TMI Blog2010 (9) TMI 1150X X X X Extracts X X X X X X X X Extracts X X X X ..... while calculating deduction u/s 80HHC of the Act without appreciating the claim of the appellant under the amended provisions of S. 80HHC of the Act. 5 Alternatively and without prejudice, only 90% of the profits and not the entire sale proceeds of DEPB license could have been reduced from the profits of the business. 6 Alternatively and without prejudice, if profit on sale of DEPB licenses is not falling within the purview of S. 28(iiia)/(iiib)/(iiic) of the Act, the same is not liable to tax at all and therefore the same has to be reduced from the taxable income of the appellant. 7 Alternatively and without prejudice, even as per the provisions of Taxation Laws (Second Amendment) Act, 2005, the said DEPB sale proceed is eligible for deduction u/s 80HHC of the Act. 8 Alternatively and without prejudice Ld. CIT(A) failed to appreciate that the said sale proceeds of the DEPB license are covered by 28(iv) of the Act and therefore deduction u/s 80HHC of the Act ought to have been allowed fully on the same. 9 The learned CIT(A) has erred in law and on facts in confirming the action of AO in adding ₹ 1,82,97,194/- on account of adjustme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er the Act. 2 Adverting first to ground no.1, facts, in brief, as per relevant orders are that return declaring nil income filed on 30-10-2004 by the assessee, manufacturing intermediates, dyes and colors, etc., after being processed u/s 143(1) of the Income-tax Act, 1961 [hereinafter referred to as the Act ], was selected for scrutiny with the issue of notice u/s 143(2) of the Act on 28-04-2005.During the course of assessment proceedings, the Assessing Officer (AO in short) noticed that though the assessee did not claim any depreciation in the AY 2001-02, the AO allowed the depreciation to the assessee in that year. Since the assessee had claimed depreciation of ₹ 37,08,10,879/- in the year under consideration, the AO show-caused the assessee as to why the claim for depreciation be not reduced in the light of his own findings in the AY 2001-02. In response, the assessee submitted vide letter dated 25 11-2006 that the assessee did not opt for depreciation in AY 2001 02 in view of the decision of the Hon ble Jurisdictional High Court in the case of Arun Textile Ltd. as also decision of the Hon'ble Supreme Court in the case of Mahendra Mills Ltd. It was also pointe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have carefully considered the rival submissions and, perused the material on record. We find that the issue involved is duly covered by the decision of the Special Bench of ITAT in the case of Vahid Paper Converters v. ITO, Vapi Ward-4, Daman (1006) 98 ITD 165 (Ahd) (SB), in which it was held as under: it is, thus evident that for the purpose of Chapter VI-A, the Assessing officer has to compute the profits and gains of business separately. Of course, the computation has to be made as per the provisions of the Act meaning thereby, while computing the profits and gains of the eligible business, the Assessing officer has to give effect to all the relevant provisions of the Act, which include section 32 also. Therefore, while computing the profits and gains of the eligible business, the Assessing officer has to give effect to the provisions of section 32 also and work out the profits and gains after allowing the depreciation. It is true that certain Division Benches of the Tribunal have taken the view that for computing deduction under Chapter VI-A also, it is the option of the assessee to claim the depreciation or not to claim. However, when the view canvassed by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... O disallowed the claim for deduction u/s 80IA on profits from New Power Plant on the ground that new industrial unit was formed by a transfer to a new business of machinery or plant, which was previously used by the assessee, resulting in contravention of the provisions of section 80IA(3)(ii) of the Act. 7. On appeal, the learned CIT(A) upheld the disallowance, following his own order for the AY 2003-04. 8. The assessee is now in appeal before us against the aforesaid findings of the learned CIT(A). Both the parties agreed that the issue is squarely covered against the assessee by the decision dated 24 07-2009 of the ITAT Ahmedabad Bench-D in the assessee s own case for the AY 2003-04 in ITA No.157/Ahd/2007. 9.. We have heard both the parties and gone through the facts of the case as also aforesaid decision of the ITAT. We find that while adjudicating a similar issue, the Tribunal vide their aforesaid order dated 24-07-2009 in ITA No.157/Ahd/2007, concluded as under:- 7. The next common issue in both the appeals of the assessee is as regards to the disallowance of deduction u/s.80IA of the Act. The assessee has raised the following grounds in respective ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er the C.A s certificate which has been reproduced in earlier pat of the order, which was taken out of assessment order, that this power plat was an old plant. Apart from that it is apparent that turbine in itself cannot be said to be a new power plant, therefore, the claim of deduction u/s.80IA was simply with a view to reduce the incidence of tax and the Assessing officer after investigation of the issue as rightly come to the conclusion that the same cannot be termed as new power plant. This ground is therefore dismissed. We further find that this issue is recurring from earlier years and the Tribunal in