Garware Polyester Ltd., Mumbai vs Department Of Income Tax on 11 March, 2010

[Cites 41, Cited by 1]

Income Tax Appellate Tribunal - Mumbai

Garware Polyester Ltd., Mumbai vs Department Of Income Tax on 11 March, 2010

आयकर अपील य अ धकरण,
धकरण, मंुबई यायपीठ 'क
के' मंुबई

IN THE INCOME TAX APPELLATE TRIBUNAL
"K" BENCH, MUMBAI

ी बी.
बी रामकोट
रामकोट य,
य लेखा सद य,
य एवं ी अ मत शु ला, या यक सद य के सम

BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER AND
SHRI AMIT SHUKLA, JUDICIAL MEMBER

आयकर अपील सं. / ITA no. 4189/Mum./2010
( नधारण वष / Assessment Year : 2003-04)

M/s. Garware Polyester Ltd. ....................... अपीलाथ /
Garware House, 50-A Appellant
Swami Nityanand Marg
Vile Parle (East), Mumbai 400 057

बनाम v/s

Asstt. Commissioner of Income Tax ................... यथ /
Circle-8(1), Aayakar Bhavan Respondent
101, M.K. Road, Mumbai 400 020
थायी लेखा सं./ Permanent Account Number - AAACG0571D

आयकर अपील सं. / ITA no. 4418/Mum./2010
( नधारण वष / Assessment Year : 2003-04)

Asstt. Commissioner of Income Tax ....................... अपीलाथ /
Circle-8(1), Aayakar Bhavan Appellant
101, M.K. Road, Mumbai 400 020

बनाम v/s

M/s. Garware Polyester Ltd. ................... यथ /
Garware House, 50-A Respondent
Swami Nityanand Marg
Vile Parle (East), Mumbai 400 057
थायी लेखा सं./ Permanent Account Number - AAACG0571D
M/s. Garware Polyester Ltd.

आयकर अपील सं. / ITA no. 4444/Mum./2011
( नधारण वष / Assessment Year : 2005-06)

Dy. Commissioner of Income Tax ....................... अपीलाथ /
Circle-8(1), Aayakar Bhavan Appellant
101, M.K. Road, Mumbai 400 020

बनाम v/s

राज व क ओर से / Revenue by : Mr. Ajeet Kumar Jain a/w
Mr. Pravin Kumra
नधा रती क ओर से / Assessee by : Mr. Vijay Mehta

सनवाई
ु क तार ख / आदे श घोषणा क तार ख /
Date of Hearing - 25.10.2012 Date of Order - 19.12.2012

आदे श / ORDER

येक पीठ PER BENCH Cross Appeals for assessment year 2003-04, are directed against the impugned order dated 11th March 2010, whereas the Revenue's appeal for assessment year 2005-06, is directed against the impugned order dated 17th March 2011, and both the orders are passed by the learned Commissioner (Appeals)-XV, Mumbai, for the quantum of assessment passed under section 143(3) of the Income Tax Act, 1961 (for short "the Act"). Since the issues involved are common and inter-connected in all these appeals, therefore, these were heard together and, as a matter of M/s. Garware Polyester Ltd.

convenience, these appeals are being disposed off by way of this consolidated order.

2. Learned Counsel for the assessee submitted before us that in assessment year 2005-06, the learned Commissioner (Appeals) has passed a very detailed order after discussing and analysing the issue relating to transfer pricing adjustment, has passed a very detail order for coming to his conclusion regarding transfer pricing adjustment in favour of the assessee. Therefore, he pleaded that appeal for assessment year 2005-06 be taken up first. Learned Departmental Representative did not object to this contention of the learned Counsel for the assessee.

3. In Revenue's appeal in ITA no.4444/Mum./2011, for assessment year 2005-06, following grounds have been raised:-

"1. On the facts and in the circumstances of the case and in law, the Ld CIT(A) erred in deleting the addition made by the TPO / AO on account of sale of films amounting to Rs. 3,38,93,862/-, and ignoring the fact that the global average price adopted by the TPO / AO for UK & USA is a good comparable price."

"2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in reducing the adjustment of Rs. 61,12,632/- made by the TPO / AO on account of commission paid to GPIL (AE) to Rs. 11,60,682/-, and n not appreciating the fact that safe harbor of (+/-) 5% is not allowed under CUP method."

"3. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the disallowance of interest of Rs. 28,52,000/- related to capital W.I.P. u/s. 36(1)(iii) of the I.T. Act, 1961, without appreciating the fact that the provision of section 36(1)(iii) states that the amount of interest paid in respect of capital borrowed for acquisition on an asset for extension of existing business or profession for any period beginning from the date on which the capital was borrowed for acquisition of the assets till the date on which such asset was first put to use, shall not be allowed as deduction."

4. Relevant facts, apropos the issue arising out of grounds no.1 and 2, relating to transfer pricing adjustment made in respect of the transactions undertaken with the Associate Enterprises (for short "A.E") are that the assessee is engaged in the business of manufacture and sale of plain M/s. Garware Polyester Ltd.

polyester films, sun control films, metalized films and other verities of polyester films. The assessee is selling its products not only at the local level but also involved in export to various countries. Insofar as sale to countries like Russia, South Arabia, Turkey, Singapore, Japan and other parts of the world are concerned, the assessee has been selling directly to the third parties through non-A.E. foreign agents. As regards U.S. and U.K. markets are concerned, the assessee has set-up wholly owned subsidiary namely GPIL in U.K. (Garware Polyester International Ltd.) GPF, U.S.A., (Global Pet Films IMC), to undertake the marketing, promotion, business development and distribution of assessee's products. These A.Es have been appointed as assessee's sole selling agent, not only to perform the sales but also to provide other services such as market development, sales promotion, new product development, etc., in their respective territories. For the assessment year 2005-06, the assessee has undertaken following international transactions with it's A.Es.

               S.no.      Name of Transaction             Amount (` )          Method

                       Sale of Plain Film to GPF          13,85,98,000          CUP
           1.
                       Sale of Sun Control Film           12,56,91,000          CUP
           2.
                       to GPIL

                       Sale of Sun Control Film           22,71,64,000          CUP
           3.
                       to GPF

           4.          Payment of commission               1,01,87,553          CUP
                       to GPL

5. The assessee, in its report in Form no.3CEB, has bench marked its transactions by applying CUP method, wherein average price charged to A.Es for sun control films and plain films have been compared with the average price for these products charged to local customers of the assessee in India. The payment of commission to those A.Es has also been bench marked by applying CUP method @ 12.9%. A reference was made under section 92CA(1) to the Transfer Pricing Office (for short "TPO") by M/s. Garware Polyester Ltd.

the Assessing Officer, to examine and determine the assessee's arm's length price of its transactions with its A.Es.

6. The TPO held that the approach of the assessee for comparing local sale price in the Indian market with the price charged from the A.E. is not a correct approach because CUP method can be applied only when the products are absolutely similar to each other or where adjustments can be accurately made for adjustment of these differences. He further noted that the assessee is selling sun control films and plain films to non-A.Es located in different countries like Russia, South Arabia, Turkey, Singapore, Africa, etc., and in case of sales made to U.S.A. and U.K., the assessee is carrying out its business activities only through A.Es. He, though admitted that there exist geographical difference between U.S.A. and U.K. markets on one hand and the other countries on the other hand, however, held that such geographical differences are taken care of when multiple country non-A.E. sales are considered. Based on this assumption, he proceeded to compare product qualitywise average of non-A.E. export price vis-a-vis price charged from A.Es and computed the transfer pricing adjustment of ` 3,38,93,862. Similarly, in respect of payment of commission to A.E. / GPIL, the TPO noted that commission paid @ 12.5% to it's a.Es is excessive because the assessee has been getting export orders from various countries after paying normal commission of 5% to various independent non-A.E. foreign parties. Consequently, the TPO determined arm's length commission @ 5% and made transfer pricing adjustment of ` 61,12,532 after holding that commission of 7.5% is excessive. Thus, the aggregate transfer pricing adjustment of ` 4,00,06,934, was made in respect of product sales as well as for the export commission.

7. The assessee, being aggrieved by the stand so taken by the TPO, carried the matter in first appeal, wherein, before the learned Commissioner (Appeals), the assessee made a very detail submission after analyzing various factors specifically with regard to geographical and market difference and other facts of the case in the following manner:-

M/s. Garware Polyester Ltd.

"Geographical and Market Differences:

Appellant submitted that approach of TPO of comparing the export prices charged to AEs (who operates in US and European geographies) with the prices charged to Non AEs (who operate in the countries falling within Asian, African, Middle-east, Far East, Russia and other CIS countries) is erroneous and devoid of business realities as it do not take into consideration geographical, economic and market differences. AEs are operating in American markets and European markets which are developed markets. In contrast to that, exports sales to Non AEs are in Asian, African, Middle--East, Far East, Russia and other CIS countries which are either developing markets or not so developed markets. Hence, there are geographical differences between AE export sales and Non AE export sales. These differences are on account of market size, market location and level of competition and overall economic development of respective markets. The appellant's export prices substantially differ from country to country for variety of economic reasons and market forces, few of them are as follows:

i. Availability of locally manufactured material;

ii.    Presence of competitor in the territory;
iii.   Duties & tax structure of the country;
iv.    General purchasing power in the country;
v.     Availability of substitutes, etc.
vi.    Size of the market and level of demand and supply

2.8    American and European markets where AEs operate are

matured, highly competitive and bigger size markets as compared to Asian, African, Middle-East, Far East and Russian markets which consists of mostly economically underdeveloped nations except some of the countries like Japan, Australia. There are always price variations on account of geographical differences between American & European markets on the one hand and Asian, African, Far East and Middle East Markets on the other hand. The market prices in American and European markets, which are developed and highly competitive markets, are generally lower than other markets.

2.9 Thus, appellant's international transactions of sale of polyester film products to its AEs including pricing for the same are guided by the economic and market conditions prevailing in the Europe, North American and Latin American geographical markets. In contrast to that, appellant's transactions of sale of polyester film products to its Non AE customers including pricing for the same are guided by the economic and market conditions prevailing in these respective Asian, African, Middle-east, Far East, Russia and other CIS geographies.

2.10 It has been further submitted that while the TPO himself admitted in para 6 and 7 (on page 2) of his order u/s. 92CA(3) that 'for application of CUP, besides similarity of products one has to take into account the variations arising on account. of geographical M/s. Garware Polyester Ltd.

differences'. However, he failed to take the same into consideration or provide appropriate adjustment for differences in economic and geographical markets. The TPO proceeded on the assumption that since appellant's non AE sales comprise of many countries, the sale price charged to Non AEs do reflect the international prices of the products and the comparison of these prices vis-à-vis the prices charged to AEs without any adjustment would reflect a comparable uncontrolled price. Appellant submitted that TPO's aforesaid assumption / proposition is erroneous and is devoid of market realities as it fails to appreciate that American and European markets in which AEs operate is a distinct market geography with distinct features as compared to other countries (as a class) where Non AEs operates. Merely averaging the sales to Non AEs of two or three countries does not eliminate the pricing differences that exist on account of geographical and market factors.

