUE SHOULD BE EXCLUDED. T HE LD. COUNSEL ALSO POINTED OUT THAT THE LD. DRP IN ITS ORDER DATED 16.12.2014 FOR AY 2005-06 HAS CONCLUDED THAT NTPCES IS NOT FUNCTIONALLY COMPARABL E WITH THE ASSESSEE BECHTEL INDIA. HE TOOK US THROUGH OPERATIVE PARA A T PAGES 5-6 OF THE DRP ORDER (SUPRA). ITA NO.882/D/2014 ASSTT.YEAR: 2009-10 14 15. REPLYING TO THE ABOVE, LD. DR POINTED OUT THAT BUSINESS PROFILE OF THE ASSESSEE COMPANY AS TAXPAYER RECORDED BY THE DRP IN PARA 3 PAGE 2 OF THE DRP ORDER AND SUBMITTED THAT THE ASSESSEE COMPANY HAS L ESS COMPLEX O NTPCES AND CEIL OPERATIONS AND WAS ACCORDINGLY SELECTED AS A T ESTED PARTY FOR THE TP ANALYSIS. LD. DR SUPPORTING THE OBSERVATIONS OF TH E DRP SUBMITTED THAT NTPCES IS INTO SERVICES REQUIRING HIGH END TECHNOLO GY AND ENGINEERING ADVANCES, THEREFORE, THIS COMPANY IS FUNCTIONALLY Q UITE SIMILAR TO THE ASSESSEE BECHTELL. LD. DR ALSO POINTED OUT THAT AS PER ANNU AL REPORT OF THE NTPCES THE ASSESSEE COMPANY ALSO HAS SIMILAR FUNCTIONAL PROFIL E, THEREFORE, THE DRP WAS RIGHT IN UPHOLDING THE CONCLUSION OF THE TPO IN THI S REGARD WHEREIN NTPCES WAS INCLUDED IN THE FINAL SET OF COMPARABLES. 16. ON CAREFUL CONSIDERATION OF ABOVE SUBMISSIONS O F BOTH THE SIDES, WE NOTE THAT THE BUSINESS AND FUNCTIONAL PROFILE OF ASSESSE E COMPANY AS TAX PAYER, AS NOTED BY THE DRP READS AS UNDER:- BUSINESS PROFILE OF BECHTEL INDIA AS PER TAXPAYER : BECHTEL CORPORATION, USA (HEREINAFTER REFERRED TO AS BECHTEL USA') SET UP A SUBSIDIARY COMPANY IN INDIA VIZ BIPL IN APRIL 1994 TO RENDER ENGINEERING SUPPORT SERVICE IN RESPECT OF ENGINEERING DESIGNS AND DRAWINGS, BIPL EXECUTES ENG INEERING DESIGNS AND DRAWINGS FOR VARIOUS OVERSEAS GROUP ENT ITIES TO SUPPORT THE OVERSEAS OFFICES' TURNKEY PROJECT EXECU TION. PRESENTLY, BIPL UNDERTAKES ENGINEERING DESIGN AND R ELATED SERVICES FOR ITS OVERSEAS GROUP COMPANIES. ' THE DEVELOPMENT OF THE ARM'S LENGTH PRICE ('ALP' ) BY THE TAXPAYER RECOGNIZES THAT BIPL PERFORMS CONTRACT ENGINEERING DESIGN SERVICES FOR ITS GROUP COMPANIES . BIPL LEVERAGES ON ALL THE VALUABLE INTELLECTUAL PROPERTY (IP') RIGHT ITA NO.882/D/2014 ASSTT.YEAR: 2009-10 15 ('IPRS') [KNOW-HOW, COPYRIGHTS, ETC] AND OTHER COMM ERCIAL PROCESSES, METHODOLOGIES, ETC. BELONGING TO ITS AES . FURTHER, THE GROUP IS INVOLVED IN COMPLEX OPERATIONS OF MARKETIN G, BIDDING FOR PROJECTS, PROVIDING TURNKEY SOLUTIONS, PROJECT MANAGEMENT AND ADHERING TO DELIVERY TIMELINES. BIPL PROVIDES E NGINEERING DESIGN SERVICES EXCLUSIVELY TO ITS OVERSEAS AES. BA SED ON ABOVE, BIPL HAS LESS COMPLEX OPERATIONS, BEARS LESSER SHAR E OF RISKS AND WAS ACCORDINGLY SELECTED AS THE TESTED PARTY F OR THE ANALYSIS . IN VIEW OF RIVAL SUBMISSIONS OF BOTH THE SIDES, AT THE VERY OUTSET, WE NOTE THAT THE ASSESSEE BETCHELL INDIA (BIPL) IS A PRIVATE COMPANY INCORPORATED IN INDIA IN APRIL 1994 AS BECH TELL CORPORATION, USA. ADMITTEDLY AND UNDISPUTEDLY, AS PER BUSINESS AND FUNCTIONAL PROFILE OF THE ASSESSEE COM PANY, THE ASSESSEE COMPANY IS RENDERING SUPPORT SERVICES OF E NGINEERING DESIGN AND DRAWING, EXECUTION OF ENGINEERING DESIGN S AND DRAWING FOR VARIOUS OVERSEAS GROUP ENTITIES TO SUPP ORT THE OVERSEAS OFFICES IN TURNKEY PROJECT EXECUTION. THE ASSESSEE COMPANY ALSO UNDERTAKES ENGINEERING DESIGN AND RELA TES SERVICES FOR ITS OVERSEAS GROUP COMPANIES. FROM TH E AFORESAID BUSINESS AND FUNCTIONAL PROFILE IT IS AMPLY CLEAR T HAT THE ASSESSEE COMPANY PERFORMS CONTRACT ENGINEERING DESIGN SERVIC ES FOR ITS GROUP COMPANIES. BIPL LEVERAGES ON ALL THE VALUABLE INTELLECTUAL PROPERTY (IP') RIGHT ('IPRS') AND OT HER COMMERCIAL PROCESSES, METHODOLOGIES, ETC. BELONGING TO ITS AE I.E. BECHTELL CORPORATION USA. THE DRP HAS ALSO RECORDED THAT TH E ENTIRE GROUP IS INVOLVED IN COMPLEX OPERATIONS OF MARKETIN G, BIDDING FOR PROJECTS, PROVIDING TURNKEY SOLUTIONS, PROJECT MANAGEMENT AND ADHERING TO DELIVERY TIMELINES. THE ASSESSEE CO MPANY ONLY PROVIDES ENGINEERING DESIGN SERVICES EXCLUSIVELY TO ITS OVERSEAS AES AND THE ASSESSEE HAS LESS COMPLEX OPERATIONS, B EARS LESSER SHARE OF RISK. LD. DR HAS NOT DISPUTED AND COULD NOT DEMOLISH THIS FACT THAT AS PER WEBSITE OF NTPC.COM THE NTPCES IS A WHOLLY OWNE D SUBSIDIARY COMPANY OF NTPC WITH THE OBJECTIVE OF MA KING A FORAY INTO THE BUSINESS DISTRIBUTION AND SUPPLY OF ELECTRICAL POWER AS A SEQUEL TO REFORM INITIATED IN THE POWER SECTOR. WE FURTHER NOTE THAT UNDISPUTEDLY NTPCES WAS ALSO MAND ATED TO TAKE UP CONSULTANCY AND OTHER ASSIGNMENTS IN THE AR EA OF ELECTRICAL DISTRIBUTION MANAGEMENT SYSTEM. FROM PA GE 843 OF VOLUME 4 OF ASSESSEES PAPER BOOK, NTPCES IS OPERAT ING IN A ITA NO.882/D/2014 ASSTT.YEAR: 2009-10 16 SINGLE SEGMENT I.E. PROVIDING CONSULTANCY, PROJECT MANAGEMENT AND SUPERVISION SERVICES. HOWEVER, LD. DR HAS POINTED OUT THAT EXCEPT MICRO DISSIMILARITIES THE MAIN BUSINESS AND FUNCTIONAL PR OFILE OF THE ASSESSEE COMPANY IS QUITE SIMILAR TO NTPCES BUT HE COULD NOT DEMOLISH THIS FACTUM THAT THE NTPCES EXECUTED TURNK EY CONTRACTS FOR 11 TH PLAN ELECTRICITY SUPPLY PROJECTS AWARDED TO IT BY THE GOVERNMENT COMPANIES AND ELECTRICAL DEPARTME NTS WHICH ALSO INCLUDES ACTIVITY OF DISTRIBUTION OF POWER IN KERALA. UNDISPUTEDLY, THE NTPCES WAS ALSO PROVIDED WORK CON TRACT OF RURAL ELECTRIFICATION OF 4107 VILLAGES, EXECUTION O F TURNKEY PROJECTS AND ALSO PROVIDED THIRD PARTY INSPECTION S ERVICES. WHILE THE NTPCES IS ALSO RENDERING SERVICES FOR RET AIL DISTRIBUTION OF POWER AND MANAGEMENT CONSULTANCY TO DISCOMS AND OTHER POWER GENERATING COMPANIES, THEN ITS FUNCTIONALITY WITH THE ASESSEE COMPANY CANNOT BE HE LD AS COMPARABLE. WE ARE ALSO NOT IN AGREEMENT WITH THE CONCLUSION OF THE DRP/TPO THAT THE FUNCTIONAL PROFILE OF NTPCE S IS SIMILAR TO BECHTELL CORPORATION USA I.E. HOLDING CO MPANY BECAUSE WE HAVE TO COMPARE COMPARABILITY OF ASSESEE COMPANY AND NOT ITS HOLDING COMPANY. TURNING TO THE ISSUE OF GEOGRAPHICAL MARKETS OF BO TH THE COMPANIES, UNDISPUTEDLY ASSESSEE COMPANY HAVING INT ERNATIONAL TRANSACTIONS ONLY WITH AE EXPORTING 100% SERVICES T O BECHTELL CORPORATION USA WHEREAS THE NTPCES HAS NIL EXPORTS HAVING 100% DOMESTIC CUSTOMERS WHO ARE GOVERNMENT COMPANIE S AND DEPARTMENTS. WE CANNOT ALSO IGNORE THIS FACT THAT THE ASSESSEE BECHTELL HAS 100% RELATED PARTY TRANSACTION WITH IT S AE AND RPT HAVE NOT BEEN REPORTED IN THE ANNUAL REPORT OF THE NTPCES. IT CANNOT BE IGNORED THAT THE CONTRACTS PU RCHASED FOR RURAL ELECTRIFICATION SCHEMES ESSENTIAL TO NTPCES U NDER RAJIV GANDHI GRAMEEN VIDUTIKARANA YOJANA (RGGVY) WERE NOT AWARDED UNDER OPEN TENDER AS PER CVC CIRCULAR DATED 3.3.2007 AND ON SPECIFIC QUERY FROM THE BENCH. LD. DR COULD NOT POINT OUT ANY FACT DEMOLISHING THIS FACTUM. WHEN WE CONSIDER THE RATIO LAID DOWN BY ITAT MUMBA I IN THE CASE OF THYSSENKRUPP INDIA (P) LTD. VS ACIT (MUMBAI ) WE NOTE THAT THE ITAT MUMBAI HAS CATEGORICALLY HELD THAT WH EN THE RELATED PARTY TRANSACTIONS ARE MUCH MORE THAN THE F ILTER OF 25%, ITA NO.882/D/2014 ASSTT.YEAR: 2009-10 17 THEN THE SAME SHOULD BE EXCLUDED. THE RELEVANT OBS ERVATIONS OF THE TRIBUNAL AT PAGE 694 READ AS UNDER:- 12.8.1 NEXT IS THE CASE OF ENGINEERS INDIA LIMITED , WHICH WAS INCLUDED BY THE TPO AT HIS OWN. THE LEARNED COUNSEL FOR THE ASSESSEE CONTENDED THAT THIS CASE SHOULD BE IGNORED BECAUSE IT IS A GOVERNMENT UNDERTAKING. IT WAS FURTHER POINTED OUT THAT MOST OF ITS CUSTOMERS OF THE 'TURNKEY PROJECT DIVIS ION' ARE RELATED PARTIES, BEING, OTHER PUBLIC SECTOR UNDERTA KINGS, WHICH IS MUCH MORE THAN THE FILTER OF 25%. THE LEARNED DE PARTMENTAL REPRESENTATIVE, HOWEVER, ACCENTUATED THAT THE TPO W AS RIGHT IN INCLUDING THIS CASE IN THE LIST OF COMPARABLES. 12.8.2 WE FIND IT AS UNDISPUTED THAT ENGINEERS INDI A LIMITED IS A GOVERNMENT COMPANY. IT HAS SEVERAL SEGMENTS WHICH ALSO INCLUDE TURNKEY PROJECT'. PAGE 700 OF THE PAPER BOO K IS A COPY OF ANNUAL REPORT OF ENGINEERS INDIA LIMITED ON TURN KEY PROJECT. IT CAN BE SEEN THAT THE REVENUE HAS ARISEN FROM COM PLETING PARAXYLENE PLANT OF IOCL AND FURTHER THAT COMPANY I S ENGAGED IN EXECUTION OF OTHER UNIT OF IOCL'S PANIPAT NAPHTH A CRACKER PROJECT. IN OUR CONSIDERED OPINION, THIS CASE SHOUL D NOT HAVE BEEN INCLUDED IN THE LIST OF FINAL COMPARABLES FOR TWO REASONS. FIRST REASON IS THAT PROFIT MOTIVE IS NOT A RELEVAN T CONSIDERATION IN CASE OF GOVERNMENT UNDERTAKINGS. MANY GOVERNMENT UNDERTAKINGS EVEN OPERATE ON LOSSES IN FURTHERANCE OF THE SOCIAL OBLIGATIONS OF THE GOVERNMENT. THE SECOND REASON IS THAT ENGINEERS INDIA LIMITED EARNED INCOME FROM TURNKEY PROJECT BY SUCCESSFULLY COMPLETING THE PROJECT OF IOCL AND OTH ER PUBLIC SECTOR UNDERTAKINGS. IN THAT SENSE OF THE MATTER, T HE RELATED PARTY TRANSACTIONS ARE MUCH MORE THAN THE FILTER OF 25%. WE, THEREFORE, ORDER FOR THE EXCLUSION OF THIS CASE FRO M THE LIST OF COMPARABLES. 17. IN VIEW OF PROPOSITION LAID DOWN BY THE ITAT, M UMBAI, WE OBSERVE THAT IN THAT CASE, ENGINEERS INDIA LTD. EARNED INCOME FR OM TURNKEY PROJECTS BY ITA NO.882/D/2014 ASSTT.YEAR: 2009-10 18 SUCCESSFULLY COMPLETING THE PROJECT OF IOCL AND OTH ER PUBLIC SECTOR UNDERTAKING AND THE RELATED PARTY TRANSACTION WERE MUCH MORE TH AN THE FILTER OF 25%, THEREFORE, THE ORDER FOR EXCLUSION OF ENGINEERS IND IA LTD. WAS PASSED BY THE TRIBUNAL. IN THE PRESENT CASE, THE NTPCES WAS SHEL TERED BY ITS HOLDING COMPANY NTPCES AND GOVERNMENT COMPANIES AND DEPARTM ENTS AWARDED/ENTRUSTED VARIOUS PROJECTS/CONTRACTS FOR RU RAL ELECTRIFICATION, DISTRIBUTION OF POWER AND PROJECT MANAGEMENT CONSUL TANCY, THEREFORE, NTPCES LOSES THE TAG OF COMPARABILITY WITH THE ASSESSEE BE CHTELL INDIA. WE ALSO FIND IT APPROPRIATE TO MENTION THAT IT CANNOT BE IGNORED TH AT THE NTPCES IS ALSO ENJOYING SETTLEMENT OF ALL EMPLOYEES FROM THE HOLDI NG COMPANY NTPCS AT COST AND THE BENEFITS RECEIVED FROM THE HOLDING COMPANY AND RELATED PARTY TRANSACTIONS (RPT) ARE NOT MONETISED IN THE ANNUAL REPORT AND IN ABSENCE OF SPECIFIC DATA IN THIS REGARD, NTPCES CANNOT BE HELD AS COMPARABLE WITH THE ASSESSEE COMPANY. THEREFORE, AO/TPO WAS NOT JUSTIF IED IN INCLUDING NTPCES IN THE FINAL SET OF COMPARABLES FOR BENCHMARKING IM PUGNED INTERNATIONAL TRANSACTION OF THE ASSESSEE COMPANY AND THEY ARE DI RECTED TO DELETE THE SAME. WE ORDER ACCORDINGLY. ADJUDICATION OF COMPARABILITY OF CIEL WITH THE ASSE SSEE COMPANY 18. LD. COUNSEL OF THE ASSESSEE COMPANY REITERATED THE FUNCTIONALITY OF THE ASSESSEE COMPANY BECHTELL INDIA SUBMITTED THAT THE CIEL IS NOT FUNCTIONALLY SIMILAR TO THE ASSESSEE COMPANY DUE TO ITS SPECIAL FEATURES AND MONOPOLY BASED CONTRACT AWARDING PRIVILEGES GRANTED BY ONGC AND OT HER GOVERNMENT ITA NO.882/D/2014 ASSTT.YEAR: 2009-10 19 COMPANIES. LD. COUNSEL STRONGLY CONTENDED THAT THE CIEL IS A GOVERNMENT COMPANY AND IT WAS A DIVISION OF ENGINEERS INDIA LT D. TILL 1994 FROM WHICH IT WAS DEMERGED AS A 100% SUBSIDIARY COMPANY OF ENGINE ERS INDIA LTD. (EIL). LD. COUNSEL POINTED OUT THAT CIEL UNDERTAKES THIRD PARTY INSPECTION AND CERTIFICATION OF EQUIPMENT SUPPLIED BY THE VENDORS AND FABRICATION AND INSTALLATION WORK OF CONTRACTS OF ONGC UNDER MOU BE TWEEN EIL AND ONGC DATED 11.4.1985 ON NOMINATION BASIS. REFERRING TO PAGE 365 TO 773 AND 803 TO 805 VOLUME IV OF ASSESSEES PAPER BOOK SUBMITTED TH AT THE TERMS OF SAID MOU ARE NOT KNOWN AND OPEN TO THE PUBLIC DOMAIN AND HEN CE IT CAN BE SAFELY INFERRED THAT THE CIEL IS ENJOYING THE BENEFITS OF AWARDING OF CONTACT WORK ON NOMINATION BASIS WITHOUT ANY OPEN TENDER FROM ITS H OLDING COMPANY EIL AND OTHER GOVERNMENT COMPANIES. LD. COUNSEL ALSO POINT ED OUT THAT THE CIEL ALSO CARRIES ON SIMILAR THIRD PARTY INSPECTION (TPI) AND CERTIFICATION WORK INDEPENDENTLY FOR OTHER PUBLIC SECTOR UNDERTAKING A ND IT CANNOT BE COMPARED WITH ASSESSEE BECHTELL INDIA WHO IS RENDERING ONLY ENGINEERING SUPPORT SERVICES INCLUDING RELATED DRAWING AND DESIGN, AS PER SPECIF ICATION OF FOREIGN AE. LD. COUNSEL VEHEMENTLY CONTENDED THAT THE ASSESSEE BECH TELL INDIA IS PROVIDING PRIMARY ENGINEERING SUPPORT SERVICES ALONG WITH DES IGN AND DRAWINGS AS PER SPECIFICATION OF THE FOREIGN ASSOCIATED ENTERPRISE WHICH CLEARLY DENOTES PRIMARY AND PREPARATORY WORK FOR INTUITION OF EXECUTION OF WORK CONTRACT WHEREAS THE CIEL PROVIDES SERVICES OF THIRD PARTY INSPECTION (T PI) AND CERTIFICATION OF EQUIPMENT SUPPLIED BY THE VENDORS AND FABRICATION A ND INSTALLATION OF WORK ITA NO.882/D/2014 ASSTT.YEAR: 2009-10 20 CONTRACTS OF ONGC WHICH IS A SERVICE RENDERED AFTER COMMISSIONING AND INSTALLATION OF PROJECT. 19. LD. COUNSEL ALSO POINTED OUT THAT CIEL PROVIDES AFORESAID SERVICES TO ITS DOMESTIC GOVERNMENT COMPANIES AND PSU HAVING INSIGN IFICANT EXPORT OF SERVICES WHEREAS THE ASSESSEE BECHTELL INDIA IS EXP ORTER OF 100% SERVICES TO ITS AE. LD. COUNSEL ALSO POINTED OUT THAT THE ASSESSEE BECHTELL INDIA RECEIVES ITS REMUNERATION/REVENUES FROM ITS AE IN FOREIGN EXCHAN GE HAVING FOREX FLUCTUATION RISK WHEREAS THE CIEL HAVING INSIGNIFIC ANT FOREX EARNING OF 3.75% OF OPERATING REVENUE AS PER SCHEDULE III AT PAGE 80 3 OF VOLUME IV OF PAPER BOOK OF THE ASSESSEE. LD. COUNSEL VEHEMENTLY CONTE NDED THAT THE RELATED PARTY TRANSACTION (RTP) ARE 100% IN THE CASE OF ASESSEE B ECHTELL INDIA WHEREAS THE RTP OF CIEL ARE ONLY MONETARY TRANSACTION WITH THE HOLDING COMPANY HAVING 19.60% TRANSACTION WITH ONGC, IOCL ETC. WHICH ARE N OT QUANTIFIED. LD. COUNSEL ALSO POINTED OUT THAT THE JOBS AWARDED BY O NGC ON NOMINATION BASIS ARE BEING GOVERNED BY THE MOU OR BY HOLDING COMPANY DATED 11.4.1985. 