TaxTMI Updates e-Newsletter
May 22,2015

Deduction under Section 80-IA(4) of the Income-tax Act - definition of 'infrastructure facility' in the Explanation to Section 80-IA(4) - income derived from the use of the infrastructure facility - inclusive expression 'including' in statutory definitions - strict construction of tax exemption provisions

Deduction under Section 80-IA(4) of the Income-tax Act - income derived from the use of the infrastructure facility - strict construction of tax exemption provisions - The respondent-assessee is not entitled to claim deduction under Section 80-IA(4) for the assessment years in question. - HELD THAT: - The court examined the agreements between the assessee and BBMP and found that the assessee acted as a licensee to construct and maintain bus-shelters, erect light poles, beautify medians and build a footbridge for a limited period and was permitted to recoup expenditure only by way of advertising revenue. No ownership or enduring proprietary right in the infrastructure accrued to the assessee and the arrangement was temporary in nature. The Explanation to Section 80-IA(4) contemplates permanent infrastructure facilities such as roads, bridges, toll roads or rail systems and requires that the income eligible for deduction be derived from use of the infrastructure developed (for example toll collection). The assessee's income derived solely from advertisements placed on the temporary structures does not amount to income from the use of an infrastructure facility as contemplated by Section 80-IA(4). Applying the established principle that tax exemptions must be construed strictly, the court held that the assessee did not fall within the statutory four corners of Section 80-IA(4). [Paras 10, 16, 20]

Claim for deduction under Section 80-IA(4) is rejected and the Assessing Officer's order disallowing the deduction is upheld.

Definition of 'infrastructure facility' in the Explanation to Section 80-IA(4) - inclusive expression 'including' in statutory definitions - The business activities of erecting bus-shelters, medians beautification, street lighting and a footbridge do not fall within the ambit of 'infrastructure facility' as defined in the Explanation to Section 80-IA(4). - HELD THAT: - The court considered the contention that the word 'including' and the reference to 'other activities' indicate an inclusive and wide meaning. Notwithstanding that linguistic argument, the Explanation specifies types of infrastructure that are permanent and substantial (roads, toll roads, bridges, rail systems, ports, airports, etc.). The assessee's works were temporary, removable or ancillary structures intended to facilitate advertisement revenues and the agreements barred charging users for use; consequently there was no income from use of an infrastructure facility as envisaged by the provision. Reliance on purposive or liberal construction was rejected where the statutory text and conditions for the exemption are not satisfied. [Paras 9, 13, 16, 20]

Activities undertaken by the assessee do not qualify as 'infrastructure facility' under the Explanation to Section 80-IA(4).

Final Conclusion: Revenue appeals allowed; the Tribunal's order granting deduction under Section 80-IA(4) is set aside and the orders of the lower authorities disallowing the deduction are upheld.

Assessment in case of search under section 153A - abatement of pending proceedings vs finality of completed assessments - scope of assessment under section 153A linked to search/requisition and material found - harmonious interpretation of sections 132 and 153A - inland container depot and container freight station as inland port qualifying as infrastructure facility under section 80-IA(4) - requirement of agreement with Government for claiming deduction under section 80-IA(4)

Assessment in case of search under section 153A - abatement of pending proceedings vs finality of completed assessments - scope of assessment under section 153A linked to search/requisition and material found - harmonious interpretation of sections 132 and 153A - Whether section 153A permits reopening and reassessment of completed assessments for the six years and the scope of assessment under section 153A. - HELD THAT: - The Court held that section 153A is a special provision enacted for assessment in cases where a search under section 132 or requisition under section 132A has been initiated, and must be read in harmony with section 132(1). The non-obstante clause and mandatory language require issue of notice and assessment/reassessment of six years when a search/requisition is initiated, but the second proviso abates only those assessment/reassessment proceedings that were pending on the date of initiation of the search. Assessments already finalised do not abate and attain finality unless material unearthed in the search establishes that reliefs granted earlier were contrary to facts discovered. For pending assessments the jurisdiction under ordinary proceedings and under section 153A merges into a single assessment made on the basis of search findings and any other material brought on record; for non-abated (finalised) assessments the reassessment under section 153A is limited to taking into account books/documents found in the search or undisclosed income/property discovered in the search. The Special Bench's reading limiting the practical exercise of section 153A to matters connected with the search was not perverse, and the Court affirmed the Division Bench precedent of this High Court on the point. [Paras 30, 31, 37]

The Tribunal/Special Bench correctly interpreted section 153A; pending assessments abate and merge for purposes of a single assessment under section 153A, while completed assessments do not abate except to the extent incriminating material discovered in the search justifies revisiting them; the Revenue's challenge on this point is rejected.

Inland container depot and container freight station as inland port qualifying as infrastructure facility under section 80-IA(4) - requirement of agreement with Government for claiming deduction under section 80-IA(4) - Whether income of Container Freight Stations (CFS) / Inland Container Depots (ICD) qualifies for deduction under section 80-IA(4) as an "inland port" and whether a specific formal agreement with the Central/State Government is a prerequisite. - HELD THAT: - The Court examined the language of section 80-IA(4) and its Explanation, relevant CBDT/CBEC communications and judicial decisions, including the Division Bench of the Delhi High Court, and concluded that ICDs and CFSs perform functions (warehousing, customs clearance, transport between ICD/CFS and seaports) that bring them within the concept of an "inland port" and therefore within the definition of "infrastructure facility" under section 80-IA(4). The Court held that acceptance or recognition by competent government authority (including notifications/communications and the statutory scheme) can suffice and that a rigid requirement of a separate formal agreement executed with the Central Government is not necessary where the facility is otherwise established as an infrastructure facility in accordance with the scheme and relevant governmental acceptances; likewise, withdrawal of a port authority certificate does not automatically negate the infrastructural character where the statutory and factual matrix supports the classification. [Paras 46, 47, 48]

The Tribunal's conclusion that ICDs and CFSs qualify as "inland ports" and are entitled to deduction under section 80-IA(4) is upheld; a formal written agreement with the Central Government in each case is not an indispensable prerequisite where governmental acceptance/recognition and the statutory/factual matrix establish the facility as infrastructural.

Final Conclusion: The Revenue appeals are dismissed. The High Court affirms the Tribunal's Special Bench interpretation of section 153A and its conclusion that income of ICDs/CFSs qualifies as deductible under section 80-IA(4) as "inland ports", answering the substantial questions of law against the Revenue and in favour of the assessees; no order as to costs.

Third proviso to Section 254(2A) of the Income-tax Act - aggregate stay limit - incidental power of the Tribunal to grant and extend interim stay - Article 14 - impermissible classification and unequal treatment - reading down to avoid constitutionality strain - right of appeal rendered illusory

Third proviso to Section 254(2A) of the Income-tax Act - aggregate stay limit - Article 14 - impermissible classification and unequal treatment - incidental power of the Tribunal to grant and extend interim stay - Constitutional validity of the expression 'even if the delay in disposing of the appeal is not attributable to the assessee' in the third proviso to Section 254(2A) as inserted by the Finance Act, 2008, and the extent of the Tribunal's power to extend stay where delay is not attributable to the assessee. - HELD THAT: - The Court held that the statutory scheme recognises the Tribunal's ancillary/incidental power to grant stay as necessary to make appellate jurisdiction effective. The 2008 insertion - making the stay vacate after 365 days 'even if the delay in disposing of the appeal is not attributable to the assessee' - treats assessees who have not caused delay the same as those who have, thereby creating a classification without rational nexus to the legislative object. Applying the Article 14 principles (intelligible differentia and rational nexus), the Court found the added words to render the right of appeal illusory for well-behaved assessees and to be hostile discrimination. The Court relied on the jurisprudence that (i) incidental powers of an appellate forum include stays to prevent rendering an appeal nugatory, (ii) statutory conditions may be upheld if reasonable but cannot be so onerous as to nullify the appeal right, and (iii) a provision should be read consistently with constitutional mandates where possible. The Court therefore struck down the 2008 insertion as violative of Article 14 and restored the earlier construction (as in Narang Overseas) that, in deserving cases where delay is not attributable to the assessee, the Tribunal retains power to extend stay beyond 365 days. The Court clarified that this does not condone routine stays; the Tribunal's exercise remains discretionary and fact-sensitive, and High Courts retain their writ jurisdiction under Articles 226/227. [Paras 23, 24]

The words inserted by the Finance Act, 2008 - 'even if the delay in disposing of the appeal is not attributable to the assessee' - are struck down as violative of Article 14; the Tribunal may, in deserving cases where delay is not attributable to the assessee, grant extension of stay beyond 365 days.

Final Conclusion: The writ petitions are allowed; the 2008 amendment phrase is struck down for violating Article 14 and the Tribunal retains power to extend stay beyond 365 days where delay is not attributable to the assessee; petitioners may apply to the Tribunal for extension and interim orders granted shall continue until the Tribunal acts.

Change of opinion - reassessment jurisdiction under section 147/notice under section 148 - new material / fresh information - Dispute Resolution Panel powers under section 144C(8) and Explanation - protection against review disguised as reassessment

Change of opinion - reassessment jurisdiction under section 147/notice under section 148 - The validity of reopening the assessment on the ground that the Assessing Officer had not formed an opinion earlier and thus there was no 'change of opinion'. - HELD THAT: - The Court found that the Assessing Officer had noticed and recorded the restructuring and allocation of receipts (upto July 2007 in the hands of the petitioner and thereafter in the hands of the subsidiary) in the draft order, the DRP proceedings and the final assessment order. Both the Assessing Officer and the DRP had examined the business transfer and, having made no addition, had effectively formed the opinion that the transaction was not exigible to tax. Thereafter taking a contrary view to reopen the assessment amounted to a prohibited 'change of opinion' and an impermissible attempt to review the earlier assessment order instead of reassessing on fresh material. The Court relied on the distinction between review and reassessment and held that reassessment cannot be used to revisit an issue already examined and concluded in the original assessment. [Paras 19, 20]

Reopening the assessment was a change of opinion and therefore invalid; the notice under section 148 could not be sustained on this ground.

New material / fresh information - reassessment jurisdiction under section 147/notice under section 148 - Whether any new facts or material surfaced after the original assessment order to justify initiation of reassessment proceedings. - HELD THAT: - The Court held that all relevant factual material relied upon by the Assessing Officer in the reasons for reopening was already on record during the original assessment and DRP proceedings. Since no fresh or additional material which was not available at the time of the assessment order had come to the Assessing Officer's knowledge, the statutory precondition for reopening on the basis of new material was not satisfied. The absence of new material reinforced the conclusion that the reopening represented a change of opinion rather than a permissible reassessment based on fresh information. [Paras 21, 22]

No new material was available to justify reopening; reassessment on the same material was contrary to law.

