TMI Blog2009 (7) TMI 1270X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee and one High Court i.e., Hon'ble Punjab and Haryana High Court against the assessee, applying the case law of Hon'ble Apex Court in the case of CIT v. Vegetable Products Ltd[ 1973 (1) TMI 1 - SUPREME COURT] , the beneficial view, which is in favour of the assessee is to be adopted. Respectfully following, the above, we allow the claim of the assessee and this common issue in both the appeals of the assessee is allowed. Deduction on the amount of deduction u/s 80IA and 80IB - reduced while calculating the deduction u/s 80HHC - HELD THAT:- In the case of M/s. SCM CREATIONS [ 2008 (3) TMI 223 - MADRAS HIGH COURT] , it is noticed that, the amendment brought out in Chapter VIA of the Act and introduction of section 80IA(9) was not brought to the notice of the Hon ble High Court. The Hon ble Special Bench of Chennai in the case of Rogini Garments [ 2007 (4) TMI 122 - ITAT, CHENNAI] has already considered the case law of J.P. Tobacco Products P.Ltd.[ 1996 (8) TMI 29 - MADHYA PRADESH HIGH COURT] and has also considered the amended provisions of section 80IA(9) of the Act. Respectfully following the Special Bench of Chennai in the case of Rogini Garments (supra), which now ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion other than just product comparability. The examples provided in the OECD guidelines of Transfer Pricing Guidelines for Multinational Enterprises and Tax Administration has discussed how the CUP method is to be applied. The Hon'ble Banagalore Special Bench in the case of Aztec Software Technology Services Ltd. [ 2007 (7) TMI 50 - ITAT BANGALORE] 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 also economic conditions and peculiar situation of that business. The Bench further held that the assessee knew even about the comparable uncontrolled transaction, and therefore it is reasonable to call upon the taxpayer to furnish controlled / un controlled transactions which are within taxpayer s special knowledge. Accordingly, the burden placed on the assessee is not discharged in the present case before us as the assessee has not filed the details before TPO or the Assessing officer. The relevant details, i.e. the transaction carried out of comparable controlled and un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r pricing difference on ALP, the matter in quantum appeal has been set aside to the file of Assessing officer, the penalty cannot survive at this stage. However, the Assessing officer is free to initiate the penalty u/s.271(1)(c) of the Act if the facts warrant so during the course of assessment of set aside proceedings and as per law. Accordingly, this appeal of the assessee is allowed as indicated above. In the result, the appeals of assessee s are allowed for statistical purposes and that of Revenue s appeal is dismissed. - SHRI R.P.GARG, SENIOR VICE PRESIDENT AND SHRI MAHAVIR SINGH, JUDICIAL MEMBER For the Petitioner : Shri J.P. Shah For the Respondent : H. Patidar, CIT DR Shri V.K. Gupta ORDER PER Mahavir Singh, Judicial Member:- These four appeals three by the assessee and one by Revenue are arising out of the orders of Commissioner of Income-tax (Appeals)-V VI Ahmedabad in appeals No. CIT(A)-VI/DCIT(SOD)Range-1/84/05-06 dated 27-02-2006; CIT(A)VI/DC. Range-1/110/07-08 dated 10-01-2008 and CIT(A)-V/DCIT(OSD)/Range-1/57/06-07 dated 22-11-2006. The assessments were framed by the DCIT(OSD),Range-1 Ahmedabad u/s.143(3) of the Income-tax Act, 1961 (hereinafter referred to as the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ains 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 the Revenue is supportable by the decisions of the Supreme Court, the jurisdictional High Court and other High Courts in the sense that while working out the income for the purpose of Chapter VI-A, the depreciation has to be deducted whether opted to the claimed by the assessee or not; and the view canvassed by the assessee was only supported by the decisions of the Tribunal that it is choice of the assessee as in the case of normal computation of income, it cannot be said that both the views are equally possible or reasonable views. The view, which is supported by the decisions of the Supreme Court, jurisdictional High Court and other High Courts, has to be preferred than the view taken by the Tribunal. Therefore, the depreciation, which is though allowable but not claimed in the return for normal computation of income, has to be allowed while computing the deductions under Chapter VI-A viz., sections 80H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The learned CIT(Appeals)-Vs, Ahmedabad, erred in not recognizing New Power Plant as new Industrial Undertaking whose profits are eligible for deduction under section 80IA of the Act. 2. The learned CIT(A) has erred in law and on facts in confirming the action of AO in disallowing the claim of deduction u/s.80IA of the Act on the New Power Plant. 