20. LD. COUNSEL ALSO POINTED OUT THAT CONTRACTS BEI NG AWARDED TO CIEL FOR RURAL ELECTRIFICATION SCHEMES SANCTIONED TO NTPCES ARE NOT AWARDED UNDER OPEN TENDER AS PER CVC CIRCULAR DATED 3.3.2007 AND HENCE , THIS COMPANY HAVING PRIVILEGE OF AWARDING CONTRACTS AND JOB ON NOMINATI ON BASIS WITHOUT ANY OPEN TENDER CANNOT BE HELD AS FUNCTIONALLY COMPARABLE WI TH THE ASSESSEE COMPANY. 21. REPLYING TO THE ABOVE, LD. CIT DR SUBMITTED THA T APART FROM ENGINEERING DESIGN, PROJECT SUPPORT AND PROCUREMENT SERVICES AL SO HAS OBJECTS LIKE PROJECT ITA NO.882/D/2014 ASSTT.YEAR: 2009-10 21 MONITORING AND CONTROL AND CONSTRUCTION SERVICES. THUS, FUNCTIONALLY IT IS NO DIFFERENT FROM CERTIFICATION ENGINEERS INTERNATIONA L LTD. (CEIL). LD. DR ALSO POINTED OUT THAT UNLIKE THE 1980S, GOVERNMENT COMPA NIES NOW CARRY ON BUSINESS IN AN ENVIRONMENT OF OPEN COMPETITION AND THEREFORE PRICE PAID BY ONE PSU OR GOVERNMENT COMPANY TO ANOTHER FOR GOODS OR SERVICES REPRESENTS ARMSS LENGTH PRICE (ALP). LD. CIT DR CONTENDED THAT IN THIS SIT UATION OF OPEN MARKET ENVIRONMENT, MOU BETWEEN EIL AND ONGC REFERRED TO I N THE ANNUAL REPORT OF CIEL FOR FY 2008-09 PERTAINING TO AY 2009-10 HAS NO RELEVANCE. 22. LD. CIT DR ALSO SUBMITTED THAT THE TPO RIGHTLY OBSERVED THAT SINCE A PERSON HOLDING VOTING SHARES OF 26% IN A COMPANY IS CONSIDERED TO BE ITS AE U/S 92A(2)(B), THEREFORE, RPT FILTER OF 25% OF TOTA L REVENUE IS JUSTIFIED, THEREFORE, RPT FILTER OF 25% WITHOUT RECOGNIZING NO N-MONETIZED BENEFITS FLOWING FROM HOLDING COMPANY TO CEIL/NTPCES HAS BEE N CORRECTLY APPLIED. LD. CIT DR STRONGLY CONTENDED THAT THE TRANSACTIONS BETWEEN TWO GOVERNMENT COMPANIES OR PUBLIC SECTOR UNDERTAKINGS SHOULD NOT BE CONSIDERED TO BE RELATED PARTY TRANSACTIONS BECAUSE SHARES IN GOVERNMENT COM PANIES ARE HELD BY THE PRESIDENT OF INDIA MERELY IN THE NAME AND NO EFFEC TIVE CONTROL IS EXERCISED BY HIM. LD. CIT DR LASTLY SUBMITTED THAT NO ADVERSE INFERENCE NEEDS TO BE DRAWN FROM NON-DISCLOSURE OF TRANSACTIONS BETWEEN TWO STA TE-CONTROLLED ENTERPRISES AS NO SUCH REQUIREMENT IS PRESCRIBED IN AS-18. LD. DR FINALLY SUBMITTED THE ACTION OF THE AO/TPO BY INCLUSION OF CIEEL IN THE F INAL SET OF COMPARABLES FOR BENCHMARKING OF IMPUGNED INTERNATIONAL TRANSACTIONS OF THE ASSESSEE COMPANY. ITA NO.882/D/2014 ASSTT.YEAR: 2009-10 22 23. LD. COUNSEL OF THE ASSESSEE ALSO PLACED REJOIND ER TO THE AFORESAID SUBMISSIONS AND CONTENTIONS OF THE LD. CIT DR AND S UBMITTED THAT THE LD. DRP HAS DULY NOTED THE BUSINESS FUNCTIONS OF THE ASSESS EE AND HAVE REPRODUCED THE SAME AT PAGE 2 OF ITS ORDER U/S 144C (5) OF THE ACT . LD. COUNSEL OF THE ASSESSEE VEHEMENTLY CONTENDED THAT THE LD. DRP AGREES THAT T HE CONCLUSION OF THE LD. TPO THAT THE ASSESSEE BECHTEL INDIA IS PRIMARILY EN GAGED IN RENDERING ENGINEERING SUPPORT SERVICES BY WAY OF PROCURING AN D SUPPLYING DESIGN AND DRAWINGS AS PER SPECIFICATIONS OF THE AE BY USING T HE IPR SUPPLIED BY THE AE BECHTEL CORPORATION USA. LD. COUNSEL FURTHER POINT ED OUT THAT IT IS FOR THIS REASON THAT THE DRP UPHELD THE TWO FILTERS APPLIED BY THE AO FOR THE PURPOSE OF SELECTING COMPARABLES VIZ. (I) COMPANIES HAVING REV ENUE OF LESS THAN RS. 5 CRORE FROM RENDERING SUPPORT SERVICES AND; (II) REVENUE F ROM ENGINEERING SUPPORT SERVICES IS LESS THAN 75% OF TOTAL OPERATING REVENU E. LD. COUNSEL ALSO CANVASSED ANOTHER SUBMISSION THAT THE LD. TPO/DRP H AVE APPLIED AFORESAID TWO FILTERS FOR SELECTING COMPARABLES BECAUSE THEY ACCE PT THAT THE PRIMARY BUSINESS OF THE ASSESSEE COMPANY IS OF PROCURING DESIGN AND DRAWINGS FOR AE ENABLING THEM TO EXECUTE ENGINEERING PRODUCTS FOR CLIENTS OU TSIDE INDIA. LD. COUNSEL CONTENDED THAT THE LD. TPO/DRP HAVE WRONGLY REJECTE D THE ASSESSEES OBJECTION REGARDING INCLUSION OF CIEL ON ALTOGETHER DIFFERENT BASIS I.E. THE ISSUE REGARDING FUNCTIONAL NON-COMPARABLES; IS ALSO NOT ACCEPTABLE THAT IN THE CASES OF TNMM ANALYSIS ONE EXAMINES THE COMPARABLES AT A VERY BRO AD LEVEL UNLIKE CUP ANALYSIS WHERE EXACT SIMILARITY IS REQUIRED. LD. C OUNSEL HAS ALSO DRAWN OUR ITA NO.882/D/2014 ASSTT.YEAR: 2009-10 23 ATTENTION TOWARDS RELEVANT PART OF THE DRP ORDER AV AILABLE AT PAGE 48 OF THE ASSESSES PAPER BOOK WHEREIN SOLE CRITERION ADOPTED BY THE DRP FOR TREATING NTPCES AND CIEL S COMPARABLE TO THE ASSESSEE IS THA T LIKE BECHTEL INDIA, THESE TWO COMPANIES EMPLOY HIGH-END TECHNOLOGY AND HANDLI NG SOURCES AND PERSONNEL. 24. LD. COUNSEL FINALLY POINTED OUT THAT CIEL IS NO T FUNCTIONALLY COMPARABLE WITH THE ASSESSEE BECHTEL INDIA NOT ONLY DUE TO AFO RESAID REASONS BUT RELATED PARTY TRANSACTION DECLARED BY CIEL WITHHOLDING COMP ANY ARE ONLY 19.60% AND TRANSACTION WITH OTHER AE/GOVERNMENT COMPANIES AND DEPARTMENTS LIKE ONGC, IOCL ETC. ARE NOT QUANTIFIED. TO SUPPORT THIS CONT ENTION HE HAS DRAWN OUR ATTENTION TOWARDS ASSESSEES PAPER BOOK VOLUME II P AGE 215 THE SUBMISSION OF THE ASSESSEE BEFORE DRP. LD. COUNSEL PARTED WITH T HE ARGUMENT THAT THE AO/DRP/TPO SHOULD BE DIRECTED TO DELETE CIEL FROM T HE FINAL SET OF COMPARABLES WHICH IS CLEARLY FUNCTIONALLY DIFFERENT WITH THE ASSESSEE COMPANY. 25. ON CAREFUL CONSIDERATION OF ABOVE RIVAL SUBMISS IONS OF BOTH THE SIDES, T THE VERY OUTSET, LET US DEAL WITH THE ISSUE OF RELA TED PARTY TRANSACTIONS (RPT). LD. DR RELYING ON THE TPOS OBSERVATIONS SUBMITTED THAT SINCE THE PERSON HOLDING VOTING SHARES OF 26% IN A COMPANY IS CONSID ERED TO BE ITS AE U/S 92A(2)(B) OF THE ACT, THEREAFTER RPT FILTER OF >25 % OF TOTAL REVENUE IS JUSTIFIED. LD. DR FURTHER POINTED OUT THAT RPT FILTER OF 25% W ITHOUT RECOGNISING NON- MONETIZED BENEFITS FLOWING FROM THE HOLDING COMPANY CIEL/NTPCES HAS BEEN CORRECTLY APPLIED. LD. DR HAS ALSO CONTENDED AND R EITERATED THAT THE TRANSACTION ITA NO.882/D/2014 ASSTT.YEAR: 2009-10 24 BETWEEN TWO GOVERNMENT COMPANIES SHOULD NOT BE CONS IDERED TO BE RPT BECAUSE SHARES IN GOVERNMENT COMPANIES ARE HOLD BY THE PRESIDENT OF INDIA MERELY IN HIS NAME AND THERE IS NO EFFECTIVE CONTRO L EXERCISED BY HIM AND THEY CANNOT BE TREATED AS RELATED PARTIES. TO SUPPORT T HIS CONTENTION, LD. DR HAS PLACED RELIANCE ON THE DECISION OF ITAT DELHI IN TH E CASE OF NOKIA INDIA (P) LTD. VS DCIT REPORTED AS 214-TII-224-ITAT-DEL-TP AN D AHS DRAWN OUR ATTENTION TOWARDS PARA NO. 15 AND 16 OF THIS ORDER AND SUBMITTED THAT AFTER CONSIDERING THE RATIO OF ALL RELEVANT JUDGMENTS AND ORDERS, THE ITAT DELHI CATEGORICALLY HELD THAT THE PERCENTAGE OF RPT TO MA KE A COMPANY AS INELIGIBLE FOR COMPARISON SHOULD BE TAKEN AS MORE THAN 25% AND NOT 15% AS SUGGESTED ON BEHALF OF THE ASSESSEE. 26. ON THE ISSUE OF RPT, IT HAS BEEN CONTENDED BY T HE LD. COUNSEL OF THE ASSESSEE THAT 25% FILTER IS NOT AN APPROPRIATE FILT ER FOR RPT AND THIS TEST CANNOT BE APPLIED MECHANICALLY AS IF IT HAS STATUTORILY PR OVIDED WITHOUT EXCEPTION. LD. COUNSEL PLACING RELIANCE ON THE DECISION OF ITAT IN THE CASE OF MOTOROLA SOLUTIONS INDIA (P) LTD. IN ITA NO.5637/D/11 SUBMIT TED THAT THE RPT FILTER MUST NOT EXCEED 15%. LD. COUNSEL VEHEMENTLY CONTENDED THAT PREREQUISITE OF ARRIVING AT ALP WITH THE TRANSACTION OF TESTED PART Y SHOULD BE BENCHMARKED WITH THE UNCONTROLLED TRANSACTION UNDER RULE 10B(1)(E)(I I) OF THE RULES. FINALLY, LD. COUNSEL SUBMITTED THAT THE FILTER SHOULD BE RESTRIC TED TO 15% OF THE TOTAL REVENUE. ON CAREFUL CONSIDERATION OF ABOVE SUBMISSIONS, WE A RE OF THE VIEW THAT THE ITAT DELHI IN THE CASE OF NOKIA INDIA (P) LTD. (SUP RA) HELD THAT IN PRINCIPLE IF ITA NO.882/D/2014 ASSTT.YEAR: 2009-10 25 ANY COMPANY THOUGH FUNCTIONALLY COMPARABLE BUT IS M ORE THAN SPECIFIC PERCENTAGE OF RTP, THEN THE SAME SHOULD BE IGNORED BY TREATING AS A CONTROLLED TRANSACTION. THE TRIBUNAL IN THIS ORDER FURTHER HE LD THAT THE PERCENTAGE OF RPT TO MAKE THE COMPANY AS INELIGIBLE FOR COMPARISON SH OULD BE TAKEN AS MORE THAN 25% AND IT WAS HELD THAT A COMPANY CAN BE CONSIDERE D AS INCOMPARABLE IF ITS RPT EXCEEDS 25%. THE RELEVANT OPERATIVE PART OF TH IS ORDER IN PARA 15 AND 16 READ AS UNDER:- 15. THE ASSESSEE HAS RELIED ON THE DECISION OF BMW INDIA PVT. LTD. VS. ADDL . CIT (ITA NO. 5354/D/2012) DATED 16TH AUGUST, 2013 . THE ASSESSEE HAS FILED FOLLOWING ADDITIONAL WRITTEN SUBMISSIONS TO CONSIDER THE JUDGMENT OF BMW INDIA P. LTD. (SUPRA) WHILE DECIDING THE ISS UE RELATING TO AMP ON BEHALF OF THE ASSESSEE: 'SUBJECT: ADDITIONAL WRITTEN SUBMISSION TO CONSIDER THE JUDGMENT OF BMW INDIA PVT. LTD. VS. ADDL. CIT (I.T.A .NO.-5354/DEIL 2012) WHILE DECIDING THE ISSUE RELATING TO ADVERTISING, MARKETING AND PROMOT ION ('AMP') ON BEHALF OF THE APPELLANT. THIS IS WITH RESPECT TO MOTOROLA SOLUTIONS INDIA PRIVATE LIMITED ('MSILP') APPEAL NO. ITA 56371 DELL 2011 FO R ASSESSMENT YEAR ('AY') 2007-08. THE HEARINGS FOR THE SAME WERE CONC LUDED ON JULY 18, 2013 AND THE ORDER WAS RESERVED ON THAT DATE. THE MATTER IS NOW AWAITING PRONOUNCEMENT OF THE DECISION BY YOUR HONOURS. IN T HE MEANTIME THE'!' BENCH OF THE HON'BLE INCOME TAX APPELLATE TRIBUNAL ('TRIBUNAL'), NEW DELHI HAS PRONOUNCED ITS DECISION IN THE CASE OF BM W INDIA PVT. LTD. VS. ADDL.. CIT (I.T.A .NO.- 5354/DEI/2012 FOR AY 2008-0 9) ('BMW INDIA ORDER'). THE SAID ORDER WAS PASSED ON AUGUST 16, 20 13. YOUR HONOURS ATTENTION MAY KINDLY BE DRAWN TO THE FOLLOWING: AS MENTIONED IN THE BMW INDIA ORDER, BMW INDIA ACTED AS A DISTRIBUTOR OF MO TOR VEHICLES AND PARTS. DURING THE YEAR UNDER CONSIDERATION IN THE ORDER, U NDER THE TRANSACTIONAL NET MARGIN METHOD ('TNMM') APPLIED BY BMW INDIA ITS OPERATING PROFIT MARGIN WAS HIGHER THAN THE OPERATING PROFIT MARGIN OF THE COMPARABLE COMPANIES. DURING THE TRANSFER PRICING ASSESSMENT P ROCEEDINGS, THE LD. TRANSFER PRICING OFFICER ('TPO'), HAD ALLEGED THAT BMW INDIA HAD INCURRED EXCESSIVE AMP EXPENSES VIS A VIS THE COMPARABLE COM PANIES AND THEREFORE, SHOULD HAVE BEEN REIMBURSED BY THE BMW GROUP FOR TH E EXCESSIVE AMP SPEND BASED ON THE BRIGHT LINE ANALYSIS ALONG WITH A MARK-UP. THE HON'BLE DISPUTE RESOLUTION PANEL ('DRP') CONFIRMED THE ADDI TIONS MADE BY THE LD. TPO. ON APPEAL BY BMW INDIA TO THE HON'BLE TRIBUNAL, THE HON'BLE TRIBUNAL PRONOUNCED ITS DECISION ON VARIOUS ISSUES RELATED T O AMP. AS ALREADY ITA NO.882/D/2014 ASSTT.YEAR: 2009-10 26 MENTIONED ABOVE, BMW INDIA WAS A DISTRIBUTOR DURING THE YEAR CONSIDERED IN THE ORDER. ON THESE FACTS, THE HON'BLE TRIBUNAL HELD THAT THIS CASE IS DISTINGUISHABLE FROM THE DECISION OF THE SPECIAL BE NCH IN L.G. ELECTRONICS CASE ('SPECIAL BENCH') AS THE FACT UNDER CONSIDERAT ION IN BMW INDIA IS THE REMUNERATION MODEL OF A DISTRIBUTOR AND NOT THAT OF A LICENSED MANUFACTURER. THE RELEVANT TEXT OF THE DECISION HAS BEEN PROVIDED HEREUNDER: (PARA 6.20, PAGE 50 OF BMW INDIA ORDER): QUOTE ON EXAMINATION OF CONTEMPORARY GUIDELINES/JUR ISPRUDENCE ON THE SUBJECT, WE ARE OF THE VIEW THAT A DISTRIBUTOR IS R EWARDED BY THE ENTITY FOR WHOM THE DISTRIBUTOR WORKS AND THE REWARDS ARE GUAR ANTEED UPTO AN EXTENT AND THE RISK COMPONENT VIS-A-VIS A MANUFACTURER IS NECESSARILY VERY LESS. THE REWARDS CAN BE AND GENERALLY ARE BASED ON PRICI NG ADJUSTMENTS AND CAN ALSO BE COMPENSATED OVER AND ABOVE THAT IF GREA TER SERVICES ARE RENDERED AND PRICING ADJUSTMENTS HAVE NOT COVERED T HE COST OF ROUTINE SERVICES RENDERED. GENERALLY SPEAKING THE REMUNERAT ION MODEL FOR A DISTRIBUTOR IS REWARD-BASED AND REWARDS ARE BASED O N THE QUANTITY OF SALES. UNQUOTE THE SECOND POINT PRONOUNCED BY THE HON'BLE TRIBUNAL WAS THAT DURING THE YEAR UNDER CONSIDERATION IN THE ORDER, B MW INDIA'S OPERATING PROFIT MARGIN WAS HIGHER THAN THAT OF THE COMPARABL ES. THE COMPARABLE COMPANIES SET AND THEIR MARGINS WERE NOT DISPUTED B Y THE LD. TPO AND THE HON'BLE DRP. HENCE, THE HON'BLE TRIBUNAL HELD THAT THE COMPENSATION FOR AMP SERVICES WAS EMBEDDED IN THE PRICING ARRANGEMEN T OF THE CONTRACT GOODS ITSELF AND THAT NO FURTHER COMPENSATION WAS R EQUIRED TO BE MADE BY THE ASSOCIATED ENTERPRISE ('AE'). IN OTHER WORDS, B MW INDIA HAD RECEIVED COMPENSATION FOR AMP EXPENSES THROUGH PREMIUM PRICI NG WHICH WAS DEMONSTRATED THROUGH ITS HIGHER PROFIT MARGINS. THE RELEVANT TEXT OF THE HON'BLE TRIBUNAL RULING IN CASE OF BMW INDIA IS PRO VIDED HERE BELOW(PARA 6.25, 6.26 PAGE 53, 55 OF BMW INDIA ORDER): QUOTE W E HOLD THAT IN THE FACTS OF THE PRESENT CASE THE ASSESSEE HAS DEMONSTRATED T HAT THE COMPENSATION FOR THE HIGHER SERVICES WAS EMBEDDED IN THE PRICING ARR ANGEMENT OF THE CONTRACT GOODS ITSELF IT IS SEEN THAT THE COMPARABL ES IDENTIFIED BY THE ASSESSEE AND ACCEPTED BY THE TPO AS HAVING SIMILAR INTENSITY FUNCTIONS HAVE EARNED PROFIT AT THE GROSS AND NET LEVELS FAR BELOW THE PROFITS BOTH AT GROSS AND NET LEVELS AS ACHIEVED BY THE ASSESSEE. IN THE CIRCUMSTANCES AS EVIDENCED FROM RECORD, WE ARE INCLINED TO AGREE WIT H THE SUBMISSIONS ADVANCED ON BEHALF OF THE ASSESSEE THAT NO FURTHER COMPENSATION