assessee s own case for assessment year 2001-02 in ITA No.3528/Ahd.2004 has held against the assessee by discussing the facts as under:- 7.Ground Nos.3 and 4 relate to the claim of the assessee for deduction u/s 80-IA in respect of new power plant. The assessee claimed that during the year he has established the new power plant and accordingly claimed the deduction on that power plant u/s 80-IA of the Act. When questioned by the AO, the assessee vide letter dated 9/3/2004 pointed out that for generation of the power what is required is turbine. For composite plan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that no industrial undertaking came into existence within the provisions of Section 80IA by transferring the boiler or by installing new machinery for the purpose of generation of power for factory consumption. I find that this is nothing but an exercise to claim deduction to reduce taxable profits. I also find that the power plant is not capable to run independently and is dependent on the transfer of steam etc. from the existing plant. I therefore hold that the appellant is not entitled to claim deduction u/s 80IA on new power plant amounting to ₹ 15,68,40,556/-. This ground of appeal is therefore rejected. 8 Before us, the learned AR vehemently contended that the installation of a new turbine is a new Industrial Undertaking capable of generating electricity. This undertaking is being run independently. Merely that the assessee was using the steam as raw material from the existing boiler does not mean that a new Industrial Undertaking has come into existence. The assessee could have bought the steam from outside also. The power and plant is a separate unit from the boiler. Therefore, the assessee should have treated new turbine to be an Industrial Underta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o both the turbine which was already in existence and the new one established by the assessee. The claim of the assessee is that the new turbine established by him itself is a new undertaking engaged in the business of generating the power. New turbine itself cannot generate power until and unless the steam is provided to it through boiler. An undertaking which is eligible for deduction u/s 80IA, in our opinion, must itself be an independent undertaking and should be able to carry out the activities for which it has been established. The new turbine established by the assessee cannot itself generate the power. The undertaking so that it may generate the power will be complete only when both new turbine and the boiler are installed. The assessee has not installed boiler but it is part of existing undertaking generating the power. This, in our opinion, is merely an expansion of the existing undertaking. If the existing boiler is carved out from the new turbine installed by the assessee, the new turbine claimed to be eligible undertaking itself cannot generate the power. No material or evidence was brought to our knowledge which may prove that the new turbine installed by the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... decision in AY 2003-04. 12. The assessee is now in appeal before us against the aforesaid findings of the learned CIT(A). The learned AR on behalf of the assessee fairly admitted that though the Tribunal in the aforesaid order dated 24-07-2009 in AY 2003-04 allowed the claim of the assessee, the Hon'ble Supreme Court in their decision in the case of Liberty India vs. CIT (2009) 317 ITR 218 (SC) held that DEPB benefits were not entitled to deduction u/s 80IB of the Act. Accordingly, the ld. AR pleaded that issue has to be decided in the light of said decision of the Hon ble Apex Court. On the other hand, the learned DR supported the findings of the ld. CIT(A) in the light of decision of the Hon'ble Supreme Court in the case of Liberty India (supra). 13. We have heard both the parties and gone through the facts of the case as also the aforesaid decision of the ITAT and the decision of the Hon'ble Supreme Court in the case of Liberty India (supra). On a similar issue as to whether the profit from Duty Entitlement Passbook Scheme (DEPB) and Duty Drawback Scheme are derived from the business of the Industrial Undertaking and consequently eligible f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DEPB credit under the Scheme has to be calculated by taking into account the deemed import content of the export product as per basic customs duty and special additional duty payable on such deemed imports. Therefore, in our view, DEPB/Duty Drawback are incentives which flow from the Schemes framed by Central Government or from Section 75 of the Customs Act,1962, hence, incentives profits are not profits derived from the eligible business under Section 80-IB. They belong to the category of ancillaryprofits of such Undertakings. 17. The next question is what is duty drawback? Section 75 of the Customs Act, 1962 and Section 37 of the Central Excise Act, 1944 empower Government of India to provide for repayment of customs and excise duty paid by an assessee. The refund is of the average amount of duty paid on materials of any particular class or description of goods used in the manufacture of export goods of specified class. The Rules do not envisage a refund of an amount arithmetically equal to customs duty or central excise duty actually paid by an individual importer-cum-manufacturer. Sub-section (2) of Section 75 of the Customs Act requires the amount of drawback to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt at later stage) arising on account of rebates, duty drawback, DEPB benefit etc. Profit generation could be on account of cost cutting, cost rationalization, business restructuring, tax planning on sundry balances being written back, liquidation of current assets etc. Therefore, we are of the view that duty drawback, DEPB benefits, rebates etc. cannot be credited against the cost of manufacture of goods debited in the Profit Loss account for purposes of Sections 80-IA/80-IB as such remissions (credits) would constitute independent source of income beyond the first degree nexus between profits and the industrial undertaking. 