TaxTMI Updates e-Newsletter
Nov 04,2013

Deeming provision under section 50C - binding effect of stamp valuation authority on Assessing Officer - non binding character of District Valuation Officer report on appellate authority - limits on appellate relief - ascertainable features of property versus personal or distress circumstances - power of Assessing Officer to adopt guideline value when DVO report is not available before completion of assessment

Deeming provision under section 50C - power of Assessing Officer to adopt guideline value when DVO report is not available before completion of assessment - Admissibility of the Assessing Officer's adoption of the stamp guideline value in computation of long term capital gains where the consideration stated in the sale deed was less than the guideline value and the DVO report was not available before completion of assessment. - HELD THAT: - Section 50C is a deeming provision which mandates that where the consideration stated in the transfer document is less than the value adopted or assessable by the stamp valuation authority, that guideline value shall be deemed to be the full value of consideration for the purpose of section 48. A deeming provision must be strictly applied and the Assessing Officer is bound to adopt the guideline value when the document consideration is lower. In the present case the guideline value exceeded the sale consideration and the Assessing Officer, having referred the matter to the District Valuation Officer, did not have the DVO report available before the statutory limitation for completing assessment expired. Given the unavailability of the DVO report within time, the Assessing Officer was obliged to complete the assessment by adopting the guideline value. There is therefore no infirmity in the Assessing Officer's adoption of the guideline value under section 50C in these circumstances.

The Assessing Officer rightly adopted the guideline value under section 50C when the DVO report was not available prior to completion of assessment.

Non binding character of District Valuation Officer report on appellate authority - limits on appellate relief - ascertainable features of property versus personal or distress circumstances - Extent of the appellate authority's power to re determine value adopted under section 50C and permissible grounds for granting relief below the guideline or DVO values. - HELD THAT: - Although the DVO's report is relevant it is not binding on the Commissioner of Income tax (Appeals); the appellate authority may examine the matter afresh and can adopt a value different from both the guideline value and the DVO valuation. However, any interference by the appellate authority must be founded on reasons within the four corners of law and on the apparent features of the property (valuation aspects), not on extraneous personal circumstances of the assessee such as distress sale, misfortunes or repayment pressures. Section 50C provides the statutory route for relief by way of reference to the DVO; appellate relief must be based on legal and evidentiary grounds pertaining to the property's valuation and not merely on the assessee's hardships.

The Commissioner (Appeals) is competent to go below the guideline or DVO value, but may not grant relief based on personal or distress circumstances; relief must be grounded on property related valuation considerations.

Limits on appellate relief - ascertainable features of property versus personal or distress circumstances - non binding character of District Valuation Officer report on appellate authority - Appropriate corrected value to be adopted for computation of long term capital gains in the present case after excluding distress sale considerations relied upon by the Commissioner (Appeals). - HELD THAT: - The Tribunal accepted that neither the guideline value nor the DVO valuation could be treated as sacrosanct and that value estimates varied across authorities and points in time; equally, the Tribunal held that the Commissioner (Appeals) erred to the extent he was carried away by the assessee's plea of distress sale and other personal hardships which are impermissible bases for modification under section 50C. Balancing the available valuations and the permissible bases for interference, the Tribunal exercised its appellate discretion to refix the consideration accountable under section 50C at an intermediate value that reflects the tribunal's assessment of the property related evidence and valuations considered by the authorities below.

Consideration for the purposes of section 50C is refixed at Rs. 2.5 crores and the Assessing Officer is directed to modify the long term capital gains accordingly; the Revenue appeal is partly allowed.

Final Conclusion: The Assessing Officer properly adopted the stamp guideline value under section 50C when the DVO report was not available before completion of assessment; the appellate authority may independently re determine value but must base any reduction on property related valuation grounds and not on the assessee's distress or personal circumstances. Applying these principles, the Tribunal refixed the consideration at Rs. 2.5 crores and directed modification of the long term capital gains, partly allowing the Revenue's appeal.