WAS REQUIRED TO BE MADE BY THE AE AS THE SAME HAS ALREA DY BEEN RECEIVED. THIRDLY, THE HON'BLE TRIBUNAL IN BMW INDIA ORDER PR OVIDED THAT BMW INDIA WAS REWARDED BY PRICE ADJUSTMENTS TO EARN PROFITS W HICH INCLUDED THE COST OF AMP WITH MARK UP. IT HELD THAT THE TAX DEPARTMEN T CANNOT INSIST THAT THE MODE OF COMPENSATION RECEIVED BY BMW INDIA FROM ITS AE NECESSARILY HAD TO BE DIRECT COMPENSATION AND THAT PRICING ADJUSTME NT WAS NOT ACCEPTABLE. THE RELEVANT TEXT OF THE HON'BLE TRIBUNAL RULING IN CASE OF BMW INDIA IS PROVIDED HERE BELOW(PARA 6.27, PAGE 56 OF BMW INDIA ORDER): QUOTE THE CLAIM OF THE ASSESSEE HAS MERIT AS THE AS SESSEE WITH THE AE CAN AGREE TO BE REWARDED/ REMUNERATED BY PRICE ADJUSTME NTS TO EARN PROFITS ITA NO.882/D/2014 ASSTT.YEAR: 2009-10 27 WHICH INCLUDE THE COST OF RENDERING SERVICES WITH P ROFIT. THE DEPARTMENT CANNOT INSIST IN THE ABSENCE OF ANY PROVISION UNDER THE ACT THAT THE MODE OF COMPENSATION TO THE ASSESSEE BY THE FOREIGN AE NECE SSARILY HAS TO BE DIRECTED COMPENSATION AND PRICING ADJUSTMENT IS NOT ACCEPTED. UNQUOTE THE HON'BLE TRIBUNAL FURTHER HELD THAT (PARA 6.26, PAGE 55 OF BMW INDIA ORDER): QUOTE IN SUPPORT OF THE REMUNERATION MODEL OF THE ASSESSEE WHO IS A DISTRIBUTOR REWARDED BY WAY OF PRICE ADJUSTMENTS TO ENSURE PROFITABILITY UPTO MUTUALLY ACCEPTED TERMS IS A WELL- RECOGNIZED AND WELL-ACCEPTED METHOD FOR COMPENSATING A DISTRIBUTOR. UNQUOTE FURT HER, ON THE ISSUE OF THE MARK UP THE HON'BLE TRIBUNAL IN THE BMW INDIA ORDER HELD AS UNDER (PARA 6.28, PAGE 58 OF BMW INDIA ORDER): QUOTE WE HOLD THAT IN THE FACTS OF THE PRESENT CASE THERE WAS NO OCCASION FOR THE AE TO FURTHER COMPENSATE THE ASSESSEE FOR T HE SERVICES RENDERED TOWARDS BUILDING THE BRAND OF THE AE AS THE SAME AL READY STOOD FACTORED IN THE PRICING ADJUSTMENT OF THE CONTRACT GOODS. AS SU CH THE OCCASION TO CONSIDER THE APPLICABILITY OF MARK-UP DOES NOT ARIS E. UNQUOTE THE HON'BLE TRIBUNAL, IN PARA NO. 6.27 OF THE BMW INDIA ORDER H AS ALSO MENTIONED THAT THE SPECIAL BENCH HAS ACCEPTED THAT THERE ARE DIVER SE NATURE OF FACTS, BUSINESS MODELS AND PECULIAR TERMS AND CONDITIONS O F DIFFERENT ASSESSES AND THERE CANNOT BE ANY STRAIGHT JACKET FORMULA. APPLICABILITY TO MSIPL AS PROVIDED IN THE DETAILED HEARINGS AND SUBMISSIONS PROVIDED, MSIPL FOR THE RELEVANT YEAR U NDER CONSIDERATION ALSO ACTED AS A DISTRIBUTOR OF MOBILE HANDSETS, WALKIE-T ALKIES AND TELECOM EQUIPMENT. DURING THE YEAR UNDER CONSIDERATION, UND ER THE TNMM ANALYSIS THE OPERATING PROFIT MARGIN ON SALES (OP/SALES) OF MSIPL WAS HIGHER THAN THAT OF THE COMPARABLE COMPANIES. THIS HAS BEEN MEN TIONED IN PARA 1 OF PAGE 1 OF THE WRITTEN SUBMISSION FILED WITH YOUR HO NOURS ON MAY 20, 2013 AND AGAIN ON PARA 5 OF PAGE 133 OF THE WRITTEN SUBM ISSION FILED WITH YOUR HONOURS ON MAY 20,2013. THE LD. TPO DID NOT HAVE AN Y DISPUTE RELATING TO THE TNMM ANALYSIS CONDUCTED BY THE APPELLANT. THE O NLY DISPUTE WAS ON THE MATTER OF AMP EXPENSES. THE LD. TPO BASED ON THE BR IGHT LINE ANALYSIS HELD THAT MSIPL SHOULD HAVE BEEN REIMBURSED BY THE AE FO R THE EXCESS AMP EXPENSES INCURRED BY IT ALONG WITH A MARK-UP. THE A PPELLANT FILED AN APPEAL BEFORE THE HON'BLE TRIBUNAL. THE GROUNDS RELATED TO AMP ISSUE ARE COVERED IN GROUNDS NOS. 2.1 TO 2.10 AND 3. (THE DETAILS HAV E BEEN MENTIONED IN PARA 4-43 OF PAGE 2-23 OF THE WRITTEN SUBMISSION FILED W ITH YOUR HONOURS ON MAY 20, 2013 AND AGAIN IN PARA 8 OF PAGE 133-138 OF THE WRITTEN SUBMISSION FILED WITH YOUR HONOURS ON MAY 20, 2013.) IN THIS R EGARD WE HUMBLY SUBMIT THAT THE DECISION IN CASE OF BMW INDIA ORDER ALSO A PPLIES TO MSIPL, AS THE FACTS OF MSIPL ARE SIMILAR TO THAT IN THE BMW INDIA ORDER. HENCE, WE HUMBLY SUBMIT THAT THE DECISION RENDERED IN THE BMW CASE HAS A DIRECT BEARING ON THE AMP ISSUE. THIS HAS BEEN SUMMARIZED AS UNDER: 1.BMW INDIA IS A DISTRIBUTOR OF MOTOR VEHICLES AND RELATED PARTS. MSIPL IS ALSO A DISTRIBUTOR. HENCE, WHAT IS RELEVANT FOR CON SIDERATION IS THE REMUNERATION MODEL OF A DISTRIBUTOR IN BOTH THE CAS ES. ITA NO.882/D/2014 ASSTT.YEAR: 2009-10 28 2.BMW INDIA'S OPERATING MARGIN WAS HIGHER THAN THAT OF THE COMPARABLES. SIMILARLY, MSIPL ALSO OPERATED AT A HIGHER NET OPER ATING MARGIN THAN THAT OF THE COMPARABLES. THIS IS DEMONSTRATIVE OF THE FA CT THAT THE COMPENSATION FOR THE ALLEGED HIGHER SERVICES WAS EMBEDDED IN THE PRICING ARRANGEMENT OF THE CONTRACT GOODS ITSELF AND THAT NO ADDITIONAL RE MUNERATION WAS REQUIRED FROM THE AES. IN OTHER WORDS, LIKE IT HAS BEEN HELD IN THE BMW INDIA ORDER, THE COMPENSATION FOR THE ALLEGED EXCESS AMP EXPENSE S WAS RECEIVED THROUGH PREMIUM PRICING WHICH CAN ALSO BE DEMONSTRA TED THROUGH ITS HIGHER PROFIT MARGINS. IN THE BMW INDIA ORDER, THE HON'BLE TRIBUNAL HAS HE LD THAT THE DEPARTMENT CANNOT INSIST THAT PRICING ADJUSTMENT CANNOT BE ACC EPTED AS MODE OF COMPENSATION. HEREIN, IT MAY BE REITERATED, THAT MS IPL HAS ALREADY RECEIVED THE SAID PRICING ADJUSTMENT THROUGH CREDIT NOTES AS A COST CREDIT! PURCHASE PRICE ADJUSTMENT FROM ITS AES. THIS HAS BE EN MENTIONED IN PARA NO 18 OF PAGE 11 OF THE WRITTEN SUBMISSION FILED WITH YOUR HONOURS ON MAY 20, 2013 AND IN PARA 8(1) OF PAGE 134 OF THE WRITTEN SU BMISSION FILED WITH YOUR HONOURS ON MAY 20, 2013.' 15.1 THUS, THE MAIN CONTENTION OF ASSESSEE IS THAT REMUNERATION MODEL IN CASE OF DISTRIBUTOR TOWARDS AMP EXPENSES IS DIFFERE NT FROM THE COMPENSATION MODEL IN CASE OF LICENSE MANUFACTURER. THEREFORE, BEFORE CONSIDERING THE APPLICATION OF BMW'S CASE TO ASSESS EE'S CASE, IT IS NECESSARY THAT THE BUSINESS PROFILE OF ASSESSEE'S CASE VIZ-A- VIZ BMW'S CASE WITH REFERENCE TO LG'S SPL. BENCH CASE IS TO BE CONSIDER ED. ADMITTEDLY, THE DECISION IN THE LG'S CASE HAS BEEN RENDERED IN REGA RD TO AMP EXPENSES AND FOR QUANTIFICATION OF AMP EXPENSES ALSO DETAILED GU IDELINES HAVE BEEN LAID DOWN IN THE CASE OF LG. 15.2 IN CASE OF LG ELECTRON ICS BRIEF FACTS WERE AS UNDER: 'THE FACTUAL MATRIX OF THE CASE IS THAT L.G. ELECTRONICS INC. BUSINESS OF MANUFACTURE, SALE AND DISTRIBUTION OF E LECTRONIC PRODUCTS AND ELECTRICAL APPLIANCES SUCH AS TELEVISION, AUDIO/VID EO EQUIPMENTS, WASHING MACHINES, REFRIGERATORS AND AIR- CONDITIONERS ETC. PURSUANT TO THE APPROVAL OF THE GOVT. OF INDIA, CONVEYED VIDE LETTER DATED 2 9-1-1997, LGK WAS PERMITTED TO ESTABLISH A WHOLLY OWNED SUBSIDIARY IN INDIA. L.G. ELECTRONICS QUESTION, WAS INCORPORATED IN 1997 AS A WHOLLY OWNE D SUBSIDIARY OF LGK. AN AGREEMENT WAS ENTERED BETWEEN LGK AND LGI ON 10T H MARCH 1997, AS PER WHICH BOTH ENTERED INTO A MUTUAL FOREIGN COLLAB ORATION AGREEMENT. THEREAFTER A TECHNICAL ASSISTANCE AND ROYALTY AGREE MENT WAS ENTERED INTO BETWEEN THESE TWO ENTITIES ON 1-7- 2001 BY WHICH LG I, IN THE CAPACITY OF A LICENSEE, OBTAINED A RIGHT TO USE THE TECHNICAL INF ORMATION, DESIGNS, DRAWINGS AND INDUSTRIAL PROPERTY RIGHTS FOR THE MAN UFACTURE, MARKETING, SALE AND SERVICES OF THE AGREED PRODUCTS FROM THE L GK I.E. THE LICENSOR.' 16. IN ASSESSEE'S CASE THE FACTUAL MATRIX HAS BEEN REPRODUCED EARLIER. ASSESSEE IS PRIMARILY ENGAGED IN THE DISTRIBUTION O F TELECOM EQUIPMENT, MOBILE PHONES AND PROVISION OF TELECOMMUNICATION SE RVICE IN INDIA. THE COMPANY ALSO PROVIDES SOFTWARE DEVELOPMENT SERVICES TO THE GROUP COMPANIES. ADDITIONALLY THE COMPANY ALSO PROVIDES M ARKETING AND ITA NO.882/D/2014 ASSTT.YEAR: 2009-10 29 ADMINISTRATIVE SUPPORT SERVICES TO ITS GROUP COMPAN Y. IN THE CASE OF BMW THE FACTUAL MATRIX WAS AS UNDER: 2.4 'A PERUSAL OF THE SAME SHOWS THAT THE TPO TOOK NOTE OF THE FACTS THAT THE BMW GROUP HAS G LOBAL OPERATIONS IN 3 SEGMENTS NAMELY AUTOMOBILES, MOTORCYCLES AND FINANC IAL SERVICES. THE PARENT COMPANY OF THE GROUP IS BMW AG I.E. THE ASSO CIATED ENTERPRISE (HEREINAFTER REFERRED TO AS THE 'AE') WHICH IS HEAD QUARTERED IN MUNICH, GERMANY AND IS PRIMARILY ENGAGED IN THE MANUFACTURI NG OF AUTOMOBILES AND MOTORCYCLES. THE MAJOR CAR BRANDS MANUFACTURED BY B MW AG ARE STATED TO BE BMW, MINI AND ROLLS-ROYCE. THE TPO TAKES NOTE OF THE FACT THAT THE ASSESSEE HAD UNDERTAKEN THE FOLLOWING INTERNATIONAL TRANSACTIONS: 1. PURCHASE OF RAW MATERIAL 167,051,9 34 TNMM 2. PURCHASE OF TRADED VEHICLE 535,438, 461 RPM 3. PURCHASE OF SPARE PARTS 18,057, 016 RPM 4. PURCHASE OF FIXED ASSETS 175,346, 819 CUP 5. PURCHASE OF SOFTWARE 78,880, 000 CUP 6. RECEIPT OF TECHNICAL SUPPORT 29,449, 506 CUP SERVICE 7. RECEIPT OF IT SUPPORT SERVICES 2,739, 917 CUP 8. MARKET SURVEY EXPENSES 11,711, 690 CUP 9. REIMBURSEMENT OF PERSONAL COST 17,252, 074 CUP 10. REIMBURSEMENT OF EXPENSES 12,270, 724 CUP 11. INTEREST OF LOAN 12,9773 ,291 CUP 2.5 REFERRING TO THE TRANSFER PRICING STUDY OF THE ASSESSEE, THE TPO OBSERVED THAT THE ASSESSEE DESCRIBED ITS ACTIVITIES AS THAT OF A DISTRIBUTOR. THE TPO REFERRED TO THE IMPORTATION AGREEMENT BETWEEN THE P ARENT COMPANY BMW AG AND THE ASSESSEE AND OBSERVED THAT THE SAME HAD BEE N ENTERED INTO W.E.F. 01.01.2006 AND IT STATED THAT THE ASSESSEE HAD THE FOLLOWING DUTIES IN REGARD TO MARKETING AND PROMOTION OF THE PRODUCTS OF THE P ARENT COMPANY: '2.2. RESPONSIBILITY IN THE CONTRACT TERRITORY BMW INDIA REPRESENTS THE INTEREST OF BMW AG IN THE CONTRACT TERRITORY. IT IS RESPONSIBLE FOR THE SALE PROMOTION AND THE FULL UTILIZATION OF THE MARKET PO TENTIAL FOR THE CONTRACT GOODS IN THE CONTRACT TERRITORY. IT IS FURTHER RESPONSIBLE FOR ENSURING THE PROVISIO N OF THE BEST POSSIBLE CUSTOMER SERVICE AND ADEQUATE STOCKS OF ORIGINAL BM W PARTS IN THE CONTRACT TERRITORY. FURTHERMORE, BMW INDIA UNDERTAKES THE FO LLOWING FUNCTIONS IN THE CONTRACT TERRITORY IN ACCORDANCE WITH THE LAWS OF T HE CONTRACTING TERRITORY: ESTABLISHMENT AND SUPERVISION OF AN EFFICIENT BMW DISTRIBUTION NETWORK; PERFORMANCE OF AN ADEQUATE ADVERTISEMENT AND SALES PROMOTION AS WELL AS PUBLIC AND MEDIA RELATIONS. COLLECTION, EVALUATION AND COMMUNICATION OF MARKE T INFORMATION TO BMW AG. ITA NO.882/D/2014 ASSTT.YEAR: 2009-10 30 3. SCOPE OF THE ACTIVITY OF BMW INDIA 3.1 BMW INDIA WILL MEET ITS RESPONSIBILITY FOR THE PROMOTION OF SALES AND THE F ULL UTILIZATION OF THE MARKET POTENTIAL FOR THE CONTRACT GOODS BY APPLYING ITS BE ST EFFORTS AND ADEQUATE RESOURCES TOWARD EFFECTIVE SALES PROMOTION AND ADVE RTISING FOR THE CONTRACT GOODS INCLUDING AVAILABLE OPTIONAL EQUIPMENT AND AC CESSORIES.' 27. IN VIEW OF ABOVE, WE ARE INCLINED TO ACCEPT THE CONTENTION OF THE LD. CIT DR BECAUSE THERE IS NO STRAITJACKET FORMULA GIVEN I N EITHER SECTION 92A(2)(B) OR IN RULE 92A(2)(B) OR IN RULE 10B OF THE RULES FOR APPLYING FILTER TO THE RELATED PARTY TRANSACTIONS, HOWEVER, IT IS A WELL-SETTLED P ROPOSITION THAT IF ANY COMPANY IS FUNCTIONALLY COMPARABLE WITH THE TAXPAYER BUT AT THE SAME TIME IT IS MORE THAN A SPECIFIC PERCENTAGE OF RTP, THEN THE SAME SHOULD BE IGNORED BY TREATING IT AS A CONTROLLED TRANSACTION AND HENCE, THE VIEW TAKEN BY THE ITAT DELHI IN THE CASE OF NOKIA INDIA PVT. LTD. (SUPRA) IS A BALANCED VIEW SUPPORTED BY VARIOUS ORDERS OF THE TRIBUNAL ON THE ISSUE. THEREFORE, WE ARE IN CLINED TO ACCEPT THE CONTENTION OF THE LD. CIT DR THAT A COMPANY SHOULD BE CONSIDER ED AS NON-COMPARABLE ONLY IF ITS RPT EXCEEDS 25%. 28. THE NEXT ISSUE FOR OUR CONSIDERATION IS THE FUN CTIONAL COMPARABILITY OF THE ASSESSEE BECHTEL INDIA WITH CIEL. WE HAVE ALREADY NOTED THE FUNCTIONAL PROFILE OF THE TAXPAYER ASSESSEE IN PARA 16 AS STATED ABOVE . THAT THE FUNCTIONAL PROFILE OF CIEL HAS BEEN SUBMITTED BY THE LD. COUNSEL OF TH E ASSESSEE WHICH EXPLAINS THE DETAILS OF SERVICES OFFERED BY CIEL, AREA OF CE RTIFICATION EXPERTISE AND ANOTHER IMPORTANT AREA OF ENERGY EFFICIENCY AUDIT F UNCTIONS BY THE ASSESSEE CIEL. THE RELEVANT OPERATIVE PART READS AS UNDER:- ITA NO.882/D/2014 ASSTT.YEAR: 2009-10 31 4. SERVICES OFFERED BY CEIL: CEIL IS INDIA'S LEADING CERTIFICATION AND INSPECTIO N AGENCY FOR OFFSHORE OIL & GAS PROCESS & WELL PLATFORMS, PETRO- CHEMICAL REFINERIES, SUBMARINE AND CROSS COUNTRY PIPELINES E TC. CEIL PROVIDES SERVICES DESIGNED TO SUIT PROJECT REQUIREM ENTS THROUGHOUT THE LIFE SPAN OF A PLANT / FACILITY FROM CONCEPT TO COMMISSIONING, REVAMPING AND HEALTH CHECK. IT PROMO TES SAFETY, QUALITY AND RELIABILITY THROUGHOUT THE DESIGN AND O PERATING LIFE OF ALL TYPES OF EQUIPMENT, STRUCTURES, PRESSURE VES SELS, PIPELINES AND ROTATING MACHINERY. THE SERVICES COVER ALL TYPE S OF CAPITAL GOODS AND EQUIPMENT DURING MANUFACTURE AND ERECTION STAGES FOR OIL & GAS AND GENERAL ENGINEERING SECTORS, ENCOMPAS SING; ~ REVIEW OF DETAILED ENGINEERING ~ INDEPENDENT ANALYSIS AND REVIEW OF DESIGNS/DRAWI NGS ~CONFORMANCE OF MATERIALS & EQUIPMENTS TO NATIONAL/INTERNATIONAL CODES - ~ REVIEW AND APPROVAL OF INSPECTION TEST PLANS ~REVIEW OF INSTALLATION, PRE-COMMISSIONING AND COMMISSIONING PROCEDURES ~ THIRD PARTY INSPECTION SERVICES / PRE-SHIPMENT I NSPECTION ~ SUPERVISION OF SITE CONSTRUCTION FOR CROSS COUNTR Y WATER / GAS PIPELINES ~ PMC SERVICES FOR INFRA STRUCTURE PROJECTS OF MUN ICIPALITIES ~ HAZOP STUDIES / QUANTITATIVE RISK ANALYSIS ~ MITIGATION MEASURES REPORT WITH RECOMMENDATIONS TO REDUCE THE RISK FACT OR IS ISSUED AFTER STUDYING THE ABOVE. 