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2016 (5) TMI 279 - ITAT MUMBAI

2016 (5) TMI 279 - ITAT MUMBAI - TMI - Addition on account of upward adjustment by imputing Notional Interest on delayed debts - Held that:- It is uncontroverted stand of the assessee that he has not charged interest on delay in realization of debts in non AE situations as well. Once it is not in dispute, as is the case before us, that no interest is charged from the non AEs, i.e. independent transactions, as well, there cannot be any occasion to make an ALP adjustment, for notional interest, on .....

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ble in only two situations i.e. (i) where the economic substance of a transaction differs from its form and (ii) where the form and substance of the transaction are the same but arrangements made in relation to the transaction, viewed in their totality, differ from those which would have been adopted by independent enterprises behaving in a commercially rational manner.

None of these conditions is satisfied in the present case. The form and substance of the transactions are the sam .....

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AEs. Recharcaterization of this transaction, therefore, is not permissible. The very foundation of the Transfer Pricing Officer is thus wholly unsustainable in law. - Decided in favour of assessee - I.T.A. No.7297/Mum/2014 - Dated:- 31-3-2016 - Pramod Kumar AM and Pawan Singh JM For The Appellant : Bharath Janarthanan For The Respondent : Mallikarjun Utture ORDER Per Pramod Kumar, AM: 1. By way of this appeal, the assessee appellant has challenged correctness of the order dated 23.09.2014 passed .....

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directing the Assessing Officer (AO) to follow the directions of Hon'ble DRP-II given in appellant's own case in respect of assessment year 2008-09; 1.2 On the facts and in the circumstances of the case and in law, the CIT(A) erred on facts in arriving a decision that the appellant itself has offered interest at the rate of 11.96% which has to be taken as basis while working out the amount of adjustment; 1.3 On the facts and in the circumstances of the case and in law, the CIT(A) erred .....

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19 wherein Hon'ble High Court has held that right to receive interest and liability to pay interest arose in respect of the same period and out of the same event i.e. non payment of sale proceeds in time, it afforded sufficient nexus between two to justify applicability of principles of netting; 1.5 The Appellant submits that while giving directions to the AO to follow directions of Hon'ble DRO for this year wherein all objections have been considered, the CIT(A) has ignored the followin .....

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d be applied considering the rating of 'AAA' instead of 'BBB'; e) that the payment of interest by the assessee to its AE on the contention that it would reduce the income which is prohibited by the Act; f) that the assessee company has both, purchase and sales, transactions with the AE and AE has not charged interest on delay in payments by assessee company; g) that the assessee company is entitled to nett off each and every transactions of sales and purchase with the AE (in acco .....

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d payables account of the AE remain in the open position and therefore receivables/debts found to be delayed which has invited the imputation of notional interest; i) that no such upward adjustment has been made in the assessment year 2007-08 (earlier year) and in the assessment year 2010-11 (subsequent year) despite the receivables were delayed and identical facts did existed in those years; 1.6 In view of the above grounds of appeal, the appellant submits that the CIT(A) be directed to delete .....

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of debts. The assessee s argument that no such interest is charged from the non AEs was noted and brushed aside. It was also noted that in many cases the assessee has received advance payments from the AEs as well. He also noted that the business prudence or necessity of extending credit to the AE is not relevant for computing arm s length price in unrelated (sic- related) party transactions . It was also noted that lending or borrowing is not the man business of the company and that the assess .....

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We find that this is uncontroverted stand of the assessee that he has not charged interest on delay in realization of debts in non AE situations as well. Once it is not in dispute, as is the case before us, that no interest is charged from the non AEs, i.e. independent transactions, as well, there cannot be any occasion to make an ALP adjustment, for notional interest, on delay in realization of trade debts from the AEs. The very purpose of the arm s length price adjustments is to neutralize the .....

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form and substance of the transaction are the same but arrangements made in relation to the transaction, viewed in their totality, differ from those which would have been adopted by independent enterprises behaving in a commercially rational manner. None of these conditions is satisfied in the present case. The form and substance of the transactions are the same. The Transfer Pricing Officer has not brought on record any material to demonstrate and establish that the form and substance of trans .....

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wholly unsustainable in law. In any event, by our order of even date in the case of Rusabh Diamonds Vs ACIT and vice versa (I.T.A. Nos. 2497 and 689/Mum/2010, Assessment year: 2009-10), we have held this issue, in general, in favour of the assessee, by observing as follows: 12. In our considered view, even if we proceed on the basis that Explanation to Section 92B is indeed retrospective in effect and it does cover delay in realization of debts, as long as sale is benchmarked on TNMM basis, as i .....

