TMI Blog2013 (12) TMI 241X X X X Extracts X X X X X X X X Extracts X X X X ..... foreign agents which were ranging from three percent to 10 percent - Held that:- The arm's length rate of commission @ 10% has been determined with regard to several agency arrangements of appellant with its non-associate enterprises foreign agents - Internal comparable uncontrolled price - Rate of 10 percent is quite reasonable when it is analysed with a case where there is less risk and commission rates ranges between three percent and 10 percent – The CIT(A) has given the benefit of arm's length range of +/- five percent in terms of the proviso to section 92C - The statute does not provide any kind of standard deduction - The benefit of +/- five percent given by the learned Commissioner (Appeals) is set aside – Partly allowed in favour of Revenue. Disallowance of interest related to capital work-in progress under section 36(1) (iii) – Held that:- Following assessee's own case for the assessment year 2004-05 - The proviso of section 36(1) (iii) as amended by the Finance Act, 2003, with effect from April 1, 2004 - Proportionate interest has to be disallowed in view of the amended provisions – The issue restored to the files of AO. Levy of interest u/s 234B - Shortfall of pay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ORDER The cross appeals for the assessment year 2003-04, are directed against 1 the impugned order dated March 11, 2010, whereas the Revenue's appeal for the assessment year 2005-06, is directed against the impugned order dated March 17, 2011, and both the orders are passed by the learned Commissioner (Appeals)-XV, Mumbai, for the quantum of assessment passed under section 143(3) of the Income-tax Act, 1961 (for short "the Act"). Since the issues involved are common and inter-connected in all these appeals, therefore, these were heard together and, as a matter of convenience, these appeals are being disposed of by way of this consolidated order. 2. Learned counsel for the assessee submitted before us that in the assess2 ment year 2005-06, the learned Commissioner (Appeals) has passed a very detailed order after discussing and analysing the issue relating to transfer pricing adjustment, for coming to his conclusion regarding transfer pricing adjustment in favour of the assessee. Therefore, he pleaded that appeal for the assessment year 2005-06 be taken up first. The learned Departmental representative did not object to this contention of learned counsel for the assessee. 3. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n agents. As regards U. S. and U. K. markets are concerned, the assessee has set-up wholly owned subsidiary namely GPIL in U. K. (Garware Polyester International Ltd.) GPF, U. S. A., (Global Pet Films IMC), to undertake the marketing, promotion, business development and distribution of the assessee's products. These associate enterprises have been appointed as the assessee's sole selling agent, not only to perform the sales but also to provide other services such as market development, sales promotion, new product development, etc., in their respective territories. For the assessment year 200506, the assessee has undertaken following international transactions with its associate enterprises. S. No. Name of transaction Amount (Rs.) Method 1. Sale of plain film to GPF 13,85,98,000 CUP 2. Sale of sun control film to GPIL 12,56,91,000 CUP 3. Sale of sun control film to GPF 22,71,64,000 CUP 4. Payment of commission to GPL 1,01,87,553 CUP 5. The assessee, in its report in Form No. 3CEB, has benchmarked its transactions by applyi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transfer pricing adjustment of Rs. 61,12,532 after holding that commission of 7.5 percent is excessive. Thus, the aggregate transfer pricing adjustment of Rs. 4,00,06,934, was made in respect of product sales as well as for the export commission. 7. The assessee, being aggrieved by the stand so taken by the Transfer Pricing Officer, carried the matter in the first appeal, wherein, before the learned Commissioner (Appeals), the assessee made a very detail submission after analysing various factors specifically with regard to geographical and market difference and other facts of the case in the following manner : "Geographical and market differences : Appellant submitted that approach of the TPO of comparing the export prices charged to associate enterprises (who operates in the U. S. and European geographies) with the prices charged to non-associate enterprises (who operate in the countries falling within Asian, African, Middle-east, Far East, Russia and other CIS countries) is erroneous and devoid of business realities as it does not take into consideration geographical, economic and market differences. The associate enterprises are operating in American markets and Euro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for application of comparable uncontrolled price, besides similarity of products one has to take into account the variations arising on account. of geographical differences'. However, he failed to take the same into