Income Tax Appellate Tribunal - Ahmedabad
Atul Limited,, Ahmedabad vs Assessee on 23 March, 2007
IN THE INCOME TAX APPELLATE TRIBUNAL
AHMEDABAD BENCH "D"
Before SHRI BHAVNESH S AINI,JM & SHRI A N P AHUJ A, AM
ITA No.1547/Ahd/2007
(Assessment Year:-2004-05)
Atul Limited, 3 r d Floor, V/s Deputy Commissioner of
Ashoka Chambers, Rasala Income-tax (OSD), Range-
Marg, Ellis-bridge, 1, Ahmedabad
Ahmedabad
[Appellant] [Respondent]
Assessee by :- Shri S N Soparkar, AR
Revenue by:- Shri B S SandhuDR
O R D E R
A N Pahuja: This appeal by the assessee against an order dated 23-03-2007 of the ld. CIT(Appeals)-V, Ahmedabad, raises the following grounds:-
1 "The learned CIT(A) has erred in law and on facts in confirming the action of AO in reducing the claim of depreciation from Rs.40,80,04,483/- to Rs.37,27,25,696/-.
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 amounting to Rs.7,63,69,274/-.
3 The learned CIT(A) has erred in law and on facts in confirming the action of AO in denying the deduction u/s 80IB of the Act on DEPB Credit of Rs.3,65,34,766/-.
4 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.
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 ITA No.1547/Ahd/2007 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 Rs.1,82,97,194/- 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.
10 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.
11 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 (TPO) u/s 92C(3) r.w.s. 92CA(1) of the Act without providing an opportunity of being heard to the appellant.
12 In any case the whole reference and the consequent orders are bad and illegal because the alleged approval granted by CIT u/s 92CA(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.
13 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 pricing as well as method thereof adopted by the appellant as the same is falling within the parameters of transfer pricing laid down under the scheme of the Act.
14 Alternatively and without prejudice, the learned CIT(A) has erred in law and on facts in confirming the order of the Additional Commissioner of Income Tax acting as Transfer Pricing Officer which is without jurisdiction and against the express provisions of law in as much as Additional Commissioner of Income Tax could not have acted as transfer pricing officer.2 ITA No.1547/Ahd/2007
15 Both the lower authorities have passed the respective orders without properly appreciating the fact and that they further erred in grossly ignoring various submissions, explanations and information submitted by the appellant from time to time which ought to have been considered before passing the impugned order.
16 The Learned CIT(A) has erred in law and on facts in confirming the levy of interest under section 234B and 234C of the Act.
17 Learned CIT(A) has erred in law and on facts in upholding the action of AO in initiating penalty under section 271(1)(c) of the Act without recording mandatory satisfaction as contemplated under 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 Rs.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 pointed out by the assessee that the explanation 5 to section 32(1)(ii) was not explanatory and came into operation only with effect from AY 2002-03. Accordingly, relying upon the decision of the Hon'ble Punjab & Haryana High Court in the case of Ram Nath Jindal vs. CIT ,170 CTR 251 and the decision of the Hon'ble Kerala 3 ITA No.1547/Ahd/2007 High Court in the case of CIT vs. Kerala Electric Lamp W orks Ltd.,183 CTR 182, the assessee contended that depreciation should not be reduced in the year under consideration. However, the AO did not accept the contentions of the assessee. W hile referring to the amendment in the provisions of section 32 of the Act and the principles laid down by the Hon'ble Jurisdictional High Court in the case of CIT vs. Gujarat W arehousing Corporation,104 ITR 1 and the decision of Hon'ble Supreme Court in the case of CIT vs. Mother India Refrigeration Industries Pvt. Ltd.,155 ITR 711 as also the decision of the ITAT Ahmedabad Bench in the case of United Phosphours Ltd. vs. JCIT (2001) 73 TTJ 404 (Ahd), the AO reduced the claim for depreciation on the basis of his own findings in the AY 2001-02.
3. On appeal, the learned CIT(A) upheld the disallowance, following his own decision for the AY 2003-04.
4. 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, following the decision of the Special Bench of ITAT in the case of Vahid Paper Converters vs. ITO (2006) 98 ITD 165 (Ahd) (SB).
5. W e have heard both the parties and gone through the facts of the case as also the aforesaid decisions of the ITAT. W e 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:-
"3. At the outset, it was brought to our notice that this common issue is recurring in every year and in earlier assessment year 2001-02 in ITA 4 ITA No.1547/Ahd/2007 No.3528/Ahd/2004, the "D" Bench of this Tribunal vide order dated 16-05- 2008, following the Special Bench of this Tribunal i.e., the Ahmedabad Special Bench in the case of Vahid Paper Converters v. ITO, Vapi Ward- 4, Daman (2006) 98 ITD 165 (Ahd) (SB), wherein under para-5 it was held as under:-
"5. We 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 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 5 ITA No.1547/Ahd/2007 viz., sections 80HH, 80IA, 80IB, etc., of an industrial undertaking.