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e the interest income is part of the other income , under pre amended as well as post amended schedule VI to the Companies Act, which is duly taken into account into computation of PBIT. In a way PBIT is a misnomer, as while PBIT does not take into account interest expenditure, it does take into account interest incomeappearing in the other income. Once the profitability, as per PBIT, is found to be comparable, there cannot be a separate adjustment for interest income on delayed realization whic .....

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cally stated that "further, the said amount of ₹ 2428.26 millions has also been determined/ computed by the assessee having regard to the arm's length price on application of Transactional Net Margin Method (TNMM), on aggregation of transactions, as prescribed under section 92C of the Income Tax Act, 1961". In this backdrop, we can usefully refer to the decision of Hon'ble Delhi High Court, in the case of Sony Ericsson Mobile Corporation Pvt Ltd Vs ACIT [(2015) 374 ITR 11 .....

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congruous to accept the comparables and determine or accept the transfer price and still segregate AMP expenses as an international transaction," 8. By way of an example, this aspect of the matter was then explained by Hon'ble Delhi High Court as follows: "An example given below would make it clear: Particulars Case 1 Case 2 Sales 1000 1,000 Purchase Price 600 500 Gross Margin 400 (40%) 500 Marketing Sale promotion 50 150 Overhead expense 300 300 Net profit 50 (5%) 50 (5%) The abov .....

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action, the position in case 2 would be: Particulars Case 2 Sales 1,000 Purchase Price 500 Gross Margin 500 (50%) Overhead expenses 300 Marketing expenses 50 Net profit 150 (15%) It is obvious that this would not be the correct way and method to compute the arm's length price. The purchase price adjustments/set off would be mandated to arrive at the arm's length price, if the AMP expenses are segregated as an independent international transaction....." 9. By the same logic, even mak .....

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he interest levy for late realization of debtors, being inextricably connected with the sales, is also part of operating income. In the case of Nirma Industries Limited Vs DCIT [(2006) 283 ITR 402 (Guj)], Hon'ble High Court has dealing with the nature of interest on debtors, held it to be integral to business income. The same is the principle for the transfer pricing cases to that extent interest is to be taken as integral to sale proceeds, and, as such, includible in operating income. When .....

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nceptual foundation, for separate adjustment for delayed realization of debtors and on the facts of this case, is thus devoid of legally sustainable merits. 10. The other aspect of the matter is that a separate adjustment for delayed realization of debtors can, even in a fit case, can only be made only to the extent the credit period allowed to the associated enterprises is more than the credit period allowed to independent enterprise in respect of the same or materially similar transactions. In .....

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e same. This fact, if anything, shows that the credit period allowed to the AEs is comparable with credit period of non AEs in respect of similar goods. To compare credit period in respect of finished goods with the credit period in respect of semi-finished goods, is, therefore, somewhat fallacious in approach and untenable in law. In our considered view, merely because there is a delay in realization of debts cannot be reason enough to make an addition as long as such a delay is peculiar to the .....

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not a standalone international transaction per se, but is a result of the international transaction as it only reflects that the related payment has not been made by the debtor. As for the learned Departmental Representative's stand that "the supplier is entitled to receipt of payment immediately on delivery irrespective of whether the finished goods is sold in the market, get spoiled in manufacturing or is damaged" would probably be valid in the perfect market conditions which are .....

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lity that immediate payments are more of exceptions rather than rule, and more so in a complex case in which the assessee is sole vendor and the very existence of the buyer is to process the semi- finished goods and sell it to the end buyers. Many factors, such normal business practices and the commercial exigencies, influence the fact of payment in respect of a commercial transaction. Whether a payment is made immediately by the AE or is made after six months cannot, therefore, be seen in isola .....

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assessee was to have similar transactions with non- AEs. The comparison has to be based on real transactions of similar nature, if at all such transactions have taken place. When no such transactions have taken place, as is the case before us, there is obviously no occasion of any comparison. The stand taken by the learned Departmental Representative, therefore, is not only quite detached from commercial reality but also wholly untenable in law. In any case, what can be examined on the touchston .....

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which is duly accepted by the TPO. In view of these discussions, and respectfully following the decision of the coordinate bench in assessee's own case for the earlier years, we uphold the grievance of the assessee and direct the Assessing Officer to delete the impugned ALP adjustment of ₹ 2,10,95,346. 14. As regards learned Departmental Representative s contention that Sony Ericsson Mobile Corporation decision (supra) will not apply in the case before us in the context of interest on .....

