TMI Blog2008 (5) TMI 660X X X X Extracts X X X X X X X X Extracts X X X X ..... gned assessment year the claim of the assessee should have been examined in the light of the report of the Transfer Pricing Officer and the evidences filed by the assessee but the AO as well as the CIT(A) have not adjudicated the issue in accordance with law. We, therefore, are of the view that this issue requires fresh adjudication - Since the report of the Transfer Pricing Officer has already been obtained and the issue requires proper examination by the AO in the light of the report of TPO, detailed analysis of licence fee paid and other evidences filed by the assessee, we set aside the order of the CIT(A) in this regard and the matter is restored to the file of the AO to readjudicate the issue in terms indicated above. Disallowance on interest - expenditure attributable to dividend income by virtue to Section 14A - Assessee has incurred interest expenses paid on the Loan borrowings - HELD THAT:- In the instant, case the assessee has paid a substantial amount of interest on the borrowed funds and he has also earned the dividend income from investment in Mutual Funds which is exempted from tax and from the details furnished before the AO and even before us it is not clear as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom its careful perusal we find that Tribunal has examined this aspect in detail with the help of various judicial pronouncements in his order before concluding that judgment in the case of Bangalore Clothing Co. is not over ruled as the judgment of the Apex Court in the case of K.Ravindranathan Nair (supra) was rendered in different contexts - Therefore, On perusal of the order clearly reveals that amendment was made to exclude only those incomes which do not have element of turnover. It is pertinent to note that legislature referred to element of turnover and not export turnover. Therefore, considering the above circular which is binding on the tax authorities, we are of the view that any income arising from an activity involving turnover cannot be excluded from the profits of business in terms of Explanation (baa) to section 80HHC/Explanation (f) to section 80HHF. Whether consideration revived by the assessee by way of cable subscriptions amounts to turnover - scope of the word 'turnover' may vary in section 80HHC and Section 80HHF - HELD THAT:- In the present case, the right to exhibit the programmes telecasted by various channels owned by 'Star Group' in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laimed - Hence, it falls outside the purview of explanation (1) of S. 80HHF of the Act. We have also considered the alternative arguments of the assessee that netting be allowed in case of Explanation (baa) is held to be applicable. In this regard, we find force in the contention of the assessee and we are of the view that whatever expenses are incurred by the assessee which were not debited to the accounts of the principal, are required to be set off against the commission received by the assessee. If nexus are proved in the light of the Order of the Special Bench in the case of Lalsons Enterprises [ 2004 (2) TMI 294 - ITAT DELHI-E] and the judgment of the Delhi High Court in the case of Shree Ram Honda Power Equipment [ 2007 (1) TMI 86 - HIGH COURT, DELHI] . Accordingly, we, restore the matter to the file of the AO to allow netting between the expenses incurred to earn the commission and the commission received, if nexus are proved. Accordingly, this issue is disposed off. Disallowance of security deposit written off - bad debt written off - HELD THAT:- In the instant case the security deposit, which was claimed to be written off in this year were neither credited to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Services [ 2007 (7) TMI 50 - ITAT BANGALORE] - We are therefore of the view that Arms Length Price in relation to the impugned activities are not properly determined either by the assessee or by the TPO or the AO. As such, it requires a fresh determination in the light of the order of the Special Bench in the case of Aztec Software and Technical Services . We accordingly set aside the order of the CIT(A), confirming the order of the AO in this regard and restore the matter to the file of the AO with a direction to make a further reference to the TPO for determination of Arms Length Price in respect of each of the assessee's independent activities in the light of the comparable cases and also in the light of the decision of the Special Bench of the Tribunal in the case of Aztec Software and Technical Services (supra) and other order/judgment rendered on the issue. In the result, Appeals of the assessee as well as the Revenue are partly allowed for statistical purposes. - Sunil Kumar Yadav, J.M and R.K. Panda, A.M For the Petitioner : Porus F. Kaka For the Respondent : Anil Mehta ORDER Sunil Kumar Yadav, J.M: These cross appeals are preferred by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efore, dismiss this ground being not pressed. 8. Ground No. 3 relates to the grant of deduction of 20% of the total payment for licence fee of ₹ 105,16,49,528/- made by the assessee to Indian Sky Broadcasting Limited (ISkyB) and Asian Broadcasting (AB). 