Respectfully following the aforesaid decisions, we do not find any illegality or infirmity in the order of the CIT(A). We accordingly confirm the order of the CIT(A) on this issue. Thus, this ground stands dismissed."
4. Now before us both the Ld. Counsel for the assessee and the learned DR agreed that the issue is covered against the assessee and in favour of the Revenue. We find from the Tribunal's order for assessment year 2001-02, which has confirmed the orders of the lower authorities allowing the depreciation. Accordingly, in these two assessment years, the CIT(A) as well as the Assessing officer has allowed depreciation on correct amount of WDV as worked out. Before us no mistake is pointed out in the computation of WDV and accordingly we uphold the order of CIT(A). This common issue of the assessee's appeals is dismissed."
5.1 Since the facts obtaining in the year under consideration are undisputedly similar to the facts obtaining in the preceding assessment years, we have no hesitation in upholding the findings of the learned CIT(A) in the light of the aforesaid decision of the ITAT in the assessee's own case for AY 2003-04. Therefore, ground no.1 in the appeal of the assessee is dismissed.
6. Ground no..2 in the assessee's appeal relates to the claim for deduction of Rs.7,63,69,274/- u/s 80IA of the Act. Relying upon his own findings in AY 2001-02, the AO 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.
6 ITA No.1547/Ahd/20078. 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.. W e have heard both the parties and gone through the facts of the case as also aforesaid decision of the ITAT. W e 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 appeals:-
"3. 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 generate power and as such this is a new power plant. It was claimed that assessee had installed new turbine and this can be 7 ITA No.1547/Ahd/2007 utilized by using steam from outside sources and since the assessee already had a boiler, they have charged for consumption of steam at the rate of Rs.660/- per MT. It appears that the assessee wants to say turbine in itself amounts to establishing a new undertaking. This does not appeal to reason because turbine in itself can never be held to be a new power plant. A new power plant will have several things like provision for supply of steam, transmission lines, controlling towers and other items. Simply saying that a new turbine is a new industrial undertaking means that if a new engine is installed in an old body of a car, the same is converted into a new car. This example has been given for simple and logical understanding of the situation. The assessee has vehemently claimed at the time of assessment that supply of power is not a part of the power plant then turbine in itself can never be said to be a power plant because turbine alone can never be a unit of generating power. As discussed earlier, as per 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 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 8 ITA No.1547/Ahd/2007 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 Rs.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 survive.
It was also pointed out that the total value of the plant and machinery used for business of generating power works out to Rs.14,56,44,295/- (1827180 on plant and machinery and 126427115 Turbine, a new industrial unit). The value of the boiler (pre-existing and pre-used is Rs.1476600/- (purchased second-hand on 9-11-98). It was also contended that the boiler is not a part and parcel of new plant and machinery. The AO did not agree with the contentions of the assessee that the turbine has to be treated as an independent power generating unit and ultimately he held that new power plant has been established by way of transfer of old previously used machinery and accordingly did not allow the deduction u/s 80-IA in respect of this power plant. The assessee went in appeal before the CIT(A). The CIT(A) also confirmed the finding of the AO by holding as under:
"4.1 I have considered the findings of the AO, submissions and arguments advanced by the Ld. Counsel 9 ITA No.1547/Ahd/2007 for the appellant during the course of assessment as well as appellate proceedings and case laws relied upon on the issue. I find 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 Rs.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 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 allowed an amount equal to 100% of the profits and gains derived from such business for ten 10 ITA No.1547/Ahd/2007 consecutive years. 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 must fulfill the conditions laid down therein. The first condition therein is that the undertaking should not be formed by splitting up, or the reconstruction, of a business already in existence. The second condition states that the undertaking is not formed by the transfer to a new business of machinery or plant previously used for any purpose. Explanation 2 to this sub-section states that where in the case of an undertaking, any machinery or plant or any part thereof previously used for any purpose is transferred to a new business and the total value of the machinery or plant or part so transferred does not exceed twenty per cent of the total value of the machinery or plant used in the business, then, for the purposes of clause (ii) of this sub-section, the condition specified therein shall be deemed to have been complied with. This is an undisputed fact that in this case the assessee has not transferred the existing boiler to the new undertaking for generating the power but the contention of the assessee is that the same very boiler is being used for supplying the steam to 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 11 ITA No.1547/Ahd/2007 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 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 2001-02, the facts being exactly identical, we decide this common issue against the assessee. Accordingly, this common issue of the assessee's appeals is dismissed."