5.7 ENERGY EFFICIENCY AUDIT IN ADDITION TO CERTIFICATION SERVICES, CEIL ALSO CA RRIES OUT ENERGY AUDIT, BASE LINE VERIFICATION OF ENERGY INTE NSIVE FACILITIES E.G. PUMPING STATIONS, MUNICIPAL LIGHTING, AND COMM ERCIAL BUILDINGS AS PER CLIENT'S REQUIREMENTS. CEIL IS ALS O PREPARED TO PROVIDE ENERGY SERVICE CONTRACTING SERVICES (ESCO) FOR REHABILITATION / REPLACEMENT OF ENERGY INEFFICIENT EQUIPMENTS / APPLIANCES AND TO BE PAID BACK FROM AFFECTED SAVING S IN ENERGY CONSUMPTION. 6. AREAS OF CERTIFICATION EXPERTISE: CEIL AVAILS A TOTAL SYNERGETIC SUPPORT OF ITS PARE NT COMPANY EIL WHICH HAS SKILLED AND EXPERIENCED PROFESSIONALS LOC ATED AT HEAD OFFICE AND SPREAD ACROSS INDIA AND ABROAD WHO ARE F ULLY CONVERSANT WITH NATIONAL AND INTERNATIONAL CODES BA CKED BY OVER ITA NO.882/D/2014 ASSTT.YEAR: 2009-10 32 4 MILLION MAN HOURS OF EXPERIENCE. IT HAS ON ITS RO LL ENGINEERS QUALIFIED BY VARIOUS RECOGNIZED NDT BODIES LIKE ASN T, ISNT AND QMS. CEIL'S EXPERTISE COVERS DESIGN VERIFICATION, QUALIT Y SERVICES AND COMMISSIONING ASSISTANCE ON: ~ HIGH PRESSURE REACTORS, PRESSURE VESSELS, COLUMNS , HEAT EXCHANGERS, REFORMERS OF CARBON STEEL, STAINLESS STEEL, ALLOY S TEELS & NON FERROUS MATERIALS ~ CLAD COLUMNS, STORAGE TANKS, HORTON SPHERES, MOUN DED TANKS ~ EQUIPMENT FOR COMBUSTIBLE / EXPLOSIVE CLASSIFICAT IONS, OCCUPATIONAL SAFETY AND HAZARDOUS AREA CLASSIFICATI ONS ~ INSTRUMENT AIR / PLANT AIR SYSTEMS, AIR DRYING PL ANTS, GAS DEHYDRATION UNITS ~ HEATING, VENTILATION AND AIR CONDITIONING (HVAC) SYSTEMS ~ LINE PIPES, PIPE COATING AND PIPING APPURTENANCES 29. IN VIEW OF ABOVE, THE ASSESSEE TAXPAYER BECHTEL INDIA WHICH IS RENDERING ENGINEERING SUPPORT SERVICES INCLUDING RELATED DESI GN AND DRAWING AS PER SPECIFICATION OF ITS FOREIGN AE BECHTEL CORPORATION USA CANNOT BE COMPARED WITH A COMPANY WHICH IS ENGAGED IN THE FUNCTIONS OF THIRD PARTY INSPECTIONS (TPI), CERTIFICATION OF EQUIPMENT SUPPLIED BY VENDO RS & INSTALLATION OF WORK OF CONTRACTORS OF ONGC AND OTHER GOVERNMENT DEPARTMENT S AND PRIVATE SECTOR UNDERTAKINGS. THE CIEL HAVING DOMESTIC CONSUMERS, GOVERNMENT COMPANIES AND PUBLIC SECTOR UNDERTAKING HAVING INSIGNIFICANT EXPORT SURPLUS CANNOT BE COMPARED WITH THE ASSESSEE BECHTEL INDIA WHICH IS 1 00% EXPORTER OF SERVICES TO ITS AE BECHTEL CORPORATION, USA. 30. WE MAY POINT OUT THAT FUNCTIONS OF A COMPANY SH OULD BE DETERMINED HAVING REGARD TO ITS DATA MENTIONED IN THE FINANCIA L RESULTS FILED ALONG WITH ITA NO.882/D/2014 ASSTT.YEAR: 2009-10 33 RETURN OF INCOME AND ANNUAL REPORT WHICH IS A PRIMA RY RESOURCE AND GENERAL INFORMATION IN THE ANNUAL REPORT IS MORE ACCURATE A ND THIS FACT HAS NOT BEEN CONTROVERTED BY THE LD. CIT DR. FROM THE FUNCTIONA L PROFILE OF ASSESSEE BECHTEL INDIA AND FUNCTIONAL PROFILE OF CIEL AS REPRODUCED HEREINABOVE, IT IS AMPLY CLEAR THAT THE CIEL CARRIES ON BUSINESS OF CERTIFIC ATION AND THIRD PARTY INSPECTION OF EQUIPMENTS PROVIDED BY A CONTRACTOR AND OBVIOUSL Y CERTIFICATION AND TPI FUNCTIONS ARE DISSIMILAR FORM THE BUSINESS OF RENDE RING ENGINEERING SUPPORT SERVICES INCLUDING RELATED DESIGN AND DRAWING AS PE R SPECIFICATIONS OF FOREIGN AE AND BY USING INTANGIBLES/IPR OF PARENT COMPANY. 31. LD. DR COULD NOT DEMOLISH THIS FACTUM THAT THE CERTIFICATION/TPI INVOLVES TESTING/ASSESSING AND AUDITING OF THE WORK DONE BY THE HIGH-END TECHNOCRATS WHICH CONFORMS TO SPECIFICATIONS PRESCRIBED IN THE CONTRACT; MEETS QUALITY STANDARD OF WORK AND MATERIAL; MEETS SAFETY STANDAR DS; MEETS ENVIRONMENTAL STANDARDS AND SATISFACTORY WORKS, PLANT COMMISSIONI NG AND INSTALLATION OF VARIOUS WORKS AND PROJECTS FOR THE EMPLOYER LIKE ON GC. THE CIEL CERTIFIES THE WORK OF THE CONTRACTOR THAT THE EMPLOYER ACCEPTS TH E WORK UNDERTAKEN AS PER SPECIFICATIONS OF THE CONTRACT AND THEN MAKES THE P AYMENT. PER CONTRA, THE BUSINESS FUNCTIONAL PROFILE OF ASSESSEE COMPANY IS TO PERFORM THE WORK OF PREPARING AND SUPPLYING DESIGN AND DRAWINGS GIVEN B Y ITS PARENT BECHTEL CORPORATION USA. IN THIS MODUS OPERANDI THIS WORK IS OUTSOURCED BY THE NON- RESIDENT AE TO THE ASSESSEE BECHTEL INDIA WHICH CAR RY OUT THE WORK AS PER SPECIFICATIONS GIVEN BY THE OUTSOURCING COMPANY AE. WE MAY ALSO POINT OUT ITA NO.882/D/2014 ASSTT.YEAR: 2009-10 34 THAT THE REVENUE OF CIEL FORM EXPORT OF SURPLUS IS 3% WHICH IS INSIGNIFICANT AND THE INCOME FROM EXPORT OF SERVICES BY THE ASESSEE B ECHTEL INDIA IS 100% OF OPERATING INCOME AS THERE IS NO DOMESTIC CLIENT, TH US, AS PER RULE 10B(2)(D) OF THE RULES, THE COMPARABILITY TEST ALSO FAILS ON THI S COUNT. 32. ON THE BASIS OF FOREGOING DISCUSSION, WE HAVE N O HESITATION TO HOLD THAT THE FUNCTIONS OF ASSESSEE BECHTEL INDIA ARE QUITE D ISSIMILAR WITH CIEL WHICH WAS WRONGLY TAKEN BY THE TPO AS A SUITABLE COMPARAB LE FOR BENCHMARKING OF IMPUGNED INTERNATIONAL TRANSACTION UNDERTAKEN BY TH E ASSESSEE DURING THE RELEVANT FINANCIAL PERIOD. THE FUNCTIONAL DISSIMIL ARITY AS WELL AS DISTINCTION IN THE GEOGRAPHICAL MARKET IN THE LIGHT OF FOREIGN EXC HANGE FLUCTUATION RISK OF THE ASSESSEE COMPANY COUPLED WITH BELOW 25% RPT UNDERTA KEN BY THE CIEL, WE, THEREFORE, DECLINE TO AGREE WITH THE CONCLUSION OF THE AO/DRP/TPO THAT THE CIEL IS A SUITABLE COMPARABLE FOR THE PURPOSE OF PR OPOSED TP ADJUSTMENT MADE BY THE AUTHORITIES BELOW. FUNCTIONAL DISSIMILARITY AND OTHER ASPECTS CANNOT BE IGNORED AND THESE FACTORS CLEARLY DEMONSTRATE THAT CIEL SHOULD NOT HAVE BEEN INCLUDED IN THE FINAL SET OF COMPARABLES FOR MAKING TRANSFER PRICING ADJUSTMENT PERTAINING TO THE IMPUGNED INTERNATIONAL TRANSACTIO NS OF THE ASSESSEE COMPANY AND WE ORDER TO EXCLUDE THE SAME FROM THE FINAL SET OF COMPARABLES. IT IS ORDERED ACCORDINGLY. CORPORATE ISSUE OF MARK TO MARKET LOSSES GROUND NO. 5 TO 5.4 33. ON THE ISSUE OF MARK TO MARKET LOSSES, THE LD. COUNSEL REITERATING ITS WRITTEN SUBMISSIONS DATED 17.6.2015 POINTED OUT THA T THE ASSESSEE CLAIMED MARK ITA NO.882/D/2014 ASSTT.YEAR: 2009-10 35 TO MARKET LOSSES OF RS.21.80 CRORE ON FOREIGN EXCHA NGE FORWARD CONTRACTS AS ON 31.3.09 WHICH WAS WRONGLY DISALLOWED. LD. COUNSEL OF THE ASSESSEE FURTHER POINTED OUT THAT THE AO ERRED IN HOLDING THAT THE MARK TO MARKET LOSSES IN RESPECT OF RE-MEASURING THE FOREIGN EXCHANGE FORWAR D CONTRACT AS ON BALANCE SHEET DATE ARE NOTIONAL AND CONTINGENT IN NATURE WH ICH ARE NOT ALLOWABLE. LD. COUNSEL VEHEMENTLY POINTED OUT THAT THE AO FURTHER ERRED IN PLACING RELIANCE ON INSTRUCTION NO. 3/2010 DATED 23 RD MARCH 2010 ISSUED WITH RESPECT OF ASSESSEES TRADING IN FOREX DERIVATIVES AND THESE INSTRUCTIONS WERE ISSUED AFTER COMPLETION OF FINANCIAL PERIOD UNDER CONSIDERATION, THUS, THE SAME WAS NOT APPLICABLE TO THE ASSESSEE AND FURTHER SAID INSTRUCTION IS ULTRA VIRE S TO THE SCOPE OF SECTION 119 OF THE ACT. 34. LD. COUNSEL ALSO CONTENDED THAT THE AO ERRED IN HOLDING THAT MARK TO MARKET LOSSES IN RESPECT OF RE-MEASURING THE FOREIG N EXCHANGE FORWARD CONTRACT AS ON BALANCE SHEET DATE IS NOT ALLOWABLE AS THE FO RWARD CONTRACTS HAVE NOT BEEN TAKEN FOR THE PURPOSE OF BUSINESS ON RAISING OF EXP ORT INVOICE BUT TAKEN WITHOUT DUE EXPOSURE. LD. COUNSEL HAS FURTHER DRAWN OUR AT TENTION TOWARDS ORDER OF ITAT IN ASSESSEES OWN CASE FOR AY 2008-09 REPORTED AS BECHTEL INDIA PVT. INDIA LTD VS ACIT(2013) 33 TAXMAN.COM 213 (DELHI TR IBUNAL) AND SUBMITTED THAT THE MARK TO MARKET LOSSES IN RESPECT OF FOREIGN EXCHANGE FORWARD CONTRACTS AS ON THE BALANCE SHEET DATE WAS ALLOWED TO THE ASSESSEE. LD. COUNSEL OF THE ASSESSEE ALSO TOOK US THROUGH THE WRITTEN SU BMISSIONS DATED 13.6.15 FILED ON 17.6.15 WHICH READ AS UNDER:- ITA NO.882/D/2014 ASSTT.YEAR: 2009-10 36 SCHEDULE XIII - A. SIGNIFICANT ACCOUNTING POLIC IES:- IV) FOREIGN EXCHANGE TRANSACTIONS FOREIGN EXCHANGE TRANSACTIONS ARE RECORDED AT THE EXCHANGE RATE PREVAILING AT THE DATE OF TRANSACTION. REALIZE D GAINS AND LOSSES ON FOREIGN EXCHANGE TRANSACTIONS DURING THE YEAR AR E RECOGNIZED IN THE PROFIT AND LOSS ACCOUNT. FOREIGN CURRENCY MONET ARY ASSETS AND LIABILITIES ARE TRANSLATED TO INDIA RUPEES AT YEAR END RATES AND ANY RESULTING GAIN/LOSS ON SUCH TRANSLATION IS ALSO REC OGNIZED IN THE PROFIT AND LOSS ACCOUNT. V) FORWARD FOREIGN EXCHANGE CONTRACTS THE COMPANY ENTERS INTO FORWARD FOREIGN EXCHANGE CO NTRACTS WITH THE BANKERS TO MITIGATE THE RISKS ASSOCIATED W ITH FOREIGN EXCHANGE FLUCTUATIONS ASSOCIATED WITH THE ACCOUNTS RECEIVABLE AND FORECASTED SALES TRANSACTIONS. ANY PREMIUM OR DISCOUNT ARISING AT THE INCEPTION OF THE FORWARD EXCHANGE CONTRACT, WHI CH HAVE BEEN TAKEN ON UNDERLYING TRANSACTION, IS RECOGNIZED AS E XPENSES/INCOME OVER THE LIFE OF THE CONTRACT AND EXCHANGE DIFFEREN CES ARISING ON SUCH FORWARD EXCHANGE CONTRACT IS RECOGNIZED IN THE PROFIT AND LOSS ACCOUNT IN THE REPORTING PERIOD IN WHICH THE E XCHANGE RATE CHANGES. THE FAIR VALUE OF FORWARD FOREIGN EXCHANGE CONTRACTS, WHICH HAVE BEEN TAKEN TO COVER FOREIGN EXCHANGE RIS K IN RESPECT OF PROBABLE FORECASTED TRANSACTIONS, BEING THE DIFFERE NCE BETWEEN THE CONTRACTED RATE AND FORWARD RATE AT THE BALANCE SHE ET DATE, ARE RECOGNIZED IN THE PROFIT AND LOSS ACCOUNT. ' (PG. 470 & 476/VOL.II) THE FOLLOWING TABLE SUMS UP THE FACTS :- RS. IN CRO RES (RS. I N CR.) (ROUNDED) A. ALL 9 FOREIGN EXCHANGE FORWARD CONTRACTS (F.C) WE RE ENTERED 119.50 WITH AUTHORIZED BANK ON 6.8.2008 MATURING EVERY SUC CESSIVE MONTH STARTING FROM 3.4.2009 TO 4.12.2009 B. EXPORT SALES BOOKED DURING FINANCIAL YEAR 2008-09 178.36 FINANCIAL YEAR 2007-08 159.23 C. RECEIVABLES AS ON 31.3.2009 71.64 RECEIVABLES AS ON 31.3.2009 41.61 D. FOREIGN EXCHANGE (USD) ACTUALLY RECEIVED IN FINANC IAL YEAR 2008-09 156.72 ITA NO.882/D/2014 ASSTT.YEAR: 2009-10 37 FINANCIAL YEAR 2007-08 167.31 E. VALUE OF UNEXPIRED FCS AS ON 31.3.2009 119.50 VALUE OF UNEXPIRED FCS AS ON 31.3.2008 96.00 F. INVOICES RAISED BY 6.8.2008 (PG. 362/P.B. VOL.-II) 58.09 G. ALL 9 CONTRACTS WERE ULTIMATELY SETTLED THROUGH DEL IVERY OF CONTRACTED RS. 119.50 CRORES WORTH OF U.S. DOLLARS. REF : A) PG. 61-66 OF P.B. VOL.-I B) PG. 355 OF P.B. VOL.II C) PGS. 751-753 OF P.B. VOL. IV D) DRAFT ASSESSMENT ORDER FOR A.Y. 2010- 11 PG. 754/PB VOL.-4. E) ASSESSMENT ORDER U/S 143(3)/144C DATE D 30.1.2015 FOR A.Y. 2010-11 (PARA 6 AT ANNEXURE 1) 4. LD. DRP : I) IGNORES ACCOUNTING POLICY FOLLOWED BY ASSESEE FO R PG. 462-476 & 450- FOREIGN EXCHANGE (FORWARD) TRANSACTIONS. 51/P.B.VOL.-II, AS 11 & AS 30 READ WITH AS 1. II) THE DRP IGNORES THE JUDGMENT OF HON'B1E DELHI H IGH COURT IN VIRTUAL SOFT SYSTEMS LTD. (341 ITR 593) BROUGHT TO ITS NOTICE. I T HAS BEEN HELD THEREIN THAT:- '10 .... THE FACT THAT THE OPINION OF THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA WAS EXPRESSED IN A GUIDANCE NOTE WHICH HAD NO T ATTAINED A MANDATORY STATUS, WOULD NOT PROVIDE A BASIS TO THE ASSESSING OFFICER TO DISREGARD THE BOOKS OF ACCOUNT OF THE ASSESSEE AND IN EFFECT METHOD OF ACCOUNTING FOR LEASES, FOLLOWED BY THE ASSESSEE. ' III) THE ACTION OF THE LD. DRP IS ILLEGAL IN NOT FO LLOWING THE ORDER OF THE HON'BLE TRIBUNAL FOR A.Y. 2008-09 WITHOUT DISTINGUISHING IT ON FACTS. AS HELD BY THE HON'B1E SUPREME COURT IN C1T VS. RALSON INDUSTRIES LTD. (288 ITR 322), 'WHERE AN ORDER IS PASSED BY A HIGHER AUTHORITY, TH E LOWER AUTHORITY IS BOUND THEREBY KEEPING IN VIEW THE PRINCIPLES OF NATURAL J USTICE. IT IS SIGNIFICANT TO NOTE THE DRP'S ORDER DT. 26.11.2013 IS APPEALABLE U /S 253(1)(D) OF THE ACT AND WAS NOT BINDING ON THE DEPARTMENT. IV) HOLDS SUPREME COURT DECISION IN WOODWARD GOVERN OR IS NOT APPLICABLE. PG. 382/P.B.VOL.-II V) FOLLOWS CBDT INSTRUCTION NO. 3/2010. ITA NO.882/D/2014 ASSTT.YEAR: 2009-10 38 VI) DRP SELECTIVELY QUOTES GUIDELINES ISSUED BY RBI . IT IGNORES THE FOREIGN EXCHANGE MANAGEMENT (FOREIGN EXCHANGE DERIV ATIVE CONTRACTS) REGULATIONS, 2000 READWITH SCHEDULE 1 OF THE REGULATION-4. THE SAID SCHEDULE STATES THAT A FORWARD FORE. CONTR ACT CAN BE BOOKED BY AN AUTHORIZED DEALER ON THE BASIS OF REASONABLE EST IMATE AFTER VERIFYING THE DOCUMENTARY EVIDENCE. (REF. PGS. 728-733 OF PB VOL.-IV). VII) THE CHART AT PG. 751/VOL.-IV, WHICH SUMMARIES, THE YEAR-WISE POSITION OF FOREX BOOKED/ RECEIVABLES ETC. IS AT AN NEXURE-2A. VIII) THE DRP VERIFIES FIRCS AND DOES NOT DISPUTE T HAT ALL THE FCS WERE ULTIMATELY SELECTED THROUGH DELIVERY OF CONTRACTED AMOUNT OF US DOLLARS. (PARA 3.7.1 AT PG. 36 OF DRP ORDER AT PG. 65 OF P13 VOL.-I). 5. THE LD. DRP ALLEGES THAT THE FCS WERE NOT TAKEN OUT BY THE ASSESSEE FOR BUSINESS PURPOSE. THIS BALD ALLEGATION IS NOT SUBSTANTIATED BY THE DRP. FURTHER, THE ALLEGATION MADE BY THE LD. DRP IS SELF- CONTRADICTORY. IN THE PRECEDING ASSESSMENT YEAR, TH E LD. AO HAD DISALLOWED SIMILAR MARK TO MARKET ACCOUNTING OF LOS S ON UNMATURED FCS ON THE LAST DATE OF ACCOUNTING YEAR; I.E., 31.3 .2008. HOWEVER, THIS LOSS HAS BEEN ALLOWED BY THE AOIDRP IN THE SUCCEEDI NG ASSESSMENT YEAR 2009-10 ON CASH BASIS. THUS, THE DRP ADMITS TH AT FOREIGN EXCHANGE FORWARD CONTRACTS ARE NOT SPECULATIVE AND THEY ARE ALSO FOR' BUSINESS PURPOSE. THE FACTS THIS YEAR ARE SAME AS I N THE PRECEDING A.Y. 2008-09. SIMILARLY, ACTUAL LOSS ON THE FC ON MATURI TY HAVE BEEN ALLOWED IN THE SUCCEEDING ASSESSMENT YEAR 2010-11. (TILE CHART SUMMARIZING THE EFFECT OF THE ORDERS IS AT (PG. 753 /VOL.