TMI Blog2016 (6) TMI 208X X X X Extracts X X X X X X X X Extracts X X X X ..... in case an alternate supplier was found, who offers more competitive cost, then the assessee would get 30 days time to respond to the competitive threat and in case, the assessee is unable to meet the competitive threat and then, mutually acceptable phase out would be negotiated between the parties. The aforesaid clause agreed upon between the parties is used by the authorities below to imply that Cummins regulates the price at which the goods have to be sold and hence, it fulfills the conditions of deemed AE as provided in section 92A(2)(i) of the Act. We find no merit in the said stand of revenue authorities, where the understanding between the parties is for the purpose of carrying on the business at competitive rates and where there is an alternate provided in the purchase agreement to determine the cost of goods, the same does not lead to the conclusion that the price is controlled by purchaser. In any case, the total exports of the assessee to Cummins constitute 18.76% of the total turnover and the extent of exports cannot be held to influence the price of assessee’s goods. The TPO while starting the TP proceedings had observed that the assessee has shown total earning i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r permission of the concerned CIT would not justify the action of Assessing Officer in this regard. Accordingly, we hold so. Consequently, the addition made in the hands of assessee does not stand. Apportionment of ₹ 3 lakhs out of administrative expenses to the EOU unit does not survive in view of our holding the assessment order passed to be beyond limitation. - Decided in favour of assessee. - ITA No.580/PN/2014, ITA No.974/PN/2014, ITA No.581/PN/2014 - - - Dated:- 29-4-2016 - MS. SUSHMA CHOWLA, JM AND SHRI PRADIP KUMAR KEDIA, AM For The Assessee : Shri Nikhil S. Pathak For The Revenue : Shri Mazhar Akram ORDER PER SUSHMA CHOWLA, JM: Out of this bunch of appeals, cross appeals filed by the Revenue and assessee are against order of CIT(A)-III, Pune, dated 01.01.2014 relating to assessment year 2008-09 against order passed under section 143(3) of the Income-tax Act, 1961 (in short the Act ). The Revenue is also in appeal against the order of CIT(A)-III, Pune, dated 01.01.2014 relating to assessment year 2009-10 against order passed under section 143(3) of the Income-tax Act, 1961 (in short the Act ). 2. This bunch of appeals relate to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nery of ₹ 23,45,902/- in respect of the EOU unit while computing the deduction u/s 10B. 5] The learned CIT(A) erred in not appreciating that as per the provisions of section 32, the additional depreciation was not mandatory and hence, there was no reason to thrust the said additional depreciation while computing the deduction u/s 10B. 6] The learned CIT(A) erred in holding that the learned A.O. was justified in apportioning a further amount of ₹ 3,00,000/- on adhoc basis in respect of the administrative expenses to the EOU unit without appreciating the correct facts of the case. 7] The learned CIT(A) erred in confirming the disallowance of ₹ 1,07,837/- u/s.14A r.w.r. 8D. 8] The appellant craves leave to add, alter, amend or delete any of the above grounds of appeal. 5. The assessee and the Revenue has filed cross appeals for assessment year 2008-09 and the Revenue is also in appeal in assessment year 2009-10. All the three appeals relating to the same assessee were heard together and are being disposed of by this consolidated order for the sake of convenience. 6. First, we shall take up the appeals filed by the Revenue, wherein in b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have already adjudicated similar issue vide order of even date in cross appeals in Serum Institute of India Vs. Addl. CIT and Addl. CIT Vs. Serum Institute of India in ITA Nos.1578/PN/2012 and 1618/PN/2012, relating to assessment year 2008-09, holding as under:- 26. We have heard the rival contentions and perused the record. The assessee was engaged in the business of trading and dealing in pharmaceuticals. Further, the assessee had set up two windmills for generation of power in assessment year 2002-03. The assessee opted for assessment year 2004-05 as the first year for claim of deduction by exercising the option available under section 80IA(2) of the Act. The Assessing Officer however, denied the deduction claimed under section 80IA(5) of the Act, in view of the option of initial assessment year. The CBDT recently vide Circular No.1/2016, dated 15.02.2016 had clarified the term initial assessment year under section 80IA(5) of the Act. The CBDT has clarified that it is abundantly clear from subsection 2 of section 80IA of the Act that the assessee has the option to choose the first year. It is also clarified that initial assessment year would mean the first year opted by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lid in law being barred by limitation. The grounds of appeal No.4, 5 and 7 raised by the assessee are not passed and hence, the same are dismissed as not pressed. The issue in ground of appeal No.6 is against adhoc allocation of administrative expenses to the tune of ₹ 3 lakhs to the EOU unit, against which the assessee is in appeal. 