consideration or provide appropriate adjustment for differences in economic and geographical markets. The Transfer Pricing Officer proceeded on the assumption that since the appellant's non-associate enterprises sales comprise of many countries, the sale price charged to non-associate enterprises do reflect the international prices of the products and the comparison of these prices vis-a-vis the prices charged to associate enterprises without any adjustment would reflect a comparable uncontrolled price. The appellant submitted that Transfer Pricing Officer's aforesaid assumption/proposition is erroneous and is devoid of market realities as it fails to appreciate that the American and the European markets in which associate enterprises operate is a distinct market geography with distinct features as compared to other countries (as a class) where non-associate enterprises operates. Merely averaging the sales to non-associate enterprises of two or three countries does not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y unrelated customers/ second level distributors. Thus, sale prices charged to such third party unrelated customers for the particular quality of the product represent comparable uncontrolled prices on aggregate basis in the respective comparable market. Therefore, these transactions can be said to meet the comparability test. 2.13 The appellant filed the statements setting out the prices at which associate enterprises sold plain film products and sun control products (that they purchased from the appellant) to their third party customers and contended that the gross difference between the landed cost of goods sold and the price at which the associate enterprises sells those products to the third party customers in their designated territory is very nominal and in some cases even not sufficient to cover the overheads of associate enterprises which are around 20 percent to 25 percent of the landed cost of the goods sold. Operating results of associate enterprises do not justify transfer pricing adjustment : 2.14 In this regard, contentions of appellant are as follows : (a) The associate enterprises are working as distributors solely for the appellant. Therefore, the fina ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iven case of the appellant then it indirectly means that the appellant's associate enterprises should not be expected to make any profit or should continue to suffer larger amounts of losses. This proposition blatantly appears to be founded on 'non-arm's length principle', because no independent third party exclusive distributor would work on such loss making business proposition under the arm's length business dealings. 2.15 Business strategy aspect : The appellant also submitted that for the designated territory for which associate enterprises operate, the appellant, in collaboration with its associate enterprises, follows the business strategy of market penetration and increasing market share following competitive pricing policy. 2.16 Capacity utilisation aspect : It was further submitted by the appellant that at times in order to ensure that plants runs at the maximum capacity, books the orders even from third parties at the prices which are far below the standard list prices of the appellant, so long such sales result into 'contribution' towards the fixed overheads. It was submitted that this fact can be gathered from the comparative statement of product wise details of sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ociate enterprises quantity in case of plain films. It was further contended that since associate enterprises are exclusively promoting, marketing and distributing the products of the appellant and they do not deal with any third party suppliers or manufactures of polyester film products, it is but natural that all their orders or requirements will be procured from the appellant. Therefore, it was submitted that, the expected volume of procurement by the associate enterprises will, generally be higher than any non-associate enterprises single customer. If sales of such high magnitude were made to uncontrolled parties then a volume discount ranging from 15 percent to 20 percent would be considered which is generally granted by way of charging reduced sales prices and also such discount would be required to justify the commercial nature of the transaction. 2.20 Geographical adjustment : The appellant reiterated its submissions as regards geographical and markets differences and submitted that on an average a price variation always exists to the extent of 20 percent to 30 percent on account of geographical differences between the American and the European markets on the one hand and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rol and plain films to associate enterprises is erroneous, devoid of market and business reality and judicial pronouncements in this respect and hence, it was prayed that same be deleted." 