2.11 To support its submission that there exist substantial price variation from country to country and market to market, the appellant relied on the details of Non AE export sales filed before the TPO and submitted that even the export prices charged to Non AEs located in different countries differs substantially for the same product due to differences in economical, geographical and market conditions and other factors pointed out above. Appellant also relied on judicial pronouncement in the cases of Intervet India (P) Ltd vs. ACIT-8(2) [130 TTJ 301, Mumbai ITAT] and ACIT, 8(1), Mumbai vs. Dufon Laboratories [39 SOT 59, Mumbai ITAT] and also on para 1.30 of Transfer Pricing Guidelines for multinational enterprises and tax administrations issued by the Organisation for Economic Development and Co-operation to emphasize the importance of geographical and market comparability in any fair transfer pricing analysis.

Alternative comparable uncontrolled transactions:

2.12 Appellant submitted that TPO failed to appreciate that because AEs operate only in the defined territories of Europe and America, the Non-AE transactions with which transactions with AEs can be compared (applying the CUP method) are only those instances wherein appellant has sold products to Non-AE customers in the same geography under the comparable circumstances. The appellant has not directly sold any product to Non-AE customers (Europe/America) in the geography where AEs operate. In such circumstances, it was contended that the most appropriate way to examine the compliance of arm's length conditions in the appellant's transactions with its AE is to deduce the market prices prevailing in the concerned geographical market from the AEs sales transactions with their customers, subject to adjustment for the expenses that the AEs need to incur to consummate the transactions and sale the products, because AEs are selling the products purchased from appellant to third party unrelated customers / second level distributors. Thus, sale prices charged to such third party unrelated customers for the particular quality of M/s. Garware Polyester Ltd.

the product represent comparable uncontrolled prices on aggregate basis in the respective comparable market. Therefore, these transactions can be said to meet the comparability test.

2.13 The appellant filed the statements setting out the prices at which AEs sold plain film products and sun control products (that they purchased from appellant) to their third party customers and contended that the gross difference between the landed cost of goods sold and the price at which AE sells those products to third party customers in their designated territory is very nominal and in some cases even not sufficient to cover the overheads of AE which are around 20% to 25% of the landed cost of the goods sold.

Operating results of AEs do not justify transfer pricing adjustment:

2.14 In this regard, contentions of appellant are as follows:-

(a) AEs are working as distributors solely for the appellant.

Therefore, the financial results of AEs get affected solely on account of its transactions with the appellant. Both GPF and GPIL have been consistently either suffering losses or are making only very nominal profits. In support of this contention, appellant furnished gross profit and net profit analysis of AEs for several years since commencement of their operations. Based on this analysis, it was contended that on an aggregate basis, the gap between the prices at which AEs procured products from appellant and the price at which they sold the products does not exceed 10%. In contrast to that, the TPO's working of transfer pricing adjustment highlights that the difference between AE prices and Non AE prices is as high as 30% to 40%, which is entirely contrary to facts reflected from audited financial statements of AEs. Such contradicting differences exist because TPO has not taken same market / geography non-AE transactions as comparable transactions.

(b) Such price difference retained by the AEs is not: enough to cover even the AE's operating expenses. No third party distributor would work for the appellant at such loss making proposition. It was submitted that had it been the case that appellant has charged lower prices to its AEs than prevailing market prices in the respective geographical market then AEs would have been making significant profits year by year, rather than suffering losses or earning only nominal profits.

(c) From above, it was argued that there is no shifting of profits by the appellant to its overseas AEs. It was also submitted that corporate tax rates in USA and UK are comparatively higher or on par with corporate tax rates in India and hence there is no motive to avoid payment of taxes. Thus, appellant's case is not the one to which transfer pricing adjustment should apply given that transfer pricing regulations are applied as anti-avoidance measures to curb shifting of profits from one jurisdiction to another jurisdiction.

M/s. Garware Polyester Ltd.

(d) If TPO's proposal of upward transfer pricing adjustment is to be applied in the given case of the appellant then it. indirectly means that appellant's AEs should not be expected to make any profit or should continue to suffer larger amounts of losses. This proposition blatantly appears to be founded on 'Non-Arm's Length Principle', because no independent third party exclusive distributor would work on such loss making business proposition under the arm's length business dealings.

2.15 Business strategy aspect: appellant also submitted that for the designated territory for which AEs operate, the appellant, in collaboration with its AEs, follows the business strategy of market penetration arid increasing market share following competitive pricing policy.

2.16 Capacity utilization aspect: It was further submitted by the appellant that at times in order to ensure that plants runs at the maximum capacity, books the orders even from third parties at the prices which are far below the standard list prices of the appellant, so long such sales result into 'contribution' towards the fixed overheads. It was submitted that this fact can be gathered from the comparative statement of product wise details of sales to AEs and Non-AEs, which clearly reflects that even in case of sales to Non-AE customers, prices fluctuate widely.

2.17 It was also submitted that AEs have to further process the products by undertaking slitting, repackaging, labeling as per local standards and laws, etc for which expenses are incurred by the AEs. In case of sale of products to AE G-PF, GPF sells and markets some of the products purchased from appellant under its own GPF brand and trade marks, whereas appellant's sales to Non-AE customers in all other geographies are sold under appellant's own brand. Thus, GPF need to incur additional cost and expenses for development of the brand, 1:c, which are borne by GPF only. GPF also has to bear the heavy antidumping duty levied by USA government on the polyester film imported from India, due to which the import cost of the polyester film for it is comparatively high. Therefore, in order to derive the arm's length price for the products sold to AEs, one is required to make appropriate adjustments to the Non AE prices. The Ld. AO/TPO has not made any such adjustment.

2.18 Further, without prejudice to other arguments and submissions, appellant contended that TPO erred in not making appropriate adjustments for material differences in transactions with AEs and Non AE customers. The appellant brought out the following material commercial differences that exist between the transactions with AE and the transactions with the Non-AEs, which differences have material impact on the prices in the open market:

2.19 Adjustment for quantity volume: the average quantity of sun control films and plain films sold to AEs are substantially higher M/s. Garware Polyester Ltd.

than average quantities of these products sold to each of Non AE customers in the export market. Referring to written submissions, it was pointed out that , average quantities sold to AEs are 22 times higher than average Non AE quantity in case of Sun Control Films and are 19 times higher than average Non AE quantity in case of Plain Films. It was further contended that since AEs are exclusively promoting, marketing and distributing the products of appellant and they do not deal with any third party suppliers or manufactures of polyester film products, it is but natural that all their orders or requirements will be procured from the appellant. Therefore, it was submitted that, the expected volume of procurement by the AEs will, generally be higher than any Non AE single customer. If sales of such high magnitude were made to uncontrolled parties then a volume discount ranging from 15% to 20% would be considered which is generally granted by way of charging reduced sales prices and also such discount would be required to justify the commercial nature of the transaction.

2.20 Geographical adjustment: Appellant reiterated its submis- sions as regards geographical and markets differences and submitted that on an average a price variation always exists to the extent of 20% to 30% on account of geographical differences between American & European markets on the one hand and Asian, African, Far East and Middle East Markets on the other hand. It submitted that adjustment on account of geographical differences to the extent of approximately 20% has been judicially approved by the Hon'ble Mumbai ITAT in the case of Intervet India (P) Ltd vs. ACIT -8(2) [1 3OTTJ 301, Mumbai ITAT] 2.21 Selling and marketing cost: for making sales to Non AEs, selling and marketing costs are incurred. For making sales to AEs, such costs are not required to be incurred. In case of sales to Non AEs appellant needs to pay commission to intermediateries, which ranges from 3% to 10%, with average commission of 5%. Therefore, an adjustment on account of saving in selling and marketing cost in case of sales to AEs needs to be made. Given that average commission rate alone is 5% and if one further consider at least 2% of sales as other selling and marketing cost then an adjustment of 7% on account of saving in selling and marketing cost is required.

2.22 Appellant also referred to Rule 10B(1) of the income Tax Rules 1962 and submitted that in terms of sub-clauses (ii) and (iii) of clause (a) of Rule 10B(1) of the Income Tax Rules 1962, one is obliged to consider the adjustments for material differences in the transactions while applying the CUP method. Referring to statements filed along with written submissions, it was submitted that if these adjustment are taken into consideration, the appellant's realization from AEs are far better than the price realization from Non AE customers.

M/s. Garware Polyester Ltd.

2.23 The appellant also highlighted discrepancies in price comparison done by the TPO concerning (a) sun control film products Safety 4 MIL SRC B and Safety 7 MIL SRC B and (b) comparison of high volume AE transactions with low volume isolated & solitary Non AE transactions and contended that if these discrepancies are cured than that alone will reduce the transfer pricing adjustment significantly.

2.24 Based on above it was submitted that the upward transfer pricing adjustment of ` 33,893,862/- made by TPO in respect of sale of sun control and plain films to AEs is erroneous, devoid of market and business reality and judicial pronouncements in this respect and hence, it was prayed that same be deleted."

8. The Commissioner (Appeals) appreciated the assessee's contentions and the submissions and after analyzing the same deleted the T.P. adjustment of ` 3,38,93,862, while observing and holding as under:-

"2.25 I have perused and considered the facts of the case, TPO's order u/s. 92CA (3), the assessment order on this aspect and the written submissions and oral arguments of appellant.

2.26 Transfer pricing is not an exact science. It involves a rationale and objective analysis of all economic and commercial aspects & circumstances of each specific case to derive a fair and proper analysis. Facts and circumstances in totality need to be taken into ,' consideration to come to conclusion on whether or not in particular case the condition of arm's length standard (or price) is satisfied.

2.27 There is force in the first contention of appellant that while applying the CUP method the approach of TPO of comparing the export prices charged to AEs (who operates in US and European geographies) with the prices charged to Non AEs (who operate in the countries falling within Asian, African, Middle-east, Far East, Russia and other CIS countries) is erroneous and devoid of business realities as it does not take into consideration geographical, economic and market differences. Under the CUP Method, the price of the goods or services is directly compared with the price in uncontrolled transaction under similar conditions. Though THE CUP appears simple in concept, it is very difficult to apply in practice. It's sensitivity on the properties of the product and the accompanying circumstances and conditions requires a careful analysis in it's application. This method calls for not only a very high degree of comparability in the products but also in the underlying circumstances and other economical factors of the transaction. For such comparison to be useful, the relevant economic, market and geographical characterization underlying the transactions must be sufficiently alike. The requirement of M/s. Garware Polyester Ltd.

similarity in geographical and market conditions is given statutory recognition in Indian law in Rule 10B(2) of the Income Tax Rules 1962 which speaks of comparability standards for transfer pricing purposes and provides as follows:

Rule 10B(2):

"For the purposes of sub-rule (1), the comparability of an international transaction with an uncontrolled transaction shall be judged with reference to the following, namely:--

(a) to(c)* * *

(d) conditions prevailing :.n the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail.

2.28 The requirement of similarity in geographical and economical conditions of markets is also judicially approved of in the following cases: ACIT, 8(1), Mumbai vs. Dufon Laboratories [39 SOT 59, Mumbai ITAT], Intervet India (P) Ltd vs. ACIT -8(2) [130TJ 301, Mumbai ITAT]. Importance of geographical and market compara- bility in any fair transfer pricing analysis for determination of arm's length price is also highlighted in para 1.30 of the OECD TP Guidelines.

