A.O. not to to demonstrate tax avoidance before invocation of TP provisions

IN THE ITAT AHMEDABAD BENCH ‘D’

Atul Ltd.

Versus

Assistant Commissioner of Income-tax, Range-1

IT Appeal No. 3118 (Ahd.) of 2010

[Assessment Year 2006-07]

October 29, 2012

ORDER

Mukul Kr. Shrawat, Judicial Member 

This is an appeal filed by the Assessee on Form No. 36B i.e ‘Memorandum of Appeal’ as prescribed u/s 253(1)(d) being a direct appeal emanating from the Assessment Order passed u/s 143(3) r.w.s.144C dated 22.10.2010. However, the chronology of the connected orders passed by the Revenue Authorities is as follows:-

1.  T.P.O. order U/s 92 CA(3) dated 12.10.09.

2.  Draft Assessment Order U/s 144 C dated 22.12.2009.

3.  D R P ( Dispute Resolution Panel ) order U/s 144C (5) dated 22.09.2010.

4.  Assessment Order U/s 143(3) r.w.s. 144C dated 22.10.2010.

2. Ground-wise decision is as under.

Ground Nos.1 to 6 :-

 1.  Learned AO/DRP has erred in law and on facts in adding Rs.4,46,52,496/- on account of adjustments to the Arm’s length price without there being any jurisdiction as well as legal and factual basis for the same.

 2.  Learned AO has erred in law and on facts in referring the case of the appellant to the transfer pricing officer. Under the facts and circumstances of the case, there was no reasons to interfere with the pricing adopted by the appellant as the same is falling within the parameters of transfer pricing laid down under the scheme of the Act.

 3.  Alternatively and without prejudice, the order of the Additional Commissioner of Income Tax acting as Transfer Pricing Officer is without jurisdiction and against the express provisions of law in as much as Commissioner of Income Tax could not have acted as transfer pricing officer.

 4.  The learned assessing officer has erred in law and on facts in invoking the provisions of Chapter X without prima facie demonstrating that there was some tax avoidance.

 5.  The learned assessing officer has erred in law and on facts in making a reference to the Transfer pricing Officer (TPO) u/s.92C(3) r.w.s. 92CA(1) of the Act without providing an opportunity of being heard to the appellant.

 6.  In any case the whole reference and the consequent orders are bad and illegal because the alleged approval granted by CIT u/s.92CA(1) of the Act is vitiated in law firstly because the appellant was not heard before any such approval and secondly because the same has been granted mechanically, without any application of mind and without due diligence.

2.1 Apart from these grounds, the appellant has also raised an Additional Ground, reproduced below:-

 1.  The Learned Transfer Pricing Officer, and consequentially the D.R.P. and the Assessing Officer, have no jurisdiction to make any adjustment in relation to alleged commission income of GBP 3,45,418/- (Rs.2,71,82,980/-) in as much as the same were not subject mater of Reference made to the Transfer Pricing Officer under section 92CA(1) of the Income Tax Act, 1961.

3. At the outset, it is worth to mention that the appellant had also moved a petition for admission of Additional Evidences as follows:-

“1.  Statement of account of the assessee in the books of Atul Europe Ltd. for A.Y. 2004/05 & F.Y.2005/06 in support of the submissions made before ld. TPO vide letter dated 01/07/2010 placed @ page 351 para 1 of the paper book that assessee accounted for the commission income on net basis since Atul Europe Ltd. forwarded GEB 141714 only after adjusting the expenses for the transactions with the Agricultural Support Service Company (ASSC).

 2.  Statement of account of assessee in the books of Atul Europe Ltd. from Financial Year 2000/01 to Financial Year 2004/05 in support of the submissions made before ld.TPO vide letter dated 01/07/2010 placed @ 351 para 2 of the paper book that though Atul Europe Ltd. accounted commission receivable from P P Site in their books for earlier years, it was written off in Financial Year 2005/06 and hence no such commission income was accounted for in the books of assessee as it was never received from Atul Europe Ltd.

 3.  Re. Summary of comparative data for sales made to AE and non AEs’ for Financial Year 2005/06 submitted as part of audited accounts placed @ page 95 of the paper book reproduced as Annexure A of the order of Transfer Pricing Officer, the assessee submits that on verification of the sale transaction with AE / Non AE, discrepancy in the nature of sale of product code 111108 (product name Novatic Brown R Pure) to non AE parties was through oversight shown as sale of product code 110308 (product name Novatic Olive R Pure). A certificated dated 6th August 2011 of M/s.Ghanshyam Parekh & Co., Chartered Accountants with the sale Invoices in support of the above contention are annexed herewith for appreciation of the Hon’ble Bench.”

3.1 The ITAT Bench has considered the petition and thereafter vide an order sheet entry dated 25.01.2012 has decided that the additional evidences as mentioned at Serial no. 1 & 2. are to be admitted , but the additional evidence at Serial No. 3 was not allowed to be admitted. With this back ground now we shall proceed to decide the controversies raised in this appeal.

4. Before us in respect of the above grounds the Appellant has primarily raised the objections about the stand taken by the T.P.O. in respect of the following two additions:-

	(a)	Upward adjustment in respect of the goods sold by the assessee to ‘AE’ at lower price as compared to the third party, the upward adjustment of	…..	Rs.1,74,69,516/-
	(b)	Commission received from M/s. Atul Europe Ltd. ($ 1,54,530 + $ 1,90,888) Not at Arm’s Length hence upward adjustment of	…..	Rs.2,71,82,980/-
		TOTAL ADDITION CONTESTED
		In the grounds	…..	Rs.4,46,52,496/-

4.1 Due to this reason we shall first discuss the said order of the TPO in respect of the ‘sale price’ adjustment and then the upward adjustment of Commission, thus by doing so the above ground shall be adjudicated completely. Facts in brief as per the order of the T.P.O. passed U/s 92CA(3) dated 12.10.2009 are that the appellant company is a manufacturer of chemicals & dyes. The TPO has noted them as “Agrochemicals, bulk drugs and commodity chemicals”. The appellant company has six divisions:- i) agrochemicals, ii) aromatics, iii) colors, iv) pharmaceuticals, v) intermediates, vi) polymers.

4.2 The appellant has four wholly owned subsidiaries viz. (i) Atul Americas Inc., U.S.A. (AAI), II) Atul Europe Ltd. U.K.( AEL), iii) Atul Deutshland GmBh, Germany ( A.D.)iv) Atul International Trading (Sanghai) Co. Ltd, China (AITCL ). These wholly owned subsidiaries (in short WOS) undertook the selling of dyes and chemicals manufactured by the appellant. On account of this reason the assessee has furnished 3CEB report and informed about the sales to these concerns. The assessee had also chosen the CUP method for the purpose of comparison. The details of the International Transaction with the “Associated Enterprises” ( in short A.Es.) was informed as under:-

S.No.	Name of Assessee	Nature of Transaction	Value of Transaction
1.	Atul Americans Inc, USA	(i) Sale of goods	51,52,71,449
		(ii) Purchase of Raw materials	1,11,86,602
2.	Atul Europe Ltd, Cheshire	(i) Sale of Goods	33,23,81,495
		(ii) Commission	65,70,688
3.	Atul Deutchland GmbH Germany	(i) Sale of goods	30,26,53,941
4.	Atul International Trading (Shanghai) Co. Ltd., China	(i) Sale of Goods	3,29,35,902
		(ii) Purchase of raw materials	88,097
		(iii) Commission	29,58,248
		Total :	120,40,46,422/-

4.3 The TPO has observed that the assessee company had sold the goods to it’s subsidiaries for re-distribution in the respective markets. It has also been noted by the TPO that although the assessee had chosen CUP method but did not furnish the comparison of sales with supporting Internal CUP or External CUP in respect of all the products/ transaction. So the TPO has issued a show-cause notice asking the assessee to furnish internal/external comparable uncontrolled price for all the products exported to the A.E.’s. Hence for the purpose of determination of Arm’s Length Price it was asked to furnish the comparable transaction for bench-marking.

4.4 The assessee has furnished the details of the products sold and also furnished the internal & external uncontrolled prices which were stated to be available to the assessee. The assessee had asked for the adjustments namely; (a) difference in application, (b) quantity discount, (c) marketing risk, (d) financial risk. The adjustments claimed by the assessee were listed by the TPO as under :-

“(i)  The assessee has claimed 100% adjustments in prices for issue of difference in applications.

(ii)  The assessee has claimed quantity discount of 2% and 5%.

(iii)  The assessee has claimed adjustment for marketing risk at 5% and for financial risk at 2%.

(iv)  The assessee has claimed adjustment in price due to long term contract at 11%.

(v)  The assessee has claimed price difference of 30-50% due to lower price prevailing in China market.”

4.5 It is worth mentioning that the TPO has accepted the adjustment mentioned in column no. iii) , iv) and v) i.e. adjustment for marketing risk, adjustment for long terms contract and lower price prevailing in China. Except for the above adjustments in column no. i) and ii) i.e. adjustment for difference in application and adjustment on account of quantity discount, the TPO had accepted all other adjustment as suggested by the assessee. Correctness of the rejection of adjustments are going to be discussed underneath.

4.6 An important fact has also been noted by the TPO that the assessee has itself computed the upward adjustment of Rs.1,09,80,062/-, even after claiming the above mentioned adjustments.

4.7 The two adjustments which were not accepted by the TPO were discussed as under:-

“(A) Different Applications : The assessee has carried out sale of Novatic Olive R Pure to its AE M/s.AAI, America. Similar product was sold to M/s.Dyestar, Japan and M/s.Dyestar, Germany. The products were sold @ 1745.15 per kg for 990 kg to Dyestar, Japan and at Rs.1780.89 per kg for 16830 per kg to M/s.Dyestar, Germany whereas assessee has sold only 9259 kg to its AE. The assessee has claimed adjustment on account of different application by the client i.e. for plastic and auto paint as compared to normal product use in textile industry @ 100%. There is no adjustment possible on the basis of product application. It is not an economic adjustment on the basis of FAR analysis. If a product has been manufactured and is sold using similar FAR analysis, an adjustment on the basis of non-economic indicator cannot be applied. OECD guidelines for Transfer Pricing administration also does not speak of any such adjustment. No such adjustment has been provided in Rule-10B of the IT Act, 1962 under CUP method. In view of the above, claim of the assessee of making upward adjustment of 1005 to its price is rejected. The assessee has further claimed quantity adjustment on these transactions which is being discussed in the next paragraph.”