9. The facts borne out in this regard are that during the course of assessment proceedings the Assessing Officer noticed that assessee has claimed licence fee paid to two entities of ₹ 105,49,528/- of which details are as under. Indian Sky Broadcasting Ltd ₹ 21,74,13,619 Asian Broadcasting FZE ₹ 83,42,35,910 Total ₹ 105,16,49,528 10. The Assessing Officer noticed in his order that the payment of licence fee cropped up first time in the preceding year, i.e. Assessment Year 2001-02. In that year assessee made payment of licence fee only to Indian Sky Broadcasting Ltd and in the current year assessee has made payment to two entities as indicated above. In the preceding year. Assessing Officer drew an inference that the so called licence fee was a tool adopted by the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... I, it cannot be said that the that the transactions are not at arms length the learned counsel for the assessee has placed reliance on the judgement of the jurisdictional High Court in the case of SGS India (P) Ltd. vs. ACIT 208 CTR 263. 13. The learned counsel for the assessee has further contended that the legal position has undergone a change from the Assessment Year 2001-02 by the introduction of Transfer Pricing Rules under Section 92. Thus for the first time from Assessment Year 2002-03 on wards the expenditure deductible and quantum depends on the satisfaction of the arms length principle. Therefore, it can be said that a subjective standard of reasonableness has for the first time been introduced and that standard test is the arms length principle. He further placed reliance upon the judgement of the Apex Court in the case of Morgan Stanley and Co. Inc. (292 ITR 416)in support of his contention that under Transfer Pricing Rules international transactions must be at arms length price and no further disallowance can be made once the transaction at arms length price determined. The learned counsel for the assessee further contended that since the assessee has placed detaile ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... according to which allowance for any expenses or interest arising from an international transaction shall be determined having regard to the arms length price. From the Assessment Year 2002-03 the Assessing Officer is required to computing the total income of the assessee under sub-section (iv) of Section 92C having regard to the arms length price determined under sub-section (iii) by the Transfer Pricing Officer. But the Assessing Officer did not look into the report of the Transfer Pricing Officer and he was carried away with the assessment order for the Assessment Year 2001-02 and has disallowed the entire claim of the assessee. 16. The CIT(A) has also adjudicated thc issue in a cryptic: manner following the order of his predecessor for the Assessment Year 2001-02 without looking into the fact that the provisions of Section 92 has undergone a change and with effect from Assessment Year 2002-03, the Assessing Officer is required to compute total income of the assessee under sub-section (iv) of Section 92C having regard to arms length price determined under sub-section (iii) by the Transfer Pricing Officer. The CIT(A) also did not take cognizance of the report of the Transfer P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 06,456/- after treating it as capital expenditure and allowed depreciation of 25% of the same. He, however, allowed Internet charges as revenue expenditure. Assessee preferred an appeal before the CIT(A) and the CIT(A), following earlier order of his predecessor, has confirmed the disallowance. 18. Now the assessee has preferred an appeal before the Tribunal and during the course of hearing our attention was invited with the submission that the issue, i.e. whether the expenditure incurred by the assessee on account of computer software is of revenue nature or capital nature is required to be decided in the light of the order of the Special Bench in the case of M/s. Amway India Enterprises V/s. DCIT (111) ITD 112 (SB). Both the parties have agreed that the issue be referred to the file of the Assessing Officer with the direction to readjudicate it in the order of the Special Bench in the aforesaid case. 19. In the light of the above request of the parties we set aside the order of the CIT(A) in this regard and restore the matter to the file of the Assessing Officer with the direction to readjudicate the issue afresh in the light of the order of the Special Bench in the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stment made to earn the said dividend income have not been made out of borrowed funds of the assessee. He, however, submitted that the onus is upon the Revenue to establish the nexus between the borrowings and the investments to earn exempted income. He accordingly placed reliance upon the order of the Delhi Tribunal in the case of Maruti Udyog Ltd. vs. DCIT (92 ITD 119) wherein it has been held that the initial onus is on the Revenue to show that the expenses ought to be disallowed has nexus between directly or indirectly to earn tax free income. 23. The learned DR, on the other hand, has submitted that undisputedly the assessee has paid a substantial amount of interest on the borrowings. It has also carried the dividend income which is exempted from tax. In this situation the onus is upon the assessee to establish that the surplus funds were invested to earn dividend income. The learned DR has further invited our attention to the written submissions filed by the assessee on this issue with the submission that assessee has admitted that, he has paid interest on borrowings at ₹ 2,27.39,858/- to Credit Lyonnais Bank and ₹ 2.281 to HDFC Bank. The interest to Credit Lyo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... These facts are not clear either form the orders of the lower authorities or from the written submissions of the assessee. For the sake of reference we extract the relevant portion of the written submission of the assessee as under : - At the outset, the Appellant humbly submits that it has incurred total interest expenses amounting to ₹ 22,742,239/-. The party wise