2.29 In his order u/s. 92CA(3), the TPO admits that besides similarity of products one has to take into account the price variations arising on account of geographical differences He further states that there are no direct third party exports by appellant to USA and UK where AEs operate as in these countries the AEs are the sole selling agents and that the appellant's third party exports are to different countries like Russia, Saudi Arabia, Turkey, Singapore, Argentina, Japan etc. However, in spite of admitting that there are geographical differences and one has to take into account variations on account of geographical differences for arriving at the comparable uncontrolled price in case of international transactions, the TPO concludes that prices charged from Non AEs do reflect the international prices of products as Non AEs are based in more than one country and that the comparison of these prices vis-a-vis the price charged to the AEs without any adjustment would reflect the comparable uncontrolled price. There is an apparent contradiction between the admitted facts and the ultimate conclusion. While TPO was bold enough to enter the chopping seas of the CUP Method but was unable to navigate it on account of ignoring the core tenets of reasonably accurate adjustments to be made thus leading to an erroneous arms length price computation mechanism. TPO's assumption that since appellant's non AE sales comprise of many countries, the average M/s. Garware Polyester Ltd.

of such Non AE sale prices do reflect the international prices of the products, is faulty and misconceived. This is so because, firstly American and European markets in which AEs operate is distinct market geography with distinct features as compared to other countries (as a class) where Non AEs operates. Merely aggregating the sales to Non AEs of two or three countries does not eliminate the pricing differences that exist on account of geographical and market factors. The average of Non AE prices would still continue to reflect the characteristics of markets in which Non AEs operate and would not convert those characteristics into characteristics and conditions of American & European markets. This is based on the theory that a sum / average of apples still retains the characteristics of apples only and that just because it is a sum/average of apples does not turn its characteristic into those of oranges. Secondly, it is not the case that all products are sold in all Non AE countries and thus at times such average will represent just one or two countries only.

2.30 It is noted from appellant's submissions and material placed on record that export prices of products manufactured and sold by the appellant vary considerably from country to country and reason for such price variation is attributed primarily to various economic and market conditions prevailing in respective country / market such as availability of locally manufactured material, presence of competitor in the territory, duties & tax structure of the country, general purchasing power in the country, availability of substitutes, size of the market and level of demand and supply in the respective country. An analysis of appellant's export transactions with its Non AE customers reveals that even the export prices charged to Non AE customers based in two different countries for the same product vary considerably on account of aforesaid economical and geographical differences. AE-GPF and AE GPIL are operating in American markets and European markets. On the other hand, exports sales of appellant to non-AE customers are in Asian, African, Middle-East, Far East, Russia and other CIS countries. American and European markets where AEs operate are matured, highly competitive arid bigger size markets as compared to Asian, African, Middle-East, Far East and Russian markets which consists of mostly economically underdeveloped nations except some of the countries like Japan, Australia and that these markets are fragmented in nature. The market prices in American and European markets, which are developed and highly competitive markets, are generally lower than other markets. This fact is established from material placed on record by the appellant. For example, table below reflects some of instances where wholesale prices of AE GPF for its US based customers itself, are lower than the sale prices charged by appellant to its Non AEs customers:

M/s. Garware Polyester Ltd.

Sr.          Product quality       Appellant's Non        AE GPF's
no.                                AE prices (US$ /    wholesale price
                                      lac sq.ft)          in US to
                                                         unrelated
                                                         customers
                                                       (US$/ lac sg.ft)

 1     GRD/BLUE/GREY 20 SRC             0.35                0.26

 2     GRD/BLUE/GREY 5 SRC              0.35                0.25

 3     GRD GOLD/BRONZE 15               0.35                0.30

 4     GRD SIL/GREY 20 SRC              0.33                0.25

 5     MATTE BRONZE                     0.28                0.20

 6     R BLUE 15 SRC                    0.27                0.22

 7     R BRONZE 10 SRC                  0.28                0.26

 8     R GOLD 15 SRC                    0.27                0.25

2.31 The American and European markets cannot be construed to be similar to African, Asian, Middle-East, Far East markets where Non AEs are based when the end customer prices (i.e. the price at which AEs sell subject products to unrelated customers) in American and European markets are itself lower than the export prices at which Appellant sells to Non AE customers based in other geographical markets. The TPO has ignored these documented facts and worked out arm's length prices for sale of products by the appellant to its AEs, which works out to be more than actual prices realised by AEs from sale of those products to unrelated third party customers. It is a classical paradox where, in most of instances, the TPO determined arm's length prices for sale by the Appellant to its AEs is more than the actual prices at which AEs are selling those products to their unrelated customers.

2.32 For the reasons set out in paragraphs 225 to 2.31 above, I reject the approach of TPO of comparing the export prices charged to AEs (who operates in US and European geographies) with the prices charged to Non AEs while applying the CUP Method. In this context, it is also pertinent to note the benchmarking exercise done by Appellant while filing Accountant's Report in Form 3CEB. In form 3CEB and its transfer pricing documentation, the appellant established arm's length prices of sale of products to its AEs by comparing average export prices charged to AEs with average prices charged to local Indian customers. The appellant's aforesaid approach is also not acceptable as geographical difference does exist between Indian market on one hand and American & European on the other hand.

2.33 As there are no direct third party exports by appellant to USA and UK where AEs operate, therefore, there are no directly comparable uncontrolled transactions. in these circumstances, the most appropriate way to examine the compliance of arm's length M/s. Garware Polyester Ltd.

conditions is to deduce tae market prices prevailing in the concerned geographical market from the financial statements of respective AEs itself, subject to adjustment for the expenses that AEs need to incur to consummate the transactions and sale the products. AEs are selling products purchased from appellant to third party unrelated customers. Thus, sale prices charged to such third party unrelated customers for the particular quality of the product represent comparable uncontrolled prices on aggregate basis in the respective comparable market under comparable circumstances. In this regard, perusal of statement furnished by the appellant setting out the prices at which AE GPF sold plain film products and sun control products to its third party customer and AE GPF's corresponding landed cost of those products purchased from appellant and the gross margin earned by the AE GPF, reveals that the gross difference between the landed cost of goods sold and the price at which AE sells those products to third party customers in its designated territory is very nominal and in some cases even not sufficient to cover the overheads of AE which are around 20% to 25% o:' he landed cost of the goods sold. AEs have to further process the products by undertaking slitting, repackaging, labeling as per local standards and laws, etc for which expenses are incurred by the AEs. AE GPF sells and markets some of the products purchased from appellant under its own GPF brand and trade marks, for which GPF need to incur additional, cost and expenses for development of the brand, etc. One has to also bear in mind that in USA there is heavy antidumping duty on the polyester film imported from India.

2.34 In this context, it is also relevant to note that AEs are working as distributors solely for the appellant. AEs do not have any other business other than that with the appellant. The financial results of AEs, therefore, get affected solely on account of its transactions with the appellant. The financial results of the AEs for the relevant financial period are tabulated below:

     Particulars                           GPF             GPIL

    Turnover                           $7,862,503       £5,883,738

    Gross Profit                        $780,692         £641,990

    G.P/ Ratio                            9.93%           10.91%
    Operating Expenses                  $890,968         £699,818

    % of Operating Exp to sales          11.33%           11.89%
    Operating Profit/-Loss              -$110,276        -£57,828

The above analysis reflects that, on an aggregate basis, the gap between the prices at which AEs procured products from appellant and the price at which they sold the products does not exceed 9.93% for AE GPF and 10.91% for AE GPIL as is reflected in the gross profit margins of these AEs. Further, such price difference retained by the AEs is not enough to cover even the AE's operating M/s. Garware Polyester Ltd.

expenses. No third party distributor would work for the appellant at such loss making proposition. In contrast to that, the TPO's working of transfer pricing adjustment highlights that the difference between AE prices and Non-AE prices is as high as 30% to 40%, which is entirely contrary to facts reflected from audited financial statements of AEs. Such contradiction/ differences exist because TPO has not taken same market / geography Non-AE transactions as comparable transactions.

2.35 The appellant also furnished AEs profitability margin statement since their inception till the relevant financial period. On perusal of the said statement it is observed that AEs are either suffering losses consistently for the years or are earning only nominal net profit margins. Had it been the case that appellant has charged lower prices to its AEs than prevailing market prices in the respective geographical market the AEs would have been making significant profits year by year, rather than suffering losses or earning only nominal profits. The fact that the marginal rates of tax are higher in USA and UK also acts as a dampener in shifting profits.

2.36 It is a cliché in Transfer Pricing circles hut nonetheless true that Transfer Pricing is more of an art than a science. This proposition allows the degree of the judgment about the level of evidence that is required to evaluate a Transfer Price and to ascertain that a particular method is a reasonable estimation of the arms length price. Based on the level of evidence filed and brought on record a judgment can be made that this transaction with its AE is at arms length price.

2.37 Taking all the above facts and circumstances cumulatively and for reasons recorded in Para 2.25 to 2.37, it is held that the appellant's international transactions of sale of sun control and plain film products with its AEs GPF and GPIL was at arm's length and there was no case for making transfer pricing adjustments. The addition of ` 33,893,862/- made by assessing officer on account of transfer pricing adjustments is therefore deleted.

2.38 The other aspects of appellant's submissions concerning international transactions of sale of sun control and plain film products are dealt with hereinafter:

2.39 The appellant took the alternative plea that if at all prices charged to Non AEs in different geographies are to be compared with the price charged to AEs then one need to consider differences in the transactions and appropriate adjustments need to be made in Non AE prices to arrive at the arm's length price. The appellant sought adjustments for (a) volume discount, (b) geographical differences and (c) selling & and marketing cost (d) mistake in respect of certain transaction vide Paras 2.19, 2.20, 2.21 & 2.23 of M/s. Garware Polyester Ltd.

this order. There is merit in its claim so far it applies to volume discounts and apparent mistakes. However since the matter has been already decided in its favour hence the same is not being addressed hence. As regards adjustments on account of geographical differences and selling d marketing cost it is felt that it is not possible to make reasonably accurate adjustments hence it cannot be acceded to. In any case, as stated earlier, the main issue has been addressed on merits in appellants favour and so these issues have become redundant.