Dispute Resolution Panel powers under section 144C(8) and Explanation - protection against review disguised as reassessment - Whether the DRP could examine matters not specifically proposed as variations in the draft order and whether DRP proceedings altered the question of whether an opinion had been formed during assessment. - HELD THAT: - The Court observed that the Explanation to Section 144C(8), effective retrospectively from 01.04.2009 and operative at the time of the DRP directions, empowers the DRP to consider matters arising out of assessment proceedings even if not raised in the draft order. The DRP had accordingly queried, examined and recorded observations on the restructuring and the transfer of contracts, yet made no direction for addition. Because the DRP procedure is part of the assessment proceedings, queries and answers during DRP carry the same weight as those before the Assessing Officer. The DRP's examination and the absence of any direction for addition indicated an opinion had been formed against taxability, and the subsequent reopening was therefore a change of opinion. [Paras 23, 24]

The DRP could examine the restructuring; having done so and not directed any addition, the DRP's treatment supports the conclusion that an opinion had been formed and reopening was impermissible.

Final Conclusion: Writ petition allowed; the notice dated 13.10.2011 under Section 148 for AY 2008-09 and all consequential proceedings including the order dated 19.07.2012 rejecting objections are quashed; no order as to costs.

Manufacture - deduction under Section 80IB(4) - computation of eligible profits after allowing depreciation under Section 32 - substantial compliance with employment requirement under Section 80IB(2)(iv)

Manufacture - deduction under Section 80IB(4) - Conversion of gram Dal into Besan by roasting/grinding amounts to manufacture and qualifies for deduction under Section 80IB(4). - HELD THAT: - The Court applied the established tests for manufacture - production of a certain commodity by process involving labour or machinery, transformation into an end product with a different name, character and use, and loss of original identity - as explained in Idandas v. Anant Ram Chandra Phadke and followed in this Court's earlier decisions. Observing that gram Dal, when ground into Besan, loses its original shape and identification, is produced by labour and machinery and results in a commercially distinct product treated differently from gram Dal, the Court concluded that the process amounts to manufacture. The Court noted that although a statutory definition of 'manufacture' was introduced with effect from 1.4.2009, that definition embodies prior judicial tests and is therefore relevant to the analysis of pre-amendment years. [Paras 15, 16]

Conversion of gram Dal into Besan is manufacturing and the assessee is entitled to deduction under Section 80IB(4).

Computation of eligible profits after allowing depreciation under Section 32 - deduction under Section 80IB(4) - Profits eligible for deduction under Section 80IB(4) are to be computed after allowing depreciation under Section 32, but the mandatory application of this rule applies only from 1.4.2002. - HELD THAT: - The Court recognised that Explanation 5 to Section 32(1), making depreciation allowance mandatory irrespective of whether claimed, took effect from assessment year 2002-03 (1.4.2002). Consequently, computation of eligible profits under Chapter VIA, including Section 80IB, must account for depreciation where the statutory amendment applies. For years prior to 1.4.2002, the Court followed binding precedent holding that the post-amendment rule is not retrospective and an assessee's voluntary non-claim of depreciation in earlier years cannot be overridden. [Paras 21]

Eligible profits under Section 80IB(4) must be computed after allowing depreciation under Section 32, but this requirement applies only from 1.4.2002 and not to earlier assessment years.

Substantial compliance with employment requirement under Section 80IB(2)(iv) - Requirement of employing ten or more workers for claiming deduction under Section 80IB(2)(iv) must be satisfied for a substantial part of the year; employment for only a short period (as in the present case) does not qualify. - HELD THAT: - A plain reading of Section 80IB(2)(iv) requires employment of ten or more workers in the manufacturing process carried on with aid of power. The Court endorsed the approach that what is required is substantial compliance - employment of the requisite number 'substantially during the period for which relief is claimed' - and there is no rigid temporal formula; it is a factual determination. Applying earlier decisions of this Court, the Court held that employment of the requisite number only for a limited period (as found on the facts) cannot be treated as substantial; where the assessee failed to show ten or more workers for a substantial part of the year, the condition is not met. [Paras 26]

The assessee did not substantially employ ten or more workers during the year; the condition in Section 80IB(2)(iv) is not satisfied and the claim fails.

Final Conclusion: The appeals are disposed by allowing the assessee's contention on manufacture and limitedly on computation of profits (subject to application of depreciation only from 1.4.2002), but the assessee's claim under the employment-size condition of Section 80IB(2)(iv) fails for lack of substantial employment of ten or more workers; parties to bear their own costs.

Certificate under Section 12A - power of the Assessing Officer to go behind 12A certificate - examination of application of income by a trust - revocation of registration under Section 12A - independent proceedings for cancellation under Section 12A - obligation of a charitable trust to furnish material in revocation proceedings - remand for fresh consideration by the DIT (Exemption)

Certificate under Section 12A - power of the Assessing Officer to go behind 12A certificate - examination of application of income by a trust - Whether the Assessing Officer could impugn or go behind a registration certificate granted under Section 12A by examining the correctness of that certificate. - HELD THAT: - The Court upheld the ITAT's conclusion that the Assessing Officer is not empowered to go behind or impugn a certificate issued under Section 12A. While the AO is entitled to examine the nature of expenditure and the application of income by the trust in the course of assessment, such examination does not permit the AO to annul or substitute the statutory certification granted by the competent authority under Section 12A. Accordingly, the ITAT's finding that the AO lacked power to question the validity of the 12A registration was accepted and the question of law framed in the Revenue's appeals on this point is answered against the Revenue and in favour of the assessee. [Paras 4]

The AO cannot go behind the certificate issued under Section 12A; the ITAT's finding to that effect is affirmed.

Revocation of registration under Section 12A - independent proceedings for cancellation under Section 12A - obligation of a charitable trust to furnish material in revocation proceedings - remand for fresh consideration by the DIT (Exemption) - Legality of the DIT (Exemption)'s revocation of the assessee's registration under Section 12A and whether the ITAT was justified in setting aside that revocation. - HELD THAT: - The Court found that the DIT (Exemption) was entitled to insist on cogent material in revocation proceedings and that such proceedings under Section 12A are independent of assessment proceedings; the outcome of one does not automatically determine the other. The DIT's cancellation relied upon the AO's observations regarding large remittances made to another trust and concluded the transfer was a colorable device, and that the activities did not qualify as charitable. The ITAT had quashed the DIT's order, observing that the DIT had not specified how the transactions were colorable or how specified persons benefited, and that earlier adverse observations of the AO were not upheld on appeal. This Court held that the ITAT's order could not be sustained because, given the scale of the impugned transactions, the assessee ought to have furnished adequate material to rebut the DIT's concerns; the assessee's reliance on the contention that the AO lacked jurisdiction was insufficient in the revocation proceedings. At the same time the Court found defects in the DIT's order and therefore set aside both the ITAT's order and the DIT's order and remitted the matter to the DIT (Exemption) for fresh examination after permitting the assessee to place material within four weeks. [Paras 5, 6, 7, 8]

DIT's cancellation and ITAT's restoration both set aside; matter remitted to DIT (Exemption) for fresh consideration on the material the assessee may produce within four weeks.

Final Conclusion: The Court held that the Assessing Officer cannot go behind a valid 12A registration certificate (decision for the assessee) but found that the DIT's revocation required reconsideration: both the DIT's order of cancellation and the ITAT's order restoring registration are set aside and the matter is remitted to the DIT (Exemption) for fresh examination after the assessee places material within four weeks.

Allowability of depreciation during suspension/lock-out where plant is ready for use - meaning of 'used' for depreciation - passive use and readiness for use - capital versus revenue expenditure - improvements conferring enduring benefit

Allowability of depreciation during suspension/lock-out where plant is ready for use - meaning of 'used' for depreciation - passive use and readiness for use - Depreciation claim on plant and machinery for the period when the mill's operations were suspended was allowable. - HELD THAT: - The Court applied earlier decisions holding that where the assessee's plant and machinery remained ready for use and the suspension of operations was due to events beyond the assessee's control (such as lock-out, suspension not actuated by malice or by the assessee), the machinery can be regarded as being used in the business for the purpose of section 32 and depreciation is allowable. The judgments relied upon treat lock-outs and adverse external events as business hazards incidental to carrying on business and accept a wider meaning of 'used' to include passive use or readiness for use; no finding of malice or abandonment impugned the assessee's entitlement. Applying that principle to the present facts, where suspension was not caused by the assessee, the plant lay ready for use and operations were later resumed, the claim for depreciation must be allowed.

Allowed in favour of the assessee; first question answered affirmative against the revenue.

Capital versus revenue expenditure - improvements conferring enduring benefit - Expenditure on filling up a pond and levelling low land was capital in nature and not allowable as a revenue deduction. - HELD THAT: - The Court endorsed the finding that filling up the pond converted it into land and thereby enhanced its value, producing an advantage of a permanent character and enduring benefit to the assessee's assets. Such improvement brought into existence an advantage/asset and increased the cost/value of the land, fitting the traditional test for capital expenditure. The Tribunal's conclusion that the expenditure was capital was a possible view on the facts and did not call for interference.

Rejected the assessee's claim; second question answered negative against the assessee.

Final Conclusion: Appeal partly allowed: depreciation during the suspension period is allowed; expenditure on filling the pond is capital in nature and disallowed as a revenue deduction.

Allowance of additional depreciation under section 32(1)(iia) read with the second proviso to section 32(1) - reconciliation of proviso restricting depreciation for assets used less than 180 days with the incentive in section 32(1)(iia) - application of section 14A and Rule 8D - disallowance of expenses attributable to exempt dividend income and requirement of nexus/source verification - characterisation of government industrial investment promotion assistance as capital receipt by application of the purpose test - scope and application of Explanation 10 to section 43(1) - whether subsidy reduces actual cost of asset for depreciation - treatment of entry tax exemption and deductibility under section 43B - deductibility of provision for leave encashment and remand for decision in view of pending Supreme Court consideration

Allowance of additional depreciation under section 32(1)(iia) read with the second proviso to section 32(1) - reconciliation of proviso restricting depreciation for assets used less than 180 days with the incentive in section 32(1)(iia) - Entitlement to the balance 50% of additional depreciation under section 32(1)(iia) in the year subsequent to the year in which new plant and machinery was put to use for less than 180 days. - HELD THAT: - The Tribunal followed coordinate-bench decisions holding that clause (iia) confers an entitlement to additional depreciation of 20% where new plant and machinery is acquired and installed after 31-03-2005, and the second proviso to section 32(1)(ii) only restricts the allowance to 50% in the year of acquisition if used for less than 180 days. In the absence of any express bar in clause (iia) against allowing the balance 50% in the subsequent year, the proviso must be harmonised with clause (iia) so as not to defeat the incentive. Accordingly, where only 50% was allowed in the year of acquisition by reason of the proviso, the assessee is entitled to claim the balance 50% additional depreciation in the immediately subsequent assessment year. [Paras 5]

Assessee entitled to balance 50% additional depreciation under section 32(1)(iia); issue allowed and remanded to AO to give effect.