24. In the circumstances, we hold that Duty drawback receipt/DEPB benefits do not form part of the net profits of eligible industrial undertaking for the purposes of Sections 80I/80-IA/80-IB of the 1961 Act. 13.1. In the light of view taken in the aforesaid decision of the Hon ble Apex Court, we hold that DEPB benefits do not form part of the net profits of eligible industrial undertaking for the purposes of Sections 80-IB of the Act. Therefore, we have no option but to uphold the conclusion of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unt which bears to ninety per cent of any sum referred to in clause (iiid) of section 28, the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee, if the assessee has necessary and sufficient evidence to prove that, - (a) he had an option to choose either the duty drawback or the Duty Entitlement Pass Book Scheme, being Duty Remission Scheme; and (b) the rate of drawback credit attributable to the customs duty was higher than the rate of credit allowable under the Duty Entitlement Pass Book Scheme, being Duty Remission Scheme : 17.2 As is apparent from the impugned order, the ld. CIT(A) upheld the findings of the AO since the assessee failed to furnish any evidence ,which could establish that the assessee fulfilled the aforesaid two conditions stipulated in the third proviso to sec.80HHC(3) of the Act as introduced by the Taxation Laws (Second Amendment) Act, 2005, w.e.f 1.4.1998. Even before us situation is no better. The assessee having failed to prove as to how it fulfilled the aforesaid two stipulated conditions stipulated in the third proviso to sub-section (3) of sec. 80HHC of the Act, we are o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is profits and falls under s. 28(iiid). There was no basis or justification for the Tribunal to hold that the face value of the DEPB credit can be reduced from the sale consideration. It was not permissible to bifurcate the proceeds of the DEPB into face value and excess of face value . The approach of the Tribunal is misconceived and unsustainable. As the assessee had an export turnover exceeding ₹ 10 crores and did not fulfill the conditions set out in the third proviso to s. 80HHC (3), it was not entitled to a deduction u/s 80HHC on the amount received on transfer of DEPB, Hon ble High Court concluded. The relevant findings of the Hon ble High Court are in the following terms: 31. We do not find any logical justification in bifurcating the value of the sale consideration realized by the exporter on the transfer of the DEPB credit. For one thing clause (iiid) of Section 28 must cover within its purview, the entirety of the sale consideration which is realized by the exporter on the transfer of the DEPB credit since that represents the profit which the exporter obtains on the transfer of the credit. No part of the credit that is available under the DEPB scheme c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er of the DEPB credit as export receipts while computing the deduction under Section 80HHC. Consequently, the entirety of the receipts on the transfer of the DEPB credit which was sought to be included in Section 28(iv) was brought in by the Parliamentary amendment in the form of an insertion of clause (iiid) in Section 28 with retrospective effect. There was no controversy regarding the taxability of the quantum of receipts on the transfer of the DEPB credit. Hence, for these reasons we are of the view that it cannot be inferred from the speech of the Finance Minister that the insertion of clause (iiid) in Section 28 was made with a view to tax only the amount which has been received in excess of the face value of the DEPB credit. 33. The submission that prior to the insertion of clause (iiid) in Section 28, the face value of the DEPB credit realized on the transfer of such credit constituted export profits, but not the amount realized in excess of the face value of the DEPB is similarly without any basis. This is because (i) The object of DEPB was to furnish an incentive to exporters so as to adjust the credit against the customs duty payable on any goods imported into In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sistance (by whatever name called) received by the assessee from the Government pursuant to a scheme of the Government. The amount received on the transfer of the DEPB credit is not received by the assessee from the Government pursuant to a scheme of the Government within the meaning of clause (iiic) and (c) When Section 28(iiid) specifically deals with profits realized on the transfer of the DEPB credit, it would be impermissible as a matter of first principle to bifurcate the face value of the DEPB and the amount received in excess of the face value of the DEPB. 34. For all these reasons, we have come to the conclusion that the view of the Tribunal on the two questions of law formulated by the revenue is unsustainable. In the circumstances, we allow the appeal by answering the first question of law as formulated in the negative. 