8. At the outset, the Ld. Counsel for the assessee fairly stated that this issue has been decided by the Tribunal in ITA No.3528/Ahd.2004 for the assessment year 2001-02 vide order dated 16-05-2008 against the assessee. We find that the CIT(A) in both the years has relied on the appellate order for the assessment year 2001-02 and decided this issue following the same. However, the CIT(A) in assessment year 2003-04 has also given a finding in para 6.4 of his appellate order 21-11-2006 as under:- 6.8 Thus the issue involved is not that any old machinery was used, but the issue is that no new industrial undertaking came into existence. The above position clearly shows that what has been done in the name of alleged new industrial undertaking is that the assessee has purchased a turbine and it has been claimed that turbine independently can ge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iler manufactures the steam which is the raw material for turbine. Turbine is independently kept for generating power. The assessee installed new turbine which itself is a new industrial undertaking capable of generating electricity. This turbine can be operated by purchasing steam from outside source but the assessee since had the spare capacity of steam used the same for generating electricity in turbine. It was pointed out that the assessee has charged for consumption of steam at the rate of ₹ 660 per MT. Relying on the decision 107 ITR 195 (SC), it was pointed out that the assessee may establish a new unit for using the product of the old business as its raw material. The business may establish new unit for supplying raw material for its old unit. The assessee may establish a division of its own product as a new unit and the assessee may establish one or more units. It was also pointed out that the AO has presumed that the existing boiler is an integral part of the new plant. There is no transfer of previously used plant and machinery and therefore the question of value of previously used plant being less than 20% of the total value of the new plant and machinery does not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the total plant and machinery installed by the assessee. Both the learned AO and the learned CIT(A) could not be able to understand that the power can be generated independently. Thus, it was contended that the assessee was entitled for the deduction u/s 80IA. The learned DR, on the other hand, relied on the order of the AO. 9 We have carefully considered the rival submissions and perused the material on record along with the order of the tax authorities below. The deduction u/s 80IA is available to an assessee where the gross total income of the assessee includes any profits and gains derived by an undertaking or enterprise from any eligible business as referred to in sub-section (4). The deduction shall be allowed an amount equal to 100% of the profits and gains derived from such business for ten consecutive yea Rs. As per section 80IA(4) this section applies to any undertaking which is set up in any part of India for the generation or generation and distribution of power if it begins to generate power at any time during the period beginning on the 1st day of April, 1993 and ending on the 31st day of March, 2010. Sub-section (3) of section 80IA requires that such undertaking mus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... generating the power. The assessee in this case has merely added a new turbine to the existing undertaking by which his capacity to generate the power has increased. This, in our opinion, is merely an expansion of the existing undertaking. The new undertaking as is eligible u/s 80IA, in our opinion, must be independent and integrated unit which should be able to carry on the activities or to carry on the business as has been stipulated u/s 80IA independently. It is not the case of the assessee that the new unit established by the assessee has taken the boiler from the existing unit for its exclusive use and generation of power. It is only in the existing unit the assessee has added new turbine which, in our opinion, cannot be regarded to be establishing the new undertaking qualifying for deduction u/s 80IA. We, therefore, do not find any illegality or infirmity in the order of the CIT(A) in denying deduction to the assessee u/s 80IA. Thus, Ground Nos.3 and 4 stand dismissed. 9. As the Tribunal has already decided this issue and this being a recurring issue and while deciding this issue, one of the Members, i.e. the author of this order, is party to the order for assessment year 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ertaking. The expression derived from has a definite, but narrower meaning and it can not receive a flexible or a wider concept. Hon'ble Supreme Court in the case of Sterling Foods vs. CIT 237 ITR 579 (SC) have held that profit from sale of import entitlement are not profits derived from industrial undertaking in the case of Pandian Chemicals Vs. CIT 262 ITR 278 (SC) also similar view has been taken. Hon'ble Delhi High Court in the case of CIT Vs. Cement Distributors 208 ITR 355 has also held that deduction u/s.80HH/80I is not allowable on export entitlement. In view of the above judgments, I agree with the AO and accordingly the AO was fully justified in excluding this income of ₹ 3,98,98,792/- while computing deduction u/s.80IB. Therefore, this ground of the appellant is rejected. 