Application of section 14A and Rule 8D - disallowance of expenses attributable to exempt dividend income and requirement of nexus/source verification - Approach to disallowance under section 14A/Rule 8D in respect of dividend income of the assessee and requirement to verify nexus between borrowings and investments. - HELD THAT: - The Tribunal noted that the assessee held shares acquired in earlier periods and that the AO must ascertain whether such investments were made out of the assessee's own funds or out of borrowings on which interest was paid. Disallowance under section 14A/Rule 8D presupposes a nexus between the expenditure (e.g., interest) and the earning of exempt income; where the source of investment is within the assessee's special knowledge, the AO should verify the source and establish nexus before making proportionate disallowance. In the absence of such verification by the authorities below, the matter was set aside for fresh adjudication by the AO. [Paras 9]

Issue set aside to the file of the AO for re verification of source/nexus; ground allowed for statistical purposes.

Characterisation of government industrial investment promotion assistance as capital receipt by application of the purpose test - scope and application of Explanation 10 to section 43(1) - whether subsidy reduces actual cost of asset for depreciation - Whether the Industrial Investment Promotion Assistance (IPA) is a capital receipt and whether Explanation 10 to section 43(1) requires reduction of actual cost of assets by the subsidy for computing depreciation. - HELD THAT: - Applying the purpose test as laid down by the Supreme Court and the jurisdictional High Court, the Tribunal held that the IPA, granted under the Madhya Pradesh scheme to encourage setting up/expansion of industry and linked to fixed capital investment, is capital in nature. On Explanation 10 to section 43(1), the Tribunal affirmed that the statutory provision requires reduction of actual cost only where the subsidy is directly or indirectly used to meet the cost of a specific asset; where the subsidy is an incentive to promote industrialisation (not asset specific), it does not reduce the actual cost of depreciable assets. In the facts of the scheme, although the subsidy amount is measured with reference to sales tax/ investment, it is not directly relatable to particular assets; hence Explanation 10 does not operate to reduce the actual cost for depreciation. [Paras 16, 19]

IPA held to be capital receipt; Explanation 10 does not mandate reduction of actual cost in these facts - departmental appeal dismissed and assessee's claim allowed to the extent indicated.

Treatment of entry tax exemption and deductibility under section 43B - Whether the entry tax exemption under the Industrial Promotion Policy can be treated as a deductible expenditure (capital receipt) in computing taxable income or must be governed by section 43B. - HELD THAT: - The Tribunal upheld the CIT(A)'s conclusion that the Income-tax Act, and specifically section 43B, governs the timing and allowability of deductions for sums payable by way of tax; benefits/exemptions under a state scheme do not override the Income-tax Act. The assessee had not actually paid the entry tax (it was exemption under the State policy) and could not treat the hypothetical entry tax as an allowable deduction. Prior decisions cited by the authorities support that statutory non payment under another Act does not permit contravention of Income tax provisions requiring actual payment for deduction. [Paras 21]

Assessee's claim for deduction of entry tax rejected; CIT(A)'s order confirmed.

Deductibility of provision for leave encashment and remand for decision in view of pending Supreme Court consideration - Allowability of unpaid provision for leave encashment in view of the contested judicial position and pending Supreme Court consideration in Exide Industries Ltd. - HELD THAT: - The Tribunal recorded that the matter was the subject matter of proceedings before the Supreme Court (stay/grant of leave) and that the legal position remained unsettled. In that factual and legal matrix the Tribunal remitted the issue to the AO to decide afresh in accordance with the law as finally declared by the Supreme Court and relevant directions. [Paras 24]

Issue remitted to the file of the AO for fresh adjudication in the light of the Supreme Court decision; ground allowed for statistical purposes.

Final Conclusion: For AYs 2008-09 and 2009-10 the Tribunal allowed the assessee's claim for the balance 50% additional depreciation under section 32(1)(iia); set aside the section 14A/Rule 8D disallowance for AO's verification of nexus; held the industrial investment promotion assistance to be a capital receipt and, on the facts, not deductible from actual cost under Explanation 10 to section 43(1); confirmed denial of deduction for entry tax under section 43B; and remitted the claim for unpaid leave encashment provision to the AO for fresh decision in view of pending Supreme Court consideration.

Transfer pricing adjustment - comparability analysis - Transactional Net Margin Method (TNMM) - profit level indicator (OP/OC) - exclusion of comparable enterprises on functional dissimilarity - abnormally high profit as ground for exclusion - use of multiple-year data versus single-year data in benchmarking - application of 5% safe harbour range under section 92C(2)

Exclusion of comparable enterprises on functional dissimilarity - comparability analysis - use of multiple-year data versus single-year data in benchmarking - Infosys Technologies Ltd. excluded from final set of comparables - HELD THAT: - The Tribunal accepted the assessee's demonstration of material functional differences between the assessee (a captive cost-plus software development centre) and Infosys (a large, diversified, full-risk software entrepreneur). The assessee showed divergent scale of operations, different nature of services, risk profile and ownership of intangibles; these factual distinctions were not controverted by Revenue. The Tribunal followed precedent treating a giant, full-risk service provider as functionally non-comparable with a captive cost-plus entity and held that prior inclusion of the concern in the assessee's study does not preclude its exclusion where justifiable differences are shown. Consequently Infosys was excluded from the comparable set. [Paras 11, 13, 14]

Infosys Technologies Ltd. excluded from final comparable set

Exclusion of comparable enterprises on functional dissimilarity - comparability analysis - Transactional Net Margin Method (TNMM) - E-Zest Solutions Ltd. excluded from final set of comparables - HELD THAT: - The Tribunal found that E Zest performed KPO/ITES/product-related activities and did not provide segmental data isolating pure software development services. The assessee's uncontested factual assertions and existing Tribunal precedent holding E Zest functionally dissimilar in comparable facts led the Tribunal to exclude E Zest from the final comparable set for benchmarking under TNMM. [Paras 15, 16, 17]

E-Zest Solutions Ltd. excluded from final comparable set

Exclusion of comparable enterprises on functional dissimilarity - comparability analysis - Kals Information Systems Ltd. excluded from final set of comparables - HELD THAT: - Relying on precedents where Kals was held to engage in development and sale of software products (distinct from pure software services) and on the similarity of facts between those cases and the present appeal, the Tribunal concluded Kals is functionally dissimilar to the assessee and therefore must be excluded from the comparable set for benchmarking. [Paras 18, 19]

Kals Information Systems Ltd. excluded from final comparable set

Exclusion of comparable enterprises on functional dissimilarity - comparability analysis - use of multiple-year data versus single-year data in benchmarking - Bodhtree Consulting Ltd. excluded from final set of comparables - HELD THAT: - The Tribunal accepted that Bodhtree follows a fixed price/product revenue recognition model and may engage in product sales/ITES activities with no reliable segmental data, producing volatile margins that do not reflect the assessee's cost plus model. Precedents and the DRP/TPO analyses supported exclusion where such business model and revenue recognition differences undermine comparability; the Tribunal directed exclusion of Bodhtree. [Paras 20, 21, 22, 24]

Bodhtree Consulting Ltd. excluded from final comparable set

Abnormally high profit as ground for exclusion - exclusion of comparable enterprises on functional dissimilarity - comparability analysis - FCS Software Solutions Ltd. excluded from final set of comparables - HELD THAT: - Applying the Special Bench guidance, the Tribunal examined FCS's proximate years and found the year under consideration showed abnormal and non representative operating margins accompanied by atypical changes in revenue and development expenditure. On the facts (undisputed by Revenue), the high margin did not reflect normal business trend; hence FCS was excluded from the comparable set after necessary factual scrutiny. [Paras 25, 26, 28, 29]

FCS Software Solutions Ltd. excluded from final comparable set

Final Conclusion: Allowing the appeal, the Tribunal excluded Infosys, E Zest, Kals, Bodhtree and FCS from the final set of comparables; with those exclusions the arm's length computation falls within the 5% range under section 92C(2) and the transfer pricing addition was rendered academic, resulting in allowance of the appeal.

Transfer pricing - comparability and selection of comparables - Related party transaction filter (RPT) - threshold for exclusion of comparables - Abnormal/high profit comparables - treatment and further inquiry - Arm's Length Price and the proviso to section 92C(2) - scope of +/-5% option after insertion of section 92C(2A) - Deduction under section 10A - computation by excluding same items from export turnover and total turnover - Use of contemporaneous (current year) data for comparability - mandatory requirement under Rule 10B(4) - Turnover filter for selection of comparables - application of an upper limit in light of co ordinate bench precedents - Risk adjustment claims - burden of quantification on the assessee - Reimbursement receipts - pass through expenses and inclusion in operating cost for mark up - Interest under section 234B - mandatory and consequential charge on assessment adjustments

Deduction under section 10A - computation by excluding same items from export turnover and total turnover - Whether expenditure in foreign currency (daily allowance, support allowance and travel) excluded from export turnover for computation of deduction under section 10A must also be excluded from total turnover. - HELD THAT: - The Tribunal followed the decision of the Hon'ble High Court of Karnataka in Tata Elxsi Ltd. and held that where export turnover is to be arrived at after excluding certain expenditure, the same expenditure must also be excluded from total turnover for computing deduction under section 10A. The court directed the Assessing Officer to exclude the specified foreign currency expenditures from both export turnover and total turnover while recomputing the deduction. [Paras 12]

Revenue's ground on this point is dismissed; AO to exclude the specified foreign currency expenses from both export and total turnover when computing section 10A deduction.

Related party transaction filter (RPT) - threshold for exclusion of comparables - Whether companies with any related party transactions should be excluded from the set of comparables or a threshold (15% of total revenues) should be applied. - HELD THAT: - The Tribunal examined coordinate bench precedents, in particular the decision in 24/7 Customer.Com Pvt. Ltd. (following Sony India), which applies an RPT filter of 15% of total revenues as the threshold for exclusion. The CIT(A)'s approach of excluding companies merely because they had any RPT was held not to be correct. The Tribunal directed the TPO/AO to apply the 15% RPT filter in including/excluding comparables and to verify the RPT percentages. [Paras 13]

Partly allow revenue's ground; apply a 15% RPT threshold for exclusion of comparables and remit to TPO/AO for verification and adjustment.