8. The Commissioner (Appeals) appreciated the assessee's contentions and the submissions and after analysing the same deleted the transfer pricing adjustment of Rs. 3,38,93,862, while observing and holding as under : "2.25 I have perused and considered the facts of the case, the Transfer Pricing Officer's order under section 92CA(3), the assessment order on this aspect and the written submissions and oral arguments of the appellant. 2.26 The transfer pricing is not an exact science. It involves a rationale and objective analysis of all economic and commercial aspects and circumstances of each specific case to derive a fair and proper analysis. The facts and circumstances in totality need to be taken into consideration to come to conclusion on whether or not in particular case the condition of arm's length standard (or price) is satisfied. 2.27 There is force in the first contention of the appellant that while applying the comparable uncontrolled price method ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alysis for determination of the arm's length price is also highlighted in para 1.30 of the OECD transfer pricing Guidelines. 2.29 In his order under section 92CA(3), the Transfer Pricing Officer admits that besides similarity of products one has to take into account the price variations arising on account of geographical differences. He further states that there are no direct third party exports by the appellant to U. S. A. and U. K. where associate enterprises operate as in these countries the associate enterprises are the sole selling agents and that the appellant's third party exports are to different countries like Russia, Saudi Arabia, Turkey, Singapore, Argentina, Japan, etc. However, in spite of admitting that there are geographical differences and one has to take into account variations on account of geographical differences for arriving at the comparable uncontrolled price in the case of international transactions, the Transfer Pricing Officer concludes that prices charged from non-associate enterprises do reflect the international prices of products as nonassociate enterprises are based in more than one country and that the comparison of these prices vis-a-vis the price ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bility of substitutes, size of the market and level of demand and supply in the respective country. An analysis of the appellant's export transactions with its non-associate enterprises customers reveals that even the export prices charged to non-associate enterprises customers based in two different countries for the same product vary considerably on account of the aforesaid economical and geographical differences. AE-GPF and AE GPIL are operating in the American markets and European markets. On the other hand, exports sales of the appellant to non-associate enterprises customers are in the Asian, African, Middle-East, Far East, Russia and other CIS countries. The American and the European markets where associate enterprises operate are matured, highly competitive and bigger size markets as compared to Asian, African, Middle-East, Far East and Russian markets which consists of mostly economically underdeveloped nations except some of the countries like Japan, Australia and that these markets are fragmented in nature. The market prices in the American and the European markets, which are developed and highly competitive markets, are generally lower than other markets. This fact is e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it is also pertinent to note the benchmarking exercise done by the appellant while filing accountant's report in Form 3CEB. In Form 3CEB and its transfer pricing documentation, the appellant established the arm's length prices of sale of products to its associate enterprises by comparing average export prices charged to the associate enterprises with average prices charged to local Indian customers. The appellant's aforesaid approach is also not acceptable as geographical difference does exist between Indian market on one hand and the American and the European on the other hand. 2.33 As there are no direct third party exports by the appellant to the USA and the UK where associate enterprises operate, therefore, there are no directly comparable uncontrolled transactions. In these circumstances, the most appropriate way to examine the compliance of the arm's length conditions is to deduce the market prices prevailing in the concerned geographical market from the financial statements of respective associate enterprises itself, subject to adjustment for the expenses that the associate enterprises need to incur to consummate the transactions and sell the products. The associate enter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... $110,276 57,828 The above analysis reflects that, on an aggregate basis, the gap between the prices at which the associate enterprises procured products from the appellant and the price at which they sold the products does not exceed 9.93 percent for AE GPF and 10.91 percent for AE GPIL as is reflected in the gross profit margins of these associate enterprises. Further, such price difference retained by the associate enterprises is not enough to cover even the associate enterprises operating expenses. No third party distributor would work for the appellant at such loss making proposition. In contrast to that, the Transfer Pricing Officer's working of transfer pricing adjustment highlights that the difference between associate enterprises prices and non-associate enterprises prices is as high as 30 percent to 40 percent, which is entirely contrary to facts reflected from audited financial statements of the associate enterprises. Such contradiction/differences exist because the Transfer Pricing Officer has not taken same market/geography non-associate enterprises transactions as comparable transactions. 