9.1 Since the facts obtaining in the year under consideration are undisputedly similar to the facts obtaining in the preceding assessment year, we have no hesitation in upholding the findings of the learned CIT(A) in the light of the aforesaid decision of the ITAT in the assessee's own case for AY 2003-04. Therefore, ground no.2 in the assessee's appeal is dismissed.
12 ITA No.1547/Ahd/200710. Ground No.3 in the assessee's appeal relates to deduction u/s 80IB of the Act on the DEPB credit amounting to Rs.3,65,34,766/-. The AO while referring to the decision of the Hon'ble Jurisdictional High Court in the case of CIT v India Gelatine & Chemicals Ltd. [2005] 275 ITR 284 (Guj) did not allow the claim of the assessee for deduction u/s 80IB of the Act on the amount of DEPB benefits amounting to Rs.3,65,34,766/-.
11. On appeal, the learned CIT(A) upheld the findings of the AO, following his own 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. W e 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 for deduction u/s 80-IB of the Act, the Hon'ble Apex Court observed that the Act broadly provides for two 13 ITA No.1547/Ahd/2007 types of tax incentives, namely, investment linked incentives and profit linked incentives. Chapter VI-A essentially belongs to the category of "profit linked incentives" while ss. 80-IA/80-IB refer to profits derived from eligible business, it is not the ownership of that business which attracts the incentives but the generation of profits (operational profits) and each of the eligible business in sub- sections (3) to (11A) constitutes a stand-alone item in the matter of computation of profits. It was further held that Ss. 80-IB/80-IA are a Code by themselves as they contain both substantive as well as procedural provisions. S. 80-IB allows deduction of profits and gains derived from the eligible business. The words "derived from" is narrower in connotation as compared to the words "attributable to". By using the expression "derived from", Parliament intended to cover sources not beyond the first degree; Though the object behind DEPB etc is to neutralize the incidence of customs duty payment on the import content of export product DEPB credit/duty drawback receipt do not come within the first degree source as the said incentives flow from Incentive Schemes enacted by the Government or from s. 75 of the Customs Act. Such incentives profits are not profits derived from the eligible business u/s 80-IB. They are 'ancillary profits' of such undertakings and even as per AS-2 and the ICAI Guidance Note, duty drawback, DEPB benefits, rebates etc. cannot be credited against the cost of manufacture of goods but have to be shown as an independent source of income beyond the first degree nexus between profits and the industrial undertaking. The Hon'ble Apex Court concluded that "16. DEPB is an incentive. It is given under Duty Exemption Remission Scheme. Essentially, it is an export incentive. No doubt, the object behind DEPB is to neutralize the incidence of customs duty payment on the import content of export product. This neutralization is provided for by credit tocustoms duty against export product. Under DEPB, an exporter may apply for credit as percentage of FOB value of exports made in freely convertible currency. Credit is available only against the export product and at rates specified by DGFT for import of raw materials, components etc.. 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, 14 ITA No.1547/Ahd/2007 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 determined on a consideration of all the circumstances prevalent in a particular trade and also based on the facts situation relevant in respect of each of various classes of goods imported. Basically, the source of duty drawback receipt lies in Section 75 of the Customs Act and Section 37 of theCentral Excise Act.
18. Analysing the concept of remission of duty drawback and DEPB, we are satisfied that the remission of duty is on account of the statutory/policy provisions in the Customs Act/Scheme(s) framed by the Government of India. In the circumstances, we hold that profits derived by way of such incentives do not fall within the expression "profits derived from industrial undertaking" in Section 80- IB.
19. Since reliance was placed on behalf of the assessee(s) on AS-2 we need to analyse the said Standard.
20. AS-2 deals with Valuation of Inventories. Inventories are assets held for sale in the course of business; in the production for such sale or in form of materials or supplies to be consumed in the production.
21. "Inventory" should be valued at the lower of cost and net realizable value (NRV). The cost of "inventory" should comprise all costs of purchase, costs of conversion and other costs including costs incurred in bringing the "inventory" to their present location and condition.
22. The cost of purchase includes duties and taxes (other than those subsequently recoverable by the enterprise from taxing authorities), freight inwards and other expenditure directly attributable to the acquisition. Hence trade discounts, rebate, duty drawback, and such similar items are deducted in determining the costs of purchase. Therefore, duty drawback, rebate etc.should not be treated as adjustment (credited) to cost of purchase or manufacture of goods. They should be treated as separate items of revenue or income and accounted for accordingly (see: page 44 of Indian Accounting Standards & GAAP by Dolphy D'souza). Therefore, for the purposes of AS-2, Cenvat credits should not be included in the cost of purchase of inventories. Even Institute of Chartered Accountants of India (ICAI) has issued Guidance Note on Accounting Treatment for Cenvat/Modvat under which the inputs consumed and the inventory of inputs 15 ITA No.1547/Ahd/2007 should be valued on the basis of purchase cost net of specified duty on inputs (i.e. duty recoverable from the Department 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 ld. CIT(A) and reject ground no.3 of the appeal.