Abnormal/high profit comparables - treatment and further inquiry - Whether companies with profit on cost exceeding 50% must be excluded as comparables solely on that ground. - HELD THAT: - Following the Special Bench in Maersk Global Centres, the Tribunal held that potential comparables cannot be excluded solely due to high profit margins; such instances require further investigation to ascertain whether high profits reflect normal business conditions or are due to abnormal/one off factors. The CIT(A) had excluded companies merely because their margins exceeded 50% without examining comparability; that finding was reversed and the matter was restored to the file of the TPO for re examination after affording opportunity to the assessee. [Paras 14]

Allow revenue's ground to the extent of reversing CIT(A)'s blanket exclusion; remand to TPO for detailed investigation into high margin comparables and fresh comparability determination.

Arm's Length Price and the proviso to section 92C(2) - scope of +/-5% option after insertion of section 92C(2A) - Whether the assessee is entitled to a standard deduction of 5% from the ALP under the proviso to section 92C(2). - HELD THAT: - The Tribunal examined the retrospective amendment by insertion of section 92C(2A) (Finance Act, 2012) which provides that where variation between the arithmetic mean and the actual price exceeds 5%, the assessee cannot exercise the option under the earlier proviso. The amendment confines +/-5% to justify the price charged and excludes its use as a stand alone standard deduction for adjustment. Judicial decisions prior to the amendment were held inapplicable. [Paras 15]

CIT(A)'s allowance of 5% standard deduction is reversed; assessee not entitled to 5% standard deduction in view of section 92C(2A).

Turnover filter for comparables - application of an upper limit in light of co ordinate bench precedents - Whether companies with turnover in excess of Rs. 200 crores should be excluded from the set of comparables where the assessee's turnover is substantially lower. - HELD THAT: - Relying on the co ordinate bench decision in Genisys Integrating Systems (India) Pvt. Ltd., the Tribunal held turnover is an important filter and where the assessee's turnover is below Rs. 200 crores, companies with turnovers exceeding Rs. 200 crores should be excluded. The Tribunal directed the AO to exclude the five identified large turnover companies from the comparable set. [Paras 19]

Assessee's objection accepted; AO to exclude the specified companies with turnovers above Rs. 200 crores from comparables.

Use of contemporaneous (current year) data for comparability - mandatory requirement under Rule 10B(4) - Whether multiple year/prior year data may be used instead of current financial year data for comparability analysis. - HELD THAT: - The Tribunal held that Rule 10B(4) mandates use of data relating to the financial year in which the international transaction was entered into; prior year data may be considered only as permitted by the proviso when it reveals facts influencing transfer price. Therefore the TPO was right to reject the assessee's use of earlier years' data where no influence on current year prices was demonstrated, and the TPO is duty bound to use contemporaneous data even if not available to the assessee when preparing its TP report. [Paras 23]

Assessee's ground on multiple year data dismissed; TPO correctly required use of current year (and permitted prior two years only as exception) data for comparability.

Related party transaction - case of Four Soft Ltd. and verification of RPT percentage - Whether Four Soft Ltd. should be excluded from comparables on account of RPT being in excess of 15%. - HELD THAT: - The Tribunal noted the assessee's claim that Four Soft Ltd.'s RPT is 19.89% and, following the 15% threshold applied from coordinate bench precedent, directed the TPO/AO to exclude Four Soft Ltd. from comparables if verification confirms RPT exceeds 15%. [Paras 20]

Assessee's objection allowed for statistical purposes; TPO/AO to verify RPT and exclude Four Soft Ltd. if RPT >15%.

Comparability on grounds of functional dissimilarity - remand for fresh FAR analysis - Whether certain identified companies (Exensys, Tata Elxsi, Geometric, Sankhya, Thirdware) are functionally comparable or should be excluded. - HELD THAT: - The Tribunal found that the CIT(A) had not adjudicated on the functional differences raised by the assessee. Given the factual and year specific nature of FAR analysis, the Tribunal remanded the comparability of the five companies to the TPO for fresh examination, directing that the TPO/AO consider the assessee's submissions and cited precedents and carry out a fresh FAR analysis after affording opportunity to the assessee. [Paras 22]

Issue remanded to TPO/AO for fresh consideration and FAR analysis of the five companies; assessee to be afforded opportunity to file details.

Reimbursement receipts - pass through expenses and inclusion in operating cost for mark up - Whether reimbursements paid/received should be included in operating cost/income for determination of mark up. - HELD THAT: - The Tribunal reiterated the settled principle that pure pass through reimbursements without service element should not be added to cost base. However, it found that neither TPO nor CIT(A) had examined the breakup/details to establish whether the items were mere pass throughs. Consequently the matter was remitted to AO/TPO for detailed verification; if receipts are mere recoveries without service element they should be excluded from cost base. [Paras 27]

Remanded to AO/TPO for detailed verification; if reimbursements are mere pass throughs they should not be included in operating cost for mark up.

Risk adjustment in transfer pricing - burden of quantification on the assessee - Whether the assessee's claim for a risk adjustment should be allowed without quantification. - HELD THAT: - The Tribunal agreed with the TPO that the burden of proof for quantifying a risk adjustment lies on the assessee. The assessee had failed to provide any quantification or basis for such adjustment before the TPO, CIT(A) or Tribunal. While noting coordinate bench decisions where quantified claims were directed to be considered, the Tribunal held that in absence of quantification the claim must fail. [Paras 26]

Assessee's claim for risk adjustment dismissed for lack of quantification; TPO rightly rejected the claim.

Use of data gathered under section 133(6) - permissibility and contemporaneous information - Whether the TPO erred in using information available at time of assessment proceedings collected under section 133(6). - HELD THAT: - The Tribunal noted that Rule 10B(4) and section 92D require contemporaneous data and documentation, and the Act does not prescribe a cut off limiting the TPO from using contemporaneous public domain information available at the time of TPO audit. Accordingly, there was no infirmity in the TPO using such contemporaneous data even if it was not available to the assessee when preparing its TP study. [Paras 24]

Assessee's objection on this point dismissed; TPO's use of contemporaneous data at time of TP audit held acceptable.

Interest under section 234B - mandatory and consequential charge on assessment adjustments - Whether interest under section 234B charged consequent to the TP adjustment is to be upheld. - HELD THAT: - Relying on settled law cited (Anjum Ghaswala & Others), the Tribunal held charging interest under section 234B is mandatory and consequential on the assessment. It directed recomputation of interest, if necessary, after giving effect to the order. [Paras 28]

Charging of interest under section 234B is upheld; AO to recompute interest as necessary while giving effect to this order.

Final Conclusion: The revenue appeal is partly allowed and the assessee's cross objections are partly allowed. Key outcomes: AO directed to exclude specified foreign currency expenditures from both export and total turnover for section 10A computation; RPT filter of 15% to be applied for comparables; CIT(A)'s blanket exclusion of high margin comparables reversed and matter remitted to TPO for detailed inquiry; 5% standard deduction under proviso to section 92C(2) is disallowed in view of section 92C(2A); turnover and other filters to be applied as directed; several factual comparability and reimbursement issues remanded to TPO/AO for fresh consideration; risk adjustment claim rejected for want of quantification; interest under section 234B upheld with direction to recompute if required.

Allowance of additional depreciation under section 32(1)(iia) - effect of the second proviso to section 32(1)(ii) on timing of additional depreciation - carry forward / balance 50 per cent. of additional depreciation - additional depreciation on captive power plant as part of manufacturing business - revision of assessment under section 263

Allowance of additional depreciation under section 32(1)(iia) - effect of the second proviso to section 32(1)(ii) on timing of additional depreciation - carry forward / balance 50 per cent. of additional depreciation - additional depreciation on captive power plant as part of manufacturing business - Assessee entitled to the balance 50 per cent. additional depreciation under section 32(1)(iia) in the subsequent year and additional depreciation is allowable on plant and machinery of a captive power plant used for the business of manufacture. - HELD THAT: - The Tribunal held that clause (iia) of section 32(1) grants an assessee engaged in manufacture an entitlement to additional depreciation equal to a prescribed percentage of cost where qualifying plant and machinery are acquired and installed after the specified date, and the second proviso to section 32(1)(ii) only restricts the amount allowable in the year of acquisition if the asset is used for less than 180 days. Because the proviso does not expressly prohibit allowance of the unutilised portion in the subsequent year, the restriction must be read as limited to that year and cannot be interpreted to divest the assessee of the right to the balance in the next assessment year. The Tribunal relied on coordinate Benches and High Court authority which adopt a purposive, liberal construction to ensure the one time incentive is not defeated by an implied restriction. Applying those principles, the Tribunal held that where 50 per cent. additional depreciation was allowed in the year of acquisition because of usage for less than 180 days, the remaining 50 per cent. may be claimed and allowed in the immediately succeeding year. Separately, following precedent, the Tribunal held that additional depreciation under section 32(1)(iia) is available for plant and machinery of a captive power plant installed for use in the assessee's manufacturing unit, since the provision requires only that the assessee be engaged in manufacture and does not demand operational connectivity between the new asset and the article produced; thus captive power plant assets fall within the scope of clause (iia).

Balance 50 per cent. additional depreciation under section 32(1)(iia) is allowable in Assessment Year 2006-07 and additional depreciation is allowable on captive power plant machinery used for the manufacturing business.

Revision of assessment under section 263 - Revision under section 263 setting aside the assessment for allowing additional depreciation was not sustained and the revision order was quashed. - HELD THAT: - The Commissioner under section 263 had directed reconsideration of allowance of certain additional depreciation on the ground that assets were acquired before the cut off date. The Tribunal found that the substantive question had already been adjudicated in the assessee's appeal (ITA No. 560/Kol/2010) and, in light of the legal conclusions reached thereon (that additional depreciation was allowable including carry forward and on captive power plant), the revision order could not be sustained. Where the same contested legal proposition has been finally decided in favour of the assessee, the exercise of revisional power to reverse that position was quashed.

Order passed under section 263 is quashed and the assessment as originally framed is not to be revised on the basis urged by the Commissioner.

Final Conclusion: Appeals allowed: assessee granted the balance 50 per cent. additional depreciation under section 32(1)(iia) for AY 2006-07 (including on captive power plant machinery), and the revision under section 263 directing reassessment on that basis is quashed.