2.35 The appellant also furnished associate enterprises p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion vide paras 2.19, 2.20, 2.21 and 2.23 of this order. There is merit in its claim so far it applies to volume discounts and apparent mistakes. However, since the matter has been already decided in its favour the same is not being addressed hence. As regards adjustments on account of geographical differences and selling and marketing cost it is felt that it is not possible to make reasonably accurate adjustments hence it cannot be acceded to. In any case, as stated earlier, the main issue has been addressed on merits in the appellants favour and so these issues have become redundant. 2.40. Comparison with non-comparable isolated solitary transactions : Referring to annexures to transfer pricing order under section 92CA(3) and statements enclosed with the appellant's written submissions dated December 7, 2010, the appellant drew my attention to the fact that in some instances the Transfer Pricing Officer has compared prices charged to associate enterprises with the prices charged in highly priced solitary low volume non-associate enterprises transactions resulting into disproportionate quantum of transfer pricing adjustment. The appellant submitted that such highly priced, solita ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of sun control and plain film products with its associate enterprises GPF and GPIL are at arm's length and there was no case for making adjustments and deleted the entire transfer pricing addition of Rs. 3,38,93,862." 9. On the issue of transfer pricing adjustment of Rs. 61,12,532, relating to commission paid to associate enterprises, GPIL, the assessee, before the Commissioner (Appeals), first of all, objected that the commission accrued to associate enterprises, GPIL, for the financial year 2004-05, has been mistakenly taken as Rs. 1,01,87,553, whereas, the actual amount of commission accrued to associate enterprises, GPIL for the relevant financial year and which was debited to commission expenditure account in the books was at Rs. 72,54,263 only. Therefore, excessive transfer pricing adjustment of Rs. 17,59,974 [29,33,290/12.5 * 7.5] has been calculated on differential commission amounting to Rs. 29,33,290, which is the payment of remittance made to the associate enterprises GPIL in the financial year 2004-05 for the commission amount already debited in the books of the assessee in the financial year 2003-04, which has been reported in Form No. 3CEB, for the financial year 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s products which are consumer products ("CPD products") and plain films which are industrial products ("IPD products"). The agency arrangement with non-associate enterprises foreign agents is only for plain film ("garfilm"), i.e., only for IPD products. Consumer products are not covered in the arrangement with non-associate enterprises foreign agents. Market territory differences Associate enterprises GPIL operates in Europe where the costs of operations are comparatively higher. Non-associate enterprises foreign agents operates in the territories of Iran, Egypt, Argentina, Srilanka, Philippines, South Africa, Turkey, etc. where the cost of operations are comparatively lower. Industry and competition differences CPD products are used as final product in automobile industry and building industry by ultimate end consumers. Thus, these are consumer products. IPD products are industrial products (and not consumer products) and are used as input by various industries, viz., packaging industry, electric and motor insulation industry, etc. CPD products are sold in more than 300 qualities and broadly in 80 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e countries to sell plain film products. The role of these non-associate enterprises foreign agents is very limited for this specific purpose of liaisoning and co-ordination with already established industrial customer base. 10. The Commissioner (Appeals) further noted that for promoting and marketing of consumer products, i.e., sun control film, agent need to undertake massive advertisement and publicity campaigns and need to maintain sufficient organisational facility for sales promotion and market development activities and initiatives. Such activities involve incremental costs in the form of office facilities, marketing staff salaries, employee related regulatory and social security costs, travelling