break-up of the interest expenses is enclosed herewith as Annexure 1. The Appellant respectfully submits that of the total amount of ₹ 22,742,239/- a majority amount of ₹ 22,739,858 has been incurred in connection with the loan of ₹ 400,000,000 taken by the Appellant at the rate of 9 percent from Credit Lyonnais Bank on August 17, 2001 in connection with its business. This loan was subsequently repaid by the Appellant on March 23, 2002. The Appellant has immediately utilized the loan of ₹ 400,000,000 to create a term deposit with ICICI Limited from August 20, 2001 at an interest rate of 9 percent. This term deposit was created for a period of 120 days and the maturity date for the same was December 18, 2001. Pursuant to expiry of the term deposit, the Appellant re-invested the ab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch no interest was paid no corresponding disallowance can be under Section 14A of the IT matter to the file of the Assessing Officer with the direction to readjudicate the issue in terms, indicated above after affording an opportunity of being-heard to the assessee. 26. Ground No. 6 relates to an addition of ₹ 7,19,94,617- on account of Commission income accrued to the assessee. Facts borne out from the records are that during the course of assessment proceedings assessee was required lo explain as to why the understatement of commission income on account of deviation from the accounting the commission revenue as mentioned in para-2(D) of the notes on accounts should not be brought to tax in accordance with the view adopted by the Department in Assessment Year 2001-02. In response to this query assessee has replied as under:- As requested, we have enclosed as Annexure 8, a statement providing the commission income earned by SIPL on the basis of advertisement collections made by SIPL on behalf of overseas media companies, the commission on the basis of invoices raised by overseas media companies on advertises/advertisement agencies and the differences on this account. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ealizing of the amount and remittance are very much part of the job requirement to be performed by the assessee. The. relevant observations of the Third Member agreeing with the Judicial Member are as under: - Income would accrue as per terms and conditions of the agreement for determining accrual of income, the agreement and in particular, clauses containing terms of payment are required to the construed. As per cl. 8 of the agreement, the assessee is entitled to i.e. he gets a right to retain 15 per cent of net invoice amount paid by the clients as commission. Thus commission is required to be worked and right of assessee to receive commission is dependent on payment of charges by clients of assessee's principal. So it is clearly provided that right to receive/retain income would accrue after to or before payment is made by the assessee's client payment or realization of amount from client for the advertisement aired in TV channel is a condition precedent for accrued of income. Though cl.8 of the agreement is in clear terms and is sufficient to indicate as to when income would accrue to the assessee or terms of the agreement also support the same inference Sub cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cannot be understood to be relating to relinquishment of income after its accrual. It has rightly been held by the JM that income accrued to the assessee when payment due to its principal was realized by the assessee and he was in a position to retain his commission. 31. Since identical issue has been examined by the Tribunal in earlier years and the CIT(A) has confirmed the disallowance following its earlier years orders, we find no justification to readjudicate the issue afresh. Moreover, the Third Member's decision is also binding upon the Division Bench. We, therefore, following the same decide the issue in favour of the assessee and hold that commission due to the assessee for procuring advertisement accrued to it only when the payment due to its principal from the clients was realized by the assessee. Accordingly the disallowance made by the Revenue authorities in this regard is hereby deleted. 32. Ground No. 7 relates to grant of deduction for only 20% out of total expenses of ₹ 37,29,17,000/- incurred by the assessee on advertisement and publicity. Following the orders of earlier years Assessing Officer disallowed all the expenses amounting to ₹ 37,2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ic finding in the immediately preceding year in this regard, we find no reason to take contrary view in this assessment year. We, therefore, following the same hold that the assessee has incurred expenses wholly and exclusively for the purpose of its business and therefore is entitled to deduction of expenditure claimed in computing its income. Accordingly the disallowance made in this regard is deleted. 