Levy of interest under sections 234B and 234C on tax computed under MAT under section 115JB - Mandatory nature of interest under sections 234B and 234C - Retrospective effect of authoritative Supreme Court decisions

Levy of interest under sections 234B and 234C on tax computed under MAT under section 115JB - Applicability of advance tax/assessed tax concept to MAT assessments - Interest under sections 234B and 234C is leviable on tax computed on book profits under section 115JB (MAT). - HELD THAT: - Relying on the exposition in Rolta India Ltd. the Tribunal held that sections 234B and 234C apply where an assessee is liable to pay advance tax and the expression 'assessed tax' includes tax determined under the MAT provisions. Section 115JB is a self-contained code which does not exclude other provisions of the Act; accordingly companies liable to tax under section 115JB are also liable to pay advance tax and, on default, attract interest under sections 234B and 234C. Earlier contrary decisions rendered before the Apex Court's ruling do not prevail against the Supreme Court's authoritative exposition. The Tribunal found no merit in the assessee's contention that MAT assessments fall outside the scope of sections 234B/234C and upheld the levy of interest. [Paras 7]

The levy of interest under sections 234B and 234C on tax computed under section 115JB is upheld.

Retrospective effect of authoritative Supreme Court decisions - Good faith or divergent judicial views as defence to mandatory interest - A bona fide belief arising from prior divergent decisions does not exempt the assessee from mandatory interest once the Supreme Court has authoritatively held interest to be leviable; the Supreme Court's clarification operates retrospectively. - HELD THAT: - The Tribunal applied the principle that judicial decisions discover the law and operate retrospectively. Given the Supreme Court's rulings (including Rolta India Ltd. and Saurashtra Kutch Stock Exchange Ltd.), the mandatory character of interest under sections 234B and 234C cannot be avoided by the assessee's reliance on earlier conflicting precedents or a claimed inability to foresee the law. The Tribunal rejected the plea that divergence of opinion or bona fide belief absolves liability for interest on MAT assessments. [Paras 4, 6, 7]

The assessee's plea of bona fide belief/divergent judicial views is rejected; interest remains payable with retrospective effect as explained by the Supreme Court.

Final Conclusion: The Tribunal dismissed the appeal, upholding the levy of interest under sections 234B and 234C on tax assessed under section 115JB for Assessment Year 2009-10 and rejecting the assessee's reliance on prior divergent decisions or bona fide belief as a defence.

Arm's length principle - transfer pricing adjustment - cost allocation on time-spent basis - reimbursement of expenses - benefit test in cost sharing / actual services rendered - commercial expediency / business connection - verification and remand for factual corroboration - depreciation on computer software / capitalization versus revenue treatment

Arm's length principle - transfer pricing adjustment - cost allocation on time-spent basis - benefit test in cost sharing / actual services rendered - Allowability of allocation of costs charged by foreign AE for technical/site services where charge is on per-hour basis. - HELD THAT: - The Tribunal examined whether the TPO was justified in determining the ALP of the cost allocation at nil on the ground that the assessee had not established need, actual availment or basis of allocation. The assessee, a newly incorporated entity engaged in supplying formwork and scaffolding, produced technical designs, invoices showing hours charged by the AE, evidence of engineers' visits and comparable invoices to other group entities. Given the highly technical nature of the business and the assessee's lack of in-house expertise in its first year of operations, the Tribunal held that engaging the AE's engineers was an inevitable part of performing the assessee's contracts and that the mode and actual services availed could not reasonably be doubted. The TPO proceeded on a premise of non-need despite documentary evidence of services rendered; that approach was held unsustainable. Because the AE charged specifically for hours spent (not a pooled cost-sharing arrangement), the cost-sharing tests urged by Revenue were held inapplicable and, in absence of any contrary material from the TPO/AO, the ALP determination at nil was set aside and the assessee's claim allowed. [Paras 7]

Claim for allocation of technical services charged by AE on per-hour basis allowed; TP adjustment set aside.

Reimbursement of expenses - transfer pricing adjustment - commercial expediency / business connection - verification and remand for factual corroboration - Allowability of reimbursement of commission paid in relation to contract (project migrated from Malaysian AE to assessee) subject to verification whether the Malaysian AE actually paid the agent. - HELD THAT: - The assessee produced correspondence and the original agreement showing the project was initially awarded to PERI Malaysia through an agent, and produced material showing the project was later transferred to the assessee and generated substantial revenue. On principle, where contractual liability for commission existed with the AE and the project (and related obligations) were transferred to the assessee, reimbursement of that liability is substantively tenable. The TPO/DRP's denial for want of a direct contract between the assessee and the agent and absence of comparables was not accepted by the Tribunal in view of the contemporaneous documents produced by the assessee. However, the Tribunal noted that the assessee had not produced evidence that the Malaysian AE actually paid the agent. Accordingly the Tribunal accepted the assessee's claim in principle but remanded the matter to the AO/TPO to verify from record whether the corresponding payment by the Malaysian AE to the agent was made, and to consider the claim thereafter. [Paras 11]

Reimbursement of commission accepted in principle; directed remand to AO/TPO to verify corresponding payment by Malaysian AE to the agent and then decide.

Depreciation on computer software / capitalization versus revenue treatment - reimbursement of expenses - arm's length principle - Allowability of depreciation on software reimbursed to parent where parent purchased software licenses and reimbursed cost to group entities. - HELD THAT: - The assessee demonstrated that the AutoCAD software was necessary to open client drawings and was essential to its business operations (tendering and execution). The assessee produced the parent company's invoice from the software vendor and invoices showing recovery of that cost from group companies, evidencing that the charge was a reimbursement of actual cost without markup. With the need and benefit for the assessee established and documentary proof that the assessee paid only the actual cost incurred by the parent, the Tribunal concluded that the DRP's disallowance of depreciation was based on assumptions contrary to the evidence and set aside the disallowance, allowing depreciation. [Paras 16]

Disallowance of depreciation on software set aside; depreciation claim allowed.

Transfer pricing adjustment - reimbursement of expenses - commercial expediency / business connection - verification and remand for factual corroboration - Allowability of travel expenses reimbursed to AE staff (visit and stay) - remanded for fresh consideration by AO/TPO on production and verification of evidence. - HELD THAT: - The assessee produced hotel and travel invoices and payment details showing that the AE's support manager incurred expenses (by credit card) while travelling with the assessee's Managing Director, and that 50% of the expenses were reimbursed. The TPO had treated the ALP as nil for want of details; the Tribunal found that vouchers and payment proofs were on record and that the reimbursements were not payments to the AE but reimbursements of expenses incurred in relation to business operations. In the interest of justice the Tribunal did not decide the issue finally but directed the AO/TPO to consider the evidence furnished by the assessee afresh after giving an opportunity of hearing. [Paras 22]

Issue remanded to AO/TPO to consider the assessee's documentary evidence and decide after opportunity of hearing.

Final Conclusion: The appeal is partly allowed: transfer pricing disallowance on allocation of technical services and disallowance of software depreciation are set aside and allowed; reimbursement of commission is accepted in principle but remitted to AO/TPO for verification of corresponding payment by the Malaysian AE to the agent; travel-expense adjustment is remanded to AO/TPO for fresh consideration on the evidence.

Transactional Net Margin Method - internal comparables - arm's length price - functional comparability - remand for fresh consideration - capital versus revenue expenditure - depreciation under Section 32

Transactional Net Margin Method - internal comparables - arm's length price - functional comparability - Applicability of internal TNM comparables for benchmarking the manufacturing segment and consequent validity of the transfer pricing adjustment - HELD THAT: - The Tribunal examined the assessee's bifurcation of the manufacturing segment into an 'AE segment' (products consuming raw materials/components from associated enterprises) and a 'third party segment' (products not consuming such inputs) and the assessee's internal TNM comparison of profitability between these two segments. The Tribunal accepted that TNMM requires functional similarity rather than absolute product identity and that internal comparables (profitability from uncontrolled transactions of the same assessee) provide a closer and more direct benchmark for the tested controlled transactions. The assessee's segmentation, allocation methodology and supporting tabulation were not controverted by the TPO and the minor inclusion of a small sale in the AE segment did not vitiate the segmentation. On the internal comparison the AE segment profitability (computed by the assessee) exceeded the third party segment profitability; accordingly the international transactions in the manufacturing segment were found consistent with the arm's length standard. The Tribunal therefore held that the TPO was unjustified in rejecting internal TNM comparables for the manufacturing segment and allowed Ground No. 2, setting aside the transfer pricing adjustment insofar as it related to the manufacturing segment. [Paras 13, 16, 17]

Assessee's plea for internal TNM comparables in respect of the manufacturing segment is accepted; no transfer pricing adjustment is required for those international transactions.

Remand for fresh consideration - capital versus revenue expenditure - depreciation under Section 32 - Treatment of lease rentals (vehicles and computers) - whether capital in nature and entitlement to depreciation - and the appropriate course pending earlier year's final decision - HELD THAT: - The Tribunal noted that the identical issue for earlier assessment years (beginning AY 2003 04) remained undecided. The assessee sought remand so that the current year's claim may be considered in light of the ultimate decision in the earlier year. The Department did not contest the factual matrix or oppose remand. In these circumstances the Tribunal restored the matter to the file of the Assessing Officer with a direction to examine the claim in conformity with the ultimate decision in AY 2003 04, thereby treating the question as requiring fresh consideration rather than deciding it on merits in the present proceeding. [Paras 21, 22]

Issue remanded to the Assessing Officer for decision in conformity with the ultimate conclusion in assessment year 2003 04.

Final Conclusion: Appeal partly allowed: the transfer pricing adjustment relating to the manufacturing segment is set aside by accepting the assessee's internal TNM comparables; the claim on lease rentals (vehicles and computers) is remanded to the Assessing Officer for fresh consideration in light of the ultimate decision in AY 2003 04.

Revenue expenditure vs capital expenditure - Advertising and artwork expenditure revenue treatment - Business expediency and foreign travel deduction - Market research expenses as revenue expenditure - Product development and design charges revenue treatment - Conditional consideration of deduction under section 80-IB

Revenue expenditure vs capital expenditure - Advertising and artwork expenditure revenue treatment - Treatment of artwork expenses claimed under section 37 as revenue or capital expenditure - HELD THAT: - The Tribunal examined the nature and use of the artwork payments which were for designing and conceptualising advertising material (banners, posters, labels, hoardings) largely tied to events, festivals and short-term campaigns. Noting that such artwork generally has a short life (often less than six months) and that earlier Tribunal decisions in the assessee's earlier years had treated similar expenses as revenue, the Tribunal held that the payment does not give rise to an enduring capital asset and is properly allowable as business expenditure. The appellate finding that some artworks might be reusable did not justify treating the entire claim as capital; the proper approach is to treat such short-duration advertising artwork as revenue in nature. [Paras 7]

Artwork expenses allowed as revenue expenditure; ground No.1 allowed.