Addition on account of low gross profit - maintenance of day-to-day stock register - acceptance of books of account - burden of proving bogus purchases or unrecorded sales - appreciation of evidence by the assessing officer - scope of appellate review by CIT(A)

Addition on account of low gross profit - maintenance of day-to-day stock register - acceptance of books of account - burden of proving bogus purchases or unrecorded sales - Deletion of the addition of Rs.9,83,904 made by the Assessing Officer on account of low gross profit was upheld by the CIT(A) and challenged by the Revenue. - HELD THAT: - The Tribunal found that although the gross profit rate declined from 22.60% in the preceding year to 14.39% in the relevant year, the assessee's turnover increased substantially. The assessee had produced item-wise day-to-day stock registers and supporting purchase bills before the AO and on record before the Tribunal. The CIT(A) recorded that product-wise quantitative details and valuations of closing stock with supporting bills were submitted and that there was no adverse remark in the audit report regarding maintenance of stock records. The AO did not point to any specific defect in the books of account nor produced material to demonstrate that purchases were bogus or sales were unrecorded or undervalued. The CIT(A)'s conclusions that variations in purchase and sale prices, introduction or discontinuation of certain products and differing margins explained the fall in gross profit were based on evidence on record and were not controverted by the Revenue. On these facts, the Tribunal held that the AO's factual appreciation was contrary to the evidence and there was no justification to sustain the addition; the CIT(A)'s speaking order was accordingly confirmed.

The deletion of the gross-profit addition by the CIT(A) is confirmed and the Revenue's appeal is dismissed.

Final Conclusion: The Tribunal confirms the appellate authority's deletion of the addition on account of low gross profit for Assessment Year 2006-07, finding the assessee's books and supporting records reliable and the AO's addition unsustainable; the Revenue's appeal is dismissed.

Deduction under section 80-IB(4) - Insurance claim as recoupment of loss of stock-in-trade - Capital receipt versus revenue receipt - Direct nexus with the industrial undertaking - Deductibility of compensation for failure to supply

Deduction under section 80-IB(4) - Insurance claim as recoupment of loss of stock-in-trade - Capital receipt versus revenue receipt - Allowability of deduction under section 80-IB(4) in respect of insurance claim received for loss due to floods, as adjusted against cost of raw material - HELD THAT: - The assessee received a total insurance settlement of Rs.90.91 lakh comprising loss of stock-in-trade and loss to plant and machinery. In the earlier year Rs.80 lakh (part of the stock-in-trade component) was adjusted and allowed as deduction. For the assessment year under appeal the assessee sought deduction by adjusting the remaining Rs.10.91 lakh wholly against raw material cost. The Tribunal held that the portion of the insurance claim attributable to plant and machinery is capital in nature and cannot be set off as a recoupment of raw material cost; that portion is not eligible for deduction under section 80-IB(4). However, the Tribunal found that Rs.5.07 lakh related to loss of raw material and, following precedents where insurance proceeds for destroyed goods were treated as eligible for deduction under similar incentive provisions, allowed deduction under section 80-IB(4) in respect of that portion. [Paras 4, 5]

Deduction under section 80-IB(4) allowed in respect of Rs.5.07 lakh (insurance for loss of raw material); disallowance upheld insofar as Rs.5.84 lakh attributable to plant and machinery is capital and not deductible.

Deduction under section 80-IB(4) - Direct nexus with the industrial undertaking - Deductibility of compensation for failure to supply - Allowability of deduction under section 80-IB(4) in respect of compensation (liquidated damages) received for non-supply of raw material - HELD THAT: - The assessee claimed that compensation received from a contracted supplier represented recoupment of loss suffered when it had to buy raw material at a higher price from the market. The Tribunal observed that to qualify under section 80-IB(4) the income must be shown to be derived from the industrial undertaking and there must be a direct nexus between the receipt and the undertaking's operations. The assessee failed to produce documentary evidence establishing that higher purchase price or the direct link between the compensation and increased raw material cost. In absence of such evidence the compensation could not be treated as income derived from the industrial undertaking eligible for deduction under section 80-IB(4). [Paras 6, 7]

Deduction under section 80-IB(4) in respect of the Rs.3 lakh compensation denied for lack of evidence of nexus with the industrial undertaking.