37. Ground No. 8 relates to deduction under Section 80HHF of the I.T. Act. During the course of assessment proceedings Assessing Officer has examined the calculations of deduction under Section 80HHF and asked the assessee to submit his explanations on following accounts: - While computing 80HHF, you ought to have reduced 90% of gross commission, being ₹ 61.30 Crores instead of ₹ 3.43 Crores (not considered by you in report u/s. 80HHF). Similarly, the gross interests also require to be considered under the head 'Income from Other Sources' of ₹ 10.32,00,000/ instead of ₹ 8,04,81,000/- as shown by you and the interest payment expenses claimed in Schedule-14 of PandL a/c of ₹ 2,27,42,000/- requires to be allocated against the head 'Bus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Third Member has held that for earning the income assessee's duties are far beyond merely earning commission income and rights gets vested in the assessee as it has obligation extending subsequently to even collecting income and acting as a collection agent. However, the commission is earned per advertisement which has a clear element to turnover as laid down by the jurisdictional High Court. In some of the assessment years, i.e. 1995-96 and 1996-97 this income goes to 80% and 41% of the gross income. Thus, this is the primary business activity of the assessee. Since this activity represents its main object it cannot be excluded while considering Section 80HHF as per the decision of the jurisdictional High Court. The learned counsel for the assessee has raised the argument in the alternative and without prejudice, that if exclusion is done, only 90% of the net income be excluded in the light to the decision of the Special Bench in the case of Lalson Enterprises vs. DCIT 89 ITD 25 and the judgment of the Delhi High Court in the case of CIT vs. Shriram Honda Power Equipment 207 CTR 689. With regard to interest and rental income the learned counsel for the assessee has submitte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essment year 2000-2001 the Tribunal has adjudicated this issue whether the judgment of the Apex Court in the case of Ravindranathan Nair has over ruled the verdict given in the case of Bangalore Clothing Co. by the jurisdictional High Court and the Tribunal has categorically held in the negative by holding that the ratio laid down in the case of Bangalore Clothing is still holds the field, as it has not been over ruled by the Apex Court. 41. The learned DR on the other hand besides placing a reliance upon the Order of the lower authorities, has submitted that deduction u/s. 80HHF has to be computed strictly as per provisions of section 80HHF IT Act and in the light of the judgments rendered by the Apex Court and other High Courts. The learned DR placed a heavy reliance upon the judgment of the Apex Court in the case of Ravindranathan Nair (supra) with the submissions that the view taken by the Judgment of the jurisdictional High Court with regard to labour charges or the processing charges, has been over ruled by the Apex Court. The Apex Court has over ruled the viewed the jurisdictional High Court expressed in Bangalore Clothing co. (supra) that if an income which has an elemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e claimed deduction of 90% of the not commission received. The CIT(A) has simply followed earlier years order and confirmed the disallowance. 43. During the course of hearing, the controversy has been raised with regard to the effect of judgment of the Apex Court in the case of K.Ravindranathan Nair (supra), i.e. whether it has over-ruled the judgment of the jurisdictional High Court in the case of Bangalore Clothing Co. (supra),. According to the Revenue the judgment of Bangalore Clothing Co. has been over ruled by the Apex Court in the case of K.Ravindranathan Nair (supra) by holding that the processing charged is held to be included in the total turnover and 90% of the same is also to be reduced as per Explanation (baa). But, according to the assessee, the judgment of the Bangalore Clothing Co. of the jurisdictional High Court, as still holds the field inasmuch the issue / question before the Apex Court was entirely different. The issue raised in that case is whether the processing charges shall be included in the total turnover while arriving at the export profits u/s. 80HHC (3) of the Act. During the course of hearing, our attention was invited to the fact that this controv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... formula allowed deduction even in respect of profits which emanated from activities not involving element of turnover. Accordingly the legislature made amendment in section 80HHC by inserting clause (baa) in the Explanation to this section. The intention behind the amendment was to cure the mischief in the exiting formula. The purpose behind the existing formula was to determined the profit from export activity on the basis of ratio of export turnover to total turnover. This was done because common books of recover were maintained by the assessee in respect of export as well as local turnover, whether of same commodity or of different commodities as there was no formula for segregating the turnover of different items. Since common accounts were maintained, it was difficult to ascertain the profits from export. So the object of the existing formula was to ascertain the export profits on the basis of ratio of export turnover to total turnover. Perhaps the legislature could not foresee the other incomes which could be earned by the assessee emanating from the activities not involving the turnover. One of the variables to be considered in the formula was the profits of business compute ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... early reveals that amendment was made to exclude only those incomes which do not have element of turnover. It is pertinent to note that legislature referred to element of turnover and not export turnover. Therefore, considering the above circular which is binding on the tax authorities, we are of the view that any income arising rom an activity involving turnover cannot be excluded from the profits of business in terms of Explanation (baa) to section 80HHC/Explanation (f) to section 80HHF. 37. The next question for consideration is whether consideration revived by the assessee by way of cable subscriptions amounts to turnover. The scope of the word 'turnover' may vary in section 80HHC and Section 