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on the given facts, it is in the nature of other income which is duly included in the PBIT figure. It is only interest expenditure which is not taken into account in the PBIT computation. There is no warrant for the proposition that interest expenditure taken into account is net of interest income on account of delay in realization of debts. We, therefore, reject this contention of the Departmental Representative. 15. As for learned Departmental Representative s suggestion that it is to be veri .....

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acts of each case, and as such constitute integral part of the transfer pricing documentation. There is nothing on record to show these exclusions. 16. As regards the contention that normally all interest incomes are excluded in the computation of PBIT as such incomes rarely constitute operational income, we see no need to be guided by such hypothesis and generalities. There is nothing on the records, as we have noted earlier, such exclusions on the facts of this case. In any event, setting off .....

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roceeds. Such being our conclusions, we also see no need to address ourselves to the specific factual arguments advanced by the learned counsel. In effect thus, we uphold the grievance of the assessee, and direct the Assessing Officer to delete the impugned arm s length price adjustment. 18. As we have upheld the grievance of the assessee, and thus deleted the impugned ALP adjustment, grievance raised by the Assessing Officer, which was in respect of the interest rate on the basis of which ALP a .....

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m 1st April 2002. This Explanation provides as follows: Explanation*: - For the removal of doubts, it is hereby clarified that - (*inserted by the Finance Act 2012, though with retrospective effect from 1st April 2002) (i) the expression "international transaction" shall include - (a) the purchase, sale, transfer, lease or use of tangible property including building, transportation vehicle, machinery, equipment, tools, plant, furniture, commodity or any other article, product or thing; .....

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g, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business; (d) provision of services, including provision of market research, market development, marketing management, administration, technical service, repairs, design, consultation, agency, scientific research, legal or accounting service; (e) a transaction of business restructuring or reorganisation, entered into .....

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y notebooks, technical know -how; (c) artistic related intangible assets, such as, literary works and copyrights, musical compositions, copyrights, maps , engravings; (d) data processing related intangible assets, such as, proprietary computer software, software copyrights, automated databases, and integrated circuit masks and masters; (e) engineering related intangible assets, such as, industrial design , product patents, trade secrets, engineering drawing and schematics, blueprints, proprietar .....

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exploitation rights, easements, air rights, water rights; (j) goodwill related intangible assets, such as, institutional goodwill, professional practice goodwill, personal goodwill of professional, celebrity goodwill, general business going concern value; (k) methods, programmes, systems, procedures, campaigns, surveys, studies, forecasts, estimates, customer lists, or technical data; (l) any other similar item that derives its value from its intellectual content rather than its physical attribu .....

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ng from an international transaction as well. That is the only provisions under which ALP adjustments can be made. In other words, therefore, arm's length price adjustments can only be made in respect of an 'international transactions'. The expression 'international transaction', on the other hand, is defined under section 92 B as a transaction between two or more associated enterprises, either or both of them are non-residents, "in the nature of purchase, sale or lease .....

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ing, is not an international transaction per se, but is a result of the international transaction. In plain words, a continuing debit balance only reflects that the payment, even though due, has not been made by the debtor. It is not, however, necessary that a payment is to be made as soon as it becomes due. Many factors, including terms of payment and normal business practices, influence the fact of payment in respect of a commercial transaction. Unlike a loan or borrowing, it is not an indepen .....

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missible credit period, as well. The residuary clause in the definition of 'international transaction', i.e. any other transaction having a bearing on the profits, incomes, losses or assets of such enterprises, does not apply to a continuing debit balance, on the given facts of the case, for the elementary reason that there is nothing on record to show that as a result of not realizing the debts from associated enterprises, there has been any impact on profits, incomes, losses or assets .....

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ue authorities, delayed. 22. We have noted the learned Departmental Representative s contention that the above decision is no longer good in law since a coordinate bench of this Tribunal, in the case of i-Gate Computer Systems Ltd Vs ACIT and vice versa (ITA No. 2504/PN/2012 has, inter alia, stated that the Hon ble Bombay High Court, in assessee s own case relating to the assessment year 2002-03 in Income Tax Appeal No. 1148/2012, vide judgment dated 28.2.2013, has held that in view of the amend .....

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nt, was (c) whether, on the facts and circumstances of the case and in law, the Tribunal did not err in holding that the loss suffered by the assessee by allowing excess period of credit to the associated enterprises without charging any interest during such period would not amount to international transaction whereas Section 92B(1) of the Income Tax Act, 1961, refers to any other transaction having a bearing on the profits, income, losses or assets of such enterprise . Rather than answering thi .....