12. Now before us the Ld. Counsel for the assessee, Shri J.P.Shah and Shri S.N.Soparkar relied on the case law of CIT v. ELTEK SGS P.Ltd. (2008) 300 ITR 6 (Del) and argued that the case law cited by the lower authorities are relating to Section 80I or 80IA of the Act and not relating to Section 80IB of the Act. Both the counsel stated that ELTEK SGS P.Ltd. (supra) has very categorically al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... way of reimbursement of such duties are inextricably linked with the cost of production which has to be reflected in the profit and loss account of the assessee and, therefore, the Revenue s argument cannot be accepted Further, the Hon'ble High Court held as under:- Consequently, we are of the view that the source of the duty drawback is the business of the industrial undertaking which is to manufacture and export goods out of raw material that is imported and on which customs duty Customs Act, 1962 read with the relevant notification issued by the Central Government in that regard. Learned counsel for the Revenue also drew our attention to Pandian Chemicals Ltd. v. CIT [2003] 262 ITR 278 (SC). However, on a reading of the judgment we find that that also deals with section 80HH of the Act and does not lay down any principle different from Sterling Foods [1999] 237 ITR 579 (SC). In fact, in Pandian Chemicals [2003] 262 ITR 278 (SC) reliance has been placed on Cambay Electric Supply Industrial Co. Ltd. [1978] 113 ITR 84 (SC) and the decision seems to suggest, as we have held above, that the expression derived from an industrial undertaking is a step removed from the business of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wly watched. It is that delicate and important branch of judicial power, the concession of which is dangerous but the denial is disastrous. At one stream stands Lord Denning who said : We do not sit here to pull the language of Parliament to pieces and make non-sense of it. That is an easy thing to do. We sit here to find out the intention of Parliament and carry it out. We do this better by filling in the gaps and making sense of the enactment than by opening to destructive analysis. Viscount Simonds called it a naked usurpation of the legislative function under the thing guise of interpretation . In our opinion, the intention of Legislature is a very slippery phase. When the language of the statute is transparently plain, it is wrong to give it colour according to the temper of time. When the language implied by the enactment is clear, there is no question of interpreting the provisions in any manner except by giving them their plain and obvious meaning. Nebulous concept of the legislative intent cannot be used to curtail the explicit provisions in a statute. A statute or any enacting provisions therein must be so construed so as to make it effective and operative on the principl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itions are closed. No costs. From the above referred case law of the Hon ble Madras High Court in the case of M/s. SCM CREATIONS (supa), it is noticed that, the amendment brought out in Chapter VIA of the Act and introduction of section 80IA(9) was not brought to the notice of the Hon ble High Court. The Hon ble Special Bench of Chennai in the case of Rogini Garments (supa) has already considered the case law of J.P. Tobacco Products P.Ltd. (supra) and has also considered the amended provisions of section 80IA(9) of the Act. Respectfully following the Special Bench of Chennai in the case of Rogini Garments (supra), which now stands confirmed by a Five Members Special Bench, Delhi, we are of the view that relief under section 80-IA should be deducted from the profits and gains of the business before computing relief under section 80HHC of the Act. Accordingly, this issue of the assessee s appeal is decided against the assessee and in favour of the Revenue. Accordingly, this issue of the assessee s appeal is dismissed. 15. The next issue in ITA No.846/Ahd/2006, the appeal of the assessee is against the order of CIT(A) in including the excise duty in the total turnover for the purpose ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se law of Hon ble jurisdictional High Court in the case of DCIT v. Core Healthcare Ltd. [2001] 251 ITR 61 (Guj) even the Hon ble Apex Court has affirmed the decision of Hon ble jurisdictional High Court in the case of DCIT v. Core Health Care Ltd. [2008] 298 ITR 194 (SC), wherein it is held as under:- Interest on moneys borrowed for the purposes of business is a necessary item of expenditure in a business. For allowance of a claim for deduction of interest under the said section, all that is necessary is that, firstly, the money, i.e., capital, must have been borrowed by the assessee ; secondly, it must have been borrowed for the purpose of business ; and, thirdly, the assessee must have paid interest on the borrowed amount (see Calico Dyeing and Printing Works v. CIT [1958] 34 ITR 265 (Bom). All that is germane is : whether the borrowing was, or was not, for the purpose of business. The expression for the purpose of business occurring in section 36(1)(iii) indicates that once the test of for the purpose of business is satisfied in respect of the capital borrowed, the assessee would be entitled to deduction under section 36(1)(iii) of the Act. This provision makes no distinction be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s from the assessee s own funds. As the issue is squarely covered by the decisions of Hon'ble Apex Court in the case of Core Health Care Ltd. and Munjal Sales Corporation (supra) , respectfully following the decisions of Hon'ble Apex Court we allow the claim of the assessee and this issue of the assessee s appeal is allowed. 19. The next issues in ITA No.157/Ahd/2007, the appeal of the assessee is as regards to reduce profits of the business on account of sale proceeds of DEPB license while calculating deduction u/s.80HHC of the Act. The assessee has raised the grounds as under:- 10. The Learned CIT(A) has erred in law and on facts in reducing profits of the business on account of sale proceeds of DEPB license 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. 11. 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. 