“(B) Quantity Adjustment: The assessee has claimed quantity adjustment of 5% in respect of Novatic Olive R Pure and for product code 402141, 403211 and 152583. For these products, sales to AE is less than sale to non-AEs. It can be seen from the above paragraph, assessee has sold 16830 kg of Novatic Olive R Pure to M/s.Dyestar, Germany whereas sale to the AE of the same product is only 9259 kg. Similar is the situation of other products. In view of the above, assessee’s claim, specifically to these 4 products regarding upward quantity adjustment is rejected.”

4.8 Finally the TPO has concluded that the upward adjustment as offered by the assessee of Rs. 1,09,80,062/- was to be increased to Rs. 1,74,69,516/-. To arrive at this figure there are Annexures to the said order as ‘Annexure A to D’ in relation to all the four Associate Enterprises, summarised as under :-

	Annexure “A”	Rs. 1,11,28,585/-
	Annexure “B”	Rs. 40,46,606/-
	Annexure “C”	Rs. 42,62,272/-
	Annexure “D”	Rs. 18,68,053/-
	Total	Rs. 1,74,69,516/-

5. The matter was referred to Dispute Resolution Panel (in short DRP) and for the sake of completeness the relevant observations shall only be discussed. The chief objection of the assessee was that the over-all sale-price charged from the A.E. was more than comparing the Non-A.E. So it was pleaded that no adjustment was needed as the said International Transaction was at ALP. Secondly, it was urged that no profit was shifted from India to out side country, rather the over-all profit was retained in India by charging on the whole more price. Thirdly, it was also argued that there was no motive or incentive in shifting such an amount because the assessee is an eligible undertaking for the deduction the U/s 80IA. That there was no tax benefit to the assessee to shift profit out of country.

5.1 However, the Ld. DRP has quoted CBDT Circular Nos. 12 & 14 which says that the provisions of Transfer Pricing are made to ensure that the profits taxable in India are not understated by declaring lower receipts or higher outgoings . That the losses are not overstated in India. These transaction are to be in comparison to than those which would have been declared by the persons entering into similar transaction with unrelated parties in the same or similar circumstances. Thus the basic intention underlying the Transfer Pricing regulation is to prevent shifting -out of profit by manipulating prices charged or paid in international transaction, and thereby eroding the country’s tax base.

5.2 At this juncture it is worth to mention one of the finding of the DRP, which was in respect of the validity of the initiation of T.P. proceedings when there was no tax benefit to the assessee in view of the tax incentive provided in India. The DRP has cited MSS India Pvt. Ltd. 123 TTJ 657(Pune), one of us i.e. JM is a cosignatory, for the reason that ALP could be determined because the Legislature did comprehend the situation, while introducing these provisions, that these provisions of Transfer Pricing are to be applied while the benefit U/s 10A is still available to the assessee. In the said decision of MSS India (supra) that crease was straightened which was created by a verdict pronounced in the case of Philips Software Centre (26 SOT 226). In Philips Software (supra) it was opined that the basic intention for the introduction of Transfer Pricing provisions is to prevent the shifting of profit, but if assessee is claiming benefit of Sec. 10A then there is no motive to transfer the profit, hence T.P. provisions ought not to be applied. But this decision of Philips Software Centre(P) Ltd.{26 SOT 226 (Bang.)} was transversely opposite to the five member decision of Aztec Software & Technology Services Ltd. 162 Taxman 119 (Bang.) (S.B.) hence it was held in MSS India Pvt. Ltd (supra ) that the five member Special Bench decision is required to be adopted in preference to a Division Bench decision.

5.3 An another view of the DRP is hereby required to be mentioned through which it was opined that the important factor is the payment of tax qua India and not qua the tax along-with the A.E. The rationale behind the T.P. provisions is to curtail the avoidance of tax in India. Intent and purpose is to ensure that there is no diminution in the tax liability of an Indian Enterprise. How much tax is paid by the foreign A.E. is not relevant in the determination of correct tax liability in the hands of an Indian Enterprise. The payment of tax by A.E. abroad does not contribute anything to Indian exchequer. So it is wrong to argue that the tax liability of an Indian Enterprise is to be seen along-with the abroad tax liability of A.E. on a total basis. For this legal proposition the case law relied upon was Gharda Chemicals Ltd. (2009-TIOL -790- ITAT- Mum.)

5.4 On the question of proposed adjustments of slae-price the comment of the Ld. DRP was that if a product has been manufactured and sold using similar functional analysis , by taking into consideration the Assets and the Risks assumed, then no adjustment could be allowed on account of any non-economic indicator. No such adjustment is envisaged in 10 B except where the assessee is able to show that the transaction entered into with the parties could materially affect the price in the open market. According to DRP no such proof had been either filed before the TPO or before the DRP proceedings on the basis of which it could be proved by the assessee that in view of the transactions entered into with the third party, the price charged from the A.E. was also less. It was commented , rather the TPO has already allowed the adjustment of price after duly considering the lower price effect due to the presence of China market. Since the DRP has approved the upward adjustment of Rs. 1,74,69,516/-as suggested by Ld.TPO, hence the assessee is aggrieved and now before us.

5.5 From the side of the appellant Senior Advocate Mr.S.N.Soparkar appeared. To be précise, he has raised three issues. The first issue is in respect of the principle of aggregation. After narrating the nature of business carried on by the assessee and the brief background of the nature of adjustment made by the TPO, ld.AR has directly confronted that while making the adjustment the TPO had taken into account only such transactions where lesser amount was charged by the assessee from AE. The TPO had ignored those transactions where more amount was charged in comparison to the non-AE. He has therefore contested that all the transactions should be aggregated in respect of all the products for the entire year and the result is to be examined in the totality of those transactions. If it is found that still there was a difference which demonstrates that a lesser amount was charged by the assessee from the AE, then only that could have been adjusted. He has vehemently contested that had the AO adopted such aggregation of all the transaction, then there would be no case for any adjustment. Our attention was drawn on page 94 of the paper-book which contains summary of the transaction for A.Y. 2006-07 as follows:-

“Summary of additions for TP transactions A.Y. 2006-07

SN	AE	Addition	Deletion	Addition
1.	AAI	4652281	7513080	-2860799
2.	AEL	426272	18897943	-18471671
3.	ADG	4046607	3343034	703573
4.	AITSCL	1854903	531090	1323813
		10980061	30285147	-19305085″

5.6 So, Ld.AR has described page 94 that under the head “addition” the total of the amount of transaction with all the 4 AEs was amounting to Rs.1,09,80,061/-, which was under charged. However, with those 4 AEs there were transactions which were over charged and tabulated under the head “deletion” amounting to Rs.3,02,85,147/-. He has submitted that since the amount which was overcharged was higher in figure, therefore the net amount was in the minus figure. Thus showing that there was no requirement of any adjustment since ultimate result of all the transaction was that there was no transfer of profit by charging less from the AEs.

5.7 He has also drawn our attention on OECD guidelines which were narrated to the Revenue Authorities and the extract of the same is as under:-

“In this context, we rely on the clause (d) of Rule 10A of the income tax rules 1962 which permits aggregation of individual transactions for determination and application of arm’s length price. Rule 10A(d) defines the transaction as follows:

For the purposes of this rule and rules 10B to 10E.

 (a)  uncontrolled transaction means a transaction between enterprises other than associated enterprises, whether resident or non-resident.

 (b)  Property includes goods, articles or things and intangible property.

 (c)  Services include financial services.

 (d)  Transaction includes a number of closely linked transactions

We also draw your honor’s kind attention to paragraph 1.42 to OECD Guidelines which expressly advocates the principle of aggregation in the cases where business entities have long term arrangement for supply of goods of services or where pricing of closely linked products are involved Said paragraph 1.42 is reproduced hereinabelow for the sake of ready reference.

“Ideally, in order to arrive at most precise approximation of fair market value the arm’s length principle should be applied on transaction-by-transaction basis. However, there are often situations where separate transactions are closely linked or continuous that they cannot be evaluated adequately on a separate basis. Examples may include 1. Some long term contracts of supply of commodities or services. 2. rights to use intangible property, and 3. pricing a range of closely-linked products (e.g. in a product line) which is impractical to determine pricing for each individual product or transaction.”

5.8 The assessee has furnished the comparative data for sales made to the AE and non-AEs in the compilation running from pages 95, to 105. On the basis of those comparative data, ld.AR has explained that in respect of number of items the FOB per kg. was higher than the non-AE. The assessee has charged higher rate per kg. from the AE than the market price. So has argued that the allegation was wrong that by charging less price the correct profit was not disclosed by the assessee. The adjustment which was made by the assessee was in respect of (i) different application, (ii) quantity discount, (iii) marketing and distribution and (iv) financial risk. The ld.AR has thus pointed out that as far as the adjustment in respect of “difference in application” was concerned, the same was made only in respect of CW Division of a product code “110308”. In respect of that product the sale to AE in quantity was 9259 kgs. as against that the quantity sold to non-AE was 17820 kgs. The FOB per kg.charged was 664.47 from AE as against that the FOB per kg.charged from non-AE was 1778.79 kgs. Thus, the difference was (-)1114.3. In respect of this product only 100% ‘difference in application’ was adjusted. Further, there was difference in quantity, therefore 5% quantity discounted was also adjusted. Furthermore, a 5% discount on account of marketing and distribution was given. He has thus pleaded that the adjustments which were made by the assessee were reasonable and should have been allowed by the TPO. Rather, he has appreciated that the TPO has given the claim of adjustment in respect of marketing risk and lower price prevailing in China market as also adjustment in price due to long term contract at 11%, but not allowed “difference in application” and “quantity discount”. The adjustments as made by the TPO in annexure ABC & D are hypothetical and without any basis.

5.9 Ld.AR has vehemently contested that it was wrong on the part of the AO as well as TPO that the assessee himself has offered upward transfer pricing adjustment of Rs.1,09,80,061/-. He has informed that the amount was not offered but it was compared with the transactions with 4 AEs where the assessee has overcharged. He has argued that there was no “under charge” of sale price as alleged by the TPO because the price was fixed after considering several factors as prescribed under law. If those factors are to be taken into account and to be adjusted against the alleged under charged sale price, then there would be no difference in the sale price.

5.10 Ld.AR has persuasively drawn our attention on the provisions of Rule 10A(d) of IT Rules, 1962 which prescribes that for the purpose of Rule 10B to 10E the term “transactions” includes number of closely linked transactions. The closely linked transactions are the sales transactions which are required to be aggregated and to be computed as a whole and not be segregated with each other. The overall profitability is required to be considered by the TPO. The allegation of transfer of profit ought to be ruled out because the final figure came to be a negative figure; means at the end no positive benefit was transferred to the AEs.