14. Briefly, in the facts of the present case, the assessee had furnished return of income on 25.03.2009 declaring total income of ₹ 7,54,81,220/-. The Assessing Officer issued first notice under section 143(2) of the Act on 07.09.2009 which was served upon the assessee on 08.09.2009. The case was assigned by the CIT-III, Pune and in view of the provisions of section 129 of the Act, fresh notices under sections 143(2) and 143(1) of the Act were issued on 26.07.2010, in response to which, the assessee attended from time to time and furnished the details as asked for. The Assessing Officer noted that the assessee had claimed deduction under section 10B of the Act at ₹ 3,17,85,946/-. The assessee had three units, out of which two units were non-EOU and one unit was 100% EOU. In the EOU unit, the assessee manufactures Nozzle Shroud pla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nologies, USA was regulated by Cummins, in the sense that if any alternative supplier offers the product at a more competitive cost, then the assessee would have 30 days to response to the competitive threat and if it does not meet the new product target or provides redesign suggestions to meet the target, the party, Cummins would have the right to explore new sourcing options. The Assessing Officer was of the view that the assessee falls under the clause (i) and clause (m) of section 92A(2) of the Act and it was concluded that the interaction between the assessee and Cummins Turbo Technologies, USA part take the character of international transaction. Hence the contention of assessee that there is no associate enterprise or deemed associate enterprise within the meaning of section 92A of the Act was held to be incorrect. Before the TPO, the assessee had submitted that it applied Cost Plus Method and TNMM method for determining arm's length price and the result is that the transaction with Cummins was at arm's length price since the margins of unit-3 were better than those of unit-1 and unit-2. This contention of the assessee was without prejudice to its contention that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entered into an international transaction with its associate enterprise and in this regard, reliance was placed on the ratio laid down by the Hon ble Delhi High Court in Sony India (P) Ltd. Vs. CBDT reported in 157 taxmann 125. The CIT(A) thus, was of the view that at the reference stage, a prima facie opinion on the part of Assessing Officer has to be made that it is necessary to make such reference to the TPO and where the Assessing Officer had reached such a prima facie view, on examination of purchase agreement with the associate enterprise in the present case, then the necessary circumstances existed for making such a reference. The second objection of the assessee was with regard to considering Cummins as deemed AE under clause (i) to section 92A(2) of the Act. The CIT(A) in view of section 92A(2)(i) of the Act was of the view that the Legislature had considered any situation where the AE is able to influence the pricing of product sold by the Indian company, then the same would become a deemed AE and transaction between the parties would therefore, become international transaction. The CIT(A) noted that though the exports to Cummins constituted only around 18.76% of the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1.12.2010 and not by 30.12.2011. He stressed that the reference made by the Assessing Officer to TPO was incorrect. Our attention was drawn to the correspondence with the TPO in this regard, wherein he had stressed that Cummins was not the AE of assessee. He further pointed out that the TPO had not made any adjustment on account of arm's length price of international transaction and our attention was then drawn to the definition of deemed AE under section 92A(2) of the Act. He pointed out that clause (h) and (m) to section 92A(1) of the Act have not been applied by the CIT(A) and only recourse is made to clause (i) to the said section. The learned Authorized Representative for the assessee pointed out that DTAA did not recognize the concept of deemed AE. As per Article 9 of DTAA, where Cummins either directly or indirectly does not control the assessee, then it does not fall within the definition of clause (a) to Article 9 and also does not fall within clause (b) i.e. any concern controlling both the assessee and Cummins. Since the DTAA was available between India and USA, the provisions of DTAA would prevail in this regard. The learned Authorized Representative for the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r (d) one enterprise guarantees not less than ten per cent of the total borrowings of the other 9 ITA 3749/Mum/14 enterprise ; or (e) more than half of the board of directors or members of the governing board, or one or more executive directors or executive members of the governing board of one enterprise, are appointed by the other enterprise; or (f) more than half of the directors or members of the governing board, or one or more of the executive directors or members of the governing board, of each of the two enterprises are appointed by the same person or persons; or (g) the manufacture or processing of goods or articles or business carried out by one enterprise is wholly dependent on the use of knowhow, patents, copyrights, trade-marks, licences, franchises or any other business or commercial rights of similar nature, or any data, documentation, drawing or specification relating to any patent, invention, model, design, secret formula or process, of which the other enterprise is the owner or in respect of which the other enterprise has exclusive rights; or (h) ninety per cent or more of the raw materials and consumables required for the manufacture ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erence is made to the TPO in respect of determination of arm's length price of international transaction, then the time period for completion of assessment stands extended by one year i.e. by 31.12.2011. The vehement proposition raised by the learned Authorized Representative for the assessee before us is that in the case of assessee, where it had no AE, no reference to the TPO was warranted and the assessment had to be completed by 31.12.2010. However, since the assessment was completed on 30.12.2011, the same was invalid. 