- IV ANNEXURE 2B) 6. FINDINGS OF THE HON'BLE TRIBUNAL IN A.Y. 2008-09 :- I) FOREX FLUCTUATION LOSS ON UNEXPIRED FCS BOOKED O N 31.3.2008 IS COVERED BY THE HON'BLE SUPREME COURT DECISION IN TH E CASE OF WOODWARD GOVERNER (312 ITR 254) II) THE ASSESSEE FOLLOW MERCANTILE SYSTEM AND THE LOSS IS BOOKED ON A SCIENTIFIC BASIS IN THE ORDINARY COURSE OF BUSINESS . III) THE LOSS HAS BEEN INCURRED FOR HEDGING OF FOR EIGN CURRENCY FLUCTUATION INVOLVED IN EXPORT SALES; WHICH IS A BU SINESS DECISION TO SAFEGUARD ITS INTEREST. ITA NO.882/D/2014 ASSTT.YEAR: 2009-10 39 IV) THIS LOSS IS NOT NOTIONAL AND IT IS BUSINESS L OSS. IT HAS TO BE ALLOWED FOLLOWING THE HON'BLE SUPREME COURT IN WOOD WARD GOVERNER CASE. CBDT INSTRUCTION NO. 3 DULY NOTED BY TRIBUNAL (PG . 365/VOL.- II) TRANSACTIONS NOT SPECULATIVE U/S 43(5):- 7. ALTERNATIVELY; THE DRP, AFTER EXAMINING ALL THE INVOICES RAISED BY THE ASSESSEE ON AES, HOLDS THE FCS' TO BE SPECULATI VE TRANSACTIONS AS IT FOUND THAT THE AGGREGATE AMOUNT OF 'INVOICES RAISED' DID NOT COVER THE EXPOSURE AS PER THE FCS B OOKED BY THE ASSESSEE WITH BANK OF AMERICA ON 6TH AUGUST 2008. A CCORDING TO DRP, THE ASSESSEE SHOULD HAVE BOOKED THE FCS ONLY A FTER IT HAD RAISED AN INVOICE AND ONLY TO THE EXTENT OF AMOUNT AS PER EACH AND EVERYONE OF THE HUNDREDS OF INVOICES RAISED BY THE ASSESSEE UNDER CONTINUOUS SERVICE CONTRACTS WITH THE AES, WH ICH NORMALLY RUN FOR SEVERAL MONTHS OVERLAPPING MORE THAN ONE FI NANCIAL YEAR. THE SAMPLE FCS AND CORRESPONDING INVOICES, WHICH RU N INTO HUNDREDS, ARE AT PGS. 737-743 OF VOL.-IV. THE LD. DRP HAS FAILED TO APPRECIATE THAT IT WOULD BE NOT ONLY UNPRACTICAL, BUT WILL ALSO BE EXTREMELY COSTLY PROP OSITION TO TAKE OUT FORWARD CONTRACT FOR EVERYONE OF THE HUNDREDS O F INVOICES ISSUED TO THE AE UNDER EACH OF THE SERVICE CONTRACT S (REF. TP STUDY AT PG. 582/VOL.-III). IT IS FOR THIS REASON T HAT THE RBI REGULATIONS CLEARLY PROVIDE THAT WHERE THE AMOUNT I S NOT ASCERTAINABLE THE FORWARD CONTRACT MAY BE TAKEN ON THE BASIS REASONABLE ESTIMATE EXPECTED EXPORT RECEIPTS. 8. THE LD. ORP HAS ERRED IN TREATING CLAUSES OF PRO VISO TO SECTION 43(5) AS SUB-SECTIONS OF THAT SECTION. IT HAS THUS ERRED IN LAW IN APPLYING PROVISO (B) AND (D) TO SECTION 43(5) OF TH E ACT. THE PROVISO MERELY EXCEPTS TRANSACTIONS, WHICH ARE OTHE R-WISE SPECULATIVE UNDER MAIN WITHOUT FIRST ASCERTAINING A S TO WHETHER THE FC TRANSACTIONS ARE SPECULATIVE AS PER SECTION 43(5). 9. THE LD. DRP, AFTER VERIFYING ALL THE FOREX INWAR D REMITTANCE CERTIFICATES (FIRC), ADMITS THAT ALL FORWARD CONTRA CTS WERE ITA NO.882/D/2014 ASSTT.YEAR: 2009-10 40 ULTIMATELY SETTLED THROUGH THE DELIVERY OF PRESCRIB ED QUANTITY OF US DOLLARS ON THE DUE DATE. THIS WAS BROUGHT TO THE NOTICE OF ORP VIDE LETTER DT. 12.11.2013 AT PG. 354IVOL.-IJ. HENCE, THE SETTLEMENT OF FCS THROUGH ACTUAL DELIVERY OF US DOL LARS HAVE BEEN WRONGLY TREATED AS SPECULATIVE TRANSACTIONS U/ S 43(5) OF THE ACT. 10. DRP HOLDS THAT FCS ARE COVERED BY 'SECTION 43 ( 5)(B)' AND 'SECTION 43 (5)(D)'. APPARENTLY, REFERENCE IS T O THE PROVISO (B) AND (D) TO SECTION 43(5) OF THE ACT. THUS, THE LD. DRP HAS ERRED IN INVOKING THE PROVISO TO SECTION 43(5) WITHOUT BRING ING THE TRANSACTION INTO THE FOLD OF MAIN SECTION. THERE IS NO DISPUTE THAT ALL FORWARD CONTRACTS WERE 'ULTIMATELY' SETTLED THROUGH DELIVERY OF THE UNDERLYING COMMODIT Y, I.E., U.S. DOLLARS. THE LD. D.R.P. ITSELF HAS RECOGNISED THIS FACT AS MAY BE SEEN FROM THE TABLES AT PG. 32 & 37 OF ORP ORDER (P G. 61& 66IVOL-F). THIS BEING THE UNDISPUTED FACTUAL POSITI ON, THE IMPUGNED TRANSACTIONS CLEARLY DO NOT FALL WITHIN TH E MEANING OF THE TERM 'SPECULATIVE TRANSACTION' AS DEFINED IN SE CTION 43(5) OF THE ACT. IT MAY BE NOTED THAT FOR THE PURPOSE OF SECTIO N 43(5), IT IS NOT NECESSARY, OR EVEN RELEVANT, THAT THE FORWARD CONTR ACT IS SETTLED WITHIN THE ACCOUNTING YEAR. WHAT IS RELEVANT IS TH AT IT IS ULTIMATELY SETTLED THROUGH DELIVERY OF THE COMMODITY CONTRACTE D FOR. FURTHER, AS HELD BY THE APEX COURT, IF THE TRANSACTION SATIS FIES THE CONDITION OF 'ACTUAL DELIVERY' OF THE CONTRACTED COMMODITY, T HE TRANSACTION CANNOT BE HELD TO BE SPECULATIVE. (REF. DEVENPORT A ND CO. P. LTD. VS. CIT (1975) 100 ITR 715 (SC) AT PG. 759/VOL.-IV) . PROVISO TO SEC. 43(5) NOT APPLICABLE :- 11. SINCE THE MAIN SECTION 43(5) OF THE ACT IS NOT APPLICABLE TO THE FACTS OF THE CASE, THE LD. ORP ERRED IN LAW IN INVOKING. THE PROVISO TO THAT SECTION. THE ORP'S ACTION OF INVOKI NG THE PROVISO TO SEC. 43(5) IS MANIFESTLY ERRONEOUS. IT IS SETTLE D LAW THAT- IF A CONTRACT IS ULTIMATELY SETTLED BY WAY OF ACTUAL DEL IVERY (AS OPPOSED TO CONSTRUCTIVE DELIVERY) OF THE UNDERLYING COMMODI TY, IT IS NOT SPECULATIVE. (REF. DAVENPORT & CO. P. LTD. VS. CIT 100 ITR 715, ITA NO.882/D/2014 ASSTT.YEAR: 2009-10 41 SC). ALSO SEE THE HON'BLE TRIBUNAL IN LONDON STAR D IAMOND CO. VS. DCIT [2013J 38 TAXMANN.COM 338 (MUM. TRIB). 12. CONSIDERING THE FACT THAT ALL THE FCS ARE ULTIM ATELY SETTLED THROUGH DELIVERY OF US DOLLARS. IT'S CLEAR THAT THE DECISIONS OF THE TRIBUNAL/ HIGH COURT RELIED ON TO BY THE DRP ARE NOT RELEVANT AS ALL THOSE DECISIO NS DEAL WITH A SITUATION WHERE CONTRACT IS CANCELLED BECAUSE OF NO N-DELIVERY OF DOLLARS AND SETTLEMENT IS REACHED BY PAYING THE DIF FERENCE BETWEEN THE CONTRACTED PRICE AND THE PRICE OF THE COMMODITY ON THE DATE OF SETTLEMENT. AO/DRP IN A.V. 2010-11 :- 13. IN THE SUCCEEDING A.Y. 2010-11, THE ACTUAL LOSS INCURRED WAS RS. 15.75 CRORES AND THE REMAINING AMOUNT OF RS . 6.05 CRORES WAS OFFERED TO TAX BY THE ASSESSEE IN ITS RETURN FO R A. Y. 20 10-11, WHICH IS ACCEPTED BY THE AO. (RE .PG. 753 & 754I VO L.-IV). THE DRP HAS ALSO NOT INTERFERED WITH THE DECISION OF TH E AO. THUS WE HAVE A SITUATION WHERE AO/DRP HAVE TREATED FCS TO B E NON- SPECULATIVE TRANSACTION ENTERED INTO BY THE ASSESSE E COMPANY FOR BUSINESS PURPOSE IN THE IMMEDIATELY PRECEDING AND S UCCEEDING YEAR. 35. LD. DR SUPPORTING THE ACTION OF THE AO/DRP SUBM ITTED THAT THE ASSESSEE COMPANY DOES NOT SPECIFY THE TEST OF TRANSACTION TH AT HAVE BEEN EXCLUDED UNDER THE EXTANT PROVISION AS DEEMED SPECULATIVE TRANSACT ION BECAUSE IT HAD NOT CLEARLY DEMONSTRATED THAT THE TRANSACTIONS WERE IN RESPECT OF RAW MATERIAL OR MERCHANDISE; THE ASSESSEE IS NOT A MEMBER AND THE A SSESSEE COMPANY FAILED TO DEMONSTRATE THAT THE TRANSACTION IN QUESTION WERE HAS IN TRANSACTIONS IN ABSENCE OF DETAILS OF FOREX FORWARD CONTRACTS WHICH WERE NOT LINKED TO THE TRADE/EXPORT. LD. CIT DR FURTHER POINTED OUT THAT THE ASSESSEE IS NOT A MEMBER OF A FORWARD MARKET OR AN EXCHANGE AND IT IS NOT TH E BUSINESS OF THE ASSESSEE ITA NO.882/D/2014 ASSTT.YEAR: 2009-10 42 COMPANY TO UNDERTAKE FOREIGN EXCHANGE FORWARD CONTR ACTS. LD. CIT DR FURTHER POINTED OUT THAT FORWARD CONTRACTS ON CERTAIN DATES COULD HAVE BEEN OF HIGHER VALUE THAN THE EXPORT RECEIVABLES AND AS SUCH, THE ASSESSEE DID NOT DEMONSTRATE RUPEE TO RUPEE AND DATE SPECIFIC CORRELATION BETWEE N THE FCS AND THE EXPORT INVOICES, SPECIALLY WHEN FEW FORWARD CONTRACTS CANC ELLED BEFORE THE MATURITY DATES CLEARLY DEMONSTRATE THE CHARACTERISTICS OF SP ECULATION ACTIVITY. PLACING RELIANCE ON THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS BADRIDAS GAURIDU PVT. LTD. (2004) 134 TAXMAN 376 (B OMBAY) SUBMITTED THAT THIS ASPECT/ISSUE NEEDS TO BE EXAMINED IN DETA ILS SO AS TO CONSIDER THE NATURE OF SUCH LOSSES TO ADJUDICATE THE ALLOWABILITY AND I N THAT CASE THE MATTER WAS SET ASIDE BY THE TRIBUNAL ON THIS ISSUE AS THE ASSESSEE HAD NOT FURNISHED REQUISITE DETAILS TO THE AO. 36. LD. CIT DR FURTHER POINTED OUT THAT IN THE CASE OF DCIT VS BANK OF BAHRAIN AND KUWAIT IN ITA NO. 4404 & 1883/MUM/2004 THE SPECIAL BENCH OF ITAT MUMBAI WHILE HOLDING THAT MARK TO MARKET LOSSE S IN RESPECT OF FORWARD FOREIGN EXCHANGE CONTRACTS DEBITED TO PROFIT AND LO SS ACCOUNT IS ALLOWABLE AND AT THE SAME TIME, CBDT INSTRUCTION NO. 3/2010 MANDATES THAT INSTRUCTION FROM CBDT WERE EITHER NOT POINTED OUT TO THE ITAT OR WAS SUBSEQUENT TO THIS ORDER. LD. CIT DR ALSO VEHEMENTLY CONTENDED THAT THE QUEST ION IN THE SAID CASE WAS WHETHER MARK TO MARKET LOSS WAS A REAL LOSS OR A NO TIONAL LOSS AND THE ISSUE OF SPECULATION U/S 43(5) WAS NOT BEFORE THE TRIBUNAL A ND HENCE BENEFIT OF THE SPECIAL BENCH ORDER FOR CLAIMING ALLOWABILITY CANNO T BE EXTENDED TO THE ITA NO.882/D/2014 ASSTT.YEAR: 2009-10 43 ASSESSEE. LD. CIT DR ALSO POINTED OUT THAT THE SPE CIAL BENCH ORDER WAS PASSED IN THE CASE OF ASSESSEE BANK AND ASSESSEE OF THE PR ESENT CASE IS AN ENGINEERING SERVICE PROVIDER ASSESSEE SO THE BUSINESS PROFILE V ARIES SUBSTANTIALLY. 37. REPLYING TO THE ABOVE LD. COUNSEL OF THE ASSESS EE ALSO PLACED WRITTEN REJOINDER TO THE WRITTEN REPLY AND SUBMISSIONS OF T HE DR ON THE ISSUE OF MARK TO MARKET LOSSES, LD. COUNSEL SUBMITTED THAT THE CONTE NTIONS OF THE LD. CIT DR ARE MISCONCEIVED, THAT THE ASSESSEE FAILS TO SATISFY AN Y OF THE CLAUSES OF THE PROVISO TO SECTION 43(5) OF THE ACT, THEREFORE, MARK TO MAR KET LOESS OF FORWARD CONTRACTS ARE NOT ALLOWABLE BEING SPECULATION LOSSES. LD. CO UNSEL STRONGLY CONTENDED THAT MERELY THE LD. CIT DR REITERATING THE VIEW AS EXPRE SSED BY THE LD. DRP AND THE DRP HAS IGNORED THE MAIN PROVISIONS OF SECTION 43(5 ) OF THE ACT AS THE REVENUE HAS TO SHOW AS TO HOW THE PRESENT CASE IS COVERED B Y THE DEFINITION OF SPECULATIVE TRANSACTION AS DEFINED IN SECTION 43(5) OF THE ACT. LD. COUNSEL ALSO POINTED OUT THAT THE ASSESSEE ACCOUNTS FOR FORWARD CONTRACT LOSS BASED UPON A CONSISTENCY FOLLOWED BY ACCOUNTING POLICY AS STATED IN ITS FINAL AUDITED STATEMENT AND SINCE ALL FORWARD CONTRACTS ARE SETTL ED BY THE ACTUAL DELIVERY OF CONTRACTED AMOUNT, THEREFORE, IT IS NOT A SPECULATI VE TRANSACTION U/S 43(5) OF THE ACT. LD. COUNSEL ALSO POINTED OUT THAT THE ASSESSE E ACCOUNTS FOR FORWARD CONTRACT LOSS BASED UPON CONSISTENCY, FOLLOWED BY A CCOUNTING POLICY AS STATED IN ITS FINAL AUDITED STATEMENT AND SINCE ALL FORWARD C ONTRACTS ARE SETTLED BY THE ACTUAL DELIVERY OF CONTRACTED AMOUNT, THEREFORE, IT IS NOT A SPECULATIVE ITA NO.882/D/2014 ASSTT.YEAR: 2009-10 44 TRANSACTION U/S 43(5) OF THE ACT AND THERE IS NO QU ESTION OF APPLICABILITY OF PROVISO TO THE SAID PROVISION. 38. PLACING RELIANCE ON THE JUDGEMENT OF HONBLE SUPREME COURT IN THE CASE OF DEVENPORT & CO. PVT. LTD. VS CIT 100 ITR 7 15 SUBMITTED THAT A TRANSACTION WHICH IS OTHERWISE SPECULATIVE WOULD NO T BE A SPECULATIVE TRANSACTION WITHIN THE MEANING OF EXPLANATION (2) I F ACTUAL DELIVERY OF THE COMMODITY OR THE SCRIPS HAS TAKEN PLACE. LD. COUNS EL LASTLY POINTED OUT THAT IN THE SIMILAR SET OF FACTS AND CIRCUMSTANCES, THE ISS UE HAS ALREADY BEEN DECIDED IN FAVOUR OF THE ASSESSEE BY THE TRIBUNAL FOR AY 2008- 09 IN ASSESSEES OWN CASE (SUPRA). 39. ON CAREFUL CONSIDERATION OF ABOVE SUBMISSIONS O F BOTH THE SIDES, AT THE VERY OUTSET, WE FIND IT APPROPRIATE TO REPRODUCE WR ITTEN REPLY OF THE LD. CIT DR ON THE ISSUE OF MARK TO MARKET LOSSES, WRITTEN SUBM ISSIONS OF THE ASSESSEE AS ALREADY REPRODUCED HEREIN ABOVE. THE RELEVANT WRIT TEN SUBMISSIONS OF THE LD. CIT DR READ AS UNDER: - SYNOPSIS OF DR SUBMISSIONS DATE OF SUBMISSION: 09/0712014 NAME OF ASSESSEE: BECHTEL INDIA P LIMITED AY: 2009-10 ITA NO.: 882/D/2014 MAY THE HON'BLE 'I' BENCH BE PLEASED TO CONSIDER: ITA NO.882/D/2014 ASSTT.YEAR: 2009-10 45 NOTE ON FOREX HEDGING LOSSES: THE COMPANY'S CASE DOES NOT SATISFY THE TEST OF TRA NSACTIONS THAT HAVE BEEN EXCLUDED UNDER THE EXTANT PROVISIONS AS DEEMED SPECULATIVE TRANSACTIONS AS: - IT HAD NOT CLEARLY DEMONSTRATED THAT THE HEDGING TRANSACTIONS WERE WITH RESPECT TO RAW MATERIALS OR MERCHANDISE: - THE ASSESSEE IS NOT A MEMBER OF A FORWARD MARKET OR AN EXCHANGE. - THE COMPANY FAILED TO DEMONSTRATE THAT THE TRANSA CTIONS IN QUESTION WERE HEDGING TRANSACTIONS AS NO DETAILS WERE FURNIS HED. -THE DETAILS OF FOREX FORWARD CONTRACTS WERE NOT LI NKED TO THE TRADE/EXPORT. -FCS ON CERTAIN DATES COULD HAVE BEEN OF HIGHER VAL UE THAN THE EXPORT RECEIVABLES. AS SUCH, THE ASSESSEE DID NOT DEMONSTR ATE RUPEE-TO-RUPEE AND DATE-SPECIFIC CORRELATION BETWEEN THE FCS AND T HE EXPORT INVOICES. - APPARENTLY FEW FORWARD CONTRACTS CANCELLED BEFORE THE MATURITY DATE. WHICH WAS A CHARACTERISTIC OF SPECULATION ACT IVITY OR THERE WERE ANY ALTERATIONS. IN VIEW OF THE ABOVE, THE FOLLOWING SUBMISSIONS ARE MADE: A. FORWARD CONTRACTS ARE TO BE TREATED AS COMMODITY AS HELD IN 38 TAXMANN.COM 338 (MUMBAI-TRIB.). RELIANCE ON THE DEC ISION OR THE BOMBAY HIGH COURT IN THE CASE OF CIT V. BADRIDAS GA URIDU PVT LTD 2004 134 TAXRNAN 376 (BOMBAY) AND UT V. SOORAJMULL NAGARMULL [1981] 129 ITR 169 (CAL) IN THE CASE OF LONDON STAR DIAMOND COMPANY (I) P. LTD V. DCIT [2013] 38 TAXRNANN.COM 3 38 (MUMBAI- TRIB.). RELEVANT EXTRACT OF PARA 19 OF THE JUDGMENT READS AS UNDER: 'PARA /9. THE ABOVE------- .ALTHOUGH THERE IS DECIS ION OF THE TRIBUNAL WHERE IT IS HELD THAT THE FCS ARE NOT COMMODITIES, CONSIDERING THE JUDGMENT OF HONBLE HIGH COURT OF CALCUTTA IN THE C ASE OF SOORAJ MULL MAGARMULL SUPRA, WHICH