5.11 The second plank of argument of ld.AR was that there was no motive of tax avoidance. According to him, the Revenue Department has not demonstrated that there was any tax benefit by transferring the product at lower price to AEs. In this connection, he has drawn our attention on sub-ground 4 of the main ground. Ld.AR has drawn our attention on page 339 of the paper-book, wherein the profitability ratio of the assessee along with the 4 AEs has been compared as follows:-

Profitability Ratio	Atul Ltd.	AAI	AEL	ADL	ACL
Net Profit Ratio	3.66%	0.39%	(7.91)%	0.11%	1.76%

5.12 In this connection, reliance was placed on DCIT v. Indo American Jewellery Ltd. 41 SOT page 1 (Mum.). He has pleaded that the TPO/AO was expected to first demonstrate that the assessee had a motive of tax avoidance while entering into cross-boarder transaction. Ld.AR has also referred Mastek Ltd. v. The Addl.CIT of ITAT “A” Bench Ahmedabad in ITA No.3120/Ahd/2010 for A.Y. 2006-07 dated 29.02.2012.

5.13 Ld.AR has also pleaded that the AO had erred in making a reference to the TPO without providing an opportunity of being heard to the assessee.

5.14 From the side of the Revenue, ld. CIT-DR Mr.D.P.Gupta and Mr.Anurag Sharma TPO appeared. On the issue of transfer pricing, DCIT Mr.Anurag Sharma has pleaded that the argument on principle of aggregation are against the provisions of transfer pricing as incorporated under the statute. As far as the “most appropriate method” is concerned, the Revenue as also the assessee, both, have adopted the CUP method and there is no controversy in this regard. Mr. Sharma has pointed out that although the ld.AR has pleaded the principle of aggregation, however while submitting the document in respect of transfer pricing the assessee has taken into account all the sale transactions to the AEs for the purpose of comparability pertaining to a single product. The assessee has calculated the average rate and the same was compared with the average rate of sale transaction to non-AE. He has pleaded that the assessee has therefore considered the products as a closely linked transaction for the purpose of comparability in accordance with the provisions of rule 10A(d), but it was an incorrect understanding of the said sub-section. Even under Rule 10B(1), the sub-rule(ii) says that the price is to be adjusted between the international transaction and the comparable uncontrolled transactions. The term used is “transaction” has significance because each transaction is to be compared which would materially effect the price in the open market. The ld. DR has argued that one of the criterion of comparability is the “Specific characteristics” of the property being transferred. Thus the aggregation is required to be carried out to such an extent that the specific characteristics of the property are not changed significantly, otherwise the aggregated transactions would no longer remain comparable. In this context, it is seen that the aggregation adopted by the assessee in TP report and accepted by the TPO is carried out in respect of all the transactions pertaining to a single product. For such aggregation the “characteristics” of the product being transferred remain the same as it is only a single product and the provision of rule 10B(2)(a) is complied with. However, if the contention raised by the AR is considered then different products manufactured by the assessee are clubbed together and the comparability criterion of “specific characteristics” of the property transferred is not met-out. Details mentioned in pages 95 to 97 in paper-book, as submitted by the assessee, contained the details of quantities of different products sold to AEs and non-AE. The products referred were pertained to different divisions of the assessee. The products manufactured in different divisions have different applications. The Agro Chemical Division is utilized as insecticide, the Aromatic division is used as flavors and fragrances and the Colour division is used in textile, leather industry. Therefore, the manufacturing process, asset utilization and risk is different for different divisions. According to his argument, due the said differentiations, the FAR analysis for the product of one division could not be compared to the FAR analysis of a product manufactured in other division. Ld.DR has concluded that if such products manufactured in different divisions and having different applications, then the aggregation of such transactions must not be said to be comparable transactions.

5.15 Ld.DR has also drawn our attention the average per unit rate calculated by the assessee for different products available on page 95 to 97 of its paper book. It can be seen on page 95 that the product having code 1012108 of CW Division is sold at an average per unit rate of 3620.44 while as per page 96 the product with code 16831 of CO division is sold at an average rate of 57.52. If the assessee’s contention of aggregating all products is taken into account, it would lead to situation in which the average per unit rate for sale of these products would be 1839 ([57.52 + 3620.44]/2). Now consider the situation in which the product having code 16831 is sold by the assessee at Rs.7.52 and the other product is sold at 3680.44, giving an average per unit rate of 1844. In such a scenario it may be claimed that on aggregate basis the average price charged in second case is more, while the fact is that the first product was old at a largely depressed price, which is clearly not ALP. As per the Transfer Pricing Regulations, the arm’s length price is required to be determined for each international transaction as defined in section 92(1) of the IT Act where in the section talks about “an” international transaction. By aggregating the transactions of different products, the non arm’s length nature of one transaction is masked by the price of other, which is clearly not as per the provisions of Indian law. In this respect reliance is also placed on the judgment delivered by ITAT, Mumbai in the ACIT v. Tara Ultimo Pvt. Ltd. 13 Taxman.com 184 (Mumbai).

5.16 Ld.DR has also undertook to counter an another argument of Ld. AR where he has referred an OECD guideline wherein it was opined that there are often situations where separate transactions are so closely linked or continuous that they cannot be evaluated adequately on a separate basis. According to him, ALP is required to be computed on a transaction-by-transaction basis. An aggregation is only required when a transaction cannot be evaluated on a separate basis. He has quoted Aztech Software and technology Services Ltd. 107 ITD 141 (Bangalore)(SB) for the legal proposition that the assessee is required to place on record relevant material to justify the comparable transactions before the Revenue Authorities. An another decision cited by him is ACIT v. UE Trade Corporation (India) Pvt. Ltd. 45 SOT 197 (Delhi) for the legal proposition that it was correct on the part of the TPO to examine each transaction separately.

5.17 In respect of the ground pertaining to motive behind tax avoidance, he has quoted certain portions from the decisions of Aztech Software and technology Services Ltd. (supra). Even in the case of UE Trade Corporation (India) Pvt. Ltd. (supra) and in the case of Coca Cola India 301 ITR 194, it was held that there is no statutory requirement to establish that there was a transfer of profit outside India or that there was any evasion of tax . Rather in the case of M.S.S. India Pvt. Ltd. 32 SOT 132 (Pune) the judgement Aztech Software was followed and the judgement of Philips Software Centre Pvt. Ltd. (supra) was distinguished. In the case of Tara Ultimo Pvt. Ltd. (supra), it was held that the demonstration of tax avoidance motive is not necessary. Further in the case of Gharda Chemicals 35 SOT 406 (Mum.), it was held that the quantum of tax paid by AE is irrelevant in determination of correct tax liability in the hands of the Indian Enterprise. He has therefore concluded that the adjustment made by the AO deserves to be upheld.

5.18 We have heard the arguments of both the sides at length in the light of the available case records, compilation filed and case laws cited. We have given our thoughtful consideration on the elaborate submissions advanced from both the sides. In terms of Sec. 92E a report on Form 3CEB was furnished informing about certain cross-border transaction with four Associate Enterprises, stated to be wholly owed subsidiaries. Names of those A.Es and the nature of transaction has been discussed above( ref. para 4.2 supra). The assessee has six manufacturing divisions of dyes, chemicals, agrochemicals, etc. These manufactured products were exported to A.Es. Through Form 3 CEB it was informed that the assessee was selling the products manufactured by the holding company, i.e. assessee. The assessee company was thus considered as the “Tested Party” for the purpose of the said document. One more fact has also emerged that a preliminary search was performed by the assessee company to get the potentially comparable uncontrolled transaction so identified ‘internal comparables’. We have therefore noticed that the transactions undertaken with unrelated enterprises by the assessee company were internally compared. It is worth to comment, which shall have a bearing in our decision hereinbelow, that those were somewhat similar transactions, but neither the same transaction nor identical transactions. There is no dispute that the most appropriate method selected by the assessee was the CUP method thus fulfilled the requirement of Rule 10C of I.T. Rules. The accepted policy is that under CUP method, the arm’s length price for the transfer of tangible property being transacted between the related parties is to be determined by the price paid for the same or similar property in a transaction between unrelated parties. A little more to elaborate, so that the issue raised can be decided with in this parameter, a transaction is considered comparable only if both the tangible property, i.e. the product for sale, and the circumstances surrounding the controlled transaction, are substantially the same as those of the uncontrolled transaction. So the comparability depends upon the quality of the product, the volume of the sale, the market level, the geographical conditions, the date, other realistic factors governing the sale price. Hence the comparison in respect of each transaction is an appropriate method than the averaging or aggregating, which may lead to a distorted figure, unless and until it is fully justifiable. Our attention was drawn on the comment of the auditor as appearing on page.77 of the Paper Book, quote “We have to state that we have considered the FOB price/ Kg. for each of the product category for sales made to AE and those made to uncontrolled enterprises as one adjustment while computing Arm’s Length price. This will remove the variations on account of freight and other individual charges and make them comparable on one to one basis.” Unquote. So it is essential to note that the assessee has initially chosen the method of segregating the transaction but later on argued, as dealt here-under, to aggregate the transactions.

On getting this information a reference was made by the A.O. to the TPO. It is worth to mention that undisputedly the reference to the TPO was made only in respect of cross-border sale transactions. There is a controversy in this connection that whether the TPO can go on his own beyond the transactions referred , however, this shall be addressed by us in later paragraphs. The TPO’s objection is that some of the products were sold at lower price comparing the sale transaction with the Non-A.E. To arrive at the Arm’s Length Price the assessee has chosen to adopt the Comparable Uncontrolled Price (CUP) method as prescribed under sec.92C of the Act. Undisputedly, both the sides have chosen CUP method as the most appropriate method and there is no dispute in this regard. To arrive at the ALP, on one hand the assessee wanted five type of adjustment in the sale price fetched by the assessee from the transaction with it’s AEs, but on the other hand the TPO has allowed three adjustments i.e. (i) adjustment of 5% towards marketing & financial risk, (ii) adjustment of 11% of long terms contract (iii) adjustment of 30% to 50% of price difference due to lower price of China market. But the TPO has not allowed two adjustments i.e (1) an adjustment of 100% towards ‘difference in application’ and (2) an adjustment of 2% to 5% towards ‘quantity discount’. After giving his reasons in the impugned referral order passed U/s 92CA(3), the TPO has attached four “A”, “B”, “C” & “D” Annexure giving the details of comparative data of sales made to AE and Non-AE.