80HHF. Section 80HHC refers to goods or merchandise and therefore the turnover would refer to the amount of business done in respect of goods or merchandise whereas section 80HHF refers to different softwares as well as telecast rights and therefore, turnover would not only include sale of software but also consideration for transfer of rights therein as is apparent from the definition of export turnover' given in Explanation (c) to section 80HHF, which not only includes con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... activity is in the nature of operational income then receipts from such activity would form part of profits of business as well as total turnover. There is no dispute that cable subscription activity is part of main objects of the assessee company and therefore the receipts arising from the same would form part of the operational income. Consequently such receipt would form part of turnover. 39. Having held that amount of cable subscription involves element of turnover, the question arises whether 90% of receipts included in the profits of business can be excluded from the profits of business computed under the head 'Profits or gains from Business or Profession'. The Board circular No. 621 dated 19.12.1991 dearly shows that what are to be excluded from the profits of business are those receipts which do not have element of turnover. That impliedly means that receipts having element of turnover cannot be excluded from the profits of business in terms of Explanation (f) to section 80HHF. The Constitution Bench of the hon'ble Supreme Court in the case of Navnit Lal C. Jhaveri vs. K.K. Sen, 56 ITR 198 has held that circulars issued by the Board which are beneficial to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of business in terms of clause (baa) to the Explanation to section 80HHC. The working of the Assessing Officer was confirmed in appeal by the learned CIT(A). However, in further appeal by the assessee, the Tribunal held that processing charges could not be included in the total turnover. Aggrieved by the said order of the Tribunal, the following questions were referred to the Hon'ble High Court for the opinion:- 1. Whether on the facts and circumstances of the case, while computing the relief u/s. 80HHC of the I.T. Act, 1961. the processing charges can be excluded from the turnover of the business? 2 Whether, on the facts and circumstances of the case and in view of the Explanation (baa) to section 80HHC and clauses (iiia), (iiib) and (iiic) of section 28, will not turnover take into account all other receipts other than excluded items of 41. The Hon'ble Kerala High Court upheld the order of the Tribunal by holding that processing charges could not be included in the total turnover. The Revenue filed an appeal before the Hon'ble Supreme court against the said judgment of the Hon'ble High Court. 42. The contention of the Revenue before the apex cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the authority only for what it actually decides and not what may remotely or even logically follow from it and (2) the decision on the question which has not been argued cannot be treated as a precedent. In view of these observations, Their Lordships held that earlier decision of the Supreme Court in the case of Tamilnadu vs. Kanduswami (M.K.) (1975) 36 STC 191 (SC) could not be said to be authority for the proposition that mere dispatch of goods is within the ambit of expression 'disposal of goods'. The second proposition was based on the earlier judgement in the case of Rujpur Ruda Meha V State of Gujarat (1980) 2 SCR 353 at 356. The constitution bench of the apex court in the case of State of Orissa vs. Sudhanshu Sekhar Misra AIR 1968 647 has held that the decision is only an authority for what it actually decides. What is of the essence in a decision is its ratio and not event observation found therein nor what logically follows from the various observations made in it. Similar observations were made by the apex court in the case of Union of India vs. Dhanvanti Devi [1996] 6 SCC 44. Reference can also be made to another decision of the Hon'ble Supreme Court in the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thing Co. (supra) and we find that before the Apex Court a limited issue was raised whether the department was right in including the processing charges amounting to ₹ 1,54,68,811/- in the total turnover while arriving at export profit u/s. 80HHC (3) of the Act as it stood at the material time. Having discussed this issue in detail their Lordship of the Apex Court have finally held that the processing changes were part of the gross total income of the tax payer being profits from the business, then it had to be included in the total turn over in the formula for computing the export profit. Their Lordship further held that said processing charges which are part of the gross total income form an item of independent income, like rent, commission, brokerage etc., and therefore, 90% of the said sum is to be reduced from the gross total income to arrive at business profit and since the said processing charges are an important component of the business profits, it had to be included in the total turn over in the said formula to arrive at the business profits in terms of clause (baa) of the said explanations. Their Lordships of the Apex Court in the case of K. Ravindranathan Nair (su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h is the main activity for exporting the garments of the assessee. 