14. Ground nos..4 to 8 in the appeal relate to reduction of profits of the business on account of sale proceeds of DEPB license while computing deduction u/s 80HHC of the Act. The AO while computing the deduction u/s 80HHC of the Act, did not increase eligible profits by 90% of the profits on sale of DEPB license in the light of amended provisions of section 80HHC of the Act, the assessee having failed to establish that it fulfilled the conditions stipulated in 3 r d Proviso to section 80HHC of the Act.
15. On appeal, the learned CIT(A) upheld the findings of the AO in the light of his own decision for AY 2003-04.
16. 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 their aforesaid order dated 24-07-2009 in the AY 2003-04 had restored 16 ITA No.1547/Ahd/2007 the issue to the file of the AO for decision in accordance with amendments brought in sec. 28 and 80HHC of the Act by the Taxation Laws (Second Amendment) Act, 2005, w.e.f 1.4.1998 , now the issue is to be decided in the light of view taken in the decision of the Hon'ble Bombay High Court in the case of CIT vs. Kalpataru Colours & Chemicals (2010) 233 CTR (Bom) 313,revesing the decision in the case of M/s Topman Exports,318 ITR(AT) 87(Mumbai) (SB). On the other hand, the ld. DR supported the findings of the ld. CIT(A).
17. W e have heard both the parties and gone through the facts of the case as also the decision relied on . The relevant provisions of sec. 28(iiid) applicable w.e.f 1.4.1998 read as under :
"(iiid) any profit on the transfer of the Duty Entitlement Pass Book Scheme, being the Duty Remission Scheme under the export and import policy formulated and announced under section 5 of the Foreign Trade (Development and Regulation) Act, 1992 (22 of 1992)"
17.1 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 reads as under:
"Provided also that in the case of an assessee having export turnover exceeding rupees ten crores during the previous year, the profits computed under clause (a) or clause (b) or clause (c) of this sub-section or after giving effect to the first proviso, as the case may be, shall be further increased by the amount 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 ITA No.1547/Ahd/2007
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 of the opinion that the assessee is not entitled to the deduction u/s 80HHC of the Act on that ground alone.
17.3 Even otherwise while adjudicating a similar claim in the case of M/s Topman Exports,318 ITR(AT) 87(Mumbai) (SB)., the following question was referred to the Special Bench:
Whether the entire amount received on sale of DEPB entitlements represents profit chargeable under section 28(iiid) of the Income Tax Act or the profit referred to therein requires any artificial cost to be interpolated?
17.31 The Special Bench adjudicated the aforesaid question in following terms:
i) The argument of the Revenue that DEPB is a post export event and has no relation with the purchase of goods cannot be accepted. There is a direct relation between DEPB and the customs duty paid on the purchases. For practical purposes, DEPB is a reimbursement of the cost of purchase to the extent of customs duty;
(ii) The DEPB benefit (face value) accrues and becomes assessable to tax when the application for DEPB is filed with the concerned authority.
Subsequent events such as sale of DEPB or making imports for self consumption etc are irrelevant for determining the accrual of the income on account of DEPB;
(iii) Though s. 28 (iiib) refers to a "cash assistance against exports", it is wide enough to cover the face value of the DEPB benefit;
(iv) S. 28 (iiid) which refers to the "profits on transfer of the DEPB" obviously refers only to the "profit" element and not the gross sale proceeds of the DEPB. If the Revenue's argument that the sale proceeds should be considered is 18 ITA No.1547/Ahd/2007 accepted there would be absurdity because the face value of the DEPB will then get assessed in the year of receipt of the DEPB and also in the year of its transfer;
(v) Consequently, only the "profit" (i.e. the sale value less the face value) is required to be considered for purposes of s. 80HHC.
17.4 However, the aforesaid decision of the Special bench has now been reversed by the Hon'ble Bombay High Court in their decision in the case of Kalpataru Colours & Chemicals (supra), holding that the argument that s. 28(iiid) covered only the "profit" (difference between sale consideration and face value of the DEPB credit) and that the "face value" is assessable u/s 28(iiib) is not correct. The entire amount received on transfer of the DEPB credit 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 Rs.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 can fall for classification under clause (iiib) of Section 28 which deals with cash assistance, received or receivable against any scheme of the Government of India. As the legislative history of the provision would show clause (iiib) was enacted by Parliament at a time when the export incentives that were available were (i) Import entitlement licences; (ii) Cash compensatory support; and (iii) Duty drawback. The DEPB scheme was not even in existence when clause (iiib) came to be enacted into Section 28 by the Finance Act of 1990. The DEPB scheme was brought into existence with effect from 1 April 1997. Clause (iiid) of Section 28 was inserted by the Amending Act of 2005 with effect from 1 April 1998. The value of the DEPB credit can by no means be regarded as a cash assistance 19 ITA No.1547/Ahd/2007 which is received or receivable by a person against exports under any scheme of the Government of India.