Annexure ‘A’ suggested the maximum upward adjustment of Rs.1,11,28,585/-. We have studied this annexure. There are four Divisions covered in ‘A’ Anx. We have further noticed that the maximum difference is in respect of a Product (110308) . The quantity sold to A.E. of this product was 9,259 Kg. but to Non A.E. quantity sold was 17,820 Kg. The FOB per Kg. rate was for A.E. at Rs.664.47 but rate charged from Non-A.E. was at Rs. 1,778.79. This was the basic reason of objection raised by the TPO. Since the rate per charged from the Non-A.E. was higher for the same product therefore it was objected that why the same was not charged from the assessee’s subsidiaries.

5.19 On the other hand, from the side of the assessee, a summary of comparative data for the sales made to AE and non-AE have also been furnished by the assessee as well. These details are from pages 95 to 105. In some of the cases, the overall result after the adjustment was that there was no adjustment required. Right now, we are concentrating on one product, i.e. product code number ‘110308’. In the foregoing paragraph, we have noted that for this product the TPO had made the maximum adjustment. The calculation of the assessee in respect of this product is distinguishable because of the reason that the difference in price after adjustment as per assessee was only 383.4, however, as against that, the difference in price after adjustment as per TPO was 1081.1. Therefore, the assessee has calculated the scope of adjustment of Rs.35,49,901/-. In this connection, the assessee has sought permission for the production of additional evidence, as discussed supra. It was noted by the assessee on verification of sale transaction that there was a discrepancy, informed through a separate petition seeking permission of admission, quote “3. Re. Summary of comparative data for sales made to AE and non AEs’ for Financial Year 2005/06 submitted as part of audited accounts placed @ page 95 of the paper book reproduced as Annexure A of the order of Transfer Pricing Officer, the assessee submits that on verification of the sale transaction with AE / Non AE, discrepancy in the nature of sale of product code 111108 (product name Novatic Brown R Pure) to non AE parties was through oversight shown as sale of product code 110308 (product name Novatic Olive R Pure). A certificated dated 6th August 2011 of M/s.Ghanshyam Parekh & Co., Chartered Accountants with the sale Invoices in support of the above contention are annexed herewith for appreciation of the Hon’ble Bench.” unquote. The effect of this discrepancy has yet to be ascertained and the relevant supporting evidence is yet to be examined. The net result of the two difference as explained to us is that the TPO has worked out the price difference at Rs.1081.1, as against that the assessee had calculated the price difference at Rs.383.4. The assessee has sold to A.E. @ 664.47, however the TPO has calculated the ALP at 1081.1. However, for the purpose of claims of adjustment, the assessee is to demonstrate satisfactorily the correct nature of the product, its marketing strategy and the risk involved for which the assessee is asking for certain adjustments. Due to this reason, we deem it proper to restore this part of the adjustment back to the stage of the AO for de novo consideration, needless to say after providing reasonable opportunity to the assessee.

5.19.1 It is expected from us to give a finding in respect of one of the adjustment as demanded by the assessee however, rejected by the T.P.O. We are talking about the claim of 100% adjustment in price for ‘difference in application’. The claim of the assessee was that the clients use the product purchased differently as per their business requirement. It was argued that the products sold to different parties are being used differently by them. It was explained that a chemical can be utilized in different manner. Like-wise aromatics or colors were used in plastic paints as also can be used in auto paint. So the argument is that considering the application of a product, the price was fixed by the assessee, which was the cause of variation. We are not convinced by this proposal. The end use of a product by the buyer has no relevance in fixation of sale price. How a manufacturing company, like assessee, can alter the price of a manufactured product on the basis of it’s utilization by a buyer. For e.g. a car is manufactured by an automobile manufacturer . Can the price of a car be different if used for private use, than the price of the identical vehicle used for commercial purpose, i.e. taxi etc. Naturally it is not probable. A manufacturer produces a commodity and sale the same in the market at the price fixed without even knowing about the product’s usage by the buyer. How can a product be sold at different price to different customers ? Yet an another example of a paint manufacturer is worth mentioning which is being used for painting a house, or for painting a car or a furniture or by a painter for making a picture. Is the usage determine the price of a Kg. of paint. Obviously the answer is in negative. We therefore hold that the claim of such type of adjustment is unwarranted. No such advantage in fixation of ALP price be granted.

5.19.2 The assessee has claimed an another adjustment, namely ‘quantity discount’ in the range of 2% to 5%. The assessee has furnished it’s calculation of comparative data of A.E. and Non-AE on pages 95 to 105 of the paper book. There are few products , the sales of them to the A.E. was stated to higher. Likewise we have also perused the Annexure attached by the T.P.O. We want to give a direction that there should be similarity in the calculation of adjustment. Both the sides are expected to adopt an identical methodology for the calculation. On an enquiry it was informed that the T.P.O. has made the adjustment on the A.E. price. Therefore the assessee is also expected to make the same basis of calculation. Both of them has the liberty to make different adjustment but the base figures ought to be the same otherwise the calculation shall become more complex, as much as that there shall be no meeting point of those calculations . From the Annexure of the T.P.O. it is noticed that there were adjustments of Quantity discount ranging from 2% to 5%, but the comparative difference in adjustment is not understandable. As far as the merit of this adjustment is concerned, we are of the view that it is a common market practice that the bulk-purchasers are generally given some discount. If the A.Es have been given sale-price discount due to the high quantity of purchases then the assessee is required to place on record the commercial policy of the assessee-company, whether based upon some agreement or resolution. The assessee is also expected to demonstrate with supporting evidence the basis of applying 2% adjustment and in some cases it was found to be 5% adjustment. A natural question has also come up that whether such discount in sale price had also been granted by the assessee to Non-A.E. on bulk purchases. However, we are of the view that the T.P.O was not justified in rejecting that claim which is otherwise prevalent in the market and can be said to be a common market practice. But before claiming this adjustment the assessee must be fair in not claiming this adjustment on such sale transaction to A.Es. which are apparently lower than the sales to Non-A.E. Rather bulk- purchases by the A.Es. are only required to be taken into account for this adjustment. We direct accordingly.

5.20 We have given our thoughtful consideration on the argument advanced by both the sides on the application of principle of aggregation. In this regard, a reference of Rule 10A(d) was made. This sub-clause has defined the term “transaction” which includes a number of closely linked transaction. In our opinion, the closely linked transaction are those transaction where they cannot be segregated and if segregated, then such transaction cannot be evaluated adequately on a separate basis. There is a situation where a long term contract for a supply of commodity or for rendering the service has been entered into between the parties. If the term of the said contract spill over on number of transactions, then naturally all those transactions are required to be aggregated, so that the evaluation can be made adequately. There are certain situations, where it is almost impractical to determine the price of each individual product or an independent transaction. There is a situation where in a product line each product is intricately connected with each other, so that it is impractical to determine the price of a single commodity in the linked products comprising the line of product. In such a situation, the aggregation is required. The OECD guidelines also give an another example, that if a transaction is routed from one AE to an another, then it is more appropriate to consider the transaction which is being routed in a part from an entity to an another entity and, therefore the entire transaction is to be taken into account rather than evaluating individual transaction on a separate basis. These few examples do not match with the facts of this appeal. The transactions under scrutiny in this appeal were neither of same ‘product-line’ nor ‘routed-in-parts’, nor with the purpose of ‘portfolio-approach’; therefore prima facie this adjustment is uncalled-for. In the case of Tara Ultimo Pvt. Ltd. 30 Taxman.com 184 (Mum.), the Respected Co-ordinate Bench has at one place opined that the application of CPM has to be on transaction basis rather than on global basis. According to the Bench, this fundamental scheme of cost plus method is also evident from the plain wordings of Rule 10B as well. Even also in our considered opinion, each international transaction as defined in section 92(1) is to be computed having regard to the arm’s length price. Section 92(1) is worded in this manner, quote “(1) Any income arising from an international transaction shall be computed having regard to the arm’s length price.” Unquote. So the article ‘an’ has significance.

5.21 We have examined the principle of aggregation in the light of the facts of this case. On perusal, we have noted that there are several products manufactured by the assessee at different divisions. In the above paras, we have discussed the existence of several divisions which are engaged in manufacturing different products. When the manufacturing process and risk factors are diversified, therefore it is not advisable to aggregate all those products. In this regard, functions performed, assets utilized and risk undertaken (in short FAR analysis) gives us certain guidelines and, therefore, on the basis of FAR analysis a product of one division cannot be compared with the product manufactured in other division. Rather, we have noted that there is a contradiction in the argument of ld.AR. Ld.AR has argued at one point of time that an adjustment is required on account of difference in application. In other words, the AR has admitted that the different products have different end-use. Whether such products can be considered as closely linked products is a question mark?. Rather, it is justifiable to hold, considering the FAR analysis of the case, that the arm’s length price is required to be determined on a transaction-by-transaction basis. An aggregation, as suggested, is to be ruled out when ALP can be more accurately determined or evaluated on a separate basis.

5.22 From the side of the Revenue, Ld. DR Mr. Anurag Sharma has pleaded that the aggregation is suggested where the taxpayer’s transactions are combined due to the adoption of ‘portfolio-approach’. He has explained that a ‘portfolio-approach’ is a business strategy. It consisted of bundling of transactions. It is a business planning for the purpose of earning an appropriate return across the portfolio, rather than on any single product within the portfolio. This strategy is that some products may be marketed by a businessman with a low profit to create a demand for other related products or related service. Those other related products are then sold with high profit. For instance, per Mr. Sharma, an equipment connected with captive aftermarket consumable, for e.g. vending coffee machine along with coffee pouches, or printers along with printing cartridges, are the examples of portfolio approach. However from the side of the assessee nothing of this sort has been demonstrated. No scientific or convincing reason has been advanced in support of the aggregation of all the transaction. According to us each sale is a separately contracted transaction, so need to evaluate separately to arrive at arm’s length price. Therefore different sale transactions having different economic logic should be segmented.

5.23 The controversy in respect of the demand of the assessee to aggregate all the transactions has also been addressed by the Tribunal in a cited decision of ACIT v. UE Trade Corporation (India) Pvt. Ltd. 45 SOT 197 (Delhi), wherein vide para 4.2, it was held as under:-

“4.2. The second ground is that the position should be seen as a whole with respect to all the transactions and not only with respect to the disputed transactions. In other words, if transfer pricing study is made for all the transactions, the variation made by the AO would be of insignificant amount warranting no addition. On the other hand, the case of the learned Departmental Representative is that purchases by way of import do not constitute a series of connected transactions, but each transaction is a separate transaction. Therefore, the AO was right in examining each transaction separately for this purpose. It is seen that the assessee has not been able to bring anything on record that various purchases were a part of pre-arranged scheme or agreement so as to constitute a part of the indivisible transactions of purchase. Accordingly, it is held that the AO was within his right to evaluate each transaction separately.”