Deduction under section 80-IB(4) - Claim of deduction in respect of interest on L/C margin - HELD THAT: - The assessee did not press the claim for deduction of interest on L/C margin before the Tribunal. Consequently the appellate authorities' view declining that relief is left undisturbed. [Paras 3]

Claim relating to interest on L/C margin not pressed and the impugned order is upheld on this point.

Deduction under section 80-IB(4) - Challenge to addition of administrative cost apportioned to earning of dividend income - HELD THAT: - The ground attacking confirmation of addition as administrative cost in relation to dividend income was not pressed by the assessee before the Tribunal. [Paras 8]

Ground not pressed and therefore dismissed.

Final Conclusion: Appeal partly allowed: deduction under section 80-IB(4) granted in respect of the portion of the insurance claim attributable to loss of raw material; disallowance sustained for the portion attributable to plant and machinery and for the compensation amount due to lack of nexus; claims not pressed before the Tribunal are upheld/dismissed accordingly.

Penalty under Section 272A(2)(k) of the Income tax Act, 1961 - quasi criminal nature of penalty proceedings - mens rea requirement for imposition of penalty - reasonable cause / bonafide breach as defence to penalty - e filing of TDS quarterly statements and technical/defaults - no loss to Revenue as relevant factor in penalty assessment

Penalty under Section 272A(2)(k) of the Income tax Act, 1961 - reasonable cause / bonafide breach as defence to penalty - e filing of TDS quarterly statements and technical/defaults - no loss to Revenue as relevant factor in penalty assessment - Validity of penalty levied under Section 272A(2)(k) for delayed filing of e TDS quarterly statements - HELD THAT: - The Tribunal held that the penalty was not justified. The delay in filing e TDS statements was attributable to technical/administrative causes - reliance on third party/NSDL/franchisee for e filing, lack of PANs of deductees at the time of upload, and departmental processes - and the tax deducted was deposited on time. The authorities below mechanically imposed penalty without adequately considering the assessee's explanation or the fact that statements were eventually uploaded (by franchise) and that there was no loss to Revenue. Consistent precedent and consolidated reasoning of the Bench establish that for a quasi criminal penalty under Section 272A(2)(k), mens rea, willful neglect or contumacious conduct is required; a bona fide/technical delay caused by dependency on designated e filing processes and absence of deliberate default constitutes reasonable cause and disentitles routine imposition of penalty. Applying these principles to the facts, the Tribunal cancelled the penalty. [Paras 6, 7]

Impugned penalty under Section 272A(2)(k) cancelled and the appeal allowed.

Final Conclusion: Penalty levied under Section 272A(2)(k) for delayed e TDS filing was set aside: the delay was technical/bonafide, tax was deposited, there was no willful default or loss to Revenue, and routine mechanical imposition of penalty was not justified.

Deduction under section 80-HHE - total turnover - profits of the business - eligible business - apportionment formula - export turnover - business specific deduction

Total turnover - eligible business - apportionment formula - Whether 'total turnover' for computing deduction under section 80-HHE means the turnover of the eligible computer software business (eligible unit) or the turnover of all the assessee's units taken together. - HELD THAT: - The Court held that section 80-HHE confers a deduction in respect of profits derived from the specified business of export of computer software (including transmission and related technical services) and is business specific rather than unit specific. The apportionment mandated by sub section (3) requires comparing export turnover with the total turnover of the eligible business so as to limit qualifying profits to those attributable to the export of computer software. A literal or global reading that takes the total turnover of all the assessee's businesses together would produce anomalies - diluting or improperly extending the benefit to non eligible activities and defeating the purpose of the apportionment formula. Though cognate provisions (such as section 80-HHC) have been interpreted to include broader turnover, contextual differences and legislative amendments addressing anomalies in 80-HHC support a construction of 80-HHE that confines total turnover to the computer software business. Accordingly, only the export and total turnover of the eligible computer software business are to be used in the denominator and numerator respectively for apportionment under section 80-HHE(3). [Paras 5, 6]

The 'total turnover' for the purposes of section 80-HHE(3) is the total turnover of the eligible computer software business (the eligible business), and the apportionment under the section must be made by reference to the export turnover and the total turnover of that eligible business.