46. From a careful perusal of the judgment, we are of the view that what is important to decide the nature of receipts is the fact of the case in the receipt is directly or intricately connected with the main business activity of the assessee it forms part of the operational income. If it is only an incidental receipt, irrespective of the quantum of the receipt, it would not assume the character of operational income. These aspects were also examined by the Tribunal in assessee's own case for the assessment year 2000-2001 where the cable subscription, received from the cable operators was considered to be the part of the operational income because the assessee was doing the business of engaging cable operators under his own domain besides exporting thc software to its parent company and the receipts were excluded from the scope of Explanation (baa). But, with regard to this commission received by the assessee, we find that assessee was receiving the advertisements for certain value for providing a particular slot of lime in a particular programme aired/telecasted by the principal of the assessee i.e. Indian R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ls outside the purview of explanation (1) of S. 80HHF of the Act. We have also considered the alternative arguments of the assessee that netting be allowed in case of Explanation (baa) is held to be applicable. In this regard, we find force in the contention of the assessee and we are of the view that whatever expenses are incurred by the assessee which were not debited to the accounts of the principal, are required to be set off against the commission received by the assessee. If nexus are proved in the light of the Order of the Special Bench in the case of Lalsons Enterprises 89 ITD 25 (Del.) and the judgment of the Delhi High Court in the case of Shree Ram Honda Power Equipment (289 ITR 474(Del). Accordingly, we, restore the matter to the file of the Assessing Officer to allow netting between the expenses incurred to earn the commission and the commission received, if nexus are proved. Accordingly, this issue is disposed off. 48. Through ground No. 9 assessee has raised a plea in the alternative that if the claim of the assessee is not entertained under Section 80HHF it should be considered under Section 80HHC. Since we have already considered the claim of the assessee under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tal loss and it was not taxable as such. He has also placed reliance upon the judgement of the Apex Court in the case CIT vs. Madras Auto Service P. Ltd. 233 ITR 468 in support of his contention that if an expenditure incurred for the purpose of acquisition of assets and such assets are acquired for the purpose of the business of the assessee the expenditure on assets qualified deduction irrespective of the nature of expenditure incurred and the length of lease term. 51. The learned DR, on the other hand, has submitted that assessee claim for bad debt does not survive as according to Section 36(1)(vii) and 36(2) deduction of bad debt can only be allowed if it has been taken into account in computing income of the assessee of the previous year in which the amount of such debt or part thereof is written off or of in earlier previous year or represent money lent in the ordinary course of the business of banking or money lending which is carried on by the assessee. In the instant case the assessee did not take this security deposit in account while computing the income of the assessee either in the previous year relevant to the assessment year or in any earlier previous year. As suc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee was not examined in the light of the judgement of the jurisdictional High Court in the case of IBM World Trade Corporation vs. CIT. We accordingly set aside the order of the CIT(A) and restore it to the Assessing Officer to examine it in the light of above mentioned judgement. If the advance amount is found to be irrecoverable despite the efforts of the assessee it may be allowed as business loss. 54. Ground No. 11 and 12 relate to the transfer pricing adjustment of ₹ 26,30,25,865/- to the total income of the assessee. 55. Briefly stated the assessee company has submitted the audit report in Form No. 3CEB as required under provisions of Section 92E of the Income Tax Act. The Assessing Officer noticed from this report that the assessee company has international transactions with associated enterprises during the previous year relevant to the assessment year under consideration. To ascertain assessee's claim that the international transactions with the associated concerns were conducted at arms length price, the Assessing Officer referred the matter to the Transfer Pricing Officer under Section 92CA(1) of the IT. Act and the Transfer Pricing Officer has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business activities as opposed to transactions. Even the OECD Guidelines, which the Hon'ble Special Bench in the case of Aztec Software Ltd. (107 ITD 141) has accepted, as persuasive lays down that ideally even within transactions each part of the transaction should be separately identified and priced. It is only provided that,. when within one international transaction there are series of transactions which cannot be individually and separately identified and it can be taken as one. The learned counsel for the assessee further invited our attention to the order of the Special Bench of the Tribunal in the case of Aztec Software and Technical Services Ltd. vs. ACIT 107 ITD 141 (SB) in which the Special Bench has observed that ideally in order to arrive at the most precise approximation of fair market value, the arms length principle should be applied on a transaction by transaction basis . However, there are often situations where separate transactions are so closely linked or continuous that