12. Alternatively and without prejudice, if profit on sale of DPB license is not falling within the purview of S.28(iiia)(iiib)(iiic) of the Act, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ₹ 1,80,62,067/- on account of adjustments 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 p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ice is taken to be an ALP. In the form No.3CEB there is no reference regarding adjustments made, if any, to the price charged to AE to Non-AE in the comparable uncontrolled transaction. The assessee could not furnish any evidence or supporting documents with regard to the adjustments, that were warranted to determine the ALP. The assessee has furnished product wise details of sales made to AE and non-AE giving the quantum of price charged. These details reflected certain variation in the price charge to AE vis- -vis non-AE. Since the arm s length price was to be determined each transaction-wise, instances where price charged to the AE was less have been considered. The arm s length price of these transactions was computed considering (+) 5% where the price charged to the AE was less than 5% of the price charged to the non-AE, the same had been considered for adjustment. The assessee s argument that in some instances, the price charged to the AEs is more than that charged to the non-AEs and the consequent demand for averaging the price does not hold goods as the Transfer Pricing Provision do not permit reduction in the income . and finally held as under: 8. Considering the above fac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... early mentioned that invoices do not indicate the product code or any description indicating that whether it is trial sale or otherwise. It has also been mentioned that where it was claimed that product was sold to AE for introduction in market, it has not been made clear in which part of the world the product was to be introduced. Similarly, for other reasons also no evidence was submitted by the appellant. Another reason given by the appellant is that the volume to the AE was much larger than Non AE and also AE acts as whole seller. This is also not full supported by the date submitted by the appellant. For example, in respect of product code No.456121, the quantity to AE was 2000 kg. while to Non-AE it was 16800 kg. while the price charged from AE is ₹ 397.28 per kg. as against for Non-AE it is ₹ 610.43. Therefore, in spite of lesser quantity sold to AE the price charged is less. Similarly if we see the item of product code No.110583, the quantity supplied to AE is 4000 kg. and to Non-AE it is 6870 kg. while the rate charged from AE is ₹ 470.56 per kg. and the rate charged from Non-AE is ₹ 620.56 per kg. Similarly in the case of product code 45224, the qu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (2), has the effect of reducing the income chargeable to tax or increasing the loss, as the case may be, computed on the basis of entries made in the books of account in respect of the previous year in which the international transaction was entered into. He further argued that this provision merely lays down that the result of the computation of transfer pricing income should not result into reduction of the total income or increase in the loss computed under the other provisions of the Act, therefore this provision on the contrary supports the assessee because the total income would increase by ₹ 16,49,955/-. This contention was advanced without prejudice to following contentions of the assessee submitting that no addition can be made under transfer pricing provisions. He further argued that all citizens of the country have a fundamental right to do business under the constitution. Transfer pricing provisions must not be interpreted in a manner that this fundamental right is adversely affected or diminished. Such interpretation will make the provisions falling foul of the constitution. That is why, Rule 10B(1)(a)(ii) provides that the ALP (Arm s Length Price) determined by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dition made by TPO and A.O. He also referred to Section 92CA(4) as amended w.e.f. 01.06.07 is as follows: (4) On receipt of the order under sub-section (3), the Assessing Officer shall proceed to compute the total income of the assessee under sub-section (4) of section 92C in conformity with the arm s length price as so determined by the Transfer Pricing Officer. According to him, the above provision does not apply to the case of the assessee because the assessment order is passed on 31.03.2005. 92CA(4) as actually applicable to the case of the assessee is (4) On receipt of the order under sub-section (3), the Assessing Officer shall proceed to compute the total income of the assessee under sub-section (4) of section 92C having regard to the arm s length price determined under sub-section (3) by the Transfer Pricing Officer. Therefore, the learned counsel for the assessee further argued in view of the above provisions that it was obligatory on the part of the Assessing Officer before passing the assessment order to issue a show cause notice to the assessee asking it to show cause as to why he should not compute the transfer pricing addition having regard to the TPO s order. The Del ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee, Shri Soparkar in this assessment year. He started the arguments that Under Sec.92CA(1) of the Act, Learned A.O. who framed the impugned assessment order referred the case of the assessee to Transfer Pricing Officer (TPO for short) for the purpose of framing order under Sec.92CA(3) of the Act. Pursuant to the same, the hearing took place before the TPO from time to time and finally vide his order dated 20.2.2006, TPO made adjustments of the Arm's Length Price in the sum of ₹ 