Business expediency and foreign travel deduction - Allowability of foreign travel expenses claimed by directors as business expenditure - HELD THAT: - Out of five foreign tours, the Commissioner (Appeals) had deleted amounts for travels under one lakh but confirmed two tours (to Tetra Pak offices in Germany/Switzerland/UK) on the basis that concrete evidence was not furnished. The Tribunal found the assessee had provided explanations and supporting material showing business purpose (market and technical study relating to packaging and prospective exports), that evidences of travel were not impugned, and that the Commissioner had not specified what was lacking. The Tribunal rejected the unsupported dichotomy based on amount and concluded that the foreign travel expenses were incurred wholly for business purposes. [Paras 12]

Disallowance of foreign travel expenses deleted; ground No.2 allowed.

Market research expenses as revenue expenditure - Whether market research expenses are capital or revenue in nature - HELD THAT: - The Tribunal accepted the assessee's explanation that market research was necessary and inevitable for a fast moving consumer goods business to study market trends, consumer preferences and to frame marketing strategy. The authorities had not doubted genuineness of the expenditure but characterized it as capital. Considering the industry requirement and prior favourable precedent in the immediately preceding year, the Tribunal held that such recurring market research expenses are revenue in nature, incurred in the ordinary course of business to promote existing brands. [Paras 17]

Market research expenditure allowed as revenue expenditure; ground No.3 allowed.

Product development and design charges revenue treatment - Allowability of product development expenses and design charges as revenue expenditure - HELD THAT: - The Tribunal reviewed the nature of expenses incurred for in-house testing, purchase of ingredients for trial, cold storage for preserves, and design charges for packaging. It relied on prior Tribunal findings that design charges and periodic changes in product design are regular business expenses in the FMCG sector and do not create an enduring capital asset. The Commissioner (Appeals)'s disallowance based on timing of entries (debited on year-end) was unsupported by a concrete finding that the expenses related to a subsequent year. Absent such a finding, the Tribunal deleted the disallowance and treated the expenses as revenue. [Paras 22]

Product development and design charges allowed as revenue expenditure; ground No.4 allowed (disallowance deleted).

Conditional consideration of deduction under section 80-IB - Claim for deduction under section 80-IB to be considered depending on final outcome of earlier years - HELD THAT: - The Tribunal noted that the Assessing Officer had ignored the section 80-IB claim in computing taxable income because carry-forward losses from earlier years were under dispute and subject to appellate proceedings. In line with the Tribunal's earlier observations in the immediately preceding year, the Tribunal directed that if, upon giving effect to appellate orders in earlier years, positive income results for the relevant earlier years, the Assessing Officer shall examine and allow the assessee's claim under section 80-IB as appropriate. The direction is therefore conditional and for administrative compliance rather than an immediate substantive allowance. [Paras 24]

Claim under section 80-IB treated as allowed for statistical purposes and directed to be examined by the Assessing Officer if earlier-year outcomes produce positive income.

Final Conclusion: The appeal is partly allowed: disallowances on artwork, foreign travel, market research, and product development/design charges for AY 2008-09 are deleted and treated as allowable business expenditures; the claim under section 80-IB is left open for reconsideration by the Assessing Officer contingent on the outcome of earlier-year appellate decisions and is treated as allowed for statistical purposes.

Suit for land - specific performance - delivery of possession - sale certificate under the SARFAESI Rules - exclusive jurisdiction clause - forum selection clause - Letters Patent Clause 12

Suit for land - specific performance - delivery of possession - sale certificate under the SARFAESI Rules - The suit filed by the plaintiff for specific performance was a suit for land. - HELD THAT: - The plaint sought issuance of a sale certificate in the form prescribed by the Rules under the SARFAESI Act, and the sale certificate itself contemplates handing over delivery and possession of the scheduled immovable property. While a plain specific performance claim without a prayer for possession is not a suit for land, the prayer in the plaint here implicitly required delivery of possession because the relief sought could not be granted without issuance of the sale certificate which acknowledges delivery and possession. Having regard to the plaint alone, the suit therefore fell within the category of suits for land under Clause 12 of the Letters Patent. [Paras 11, 13, 14]

The suit was a suit for land.

Exclusive jurisdiction clause - forum selection clause - Letters Patent Clause 12 - The Agreement conferred exclusive jurisdiction on the Courts of Mumbai and, coupled with the finding that the suit was a suit for land, ousted the jurisdiction of the Calcutta High Court. - HELD THAT: - The Agreement contained express clauses stating payment to be made in Mumbai and that disputes shall be subject to the jurisdiction of Mumbai courts/tribunals. Such a jurisdiction clause manifests the parties' clear intention to restrict forum to Mumbai. Given that the suit is a suit for land, Clause 12 of the Letters Patent requires that suits for immovable property situated outside the territorial jurisdiction of the Calcutta High Court not be entertained. Consequently, the Calcutta High Court did not have territorial jurisdiction to try the suit. [Paras 15, 16]

The parties granted exclusive jurisdiction to the Courts of Mumbai; the Calcutta High Court's jurisdiction was ousted.

Section 17 of the SARFAESI Act - jurisdiction of debt recovery forum - The question whether the jurisdiction of civil courts was barred by Section 17 of the SARFAESI Act was not answered by the Court and was not adjudicated. - HELD THAT: - The Court expressly declined to decide the issue of whether Section 17 of the SARFAESI Act ousted civil court jurisdiction because the determinations that the suit was a suit for land and that the parties had conferred exclusive jurisdiction on Mumbai made it unnecessary to address the question of the Debt Recovery Tribunal's jurisdiction under Section 17. [Paras 6, 16]

Left undecided; not adjudicated by the Court.

Final Conclusion: The appeal is dismissed on the ground that the suit is a suit for land and the parties had conferred exclusive jurisdiction on the Courts of Mumbai; the Calcutta High Court lacked territorial jurisdiction to try the suit. The question of jurisdiction under Section 17 of the SARFAESI Act was not decided. Parties are at liberty to pursue appropriate remedies in the competent forum.

Scientific or technical consultancy service - service tax liability under reverse charge mechanism - transfer of technology / technical know how versus consultancy - essential character test

Scientific or technical consultancy service - transfer of technology / technical know how versus consultancy - service tax liability under reverse charge mechanism - Whether amounts paid to the foreign supplier Rosobornexport fall within the definition of 'scientific or technical consultancy service' attracting service tax on reverse charge. - HELD THAT: - The Tribunal examined the parties' agreement and held that the contract effected a transfer of licence and technical documentation for manufacture of fighter aircraft, involving transfer of technology and visits by expert personnel to assist in setting up manufacture. The statutory definition of 'scientific or technical consultancy' requires (i) advice, consultancy or technical assistance and (ii) that such service be rendered by a scientist or technocrat or by a science or technology institution or organisation. The foreign supplier Rosobornexport was shown to be a joint stock state intermediary agency engaged in export/import of defence equipment and not a scientist, technocrat, or a science/technology institution. Revenue produced no evidence to the contrary. Applying the reasoning in Kopran Ltd. and subsequent precedents relied upon by the bench, the Tribunal held that transfers of know how/technology or permanent transfer of intellectual property under such agreements are not services of the nature of 'scientific or technical consultancy' as defined, and therefore the impugned demands under that head were unsustainable.

Held that the services rendered by Rosobornexport do not constitute 'scientific or technical consultancy service' and the demand confirmed by the adjudicating authority is unsustainable.

Final Conclusion: Impugned order set aside; appeal filed by the assessee allowed and revenue's appeal rejected.

Closure of proceedings where tax and interest discharged prior to issue of notice - penalty not leviable where proceedings fall within Section 73(3) after discharge of tax and interest - penalties under Sections 76, 77 & 78 of the Finance Act, 1994 - late fee payable under Rule 7(c) of the Service Tax Rules, 1944

Closure of proceedings where tax and interest discharged prior to issue of notice - penalty not leviable where proceedings fall within Section 73(3) after discharge of tax and interest - penalties under Sections 76, 77 & 78 of the Finance Act, 1994 - Whether penalties under Sections 76, 77 & 78 of the Finance Act, 1994 could be imposed where the assessee had discharged the service tax and interest before issuance of the show cause notice - HELD THAT: - The Tribunal accepted the appellant's unchallenged factual position that the service tax liability together with interest was discharged prior to issuance of the show cause notice. Applying the specific statutory provision embodied in Section 73(3), proceedings are required to be closed where tax and interest have been paid before the notice is issued. Since the notice was issued long after payment, there was no occasion to continue proceedings for the purpose of imposing penalties; accordingly, imposition of penalties under Sections 76, 77 and 78 was not warranted. The Tribunal therefore set aside the penalties while leaving intact the assessment of tax and interest which had been discharged by the appellant.

Penalties under Sections 76, 77 & 78 set aside on the ground that tax and interest had been paid before issuance of the show cause notice; matter closed insofar as penalties are concerned.

Late fee payable under Rule 7(c) of the Service Tax Rules, 1944 - Whether the late fee under Rule 7(c) of the Service Tax Rules, 1944 was waivable - HELD THAT: - The Tribunal noted that there is no provision for waiver of the late fee required to be paid under Rule 7(c) of the Service Tax Rules, 1944. While penalties have been set aside pursuant to Section 73(3), the statutory late fee remains payable and the appellant is liable to discharge it.

No waiver of late fee under Rule 7(c); appellant remains liable to pay the late fee.

Final Conclusion: The appeal is allowed to the extent of setting aside penalties imposed under Sections 76, 77 and 78 of the Finance Act, 1994, on the ground that tax and interest were discharged before issuance of the show cause notice; the assessment of tax and interest stands as dealt with and the late fee under Rule 7(c) remains payable.

Refund of service tax - time limit for refund claims - documentary evidence of payment of service tax - rectifiable defects in refund applications - eligibility under Notifications 40/2007-ST and 41/2007-ST

Refund of service tax - time limit for refund claims - rectifiable defects in refund applications - Whether the refund claims were maintainable as filed within time or liable to be rejected for being beyond the prescribed time limit and/or being incomplete - HELD THAT: - The Tribunal accepted that the appellants filed refund claims within the prescribed period and that certain shortcomings in the claims could have been rectified. However, both the original authority and the Commissioner (Appeals) found that the appellants failed to furnish the essential documentary proof of payment of service tax for the specified services for which refunds were claimed. What was produced comprised tabular summaries of payments and bank statements which could not be corroborated with invoices or documents showing service tax components. The Notifications require production of minimum documentary evidence (for example, para (f) of Notification No.41/2007-ST) to demonstrate that the services were received and that service tax was paid on eligible services; that requirement was not met. Because the deficiency went to the core entitlement for refund rather than a merely formal or curable defect, the authorities rightly rejected the claims as non-maintainable on the stated grounds.