In the light of the above discussion and respectfully following the precedents cited, we hereby reject the pleading of ld. AR through which it was demanded to aggregate the entire transaction with the AE for the whole year.

5.24 Mr. Soparkar has raised one more issue which was in respect of “tax avoidance motive”. In this regard, at the outset, we hereby place reliance on Azetc Software & Technology Services Ltd. v. Asst. CIT reported at [2007] 107 ITD 141 (Bang) (SB), wherein vide para 16 the Respected Tribunal has opined that as per the mandate of section 92(1), income from International transaction between AEs has to be computed having regard to arm’s length price. Therefore, question of tax avoidance is to be established by following mandatory provisions. In the opinion of the Respected Bench, the language used by the legislature is plain and ambiguous and there is nothing in the language employed by the legislature on the basis of which it can be said that AO must demonstrate the avoidance of tax before invoking these provisions. Even in the case of Cocacola India Inc. 309 ITR 194 (P&H) the Hon’ble Court has expressed that there is no merit in the contention that the provisions of Chapter-X could not be made applicable to parties which are subject to jurisdiction of taxing authorities in India without demonstrating that there was tax avoidance motive. Even in the case of Tara Ultimo Pvt. Ltd. (supra) the view expressed in the case of Aztec Software (supra) was affirmed wherein it was held that it is not necessary to demonstrate tax avoidance motive before transfer pricing provisions can be enforced. We have also perused a decision of Gharda Chemicals 35 SOT 406, wherein an observation was made that the price on which a particular product is available in one country may vary from the price prevailing in other countries due to host of factors. The intent and purpose of these provisions is not to ensure that there is no diminution in the tax liability of Indian Enterprise as well as its AE on a total basis. Rather the logic is to make certain that the transactions between the Associated Enterprises should not be arranged in such a way that the ultimate tax payable in India is artificially reduced. The payment of tax by the AE abroad does not contribute anything to the India exchequer. Important factor is the payment of tax qua India and not qua the assessee along with its AE on a whole. If we agree with this submission of the ld. AR that as the ultimate tax liability of the assessee together with its AE does not vary even if the lower price is charged inter-se, and hence the exercise done by the TPO be held as fruitless, then the provisions of section 92 to 92F would become redundant. Since the provisions require the determination of the ALP in an international transaction between the associated enterprises, it is imperative to undergo this exercise so as to prevent any loss to the coffers of India kitty. We therefore, reject this submission made on behalf of the assessee as devoid of any merit. Respectfully following this decision, we hereby hold that there was no force in this argument of establishing a tax avoidance motive by the Revenue Department, hence we hereby dismiss this part of the argument of the assessee.

5.25 In the ground of appeal in respect of transfer pricing adjustment, the assessee has raised sub-ground No.5 and agitated that the AO had erred in law in making a reference to TPO without providing an opportunity of hearing. We are not convinced with this objection because in the case of Coca Cola India Inc.(supra) it was held that a decision of the AO to refer the international transaction to TPO for determination of ALP do not in any manner visit the assessee with any civil consequence. A safe-guard has already been provided in the Statute by making a compulsory provision about seeking of prior approval from the CIT by the AO. It was held that there should not be any grievance to the assessee because the TPO had given due opportunity to the assessee. We therefore hold that in the absence of any Statutory provision or a mandate of requirement of giving an opportunity before reference do not adversely affect a taxpayer because the TPO has definitely given sufficient opportunity to the assessee.

Finally, in the result, this ground no. 1 along with the sub-grounds of the Assessee are restored back to the file of AO to re-compute the ALP as per the direction given hereinabove, however some of the contentions are rejected, therefore may be treated as partly allowed but for statistical purposes.

5.26 The TPO had also made an upward adjustment of Rs. 2,71,82,980/- on account of commission transaction. In this regard, at the outset, assessee has raised an additional ground (supra – i.e. para 2.1) and agitated that a reference was made by the AO only in respect of goods sold to AE, however there was no reference in respect of commission transaction, hence the upward adjustment as suggested by the TPO for upward adjustment of commission receipt is without jurisdiction. Therefore, in the additional ground, it is submitted that the adjustment in relation to commission receipt of GBP 345418 was without jurisdiction being not referred by the AO to the TPO. On perusal of 3 CEB report it was found that the assessee had not mentioned the international transaction pertaining to payment of commission by the assessee to its AE. Therefore, prima-facie the AO was not aware about the transaction of commission, hence it was not made the part of the reference. The TPO has enquired about the transaction of commission during the course of transfer pricing proceedings. In this connection, in short, ld. AR Mr. Soparkar has cited a decision of Amadeus India (P.) Ltd. v. Asst. CIT reported at [2011] 10 Taxmann.com 88 (Delhi) which is later on affirmed by Hon’ble Delhi High Court in an appeal titled as CIT v. Amadeus India (P) Ltd. 246 CTR 338 (Delhi) wherein it was held that it is not within the domain of the TPO to determine whether a particular transaction which has come to his notice but has not been referred to him, is or is not an international transaction and then determine the ALP thereof; sub-s. (2A) of s. 92CA cannot have retrospective effect inasmuch as it deals with the jurisdiction of the TPO and cannot be regarded as a mere procedural provision. Relevant portion is, quote “The role of the Transfer Pricing Officer, as indicated in Section 92CA, is restricted to determining the arm’s length price in relation to the international transaction which has been referred to him by the Assessing Officer and such computation of the arm’s length price in relation to the said international transaction has to be done in terms of Section 92C of the said Act. On a plain reading, were of the view that it is not within the domain of the Transfer Pricing Officer to determine whether a particular transaction, which has come to his notice, but which has not been referred to him, is or is not an international transaction and then to go on and determine the arm’s length price thereof. That, we feel, is in the exclusive jurisdiction of the Assessing Officer. It ought to be pointed out that these views are on the basis of the provisions of Section 92CA, as applicable to the assessment year 2006-07, that is, prior to the introduction of sub-section (2A) of Section 92CA by virtue of the Finance Act, 29011 with effect from 01.06.2011.” unquote. Respectfully following this decision, we hereby allow this additional ground of the assessee.

5.27 While reading the order of the Hon’ble Delhi High Court (supra) in the case of Amadeus India (P) Ltd. we have noted that it was also pronounced that the assessment is an exclusive jurisdiction of the AO. In the present case, the AO was handicapped about this information being not reported in Form 3CEB. Therefore, at the time of reference the AO could not know whether there was a cross-order transaction between the assessee and the AE of commission payment. In this regard, from the side of the Revenue ld. DR Mr. Sharma had referred CBDT Instruction No. 3 of 2003 which says that, quote “….. In order to make a reference to the TPO, the Assessing Officer has to satisfy himself that the taxpayer has entered into an international transaction with an associated enterprise. One of the sources form which the factual information regarding international transaction can be gathered is Form No. 2CEB filed with the return which is in the nature of an account’s report containing basic details of an international transaction entered into by the taxpayer during the year and the associated enterprise with which such transaction is entered into, the nature of documents maintained and the method followed. Thus, the primary details regarding such international transactions would normally be available in the accountant’s report. The Assessing Officer can arrive at prima facie belief on the basis of these details whether a reference is considered necessary. No detailed enquiries are needed at this stage and the Assessing Officer should not embark upon scrutinizing the correctness or otherwise of the price of the international transaction at his stage.” unquote. Therefore, we are of the opinion that the objection of the Revenue Department is justifiable. The assessee cannot take an advantage of its own mistake. The assessee has taken an argument in its favour that there was no deliberate attempt on his part of concealing the information of commission transaction because the net result was a NIL transaction during the year. Let it be as it was. Now the question is that the TPO had referred an international transaction about the commission and the AO is having this information in his possession. The reference by the AO to TPO was the first step and that first procedural aspect has ended then and there. The next procedural aspect is to frame an assessment on the basis of the information from all the sources gathered by the AO, inclusive of the report of the TPO. Whether the AO can ignore a substantive information in his knowledge, that too reported by a Revenue Officer, i.e. TPO. Hence a very serious question is that what would be the effect of such alleged extra-jurisdictional Bench marking carried out by the TPO which had come not only into the knowledge of the AO but now in public domain. As far as the provisions of section 92C(1) r.w. sub-section (3) is concerned, the language of this sub-section is that where during the course of any proceeding for the assessment of the income, the AO is on the basis of material or information or document in his possession of the opinion that the price charged or paid in an international transaction has not been determined in accordance with sub-sections (1) & (2) of section 92C, then the AO may proceed to determine the arm’s length price in relation to the said international transaction on the basis of such material or information or document available with him. As against this provision, a counter argument has been raised by ld. AR by referring the provisions of section 92CA sub-section (4) which says that On receipt of the order under sub-section (3), the Assessing Officer shall proceed to compute the total income of the assessee under sub-section (4) of section 92C in conformity with the arm’s length price as so determined by the Transfer Pricing Officer. The argument is that the AO shall compute the income in conformity with the arm’s length price as determined by the AO, but if part of the TPO’s adjustment is void ab initio, then that part ought not to be taken into account for the computation of total income. Ld. AR Mr. Soparkar has vehemently pleaded that such an exercise of computing the total income by taking into account an illegal procedure must not be approved and deserves to be held as void ab initio. In the present situation, as discussed hereinabove, specially when there was a non-disclosure on the part of the assessee, we are of the considered opinion that in terms of the provisions of section 92C(3) the AO is fully empowered to proceed to determine an international transaction which had come to his knowledge on the basis of any material or document available with him. Rather, sub-section (3) has apprehended certain situations where the document relating to an international transaction has not been kept or maintained by the assessee in accordance with the other provisions or the data used by the assessee is not reliable or the assessee had failed to furnish the information which she was acquired to furnish. The only statutory requirement is to grant an opportunity of hearing to the assessee. Our attention has been drawn on a latest decision of Hon’ble Jurisdictional High Court pronounced in the case of M/s. Veer Gems v. ACIT (246 CTR 352) [Guj.] wherein this very issue has been elaborately discussed along with the relevant provisions of the Act vide paragraphs 12 to 22. The observation was that under the scheme of the provisions contained in Chapter-X, the AO is not obliged to grant hearing to the assessee or invite objection with respect to the question whether there had been any international transaction before making a reference to the TPO. According to the Hon’ble Court, such opinion of the AO would have been formed on the basis of the available material on record. The Court has further observed that while framing the assessment there is nothing to prevent the AO from considering the objections of the assessee. If the assessee succeeds in establishing that there was no international transaction, then naturally the AO is empowered to drop the proceedings. In that case as well the Counsel of the assessee has argued that by virtue of section 92CA(4) the order passed by the TPO is binding on the AO and the AO is required to proceed in conformity with the arm’s length price so determined by the TPO. This aspect has duly been considered and thereafter it was opined that the AO is not and cannot be stated to be bound by the opinion of the TPO with respect to the question whether there had been an international transaction between the assessee and the AE. The issue is within the sole jurisdiction of the AO, held by the Hon’ble Court. A procedural aspect has also been streamlined by the Hon’ble Court by stating that u/s. 144C the AO has to forward a draft of the proposed order to the assessee. The assessee has one more opportunity to contest the addition. The assessee has an option either to file his acceptance of the variation of the assessment or file his objection to any such variation with the Dispute Resolution Panel. The DRP is also authorized to issue direction as it thinks fit for the guidance of the AO. At that stage as well the assessee has an opportunity of hearing. The AO is thereafter shall in conformity with the directions of the DRP complete the assessment proceedings. Only under sub-section 13 of section 144C of the Act, such direction are binding upon the assessee. So the existence of an international transaction can be examined by the DRP at the instance of the assessee. The Court has said that there is nothing to limit the powers of DRP. Therefore, finally the conclusion was drawn in favour of the Revenue because the assessee had more than one opportunity of hearing to contest an impugned addition. The Hon’ble Court has placed reliance on a decision of Hon’ble Delhi High Court pronounced in the case of Soni India Pvt. Ltd. 288 ITR 52 (Delhi).