2.40 Comparison with non comparable isolated solitary transactions: referring to annexures to. transfer pricing order u/s. 92CA(3) and statements enclosed with appellant's written submissions dated 07/12/2010, the appellant drew my attention to the fact that in some instances the TPO has compared prices charged to AE with the prices charged in highly priced solitary low volume non AE transactions resulting into disproportionate quantum of transfer pricing adjustment. Appellant submitted that such highly priced, solitary, low volume non AE transactions are not at all comparable with AE transactions. On perusal of details placed on record, it is noted that the TPO has compared AE transaction of sale of plain film product "GARFILM MATT (MT-12)" to AE PF of 70,601.90 kgs with a high priced solitary transaction with a Japan based Non AE customer wherein quantity of only 4395 kgs is involved and this transaction alone has led to transfer pricing adjustment of 5,003,428/-. In terms of quantity, these two transactions are not comparable at all. Hence, the transfer pricing adjustment of 5,003,428/- on account of said transaction is unjustified. TPO has compared AE transaction of sale of sun control film product "GRD Silver Grey 05" to AE GPIL of 1,19,331 kg with a high priced transaction with two NOIL AE customers wherein total quantity of only 2,167 kgs is involved, leading to transfer pricing adjustment of Rs. 6,08,811/-. In. terms of quantity, these two transactions are not comparable at all. Hence, the transfer pricing adjustment of 6,08,811/- on account of said transaction is unjustified. Further, yet in another case TPO compared AE transaction of sale of sun film product "HP Grey 05 SRC' to AE GPIL of 49,519.90 kg with a high priced solitary transaction of Non AE customer wherein total quantity of only 2,000 kg. is involved, leading to transfer pricing adjustment of 4,33,471/-. In terms of quantity, these two transactions are not comparable at all. Hence, the transfer pricing adjustment of 4,33,471 on account of said transaction is unjustified. The approach of TPO of comparing high volume AE transactions with low volume solitary transactions of appellant with its Non AE customers do not meet with comparability standards required under CUP method and such comparison done by TPO is no permissible in terms of law and on facts. However, this also becomes an academic exercise as I have already held in Para 2.37 that the appellants all international transactions of sale of sun control and plain film products with its AE GPF & GPIL are at arms length and there was no case for making adjustments and deleted entire Transfer Pricing addition of 33,893,862."

M/s. Garware Polyester Ltd.

9. On the issue of transfer pricing adjustment of ` 61,12,532, relating to commission paid to A.E., GPIL, the assessee, before the Commissioner (Appeals), first of all, objected that the commission accrued to A.E., GPIL, for the financial year 2004-05, has been mistakenly taken as ` 1,01,87,553, whereas, the actual amount of commission accrued to A.E., GPIL for the relevant financial year and which was debited to commission expenditure account in the books was at ` 72,54,263 only. Therefore, excessive transfer pricing adjustment of ` 17,59,974 [29,33,290 / 12.5 * 7.5] has been calculated on differential commission amounting to ` 29,33,290, which is the payment of remittance made to the A.E. GPIL in the F.Y. 2004-05 for the commission amount already debited in the books of the assessee in the F.Y. 2003-04, which has been reported in Form no.3CEB, for the F.Y. 2003-04. This mistake needs to be rectified. On merits, it was submitted that the assessee has bench marked its commission to A.E. applying CUP method wherein commission to A.E. @ 12.5% has been compared with commission ranging from 3% to 10% paid to several non-A.E. foreign agents of the assessee. It was submitted before the Commissioner (Appeals) that increase rate of 12.50% is justified on account of significant differences in assessee's agency arrangement with it's A.E. foreign agents. Such differences are in terms of obligation undertaken functions performed, products covered under the agency arrangement risk assumption, etc. In support of this difference, the assessee filed copy of agency agreements with it's A.E. and non-A.E. foreign agents. Various differences were pointed out before the TPO from these agreements. The Commissioner (Appeals) analysed the agency agreement with A.E. GPIL and with non-A.E. foreign agencies in the following manner:-

M/s. Garware Polyester Ltd.

Agency Arrangement with AE GPIL Agency Arrangement with Non AE Foreign Agents AE GPIL has been appointed as sole Non AEs have been appointed selling agent for promoting and as indenting agent for only canvassing orders and undertakes canvassing orders. They are not market development, advertising and obliged to undertake market sales promotion at its own cost and development, sales promotion resources. and advertising at their own cost and resources.

AE GPIL is acting as full fledged Agent     Non AE agents are limited risk
who undertakes market development,          agents as they are not under
brand promotion of its principal (i.e.      any obligation to appellant to
appellant) at its own cost, risks and       undertake any promotional and
resources.                                  market development efforts and
                                            thereby the risk of financial loss
                                            does not exist for them.
Product Differences
The agency arrangement with AE              The agency arrangement with
GPIL is for all types o polyester film      Non AE foreign agents is only
products such a Metalized films, Plain      for Plain Film ('Garfilm') i.e.
films and Sun control films i.e sun         only    for    IPD    products.
control films products which are            Consumer pro-ducts are not
consumer products ("CPD products")          covered in the arrangement
and Plain films which are industrial        with Non AE foreign agents.
products ("IPD products").
Market Territory Differences
AE GPIL operates in Europe where            Non AE foreign agents operates
the    costs    of    operations   are      in the territories of Iran, Egypt,
comparatively higher.                       Argentina, Srilanka, Philippines,
                                            South Africa,       Turkey, etc.
                                            where the cost of operations
                                            are comparatively lower.
Industry & Competition Differences
CPD products are used as final              IPD products are industrial
product in automobile industry and          products (and not consumer
building industry by ultimate end           products) and are used as input
consumers. Thus, these are consumer         by   various    industries   viz.
products.                                   packaging industry, electric and
                                            motor insulation industry, etc.
CPD products are sold in more than          IPD products are sold only in
300 qualities and broadly in 80 to 9()      maximum 12 to 16 qualities.
quality categories. Each quality differs
from other based on customers
specific requirement, specifications,
etc. For example, in case of Building
industry mainly used in window
application, customer may require
particular   VLT    %    (visual    light
transmission within the limit of
particular      country's        specific
parameters),      particular     colour,
particular   thickness     for    safety
purposes, etc.
                                                                 M/s. Garware Polyester Ltd.

                                                                                         20


      In case of CPD products, substitute        IPD products are commodity
      products are available in the market       products.          Almost    all
      which almost        looks   similar as     competitors' products are alike
      appellant's products but performance       with little variation.
      wise it is of inferior quality. But one
      cannot make out these differences
      unless practically it has been used.
      Resultantly, it is very difficult to       Being industrial product, there
      develop market for these products.         is no need to make much effort
      One has to make extra efforts to sell      in selling IPD products. The
      these products like organizing video       marketing of these products
      film presentations, make advertise-        does not involve significant
      ments by various medium such as            promotional expenses.
      taking part in exhibitions, do a
      market survey on a regular basis to
      check the customers tastes etc. For
      CPI) products, customer is king and
      one has to depend purely on
      customers requirement, tastes, likes,
      dislikes and accordingly strives hard
      to convince, satisfy and demonstrate
      customers its quality products.
      One cannot build a market for              In some of the countries the
      consumer       products     unless    it   customers prefer introduction of
      demonstrates and satisfies custo-          an agent in between in order to
      mers in all respect viz durability,        chase for timely delivery and
      latest product, convenient to use etc.     completing all custom clearance
      It can only be alone by extensive          formalities involved in the
      sales and marketing efforts which          import process. Hence appellant
      require    additional     expenses   of    has no other choice except to
      advertisement and sales promotion          appoint an agent in these
      activities. Further European and           countries to sale plain film
      American       markets      are    very    products. The role of these Non
      competitive markets as compared to         AE foreign agents is very
      other markets. The customers in            limited for this specific purpose
      these markets are highly educated          of liaisoning and co-ordination
      customers and one cannot remain in         with      already     established
      such market unless it offers a. quality    industrial customer base.
      product.

10. The Commissioner (Appeals) further noted that for promoting and marketing of consumer products i.e. sun control film, agent need to undertake massive advertisement and publicity campaigns and need to maintain sufficient organizational facility for sales promotion and market development activities and initiatives. Such activities involve incremental costs in the form of office facilities, marketing staff salaries, employee related regulatory and social security costs, traveling expenses, etc. Without incurring such costs one cannot boost the sale of consumer products. One cannot even make consumer aware of the products without M/s. Garware Polyester Ltd.

advertisement and promotions through second level distributors and in exhibitions. It is practically impossible to sell the consumer product without educating the consumers on product features and advantages. Consumers for such products consist of general masses. These products are sold in small quantities and can not be sold in bulk quantities like industrial products. One should also consider the fact that generally consumer products are sold in retail outlets and for this purpose organisation, co-ordination and management of larger supply chain (such as stockiest, distributor / wholesaler, retailer, etc) needs to be undertaken. All these involve increased level of expenses for the agent, especially when AE agent has undertaken contractual obligation to undertake market development. On perusal of financial statements of AEs it was observed that they did incur advertisement expenses, travel and entertainment expenses and employee salaries at considerable levels. Further, it was submitted that it is a fact that not much efforts are required for promotion of industrial products and there is no need to hunt for the potential customers for such industrial products. Potential customers are few specialized industrial customers who either use the product as raw materials or as component parts for manufacture of finished goods or any activity ancillary to manufacture of products. Hence, the purchaser of the industrial products is generally aware of the potential suppliers by way of its internal market intelligence. They approach supplier directly through independent agents. Industrial products are always sold in bulk quantities. One can build the good volume for industrial products only from few customers. The quantum of commission payable to such independent agents depends upon agency arrangement with such agent. As industrial products can be sold in substantial volume without making substantial efforts, commission payable commensurate with agent's efforts is much easier than the commission payable for marketing and procuring orders for consumer products where enormous efforts and expenses are required to be incurred. In the appellant's case, it is noted that all non AE foreign M/s. Garware Polyester Ltd.

agents are limited risk agents. There is no obligation on them for incurring expenses on market development. Thus, they bear the limited risk.

11. The Commissioner (Appeals) further observed that there is no guaranteed minimum commission from the appellant to AE GPIL, there is risk attached to GPIL on account of the fact that while GPIL incurrs such additional costs but there may not be commensurate commission income and thereby GPIL bearing the risk of financial loss on account of it functioning as sole selling agent. The extent of this risk is very limited in case of Non AE agents for industrial products wherein as such much efforts are not involved and they are also not under any contractual obligations to compulsorily promote appellant's products only.

12. The Commissioner (Appeals), thus, concluded that in case of non- A.E. foreign agency, where there is a limited risk, the assessee has paid commission @ 8% and in that 2% should be added for additional risk attached to the full fledged agent and, therefore, 10% commission should be taken as arm's length commission for A.E. GPIL. His relevant findings are as under:-

"3.11 The question therefore arises as to what should be arm's length rate of commission for AE GPIL in view of differences in appellant's agency arrangement with GPIL and with Non AE foreign agents. It is noted that in case of limited risk non AE foreign agent also the appellant has paid commission @ 8% for industrial products i.e. plain films. Therefore, it is not the case that increased rate of commission have been paid only to AEs. In case of Non-AEs also, wherever the perceived benefit from agent's activities are higher, increased rate of commission is paid as compared to normal rate of commission of 5%. Considering the fact that (a) AE GPIL is a full fledged agent; (b) agency arrangement with AE covers all types of products (i.e. industrial product as well as consumer products) and (c) that there is increased scope and intensity of risk assumed and functions performed by AE, it deserves more commission compared to limited risk non AE agents. Hence, in my opinion, determination of arm's length commission for AE GPIL @ 10% would be in conformity with arm's length standard. This commission is worked out by adding 2% for additional risks attached to full fledged agent on the 8% commission paid by appellant to limited risk non AE agent."

M/s. Garware Polyester Ltd.