The appeals are dismissed for failure to produce the requisite documentary evidence of payment of service tax and consequent non-compliance with the eligibility requirements of the Notifications.

Final Conclusion: The Tribunal affirmed the orders rejecting the refund claims for the quarters October-December 2007 and January-March 2008 on the ground that the appellants did not produce the minimum documentary evidence of service tax payment required by the Notifications; the appeals are dismissed.

Taxable service under Section 65(105)(zzz) - transport of goods, other than water, through pipelines or other conduit - service to self - transfer of title at the delivery point - waiver of pre-deposit and stay of recovery

Taxable service under Section 65(105)(zzz) - transport of goods, other than water, through pipelines or other conduit - service to self - transfer of title at the delivery point - Whether the appellant's activity of transporting gas to the buyer's delivery point attracts service tax as a taxable 'transport of goods through pipelines or other conduit' or falls outside the taxable ambit as a service to self. - HELD THAT: - The Tribunal found on the admitted facts and on the illustrative agreement that title to the gas transfers at the buyer's delivery point located on the buyer's premises. The appellant purchases gas and charges its customer separately for the price of gas, transportation and a marketing margin, with invoices distinguishing these components as required by the Ministry of Petroleum and Natural Gas. Because the appellant transports its own gas and the sale/transfer of title occurs at the customer's inlet point, the transportation activity is an incident of the appellant's own sale and constitutes a service to self. On this principle the activity does not fall within the taxable ambit of transportation services under Section 65(105)(zzz). The adjudicating authority's premise that the marketing margin represented a separate taxable service was rejected as fallacious in light of the contractual delivery point and transfer of title. [Paras 5]

The transport of gas by the appellant, where transfer of title occurs at the buyer's delivery point, is a service to self and not exigible to service tax under the impugned provision; the adjudication holding to the contrary is set aside on this point.

Waiver of pre-deposit and stay of recovery - Whether pre-deposit of the adjudicated service tax demand should be waived and recovery stayed pending appeal. - HELD THAT: - In view of the Tribunal's conclusion that the transportation constituted a service to self and thus fell outside the taxable ambit, the Tribunal granted full waiver of the pre-deposit and stayed further proceedings for realization of the adjudicated liability pending disposal of the appeal. [Paras 6]

Full waiver of pre-deposit granted and all further proceedings for realization of the adjudicated liability stayed pending the appeal.

Final Conclusion: The Tribunal held that transportation of the appellant's own gas, where transfer of title occurs at the buyer's delivery point, is a service to self and not taxable under the impugned provision; accordingly, waiver of pre-deposit was granted in full and recovery proceedings stayed pending the appeal.

Eligibility of goods as input under the definition of input in Rule 2(k) of the Cenvat Credit Rules, 2004 - availability of Cenvat credit on goods used in construction of capital works (jetty and port buildings) - effect of subsequent amendment to Explanation 2 of Rule 2(k) - prospective operation and non-clarificatory nature of amendment - impact of exempted output service on entitlement to input credit

Eligibility of goods as input under the definition of input in Rule 2(k) of the Cenvat Credit Rules, 2004 - availability of Cenvat credit on goods used in construction of capital works (jetty and port buildings) - Cenvat credit of excise duty on cement and steel used in construction of jetties and other port buildings is allowable as input under Rule 2(k) of the Cenvat Credit Rules, 2004. - HELD THAT: - The Court accepted the appellant's contention that the definition of input in Rule 2(k) covers goods used for providing an output service and that cement and steel used in construction of the jetty and port buildings qualify as inputs. It was not disputed that the appellant, a taxable service provider for port services, procured and supplied the cement and steel which were used in construction by a contractor. The Court rejected the Tribunal's conclusion denying credit on this account and held that the materials so used fall within the scope of inputs as contemplated by Rule 2(k). The Division Bench decision of the Andhra Pradesh High Court (Commissioner of Central Excise, Visakhapatnam-II v. Sai Sahmita Storages (P) Ltd.) was treated as squarely applicable to the facts, supporting the availability of credit.

Denial of input credit in respect of excise duty on cement and steel used in construction of jetty and port buildings set aside; appellant entitled to Cenvat credit.

Effect of subsequent amendment to Explanation 2 of Rule 2(k) - prospective operation and non-clarificatory nature of amendment - The 2009 amendment to Explanation 2 of Rule 2(k) is not a clarificatory amendment that can be applied retrospectively to deny credit for periods prior to the amendment. - HELD THAT: - The Court examined the Larger Bench's view treating the 2009 amendment as clarificatory and found no material in the amendment notification to indicate a legislative intention of clarification of prior law. Absent express indication in the amendment that it was declaratory, the amendment must operate prospectively. The Tribunal's reliance on conjecture about legislative intent was rejected and Sangam Spinners (supra) was held inapplicable on these facts.

Amendment to Explanation 2 (effective 7.7.2009) cannot be read as clarificatory to deny previously claimed input credit; Tribunal's contrary view rejected.

Impact of exempted output service on entitlement to input credit - Construction of a jetty being an exempted activity does not ipso facto disentitle the appellant to Cenvat credit of excise duty on goods supplied and used in that construction. - HELD THAT: - The Court considered the department's contention that because construction of the jetty is an exempted service, input credit must be disallowed. It observed that the appellant purchased and provided the materials (cement, steel, grid etc.) used in construction and claimed credit thereon. Two modes of execution were noted (contractor supplies materials or appellant supplies materials); in the facts of this case appellant supplied the goods and therefore was entitled to input credit. The Tribunal's view denying credit on the ground of exemption of the output activity was held unsustainable.

Denial of input credit on the ground that jetty construction was an exempted service is set aside; exemption alone does not bar credit where appellant supplied and used the goods as inputs.

Final Conclusion: The Tax Appeal is allowed. The Tribunal's denial of Cenvat credit in respect of excise duty on cement and steel used in construction of the jetty and port buildings is set aside; the appellant is entitled to the claimed input credit. The 2009 amendment to Explanation 2 of Rule 2(k) cannot be treated as a retrospective clarification to defeat pre-amendment credits, and the fact that jetty construction is an exempted activity does not by itself defeat the appellant's entitlement to input credit.

Entitlement to Cenvat credit on outward freight/transportation charges - pre deposit requirement in appellate proceedings - application of precedent and prima facie case in stay/waiver of pre deposit

Pre deposit requirement in appellate proceedings - application of precedent and prima facie case in stay/waiver of pre deposit - The validity of the Tribunal's order directing a substantial pre deposit as condition for waiver of the balance demand during pendency of the appeal. - HELD THAT: - The High Court examined whether the Customs, Excise and Service Tax Appellate Tribunal was justified in directing a pre deposit of Rs.5,00,000/-. Noting that a favourable precedent (ABB Limited v. CCE) exists and that, prima facie, there appears to be a case in favour of the appellant on the question of entitlement to Cenvat credit on outward freight, the Court held that the Tribunal's original pre deposit direction was not justified in the manner made. Exercising its supervisory jurisdiction, the Court modified the Tribunal's order by substantially reducing the pre deposit requirement and directing that, upon compliance with the reduced pre deposit, the balance demand would remain stayed during the pendency of the appeal before the Tribunal. The Court emphasised that the applicability of the precedent to the facts must be considered and decided by the Tribunal when hearing the main appeal. [Paras 8, 9]

Tribunal's pre deposit direction set aside to the extent indicated; appellant directed to make a reduced pre deposit of Rs.1,00,000 and, on such compliance, the balance demand shall remain stayed during the pendency of the appeal.

Entitlement to Cenvat credit on outward freight/transportation charges - application of precedent and prima facie case in stay/waiver of pre deposit - Whether the appellant is entitled to Cenvat credit on service tax paid on outward freight and related services. - HELD THAT: - The High Court did not decide the substantive question on the merits. It observed that the Karnataka High Court's decision in ABB Limited v. CCE is favourable to the appellant and that the applicability of that decision to the facts of this case must be examined and determined by the Tribunal while hearing the main appeal. Consequently, the question of entitlement to Cenvat credit was left for adjudication by the Tribunal on merits. [Paras 8]

Substantive issue remitted to the Tribunal for adjudication on merits; the High Court made no final determination on entitlement to Cenvat credit.

Final Conclusion: The High Court modified the Tribunal's pre deposit order by reducing the pre deposit to Rs.1,00,000 to be made by the appellant and, upon such compliance, stayed realization of the balance demand during the appeal; the substantive question of entitlement to Cenvat credit on outward freight and related services was left to the Tribunal for decision on the merits.

Self-operative dismissal - pre-condition of deposit for stay - finality of order - right to be heard - liberty to seek appropriate remedies

Self-operative dismissal - pre-condition of deposit for stay - finality of order - Whether the CESTAT rightly held that the appeals stood dismissed by virtue of the order dated 13.03.2013 for non-deposit of the directed amount. - HELD THAT: - The order dated 13.03.2013 imposed a pre-condition of deposit and expressly provided that failure to deposit the specified sum would render the order vacated and all the appeals listed would stand dismissed. The appellant did not comply with that direction. The High Court accepted the Tribunal's conclusion that the order was self-operative and had attained finality, and therefore the consequence of non-deposit - dismissal of the appeals - followed. The Tribunal's factual and legal conclusion that so long as the 13.03.2013 order remained valid the dismissal consequence persisted was upheld.

The appeals stood dismissed by operation of the 13.03.2013 order for non-deposit, and the CESTAT was right in so holding.

Right to be heard - liberty to seek appropriate remedies - Whether alleged non-hearing of the appellant at the time of passing the 13.03.2013 order, or the contention that the deposit direction applied only to another party, vitiates the dismissal now upheld by the CESTAT. - HELD THAT: - The Court noted the appellants' contention that they were not heard when the 13.03.2013 order was passed and that the deposit direction was directed only against another party. Even if those contentions were accepted, the correct course was to seek modification or setting aside of the 13.03.2013 order in appropriate proceedings. The appellants had not challenged that order for two years. The Tribunal expressly granted liberty to the appellant to pursue appropriate remedies against the 13.03.2013 order; accordingly, any grievance as to non-hearing or misdirected deposit requirement must be addressed in proceedings challenging that order rather than in the present appeals.