32. The Tribunal has relied to a considerable extent on a speech made by the then Finance Minister on the floor of Parliament in support of its conclusion that only the premium realized by an exporter on the sale of the DEPB credit would fall within the purview of clause (iiid) of Section 28 and not the face value of the DEPB. The entire approach of the Tribunal is with respect misconceived and unsustainable. The Finance Minister sought to introduce clause (iiid) in Section 28 in view of the decision of the Delhi Bench of the Tribunal in the case of P & G Enterprises (supra). The dispute in that case related to taxing the entire amount received on the transfer of the DEPB credit and not the amount that was received in excess of the face value of the DEPB credit. As a matter of fact in that case the assessee had claimed that the entire receipt on the transfer of the DEPB credit including the face value of the credit as profits under Section 28(iiia). The Tribunal in that case held that the entirety of the amount would be covered by Section 28(iv). However, the view of the Tribunal was that since Explanation (baa) in Section 80HHC did not envisage the exclusion of profits covered by Section 28(iv), such profits could not be excluded while computing the deduction under Section 80HHC. Hence, there was no dispute in considering the entirety of the receipts on the transfer of the DEPB credit as profits of business. The dispute was only in not treating the receipts by way of transfer 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 India. However, where an exporter instead of utilizing the credit transfers the credit at a premium, it cannot be said that the exporter has utilized the credit; (ii) The legislature considers that the customs duty and excise duty paid on raw materials used in the export product, when repaid or repayable as duty drawback, would not constitute export profit. Similarly, when the DEPB credit is not utilized in the business but is transferred for value, the amount received on the transfer would be business profits and not export profits irrespective of whether the amount which is realized is equal to, larger than or less than the face value of the DEPB credit. Parliament has considered that the entirety of the amount received on the transfer of the DEPB 20 ITA No.1547/Ahd/2007 shall constitute profits of business under Section 28(iiid). Since such profits are not export profits Parliament directed that ninety percent of those profits would be excluded while computing the deduction under Section 80HHC;(iii) Parliament considered that an exporter who instead of utilizing the DEPB credit for paying customs duty on imported goods, makes a profit by transferring the DEPB, would form a separate class and seeks to tax the receipts on the transfer of the DEPB credit as business profits and not export profits. Exporters who transfer the DEPB credit and make a profit cannot be placed on par with those exporters who utilize the credit for paying the customs duty on the imported goods; (iv) The fact that Parliament did not consider the amount received onthe transfer of the DEPB to be export profit cannot be a ground to hold that the receipts on the transfer of DEPB credit are not business profits. Counsel appearing on behalf of the assessee submits that the entire amount received on the transfer of the DEPB credit is business profit, but it was contended that what is included in Section 28(iiid) is the amount received on the transfer of the DEPB credit in excess of the face value of the DEPB and the amount received to the extent of the face value of the DEPB would be covered under Section 28(iiib). There is no merit in this contention because (a) the DEPB credit was not in existence when Section 28(iiib) was inserted by the Finance Act of 1990. DEPB credit was introduced with effect from 1 April 1997 which was after the insertion of clause (iiib) in Section 28;
(b) Section 28(iiib) refers to cash assistance (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 consideration would fall within the purview of Section 28(iiid). We answer the second question of law accordingly in the aforesaid terms."
17.5 In view of the foregoing, especially when the ld. AR on behalf of the assessee also did not point out any contrary decision and instead relied upon the aforesaid decision of the Hon'ble Bombay High Court in Kalpataru Colours & Chemicals(supra) while 21 ITA No.1547/Ahd/2007 the assessee had an export turnover exceeding Rs.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 . Therefore, we have no alternative but to uphold the conclusion of the ld. CIT(A). Accordingly, ground nos. 4 to 8 in the appeal are dismissed.
18. Ground Nos.9 to 14 in the appeal relate to an addition of Rs.1,82,97,194/- on account of adjustment in arms length price. The AO while computing the total income of the assessee, made an adjustment of Rs.1,82,97,194/- in terms of provisions of section 92CA(1) of the Act on account of determination of arm's length price of international transaction entered into by the assessee.
19. On appeal, the learned CIT(A) upheld the findings of the AO while relying upon his own decision for the AY 2003-04.
20. 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 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.
21. W e have heard both the parties and gone through the facts of the case as also aforesaid decision of the ITAT. W e 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:-
"21. The next common issue in both the appeals of the assessee is as regards to the orders of CIT(A) confirming the addition on account of transfer pricing adjustment. The assessee has raised the following grounds in respective appeals are under:-
"8. The learned CIT(Appeals)-V, Ahmedabad erred in confirming the addition of income on account of Transfer Pricing adjustment."22 ITA No.1547/Ahd/2007
"4. The learned CIT(A) has erred in law and on facts in confirming the action of AO in adding Rs.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 pricing as well as method thereof adopted by the appellant as the same is falling within the parameters of transfer pricing laid down under the scheme of the Act."