1,80,62,067/-. Pursuant to the said adjustment, the A.O. who framed the impugned assessment order incorporated and added the said sum of ₹ 1,80,62,067/- in the income of the assessee. Shri Soparkar further submitted that as a separate reasoned order is passed by the TPO under Sec.92CA(3) of the Act, a separate submission is made herein, dealing with the contentions raised in the impugned order dated 20.2.2006. In the Appeal Memo, the assessee has challenged the action of the TPO in adding a sum of ₹ 1,80,62,067/-. As regards this addition of ₹ 1,80,62,067, the learned counsel for the assessee submitted that the entire addition made by the TPO is untenable both on facts as we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sons behind such adoption. The assessee has adopted Comparable Uncontrolled Price Method (CUP for short) as the assessee was having sales of large number of products to these AE during the year under consideration. Apart from AE, the assessee also sold diversified products to various unrelated enterprises. Therefore considering the complexity of the transactions, product diversity and multiplicity of transactions, the said CUP method was the only practicable method to determine the margins earned by the assessee as a whole which would duly reflect the comparable price in an uncontrolled transaction in the international market, both with AEs as well as unrelated enterprises. Under the said method, the assessee found out the price of a product in an uncontrolled transaction of sale and compare the same, after making necessary adjustments for various factor associated with AEs, with the average price of sales with AE. The assessee in its reports submitted as per Rule-10D of the Income-tax Rules gave the comparison of various sales instances with other concerns and it was demonstrated that the prices charges to AE of the assessee was comparable with that of the other non-AE or such sim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e afterthought and cannot be taken into consideration. The appellant submits that 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. In any case, it is not necessary to give all the reasons or grounds for justification of a particular method in the audit report itself. If it is stated that a particular method is followed because in majority of the cases prices are comparable between AE and non-AEs, the appellant has every right to adopt the CUP method. In few instances, when prices of other comparable cases are not available, the appellant can state that prices charged by it to AE in such cases are ALP. The Learned TPO contended that wholesale margins and volume discounts as well as political risks have not been substantiated. The appellant most respectfully submits that it has provided the information and quantified these factors as provided in the Rules. However it the ld. TPO was not satisfied about its reasonableness, she should have conducted independent inquiry and given reasons as to how the percentages quantified by the appellant a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lso necessary on the part of the TPO to establish that why the method selected by her is superior to the method followed by the assessee. In this respect he submitted that Circular No.14 of 2001 issued by the CBDT explaining notes of profits in the Finance Act,2001 dated 22.11.2001 is relevant and therefore the relevant extract of the same is reproduced herein below: Circular No.14/2001 Finance Act, 2001 - Explanatory Notes On Provisions Relating To Direct Taxes. DATE : 22-11-2001 55.3 With a view to provide a detailed statutory framework which can lead to computation of reasonable, fair and equitable profits and tax in India, in the case of such multinational enterprises, the Act has substituted section 92 with a new section, and has introduced new sections 92A to 92F in the Income-tax Act, relating to computation of income from an international transaction having regard to the arm's length price, meaning of associated enterprise, meaning of international transaction, computation of arm's length price, maintenance of information and documents by persons entering into international transactions, furnishing of a report from an accountant by persons entering into internationa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation in management, control or capital, sub-section (2) specifies the circumstances under which the two enterprises shall be deemed to be associated enterprises. 55.7 Section 92B provides a broad definition of an international transaction, which is to be read with the definition of transaction given in section 92F. An international transaction is essentially a cross border transaction between associated enterprises in any sort of property, whether tangible or intangible, or in the provision of services, lending of money, etc. At least one of the parties to the transaction must be a non-resident. The definition also covers a transaction between two non-residents, where for example, one of them has a permanent establishment whose income is taxable in India. 