Allegations of non-hearing or misapplication of the deposit direction do not invalidate the consequence of dismissal; the appellant has liberty to challenge the 13.03.2013 order by appropriate remedy.

Final Conclusion: The CESTAT correctly treated the 13.03.2013 order as self-operative and final, resulting in dismissal of the appeals for non-deposit; the appellants retain liberty to move to modify or set aside the 13.03.2013 order, but the present appeals do not raise any substantial question of law and are disposed of.

Payment of excise duty by utilizing CENVAT credit as valid discharge of duty liability - Constitutionality of Rule 8(3A) of the Central Excise Rules, 2002 - Applicability of Rule 8(3A) to periods before and after its commencement - Penalty under Rule 25 of the Central Excise Rules vis-a -vis Section 11AC of the Central Excise Act

Payment of excise duty by utilizing CENVAT credit as valid discharge of duty liability - Payment of duty by utilization of CENVAT credit constitutes a valid discharge of duty liability in the facts of the case. - HELD THAT: - The High Court, following the decisions of the Gujarat High Court in Indsur Global Ltd. and Precision Fasteners Ltd. and its own earlier batch decisions, held that the condition introduced by sub rule (3A) of Rule 8 which required payment of duty without utilizing CENVAT credit until outstanding amounts were paid was unconstitutional. As a consequence of that constitutional finding, the use of CENVAT credit to discharge duty liability could not be treated as a default warranting departmental demand under the amended rule. The court therefore answered the question on the validity of discharge by CENVAT credit in favour of the assessee and against the Department. [Paras 4]

Answered in favour of the assessee; utilization of CENVAT credit is a valid discharge and demands based on Rule 8(3A) are set at naught.

Constitutionality of Rule 8(3A) of the Central Excise Rules, 2002 - Applicability of Rule 8(3A) to periods before and after its commencement - Sub rule (3A) of Rule 8, as introduced, is unconstitutional and cannot be applied to sustain demands for the period in question. - HELD THAT: - The court expressly adopted the reasoning of the Gujarat High Court and its own earlier rulings which declared the condition in sub rule (3A) unconstitutional. Consequently, proceedings initiated by the Department invoking Rule 8(3A) for the relevant period were held to be unsustainable. The question whether the rule could be made applicable to periods before or after 1.6.2006 was resolved by holding the rule invalid in the manner challenged, with the result that subsequent demands based on that provision could not be sustained. [Paras 4]

Answered in favour of the assessee; Rule 8(3A) held unconstitutional and inapplicable to sustain the departmental demands.

Penalty under Rule 25 of the Central Excise Rules vis-a -vis Section 11AC of the Central Excise Act - Whether the Tribunal was justified in retaining and reducing penalty under Rule 25 when penalty under Section 11AC was set aside. - HELD THAT: - The writ appeal raised substantial questions including the retention of penalty under Rule 25. Having held that the foundational demand based on Rule 8(3A) could not be sustained, the High Court answered the substantial questions in favour of the assessee and against the Department. The court disposed of the civil miscellaneous appeal by following the precedents it cited and allowed the appeal accordingly. [Paras 4]

Answered in favour of the assessee; the appeal allowed and the departmental position with respect to penalty not sustained as challenged.

Final Conclusion: The civil miscellaneous appeal is allowed; the substantial questions of law are answered in favour of the assessee and against the Department, following earlier High Court decisions that declared sub rule (3A) of Rule 8 unconstitutional, and consequent departmental demands and penalties founded on that provision cannot be sustained; M.P. No.1 of 2011 is closed.

Settlement Commission - bar under section 32-O(1)(i) of the Central Excise Act, 1944 - principles of natural justice - proceedings pursuant to section 32E of the Central Excise Act, 1944 - remand for reconsideration with opportunity to be heard

Bar under section 32-O(1)(i) of the Central Excise Act, 1944 - principles of natural justice - Settlement Commission - Whether the Settlement Commission could decline consideration of the settlement application by invoking the bar under section 32-O(1)(i) after having earlier decided to proceed with the application, without giving notice and opportunity to the applicants. - HELD THAT: - The Commission had, by order dated 20th December, 2013, decided to proceed with the Petitioners' application filed under section 32E. Subsequently the Commission declined consideration by referring to an earlier settlement and by observing alleged fraud and mis statement in returns, invoking the bar in section 32 O(1). The High Court held that once the Commission had determined to proceed with the application (and the Revenue had no objection to admission), it was not proper for the Commission to abandon or review that decision without putting the applicants on notice about the contemplated application of section 32 O and affording them an opportunity to be heard. In the peculiar facts, the change of course without notice offended procedural fairness; consequently the Commission's order declining consideration was set aside and the matter remitted for fresh consideration in accordance with the earlier decision to proceed, after giving the parties an opportunity to be heard. [Paras 9, 10]

Order of the Settlement Commission declining consideration under section 32 O(1)(i) set aside; matter remanded to the Commission to proceed with the application in accordance with its order dated 20th December, 2013 and after hearing the parties.

Final Conclusion: The High Court set aside the Settlement Commission's order dated 28th July, 2014 and remanded the application for reconsideration, directing the Commission to proceed with the application as per its decision dated 20th December, 2013 after giving the parties an opportunity of hearing.

Assembly of CKD/SKD components into a distinct commercial product amounts to manufacture under Section 2(f) - conversion of an incomplete or unfinished article having the essential character into a complete article amounts to manufacture (Note 6 to Section XVII) - Rule 2(a) interpretative fiction treating CKD/parts as complete for customs purposes does not negate manufacture for Central Excise - proviso to Section 11A - extended limitation and penalties where removal without disclosure amounts to suppression

Assembly of CKD/SKD components into a distinct commercial product amounts to manufacture under Section 2(f) - conversion of an incomplete or unfinished article having the essential character into a complete article amounts to manufacture (Note 6 to Section XVII) - Rule 2(a) interpretative fiction treating CKD/parts as complete for customs purposes does not negate manufacture for Central Excise - Assembling the imported CKD parts into lottery terminals amounts to 'manufacture' and is chargeable to Central Excise duty. - HELD THAT: - The adjudicating record (packing list, bill of material, CA certificate) shows the imported lotto terminal comprised numerous parts (114 components) and was supplied in knockdown kits which, as imported, were not capable of functioning as a lottery terminal. The Tribunal applied the express test in Note 6 to the relevant Section and the definition in Section 2(f): conversion/completion of an article which is incomplete or unfinished but having the essential character into a complete article amounts to manufacture. The assembly and systematic testing of the imported components therefore creates a distinct excisable product (lottery terminal) and is manufacture. Rule 2(a), which for customs purposes may treat CKD/parts as deemed complete for classification, is a limited interpretative fiction for charging customs duty and does not determine the question of manufacture under the Central Excise law. Precedents and earlier Tribunal decisions on assembly into complete equipment were applied to support the conclusion that the activity is manufacture and excisable (the adjudicator treated the product under chapter heading 84709010 as an assembled machine).

Demand for Central Excise duty on assembled lottery terminals upheld; assembly held to be manufacture.

Rule 2(a) interpretative fiction treating CKD/parts as complete for customs purposes does not negate manufacture for Central Excise - The appellants' reliance on customs classification or the assertion that the imported kits were 'complete' machines does not preclude a finding of manufacture for excise. - HELD THAT: - The Tribunal distinguished the customs assessment fiction under Rule 2(a) from the statutory test of manufacture under Section 2(f). While Rule 2(a) may classify CKD/complete sets as complete machines for customs duty assessment, the imported consignments here comprised component parts that required systematic assembly and testing to become operative. Consequently, customs classification or prior payment of customs duty does not extinguish excise liability arising from manufacturing activity in India.

Customs classification or payment of customs duty does not negate excise liability for manufacture; excise demand sustained.

Proviso to Section 11A - extended limitation and penalties where removal without disclosure amounts to suppression - The claim of export and the contention on limitation were rejected; extended period invoked and penalties sustained. - HELD THAT: - The appellants failed to produce export documentation (shipping bills, export invoices, ARE1/CT1) to substantiate any export of the assembled terminals. Mere appearance of the appellants' name as a supporting manufacturer in an advance licence does not establish export or link manufactured goods to claimed exports. The departmental finding that the appellants had earlier cleared similar assembled terminals on payment of duty but in the present instance cleared 1500 terminals without disclosure supports a finding of suppression with intent to evade duty. On these facts the proviso to Section 11A was correctly invoked to extend limitation and penalties were rightly imposed.

Export claim and limitation objection rejected; extended period applicable and penalties upheld.

Final Conclusion: The Tribunal dismissed the appeals: assembly of the imported CKD components into lottery terminals amounts to manufacture liable to Central Excise (classified under the assembled machine heading), the appellants' export claim and limitation defence were not proved, and extended period and penalties were lawfully invoked and sustained.

Interpretation of Section 21D - Transitional Provisions - applicability of transitional provisions to pending proceedings - unamended procedure under sections 21, 22 and 22A - distinction between complaint and information - broader meaning of the word 'complaint' in section 21D

Interpretation of Section 21D - Transitional Provisions - applicability of transitional provisions to pending proceedings - broader meaning of the word 'complaint' in section 21D - Whether proceedings pending before the Institute/Council prior to the commencement of the Chartered Accountants (Amendment) Act, 2006 are to be governed by the pre-amendment procedure or by the amended procedure. - HELD THAT: - The Division Bench construed Section 21D as a clear transitional provision entitling all complaints pending before the Council, any inquiry initiated by the Disciplinary Committee, and any reference or appeal made to a High Court prior to the amendment to continue to be governed as if the Act had not been amended. The court rejected any narrow distinction for the purposes of Section 21D between matters arising from a 'complaint' filed by a third party and an 'information' initiated suo motu or otherwise, holding that such a distinction is not relevant to the operation of the transitional provision. The word 'complaint' in Section 21D was given a broader and wider meaning to include pending matters based on information which have been brought to and considered by the Institute/Council. Treating complaint and information cases differently for transitional application would produce an anomalous result whereby complaint cases would follow the old procedure while information cases pending on the Council's docket would be subject to the new procedure, contrary to legislative intent. Consequently, pending proceedings are to be governed by the unamended procedure (including sections 21, 22 and 22A) applicable before the 2006 amendment.

Proceedings pending before the Council or Disciplinary Committee prior to commencement of the 2006 Amendment shall continue under the pre-amendment procedure; no distinction between complaint and information for Section 21D's operation.

Final Conclusion: The appeal is dismissed. The High Court's conclusion that Section 21D preserves the pre-amendment procedure for pending proceedings is upheld and pending matters shall be governed by the unamended provisions.