33.(It should be actually numbered 35) Insofar as the second question is concerned, we are not in agreement with the view of the Tribunal that the face value of the duty entitlement passbook realized on the transfer of the entitlement is chargeable to tax under Section 28(iiib). We have already clarified that the entirety of the sale consi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... justments to the Arm s length price without there being any jurisdiction as well as legal and factual basis for the same. 5. The learned CIT(A) has erred in law and on facts in confirming the action of AO in invoking the provisions of Chapter X without prima facie demonstrating that there was some tax avoidance. 6. The learned CIT(A) has erred in law and on facts in confirming the action of AO in making a reference to the Transfer Pricing Officer (TOP) u/s.92C(3) r.w.s. 92CA(1) of the Act without providing an opportunity of being heard to the appellant. 7. In any case the whole reference and the consequent orders are bad and illegal because the alleged approval granted by CIT u/s.92C(1) of the Act is vitiated in law firstly because the appellant was not heard before any such approval and secondly because the same has been granted mechanically, without any application of mind and without due diligence. 8. The learned CIT(A) has erred in law and on facts in confirming the action of AO in referring the case of the appellant to the transfer pricing officer. Under the facts and circumstances of the case, there was no reasons to interfere with the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ountries and the sales made to under-developed countries to non-AEs. The main contention of the assessee is that the assessee has more margins in the sales made to under-developed countries due to various risks involved in dealing with the under-developed countries. Accordingly, it was the contention that its sales goods to the AEs and the AEs in turn sale the goods to their customers in North / South America, Europe etc., which are highly competitive markets and as such it becomes difficult to sustain. The assessee has denied that it has charged lower rates from AE s as compared to those of Non-AE s, the AE s have not been able to make profits. As per assessee, if the assessee has charged rates, which are higher than those charged to Non-AE s there is a possibility that the AE s will not be able to sale anything. According to assessee, the CUP method is used, as in the said method, controlled transactions are being compared with uncontrolled transactions wherein the degree of comparability with uncontrolled transactions is very high. According to assessee, in any case, it is not necessary to give all the reasons or grounds for justification of a particular method in the audit repo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt enterprise sells unbranded Colombian coffee beans of a similar type, quality, and quantity as those sold between two associated enterprises, assuming that the controlled and uncontrolled transactions occur at about the same time, at the same stage in the production / distribution chain, and under similar conditions. If the only available uncontrolled transaction involved unbranded Brazilian coffee beans, it would be appropriate to inquire whether the difference in the coffee beans has a material effect o the price. Of example, I could be asked whether the source of coffee beans commands a premium or requires a discount generally in the open market. Such information ma be obtainable from commodity markets or may be deduced from dealer prices. If this difference does have a material effect on price, some adjustments would be appropriate. If a reasonably accurate adjustment cannot be made, here liability of the CUP Method would be reduced, and it might be necessary to combine the CUP method with other less direct methods, or to use such methods instead. 2.12 One illustrative case where adjustments may be required is whether the circumstances surrounding controlled and uncon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nion, is without any valid basis. It is to be remembered that international transactions carried out by taxpayer are cross-border transactions. Departmental authorities in India are required to deal with and determine ALP of transactions carried in Asia, Europe, America, Australia, other developed and under-developed countries in Africa, etc. It is very difficult, if not impossible for them to find relevant data of an exact or of a similar transaction or profit made not only by the taxpayer, but also by other similarly situated uncontrolled enterprises. Knowledge of economic conditions prevailing at the place where transactions are carried is also essential. The very nature of this job of collection of data is such that the assessee is in the best position to gather the requisite information. 129. The taxpayer, on the other hand, as a party to the transaction has full knowledge of the transaction carried and profit earned by him. As a person associated with that particular line of business activity, the assessee is reasonably expected to be not only aware about nuances of that business, but also about economic conditions and peculiar circumstances, if any, of that business. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... umentation supporting their transfer pricing policies. Though in theory the burden of proof lies with the tax administration, in practical terms the burden of proof has always fallen on the taxpayer where the tax authorities have deemed a profit shift to have taken place or inappropriate transfer pricing to exist. Indonesia Indonesia operates on a selfassessment system with companies setting their own transfer prices. The burden of proof lies with the taxpayer to prove that the original price has been set at arm s length. Ireland Under Ireland s self-assessment system, the burden of proof in the event of a revenue audit will fall on the taxpayer. Italy The general principle is that the burden of proof lies with the tax authorities. Where the tax authorities issue an assessment to additional tax, however, the taxpayer must prove there is no liability for the additional tax. There are other circumstances in which the burden of proof lies with the taxpayer. The most important of these are the following : If an enterprise that is tax resident in Italy wants to claim a deduction for the costs of transactions with parties that are resident in certain tax havens, then the Ital ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax return is not filed. Finally, the Court sometimes allocates the burden of proof to the party best able to provide the evidence. New Zealand In New Zealand, the burden of proof normally lies with the taxpayer, not the Commissioner. However, s. GD13(9) places the burden of proof on the Commissioner where the taxpayer has determined its transfer prices in accordance with ss. 13(6) to 13(8) of the New Zealand Tax Act. Where the Commissioner substitutes an arm s length price for the actual price, then the Commissioner must prove that either : (1) this is a more reliable measure : or (2) the taxpayer has not cooperated with the Commissioner. The guidelines provide guidance on what is considered to be non-cooperation : Where the taxpayer does not provide the requested relevant information to the Commissioner : or If a taxpayer does not prepare adequate documentation, and provide it to the inland Revenue if requested. United Kingdom The position after the 1999 rules is that the burden for proving that transfer prices are at arm s length falls squarely on the taxpayer s shoulders. The act of submitting the return under self- assessment implic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the taxpayer who is to disclose all the relevant information and documents relating to prices charged and profit earned with related and unrelated customer. (ii) If the AO has determined an ALP, other than the price declared by the assessee, AO has to prove that the price determined by him is reliable and reasonable and confirms the statutory requirement unless the case is covered by situation No. (iii) below. (iii) In case of failure on the part of the taxpayer to comply with the statutory provisions, the tax authorities would have to determine the ALP. In such a situation, burden of proof on tax authorities is much reduced. 133. Having regard to the statutory provisions, particularly the mandate of ss. 92(1) and 92D read with relevant rules, we hold that it is obligatory on the part of the taxpayer to furnish information relating to controlled international transactions, 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 co-operate in the determination of the ALP by the tax authorities by furn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h assessment (determination of ALP) would have some approximations and estimations. But even such approximations and estimations must satisfy dictates of justice and fair play and look reasonable. It cannot be arbitrary and capricious. The order of TPO is appealable and therefore, it must be objective, contain detailed reasons, conform to regulations and should be seen as just and fair. 135. On consideration of the relevant provisions, it is evident that in the process of determining ALP, the first important factor to consider is the specific characteristics of services rendered both in the international transaction as also in the uncontrolled transaction. Next important aspect required to be considered is amount of assets employed, risk involved, both in controlled and uncontrolled transactions. If there are such differences between transactions taken for comparison, which are likely to affect the price or cost 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 ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould be separately mentioned, but no prejudice is shown to have been caused to the taxpayer on account of non-mention of each transaction separately. Therefore, in our opinion, this contention is to be rejected. 30. In view of the above dictates provided in the guidelines of transfer price for multi-national enterprises and tax administration in the case of CUP method including the situation where adjustments need to be made to uncontrolled transactions to make them comparable uncontrolled transaction. The assessee has not filed the details of functional analysis of these enterprises taking into account assets used and risk assumed. Similarly, the Hon'ble ITAT Bangalore Special Bench in the case of Aztec Software Technology Services Ltd. (supra) has placed burden of the taxpayer to justify the transactions carried at ALP by maintaining the documents and other details. The Hon'ble Bangalore Special Bench has also held that taxpayer as a party to the transaction has full knowledge of transaction carried out and as a personal associate with that particular line of business, the assessee reasonably accepted to be not only aware about nuisance of that business and but ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