5.28 On the basis of the decision of Hon’ble Jurisdictional High Court, discussed hereinabove in the case of M/s. Veer Gems, we hereby hold that the AO within his jurisdiction and in terms of the provisions of section 92C(3) is empowered to determine the arm’s length price on the basis of the material available to him and finalized the assessment accordingly. Once we have held this issue, then the question arises about the merit of the impugned international transaction.

5.29 The TPO has recorded that on the basis of the financial statement of Atul Europe Ltd. the commission was paid to assessee. The assessee has furnished the details about the commission as follows:-

ATUL LIMITED – Agro Division

Details of commission received from Atul Europe Ltd. for business with ASSC, Iran

FY	Date	Debit	Amount		Account
		note No.	GBP	Rs.	Code	Name
2004-05	23.03.2005	23	47,718	3,947,710	302153	Commission Received
2005-06	24.11.2005	11	63,088	4,952,250	302153	Commission Received
2005-06	127.03.2006	26	30,908	2,409,278	302154	Commission Received Export house
Adjusted against expenses payable	141,714 49,174	38,33,115
Total	190,888	15,142,351

During the course of proceeding before us, ld. AR has contested that as far as the commission of GBP ₤154530 is concerned, no commission was paid by AEL to assessee. Rather, he has insisted that the AEL had charged commission from the assessee. Later on, it was decided that nothing was payable by the assessee to AEL. Therefore, the AEL had written off the amount in its books of account. Ld. AR has further explained that no entry was made in the books of account of the assessee in that regard. There is a reference of a letter of one Mr. Metcalf, Officer of H.M. , Revenue in Customs U.K. An enquiry was in respect of the services provided and in turn commission paid the Atul Europe Ltd. had claimed payment of commission ₤391251. The Revenue has contested before us that in response to the said enquiry, the Atul Europe Ltd. has answered that an amount of ₤154530 was payable to assessee (Atul Pesticide) and further a commission of ₤190888 was payable to assessee (Agro Division). As against that, the assessee has vehemently contested that there was no actual receipt of commission, on the contrary the assessee was supposed to pay the commission to Atul Europe Ltd. In this connection, few correspondences with Atul Europe Ltd. are now placed in the compilation. It has also been contested that the assessee had never debited commission in its books of accounts and never claimed expenditure. From the facts and the evidences now placed it is evident that the counter-claims are yet to be re-examined afresh by the AO. If the assessee is in a position to demonstrate that no commission in fact was received and on investigation the AO is satisfied, then the impugned addition/upward adjustment is required to be deleted. With these directions, we hereby hold that the upward adjustment pertaining to the Transfer Pricing transaction regarding commission received from M/s. Atul Europe Ltd. of Rs. 2,71,82,980/- is to be decided afresh by the AO. This ground may be treated as partly allowed but for statistical purposes.

6. Ground Nos.7 & 8 read as under:

Prior Period Expenses of Rs.1,11,31,209/-

7. The learned AO/DRP has erred in law and on the facts of the case in proposing to add prior period expenditure to the tune of Rs. 1,11,31,209/- to the total income of the Appellant without appreciating the facts that the liability in respect of those expenditure was crystallized during the year under consideration.

8. Alternatively and without prejudice to above, the ld. AO/DRP ought to have considered that the Appellant has also received income of Rs. 71,74,782/- pertaining to earlier year and therefore the ld. AO/DRP ought to have proposed to add only net amount of Rs. 39,56,427/- as prior period expenditure.

6.1 It was observed by the AO that the total “prior period expenses” were amounting to Rs. 1,11,31,209/-. This amount was reflected in the Audit Report vide Schedule 16 of the accounts. Accounts of the assessee have also revealed that there was earlier years income of Rs. 71,74,782/-. Therefore, the balance amount was carried over to the P&L account and debited as “net prior period expenses” of Rs. 39,56,427/-. An enquiry was raised that the “prior period expenses” did not relate to the current year, thus following the magic principle of accounts, the same was proposed to be disallowed. Assessee’s contention was that the said reliability had crystallized during the year. It has also been contested that there was no loss of Revenue since the rate of tax for the years involved was same. An alternate plea of the assessee was that the disallowance should be restricted to the net amount after setting off prior period income. The AO has not accepted the contentions of the assessee and assessed the entire “prior period expenses” as per the following observation:-

“5.5 In view thereof the claim for prior period expenditure is denied, and set off of prior period income is not accepted. Hence an addition of Rs. 1,11,31,209/- is made, being prior period expenses of Rs. 39,56,427/- claimed in the profit & loss account and Rs. 71,74,782/- being prior period income against which prior period expenses were netted. Penalty U/s. 271(1)(c) is separately initiated for furnishing inaccurate particulars of income.”

6.2 Even the DRP has affirmed the action of the AO. DRP has noted that the assessee had not furnished any evidence in support of its claim that the liability in respect of the prior period expenditure had actually been crystallized during the year under consideration. According to DRP, the appellant had although placed reliance on Saurashtra Cements & Chemicals Industries Ltd. reported at 213 ITR 523 (Guj.) but the proof about the crystallization of liability was not produced. The DRP has finalised that since the assessee had maintained the accounts on mercantile basis, therefore AO was justified in proposing to make the said disallowance.

7. From the side of the appellant, ld. AR Mr. S.N. Soparkar has pleaded that the liability had crystallized during the year, therefore the expenditure was to be allowed in the year under consideration. He has cited Toyo Engg. India Ltd. v. Jt. CIT reported at [2006] 5 SOT 616 (Mum.) and CIT v. Jagatjit Industries Ltd. reported at [2010] 48 DTR (Del) 104.

8. On the other hand, from the side of the Revenue, ld. DR Mr. D.P. Gupta has supported action of the AO primarily on the ground that the assessee has neither demonstrated the nature of liability nor demonstrated the basis on which it was considered that the liability had crystallized during the year.

9. We have heard both the sides. We have also perused the orders of the authorities below in the light of the compilation filed. It is worth to mention that the neither the Revenue Department nor the appellant, both have explained the facts in respect of the nature of the “prior period expenses”. We have carefully perused the relevant orders, but unable to understand the nature of the expenditure which were claimed to have been crystallized during the year under consideration. It is also worth to mention that the Revenue Department as also the assessee have not placed on record the details of the expenditure along with the evidences through which it could be demonstrated the year for which it pertained but it was not claimed. It is also worth to mention that the assessee has not demonstrated that why the impugned expenditure could not be claimed in the year for which it belonged to. The case laws which were cited by ld. AR, namely Jagatjit Industries Ltd. (supra) and Toyo Engg. Ltd. have been examined by us. In these cases, the assessee has demonstrated the past business practice and the consistent policy followed in the accounting practice by the assessee, therefore it was demonstrated that the expenditures were spilled over to next year. A case law can only be applied when the facts are found to be more or less akin to each other. However, we have noted that certain enquiry, said to be basic enquiry was not conducted at the assessment stage. The AO is therefore directed to first of all examine the exact nature of the liability and how it related to the business of the assessee. The next step should be to examine the evidence about the crystallization, that too crystallized during the year under consideration. What was that evidence on the basis of which the assessee had claimed that the said liability had in fact crystallized during the year under consideration. We have also noted that there was an alternate plea of assessee that the income which pertained to earlier years was received during the year amounting to Rs. 71,74,782/-. Even in this regard, there is no explanation about the nature of the income. How an income of earlier year had also earned during the year under consideration was to be demonstrated by the assessee. There is no evidence on record about the source of such income and what will be the impact of its taxability during the year under consideration. How it was termed as an income of earlier years if it was earned during the year under consideration. Since all such information is not available on record, therefore the natural justice demands to restore this issue back to the stage of the AO to be decided in the light of the observations made hereinabove, after providing a reasonable opportunity of hearing to the assessee. In the result, both the grounds of the assessee may be treated as allowed for statistical purposes only.

10. Ground No.9 reads as under:

Disallowance of Rs.2,26,03,000/- u/s.14A of the Act.

9. The ld. AO/DRP has erred in law and on facts of the case by proposing to add Rs. 2,26,03,000/- u/s. 14A of the Act by applying provisions of Rule 8 of the income Tax rules, 1962.