"9. Alternatively and without prejudice, the learned CIT(A) has erred in law and on facts in confirming the order of the Additional Commissioner of Income Tax acting as Transfer Pricing Officer which is without jurisdiction and against the express provisions of law inasmuch as Additional Commissioner of Income Tax could not have acted as transfer pricing officer."
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26. We have heard the rival contentions and gone through the facts and circumstances of the case. The facts in detail are available in assessment year 2003-04 in ITA No.157/Ahd/2007, hence, we will discuss this appeal first.
27. We find that the assessee is engaged in the business of manufacturing & sale of Intermediates, dies, colours etc. The assessee has two subsidiaries based in USA and UK namely, AAI and AEL. The 23 ITA No.1547/Ahd/2007 transaction with both the AEs have been adjusted by the TPO at Arm's Length Price, reason being the said transaction with these AEs have been understated to the extent of Rs.1,80,62,067/-. For this purpose, the assessee has opted for CUP method as the assessee was having sales of large number of products to these AEs during the years under consideration. The assessee, apart from the AEs, also sold diversified products to various other enterprises who are not related to the assessee. The assessee in view of these facts, opted for CUP method, considering the complexity of the transactions, product diversity and multiplicity of transactions, 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 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 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, as per the assessee, it has every right to adopt the CUP method. The assessee also admits that in few instances, when prices of other comparable cases are not available, in the assessee's case, the prices charged by it to AE in such cases can be adopted as an ALP. As per the TPO the wholesale margins and volume discounts as well as political risks have not been substantiated by the assessee. Now as per the assessee, both these margins i.e. wholesale discounts and political risks vary from party to party and country to country and in African Countries where high 24 ITA No.1547/Ahd/2007 political uncertainty is there, the prices are obviously higher compared to the prices charged to a highly developed nations where law and order and political stability is there.
28. Whether the information submitted by the assessee is enough in the case of Transactions recorded as per the CUP method. We are of the view that the CUP method compares the price charge for property transferred in a controlled transaction to the price charged for property transferred in a comparable uncontrolled transaction in comparable circumstances. If there is any difference between the two prices, this may indicate that the conditions of the commercial and financial relations of the associated Enterprises are not at arm's length and, that the price in the uncontrolled transaction may need to be substitute for the price in the controlled transaction. In the cases, where controlled and uncontrolled transactions are comparable, then regard should be had to the 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 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 uncontrolled sales are identical, except for the fact that the controlled sales price is a delivered price and the uncontrolled sales are made f.o.b. factory. The differences 25 ITA No.1547/Ahd/2007 in terms of transportation and insurance generally have a definite and reasonably ascertainable effect on price. Therefore, to determine the uncontrolled sales price, adjustment should be made to the price for the difference in delivery terms.
2.13 As another example, assume a taxpayer sells 1000 tons of a product for $9=80 per ton to an associated enterprise in its MNE group, and at the same time sells 500 tons of the same product for $100 per ton to an independent enterprise. This case requires an evaluation of whether the different volumes should result in an adjustment of the transfer price. The relevant market should be researched by analyzing transactions in similar products to determine typical volume discounts."
29. Similarly the Bangalore Special Bench of this Tribunal in the case of Aztec Software & Technology Services Ltd. v. ACIT, Circle-11(1), Bangalore (2007) 107 ITD 141 (Bang) ((SB) has held that the burden to establish that international transaction carried by the assessee is at ALP is on the taxpayer. The Special Bench held as under:-
"127. Having regard to above statutory provisions, it is clear that burden to establish that international transaction was carried at ALP is on the taxpayer. He has also to furnish comparable transactions, apply appropriate method for determination of ALP and justify the same by producing relevant material and documents before the Revenue authorities. In case Revenue authorities are not satisfied with the ALP and the supporting documents/information furnished by the 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 uncontrolled enterprises. Knowledge of economic conditions prevailing at the place where transactions are carried is also essential. The very nature of this job of 26 ITA No.1547/Ahd/2007 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. He is likely to know even about comparable uncontrolled transactions. Otherwise too as per the settled law every attempt to collect best evidence has to be made. Evidence of situation has to be called from a person possessing special means to know that situation. Therefore, it is reasonable to call upon the taxpayer to furnish evidence of controlled/uncontrolled transactions which are within taxpayers ' special knowledge. However, tax authorities cannot insist upon the taxpayer to furnish information he does not possess or is not required to maintain under rules. Guidelines given in circulars of CBDT are to be followed. We, therefore, hold that burden of proof to establish ALP and to furnish relevant information has rightly been placed on the assessee.