expenses, etc. Without incurring such costs one cannot boost the sale of consumer products. One cannot even make consumer aware of the products without advertisement and promotions through second level distributors and in exhibitions. It is practically impossible to sell the consumer product without educating the consumers on product features and advantages. Consumers for such products consist of general masses. These products are sold in small quantities and cannot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome and thereby GPIL bears the risk of financial loss on account of it functioning as sole selling agent. The extent of this risk is very limited in case of non-associate enterprises agents for industrial products wherein as such much efforts are not involved and they are also not under any contractual obligations to compulsorily promote the appellant's products only. 12. The Commissioner (Appeals), thus, concluded that in case of non-asso ciate enterprises foreign agency, where there is a limited risk, the assessee has paid commission at eight percent and in that two percent should be added for additional risk attached to the full fledged agent and, therefore, 10 percent commission should be taken as arm's length commission for A.E. GPIL. His relevant findings are as under: "3.11 The question therefore arises as to what should be the arm's length rate of commission for associate enterprises GPIL in view of differences in appellant's agency arrangement with GPIL and with non-associate enterprises foreign agents. It is noted that in case of limited risk non-associate enterprises foreign agent also the appellant has paid commission at eight percent for industrial product ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0,682 (i.e., Rs. 72,54,263 minus Rs. 60,93,581). Accordingly, I hold that transfer pricing adjustment in respect of commission paid to associate enterprises shall be restricted to Rs. 11,60,682 and balance transfer pricing adjustment of Rs. 49,51,850 (i.e., Rs. 61,12,532 minus Rs. 11,60,682) stands deleted." 14. Before us, the learned Departmental representative, with regard to the adjustment made in the sales to associate enterprises, submitted that the assessee has compared the sales of the U. S. A. and the U. K. with the average sale price of India which approach itself is erroneous when the assessee itself has been contending that the assessee's margin cannot be compared with sales made to other countries. He pointed out that the Commissioner (Appeals) himself has rejected this approach of the assessee in para 3.32. He further submitted that if a method adopted by the Transfer Pricing Officer is also not correct, then best way was to compare the third parties dealing in similar case. The products are the same, therefore, the matter should go back to the file of the Transfer Pricing Officer and such third party should be considered in comparable uncontrolled price method. He f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... analysis done by the learned Commissioner (Appeals) is absolutely correct and no fault or discrepancy has been found by the learned Departmental representative. He, thus, strongly relied upon the findings of the learned Commissioner (Appeals). 17. We have carefully considered the rival contentions of the parties, perused the findings given by the Transfer Pricing Officer as well as by the Commissioner (Appeals). The assessee is engaged in the business of manufacture and sale of various types of polyester films and sun control films. For exporting its products, the assessee has two types of set-ups for export sales firstly, independent agents (for short "non-associate enterprises agents") operating in the Asian countries, African countries, Middle East, Far East, Russia and other CIS countries, which are mostly developing markets and secondly, through two subsidiary companies which are termed as "associate enterprises" and are operating in American and European markets which are developed markets. The assessee has benchmarked its international transactions with its associate enterprises by applying comparable uncontrolled price method, wherein average price charged to associate en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... siness at loss. In this manner, the learned Commissioner (Appeals) has made these associate enterprises as tested parties and without looking into the independent comparables operating in the same kind of products in the said countries, he accepted the operating margin of the associate enterprises. This is where the learned Commissioner (Appeals) went on a wrong footing and incorrect approach. Once the learned Commissioner (Appeals) accepted that the comparable uncontrolled price is the appropriate method, then he has to examine whether there are any internal comparables or any external comparables. In the present case, once he has held that there are no internal comparables, he was required to look into external comparables operating or dealing with the similar products under similar terms in a similar market conditions where these