WAS FOLLOWED BY THE JUDGMENT OF JURISDICTIONAL HIGH COURT IN THE CASE OF BADRIDAS G AURIDU PVT LTD (SUPRA), NEEDS TO BE FOLLOWED BY US. THE PRINCIPLE OF 'JUDICIAL DISCIPLINE' ASSUMES IMPORTANCE AND THEREFORE, THE ' COMMODITY' INCLUDES THE FORWARD CONTRACT'. THUS, IN PRINCIPLE, THE FORWARD CONTRACTS, BEING COMMODITY, SHOULD FALL IN THE DEFI NITION OF SPECULATION TRANSACTION' AND THE SAME IS SUBJECTED TO FULFILMENT OF OTHER CONDITIONS SPECIFIED IN SUB-SECTION (5) OF SE CTION -43 OF THE ACT. HAVING HELD SO, WE SHALL NOW EXAMINE IF THE IMPUGNE D CONTRACTS/TRANSACTIONS CONSTITUTE 'HEDGING TRANSACT IONS' AND COVERED BY THE EXCLUSION PROVISIONS OF CLAUSE (A) TO THE PR OVISO TO SECTION 43(5) OF THE ACT. ' FURTHER, THE PARAS 34, 35 & 36 OF THE ORDER NEED TO BE EXAMINED IN DETAILS SO AS TO CONSIDER THE NATURE OF SUCH LOSSES WHICH REQUIRE ITA NO.882/D/2014 ASSTT.YEAR: 2009-10 46 DETAILED EXAMINATION TO SEE THE ALLOWABILTY. IN THI S CASE, THE MATTER WAS SET ASIDE BY IT AT ON THIS ISSUE AS THE ASSESSE E HAD NOT FURNISHED REQUISITE DETAILS TO THE AO. MUMBAI TRIBUNAL - S. VINODKUMAR DIAMONDS PVT. LTD. V. ADDL CIT (2013- TIOL-452- ITAT -MUM) HAS HELD SUCH TRANSACTI ONS TO BE SPECULATIVE IN NATURE. ASSESSEE WAS IN THE BUSINESS OF MANUFACTURING AND EXPORT OF DIAMONDS AND CLAIMED DEDUCTION FOR LO SS IN TAX RETURN ON ACCOUNT OF EXCHANGE RATE FLUCTUATIONS, INCLUDING LOSS ON FORWARD CONTRACTS SQUARED UP DURING THE YEAR AND MARKED-TO- MARKET LOSSES ON OUTSTANDING CONTRACTS AT THE YEAR END. THE ASSESSIN G OFFICER (' AO') AND THE CIT(A) DISALLOWED THE LOSS AND TREATED THE LOSS AS 'SPECULATION LOSS', RELYING ON AN INSTRUCTION AND CIRCULAR ISSUE D BY THE CENTRAL BOARD OF DIRECT TAXES (CBDT) REGARDING THIS MATTER (INSTRUCTION NO.] 3 OF 2010DATED 23 MARCH 2010 AND CIRCULAR NO.23 OF 1960 DATED 12 SEPTEMBER 1960). IN THIS CASE, ITAT MUMBAI HAS DRAWN A DISTINCTION B ETWEEN HEDGING TRANSACTION AND SPECULATIVE TRANSACTION, OBSERVING THAT 'SPECULATIVE TRANSACTION' IS A CONTRACT FOR PURCHASE OR SALE OF ANY COMMODITY, STOCKS OR SHARES THAT IS PERIODICALLY OR ULTIMATELY SETTLED OTHERWISE THAN BY ACTUAL DELIVERY OR TRANSFER OF THE COMMODIT Y OR SCRIP & ON THE OTHER HAND, A HEDGING TRANSACTION IS A CONTRACT ENT ERED INTO TO PROTECT AGAINST POSSIBLE PRICE FLUCTUATIONS IN THE COMMODIT Y / GOODS TRADED BY THE ASSESSEE. ITA T HAS FORMULATED SEVEN TESTS TO D ETERMINE A HEDGING TRANSACTION AS A NON SPECULATIVE TRANSACTION FOR TH E PURPOSE OF CLAUSE (A) OF PROVISO TO SECTION 43(5) OF THE ACT. THE ITA T MUMBAI NOTED THAT AS THE ASSESSEE WAS A DEALER IN DIAMONDS, HENCE ONL Y FORWARD CONTRACTS IN DIAMONDS COULD BE TREATED AS HEDGING C ONTRACTS. FURTHER, THE FORWARD CONTRACTS FOR FOREIGN EXCHANGE WERE CLO SED WITHOUT ACTUAL DELIVERY. ASSESSEE WAS ALSO UNABLE TO ESTABLISH THA T BOOKING AND CANCELLATION OF FORWARD CONTRACTS OF FOREIGN EXCHAN GE WERE IN RESPECT OF SPECIFIED EXPORT OR IMPORT. HENCE, THE LOSS ON F ORWARD CONTRACT ON CANCELLATION AND MARKED-TO- MARKET ON OUTSTANDING C ONTRACTS AS ON YEAR END ON HEDGING FOREIGN EXCHANGE RISK WAS HELD TO BE A SPECULATIVE CONTRACT. B. EXPLANATION TO S. 37(1) INSERTED BY THE FINANCE ACT 1998 WITH RETROSPECTIVE EFFECT FROM 1-4-1962 READS AS UNDER: 'EXPLANATION - FOR THE REMOVAL OF DOUBTS, IT IS HER EBY DECLARED THAT ANY EXPENDITURE INCURRED BY AN ASSESSEE FOR ANY PUR POSE WHICH IS AN OFFENCE OR WHICH IS PROHIBITED BY LAW SHALL NOT BE DEEMED TO HAVE ITA NO.882/D/2014 ASSTT.YEAR: 2009-10 47 BEEN INCURRED FOR THE PURPOSE OF BUSINESS OR PROFES SION AND NO DEDUCTION OR ALLOWANCE SHALL BE MADE IN RESPECT OF SUCH EXPENDITURE.' THE FOREX DERIVATIVE CONTRACTS ENTERED INTO IN EXCE SS OF THE UNDERLYING FOREIGN EXCHANGE EXPOSURE OF THE ASSESSEE ARE APPAR ENTLY IN VIOLATION OF THE GUIDELINES OF RBL AND FEMA AND THEREFORE HIT BY EXPLANATION TO S. 37(1). THIS EXPLANATION IMPLIEDLY LEADS US TO THE CONCLUSI ON THAT SUCH LOSSES ON FCS ARE NOT ALLOWABLE TO THE ASSESSEE. CBDT HAS ALSO ISSUED INSTRUCTION NO. 03/20 I 0, DATED 23-3-2010 TO ASSES SING OFFICERS REGARDING THE LOSS ON ACCOUNT OF CURRENCY DERIVATIV ES. THE CRUX OF THE SAID INSTRUCTION IS AS UNDER: (I) IN RESPECT OF MTM LOSSES DEBITED TO PROFIT AND LOSS ACCOUNT, THE ASSESSINGOFFICERS ARE INSTRUCTED TO DISALLOW THE SA ME WHILE COMPUTING THE TAXABLE INCOME. (2) IN RESPECT OF ACTUAL OR CRYSTALLIZED LOSSES, TH E ASSESSING OFFICERS ARE INSTRUCTED TO VERIFY WHETHER THE LOSSES ARE ON ACCOUNT OF SPECULATIVE TRANSACTION AS SPECIFIED U/S.43(5) AND DECIDE IN ACCORDANCE WITH LAW. THE ABOVE INSTRUCTIONS RENDER CLAIMS OF DEDUCTION F OR MARK TO MARK LOSSES PROVIDED FOR IN THE BOOKS IN RESPECT OF OPEN CONTRACTS UNTENABLE. HOWEVER, TO BE FAIR, IT MAY ALSO BE POIN TED OUT THAT IN THE CASE DCIT V. BANK OF BAHRAIN AND KUWAIT, (ITA NOS. 4404 & 1883/MUM./2004 REPORTED IN WWW.ITATONLINE.ORG) THE SPECIAL BENCH OF MUMBAI ITAT, WHILE HOLDING THAT MTM LOSSES IN RESPE CT OF FORWARD FOREIGN EXCHANGE CONTRACTS DEBITED TO PROFIT AND LO SS ACCOUNT IS ALLOWABLE, HAS MADE THE FOLLOWING OBSERVATIONS: (I) A BINDING OBLIGATION ACCRUED AGAINST THE ASSESS EE THE MINUTE IT ENTERED INTOFORWARD FOREIGN EXCHANGE CONTRACTS. (II) A CONSISTENT METHOD OF ACCOUNTING FOLLOWED BY THE ASSESSEE CANNOT BE DISREGARDED ONLY ON THE GROUND THAT A BETTER METHOD COULD BE ADOPTED. (III) THE ASSESSEE HAS CONSISTENTLY FOLLOWED THE SA ME METHOD OF ACCOUNTING IN REGARD TO RECOGNITION OF PROFIT OR LO SS BOTH, IN RESPECT OF FORWARD FOREIGN EXCHANGE CONTRACT AS PER THE RATE P REVAILING ON MARCH 31. (IV) A LIABILITY IS SAID TO HAVE CRYSTALLISED WHEN A PENDING OBLIGATION ON THEBALANCE SHEET DATE IS DETERMINABLE WITH REASO NABLE CERTAINTY. THE CONSIDERATIONS FOR ACCOUNTING THE INCOME ARE EN TIRELY ON DIFFERENT FOOTING. ITA NO.882/D/2014 ASSTT.YEAR: 2009-10 48 (V) AS PER AS-II, WHEN THE TRANSACTION IS NOT SETTL ED IN THE SAME ACCOUNTING PERIOD AS THAT IN WHICH IT OCCURRED, THE EXCHANGE DIFFERENCE ARISES OVER MORE THAN ONE ACCOUNTING PER IOD. (VI) THE FORWARD FOREIGN EXCHANGE CONTRACTS HAVE AL L THE TRAPPINGS OF STOCK-IN- TRADE. (VII) IN VIEW OF THE DECISION OF THE SUPREME COURT IN THE CASE OF WOODWARD GOVERNOR INDIA (I) P. LTD., THE ASSESSEE'S CLAIM IS ALLOWABLE. (VIII) IN THE ULTIMATE ANALYSIS, THERE IS NO REVENU E EFFECT AND IT IS ONLY THE TIMING OF TAXATION OF LOSS/PROFIT. THIS CREATES A SITUATION WHERE ON ONE HAND A SPECIA L BENCH DECISION ALLOWS MTM LOSSES, WHILE ON THE OTHER HAND CBDT INS TRUCTION MANDATES DISALLOWANCE. APPARENTLY, THE INSTRUCTION FROM CBDT WAS EITHER NOT POINTED OUT TO THE ITAT OR WAS SUBSEQUEN T TO THIS ORDER. ALSO, THE QUESTION IN THE SAID CASE WAS WHETHER MTM LOSS WAS A REAL LOSS OR NOTIONAL LOSS AND THE ISSUE OF SPECULATION UNDER 43 (5) WAS NOT AN ISSUE BEFORE THE ITA T. ON THIS BACKGROUND, THE BENEFIT OF THIS SPECIAL BEN CH ORDER FOR CLAIMING ALLOWABILITY OF MTM LOSSES DESPITE THE INSTRUCTION TO THE CONTRARY BY THE CBDT IS NOT AVAILABLE ESPECIALLY DUE TO THE FACTS T HAT THE ASSESSEE FAILED TO DISCHARGE ITS ONUS ON GIVING REAL TIME DATA. BE SIDES, THE ASSESSEE IN OUR CASE IS ENGG. SERVICE EXPORTER WHEREAS THIS AB ORDER WAS RENDERED FOR A BANK, SO THE BUSINESS PROFILE VARIES SUBSTANT IALLY. C. RECENT: RBI IN ORDER TO REGULATE THE CURRENCY MARKET VOLATI LITY HAS ALLOWED THE TRADING IN CURRENCY FUTURE AND FORWARD ON APRIL 20, 2007. AS THERE WAS DIFFICULTY IN MANAGING THE CURRENCY FUTURE ALONG DE PENDING ON FOREX WITH OTHER DERIVATIVES TRADED IN SECURITY EXCHANGE MARKET DEPENDING ON SENSEX, THEREFORE, RBI AND SEBI FORMED A STANDING C OMMITTEE TO ANALYZE THE TRADE IN CURRENCY FORWARD AND FUTURE MA RKET AROUND THE WORLD AND THUS LAYING DOWN THE GUIDELINE TO INTRODU CE AND MANAGE THE EXCHANGE TRADED CURRENCY FUTURE MARKET IN INDIA. TH E COMMITTEE SUBMITTED THE REPORT ON MAY 29,2008 . RBI AND SEBI ARE NOW COOPERATING AND WORKING TOGETHER TO MANAGE THIS SEG MENT OF FUTURE AND OPTION TRADING IN INDIA. VARIOUS CURRENCY DERIVATIV ES HAVE BEEN INTRODUCED BY NSE AND MCX TO MAKE INDIAN SECURITIES MARKET GLOBALLY COMPETITIVE AND LARGER. THE ISSUE THEREFORE CALLS F OR DETAILED ADJUDICATION AND IS NOT COVERED IN FAVOUR OF THE AS SESSEE. 40. WE FURTHER FIND IT APPROPRIATE TO REPRODUCE WRI TTEN SUBMISSION/REJOINDER OF THE ASSESSEE TO THE WRITTEN REPLY/SUBMISSIONS OF THE LD. CIT DR DATED ITA NO.882/D/2014 ASSTT.YEAR: 2009-10 49 19.6.2015 WHICH WERE PLACED BEFORE US ON 26.6.15. FOR THE SAKE OF CLARITY IN OUR FINDINGS, REJOINDER TO THE WRITTEN SUBMISSIONS OF THE LD. CIT DR IS BEING REPRODUCED BELOW:- BEFORE THE HON'BLE INCOME TAX APPELLATE TRIBUNAL, DELHI BENCH 'I-1' NEW DELHI BECHTEL INDIA PRIVATE LIMITED ITA NO.882/DEL12014 ASSESSMENT YEAR: 2009-10 REJOINDER TO THE WRITTEN SUBMISSION OF THE LEARNED DEPARTMENTAL REPRESENTATIVE (LD. DR) IN RESPECT OF THE 'MARK TO MARKET' LOSS OF RS. 21.80 CRORES AS ON 31.03.2009 ON THE FOREIGN EX CHANGE FORWARD CONTRACTS (FCS) IT IS HUMBLY SUBMITTED THAT THIS REJOINDER MAY KIND LY BE READ ALONG WITH THE CORPORATE TAX SUBMISSION DATED 17.06.2015 SUBMITTED BEFORE YOUR HONOURS REJOINDER : L. THE LD. CIT (DR) HAS EMPHASIZED THAT THE ASSESSE E FAILS TO SATISFY ANY OF THE CLAUSES OF THE PROVISO TO SECTIO N 43(5) OF THE ACT. THEREFORE, MARKED TO MARKET LOSSES ON FCS ARE NOT A LLOWABLE, BEING SPECULATION LOSSES. THIS CONTENTION IS MISCONCEIVED. THE LD. CIT (DR) M ERELY REITERATES THE SAME VIEW AS EXPRESSED BY THE LD. DR P. BOTH THE LD. DRP &CIT(DR) HAVE IGNORED THE MAIN PROVISION OF SEC TION 43(5) . THEY HAVE IN THE FIRST PLACE, FAILED TO SHOW AS TO HOW THE IMPUGNED CASE IS COVERED BY THE DEFINITION OF 'SPECULATIVE T RANSACTION' AS DEFINED IN SECTION 43(5) OF THE ACT. ALL THE CONTEN TIONS OF THE LD. CIT(DR) HAVE ALREADY BEEN MET IN OUR SUBMISSION DAT ED 17.06.2015. THE RELEVANT PROVISIONS OF SECTION 43(5) WHICH DEFI NES THE TERM 'SPECULATIVE TRANSACTION' READS AS UNDER: .. (5) 'SPECULATIVE TRANSACTION' MEANSA TRANSACTION IN WHICH A CONTRACT FOR THE PURCHASE OR SALE 0/ ANY COMMODITY. INCLUDING STOCKS AND SHARES, IS PERIODICALLY OR ULTIMATELY SE TTLED OTHERWISE THAN BY THE ACTUAL DELIVERY OR TRANSFER OF THE COMM ODITY OR SCRIPS: PROVIDED THAT FOR THE PURPOSES OF THIS CLAUSE- (A) A CONTRACT IN RESPECT OF RAW MATERIALS OR MERCH ANDISE ENTERED INTO BY A PERSON IN THE COURSE OF HIS MANUFACTURING OR MERCHANTING BUSINESS TO GUARD AGAINST LOSS THROUGH FUTURE PRICE FLUCTUATIONS IN ITA NO.882/D/2014 ASSTT.YEAR: 2009-10 50 RESPECT 0/ HIS CONTRACTS FOR ACTUAL DELIVERY OF GOO DS MANUFACTURED BY HIM OR MERCHANDISE SOLD BY HIM; OR (B) A CONTRACT IN RESPECT OF STOCKS AND SHARES ENTE RED INTO BY A DEALER OR INVESTOR THEREIN TO GUARD AGAINST LOSS IN HIS HOLDINGS OF STOCKS AND SHARES THROUGH PRICE FLUCTUATIONS: OR (C) A CONTRACT ENTERED INTO BY A MEMBER OF A FORWAR D MARKET OR A STOCK EXCHANGE IN THE COURSE OF ANY TRANSACTION IN THE NATURE OF JOBBING OR ARBITRAGE TO GUARD AGAINST LOSS WHICH MA Y ARISE IN THE ORDINARY COURSE OF HIS BUSINESS AS SUCH MEMBER; OR (D) AN ELIGIBLE TRANSACTION IN RESPECT OF TRADING I N DERIVATIVES REFERRED TO IN CLAUSE (AC) OF SECTION 2 OF THE SECU RITIES CONTRACTS (REGULATION) ACT, 1956 (42 OF 1956) CARRIED OUT IN A RECOGNISED STOCK EXCHANGE: SHALL NOT BE DEEMED TO BE A SPECULATIVE TRANSACTION . '[EMPHASIS SUPPLIED] THE FACTS OF OUR CASE ARE:- I. THE ASSESSEE IS AN EXPORTER OF SERVICES FOR WHIC H IT RECEIVES CONSIDERATION IN US DOLLARS THROUGH DIRECT REMITTA NCE INTO ITS BANK ACCOUNT. II. IN INDIA, US DOLLARS IS NOT MONEY BUT COMMODITY WHICH CAN BE SOLD OR BOUGHT IN INDIAN RUPEES, WHICH IS THE ONLY LEGAL TENDER IN INDIA. III. THE RATE OF US DOLLARS FLUCTUATES AGAINST TH E INR. IN ORDER TO PROTECT ITS BUSINESS AGAINST THE FLUCTUATIONS IN US DOLLARS VIS-A- VIS INR, THE ASSESSEE HEDGES ITS FOREIGN CURRENCY E XPORT RECEIVABLES AND FORECASTED SALES TRANSACTIONS BY ENTERING INTO FCS WITH ITS BANK. IV. THE ASSESSEE ACCOUNTS FOR THE FCS BASED UPON A CONSISTENTLY FOLLOWED ACCOUNTING POLICY AS STATED I N ITS AUDITED FINANCIAL STATEMENTS (PG 1 OF CORPORATE TAX SUBMISS ION DATED 17.06.2015). V. FCS WERE TAKEN FROM THE AUTHORIZED DEALER BANK I N TERMS OF THE FEMA REGULATIONS NOTIFIED BY THE RBI. THE RBI REGUL ATIONS (THE FOREIGN EXCHANGE MANAGEMENT (FOREIGN EXCHANGE DERIV ATIVE CONTRACTS) REGULATIONS, 2000 READ WITH, SCHEDULE 1 OF THE REGULATION-4-REF. PGS., 728-733 OF PE VOL.