13. The Commissioner (Appeals), however, gave the benefit of +/- 5% range held that the same should be allowed in view of various decisions of the Tribunal, as discussed in Para-3.13 of his order. He restricted the transfer pricing adjustment on account of commission paid to A.E. at ` 11,60,682, in the following manner:-

"3.12 On perusal of documents placed on record by the appellant, it is observed that total amount of commission accrued to AE GPIL in the financial year 2004-05 is only Rs.72,54,263/- and not Rs 1,01,87,553 /-. Rs.72,54,263/- represents commission @ 12.50%. Commission at the arm's length rate of 10% would thus be Rs.5,803,410/- [i.e. (72,54,263/12.5)*10]. As the arm's length rate of commission has been determined having regard to several agency arrangements of appellant with its Non AE foreign agents (i.e. internal CUP), appellant is entitled to benefit of arm's length range of +/- 5% in terms of proviso to section 92C(2) of the Act. Thus, +5% range would extend upto ` 6,093,581/- [i.e., ` 5,803,410*105%]. Consequently, the transfer pricing adjustment shall survive only for ` 1,160,682/- [i.e., ` 72,54,263 minus ` 6,093,581/-]. Accordingly, I hold that transfer pricing adjustment in respect of commission paid to AE shall be restricted to ` 1,160,682 and balance transfer pricing adjustment of ` 4,951,850 [i.e., ` 61,12,532 minus ` 1,160,682] stands deleted."

14. Before us, the learned Departmental Representative, with regard to the adjustment made in the sales to A.E., submitted that the assessee has compared the sales of U.S.A. and U.K. with the average sale price of India which approach itself is erroneous when the assessee itself has been contending that the assessee's margin cannot be compared with sales made to other countries. He pointed out that the Commissioner (Appeals) himself has rejected this approach of the assessee in Para-3.32. He further submitted that if a method adopted by the TPO is also not correct, then best way was to compare the third parties dealing in similar case. The products are the same, therefore, the matter should go back to the file of the TPO and such third party should be considered in CUP method. He further added that in the countries where A.Es are dealing, there are third parties who are involved in such business, the same can also be considered. Lastly, he submitted that if there are no internal and external M/s. Garware Polyester Ltd.

comparables, then the most appropriate method which should be adopted is that of TNMM. The learned Departmental Representative further submitted that the geographical and marketing difference in the countries where A.Es are operating and other countries have a significant difference, then also how can the Commissioner (Appeals) delete the entire adjustment when none of the approach either of the TPO or of the assessee has been found to be acceptable by him. Regarding adjustment on account of commission, he submitted that there is no difference in the activities carried out by the non-A.E. agents and the A.E., then why 5% should not be taken as held by the TPO. He further submitted that the learned Commissioner (Appeals) erroneously given the standard deduction of +/- 5% which is not permissible as per law specifically after the amendment.

15. The learned Counsel, Mr. Vijay Mehta, on the other hand, submitted that the learned Commissioner (Appeals) has thread bear analysed the difference of the market mechanism of the countries in which the A.Es are carrying out their activities and the other countries where the assessee is having dealing through its independent agents and then come to the conclusion. He further submitted that geographical and marketing difference which has a huge impact while deciding the margin of profitability has not been found to be incorrect either by the lower authorities or by the learned Departmental Representative. He thus, strongly relied upon the detail reasoning given by the learned Commissioner (Appeals) on this issue of adjustment of sales made to the A.Es.

16. Regarding transfer pricing adjustment on account of commission paid to A.E., he fairly admitted that the learned Commissioner (Appeals)'s findings with regard to benefit of +/- 5% as standard deduction cannot be allowed. However, he submitted that insofar as the applicability @ 10% commission is concerned, the reasoning and functional analysis done by the learned Commissioner (Appeals) is absolutely correct and no fault or M/s. Garware Polyester Ltd.

discrepancy has been found by the learned Departmental Representative. He, thus, strongly relied upon the findings of the learned Commissioner (Appeals).

17. We have carefully considered the rival contentions of the parties, perused the findings given by the TPO as well as by the Commissioner (Appeals). The assessee is engaged in the business of manufacture and sale of various types of polyester films and sun control films. For exporting its products, the assessee has two types of set-ups for export sales - firstly, independent agents (for short "non-A.E. Agents") operating in Asian countries, African countries, Middle East, Far East, Russia and other CIS countries, which are mostly developing markets and secondly, through two subsidiary companies which are termed as "A.E" and are operating in American and European markets which are developed markets. The assessee has bench marked its international transactions with it's A.Es by applying CUP method, wherein average price charged to A.Es have been compared with the average export prices charged to local customers in India. The TPO has rejected the assessee's comparison of export sales charged to A.Es with local sales price and compared the average non-A.E. export price with the price charged to two A.Es. The learned Commissioner (Appeals) accepted the contentions of the assessee that the TPO has failed to take into consideration the geographical, economical market differences where the A.E and non-A.E. agents are carrying out their business activities. He also appreciated that the export price of the proceeds varies considerably from country to country and specifically in a developed market of U.S. and U.K. in comparison to Asian and African countries. He analysed the prices and also the nature of market which has been advertum discussed in detail in the foregoing paragraphs. However, after having come to the conclusion that the TPO's approach is not correct and he has not taken into account the vital factor of geographical, economical market differences, held that even the assessee's approach is also not acceptable as the geographical difference does exists between the M/s. Garware Polyester Ltd.

Indian market on one hand and American & European markets on the other hand. Thus, on the same logic, he rejected the assessee's approach for bench marking the ALP of its transactions with the A.E. This has been discussed in Para-3.32 as reproduced above.

18. After having rejected the approach of the TPO as well as the assessee, he admitted that there are no direct comparable un-control transactions to bench mark the ALP of the A.Es as their market prices prevailing in the concerned geographical countries i.e., U.S.A. and Europe has to be seen subject to certain adjustment of expenses. The sale prices charged to such third party unrelated customers represents comparable un-control prices on aggregate basis in the respective comparable market under comparable circumstances. He even went to analyse the profit ratio and operating expenses of the A.Es and held that these A.Es are running into losses and no third party will carry such business at loss. In this manner, the learned Commissioner (Appeals) has made these A.Es as tested parties and without looking into the independent comparables operating in the same kind of products in the said countries, he accepted the operating margin of the A.Es. This is where the learned Commissioner (Appeals) went on a wrong footing and incorrect approach. Once the learned Commissioner (Appeals) accepted that the CUP is the appropriate method, then he has to examine whether there are any internal comparables or any external comparables. In the present case, once he has held that there are no internal comparables, he was required to look into external comparables operating or dealing with the similar products under similar terms in a similar market conditions where these A.Es are operating, which he failed to do so and simply accepted the trading results of the A.Es. Under the CUP method, the price of the goods or services is directly compared with the price in uncontrol transactions under similar conditions. Internal CUP would be available if the assessee or its group entity enters into a comparable transaction with unrelated party where the goods or services under consideration are same or similar. On the other M/s. Garware Polyester Ltd.

hand, there could be an external CUP if a transaction between two independent enterprises involves comparable goods or services under comparable conditions. The CUP method also requires a very high degree of comparability with regard to the quality of products or services, contractual terms, level of the market, geographical market in which the transaction takes place and host of other factors.

19. Once the learned Commissioner (Appeals) found that there are so much of variables for applying either internal CUPs and has not applied external CUP, probably, due to this factor, then the entire application of CUP fails in this case. The learned Commissioner (Appeals) cannot go to examine, independently the operating expenditure and operating profits of the A.Es for determining the ALP. A comparability analysis has to be carried out for determining the ALP. Provisions of section 92C provides computation of ALP and envisages that the ALP in relation to an international transaction shall be determined by any of the methods prescribed therein, being the most appropriate method having regard to the nature of transactions or class of transactions or class of associated persons or functions performed to such persons. For this purpose, six methods have been spelt out. Sub-section (2) of section 92C provides that the most appropriate method referred to in sub-section (1) shall be applied for determination of ALP. Thus, for computation on examining of ALP, one of the most appropriate methods has to be applied. Once the CUP method fails in this case, then it was required by the learned Commissioner (Appeals) to look into for other appropriate methods. Now, the question is what should be the most appropriate method. At the time of hearing, both the parties agreed that in case CUP method is failed, then TNMM can be adopted as most appropriate method, wherein the ALP is determined by comparing the operating profit relative to appropriate base viz. cost as well as asset of the tested party with the operating profit of an uncontrol party engaged in comparable transactions. Accordingly, we set aside the impugned order passed by the learned Commissioner (Appeals) M/s. Garware Polyester Ltd.

and restore the mater to the file of the TPO and direct him to examine the ALP after adopting TNMM and carry out fresh comparability analysis. The assessee will provide all the necessary information and search analysis for the comparables. The TPO will also provide due and effective opportunity of hearing to the assessee to represent its case. Accordingly, ground no.1, is treated as allowed for statistical purposes.

20. Now, coming to the issue of adjustment on account of commission paid to the A.E., the learned Departmental Representative heavily relying upon the findings of the TPO submitted that once there is a similar nature of transaction for the same product which are being dealt with by the A.Es and non-A.E. foreign agents, then there cannot be two rates for payment of commission. Payment of commission @ 12.5% is definitely excessive and the TPO has rightly taken @ 5% based on rates of commission paid to non-A.E. foreign agents. On the other hand, the learned Counsel for the assessee had submitted that the agency arrangements with the A.Es were entirely different from that of non A.E. foreign agents and this analysis has been discussed in detail by the learned Commissioner (Appeals). He also pointed out the relevant obligations which were to be carried out by the A.Es which were not there in case of non-A.E. foreign agents. He, thus, strongly relied upon the findings and the conclusion drawn by the learned Commissioner (Appeals).

21. After carefully considering the rival contentions, we find that the TPO has made the adjustment on the ground that commission rate of 12.5% paid to the A.Es are far more than the commission rate paid to the non- A.E. foreign agents which were ranging from 3% to 10% and has bench marked the said transactions by adopting the rate of 5% and thereby holding that the payment of commission @ 7.5% is excessive. The learned Commissioner (Appeals) has, in detail, analysed the agency arrangement with the A.E. and also the agency arrangement with the non-A.E. foreign agents. He has examined the functional analysis in Para-3.8 which has been reproduced above. From the conclusion and the reasoning given by M/s. Garware Polyester Ltd.

the learned Commissioner (Appeals) in Paras-3.8 to 3.10 based on such functional analysis, it is seen that the same have been correctly analysed and are liable to be accepted. He has concluded that looking to the various differences in the agency arrangement with the A.E. and non-A.E. foreign agents, the arm's length commission of the A.E. should be taken @ 10%, as concluded by him in Para-3.11 above and the reasoning given by him is quite appreciable. Otherwise also, if one analyse the agency agreement between the A.Es and that of non-A.Es and carries out the functional analysis, then it would be seen that the cost which is to be incurred by the A.Es and risk assumed are far more. Rate of 10% is quite reasonable when it is analysed with a case where there is less risk and commission rates ranges between 3% and 10%. Therefore, the rate adopted by the Commissioner (Appeals) @ 10% is definitely at arm's length.