130. It would not be out of place to mention that almost all countries world over are facing problem of diversion of income by multinational companies and other enterprises to jurisdictions where the tax burden is least or the lowest. Therefore, almost all countries have similar enactments to tackle this menace. We quote below the position of "burden of proof" in some of important countries; it being not possible and practical to note in full details of provision of all the countries. This information is being extracted from Commentaries on Transfer Pricing, 2006 published by Price Water House :
"Burden of proof Denmark The question of burden of proof has been one of the most important issue in relation to the development of transfer pricing in Denmark. In the Texaco and BP Denmark Court cases the High Court and Supreme Court confirmed that the burden of proof lies with the tax authorities and that the taxpayer is required to disclose information relevant to the question of 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 customers. 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 self- assessment system with companies setting their own transfer prices. The 27 ITA No.1547/Ahd/2007 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 Italian taxpayer must provide evidence that the foreign party is a genuine commercial undertaking or that the transactions were effected in connection with a real economic interest; and An Italian taxpayer would also have to be able to prove that the relevant transaction actually took place. Malaysia In the self-assessment system, the burden of proof lies with the taxpayer to clear any tax avoidance allegation and/or alleged transfer pricing abuse. The intention of the Malaysian Transfer Pricing Guidelines is to assist the taxpayer in their efforts to determine arm ' s length transfer prices and at the same time comply with the local tax laws and the administrative requirements of the Malaysian tax authorities. In this connection, upon a field audit or enquiry, the relevant taxpayers with related party transactions must be able to substantiate with documents, and to the tax authorities ' satisfaction, that its transfer prices have been determined in accordance with the arm ' s length principle and that there has not been any abuse of the transfer prices resulting in an alteration of the incidence of tax in Malaysia. Netherlands As indicated previously, there is a legal obligation for the taxpayer to maintain certain transfer pricing documentation. To the extent that this requirement is not met, the burden of proof is ultimately transferred to the taxpayer. In general, there are no statutory provisions to indicate how the burden of proof is divided between the taxpayer and the tax authorities. The allocation of the burden of proof between the parties is at the discretion of the Court. However, in practice and as a result of Dutch case law, if the company ' s revenue is adjusted upwards because of transfer pricing issues, the burden of proof usually lies with the tax 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 28 ITA No.1547/Ahd/2007 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 co- operated 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 implicitly assumes that the taxpayer has made all necessary adjustments to taxable profits to take account of non-arm ' s length pricing. Switzerland The burden of proof within Switzerland lies with :
The taxpayer regarding the justification of tax deductible expenses; and The tax authorities regarding adjustments, which increase taxable income. This effectively means that a taxpayer has to prove to the Swiss tax authorities that the price it has paid for its tangibles, intangibles and any service it has received from a related party satisfies the arm ' s length principle (i.e., justifies their tax deductibility).
On the other side, the Swiss tax authorities ' responsibility is to prove that the compensation for any service rendered by the taxpayer or any tangibles or intangibles transferred to a related party does not reach an arm ' s length level. However, if a taxpayer fails to produce the documents required by the tax authorities, this burden of proof also reverts to the taxpayer. Therefore, it is recommended that Swiss taxpayers maintain appropriate documentation to justify all income and expenses resulting from related party transactions. This is specifically also true with regard to license fees charged to a Swiss entity or support and defense of low profits in connection with limited risk type entities. United States Non- US tax authorities and practitioners alike have tended to be critical of the level of detail included in the US regulations and procedures. However, in considering the US regime, it is important to bear in mind that unlike many of its major trading partners, the US corporate tax system is a self- assessment system where the burden of proof is generally placed on the taxpayer, and where there is an adversarial relationship between the Government and the taxpayer. This additional compliance burden is not 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.
29 ITA No.1547/Ahd/2007132. 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, 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 furnishing all relevant information. The tax authorities in cases where they are of the opinion that ALP has not been correctly determined by the taxpayer, can substitute their own ALP on the basis of material or information furnished by the assessee or collected by them. However, such ALP has to be determined having in mind provisions of ss. 92 and 92C and other rules and regulations. While determining ALP, tax authorities are bound to follow principles of natural justice and be fair and reasonable to the taxpayer. Any material collected to be used against the taxpayer is to be put to taxpayer to explain. Having regard to the purpose of the legislation and application of similar enactment world over, it must further be held that adjustments made on account of ALP by tax authorities can be deleted in appeal only if the appellate authorities are satisfied and record a finding that ALP submitted by the assessee is fair and reasonable. Merely by finding faults with the transfer price determined by the Revenue authorities (AO/TPO), addition on account of "adjustments" cannot be deleted. This is because the mandate of s. 92(1) is that in every case of international transaction, income has to be determined having regard to ALP. Therefore, unless ALP furnished by the taxpayer is specifically accepted, the appellate authorities on the basis of material available on record have to determine ALP itself. Subject to statutory provisions, appellate authorities can direct lower Revenue authorities to carry this exercise in accordance with law. The matter cannot be left hanging in between. ALP of international transaction has to be determined in every case.