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ed to the file of the Tribunal for fresh decision in light on the amendment. Accordingly, this issue is remitted to the file of the Tribunal for fresh decision on merits 25. The observations so made by Hon ble jurisdictional High Court, in our limited understanding, cannot be construed as holding that in view of the amendment by the Finance Act 2012 with retrospective effect from 1st April 2002, the said transaction of charging of interest from the AEs is covered under the amended provision of S .....

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judication on any legal issue. 27. It is for this reason that the said decision of the Pune bench of the Tribunal, relied upon by the learned Departmental Representative, is per incurium and does not bind the coordinate benches. 28. The question then is as to what is the impact of amendment in section 92B, by the virtue of Finance Act 2012, on the definition of international transaction so far as the interest on delayed realization of debt is concerned. 29. The amendment so made by the Finance A .....

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es that capital financing of any type, including by way of deferred payment or receivable or any other debt arising during the course of business will constitute an international transaction under section 92B. Going by this definition any debts arising during the course of business will constitute an international transaction. A trade debt is, accordingly, covered by this definition. However, since the assessment year that we are dealing with is prior to the assessment year 2012-13, the next imp .....

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to be benchmarked assumes considerable significance in the light of a new judicial development that we will deal with in a short while now. In the present case, we are dealing with a situation in which the amendment was made with retrospective effect and it covered certain issues which were already subjected to a judicial interpretation in a particular manner. The judicial interpretation so given was certainly not the end of the road. The matter could have been carried in appeal before higher j .....

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asure to nullifying the impact of a judicial ruling in taxation, it is the time for, at least on a theoretical note, introspection for the draftsman as to what went so wrong that fundamental intent of law of law could not be conveyed by the words of the statute, or, perhaps for the judicial forums, as to what went so wrong that the interpretation was so off the mark visà- vis fundamental principles of taxation or the sound policy considerations. However, amendment so made are generally pr .....

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to keep in mind the distinction between "lack of inquiry" and "inadequate inquiry". If there was any inquiry, even inadequate that would not by itself give occasion to the CIT to pass orders under s. 263 of the Act, merely because he has different opinion in the matter. It is only in cases of "lack of inquiry" that such a course of action would be open ], it was reiterated that it was only the lack, not the adequacy, of inquiry which could confer jurisdiction under .....

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king the retrospective amendments, and thus contribute to greater certainty and congenial business climate. Nothing evidences it better than this subtle, but easily discernible, paradigm shift in the underlying approach to the amendments made in Section 263 in the very first full budget of the present Government. 32. What has, however, been done in the case before us is to amend the law with retrospective effect. Of course, it happened much before the current awareness about the evils of retrosp .....

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in which such amendment is couched…….. 36. A clarificatory amendment presumes the existence of a provision the language of which is obscure, ambiguous, may have made an obvious omission, or is capable of more than one meaning. In such case, a subsequent provision dealing with the same subject may throw light upon it. Yet, it is not every time that the legislature characterizes an amendment as retrospective that the Court will give such effect to it. This is not in derogation of th .....

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g given retrospective effect. …………………. 37. An important question, which arises in this context, is whether a clarificatory amendment remains true to its nature when it purports to annul, or has the undeniable effect of annulling, an interpretation given by the courts to the term sought to be clarified. In other words, does the rule against clarificatory amendments laying down new principles of law extend to situations where law had been judicially .....

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9L Ed 396 (1869)] Peony Park v. O Malley [223 F2d 668 (8th Cir 1955)]. It does not mean that the legislature does not have the power to override judicial decisions which in its opinion it deems as incorrect, however to respect the separation of legal powers and to avoid making a legislature a court of last resort, the amendments can be made prospective only [Ref County of Sacramento v State (134 Cal App 3d 428) and In re Marriage of Davies (105 I II App 3d 66)] (Emphasis, by underlining, supplie .....

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en it was observed that, Undoubtedly, the scope of a charging provision can be enlarged with retrospective effect, but an anti-avoidance measure, that the transfer pricing legislation inherently is, is not primarily a source of revenue as it mainly seeks compliant behaviour from the assessee vis-àvis certain norms, and these norms cannot be given effect from a date earlier than the date norms are being introduced . We may add that right now we are only concerned with the question of retro .....

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icance because when it is found that the purpose of such interpretive statute, or clarificatory amendment, is correct a judicial interpretation of prior law, which the legislature considers inaccurate, the effect is prospective and, as in this case, it deals with transfer pricing legislation which essentially seeks a degree of compliant behavior from the assessee vis-à-vis certain norms- the norms the assessee should know at the time of entering into the transactions rather than at the ti .....