22. However, after having coming to the conclusion that rate of 10% of the commission is at arm's length, he has given the benefit of arm's length rang of +/- 5% in terms of the proviso to section 92C. While doing so, he has gone on the premise that it is a some kind of a standard deduction. Such a conclusion is wholly erroneous as the statute does not provide any kind of standard deduction. Thus, the benefit of +/- 5% given by the learned Commissioner (Appeals) is set aside. Insofar as the application of rate of payment of commission @ 10% to its A.Es is concerned, the same is hereby upheld. Thus, ground no.2, is partly allowed.

23. Ground no.3, is with regard to disallowance of interest which relates to capital work-in-progress under section 36(1)(iii) for a sum of ` 28.52 lakhs.

24. As admitted by both the parties, identical issue has been decided by the co-ordinate bench of this Tribunal in ITA no.7394/Mum./2007 and ITA no.7687/Mum./2007, wherein the issue was restored to the file of the Assessing Officer with certain directions.

M/s. Garware Polyester Ltd.

25. After going through the said order, we find that similar issue has been decided by a co-ordinate bench of the Tribunal in assessee's own case in ITAs no.7394 & 7687/Mum./2007, for A.Y. 2004-05, vide order dated 2nd July 2009, wherein it has been observed and held as under:-

"5.4 We have considered the rival submissions made by both the sides, perused the orders of the authorities below. We have also considered the paper book filed on behalf of the assessee. We find the proviso of section 36(1)(iii) as amended by the Finance Act 2003, w.e.f. 1.4.2004, is very clear which reads as under:-

"[Provided that any amount of the interest paid, in respect of capital borrowed for acquisition of an asset for extension of existing business or profession (whether capitalised in the books of account or not); for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use, shall not be allowed as deduction.]"

5.5 Since the auditors have pointed out that an amount of ` 81.70 lakhs represents capital work-in-progress, therefore, proportionate interest has to be disallowed in view of the amended provisions. However, the date-wise details of such capital work-in- progress is not given by the assessee either before the Assessing Officer or before the learned CIT(A) or even before use. The Assessing Officer has calculated such interest @ 12% for the whole year which, in our opinion, must be from the date the assessee has incurred such expenditure. We, therefore, restore the matter back to the file of the Assessing Officer with a direction to give one more opportunity to the assessee to give the date-wise details of such expenditure. The Assessing Officer shall calculate such interest accordingly. The ground raised by the assessee is allowed for statistical purposes."

26. Keeping in view the aforesaid decision of the Tribunal, we set aside the impugned order passed by the learned Commissioner (Appeals) and restore the matter to the file of the Assessing Officer with similar directions. Accordingly, ground no.3, stands partly allowed for statistical purposes.

M/s. Garware Polyester Ltd.

We now take up assessee's appeal in ITA no.4189/Mum./2010, for assessment year 2003-04, vide which following grounds have been raised:-

1. The Id. Commissioner of Income tax (Appeals) 15, Mumbai, erred in rejecting the claim of the appellant for allowing commission paid to the subsidiary companies which was partly disallowed by the A.O. amounting to Rs.2,03,94,752/-. The appellant submits that commission paid to the foreign subsidiary companies was not excessive considering the circumstances in which the commission was paid and the performance required to be made bi the subsidiary companies and it was not for transferring or diverting any profit to the subsidiary companies as stated by the A.O.

2. The said CIT(A) erred in confirming action of the Assessing Officer in levying interest on short fall of payment of advance tax u/s 115JB ignoring the submissions made by the appellant that in case of liability under 115JB no interest can be levied for short fall in payment of advance tax as has been held by various High Court decisions.

27. Ground no.1, relates to transfer pricing adjustment of ` 2,03,94,752, in relation to the commission paid to the A.E.

28. Having heard the rival contentions and having perused the material on record as well as the findings of learned Commissioner (Appeals) and the Assessing Officer, we find that the issue before us is identical to the issue arising out of ground no.2, decided by us in Revenue's appeal in ITA no.4444/Mum./2011, in assessee's own case for assessment year 2005-06. In this year, the learned Commissioner (Appeals) has confirmed the adjustment made on account of commission paid to the A.E. The Assessing Officer found that the assessee has paid commission to its two subsidiary companies (A.Es) @ 12.5% wherein, on same kind of export sales, the parties have been paid commission @ 5% and 10% respectively. The Assessing Officer restricted the commission to 5% in relation to payment made to the A.Es. Since the facts of this issue are identical to the facts of ground no.2, raised by the Revenue in its appeal in ITA no.4444/Mum./2011, in assessee's own case, the observations made therein will apply mutatis mutandis in this ground also.

M/s. Garware Polyester Ltd.

The view taken by the learned Commissioner (Appeals) that the payment of commission to the A.E. should be taken @ 10% instead of 12.5% has been upheld. Consequently, we set aside the impugned order passed by the learned Commissioner (Appeals) and direct the Assessing Officer to take the rate of commission @ 10%. This ground is, thus, partly allowed.

29. In ground no.2, the assessee has challenged the levy of interest on short fall of payment of advance tax under section 115JB.

30. At the outset, the learned Counsel submitted that in view of the judgment of Hon'ble Supreme Court in JCIT v/s Rolta India Ltd., [2011] 330 ITR 470 (SC), interest under section 234B is to be levied on failure to pay advance tax in respect of tax payable under section 115JB. However, he submitted that with regard to the amount of deferred tax and provisions thereof, interest under section 234B, cannot be levied as the retrospective amendment in Explanation-1, clause (h) was brought in statute by the Finance Act, 2008, with retrospective effect from 1st April 2001 and in view of the latest judgment of Calcutta High Court in Emami Ltd. v/s CIT, [2011] 337 ITR 470 (Cal.), interest under section 234B cannot be charged on account of such income under section 115JB.

31. Similarly, with regard to the provisions of doubtful debts, he submitted that the Assessing Officer has treated such provisions to be in the nature of reserve or contingency made in the account and the same has been added in Explanation-1, clause (i) to section 115JB by the Finance Act, 2009, w.e.f. 1st April 2000, and therefore, no interest under section 234C can be levied.

32. Learned Departmental Representative, on the other hand, fairly agreed that insofar as the second argument of the learned Counsel is concerned, the same is covered by the judgment of Calcutta High Court in Emami Ltd. (supra).

M/s. Garware Polyester Ltd.

33. Having heard the rival contentions and having perused the material on record as well as the findings of learned Commissioner (Appeals) and the Assessing Officer, we find that the insofar as the chargeability of interest under section 234B is concerned, the same is payable on failure to pay the advance tax in respect of the tax payable under section 115JB, keeping in view the law settled by the Hon'ble Supreme Court in Rolta India Ltd. (supra), wherein Their Lordships have observed and held as under:-

"9. The question which remains to be considered is whether the assessee, which is a MAT company, was not in a position to estimate its profits of the current year prior to the end of the financial year on 31st March. In this connection the assessee placed reliance on the judgment of the Karnataka High Court in the case of Kwality Biscuits Ltd. vs. CIT (supra) and, according to the Karnataka High Court, the profit as computed under the IT Act, 1961 had to be prepared and thereafter the book profit as contemplated under s. 115J of the Act had to be determined and then, the liability of the assessee to pay tax under s. 115J of the Act arose, only if the total income as computed under the provisions of the Act was less than 30 per cent of the book profit. According to the Karnataka High Court, this entire exercise of computing income or the book profits of the company could be done only at the end of the financial year and hence the provisions of ss. 207, 208, 209 and 210 (predecessors of ss. 234B and 234C) were not applicable until and unless the accounts stood audited and the balance sheet stood prepared, because till then even the assessee may not know whether the provisions of s. 115J would be applied or not. The Court, therefore, held that the liability would arise only after the profit is determined in accordance with the provisions of the Companies Act, 1956 and, therefore, interest under ss. 234B and 234C is not leviable in cases where s. 115J applied. This view of the Karnataka High Court in Kwality Biscuits Ltd. (supra) was not shared by the Gauhati High Court in Assam Bengal Carriers Ltd. vs. CIT (2000) 162 CTR (Gau) 170 : (1999) 239 ITR 862 (Gau) and Madhya Pradesh High Court in Itarsi Oils & Flours (P) Ltd. vs. CIT (2001) 170 CTR (MP) 158 : (2001) 250 ITR 686 (MP) as also by the Bombay High Court in the case of CIT vs. Kotak Mahindra Finance Ltd. (2003) 183 CTR (Bom) 491 : (2003) 130 Taxman 730 (Bom) which decided the issue in favour of the Department and against the assessee. It appears that none of the assessees challenged the decisions of the Gauhati High Court, Madhya Pradesh High Court as well as Bombay High Court in the Supreme Court. However, it may be noted that the judgment of the Karnataka High Court in Kwality Biscuits Ltd. (supra) was confined to s. 115J of the Act. The order of the Supreme Court dismissing the Special Leave Petition in limine filed by the Department against M/s. Garware Polyester Ltd.

Kwality Biscuits Ltd. (supra) is reported in CIT vs. Kwality Biscuits Ltd. (2006) 205 CTR (SC) 122 : (2006) 284 ITR 434 (SC). Thus, the judgment of Karnataka High Court in Kwality Biscuits (supra) stood affirmed. However, the Karnataka High Court has thereafter in the case of Jindal Thermal Power Co. Ltd. vs. Dy. CIT (2006) 203 CTR (Kar) 381 : (2006) 154 Taxman 547 (Kar) distinguished its own decision in case of Kwality Biscuits Ltd. (supra) and held that s. 115JB, with which we are concerned, is a self-contained code pertaining to MAT, which imposed liability for payment of advance tax on MAT companies and, therefore, where such companies defaulted in payment of advance tax in respect of tax payable under s. 115JB, it was liable to pay interest under ss. 234B and 234C of the Act. Thus, it can be concluded that interest under ss. 234B and 234C shall be payable on failure to pay advance tax in respect of tax payable under s. 115JA/115JB. For the aforestated reasons, Circular No. 13 of 2001, dt. 9th Nov., 2001 issued by CBDT reported in (2001) 171 CTR (St) 45 : (2001) 252 ITR (St) 50 has no application. Moreover, in any event, para 2 of that circular itself indicates that a large number of companies liable to be taxed under MAT provisions of s. 115JB were not making advance tax payments. In the said circular, it has been clarified that s. 115JB is a self-contained code and thus, all companies were liable for payment of advance tax under s. 115JB and consequently provisions of ss. 234B and 234C imposing interest on default in payment of advance tax were also applicable.

10. For the aforestated reasons CIT succeeds in the civil appeal arising out of SLP (C) No. 25746 of 2009 [Jt. CIT vs. Rolta India Ltd.] as also in the civil appeal arising out of SLP (C) No. 18367 of 2010 [CIT vs. Export Credit Guarantee Corporation of India Ltd.]. Consequently, Civil Appeal No. 459 of 2006 [Nahar Exports vs. CIT] and Civil Appeal No. 7429 of 2008 [Lakshmi Precision Screws Ltd. vs. CIT] stand dismissed with no order as to costs."

34. Now coming to the chargeability of interest under section 234B on account of provisions for doubtful debts, it is seen from the order passed by the Assessing Officer that the assessee had made provisions of ` 24,01,402, on account of provisions for doubtful debts and had added back in its computation of total income. However, the same was not added back to the book profit in order to calculate MAT under section 115JB. He was of the view that it is not an ascertained liability and is more in the nature of reserve, therefore, the same is covered by clause (c) of Explanation-1 to sub-section (2) of section 115JB and, accordingly, he added back the amount as book profit. The learned Commissioner (Appeals) has dealt the issue in the following manner:-

M/s. Garware Polyester Ltd.