associate enterprises are operating, which he failed to do and simply accepted the trading results of the associate enterprises. Under the comparable uncontrolled price method, the price of the goods or services is directly compared with the price in uncontrol transactions under similar conditions. Internal comparable uncontrolled price would be availab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned by comparing the operating profit relative to appropriate base, viz., cost as well as asset of the tested party with the operating profit of an uncontrol party engaged in comparable transactions. Accordingly, we set aside the impugned order passed by the learned Commissioner (Appeals) and restore the matter to the file of the Transfer Pricing Officer and direct him to examine the arm's length price after adopting transactional net margin method and carry out fresh comparability analysis. The assessee will provide all the necessary information and search analysis for the comparables. The Transfer Pricing Officer will also provide due and effective opportunity of hearing to the assessee to represent its case. Accordingly, ground No. 1, is treated as allowed for statistical purposes. 20. Now, coming to the issue of adjustment on account of commission paid to the associate enterprises, the learned Departmental representative heavily relying upon the findings of the Transfer Pricing Officer submitted that once there is a similar nature of transaction for the same product which are being dealt with by the associate enterprises and non-associate enterprises foreign agents, then ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o be incurred by the associate enterprises and risk assumed are far more. Rate of 10 percent is quite reasonable when it is analysed with a case where there is less risk and commission rates ranges between three percent and 10 percent. Therefore, the rate adopted by the Commissioner (Appeals) at 10 percent is definitely at arm's length. 20. However, after having coming to the conclusion that rate of 10 percent of the commission is at arm's length, he has given the benefit of arm's length range of +/- five percent in terms of the proviso to section 92C. While doing so, he has gone on the premise that it is some kind of a standard deduction. Such a conclusion is wholly erroneous as the statute does not provide any kind of standard deduction. Thus, the benefit of +/- five percent given by the learned Commissioner (Appeals) is set aside. In so far as the application of rate of payment of commission at 10 percent to its associate enterprises is concerned, the same is hereby upheld. Thus, ground No. 2, is partly allowed. 23. Ground No. 3, is with regard to disallowance of interest which relates to capital work-in-progress under section 36(1) (iii) for a sum of Rs. 28.52 lakhs. 24. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he file of the Assessing Officer with similar directions. Accordingly, ground No. 3, stands partly allowed for statistical purposes. We now take up the assessee's appeal in ITA No. 4189/Mum./2010, for assessment year 2003-04, vide which the following grounds have been raised : 1. The learned Commissioner of Income-tax (Appeals)-15, Mumbai, erred in rejecting the claim of the appellant for allowing commission paid to the subsidiary companies which was partly disallowed by the Assessing Officer amounting to Rs. 2,03,94,752. The appellant submits that commission paid to the foreign subsidiary companies was not excessive considering the circumstances in which the commission was paid and the performance required to be made by the subsidiary companies and it was not for transferring or diverting any profit to the subsidiary companies as stated by the Assessing Officer. 2. The said Commissioner of Income-tax (Appeals) erred in confirming the action of the Assessing Officer in levying interest on the shortfall of payment of advance tax under section 115JB ignoring the submissions made by the appellant that in case of liability under section 115JB no interest can be le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ght in statute by the Finance Act, 2008, with retrospective effect from April 1, 2001 and in view of the latest judgment of the Calcutta High Court in Emami Ltd. v. CIT [2011] 337 ITR 470 (Cal), interest under section 234B cannot be charged on account of such income under section 115JB. 31. Similarly, with regard to the provisions of doubtful debts, he submitted that the Assessing Officer has treated such provisions to be in the nature of reserve or contingency made in the account and the same has been added in Explanation 1, clause (i) to section 115JB by the Finance Act, 2008, with retrospective effect from April 1, 2001, and therefore, no interest under section 234C can be levied. 32. The learned Departmental representative, on the other hand, fairly agreed that in so far as the second argument of learned counsel is concerned, the same is covered by the judgment of Calcutta High Court in Emami Ltd. [2011] 337 ITR 470 (Cal). 