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ion. An anti-abuse legislation does not trigger the levy of taxes; it only tells you what behavior is acceptable or what is not acceptable. What triggers levy of taxes is non-compliance with the manner in which the anti-abuse regulations require the taxpayers to conduct their affairs. In that sense, all anti abuse legislations seek a certain degree of compliance with the norms set out therein. It is, therefore, only elementary that amendments in the anti-abuse legislations can only be prospectiv .....

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e, his stock reply is that the amendment only clarifies the law, it does not expand the law. 38. Well, if the 2012 amendment does not add anything or expand the scope of international transaction defined under section 92B, assuming that it indeed does not- as learned Departmental Representative contends, this provision has already been judicially interpreted, and the matter rests there unless it is reversed by a higher judicial forum. However, if the 2012 amendment does increase the scope of int .....

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es not compel a man to do what he cannot possibly perform. The law itself and its administration is understood to disclaim as it does in its general aphorisms, all intention of compelling impossibilities, and the administration of law must adopt that general exception in the consideration of particular cases. [See : U.P.S.R.T.C. vs. Imtiaz Hussain 2006 (1) SCC 380, Shaikh Salim Haji Abdul Khayumsab vs. Kumar & Ors. 2006 (1) SCC 46, Mohammod Gazi vs. State of M.P. & Ors. 2000 (4) SCC 342 .....

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er Section 92B, to the extent it pertains to the issuance of delayed realization of debtors being outside the scope of international transaction , cannot be said to be retrospective in effect. The fact that it is stated to be retrospective, in the light of the aforesaid guidance of Hon ble Delhi High Court, would not alter the situation, and it can only be treated as prospective in effect i.e. with effect from 1st April 2012 onwards. 40. As we deal with this question, it is also relevant to cons .....

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s in accordance with the provisions of the statute, in accordance with the law laid down by Hon ble Courts above and in the light of binding judicial precedents. When a binding judicial precedent requires us to deviate from the specific words of the provisions of the statute in a particular manner, we have to do so. There is no escape from this call of duty. Of course, whatever we do is, and shall always remain, subject to the approval by Hon ble Courts above. 41. There are a number of decisions .....

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s follows: 8. With the benefit of this guidance from Hon ble Delhi High Court, in view of legislative amendments made from time to time, which throw light on what was actually sought to be achieved by this legal provision, and in the light of the above analysis of the scheme of the law, we are of the considered view that section 40(a)(ia) cannot be seen as intended to be a penal provision to punish the lapses of non deduction of tax at source from payments for expenditure- particularly when the .....

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intended consequences to make the provisions workable has to be treated as retrospective notwithstanding the fact that the amendment has been given effect prospectively . Revenue, thus, does not derive any advantage from special bench decision in the case Bharti Shipyard (supra). 9. On a conceptual note, primary justification for such a disallowance is that such a denial of deduction is to compensate for the loss of revenue by corresponding income not being taken into account in computation of t .....

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ns to that effect. Deincentivizing a lapse and punishing a lapse are two different things and have distinctly different, and sometimes mutually exclusive, connotations. When we appreciate the object of scheme of section 40(a)(ia), as on the statute, and to examine whether or not, on a fair, just and equitable interpretation of law- as is the guidance from Hon ble Delhi High Court on interpretation of this legal provision, in our humble understanding, it could not be an intended consequence to di .....

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lding lapse but it is a sort of compensatory deduction restriction for an income going untaxed due to tax withholding lapse. The penalty for tax withholding lapse per se is separately provided for in Section 271 C, and, section 40(a)(ia) does not add to the same. The provisions of Section 40(a)(ia), as they existed prior to insertion of second proviso thereto, went much beyond the obvious intentions of the lawmakers and created undue hardships even in cases in which the assessee s tax withholdin .....

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point of time when the related legal provision was introduced. In view of these discussions, as also for the detailed reasons set out earlier, we cannot subscribe to the view that it could have been an intended consequence to punish the assessee s for non deduction of tax at source by declining the deduction in respect of related payments, even when the corresponding income is duly brought to tax. That will be going much beyond the obvious intention of the section. Accordingly, we hold that the .....

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ed as follows: 14. The Court is of the view that the above reasoning of the Agra Bench of ITAT as regards the rationale behind the insertion of the second proviso to Section 40(a) (ia) of the Act and its conclusion that the said proviso is declaratory and curative and has retrospective effect from 1st April 2005, merits acceptance. 15. In that view of the matter, the Court is unable to find any legal infirmity in the impugned order of the ITAT in adopting the ratio of the decision of the Agra Be .....

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