134. There would be cases, where taxpayer does not co-operate and fails to furnish ALP or disclose full information, relevant for determination of 30 ITA No.1547/Ahd/2007 ALP when called upon to do so by tax authorities. The taxpayer fails to discharge burden placed on the 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 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 are such material differences as cannot be adjusted. If data found satisfies above requirements then further proceedings to find the most appropriate method, best suited to the facts and circumstances of a particular international transaction is to be selected. In other words, most appropriate method would be the method which provides most reasonable results having regard to the data available for determining arm ' s length price. If there are more than one ALPs determined on the application of most appropriate method then arithmetical mean of such prices or price at option of the assessee within 5 per cent variation is to be adopted [Proviso to s. 92C(2)].
136. In the light of above general observations, we now proceed to consider various objections of the parties first being clubbing of international transactions for reference to the TPO. The taxpayer, before the learned CIT(A), had contended that clubbing of all transactions with mere mention of aggregate value of all transactions in reference to TPO was wrong. A separate reference in respect of each international transaction should have been made. Likewise approval granted by the learned CIT has also been challenged as mechanical and illegal. Such an objection has also been raised in the grounds of appeal. While answering seven questions referred to the Special Bench, we have discussed this objection relating to approval of CIT in detail. In the light of above 31 ITA No.1547/Ahd/2007 discussion, we do not find any substance in the technical objections raised by the assessee and accepted by the learned CIT(A) in the impugned order. It is further to be noted that in the audit report filed by the taxpayer in Form No. 3CEB it was stated that the taxpayer had paid Rs. 28,32,20,103 to Aztec US towards onsite software services. Likewise sum paid for marketing services was also stated. Taking above details from the audit report, a reference was made by the AO to TPO to determine 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 Rs. 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 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 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 uncontrolled transactions. In view of these facts, and in the absence of material, we have no alternative but to expect to set aside this issue to the file of the Assessing officer to decide the issue afresh after giving reasonable opportunity of being heard to the assessee. The assessee may show that sale price of the controlled transactions are at arm's length. If there are differences between the controlled and uncontrolled transactions, then the assessee is entitled to the benefit of adjustment for such differences under the T.P. Rules. The AO/TPO is directed to pass a fresh order in the light of the above observations. This mater is set aside in the entirely to the file of the AO of this issue."
32 ITA No.1547/Ahd/200721.1 Since the facts obtaining in the year under consideration are undisputedly similar to the facts obtaining in the preceding assessment year, we have no hesitation in restoring the issue raised in these grounds to the file of the AO with similar directions as have been issued in the preceding assessment year in their aforesaid decision by the ITAT in the assessee's own case for AY 2003-04. W ith these observations, ground nos. 9 to 14 are disposed of.
22. Ground no..15 being general in nature, does not require any separate adjudication and is , therefore, dismissed.
23 Ground no. 16 pertains to levy of interest u/s 234B & 234C of the Act. The ld. AR did not make any submissions on this ground. The levy of interest u/s 234B & 234C of the Act being mandatory [Commissioner Of Income Tax.vs Anjum M. H. Ghaswala And Others,252 ITR 1(SC), affirmed by Hon'ble Apex Court in the case of CIT v. Hindustan Bulk Carriers [2003] 259 ITR 449(SC) and in the case of CIT v. Sant Ram Mangat Ram Jewellers [2003] 264 ITR 564(SC)], this ground is dismissed. However, the AO shall allow consequential relief ,if any, while giving effect to our aforesaid directions.
24. Ground no. 17 pertains to initiation of penalty proceedings u/s 271(1)(c) of the Act. The ld. AR did not make any submissions on this ground. Mere initiation of penalty proceedings being not appealable, this ground is, therefore, dismissed.
33 ITA No.1547/Ahd/200725. In the result, appeal is partly allowed but for statistical purposes.
Order pronounced in the court today on 24 -09-2010
Sd/- Sd/-
(BHAVNESH S AINI) (A N P AHUJA)
JUDICI AL MEMBER ACCOUNTANT MEMBER
Date : 24-09-2010
Copy of the order forwarded to:
1. Atul Limited, 3 r d Floor, Ashoka Chambers, Rasala Marg, Ellis-bridge, Ahmedabad
2. The DCIT (OSD), Range-1, Ahmedabad
3. CIT concerned
4. CIT(A)-V, Ahmedabad
5. The DR, Bench-D, ITAT, Ahmedabad
6. Guard File BY ORDER Deputy Registrar Assistant Registrar ITAT, AHMEDABAD 34