55.8 Sub-section (2) of section 92B extends the scope of the definition of international transaction by providing that a transaction entered into with an unrelated person shall be deemed to be a transaction with an associated enterprise, if there exists a prior agreement in relation to the transaction between such other person and the associated enterprise, or the terms of the relevant transaction are determined by the associated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the rules, and to substantiate the same with the prescribed documentation. Where such onus is discharged by the assessee and the data used for determining the arm's length price is reliable and correct, there can be no intervention by the Assessing Officer. This is made clear by sub-section (3) of section 92C which provides that the Assessing Officer may intervene only if he is, on the basis of material or information or document in his possession, of the opinion that the price charged in the international transaction has not been determined in accordance with sub-sections (1) and (2), or information and documents relating to the international transaction have not been kept and maintained by the assessee in accordance with the provisions contained in sub-section (1) of section 92D and the rules made thereunder; or the information or data used in computation of the arm's length price is not reliable or correct; or the assessee has failed to furnish, within the specified time, any information or document which he was required to furnish by a notice issued under sub-section (3) of section 92D. If any one of such circumstances exists, the Assessing Officer may reject the price ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... period for which the information and documents are required to be retained. The documentation required to be maintained has been prescribed under rule 10D. Such documentation includes background information on the commercial environment in which the transaction has been entered into, and information regarding the international transaction entered into, the analysis carried out to select the most appropriate method and to identify comparable transactions, and the actual working out of the arm's length price of the transaction. The documentation should be available with the assessee by the specified date defined in section 92F and should be retained for a period of eight yea Rs. During the course of any proceedings under the Act, an Assessing Officer or Commissioner (Appeals) may require any person who has undertaken an international transaction to furnish any of the information and documents specified under the rules within a period of thirty days from the date of receipt of a notice issued in this regard, and such period may be extended by a further period not exceeding thirty days. 55.15 The new section 92E provides that every person who has entered into an international tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... termined in accordance with section 92C in good faith and with due diligence. 55.19 The new section 271AA provides that if any person who has entered into an international transaction fails to keep and maintain any such information and documents as specified under section 92D, the Assessing Officer or Commissioner (Appeals) may direct that such person shall pay, by way of penalty, a sum equal to two per cent. of the value of the international transaction entered into by such person. 55.20 The new section 271BA provides that if any person fails to furnish a report from an accountant as required by section 92E, the Assessing Officer may direct that such person shall pay by way of penalty, a sum of one lakh rupees. 55.21 The new section 271G provides that if any person who has entered into an international transaction fails to furnish any information or documents as required under sub-section (3) of section 92D, the Assessing Officer or the Commissioner (Appeals) may direct that such person shall pay, by way of penalty, a sum equal to two per cent. of the value of the international transaction. 55.22 The Act has also amended section 273B to provide that the above mentioned penalties u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fferent criteria from Clauses-(a) to Clauses-(f) and based on the same, most appropriate method shall have to be determined by the assessee first and approved by the TPO later. He further submitted that even in CUP method, the mechanism for calculating Arm s length price is as follows: (a) comparable uncontrolled price method, by which, :- (i) the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions, is identified; (ii) such price is adjusted to account for differences, if any, between the international transaction and the comparable uncontrolled transactions or between the enterprises entering into such transactions, which could materially affect the price in the open market; (iii) the adjusted price arrived at under sub-clause (ii) is taken to be an arm's length price in respect of the property transferred or services provided in the international transaction; In view of this he stated that the said method can only be applied after taking into consideration various factors and material differences arising on account of risk, financial support, marketing support, technical support, geogra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansactions, and this was only the practicable method to determine the profits earned by the assessee, as a whole, as well as to the transactions to which the comparable price applies in an Uncontrolled transactions in the International market, both the AEs as well as non-AEs. The assessee claimed during the course of hearing before TPO, before the AO during the course of assessment proceedings and before CIT(A) submitted the details of price charged to AEs and non-AEs and the reasons for variation. The same details were even produced before us as Annexure-A, which is available at pages 34 to 111 of the assessee s paper book-II. The assessee has made comparison in many of the cases with the sales made with AEs in the developed countries 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he effect on price of border business function other than just product comparability. The examples provided in the OECD guidelines of Transfer Pricing Guidelines for Multinational Enterprises and Tax Administration has discussed how the CUP method is to be applied. The relevant para 2.10 to 2.13 read as under:- 2.10 The following examples illustrate the application of the CUP method, including situation where adjustments ma need to be made to uncontrolled transactions to make them comparable uncontrolled transactions. 