they cannot be adequately on a separate basis. There is no question or anything in the guidelines which permits separate business to be treated as one international transaction. In fact th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... collected the detailed analysis of all the activities alongwith the comparable cases, but the TPO did not examine them properly and has consolidated all the activities as one activity and determined the price at arms length at entity level, which is against the spirit of the statute. Having received the TPO's report, the Assessing Officer did not afford an opportunity to the assessee to comment on the TPO's report, on which he intends to rely. In the light of the principles of natural justice, the Assessing Officer should have asked for the comments of the assessee upon the TPO's report, before relying upon it while determining the price at arms length under the transfer pricing regulation in as much as at the relevant point of time, the Assessing Officer was not bound to determine the arms length price in consonance with the prices determined by the TPO. The legal position has also been clarified by the Special Bench in the case of Aztec Software and Technical Services (supra). 61. The learned Departmental Representative on the other hand has submitted, besides placing heavy reliance on the order of the CIT(A) that detailed analysis submitted by the assessee was tho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roadcasting Limited, a company based in Hong Kong . The assessee has also received commission on advertisement sales from Star Limited, Hong Kong and also from other group of entities. On export of TV programmes, the assessee. received ₹ 146.39 crores from Star Limited. Hong Kong and ₹ 63.36 crores from SOL Entertainment Limited, British Virgin Islands. In order to justify that the amounts received by the assessee is on the basis of arms length price, the assessee quoted certain comparable cases alongwith the detailed analysis before the Transfer Pricing Officer. Assessee contended before the TPO that the assessee was not involved in these activities with any other person and also could not locate comparable cases, which directly involved in similar type of activities. The assessee has, however, collected some cases, which are engaged in little bit of similar activities in nature. With regard to distribution activity, the assessee has compared its margin in this segment with other companies which are engaged in trading of computer software. He has also given the reasons for considering the computer software as a case most closely comparable to the assessee's distrib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is entitled to the agreed commission on the net billed amount, and deduct its own commission at the time of realisation and the rest of the amount is paid to the principal. In the light of these facts, commission on advertisement sales arises out of an independent activity, which cannot he linked up with the other activities of the assessee, i.e. distribution activity or activity of exporting television programmes. Likewise, the third activity of export of television programmes or supply of content of television channels to its group entities is also an independent activity, in which assessee provides content procurement service and also acts as a creator/procurer of various types of content for sale to its group entities viz. Star Ltd. and SGL. The various types of content procured by the assessee fall under the category of programs, films, format shows, in house productions and promotions. The assessee procures content in any one of the ways, such as acquiring content from external producers, in house production, joint production with external producers. Assessee also produces the content on the basis of formal specified by the overseas entities and film procurement. In these ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmination of Arms Length Price under S.92C, the criteria is specified in the Act and Rules to form the basis for judging the comparability. Thus, there should be proper analysis of such transactions with reference to the functions performed, assets employed and risks assumed by the respective parties with reference to transactions in question. This can be termed Functions, Assets and Risks Analysis (FAR analysis). All the three ingredients of the FAR have direct bearing on the pricing of products/services. Statute also provides scope for carrying out adjustments, in cases where there are some differences or variations between two transactions which are commercially comparable for the purposes of bench mark. While dealing with the issue, the Tribunal has discussed the various methods which are to be adopted for determining the Arms Length Price. The relevant observations of the Tribunal are extracted hereunder in the regard. The various methods are now discussed hereunder: (a) Comparable uncontrolled price method (CUP) [Rule) CUP is applied when a price is charged for a product or service. This is essentially comparison of prices charged for the property or serv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce at which a product that has been purchased from an associated enterprise is resold lo an independent enterprise. The resale price is reduced by resale price margin for arriving the ALP. The resale price of goods is reduced by the direct expenditure and the normal gross profit margin that would have been earned by an unrelated enterprise in a similar transaction. The price is further adjusted on account of different accounting practices and other differences between the transactions. There may be an internal RPM or external