10.1 The dividend income, which was claimed as an exempt income, was amounting to Rs. 4,26,31,480/-. The AO has proposed to invoke the provisions of section 14A to disallow the proportionate expenditure. The assessee’s contention was that in the past there was huge accumulation of profits which was non-interest bearing, hence there was no requirement of disallowance of proportionate interest expense. It has also been argued that the loans taken were for specific purposes, hence not utilized for earning exempted dividend income. It has also been contended that in earlier years the assessee had claimed deduction u/s. 80M but no such allocation of expenditure was made for disallowance. The AO’s observation was that the explanation of the assessee about the non-interest bearing accumulation of past profit was only in respect of the interest expenditure but there was no mention about the indirect expenditure incurred to earn the exempted income. According to AO, the investing-activity was an indivisible business activity of the assessee, therefore the natural corollary as per AO was that out of the expenditure incurred for the business activity would have also been incurred towards investment activity, may or may not be a direct expenditure. It was not established by the assessee that no indirect expenditure had been incurred in relation to the said exempt income. The AO has quoted that there were number of cause like interest, administrative, management, etc. associated with the earning of the exempted income. An expenditure incurred, although indirect, for earning exempt income was held to be covered by the provisions of section 14A of IT Act. The AO has reproduced the Memorandum explaining the provisions in the Finance Bill 2006 (2006) 281 ITR 190 (Statute). Reliance was placed on M/s. Haryana Land Reclamation and Development Corporation 302 ITR 218 (P&H) and M/s. Daga Capital Management Pvt. Ltd. reported at 117 ITD 169 (Mum.). The AO has therefore held that the provisions of section 14A were applicable on the facts of the case. The AO has also invoked the provisions of Rule 8 of IT Rules, 1962 and made the calculation as under:-

	“(A) Interest Expenses	Rs. 2946.12 lakh
	(B) Average Value of Investment	Rs. 5468.295 lakh
	(C) Average Assets	Rs. 81082.055 lakh

Amount to be disallowed = (A*B)/C + 0.5% of Average Value of Investment

= 198.69 lakh + 27.341 lakh = Rs.226.03 lakh”

10.2 In the light of the above calculation, the AO has computed the disallowance of Rs. 2,26,03,000/- which is now challenged before us. As far as the observations of DRP is concerned, the same revolve around the findings of the AO and few case laws as discussed by the appellant. Mainly the ld. DRP has discussed the decision of M/s. Daga Capital Management Pvt. Ltd. (supra) and proposed for the said disallowance.

11. From the side of the assessee, ld. AR has cited two decisions; namely, CIT v. Raghuvir Synthetics (Tax Appeal No. 829 of 2007) order dated 5.12.2011 and the decision of CIT v. Gujarat Power Corporation Ltd. (Tax Appeal No. 1587 of 2009) order dated 28.3.2011. Both these orders have been passed by the Hon’ble Gujarat High Court. These orders revolve around the issue of proportionate disallowance of interest and in this regard on the basis of the facts on those cases it was held that no part of the borrowed funds could be stated to have been diverted to earn tax-free income. Facts of those cases have revealed that the borrowed funds were utilized for its own business purposes and that the investment in earning tax-free income were made out of own interest-free funds. Therefore, the ld. AR has contested that the component of interest expenses was not to be taken into account in the formula as applied by the AO.

12. From the side of the Revenue, ld. CIT-DR has supported the orders of the lower authorities and argued that the assessee has not placed on record the nexus of investment of non-interest bearing own funds towards investment in tax-free dividend income.

13. We have heard both the sides. The question of applicability of section 14A on the present facts of the case must not be doubted because undisputedly a substantial amount was received as dividend income by the assessee. The only question is that how the investment was made to earn the said exempted dividend income. The contention of the assessee was that there were sufficient non-interest bearing own funds paying accumulation of the past profits. But the question is that whether the assessee was in a position to demonstrate that the non-interest bearing funds were utilized towards such exempted investment. On the other hand, even the Revenue has also not discharged the obligation to demonstrate that the interest-bearing funds were used towards investment in exempted income assets. Therefore the proportionate disallowance of interest expense could only be made when the relevant facts were considered by the AO. The AO had drawn a presumption that the interest-bearing funds could have been utilized towards earning of non-taxable dividend income. This is the one part of the disallowance, however the other part of the disallowance is about the indirect expenses which were alleged to have been incurred to earn the exempted dividend income. Although the AO has raised the query, but ultimately applied the formula as prescribed in Rule 8D. We have noted that Rule 8D(2)(i) prescribes that the expenditure in relation to income which does not form part of the total income shall be the aggregate of the amount of expenditure directly relating to income which does not form part of total income. However, the applicability of the Rule 8D vis-à-vis the applicability of section 14A has now been settled by the Hon’ble Bombay High Court pronounced in the case of Godrej & Boyce Mfg. Co. Ltd. Mumbai v. Dy. CIT in Income tax Appeal No. 626 of 2010 and Writ Petition No. 758 of 2010 order dated 12/08/2010 [now reported as 328 ITR 81 (Bom)]. On careful reading of this decision, we have concluded as follows:-

In this judgement at the end, the Hon’ble Court has recapitulated the conclusion and pronounced that a finding is required whether the investment in shares is made out of own funds or out of borrowed funds. A nexus is required to be established between the investments and the borrowings. In section 14A of the Act expenditure incurred in relation to exempted income is to be disallowed only if the Assessing Officer is satisfied with the expenditure claimed by the assessee pertaining to the said exempt income. Rather, the Hon’ble Court was very specific that in case, no such exercise was carried out by the Assessing Officer then the matter is to be remanded back for afresh investigation. It has also been made clear that the proviso to section 14A of the Act was effective from 2001-02. The Hon’ble Court has also pointed out the importance of Rule 8D of the I.T. Rules, 1962. It was made clear that sub-section (1) to section 14A was inserted with retrospective effect from 01/04/1962, however, sub-sections (2) & (3) were made applicable with effect from 01/04/2007. The proviso was inserted with retrospective effect from 11/05/2001, however Rule 8D was inserted by the Income Tax (Fifth Amendment), Rules, 2008 by publication in the Gazette dated 24/03/2008, relevant findings are reproduced below:-

“(a)  The ITAT had recorded a finding in the earlier assessments that the investments in shares and mutual funds have been made out of own funds and not out of borrowed funds and that there is no nexus between the investments and the borrowings. However, in none of those decisions was the disallowability of expenses incurred in relation to exempt income earned out of investments made out of own funds considered. Moreover, under Section 14A, expenditure incurred in relation to exempt income can be disallowed only if the assessing officer is not satisfied with the correctness of the expenditure claimed by the assessee. In the present case, no such exercise has been carried out and, therefore, the Tribunal was justified in remanding the matter.

(b)  Section 14A was introduced by the Finance Act 2001 with retrospective effect from 1 April 1962. However, in view of the proviso to that Section, the disallowance thereunder could be effectively made from assessment year 2001-2002 onwards. The fact that the Tribunal failed to consider the applicability of Section 14A in its proper perspective, for assessment year 2001-2002 would not bar the Tribunal from considering disallowance under Section 14A in assessment year 2002-2003.

(c)  The decisions reported in Sridev Enterprises (supra), Munjal Sales Corporation (supra) and Radhasoami Satsang (supra) holding that there must be consistency and definiteness in the approach of the revenue would not apply to the facts of the present case, because of the material change introduced by Section 14A by way of statutory disallowance in certain cases. There, the decisions of the Tribunal in the earlier years would have no relevance in considering disallowance in assessment year 2002-2003 in the light of Section 14A of the Act.

73. For the reasons which we have indicated, we have come to the conclusion that under Section 14A(1) it is for the Assessing Officer to determine as to whether the assessee had incurred any expenditure in relation to the earning of income which does not form part of the total income under the Act and if so to quantify the extent of the disallowance. The Assessing Officer would have to arrive at his determination after furnishing an opportunity to the assessee to produce its accounts and to place on the record all relevant material in support of the circumstances which are considered to be relevant and germane. For this purpose and in light of our observations made earlier in this section of the judgment, we deem it appropriate and proper to remand the proceedings back to the Assessing Officer for a fresh determination.

Conclusion :

74. Our conclusions in this judgment are as follows ;

  (i)  Dividend income and income from mutual funds falling within the ambit of Section 10(33) of the Income Tax Act 1961, as was applicable for Assessment Year 2002-03 is not includible in computing the total income of the assessee. Consequently, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to such income which does not form part of the total income under the Act, by virtue of the provisions of Section 14A(1);

 (ii)  The payment by a domestic company under Section 115O(1) of additional income tax on profits declared, distributed or paid is a charge on a component of the profits of the company. The company is chargeable to tax on its profits as a distinct taxable entity and it pays tax in discharge of its own liability and not on behalf of or as an agent for its shareholders. In the hands of the shareholder as the recipient of dividend, income by way of dividend does not form part of the total income by virtue of the provisions of Section 10(33). Income from mutual funds stands on the same basis;

(iii)  The provisions of sub sections (2) and (3) of Section 14A of the Income Tax Act 1961 are constitutionally valid;

(iv)  The provisions of Rule 8D of the Income Tax Rules as inserted by the Income Tax (Fifth Amendment) Rules 2008 are not ultra vires the provisions of Section 14A, more particularly sub section (2) and do not offend Article 14 of the Constitution;

 (v)  The provisions of Rule 8D of the Income Tax Rules which have been notified with effect from 24 March 2008 shall apply with effect from Assessment Year 2008-09;

(vi)  Even prior to Assessment Year 2008-09, when Rule 8D was not applicable, the Assessing Officer has to enforce the provisions of sub section (1) of Section 14A. For that purpose, the Assessing Officer is duty bound to determine the expenditure which has been incurred in relation to income which does not form part of the total income under the Act. The Assessing Officer must adopt a reasonable basis or method consistent with all the relevant facts and circumstances after furnishing a reasonable opportunity to the assessee to place all germane material on the record;

(vii)  The proceedings for Assessment Year 2002-03 shall stand remanded back to the Assessing Officer. The Assessing Officer shall determine as to whether the assessee has incurred any expenditure (direct or indirect) in relation to dividend income/income from mutual funds which does not form part of the total income as contemplated under Section 14A. The Assessing Officer can adopt a reasonable basis for effecting the apportionment. While making that determination, the Assessing Officer shall provide a reasonable opportunity to the assessee of producing its accounts and relevant or germane material having a bearing on the facts and circumstances of the case.” (Emphasis given)

On the basis of above decision, we are also of the view that it depends on the facts of each case. Admittedly, the fact of the present case was that the Assessing Officer had not enquired the issue in the light of the above legal pronouncement. Specially the pronouncement of the Hon’ble Bombay High Court was not available at that time, hence, the Assessing Officer’s assessment order was devoid of merits as also the law applicable. Now we have got certain guidelines, though can not be said to be exhaustive or complete, but on these lines, the Assessing Officer is expected henceforth to compute the correct disallowance, needless to say after providing an adequate opportunity of hearing to the assessee. In the light of the above discussion, therefore, the matter is restored to be decided afresh, hence, this ground of the assessee may be treated as allowed for statistical purposes.