33. Having heard the rival contentions and having perused the material on record as well as the findings of the learned Commissioner (Appeals) and the Assessing Officer, we find that in so far as the chargeability of interest under section 234B is conce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court, Madhya Pradesh High Court as well as Bombay High Court in the Supreme Court. However, it may be noted that the judgment of the Karnataka High Court in Kwality Biscuits Ltd. [2000] 243 ITR 519 (Karn) was confined to section 115J of the Act. The order of the Supreme Court dismissing the special leave petition in limine filed by the Department against Kwality Biscuits Ltd. is reported in CIT v. Kwality Biscuits Ltd. [2006] 284 ITR 434 (SC). Thus, the judgment of Karnataka High Court in Kwality Biscuits Ltd. [2000] 243 ITR 519 (Karn) stood affirmed. However, the Karnataka High Court has thereafter in the case of Jindal Thermal Power Co. Ltd. v. Dy. CIT [2006] 286 ITR 182 (Karn) distinguished its own decision in case of Kwality Biscuits Ltd. and held that section 115JB, with which we are concerned, is a self-contained code pertaining to MAT, which imposed liability for payment of advance tax on MAT companies and, therefore, where such companies defaulted in payment of advance tax in respect of tax payable under section 115JB, it was liable to pay interest under sections 234B and 234C of the Act. Thus, it can be concluded that interest under sections 234B and 234C shall be payable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were in the nature of reserve or contingency made in the account of the assessee. The appellant had placed reliance on the Supreme Court decision in the case of HCL Comnet Systems and Services Ltd. [2008] 305 ITR 409 (SC) to back its point that such provision were allowable. 3.1. I have perused the facts of the case and the legal position. The dispute regarding doubtful debts under section 115JB of the Incometax Act now stands settled by the amendment made in the Finance Act, 2009. It is now provided that while computing the 'book profit" for the purpose of section 115JB the net profit shall be increased by the provision for diminution in the nature of any asset debited to the profit and loss account. The said amendment is retrospectively applicable from April 1, 2001. This nullifies the effect of the above Supreme Court judgment retrospectively. The disallowance so made is therefore confirmed." 35. Thus, the learned Commissioner (Appeals) has confirmed the findings of the Assessing Officer on the ground that by the Finance Act, 2009, amendment has been brought on statute in Explanation-1 clause (i) with retrospective effect from April 1, 2001, therefore, the same has b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment year. Consequently, the assessee cannot be branded as a defaulter in payment of advance tax as mentioned above. At this stage, we may profitably rely upon the observations of the Supreme Court in the case of Star India P. Ltd. v. CCE [2006] 280 ITR 321 (SC) strongly relied upon by Mr. Bajoria, where the apex court in the context of imposition of service tax by the Finance Act, 2002 with retrospective effect held that the liability to pay interest would arise only on default and is really in the nature of quasi-punishment and thus, although the liability to pay tax arose due to retrospective effect of law, the same should not entail the punishment of payment of interest. Although Mr. Nizamuddin, the learned counsel appearing on behalf of the Revenue, in this connection, strongly relied upon the decision of the Supreme Court in the case of Joint CIT v. Rolta India Ltd. [2011] 330 ITR 470 (SC), we find that in that case the question was whether interest under section 234B of the Act could be charged on the tax calculated on the book profit under section 115JA and in other words, whether advance tax was at all payable on book profits under section 115JA of the Act. The Supreme C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ground, on the Acts and in the circumstances of the case and in law, we hereby request your honour's to grant deduction under section 80HHC under minimum alternate tax provisions to the extent of 100 percent of the eligible profits. The said claim is in accordance with the decision of hon'ble apex court in case of Ajanta Pharma Ltd. v. CIT [2010] 327 ITR 305 (SC) wherein it has been decided that the deduction under section 80HHC from minimum alternate tax income is not subjected to restriction laid down by sub-section (IB) of section 80HHC." 38. After hearing both parties, we find that this ground is similar to the ground No. 1, raised by the Department ; therefore, this ground will be disposed of while deciding the Revenue's appeal in ITA No. 4418/Mum./2010, for the assessment year 2003-04, which has been dealt in succeeding paragraphs. 39. In the result, the assessee's appeal is partly allowed. 