2.11 The CUP method is a particularly reliable method where an independent enterprise sells the same product as is sold between two associated enterprise. For example, an independent 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 m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taxpayer, the authorities have ample power to determine the same and make suitable adjustments. In such a situation, as rightly admitted in the ground of appeal by the Revenue, this responsibility of determination of ALP is shifted to the Revenue authorities who are to determine the same in accordance with statutory regulations. 128. There is criticism that legislature is not justified in placing onerous burden on the taxpayer to maintain detailed documents and to justify that transaction was carried at ALP. It is contended/argued that this is like insisting upon production of self-incriminating evidence and is uncalled for. This criticism, in our opinion, 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 uncont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... whether the arm s length principle has been violated. This information would include items such as prices and gross profit earned by the parent company when dealing with other group companies and with unrelated custome Rs. Where this information is not disclosed, the Court concludes that the burden of proof on the Danish tax authorities is reduced. France As a rule, the burden of proof lies with the tax authorities, unless the transfer of profits concerns a tax haven, in which case the burden of proof is transferred to the taxpayer. Recent developments mean that there is now a legal requirement for taxpayers to provide documentation 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 sy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x authorities. On the other hand, the burden lies with the taxpayer to prove the deductibility of expenses. In transfer pricing cases the burden of proof transfers to the taxpayer if the pricing arrangements are very unusual, for example if comparable uncontrolled prices (CUP) are available but not used, or goods or services are provided at cost or below cost. The burden of proof is also transferred to the taxpayer, and will be more onerous, if s/he refuses to provide information requested by the tax authorities where there is a legal obligation to provide that information, or if the requisite tax 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 ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t unique to the field of transfer pricing. 131. Similar provisions are available in the laws of other countries. It would be seen that even a most advanced country like United Kingdom has provisions placing on the taxpayer the burden of proving that international transaction is carried at ALP. 132. A dispassionate study of provisions of various countries on burden of proof, would show, the following fundamental features : (i) That the burden to establish that international transaction is carried at ALP, is 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, par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he taxpayer. In similar enactments of other countries, it is provided that burden on the Revenue authorities in such a case would be reduced. We have not come across similar provision in Chapter X of the Act. The tax authorities therefore, have to resort to provision of s. 144 of the IT Act and determine the ALP on the basis of the material collected or available on record. In such circumstances, the ALP determined would be on the parity with a best judgment assessment. Such 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ne ALP of international transactions. The taxpayer and TPO had fully and clearly understood what international transactions were referred for the determination of the ALP. In the light of Circular No. 3 of 2003, approval was rightly given by the CIT as aggregate value of transactions exceeded ₹ 5 crores. The circular being binding was required to be followed. The taxpayer filed all conceivable objections before the TPO. Although each transaction should 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 Serv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of transfer pricing difference amounting to ₹ 2,02,39,798/- 2. The CIT(Appeals) ought to have allowed the appeal of the assessee praying for quashing of the total penalty. 3. The C.I.T.(Appeals) failed to appreciate that the Assessing officer had not recorded his satisfaction during the course of assessment proceedings for levy of penalty under sec. 271(1)(c) and also the fact that the notice under sec.271(1)(c) also did not record its satisfaction correctly. 