Profits of the business - business specific deduction - Whether the 'profits' to be apportioned under section 80-HHE(3) are the profits of the eligible computer software business or must be taken as the profits of all businesses of the assessee. - HELD THAT: - The Court determined that the qualifying deduction is limited to profits derived from the specified business of computer software. Explanation (d) defines 'profits of the business' as profits computed under the head 'Profits and gains of business or profession' subject to specified adjustments, and the purposive construction of the section requires that only the profits of the eligible business be apportioned. Taking global profits across unrelated businesses while restricting apportionment to the eligible unit's profit would produce inconsistent and unjust results; therefore the profits refer to those of the computer software business and not to the assessee's entire business portfolio. [Paras 5, 6]

The 'profits' to be apportioned under section 80-HHE(3) are the profits of the eligible computer software business; deduction is limited to profits attributable to that specified activity.

Final Conclusion: Appeal allowed: deduction under section 80-HHE is to be computed by apportioning the profits of the eligible computer software business using the ratio of export turnover to the total turnover of that eligible business; the assessee's method of computation was approved.

Business income versus capital gains - intention and conduct in characterisation of share transactions - number and volume of transactions as relevant factors - holding period not decisive for characterisation - each assessment year is a separate unit of assessment - onus to demonstrate distinction between investment and trading

Business income versus capital gains - intention and conduct in characterisation of share transactions - number and volume of transactions as relevant factors - holding period not decisive for characterisation - each assessment year is a separate unit of assessment - onus to demonstrate distinction between investment and trading - Whether the income of Rs.25,40,974 arising from share transactions executed directly through ICICI Online in Assessment Year 2006-07 is to be treated as business income or as short term capital gains. - HELD THAT: - The Tribunal held that, on the facts of the year under consideration, the assessee's transactions acquired the characteristics of a business. The decision rests on a holistic appraisal of conduct and circumstances rather than any single criterion. Although delivery based transactions and some holdings exceeded 200 days, the assessee engaged continuously and regularly throughout the year in purchase and sale of shares, kept constant vigil over market movements, and carried out voluminous transactions across many scrips, indicating full time attention and organised activity with a view to profit (paras. 4, 4.1-4.4). The Tribunal rejected the submission that prior treatment in earlier years would be decisive, reiterating that each assessment year is a separate unit and the characterisation may change with altered facts (para. 4.3). It also held that holding period or the fact that many transactions involved delivery cannot be determinative; what matters is the overall pattern of transactions, intent and conduct (paras. 4.4, 4.6). Reliance on authorities affirming that factual matrix governs the classification was considered, and the Tribunal accepted that the multiplicity and manner of transactions justified treating the activities as trading in shares rather than mere investment (paras. 4.7-4.8). [Paras 4, 5]

The income arising from the transactions executed directly through ICICI Online in Assessment Year 2006-07 is to be treated as business income and assessed accordingly.

Final Conclusion: The Revenue's appeal succeeds; the Tribunal directed that the impugned income from ICICI Online transactions for Assessment Year 2006-07 be treated as business income and assessed as such.

Eligibility for deduction under section 80IB(10) - computation of plot area for qualifying project-treatment of land earmarked for road widening - requirement of completion certificate for projects where percentage completion method is followed - liberal construction of fiscal incentives

Eligibility for deduction under section 80IB(10) - computation of plot area for qualifying project-treatment of land earmarked for road widening - Whether the area of land earmarked for road widening (though in physical possession of the developer) can be excluded for determining whether the project is on a plot of minimum one acre for the purpose of section 80IB(10). - HELD THAT: - The Tribunal found that clause (b) of section 80IB(10) requires the housing project to be on a plot having a minimum area of one acre. The Municipal sanction had earmarked a portion of the originally larger plot for road widening; notwithstanding that the developer/flat owners may be in possession of that portion and may be utilising it, the sanctioned plan treats that portion as road area and it cannot legally be treated as part of the project area. However, the Tribunal also held that where the project was sanctioned and the developer entered into development arrangements based on a plot exceeding one acre, and the earmarking occurred after such sanction/entry, a liberal construction of the provision in favour of the assessee is warranted. Applying these principles to the facts, the Tribunal concluded on the material before it (approved plan and sanction) that the plot area available to the assessee for the housing project was to be treated as exceeding one acre for the purposes of section 80IB(10), and therefore the claim could not be denied on the ground that the net plot (excluding earmarked road) was less than one acre. [Paras 11, 13]