40. We now take up the Revenue's appeal in ITA No. 4418/Mum./2010, for assessment year 2003-04, vide which, following grounds have been raised : "1. On the facts and in the circumstances of the case and in law, the learned Commissioner of Income-tax (Appeals) erred in dele ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appellant also relied on the Special Bench decision in Dy. CIT v. Syncome Formulations (I) Ltd. [2007] 292 ITR (AT) 144 (Mumbai) [SB] as well as that of Glenmnark Laboratories Ltd. dated November 9, 2004. 4.4. I have perused the facts of the case and the legal position on this issue. As far as percentage of deduction allowable in each year the assessee would not be entitled to 100 percent deduction since sub-section (1) to section 80HHC introduced by the Finance Act, 2000 with effect from April 1, 2001 was specifically meant to phase out the deduction completely for the assessment year 2005-06 in which event on an application of the sub-section only a portion of the amount computed under section 80HHC is allowable for the assessment year 2004-05. This is in accordance with the decision of the Bombay High Court in Ajanta Pharma [2009] 318 ITR 252 (Bom). 4.5. However, the method of computation of deduction under section 80HHC is to be in accordance with the decisions of the Special Bench in Dy. CIT v. Syncome Formulation (I) Ltd. [2007] 292 ITR (AT) 144 (Mumbai) [SB]. The Assessing Officer is directed accordingly." 42. At the outset, both parties agreed that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 80HHC(1B) it is clear that after Finance Act, 2000 with effect from assessment year 2001-02 exporters would not get 100 percent deduction in respect of profits derived from exports but that they would get deduction of 80 percent in the assessment year 2001-02, 70 percent in the assessment year 2002-03 and so on. Thus, section 80HHC(1B) deals not with 'eligibility' but with the 'extent of deduction'. As earlier stated, section 115JB is a self-contained code. It taxes deemed income. It begins with a non obstante clause. Section 115JB refers to computation of 'book profits' which have to be computed by making upward and downward adjustments. In the downward adjustment, vide clause (iv) it seeks to exclude 'eligible' profits derived from exports. On the other hand, under section 80HHC(1B) it is the extent of deduction which matters. The word 'thereof' in each of the items under section 80HHC(1B) is important. Thus, if an assessee earns Rs. 100 crores then for the assessment year 2001-02, the extent of deduction is 80 percent thereof and so on which means that the principle of proportionality is brought into scale down the tax incentive in a phased manner. However, for the purposes of c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the relief will be computed under section 80HHC(3)/(3A), subject to the conditions under sub-sections (4) and (4A) of that section. The conditions are only that the relief should be certified by the chartered accountant. Such condition is not a qualifying condition but it is a compliance condition. Therefore, one cannot rely upon the last sentence in clause (iv) of the Explanation to section 115JB (subject to the conditions specified in sub-sections (4) and (4A) of that section) to obliterate the difference between 'eligibility' and 'deductibility' of profits as contended on behalf of the Department." 44. In view of the law laid down by the hon'ble Supreme Court, we direct the Assessing Officer to compute the deduction under section 80HHC in the light of the aforementioned judgment of hon'ble Supreme Court. Thus, ground No. 1, raised by the Revenue is dismissed. 45. The additional ground raised by the assessee in its ITA No. 4189/Mum./ 2010, as reproduced above, is hereby disposed of in favour of the assessee as the same is covered by the aforementioned judgment of the hon'ble Supreme Court in Ajanta Pharma [2010] 327 ITR 305 (SC). Respectfully following the same, the additiona ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "11. Ground No. 4 of the appeal reads as follows : The said learned Commissioner of Income-tax (Appeals) erred in not accepting the claim of the appellant for deduction under section 35AB (Rs. 1,15,86,168) and depreciation under section 32 (56,40,216) aggregating to Rs. 1,72,26,384. The said learned Commissioner of Income-tax (Appeals) erred in observing that this matter has to be decided by the Assessing Officer when all the details were submitted at the time of hearing of the appeal and the question of allowability of the deduction was required to be taken by him.' 12. The observations of the Commissioner of Income-tax (Appeals) on this issue were as follows : The Assessing Officer disallowed Rs. 1,22,18,252 but the correct amount was Rs. 1,03,85,368 being depreciation on technical know-how on the ground that no such depreciation was allowable on cost paid for acquiring technical knowhow. The alternative claim for deduction under section 35AB was also not allowed as the same had already been exhausted. The Assessing Officer in the assessment order disallowed the claim under section 35AB holding that the allowance of one-sixth of the technical k ..... X X X X Extracts X X X X X X X X Extracts X X X X
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