-IV CLEAR LY PROVIDE THAT WHERE THE AMOUNT IS NOT ASCERTAINABLE THE FORWARD C ONTRACT MAY BE TAKEN ON THE BASIS REASONABLE ESTIMATE EXPECTED EXP ORT RECEIPTS. THE SAID SCHEDULE STATES THAT A FORWARD FOREX CONTR ACT CAN BE BOOKED BY AN AUTHORIZED DEALER ON THE BASIS OF REAS ONABLE ESTIMATE AFTER VERIFYING THE DOCUMENTARY EVIDENCE. THE BANK AFTER SATISFYING ITSELF IN TERMS OF THE FE MA REGULATIONS HAS ISSUED THE FCS. THE FACTS ARE NOT IN DISPUTE AT ALL. THE MATTER HAS ALR EADY BEEN ITA NO.882/D/2014 ASSTT.YEAR: 2009-10 51 DISCUSSED AT POINT NO. 7 OF OUR SUBMISSION DATED 17 .06.2015 BEFORE, YOUR HONOURS. THUS, THERE IS NO REQUIREMENT FOR DEM ONSTRATING RUPEE-WISE AND DATE-SPECIFIC CORRELATION OF EXPORT RECEIVABLES FOR BEING NOT CONSIDERED AS A SPECULATIVE, TRANSACTION. VI. IT IS AN UNDISPUTED FACT THAT ALL FCS WERE ULT IMATELY SETTLED BY DELIVERY OF CONTRACTED US DOLLARS. THE LD. DRP H AS VERIFIED ALL THE FOREIGN INWARD REMITTANCE CERTIFICATES (FIRC) F OR RECEIPT OF US DOLLARS AGAINST RESPECTIVE FC AND IT IS NOT DISP UTED THAT ALL THE FCS WERE ULTIMATELY SETTLED THROUGH DELIVERY OF CON TRACTED AMOUNT OF US DOLLARS (PARA 3.7.1 OF DRP ORDER AT PG 65 OF PB VOL.1). SINCE, ALL FCS ARE SETTLED BY ACTUAL DELIVERY OF TH E CONTRACTED AMOUNT OF US DOLLARS, IT IS NOT A SPECULATIVE TRANS ACTION UNDER SECTION 43(5). SINCE IT IS NOT A SPECULATIVE TRANS ACTION UNDER SECTION 43(5), THERE IS NO QUESTION OF APPLICABILIT Y OF PROVISO TO SECTION 43(5) OF THE ACT. RELIANCE IN THIS REGARD IS PLACED ON THE FOLLOWING: HON'BLE SUPREME COURT IN THE CASE OF DAVENPORT & CO. P. LTD. V. CIT, REPORTED IN (100 ITR 715), WHEREIN THE APEX CO URT HAS HELD AS UNDER: FOR INCOME-TAX PURPOSES SPECULATIVE TRANSACTION ME ANS WHAT THE DEFINITION OF THAT EXPRESSION IN EXPLN. 2 SAYS. WHE THER A TRANSACTION IS SPECULATIVE IN THE GENERAL SENSE OR UNDER THE CO NTRACT ACT IS NOT RELEVANT FOR THE PURPOSE OF THIS EXPLANATION. THE D EFINITION OF 'DELIVERY' IN S. 2(2) OF THE SALE OF GOODS ACT WHIC H HAS BEEN HELD TO INCLUDE BOTH ACTUAL AND CONSTRUCTIVE OR SYMBOLICAL DELIVERY HAS NO BEARING ON THE DEFINITION OF 'SPECULATIVE TRANSACTI ON' IN THE EXPLANATION. A TRANSACTION WHICH IS OTHERWISE SPECU LATIVE WOULD NOT BE A SPECULATIVE TRANSACTION WITHIN THE MEANING OF EXPLN. 2 IF ACTUAL DELIVERY OF THE COMMODITY OR THE SCRIPS HAS TAKEN PLACE; ON THE OTHER HAND, A TRANSACTION WHICH IS NOT OTHERWIS E SPECULATIVE IN NATURE MAY YET BE SPECULATIVE ACCORDING TO EXPLN. 2 IF THERE IS NO ACTUAL DELIVERY OF THE COMMODITY OR THE SCRIPS. THE EXPLANATION DOES NOT INVALIDATE SPECULATIVE TRANSACTIONS WHICH ARE OTHERWISE LEGAL BUT GIVES A SPECIAL MEANING 10 THAT EXPRESSIO N FOR PURPOSES OF INCOME-TAX ONLY. '[EMPHASIS SUPPLIED] IN THE CASE OF COMMERCIAL MOTORS LTD. V. DY. CIT [2013J 218 TAXMANN.COM 69(AII.)IT WAS HELD THAT' .... THE WORD 'PERIODICALLY' OR 'ULTIMATELY' MAKES IT CLEAR THAT THE PROVISIONS OF SECTION 43(5) ARE APPLICABLE WHERE A PART OF THE CO NTRACT OR THE ENTIRE CONTRACT HAS BEEN SETTLED OTHERWISE THAN BY ACTUAL DELIVERY OF THE GOODS'. ITA NO.882/D/2014 ASSTT.YEAR: 2009-10 52 ALSO IN THE CASE OF R. CHINNASWAMI CHETTIAR V. CI T [1974J 96 ITR 353 (MAD.) IT WAS NOTED THAT 'THE EMPHASIS IN S ECTION 43(5) OF THE ACT IS ON THE WORDS. 'PERIODICALLY OR ULTIMATEL Y SETTLED OTHERWISE THAN BY ACTUAL DELIVERY'. THE WORD 'SETTLED' IS USE D IN THIS PART OF THE SECTION WITHOUT ANY RESTRICTION AS TO WHETHER I F WAS BEFORE BREACH OR AFTER BREACH. WHETHER THE SETTLEMENT WAS BEFORE OR AFTER BREACH OF THE CONTRACT IS IMMATERIAL IF ACTUAL DELI VERY OF THE GOODS IS ABSENT. IN FACT, EVEN IN CASES WHERE THE CONTRAC T IS HIGHLY SPECULATIVE AND AMOUNTS TO A WAGERING CONTRACT, IT WAS SETTLED BY ACTUAL DELIVERY, FOR THE PURPOSE OF SECTION 43(5), IT IS NOT A SPECULATIVE TRANSACTION. THUS THE SECTION DISPENSES WITH ALL OTHER FORMALITIES EXCEPT THAT THERE MUST BE ACTUAL DELIVE RY OR TRANSFER OF THE COMMODITY WHEN THE CONTRACT IS SETTLED. [EMPHAS IS SUPPLIED] VII. IT HAS BEEN CLEARLY DEMONSTRATED BEYOND DOUBT THAT THE FCS WERE TAKEN FOR HEDGING AGAINST FOREIGN EXCHANGE FLU CTUATIONS IN THE NORMAL COURSE OF EXPORT BUSINESS AS HAS ALREADY BEE N HELD IN FAVOR OF THE ASSESSEE ON SIMILAR FACTS IN THE EARLIER YEA R I.E. AY 2008-09 BY THE HON'BLE DELHI IT AT (PG.365 OF THE PB VOL. I I). 2. IT IS HUMBLY SUBMITTED THAT THE RELIANCE PLACED BY THE LD. CIT(DR) ON THE DECISION IN THE CASE OF BADRIDASGAUR IDU (P) LTD. V. CIT 134 TAXMAN 376 (BOMBAY), CIT V. SOORAJ MULL NAG ARMULL 129 ITR 169 (CAL.), LONDON STAR DIAMOND CO. VS. DCIT 38 TAXMANN.COM 338 (MUM. TRIB) AND S.VINODKUMAR DIAMON DS PVT. LTD. VS. ADDT. CIT 35 TAXMANN.COM 337 (MUMBAI IT AT ), IS WHOLLY MISPLACED AS THESE JUDGMENTS ARE IN CONTEXT OF CANC ELLATION OF FORWARD CONTRACTS AND CONSEQUENTIAL SETTLEMENT OF C ONTRACT THROUGH PAYMENT OF DIFFERENCE BETWEEN THE VALUE OF FOREIGN EXCHANGE ON THE CONTRACTED RATE IN INR AND THE PREVAILING RATE ON T HE DATE OF SETTLEMENT. THE LD. CIT(DR) LOST SIGHT OF THE UNDIS PUTED FACTS OF THE CASE THAT NONE OF THE FCS OF THE ASSESSEE WERE CANC ELLED AND ALL FCS WERE FULLY HONORED BY DELIVERY OF CONTRACTED US DOLLARS. THIS FACT IS VERIFIED BY THE LD. DRP IN THEIR ORDER AT P ARA 3.7.1 OF DRP ORDER AT PG 65 OF PB VOL.1. 3. THE REFERENCE BY THE LD. CIT(DR) TO THE EXPLANA TION TO SECTION 37(1) OF THE ACT IS MISPLACED AND IRRELEVANT. IT IS AN UNDISPUTED FACT THAT THE FCS WERE LEGALLY ENTERED INTO BY THE ASSES SEE WITH AUTHORIZED DEALER BANK IN TERMS OF THE RBI REGULATI ONS. IT IS ALSO UNDISPUTED THAT NO ILLEGALITY IS EVER FOUND OUT OR ALLEGED BY EITHER THE BANK OR THE RBI AGAINST THE ASSESSEE IN RESPECT OF THE FCS. ALSO, THE RBI REGULATIONS PERMITS TAKING FCS BASED ON REASONABLE ITA NO.882/D/2014 ASSTT.YEAR: 2009-10 53 ESTIMATE EXPORT RECEIPTS AS DISCUSSED ABOVE. IT IS UNDISPUTED THAT THE VALUE OF FCS IS MORE THAN THE EXPORT SALES AND EXPORT RECEIVABLES. THUS, IT CANNOT BE SAID THAT ENTERING INTO FCS IS IN VIOLATION OF THE RBI GUIDELINES AND THE ALLEGATION THAT IT IS HIT BY EXPLANATION TO SECTION 37(1) IS MISPLACED. 4. RELIANCE ON THE CBDT INSTRUCTION NO. 23/2010 DAT ED 23-3-2010 IS ALSO MISPLACED. THE LD. CIT(DR) FAIRLY OBSERVED THAT MTM LOSS WAS HELD TO BE ALLOWABLE BY THE SPECIAL BENCH OF HO N'BLE MUMBAI ITA T IN THE CASE OF DCIT VS. BANK OF BAHRAIN AND K UWAIT ([2010] 41 SOT 290) DATED 13-08-2010. THE OBSERVATIONS OF T HE LD. DR THAT THE SAID DECISION IS CONTRARY TO THE CBDT INSTRUCTI ON IS WHOLLY MISPLACED AS IT IS A SETTLED PRINCIPLE THAT CBDT IN STRUCTIONS ARE NOT BINDING ON THE APPELLATE AUTHORITIES. ALSO, THE SAI D DECISION OF THE MUMBAI ITAT IS LATER IN TIME AS AGAINST THE ISSUANC E OF THE CBDT INSTRUCTION. IT IS ALSO WORTH MENTIONING THAT THE SAID INSTRUCTI ON WAS SPECIFICALLY CONSIDERED BY THE HON'BLE DELHI ITAT IN THE ASSESSE E'S OWN CASE FOR AY 2008-09 AND AFTER CONSIDERING IT THE HON'BLE DELHI IT AT DECIDED THE MATTER IN FAVOR OF THE ASSESSEE AND THE MATTER STANDS COVERED IN FAVOR OF THE ASSESSEE IN THE YEAR UNDER CONSIDERATION. 5. THE LD. DR ALSO REFERRED TO A REPORT OF A COMMIT TEE FORMED BY RBI AND SEBI FOR ANALYZING THE TRADE IN CURRENCY FO RWARDS AND FUTURE MARKET AND LAYING DOWN GUIDELINES. IT IS MEN TIONED THAT THE SAID COMMITTEE SUBMITTED ITS REPORT ON 29-05-2008. HOWEVER, HOW THAT WOULD IMPACT THE INSTANT TRANSACTION IN FCS BY THE ASSESSEE IS NOT STATED. THE INSTANT FC TRANSACTION IS ENTERED I NTO IN TERMS OF RBI REGULATIONS (SUPRA). THUS, THIS OBSERVATIONS OF THE LD. CIT(DR) TOWARDS COMMITTEE REPORT LOSING SIGHT OF TH E APPLICABLE RBI REGULATIONS IS WHOLLY IRRELEVANT. 6. IN VIEW OF THE ABOVE, IT IS SUBMITTED THAT THE M TM LOSS FOR AY 2009-10 IS ALLOWABLE TO THE ASSESSEE BASED ON THE D ECISION OF THE HON'BLE ITAT IN ASSESSEE'S OWN CASE FOR AY 2008-09 AS THERE IS NO CHANGE IN THE FACTS AND CIRCUMSTANCES OF THE CASE. FURTHER, TO THE EXTENT OF ACTUAL LOSS IN THE SUBSEQUENT YEAR HAS BE EN ALLOWED ON CASH BASIS BY THE LD. AO/DRP IN THE ASSESSMENT YEAR 2010-11, WHICH HAS BEEN ACCEPTED BY THE DEPARTMENT. THUS, TH E WHOLE DISPUTE IS REGARDING TIMING OF ALLOWANCE. DATED: 26.06.2015 ITA NO.882/D/2014 ASSTT.YEAR: 2009-10 54 41. AT THE VERY OUTSET, WE OBSERVE THAT UNDISPUTEDL Y, THE ASSESSEE COMPANY IS EXCLUSIVELY EXPORTING ENGINEERING DESIGN SERVICES T O ITS NON-RESIDENT AE FOR WHICH IT RECEIVES CONSIDERATION IN FOREIGN EXCHANGE BY WAY OF DIRECT REMITTANCE TO ITS BANK IN INDIA. DURING THE RELEVANT PREVIOUS YEAR, THE ASSESSEE ENTERED INTO 9 FOREIGN EXCHANGE FORWARD CONTRACTS ON 6.8.2008 WI TH AU AUTHORISED DEALER OF THE BANK IN ORDER TO PROTECT THE VALUE OF ANTICIPAT ED SALE PROCEEDS RECEIVABLES FROM ITS AE IN THE FORM OF FOREIGN EXCHANGE I.E. US D. THE FIRST OF 9 CONTRACTS WOULD MATURE ON 3.4.2009, THEREFORE CONTRACT WOULD START MATURING EVERY SUCCCEDING MONTH AND THE LAST CONTRACT WOULD MATURE ON 4.12.2009. UNDISPUTEDLY, THE TOTAL VALUE OF FORWARD CONTRACT W AS RS. 19.50 CRORE AND IN ACCORDANCE WITH ITS METHOD OF ACCOUNTING, THE ASSES SEE BOOKED LOSS OF RS.21.8 CRORE ON THE UNEXPIRED CONTRACTS AS ON 31.3.09 BEIN G THE DIFFERENCE IN THE INR VALUE OF USD AS ON 31.3.09 WITH THE VALUE OF WHICH CONTRACTS WERE AGREED TO BE SETTLED. 42. FROM THE ASSESSMENT ORDER IT IS APPARENT THAT T HE AO HAD DISALLOWED THE SAID CLAIM OF THE ASSESSEE ON THE GROUND THAT THE L OSS BOOKED AND CLAIMED BY THE ASSESSEE IS A NOTIONAL LOSS WHICH IS NOT ALLOWABLE. LD. COUNSEL HAS DRAWN OUR ATTENTION TOWARDS SCHEDULE XIII OF THE SIGNIFICANT ACCOUNTING POLICIES OF THE ASSESSEE AND SUBMITTED THAT WHERE THE COMPANY ENTER S INTO FORWARD FOREIGN EXCHANGE CONTRACT WITH THE BANKERS TO MITIGATE THE RISK ASSOCIATED WITH THE FOREIGN EXCHANGE FLUCTUATION WHICH IS FURTHER ASSOC IATED WITH THE ACCOUNTS RECEIVABLES AND AMOUNT FORECASTED SALES TRANSACTION S. IT WAS ALSO POINTED OUT ITA NO.882/D/2014 ASSTT.YEAR: 2009-10 55 THAT THE FAIR VALUE OF FORWARD FOREIGN EXCHANGE CON TRACT WHICH HAVE BEEN TAKEN TO COVER FOREIGN EXCHANGE RISK IN RESPECT OF PROBAB LE FORECASTED TRANSACTION HAVE A DIFFERENCE BETWEEN THE CONTRACTED RATE AND F ORWARD RATE AT THE BALANCE SHEET DATE ARE RECOGNISED IN THE P&L ACCOUNT. HE H AS DRAWN OUR ATTENTION TOWARDS ASSESSEES PAPER BOOK VOLUME II PAGES 470 T O 476 TO SUPPORT THIS FACT. LD. COUNSEL ALSO POINTED OUT THAT IN ASSESSEES OWN CASE FOR AY 2008-09 ITA DELHI I BENCH ORDER DATED 8.3.2013 AS IN ITA NO. 5895/D/2012 AND ALLOWED SIMILAR CLAIM OF THE ASSESSEE IN REGARD TO FOREIGN EXCHANGE FORWARD CONTRACT, THEREFORE, HE SUBMITTED THAT THE ISSUE IS SQUARELY COVERED IN FAVOUR OF THE ASSESSEE BY THE ORDER OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR THE RELEVANT ASSESSMENT PERIOD. 43. LD. CIT DR ELABORATED HIS WRITTEN SYNOPSIS/SU BMISSIONS AS ABOVE AND SUBMITTED THAT AS PER CBDT INSTRUCTION NO. 03/2010 DATED 23.3.10 THE AO RECORDING LOSSES ON ACCOUNT OF CURRENCY DERIVATIVES AND AS PER THESE SAID INSTRUCTIONS IN RESPECT OF MTM LOSSES DEBITED TO P& L ACCOUNT, AO INSTRUCTED TO DISALLOW THE SAME WHILE COMPUTING THE TAXABLE INCOM E. LD. CIT DR FURTHER SUBMITTED THAT AS PER SAID INSTRUCTIONS IN RESPECT OF ACTUAL CRYSTALLIZED LOSS, THE AO IS INSTRUCTED TO VERIFY WHETHER THE LOSSES ARE O N ACCOUNT OF SPECULATIVE TRANSACTION AS SPECIFIED U/S 43(5) OF THE ACT AND T O DECIDE IN ACCORDANCE WITH THEM. THEREFORE, ABOVE INSTRUCTIONS RENDER CLAIM O F DEDUCTION FOR MARK TO MARKET LOSSES PROVIDED FOR IN THE BOOKS IN RESPECT OF OPEN CONTRACTS UNTENABLE. LD. CIT DR ALSO CONTENDED THAT THE CLAIM OF NATIONA L LOSS IS NOT ALLOWABLE AND IT ITA NO.882/D/2014 ASSTT.YEAR: 2009-10 56 IS ALSO RELEVANT TO EXAMINE THAT WHETHER AT THE TIM E OF BOOKING LOSS, THE CONTRACT WAS COMPLETED AND PERFORMED BY WAY OF ACTUAL PHYSIC AL DELIVERY OF FOREIGN EXCHANGE, OTHERWISE THE SAME HAS TO BE TREATED AS S PECULATIVE TRANSACTION AND NOTIONAL LOSS THEREON CANNOT BE CLAIMED AS ALLOWABL E. 44. LD. CIT DR FAIRLY SUBMITTED THAT IN THE DCIT VS BANK OF BAHRAIN AND KUWAIT (SUPRA), SPECIAL BENCH OF ITAT WHILE HOLDING THE MTM LOSSES IN RESPECT OF FOREIGN EXCHANGE CONTRACTS DEBITED TO P& L ACCOUNT HAS HELD AS ALLOWABLE WITH CERTAIN OBSERVATION BUT THIS CREATES A SITUATION WHERE ON THE OTHER HAND SPECIAL BENCH DECISION ALLOWS MTM LOSS WHILE O N THE OTHER HAND CBDT INSTRUCTIONS MANDATES DISALLOWANCE. IT WAS ALSO CO NTENDED ON BEHALF OF THE REVENUE THAT THE INSTRUCTIONS FROM CBDT (SUPRA) WAS EITHER NOT POINTED OUT TO THE SPECIAL BENCH OR WAS SUBSEQUENT TO THIS ORDER A ND THE QUESTION IN THE SAID CASE WAS WHETHER MTM LOSS WAS A REAL LOSS OR A NOTI ONAL LOSS AND THE ISSUE OF SPECULATION U/S 43(5) WAS NOT AN ISSUE BEFORE THE S PECIAL BENCH, THEREFORE, THE SAME WAS NOT CONSIDERED. LD. CIT DR FURTHER CONTEN DED THAT IN THIS BACKGROUND OF AFORESAID FACTS AND ISSUES BEFORE THE SPECIAL BENCH, THE BENCH OF RATIO OF THE SPECIAL BENCH ORDER FOR CLAIMING ALLOW ABILITY OF MTM LOSSES DESPITE THE INSTRUCTIONS TO THE CONTRARY BY THE CBD T IS NOT AVAILABLE DUE TO THE FACT THAT THE ASSESSEE FAILED TO DISCHARGE ITS ONUS ON GIVING REAL TIME DATA REGARDING ITS CLAIM, SPECIALLY TO DEMONSTRATE THAT THE CONTRACTS WERE FINALISED AND PERFORMED BY WAY OF ACTUAL PHYSICAL DELIVERY OF FOREIGN EXCHANGE RESULTING INTO BOOKED/CLAIMED LOSSES THEREFROM. LD. CIT DR F INALLY PRAYED THAT THE ISSUE ITA NO.882/D/2014 ASSTT.YEAR: 2009-10 57 IS NOT COVERED IN FAVOUR OF THE ASSESSEE AND THIS I SSUE CALLS FOR DETAILED ADJUDICATION IN THE LIGHT OF CBDT CIRCULAR NO. 03/2 010 (SUPRA) AND OTHER RELEVANT PROVISIONS OF THE ACT. 45. LD. COUNSEL OF THE ASSESSEE ALSO PLACED WRITTEN REJOINDER TO THE WRITTEN SYNOPSIS OF THE LD. CIT DR ON 29.6.15 AS REPRODUCED HEREINABOVE. LD. COUNSEL SUBMITTED THAT THE CONTENTION OF THE LD. CIT DR EMP HASISING THAT THE ASSESSEE FAILS TO SATISFY ANY OF THE CLAUSES OF THE PROVISO TO SECTION 43(5) OF THE ACT, THEREFORE, MARK TO MARKET LOSSES ON FORWARD CONTRAC TS ARE NOT ALLOWABLE BEING SPECULATIVE LOSSES AND THIS CONTENTION IS MISCONCEI VED. LD. COUNSEL FURTHER POINTED OUT THAT AS PER RELEVANT PROVISIONS OF SECT ION 43(5) WHICH DEFINES THE TERM SPECULATIVE TRANSACTION, MEANS TRANSACTION IN WHICH A CONTRACT FOR THE PURCHASE OR SALE OF ANY COMMODITY INCLUDING STOCKS AND SHARES PERIODICALLY OR ULTIMATELY SETTLED OTHERWISE THAN BY ACTUAL DELIVER Y OR TRANSFER OF THE COMMODITY OR SCRIPS. LD. COUNSEL SUMMARISING HIS MAIN ARGUME NT ALSO CONTENDED THAT THE ASSESSEE IS AN EXPORTER OF SERVICES FOR WHICH IT RE CEIVES CONSIDERATION IN USD THROUGH DIRECT REMITTANCE INTO ITS BANK ACCOUNTS. IN INDIA USD IS NOT A MONEY BUT COMMODITY WHICH CAN BE SOLD OR BOUGHT IN INDIAN RUPEE AND THE RATE OF USD FLUCTUATIONS AGAINST INR, THEREFORE, IN ORDER TO PR OTECT ITS BUSINESS LOSSES AGAINST FLUCTUATIONS IN USD VIS-A-VIS INR, THE ASSESSEE HA S AS ITS FOREIGN CURRENCY RECEIVABLE AND FORECASTED SALES TRANSACTION BY ENTE RING INTO FORWARD CONTRACTS WITH ITS BANKS. LD. COUNSEL POINTED OUT THAT THE A SSESSEE ACCOUNTS FOR FORWARD CONTRACT BASED UPON A CONSISTENTLY FOLLOWED ACCOUNT ING POLICY AS STATED IN ITS ITA NO.882/D/2014 ASSTT.YEAR: 2009-10 58 AUDITED FINANCIAL STATEMENT AND FORWARD CONTRACTS W ERE UNDERTAKEN FROM THE AUTHORISED DEALER BANK IN TERMS OF FEMA REGULATIONS NOTIFIED BY THE RBI AND AS PER RBI REGULATIONS WHERE THE AMOUNT IS NOT ASCERTA INABLE, THE FORWARD CONTRACT MAY BE TAKEN ON THE BASIS OF REASONABLE ESTIMATES E XPECTED EXPORT RECEIPTS. 