32. After hearing the rival contentions, we find that the Tribunal has upheld the disallowance of claim of deduction u/s.80IA of the Act, in the quantum appeal in ITA No.846/Ahd/2006 by relying on the earlier year s decision, (the same is being reproduced even though at the costs of duplicity, but for the sake of clarity) by giving following findings:- 8. At the outset, the Ld. Counsel for the assessee fairly stated that this issue has been decided by the Tribunal in ITA No.3528/Ahd.2004 for the assessment year 2001-02 vide order dated 16-05-2008 against the assessee. We find that the CIT(A) in both the years has relied on the appellate order for the assessment year 2001-02 and decided this issue following the same. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 plant for generation of power what is required is boiler and turbine. Boiler manufactures the steam which is the raw material for turbine. Turbine is independently kept for generating power. The assessee installed new turbine which itself is a new industrial undertaking capable of generating electricity. This turbine can be operated by purchasing steam from outside source but the assessee since had the spare capacity of steam used the same for generating electricity in turbine. It was pointed out that the assessee has charged for consumption of steam at the rate of ₹ 660 per MT. Relying on the decision 107 ITR 195 (SC), it was pointed out that the assessee may establish a new unit for using the product of the old business as its raw material. The business may establish new un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... un 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 Undertaking. Even otherwise also it was contended that the value of the boiler in any case was less than 20% of the total plant and machinery installed by the assessee. Both the learned AO and the learned CIT(A) could not be able to understand that the power can be generated independently. Thus, it was contended that the assessee was entitled for the deduction u/s 80IA. The learned DR, on the other hand, relied on the order of the AO. 9 We have carefully considered the rival submissions and perused the material on record along with the order of the tax authorities below. The deduction u/s 80IA is available to an assessee where the gross total income of the assessee includes any profits and gains derived by an undertaking or enterprise from any eligible business as referred to in sub-section (4). The deduction shall be a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 can independently generate the power. The assessee is already having the undertaking engaged in the business of generating the power. The assessee in this case has merely added a new turbine to the existing undertaking by which his capacity to generate the power has increased. This, in our opinion, is merely an expansion of the existing undertaking. The new undertaking as is eligible u/s 80IA, in our opinion, must be independent and integrated unit which should be able to carry on the activities or to carry on the business as has been stipulated u/s 80IA independently. It is not the case of the assessee that the new unit established by the assessee has taken the boiler from the existing unit for its exclusive use and generation of power. It is only in the existing unit the assessee has added new turbine which, in our op ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee also put the certificate of the chartered Accountant as required u/s.80IA(7) of the Act which also clearly demonstrate the bona fide of the assessee in making this claim. In view of the above explanation of the assessee, we find that that it is a difference of opinion on legal point of view and the assessee s explanation has never been held to be false and without that the penalty u/s.271(1)(c) of the Act cannot be levied. In the similar circumstances, (from unreported decision), the Hon'ble jurisdictional High Court in Tax Appeal No.430 to 432 of 2006 in the case of J.C.I.T. v. Kiran Sytex Private Ltd. held that penalty levied for claim of deduction u/s.80HHC of the Act, which was disallowed while the claim of the assessee was that it was under a bona fide legal belief that it was entitled to the deduction. The Hon'ble High Court affirmed the findings of Tribunal quashing the penalty u/s.271(1)(c) of the Act. Since the facts being similar, we respectfully following the Hon'ble jurisdictional High Court delete the penalty u/s.271(1)(c) of the Act on this issue. 34. As regards to confirmation of penalty on account of addition of transfer pricing difference on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... due to change of WDV would not automatically result in levy of penalty. Therefore, penalty in respect of excess claim of depreciation is not leviable at all. 38. We find from the above that the CIT(A) has deleted the penalty on the premise that this disallowance of depreciation is basically for the reason that after allowing depreciation in assessment year 2001-02, the WDV has reduced and accordingly the claim of the assessee for this year was reduced. The finding of the CIT(A) are that the earlier year s claim of the assessee was that no depreciation was allowed actually on the basis of a legal decision, hence, the issue in that year was debatable. In view of this finding of the CIT(A), we find no infirmity in the same and accordingly we uphold the same. This issue of the Revenue s appeal is dismissed. 39. As regards to non-inclusion of sales tax and excise duty in the total turnover for the purpose of deduction u/s.80HHC of the Act, the CIT(A) deleted the penalty levied by the Assessing officer u/s.271(1)(c) of the Act. We find that this issue is squarely covered in favour of the assessee and against the Revenue even in quantum by the decision of the Hon'ble Apex Court in the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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