21. First, let us look at the relevant provisions of section in this regard for the purpose of Chapter X of the Act. The requirement is that where there is a transaction between two parties, who are associate enterprises in relation to the other, then international transactions have to be computed having regard to the arm's length price. The meaning of associate enterprise is defined by section 92A of the Act, which recognized not only the associate enterprise but also defines the situation where two enterprises shall be deemed to be associate enterprises. Various situations are enlisted under sub-section (2) to section 92A of the Act and for deciding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rticipates directly or indirectly or through one or more intermediaries in its management or control or capital or the same persons who participate directly or indirectly, or through one or more intermediaries in the management or control or capital of the enterprise. The scope of associate enterprises is enlarged by clause (b), wherein in addition to the one or more persons participating in the management or control or capital of both enterprises and if through one or more intermediaries is also held to be associate enterprises. Clause (2) to section 92A of the Act starts with the Preamble for the purpose of sub-section (1) , two enterprises shall be deemed to be associate enterprises, if at any time during the previous year it fulfills the conditions laid down in clause (a) to (m) to section 92A(2) of the Act. Under section 92A(2) of the Act, it illustrates the situations where two enterprises as envisaged in sub-section (1) can be held to be associate enterprises. In this regard, we find support from the ratio laid down by the Mumbai Bench of Tribunal in Diageo India (P) Ltd. Vs. DCIT (2011) 47 SOT 252 (Mumbai), wherein it was held as under:- 10. We find that, in terms of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of two or more enterprises are the same, the enterprises are said to be associated enterprise. The expression used in the statute is 'participation in control or management or capital', but essentially all these three ingredients refer to de facto control on decision making. In terms of the basic rule thus, whether one enterprise controls the decision making of the other or whether decisions making of two or more enterprise are controlled by same interests, these enterprises are required to be treated as 'associated enterprise'. Section 92A(2) gives practical illustrations of this kind of a control. All these illustrations deal with simple situations of dealing with two enterprise, as envisaged in section 92A(1)(a), but these are equally good for application in situations involving more than two enterprise, as envisaged in section 92A(1)(b). Section 92A(2)(e), for example, refers to a situation in which more than half of the directors or members of the governing board, or one or more of the executive directors or members of the governing board, of each of the two enterprises are appointed by the same person or persons but this deeming fiction is equally applicabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee, for all effective purposes, the transaction is actually between the assessee and the Diageo group concerns supplying the raw material to the CBU, and since the assessee as also these vendors are admittedly under the control of Diageo PLC, the transactions are clearly between the associated enterprises. The objection raised by the assessee to the effect that the transactions of imports of raw material by the CBU, i.e. Konkan Agro, from Diageo group entities cannot be treated as international transactions between the associated enterprises, therefore, is rejected. 23. Where the section itself provides that in order to be associate enterprises, there should be participation, directly or indirectly or through an intermediary, in the management or control or capital of two or more enterprises, as the basic condition to qualify as associate enterprises, then in cases where this situation is not fulfilled, the provisions of Chapter X of the Act are not applicable. Even Article 9 of DTAA between India and USA refers to participation in management or control or capital and where such management, control or capital is missing between two enterprises, they cannot be referre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etween the parties. The aforesaid clause agreed upon between the parties is used by the authorities below to imply that Cummins regulates the price at which the goods have to be sold and hence, it fulfills the conditions of deemed AE as provided in section 92A(2)(i) of the Act. We find no merit in the said stand of revenue authorities, where the understanding between the parties is for the purpose of carrying on the business at competitive rates and where there is an alternate provided in the purchase agreement to determine the cost of goods, the same does not lead to the conclusion that the price is controlled by purchaser. The clause itself provides that the current supplier i.e. the assessee would have 30 days time to respond to competitive threat and if he so responds, then, may be there is no change in the understanding between the parties. In any case, the total exports of the assessee to Cummins constitute 18.76% of the total turnover and the extent of exports cannot be held to influence the price of assessee s goods. The TPO while starting the TP proceedings had observed that the assessee has shown total earning in foreign currency at ₹ 9.40 crores, against which the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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