46. LD. COUNSEL HAS FURTHER DRAWN OUR ATTENTION TOW ARDS ORDER OF LD. DRP AND SUBMITTED THAT IT IS UNDISPUTED FACT THAT ALL FORWA RD CONTRACTS WERE ULTIMATELY SETTLED BY DELIVERY OF CONTRACTED USD AND THIS FACT WAS VERIFIED BY THE DRP, THEREFORE, THE SAME CANNOT BE TERMS AS SPECULATIVE TRANSACTION U/S 43(5) OF THE ACT AND THEREFORE, THERE IS NO QUESTION OF APPLICAB ILITY OF PROVISO TO SECTION 43(5). LD. COUNSEL FURTHER POINTED OUT THAT CASE L AWS RELIED BY LD. CIT DR ARE IN THE CONTEXT OF CANCELLATION OF FORWARD CONTRACTS AND SETTLEMENT OF CONTRACT THROUGH PAYMENT OF DIFFERENCE BETWEEN THE VALUE OF FOREIGN EXCHANGE IN CONTRACT RATE IN INR AND PREVAILING RATE ON THE DAT E OF SETTLEMENT. LD. COUNSEL FURTHER CONTENDED THAT RELIANCE PLACED BY THE LD. C IT DR ON THESE JUDGEMENTS IS WHOLLY MISPLACED PERHAPS HE LOST SIGHT OF THE UNDIS PUTED FACT THAT NONE OF THE FORWARD CONTRACTS OF THE ASSESSEE WERE CANCELLED AN D ALL FORWARD CONTRACTS WERE FULLY HONOURED BY DELIVERY OF CONTRACTED USD. THIS FACT WAS ALSO VERIFIED BY THE LD. DRP IN THEIR ORDER AT PAGE 3.7.1 AT PAGE 65 OF PAPER BOOK VOLUME I OF THE ASSESSEE. LD. COUNSEL ALSO CONTENDED THAT CBDT INS TRUCTION DATED 23.3.2010 (SUPRA) ARE NOT BINDING ON THE APPELLATE AUTHORITIE S AND THE DECISION OF SPECIAL BENCH MUMBAI IN THE CASE OF DCIT VS BANK OF BAHRAIN AND KUWAIT (SUPRA) DATED 13.8.2010 WAS PASSED IN LATER TIME AGAINST TH E ISSUANCE OF CBDT ITA NO.882/D/2014 ASSTT.YEAR: 2009-10 59 INSTRUCTION. LASTLY, LD. COUNSEL VEHEMENTLY CONTEN DED THAT THE REVENUE IS HARPING ON THE BASELESS AND INCORRECT PROPOSITIONS WHICH HAVE BEEN SETTLED BY THE ITAT DELHI IN ASSESSEES OWN CASE FOR AY 2008-0 9 ON THE SIMILAR SET OF FACTS AND CIRCUMSTANCES AND HENCE THE ISSUE IS SQUA RELY COVERED IN FAVOUR OF THE ASSESSEE BY THIS ORDER OF THE TRIBUNAL. 47. AT THE VERY OUTSET, WE RESPECTFULLY TAKE COGNIZ ANCE OF DECISION OF ITAT I BENCH IN ASSESSEES OWN CASE FOR AY 2008-09 (SU PRA) WHEREIN THE ISSUE OF MARK TO MARKET LOSSES HAS BEEN DECIDED IN FAVOUR OF THE ASSESSEE WITH FOLLOWING OBSERVATIONS:- 8. COMING TO THE CORPORATE ADDITIONS I.E. DISALLO WANCE OF LOOS, IT CLEARLY EMERGES FROM THE RECORD THAT THE A SSESSEE IN RESPECT OF FOREIGN EXCHANGE REALIZATION FOLLOWS MER CANTILE SYSTEM OF ACCOUNTING AND NOT CASH SYSTEM OF ACCOUNTING. TH E LOSS HAS BEEN INCURRED FOR HEDGING OF FOREIGN CURRENCY FLUCT UATION INVOLVED IN SALES INVOICES ON THE BASIS OF FORWARD CONTRACTS, WHICH IS A BUSINESS DECISION TO SAFEGUARD ITS INTER EST. THE LOSS HAS BEEN INCURRED ON THE BASIS OF SCIENTIFIC METHOD IN THE ORDINARY COURSE OF BUSINESS. THE LOSS BEING BASED O N A SCIENTIFIC METHOD IN THE ORDINARY COURSE OF BUSINESS. THE LOS S BEING BASED ON A SCIENTIFIC METHOD, ON THE BASIS OF CONTRACTUAL LIABILITY WITH BANKS AND ON MERCANTILE SYSTEM HAS TO BE ALLOWED TO THE ASSESSEE FOLLOWING HON'BLE SUPREME COURT JUDGMENT IN THE CAS E OF WOODWARD GOVERNOR INDIA P. LTD. 312 ITR 254. OUR VI EW IS FURTHER FORTIFIED BY THE FACT THAT DRP IN ITS OWN O RDER IN SUBSEQUENT YEAR HAS ITSELF HELD THAT THE ISSUE ABOU T THE LOSS ON MERCANTILE SYSTEM IS PENDING DISPUTE IN A.Y. 2008-0 9. THEREFORE, THE ALLOWABILITY OF THE LOSS ON ACTUAL PAYMENT IN A . Y. 2009-10 HAS BEEN MADE SUBJECT TO THE ALLOWABILITY OF THE LO SS FOR A.Y. 2008- 09. THIS STAND OF THE DRP ITSELF NEGATES THE OBSERVATIONS OF ASSESSING OFFICER THAT IT IS A NOTIONAL LOSS AND ES TABLISHES THAT IT IS A BUSINESS LOSS INCURRED BY THE ASSESSEE ON MERCAN TILE SYSTEM WHICH METHOD IS CONSISTENTLY FOLLOWED BY THE ASSESS EE. UNDER THESE CIRCUMSTANCES, WE ARE INCLINED TO ALLOW THE F OREIGN ITA NO.882/D/2014 ASSTT.YEAR: 2009-10 60 EXCHANGE FLUCTUATION LOSS TO ASSESSEE IN THIS YEAR. THIS GROUND OF THE ASSESSEE IS ALLOWED. 48. IN AY 2008-09, THE CLAIM OF LOSS OF RS. 20,55,7 24 WAS CLAIMED BY THE ASSESSEE WITH FOLLOWING SUBMISSION AND CONTENTIONS: - '5.1 DURING THE PREVIOUS YEAR 2007-08, THE APPELLAN T ENTERED INTO FOREIGN EXCHANGE FORWARD CONTRACTS WI TH BANKS IN ORDER TO HEDGE FOREIGN CURRENCY FLUCTUATION AND INC URRED A (NET) FOREIGN EXCHANGE LOSS OF RS. 20,55,724/- AS A RESUL T OF MARKING TO MARKET THE FORWARD CONTRACTS THAT WERE OUTSTANDING ON MARCH 31, 2008. 5.2. LD. COUNSEL FOR THE ASSESSEE SHRI SANDEEP CHAU FLA CONTENDS THAT: (I) THERE IS NO DISPUTE ABOUT THE INCURRENCE OF T HIS LOSS AS IN THE SUBSEQUENT YEAR THE AO AFTER DUE VERIFICATIO N HAS ALLOWED THESE LOSSES; (II) SIMILARLY, THERE IS NO DISPUTE ON THE METHOD OF ACCOUNTING FOLLOWED BY THE ASSESSEE IS MERCANTILE A S THE AO HAS RECORDED THIS FACT IN THE ASSESSMENT ORDER. (III) IT IS NOT DISPUTED THAT THESE LOSSES HAVE BE EN RECOGNISED BY THE ASSESSEE IN ACCORDANCE WITH APPLI CABLE ACCOUNTING STANDARDS/POLICIES IN THIS REGARD. (IV) THE AO HAS RAISED ONLY DISPUTE THAT THIS LOSS IS NOT ALLOWABLE AS DEDUCTION IN THE YEAR OF INCURRENCE CO MPUTED UNDER MERCANTILE SYSTEM BY FOLLOWING THE ACCOUNTING STAND ARDS IN THIS RESPECT OR AT THE TIME OF REALIZATION OF EXPORT PRO CEEDS ON MATURITY OF FORWARD CONTRACTS. 49. UNDISPUTEDLY, THE FACTS AND CIRCUMSTANCES OF TH E PRESENT CASE ARE MORE OR LESS SIMILAR TO THE PRESENT AY 2009-10 AND THE ASSE SSEE BOOKED MART TO MARKET LOSS OF RS.21.80 CRORE AS ON 31.3.09 BEING DIFFEREN CE IN THE INR VALUE OF THE USD AS ON 31.3.09 AND THE VALUE OF WHICH THE HEDGIN G CONTRACT WAS AGREED TO BE SETTLED. WE FURTHER NOTE THAT THE ASSESSEE IS F OLLOWING MERCANTILE SYSTEM OF ACCOUNT FOR RECOGNITION OF THIS LOSS IN ITS FINANCI AL STATEMENTS. WHEN WE SEE THE ITA NO.882/D/2014 ASSTT.YEAR: 2009-10 61 ORDER OF THE DRP PARA 3.7.1, THEN IT IS AMPLY CLEAR THAT THE LD. DRP HAS ALLEGED THAT THE FORWARD CONTRACTS ARE NOT FULLY SUPPORTED BY THE UNDERLYING SUPPORT INVOICE BOTH IN TERMS OF THE AMOUNT AS WELL AS THE TENURE. DRP HAS DRAWN THE TABLE IN THIS APPEAL AND THEREAFTER NOTED THAT OUT OF 9 FORWARD CONTRACTS, THE ASSESSEE HAS ONLY USED 4 FORWARD CONTRACT FULLY AND THE ASSESSEE HAS NOT USED THESE FORWARD CONTRACTS IMMEDIATELY BUT STARTED USI NG THEM AGAINST THE SALE INVOICE AFTER THE LAPSE OF TIME OF FEW MONTHS. LD. DRP FURTHER NOTICED THAT CONTRACT NO. 1461 WAS USED FOR THE FIRST TIME ON 31 .10.08 FOR A NOMINAL SUM OF USD 632 AND THEREAFTER IN NOVEMBER FOR USD 144247 A ND BALANCE IN DECEMBER 2008 FOR USD 2755121. THUS, IT SHOWS THAT THERE WAS NO UNDERLYING ASSET FOR THIS CONTRACT FROM 6.8.2008 TILL 31.10.08 . THE ENTIRE FORWARD CONTRACT COULD BE UTILISED ONLY BY 31.12.08. FOR THE SAKE O F CLARITY IN OUR CONCLUSION PARA 3.7.1 OF THE LD. DRP ORDER IS BEING REPRODUCED BELOW:- 3.7.1 WITHOUT PREJUDICE TO THE ABOVE, IN CASE THE H IGHER APPELLANT AUTHORITIES' GRANTS RELIEF TO THE ASSESSE E ON ACCOUNT OF ITS CLAIM DISCUSSED ABOVE, THE RELEVANT ISSUE FOR C ONSIDERATION WOULD BE TO WHAT EXTENT THE CLAIM MADE BY THE ASSES SEE IS ADMISSIBLE? THIS FOR THE REASON THAT IN THIS CASE, THE FCS ARE NOT FULLY SUPPORTED BY THE UNDERLYING EXPORT INVOICES B OTH IN TERMS OF THE AMOUNT AS WELL AS THE TENOR. THUS, AN ATTEMPT WAS MADE BY THE PANEL TO ASCERTAIN AS TO WHAT EXTENT AND HOW THE ASSESSEE HAS USED THESE FCS? THE SAID POSITION IS GIVEN IN THE TABLE BELOW: ITA NO.882/D/2014 ASSTT.YEAR: 2009-10 62 DETAIL OF OUTSTANDING FORWARD COVERS AS ON 31 ST MARCH, 2009, FOR WHICH INVOICING DONE TILL MARCH, 2009 CONTRACT NO. CONTRACT DATE CONTRACT VALUE (US $) INVOICE DATE INVOICE AMT. USD INVOICE AMT.- INR UNDERLYING ASSETS AS AT 31.03.09 FIRC NO. FIRC DATE 146164 6-AUG-08 2,900,000 OCT-08 NOV-08 DEC-08 632 144,247 2,755,121 31,640 7,208,024 131,942,759 YES YES YES 156473 2-APR-09 146166 6-AUG-08 2,900,000 OCT-08 NOV-08 DEC-08 JAN-09 MAR-09 (5,001) 33, 512,400 2,392,577 (9) (250,495) 1,627 24,538,846 116,877,386 (452) YES YES YES YES YES 157124 4-MAY-09 146167 6-AUG-08 3,000,000 JAN-09 FEB-09 MAR-09 830,550 2,169,380 70 40,572,363 108,230,382 3,567 YES YES YES 157869 4-JUN-09 146169 6-AUG-08 3,100,000 3,100,000 JAN-09 FEB-09 MAR-09 637 1,041,624 2,057,739 YES YES YES 158594 3-JUL-09 146171 6-AUG-08 828,047 MAR-09 828,047 42,296,660 Y ES 159290 4-AUG-09 SUB-TOTAL 12,728,047 12,728,047 628,559,352 GRAND TOTAL 146171 6-AUG-08 2,271,953 BEYOND 31.3.09 NO 159290 4-AUG-09 146173 6-AUG-08 3,200,000 BEYOND 31.3.09 NO 159930 4-SEP-09 146174 6-AUG-08 3,300,000 BEYOND 31.3.09 NO 160558 1-OCT-09 146175 7-AUG-08 3,000,000 BEYOND 31.3.09 NO 161236 4-NOV-09 146176 7-AUG-08 3,100,000 BEYOND 31.3.09 NO 162068 4-DEC-09 SUB-TOTAL 14,871,953 GRAND TOTAL 27,600,000 IT CAN BE SEEN THAT OUT OF THE 9 FCS, THE ASSESSEE HAS USED ONLY 4 FCS FULLY. THE ASSESSEE HAS NOT USED THESE FCS IMMEDIATELY BUT STARTED USING THEM AGAINST THE SALE S INVOICES AFTER A LAPSE OF TIME OF FEW MONTHS. TO ELABORATE IT FURTHER, IT IS NOTICED THAT THE CONTRACT NO. 146164 WAS USED FOR T HE FIRST TIME IN 31 ST OCTOBER 2008 FOR NOMINAL SUM OF US$ 27,55,121. TH US, IT IS EVIDENT THAT THERE WAS NO UNDERLYING ASSET FOR THIS CONTRACT FROM 6.8.2008 TILL 31 ST OCTOBER 2008. THE ENTIRE FC COULD BE UTILIZED ONLY BY 31 ST DECEMBER 2008. LIKEWISE THE CONTRACT NO. 146167 AND 146169 TAKEN ON 6.8.2008 HAVE BEEN STARTED TO BE USED BY THE ASSESS EE FROM ITA NO.882/D/2014 ASSTT.YEAR: 2009-10 63 JANUARY 2009 ONWARDS. THUS, THERE WAS NO UNDERLYIN G ASSET FOR THESE CONTRACTS FROM 6.8.2008 TILL 31.12.2008. OUT OF THE FIRTH FC BEARING NO. 146171 ONLY A SMAL L PART OF US$8.28 (TOTAL US$31 LAKH) HAS BEEN USED BY 31 ST MARCH 2009 WHILE THE REMAINING 4FCS WERE NOT UTILIZED AT ALL T ILL 31.03.2009. 50. THERE IS NO OBSERVATION OF THE LD. DRP IN PARA 3.7.1 WHICH SUPPORT THE CONTENTION OF THE ASSESSEE THAT ALL FORWARD CONTRAC TS WERE DULY HONOURED BY DELIVERY OF CONTRACTS UNDER USD. IN THIS SITUATION , IN PRINCIPLE, WE AGREE THAT IN VIEW OF THE RATIO LAID DOWN BY HONBLE SUPREME COUR T IN THE CASE OF WOODWARD GOVERNER (312 ITR 254), WHILE THE ASSESSEE IS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING, THE LOSS SUFFERED BY THE ASSE SSEE BY FLUCTUATION IN THE FOREIGN EXCHANGE AS ON THE DATE OF BALANCE SHEET IS AN ITEM OF EXPENDITURE U/S 37(1) OF THE ACT. UNDER THIS PROPOSITION AND DICTA OF HONBLE APEX COURT, AND FACTS EMERGING FROM THE DRP ORDER, WE FIND IT APPRO PRIATE THAT THE ISSUE REQUIRES DETAILED EXAMINATION AND VERIFICATION AND CALCULATI ON ON SCIENTIFIC BASIS AT THE END OF THE AO/DRP IN THE LIGHT OF RELEVANT PROPOSIT ION AND PROVISIONS OF THE ACT. THEREFORE, RELYING ON THE SAID PROPOSITIONS AN D FOLLOWING THE JUDGEMENT OF HONBLE APEX COURT IN THE CASE OF WOODWARD GOVERNOR (312 ITR 254), WE RESTORE THIS ISSUE TO THE FILE OF AO/DRP FOR A FRES H ADJUDICATION AFTER FACTUAL ANALYSIS AND EXAMINATION OF THE IMPUGNED TRANSACTIO NS AFTER AFFORDING DUE OPPORTUNITY OF HEARING FOR THE ASSESSEE AND WITHOUT BEING PREJUDICED BY THE EARLIER ORDERS. ITA NO.882/D/2014 ASSTT.YEAR: 2009-10 64 51. ACCORDINGLY, GROUND NO. 5 TO 5.4 OF THE ASSESSE E ARE ALLOWED FOR STATISTICAL PURPOSES IN THE MANNER AS INDICATED ABOVE. GROUND NO. 6 BEING CONSEQUENTIAL AND GROUND NO. 7 BEING PREMATURE ARE DISMISSED. 52. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PA RTLY ALLOWED ON TRANSFER PRICING ISSUE AND PARTLY ALLOWED FOR STATISTICAL PU RPOSES ON THE CORPORATE GROUND OF MARK TO MARKET LOSSES. ORDER PRONOUNCED IN THE OPEN COURT ON 14.10.2015. SD/- SD/- ( S.V. MEHROTRA ) ( CHANDRAMOHAN GARG) ACCOUNTANT MEMBER JUDICIAL MEMBER DT. 14TH OCTOBER 2015 GS COPY FORWARDED TO:- 1. APPELLANT 2. RESPONDENT 3. CIT(A) 4. CIT 5. DR BY ORDER ASSTT. REGISTRAR