"3. The first ground of appeal relates to provisions for doubtful debts of ` 24,01,402. The Assessing Officer has held that the provisions for doubtful debts of Rs.24,01,402/- made in the profit and loss account were not allowable as deduction while computing book profit u/s. 115JB of the I.T. Act. According to the AO, such provisions were in the nature of reserve or contingency made in the account of the assessee, The appellant had placed reliance on Supreme Court decision in the case of HCL Comnet Ltd (305 ITR

409) to back its point that such provision were allowable.

3.1. I have perused the facts of the case and the legal position. The dispute regarding doubtful debts u/s. 115JB of the I.T. Act now stands settled by the amendment made in the Finance Act 2009. It is now provided that while computing the 'Book Profit' for the purpose of section 1 15J8 the net profit shall be increased by the provision for diminution in the nature of any asset debited to the profit and loss account. The said amendment is retrospectively applicable from 1st April 2001. This nullifies the effect of the above Supreme Court judgment retrospectively. The disallowance so made is therefore confirmed."

35. Thus, the learned Commissioner (Appeals) has confirmed the findings of the Assessing Officer on the ground that by Finance Act, 2009, amendment has been brought on statute in Explanation-1 clause (i) with retrospective effect from 1st April 2001, therefore, the same has been rightly added. In case of such a situation where any amount is being added as income in the computation under section 115JB, which has been brought on statute by retrospective amendment, has been dealt with by Their Lordships of Calcutta High Court in Emami Ltd. (supra), after analysing the provisions of section 115JB, section 234B and 234C, provisions relating to payment of advance tax and provisions of sections 207, 208 and 2011, have come to the following conclusion:-

"8. In the case before us, the last date of the relevant financial year was 31st March, 2001 and on that day, admittedly, the appellant had no liability to pay any amount of advance tax in accordance with the then law prevailing in the country. Consequently, the appellant paid no advance tax and submitted its regular return on 31st Oct., 2001 within the time fixed by law wherein it declared its total income and the book profit both as nil. However, consequent to the amendment of the provisions contained in s. 115JB of the Act by virtue of Finance Act, 2002 which was published in the official gazette on 11th May, 2002 M/s. Garware Polyester Ltd.

giving retrospective effect to the amendment from 1st April, 2001, the appellant first voluntarily paid a sum of Rs. 1,55,62,511 on account of the tax payable on book profit as provided in amended provision of s. 115JB and then filed its revised return of 31st March, 2003 declaring its business income as nil but the book profit under s. 115JB as Rs. 20,63,65,711. The AO accepted such return of income but imposed interest under ss. 234B and 234C of the Act amounting to Rs.44,00,937 and Rs. 11,78,960 respectively.

In our opinion, the amended provision of s. 115JB having come into force w.e.f. 1st April, 2001, the appellant cannot be held defaulter of payment of advance tax. As pointed out earlier, on the last date of the financial year preceding the relevant assessment year, as the book profit of the appellant in accordance with the then provision of law was nil, we cannot conceive of any "advance tax" which in essence is payable within the last day of the financial year preceding the relevant assessment year as provided in ss. 207 and 208 or within the dates indicated in s. 211 of the Act which inevitably falls within the last date of financial year preceding the relevant assessment year. Consequently, the assessee cannot be branded as a defaulter in payment of advance tax as mentioned above. At this stage, we may profitably rely upon the observations of the Supreme Court in the case of Star India (P) Ltd. vs. CCE (2006) 201 CTR (SC) 63 : (2006) 280 ITR 321 (SC) strongly relied upon by Mr. Bajoria, where the apex Court in the context of imposition of service tax by the Finance Act, 2002 with retrospective effect held that the liability to pay interest would arise only on default and is really in the nature of quasi-punishment and thus, although the liability to pay tax arose due to retrospective effect of law, same should not entail the punishment of payment of interest. Although Mr. Nizamuddin, the learned counsel appearing on behalf of the Revenue, in this connection, strongly relied upon the decision of the Supreme Court in the case of Jt. CIT vs. Rolta India Ltd. (supra), we find that in that case the question was whether interest under s. 234B of the Act could be charged on the tax calculated on the book profit under s. 115JA and in other words, whether advance tax was at all payable on book profits under s. 115JA of the Act. The Supreme Court answered the said question in the affirmative and further held that the provisions of interest on default as provided in ss. 234B and 234C would also apply. We have already pointed out that Mr. Bajoria, at the very outset, conceded that the said decision should be applied for answering the first question formulated in this appeal against his client. In our opinion, the said decision is not relevant for considering the second and the third questions as to whether an assessee can be said to be a defaulter in payment of advance tax if he had no liability to make payment of such tax on the last date of a financial year preceding the relevant assessment year as such question did not arise in the said case before the Supreme Court.

It appears that the learned Tribunal has not at all considered the aforesaid aspect as to the liability of the assessee to make payment M/s. Garware Polyester Ltd.

of the advance tax on the last day of the financial year i.e. 31st March, 2001 when its book profit was nil according to the then law of the land. The various decisions of the other High Courts and the Tribunals relied upon by the Tribunal did not effectively consider the question whether even in a case like the present one where on the last date of the financial year preceding the relevant assessment year, the assessee had no liability to pay advance tax, he would be nevertheless asked to pay interest in terms of s. 234B and s. 234C of the Act for default in making payment of tax in advance which was physically impossible.

We, therefore, partly allow the appeal by answering the first question in the affirmative and against the assessee and the second and the third questions in the negative and against the Revenue.

The order passed by the Tribunal is, thus, set aside to the extent indicated above."

36. Thus, respectfully following the aforesaid judgment of the Calcutta high Court, we set aside the impugned order passed by the learned Commissioner (Appeals) and hold that any such amount of provisions which has been amended retrospectively, no interest under section 234B is chargeable and the assessee cannot be held to be defaulter in payment of advance tax as no advance tax was payable on the last day as per the law then prevailing. Thus, ground no.2, is partly allowed.

37. The assessee has raised following additional grounds:-

"Without prejudice to any other ground, on the acts and in the circumstances of the case and in law, we hereby request your Honour's to grant deduction under section 80HHC under MAT provisions to the extent of 100% of the eligible profits. The said claim is in accordance with the decision of Hon'ble Apex Court in case of M/s. Ajanta Pharma wherein it has been decided that the deduction under section 80HHC from MAT income is not subjected to restriction laid down by sub-section (IB) of section 80HHC."

38. After hearing both the parties, we find that this ground is similar to the ground no.1, raised by the Department; therefore, this ground will be disposed off while deciding the Revenue's appeal in ITA no.4418/Mum./ 2010, for assessment year 2003-04, which has been dealt in succeeding paragraphs.

M/s. Garware Polyester Ltd.

39. प रणामतः नधा रती क अपील आं शक वीकत ृ क जाती है ।

40. In the result, assessee's appeal is partly allowed.

We now take up Revenue's appeal in ITA no.4418/Mum./2010, for assessment year 2003-04, vide which, following grounds have been raised:-

"1. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in deleting the addition of ` 3,68,37,122, under section 80HHC on the book profit under section 115JB without appreciating the fact that there is no such provision in the Act to deal with section 80HHC differently if the assessee is paying tax under section 115JB.

2. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in allowing depreciation on know how fees amounting to ` 77,89,026 without appreciating the facts of the case."

41. Insofar as ground no.1, is concerned, the learned Commissioner (Appeals) has discussed this issue in the following manner:-

"4. 4) The second ground of appeal relates to deduction u/s. 8OHHC from Book profit u/s.115JB of Rs.3,68,37,122/-. The AO has not allowed deduction of Rs.3,68,37,122/- while computing book profit u/s.115JB. The AO has discussed the issue in para 6 of the assessment order wherein he has stated that the company is not entitled to this deduction under the normal provisions for computation of total income due to brought forward loss.

4.1 Explanation (iv) to section 115JB provides for the following deduction.

The amount of profits eligible for deduction u/s.80HHC computed under clause (a) or clause (b) or clause (c) of sub-section (3) of sub-section (3A) as the case may be, of that section, and subject to conditions specified in that section".

4.2. It was also submitted that the computation of total income at page 1 of the business income has been computed at Rs.18,89,96,640/-. This has been accepted in the computation of total income on page 7 of the assessment order. The AO has made additions of Rs.2,86,10,444/- to this income and computed business income at Rs.21,76,07,084/--.

M/s. Garware Polyester Ltd.

4.3. It was further submitted that there was sufficient positive business profit in the year under appeal and the appellant was eligible to deduction of Rs.3,69,04,360/-. It is submitted that u/s. 1 15JB- Explanation(iv) what is provided is that the " amount of profit eligible for deduction as computed u/s.8OHHC" is allowable as deduction from book profit. It is not the condition of sec. 115JB that such deduction has been actually allowed or not in the computation of total income under the other provision. The appellant also relied on the Special Bench decision in DCIT v/s. Syndrome Formulation (1) Ltd 2007 106 lTD 793(Mum) as well as that of Glenrnark Laboratories Ltd dated 09-11-2004.

4.4. I have perused the facts of the case and the legal position on this issue. As far as percentage of deduction allowable in each year the assessee would not be entitled to 100% deduction since sub- section 1 to section 8OHHC introduced by the Finance Act w,e.f 1st appeal 2001 was specifically meant to phase out the deduction completely for A.Y,2005-06 in which event on an application of the sub-section only a portion of the amount computed u/s.8OHHC is allowable for A.Y.2004-05. This is in accordance with the decision of the Bombay High Court in Ajanta Pharma.

4.5. However, the method of computation of deduction u/s.8OHHC is to be• in accordance with the decisions of the Special Bench in DCIT v/s. Syndrome Formulation (I) Ltd (2007) 106 lTD 193(Mum). The AO is directed accordingly."

42. At the outset, both the parties agreed that this issue stands covered by the judgment of Hon'ble Supreme Court in Ajanta Pharma Ltd. v/s CIT, [2010] 327 ITR 305 (SC).

43. After hearing both the parties and on perusal of the material available on record, we find that the issue of computation of book profit under section 115JB and deduction under section 80HHC have been decided by the Hon'ble Supreme Court in the following manner:-

"9. On the other hand, s. 80HHC(1) inter alia states that where an assessee, who is the Indian resident, is engaged in the business of exports out of India of any goods earns convertible foreign exchange then in computing the total income, a deduction of the profits derived from such exports would be admissible. Thus, s. 80HHC provides for tax incentives. Sec. 80HHC(1) at one point of time laid down that an amount equal to the amount of deduction claimed should be debited to the P&L a/c of the previous year in respect of which deduction is to be allowed and credited to the reserve account to be utilized for the business purpose. Sec.

M/s. Garware Polyester Ltd.