14. Ground No.10 reads as under:-

Disallowance of Rs.12,50,444/- in respect of irrecoverable balance written off

10. The ld. AO/DRP has erred in law and on facts of the case by proposing to disallow Rs. 12,50,444/- in respect of irrecoverable balance which were written off in the books of accounts.

14.1 The AO has noted that a sum of Rs. 29,55,870/- was debited as “irrecoverable balances written off” in the P&L account. The assessee has informed that out of the said amount which was written off in the P&L account a sum of Rs. 12,50,444/- was written off which was in respect to M/s. Sando Industries. It was informed that the assessee had given an advance to the said party for one equipment. The said party had completed the work, however, the assessee-company had afterwards decided not to take the said equipment. The assessee had also not paid the balance amount. On the part of the said party the advance given was retained and the assessee was not given back the said advance. In the opinion of the AO the advance was given for acquiring a capital asset. Such an advance would not be treated as a trading loss according to AO. Placing reliance on Motiram Nandram 8 ITR 132 (Privy Council) and Khode India Ltd. 33 SOT 178 (Bang.) the AO has disallowed a sum of Rs. 12,50,444/-.

15. We have heard both the sides. We have enquired that what was the specification of the equipment and what was the purpose of advancing an amount to the said party, i.e. M/s. Sando Industries. From the side of the assessee, ld. AR has simply placed reliance on the submissions made before the Revenue Authorities and left the matter to be decided by the Bench as per law. We have noted that the description of the equipment, the use of the equipment and the details about the advance given to the said party was not informed. Rather, it appeared that the assessee wanted to acquire a capital asset, as held by the AO, therefore the expenditure or advance being related to an acquisition of a capital asset, therefore not to be allowed in view of the provisions of section 37(1) of IT Act. We also endorse the view of the AO that the impugned amount could also not be allowed u/s. 36(1)(vii) of IT Act because the said amount was not a “debt” but an advance to the said party. In the result, this addition is hereby confirmed. Ground is dismissed.

16. Ground No.11 reads as under:-

Disallowance of Rs.17,39,77,179/- in respect of deduction claimed u/s.80IA of the Act.

11. The ld. AO/DRP has erred in law and facts of the case by proposing not to allow deduction of Rs. 12,07,32,320/- for New Power Plant, Rs. 3,70,57,807/- for Captive Power Plant and Rs. 1,61,87,052 for Co-gen plant u/s. 80IA of the Act.

16.1 The assessee has claimed a deduction u/s. 80IA totalling to Rs. 22,56,27,448/- and the bifurcation of the same is as under:-

	“New Power Plant	Rs. 12,07,32,320/-
	Captive Power plant	Rs. 8,87,08,076/-
	Co-gen plant	Rs. 1,61,87,052/-“

16.2 The AO has discussed the reason of disallowance in respect of each plant. The discussion as per the assessment order is descriptive, however considering the background of the case, we are not going into that detail. We have noticed that in respect of new power plant the deduction was denied following the past history according to which the Tribunal has upheld the denial of deduction in A.Y. 2001-02. In respect of “captive power plant”, the AO had noted that in A.Y. 2005-06, after detailed reasoning the deduction u/s.80IA was denied. For the year under consideration, the AO had examined the internal consumption and the gain shown in the books of account. According to AO, the percentage of gain was at 32.26% which was inordinately high. The AO has also noted that the credit for electricity was taken at Rs. 5.199 on the basis of the charges of the Gujarat Electricity Board. As against that, the alleged notional rate of credit of electricity charges was reduced by the AO to Rs. 3.699 with the result the AO has calculated the cost of generation at Rs. 5,16,50,269/-. Resultantly, the claim was restricted to the said amount as against the claim of the assessee. About the third Unit, i.e. co-generation plant, the AO had worked out the gain at 19.99% which according to him was towards higher side. The AO has calculated the cost of generation by applying the notional rate of electricity credit at Rs.3.699 which resulted into a loss, hence the assessee’s claim was disallowed.

17. At the outset, ld. AR has informed that earlier vide an order dated 16.5.2008 for A.Y. 2001-02 in assessee’s own case titled as “Atul Limited v. The Income-tax Officer” (ITA No. 3528/Ahd/2004) it was held that in respect of “New Power Plant” that the same was merely an expansion of the existing undertaking. According to the Tribunal, there was an existing unit wherein a new deadline was added and such a unit could not be regarded to be as an establishment of a new undertaking for qualifying the deduction u/s. 80IA of the Act. At the time when the assessment was made the said order of the Tribunal was in the knowledge of the AO. However, now we have been informed that the said order of the Tribunal on the finding of 80IA was recalled by ITAT “D” Bench titled as “Atul Limited v. ITO” [MA No. 324/Ahd/2008 (arising from ITA No. 3528/Ahd/2004 – A.Y. 2001-02)] order dated 11.5.2012 and the matter is recalled and the Registry is directed to fix a fresh hearing in respect of the said ground. In the said MA order, there is a reference of a decision of Gujarat Alkalies & Chemicals 249 ITR 82 (Guj.), wherein it was held that only because to a certain extent the new undertaking is dependent on the existing unit, it will not deprive the new undertaking the status of a separate and distinct identity. We are of the considered opinion that the issue of claim of deduction u/s. 80IA is now required to be decided in the light of the verdict of the Hon’ble Gujarat High Court. Therefore, we consider it necessary to restore the entire issue back to the stage of the AO to be decided de novo in the light of the verdict of the High Court. This ground is allowed for statistical purposes only.

18. Ground No.12 reads as under:

Disallowance of Rs. 1,21,18,801/- in respect of depreciation

12. The ld. Assessing Officer/DRP erred in law and facts of the case by proposing to disallow depreciation of Rs. 1,21,18,801/- by reducing the depreciation for A.Y. 2006-07 after enhancing depreciation for A.Y. 2001-02 without appreciating the facts that the Appellant had opted not to claim depreciation for A.Y. 2001-02.

18.1 In total the company had claimed depreciation of Rs. 25,59,36,573/-. It was noted by the AO that no depreciation was claimed in A.Y. 2001-02. However, the AO had thrust upon the depreciation on the assessee for A.Y. 2001-02. The action of the AO was stated to be confirmed by the ITAT. It was noted by the AO that still the assessee continue to claim the depreciation as per the original working, i.e. without deducting depreciation which had already been allowed in A.Y. 2001-02. Hence, a conclusion was drawn by the AO that the claim of depreciation for the current year, i.e. A.Y. 2006-07 was required to be reduced by the amount of depreciation already allowed from A.Y. 2001-02 uptill A.Y. 2005-06. The assessee had submitted a revised working of depreciation. According to the revised working, the depreciation was computed at Rs. 24,38,17,771/-. The difference between the two, i.e. the original claim of depreciation and the revised claim of depreciation was thus computed by the AO at Rs. 1,21,18,801/-. In the result, the excessive claim of depreciation was disallowed. In this regard, the only argument of the assessee’s counsel was that the claim of depreciation for the year under consideration is consequential of earlier years’ judgement. While deciding the appeal of the assessee for A.Y. 2001-02, Respected Coordinate Bench “D” Ahmedabad in ITA No. 3528/Ahd/2004 vide an order dated 16/05/2008 has affirmed the findings of the ld. CIT(A) and the depreciation as allowed by the AO was affirmed. Due to this reason, we are of the view that ld. AR has correctly stated that the recalculation of depreciation for the year under consideration was nothing but a consequential effect of the re-computation of depreciation. We hereby confirm the view taken by the AO and dismiss this ground.

19. Ground No.13 reads as under:

Non carried forward of unabsorbed depreciation loss of Rs. 9,28,32,049/-

13. The ld. AO/DRP erred in law and facts of the case by proposing not allowing to carry forward unabsorbed depreciation loss of Rs. 9,28,32,049/- to set off against the income of the year under consideration.

19.1 The assessee had claimed a carried forward unabsorbed depreciation of Rs. 9,89,30,646/- to be set off against the current income. The bifurcation of the unabsorbed depreciation was as under:-

	“A.Y. 2004-05	Rs.7,97,14,997/-
	A.Y. 2005-06	Rs. 1,92,15,649/-“

19.2 On perusal of past record, it was noted by the AO as follows:-

“10.1 Perusal of the record of the assessee for A.Y. 2004-05 shows that out of depreciation claimed by the assessee, a sum of Rs. 3,52,78,787/- was disallowed. Thus, the available carry forward depreciation for this year to A.Y. 2005-06 was Rs. 4,44,36,210/-.

10.2 In A.Y. 2005-06, the assessee has claimed unabsorbed depreciation for the year of Rs. 1,92,15,649/-. Out of the depreciation claimed, the A.O. has in the order u/s. 143(3) disallowed a sum of Rs. 2,66,83,892/-. Thus, there was no unabsorbed depreciation for the year available to the assessee for carry forward in A.Y. 2006-07.

10.3 Further perusal of records of A.Y.2005-06 reveals that the gross total income for the year computed by the A.O. u/s.143(3) was Rs. 3,83,37,613/-. Out of the above, the A.O. has allowed deduction under Chapter-VIA. However, as per the provisions of Section 32(2) r.w.s. 72 & 73, the brought forward depreciation should have been adjusted before allowing any deduction under Chapter-VIA.”

19.3 Therefore, the AO had calculated the balance of unabsorbed depreciation available to the assessee to be carried forward, which resulted into a disallowance of differential of the claim of depreciation of Rs. 9,28,32,049/-. We find no legal fallacy in the aforesaid adjustment made by the AO. Even before us, no legal argument was raised. The only submission is that since few past years are involved, therefore in case of any mistake in calculation of unabsorbed depreciation, then the same may be directed to be rectified. This pleading could have been raised before the AO who is empowered to pass an order u/s. 154 of IT Act and in case of any mistake the same can be rectified. At present, in the absence of any supporting re-calculation by the assessee, we are not inclined to interfere with the calculation of the carried forward depreciation as made by the AO. This ground is dismissed.

20. Ground Nos.14 & 15 read as under:

14. Initiation of levy of interest u/s.234B, 234D and withdrawal of interest u/s.244A of the Act is not justified.

15. Initiation of penalty u/s.271(1)(c) of the Act is not justified.

20.1 These two grounds are at present pre-mature and consequential in nature, hence not to be adjudicated.

21. Rest of the grounds are common in nature, hence not argued, therefore dismisse

22. In the result, Assessee’s appeal is partly allowed that too for statistical purposes.