RPM as in the case of a CUP. Bench marking of the margins is crucial in this process. RPM could be reasonable method lo apply to transactions involving resale of tangible property or in cases where the services are resold without value addition. This method is particularly suitable in cases where goods are sold within a short period of purchases and influence of other factors is found to be minimal. (c) Cost Plus Method (CPM(Rule 1013(1)(CIT (A)); This method is ordinarily used where some semi finished goods are sold between related parties or similar situations or in respect of joint facility agreements, long-term buy and supply arrangements of pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erformed (taking into account assets used and risks assumed by each enterprise. The external market criteria may include, for example, profit split percentages or returns, observed among independent enterprises with comparable functions. (e)) Transactional Net Margin Method (TNMM)(Rule 10B(1)(c))]. The TNMM requires establishing comparability at a broad functional level. It requires comparison between net margins derived from the operations of the uncontrolled parties and net margin derived by an associated enterprise on similar operation. Under this method, the net profit margin realized by any associated enterprise from an international transaction is computed in relation to a particular factor such as costs incurred, sales, asset Utilized, etc. The net profit margin realised by an associated enterprise is compared with net profit margin of the uncontrolled transactions to arrive at the ALP. The TNMM is similar to RPM and CPM to the. extent that it involves comparison of margin earned in a controlled situation with margins earned from comparable uncontrolled situation. The only difference is that in the RPM and CPM methods, comparison is of margins of gross profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons, select a suitable method for determination and furnish ALP of such international transactions carried by it and give basis and supporting authentic evidence of ALP and adjustments made. The taxpayer has further to cooperate in the determination of the ALP by the tax authorities by furnishing all relevant information. The tax authorities in cases where they are of the opinion that ALP has not been correctly determined by the tax payer, can substitute their own ALP on the basis of material or information furnished by assessee or collected by them. However, such ALP has to be determined having in mind provisions of sections 92 and 92C and other rules and regulations. While determining ALP, tax authorities are bound to follow principles of natural justice and be fair and reasonable to the taxpayer. Any material collected to be used against the tax payer is to be put to taxpayer to explain. Having regard to the purpose of the legislation and application of similar enactment world over, it must further be held that adjustments made on account of ALP by tax authorities can be deleted in appeal only if the appellate authorities are satisfied and record a finding that ALP submitted by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ost charge, etc., in the open market then reasonable and accurate evaluation is to be done and adjustment made. Reliability of uncontrolled transaction would depend upon the degree of comparability. The uncontrolled transaction may not be taken 'as comparable' if there are such material differences as cannot be adjusted. If data found satisfies above requirements, then further proceedings to find the most appropriate method, bust suited lo the facts and circumstances of a particular international transaction are lo be selected. In other words, most appropriate method would be the method which provides most reasonable results having regard to the data available for determining arm's length price. If there are more than one ALP's determined on the application of most appropriate method then arthemetical mean of such prices or price at option of the assessee within 5 per cent variation is to be adopted. 67. With regard to the adequacy of opportunity being given to the assessee, we find that the Tribunal has also examined this aspect and has held that prior to substitution of sub section (1) of S.92CA by the Finance Act, 2007, with effect from 1st June, 2007, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed and the TPO has determined the ALP with regard to export of television programmes, but in the instant ease, the TPO has considered all the activities of the assessee as one activity and determined margin of profit on the basis of Arithmetic Mean of the profit margin declared by six so called comparable cases. 69. From a perusal of the TPO's report and the detailed analysis furnished by the assessee, we find that neither the assessee has taken the comparable cases involved in similar activities nor the TPO has determined the Arms Length Price in the light of the guidelines laid down by the Special Bench of the Tribunal in the case of Aztec Software and Technical Services (supra). We are therefore of the view that Arms Length Price in relation to the impugned activities are not properly determined either by the assessee or by the TPO or the assessing officer. As such, it requires a fresh determination in the light of the order of the Special Bench in the case of Aztec Software and Technical Services . We accordingly set aside the order of the CIT(A), confirming the order of the Assessing Officer in this regard and restore the matter to the file of the Assessing Officer with ..... X X X X Extracts X X X X X X X X Extracts X X X X
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