80HHC(1) concerns eligibility whereas s. 80HHC(3) concerns computation of the quantum of deduction/tax relief. At one point of time prior to the Finance Act, 2000, exporters were allowed 100 per cent deduction in respect of profits derived from export of goods. However, that has now been reduced in a phase-wise manner under s. 80HHC(1B). It may be noted that all assessable entities are not eligible for deduction under s. 80HHC. Similarly, only eligible goods are entitled to such special deduction under s. 80HHC(1). A bare reading of s. 80AB shows that computation of deduction is geared to the amount of income, but s. 80HHC(3), which refers to quantification of deduction is geared to the exports turnover and not to the income. On the other hand, s. 115JB refers to levy of MAT on the deemed income.

The above discussion is only to show that ss. 80HHC and 115JB operate in different spheres. Thus, two essential conditions for invoking s. 80HHC(1) are that assessee must be in the business of export and secondly that sale proceeds of such exports should be receivable in India in convertible foreign exchange. Hence, s. 80HHC(1) refers to "eligibility" whereas s. 80HHC(3) refers to computation of tax incentive. Coming to s. 80HHC(1B) it is clear that after Finance Act, 2000 w.e.f. asst. yr. 200102 exporters would not get 100 per cent deduction in respect of profits derived from exports but that they would get deduction of 80 per cent in the asst. yr. 2001-02, 70 per cent in the asst. yr. 2002-03 and so on. Thus, s. 80HHC(1B) deals not with "eligibility" but with the "extent of deduction". As earlier stated, s. 115JB is a self-contained code. It taxes deemed income. It begins with a non obstante clause. Sec. 115JB refers to computation of "book profits" which have to be computed by making upward and downward adjustments. In the downward adjustment, vide cl. (iv) it seeks to exclude "eligible" profits derived from exports. On the other hand, under s. 80HHC (1B) it is the extent of deduction which matters. The word "thereof" in each of the items under s. 80HHC(1B) is important. Thus, if an assessee earns Rs. 100 crores then for the asst. yr. 2001-02, the extent of deduction is 80 per cent thereof and so on which means that the principle of proportionality is brought in to scale down the tax incentive in a phased manner. However, for the purposes of computation of book profits which computation is different from normal computation under the 1961 Act/computation under Chapter VI-A. We need to keep in mind the upward and downward adjustments and if so read it becomes clear that cl. (iv) covers full export profits of 100 per cent as "eligible profits" and that the same cannot be reduced to 80 per cent by relying on s. 80HHC(1B). Thus, for computing "book profits" the downward adjustment, in the above example, would be Rs. 100 crores and not Rs. 90 crores. The idea being to exclude "export profits" from computation of book profits under s. 115JB which imposes MAT on deemed income. The above reasoning also gets support from the Memorandum of Explanation to the Finance Bill, 2000.

M/s. Garware Polyester Ltd.

10. One of the contentions raised on behalf of the Department was that if cl. (iv) of Explanation to s. 115JB is read in entirety including the last line thereof (which reads as "subject to the conditions specified in that section"), it becomes clear that the amount of profits eligible for deduction under s. 80HHC, computed under cl.

(a) or cl. (b) or cl. (c) of sub-s. (3) or sub-s. (3A), as the case may be, is subject to the conditions specified in that section.

According to the Department, the assessee herein is trying to read the various provisions of s. 80HHC in isolation whereas as per cl.

(iv) of Explanation to s. 115JB, it is clear that book profit shall be reduced by the amount of profits eligible for deduction under s. 80HHC as computed under cl. (a) or cl. (b) or cl. (c) of sub-s. (3) or sub-s. (3A), as the case may be, of that section and subject to the conditions specified in that section, thereby meaning that the deduction allowable would be only to the extent of deduction computed in accordance with the provisions of s. 80HHC. Thus, according to the Department, both "eligibility" as well as "deductibility" of the profit have got to be considered together for working out the deduction as mentioned in cl. (iv) of Explanation to s. 115JB. We find no merit in this argument. If the dichotomy between "eligibility" of profit and "deductibility" of profit is not kept in mind then s. 115JB will cease to be a self-contained code. In s. 115JB, as in s. 115JA, it has been clearly stated that the relief will be computed under s. 80HHC(3)/(3A), subject to the conditions under sub-cls. (4) and (4A) of that section. The conditions are only that the relief should be certified by the chartered accountant. Such condition is not a qualifying condition but it is a compliance condition. Therefore, one cannot rely upon the last sentence in cl.

(iv) of Explanation to s. 115JB [subject to the conditions specified in sub-cls. (4) and (4A) of that section] to obliterate the difference between "eligibility" and "deductibility" of profits as contended on behalf of the Department."

44. In view of the law laid down by the Hon'ble Supreme Court, we direct the Assessing Officer to compute the deduction under section 80HHC in the light of the aforementioned judgment of Hon'ble Supreme Court. Thus, ground no.1, raised by the Revenue is dismissed.

45. The additional ground raised by the assessee in its ITA no.4189/Mum./2010, as reproduced above, is hereby disposed off in favour of the assessee as the same is covered by the aforementioned judgment of the Hon'ble Supreme Court in Ajanta Pharma Ltd. (supra). Respectfully following the same, the additional ground raised by the assessee is hereby allowed.

M/s. Garware Polyester Ltd.

46. Ground no.2, relates to depreciation on knowhow fees of ` 77,89,026.

47. The learned Commissioner (Appeals) has dealt with this issue in the following manner:-

"7. The fifth ground of appeal relates to depreciation on technical know- how fees of Rs.77,89,026/-. The AO has disallowed Rs.77,89,926/- being depreciation claimed on the above head on the ground that no deduction for depreciation on technical know- how u/s.32 was allowable.

7.1. I have perused the facts of the case. This is a recurring issue where finding has been given by the ITAT as well as by the CIT(A) for immediate succeeding year i.e, 2004-05. From the submission made by the appellant and specifically the chart provided to the AO for the claim of deduction us/. 35AB and u/s,32 of the I.T. Act, I do not find any error in the claim made. The AO shall however, before allowing the claim to verify from the record and submit before him along with the figure as claimed both u/s.35AB and u/s.32 of the l.T. Act. The AO should also ensure that the deduction is allowable only after factoring in the claim which has not been accepted in favour of the department by the Hon'ble ITAT in its order in ITA NO.645/Mum/98 dated 28-10-2004 which has been relied upon by the AU in the order in the current year. Thus, the AO, shall ensure and verify the entire records and claims made therein for each year which has been included in computing the claim u/s. 35AB and 32 of the Act."

48. Both the parties admitted that this issue is covered in favour of the assessee and against the Revenue by the decision of a co-ordinate bench of this Tribunal in assessee's own case for assessment year 2002-03, ITA no.4774/Mum./2006.

49. After hearing both the parties and on perusal of the findings of the learned Commissioner (Appeals) and the Assessing Officer as well as the order passed by the Tribunal, we find that this issue has been restored to the file of the Assessing Officer for carrying out verification as per the directions given therein which, for the sake of ready reference, is reproduced below:-

M/s. Garware Polyester Ltd.

"11. Ground No. 4 of the appeal reads as follows :-

"The said learned CIT(A) erred in not accepting the claim of the appellant for deduction u/s. 35AB (Rs. 1,15,86,168/-) and depreciation u/s. 32 (56,40,216) aggregating to Rs. 1,72,26,384/-. The said learned CIT(A) erred in observing that this matter has to be decided by the Assessing Officer when all the details were submitted at the time of hearing of the appeal and the question of allowability of the deduction was required to be taken by him."

12. The observations of the CIT(A) on this issue were as follows:

The Assessing Officer disallowed Rs.1,22,18,252/- but the correct amount was Rs.1,03,85,368/- being depreciation on Technical Knowhow on the ground that no such depreciation was allowable on cost paid for acquiring technical know how. The alternative claim for deduction u/s. 35AB was also not allowed as the same had already been exhausted. The Assessing Officer in the assessment order disallowed the claim under section 35AB holding that the allowance of 1/6th of the technical knowhow expenses already stood exhausted. The Assessing Officer also did not allow the depreciation stating that this issue was covered by the decision of Hon'ble ITAT vide order bearing ITA No. 645/Mum/1998 dated 28.10.2004. In appeal, it has been held that the assessee is entitled to deduction of 1/6th of the technical knowhow fees paid and that the Assessing Officer has ignored the chart submitted to him regarding the same. It was further been argued that the Assessing Officer has committed an error in not allowing depreciation even when 'technical knowhow' has from the A.Y. 1999-2000 been classified as an 'intangible asset'. Both the deduction claimed under 'technical knowhow fees' and 'depreciation' claimed are matters to be decided by the Assessing Officer on the facts and evidences available to him on his records. Under the circumstances, the Assessing Officer shall pass necessary orders after verification of records and examining the plea of the assessee regarding his reliance on the charts and documents submitted before the Assessing Officer during the assessment proceedings.

13. We are of the view that the Learned CIT(A) has not examined the issue and has remanded the issue to the Assessing Officer. We are of the view that in the light of the chart submitted by the assessee before the Assessing Officer, the Assessing Officer should examine as to whether depreciation claimed on technical knowhow is different from the 1/6th deduction of expense on technical knowhow claimed by the assessee u/s. 35AB of the Act. If that be so, the claim for depreciation u/s. 32 has to be allowed as per the amended provisions of section 32 applicable to A.Y. 2002-

03."

50. In this year also, the learned Counsel for the assessee pointed out that a similar chart depicting deduction sections 35AB and 32, has been M/s. Garware Polyester Ltd.

given at Page-91 of the paper book. Thus, keeping in view the decision of a co-ordinate bench of the Tribunal cited supra, similar directions are issued on this issue also. Consequently, ground no.2, is partly allowed for statistical purposes.

51. प रणामतः राज व क अपील सां यक य उ े य के लए आं शक वीकत ृ क जाती है ।

49. In the result, assessee's appeal is partly allowed for statistical purposes.

आदे श क धोषणा खले ु यायालय म दनांकः 19th December 2012 को क गई ।

Order pronounced in the open Court on 19th December 2012 Sd/- Sd/-

बी.

          बी. रामकोट
              रामकोट य                                            अ मत शु ला
           लेखा सद य                                               या यक सद य
    B. RAMAKOTAIAH                                              AMIT SHUKLA
  ACCOUNTANT MEMBER                                           JUDICIAL MEMBER


मंुबई MUMBAI,     दनांक DATED: 19th December 2012

आदे श क     त ल प अ े षत / Copy of the order forwarded to:
(1)    नधा रती / The Assessee;
(2)   राज व / The Revenue;
(3)   आयकर आयु (अपील) / The CIT(A);
(4)   आयकर आयु       / The CIT, Mumbai City concerned;
(5)    वभागीय    त न ध, आयकर अपील य अ धकरण, मंुबई / The DR, ITAT, Mumbai;
(6)   गाड फाईल / Guard file.
                                              या पत   त / True Copy
                                              आदे शानसार
                                                     ु   / By Order
 द प जे. चौधर / Pradeep J. Chowdhury
वर    नजी स चव / Sr. Private Secretary
                                   उप / सहायक पंजीकार / (Dy./Asstt. Registrar)
                                  आयकर अपील य अ धकरण, मंुबई / ITAT, Mumbai

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Income Tax Appellate Tribunal - Mumbai

Garware Polyester Ltd., Mumbai vs Department Of Income Tax on 11 March, 2010