Claim of deduction under section 80IB(10) cannot be denied on the ground that area earmarked for roads reduces the project area below one acre where the project was sanctioned and undertaken on a plot exceeding one acre and the earmarking does not legally exclude entitlement to benefit.

Requirement of completion certificate for projects where percentage completion method is followed - liberal construction of fiscal incentives - Whether absence of a completion certificate in the impugned year precludes granting deduction under section 80IB(10) when the assessee follows the percentage completion method and claims deduction year-to-year. - HELD THAT: - The Tribunal observed that Explanation (ii) to clause (a) of section 80IB(10) defines 'date of completion' as the date on which the local authority issues the completion certificate, but this requirement is to ensure projects are completed within the statutory time-span rather than to deny year-to-year claims where the assessee accounts under the percentage completion method. Relying on the purposive and liberal construction of tax incentives, the Tribunal held that an assessee showing profit on partial completion in each year is entitled to claim deduction year-to-year; insistence that deduction be granted only in the year of final completion would produce an anomalous result of taxing income in one year and granting the connected deduction in a later year. The Tribunal noted CBDT Instruction No. 4 of 2009 which permits year-to-year claims subject to withdrawal if the project ultimately exceeds the prescribed completion period, and therefore the Assessing Officer cannot insist on production of the final completion certificate in the impugned year as a precondition to allow the deduction. [Paras 15, 16, 17, 18, 19]

Absence of the completion certificate in the impugned year does not by itself disentitle an assessee following the percentage completion method from claiming deduction under section 80IB(10); the Assessing Officer is directed to consider the claim in light of these observations.

Final Conclusion: Appeal allowed: deduction under section 80IB(10) to be admitted subject to the Assessing Officer considering the claim in accordance with the Tribunal's conclusions on plot-area computation (treatment of land earmarked for roads) and on the non-requirement of the final completion certificate in the impugned year where the assessee follows the percentage completion method, with withdrawal of earlier years' deduction only if the project ultimately exceeds the statutory time-limit.

Finance lease vs operating lease - Accounting Standard 19 on leases - capitalization of finance lease assets as capital expenditure - allowability of interest as business expenditure under section 36(1)(iii) - allowability of depreciation under section 32(1) - compensatory v. penal character of statutory imposts under Explanation to section 37(1) - application of coordinate-bench precedent on identical facts

Finance lease vs operating lease - Accounting Standard 19 on leases - capitalization of finance lease assets as capital expenditure - The lease transaction in question is a finance lease and not an operating lease; therefore lease rental claimed as revenue expenditure is not allowable. - HELD THAT: - The Tribunal held that the substance of the transaction, as reflected in the assessee's books and the lease agreement, corresponds to a finance lease. The assessee had capitalized the wagons as fixed assets in accordance with Accounting Standard 19, treated amounts paid as acquisition of finance-lease assets (capital expenditure), recorded loan funding and debited interest and depreciation in profit and loss. The agreement's terms (fixed non-cancellable payment over 25 months, security deposit approximating cost, option to buy, and installment/EMI structure) indicate transfer of risks and rewards of ownership and that payments are in substance towards purchase. Reliance was placed on the guiding principles in the Supreme Court decisions and the Special Bench of the ITAT (Indusind Bank Ltd.) that apply the Asea Brown Boveri test, leading to the conclusion that the transaction is a finance lease and the lease-rental claim as revenue deduction cannot be sustained. [Paras 2]

Lease transaction held to be a finance lease; claim of lease rental as revenue expenditure disallowed.

Allowability of interest as business expenditure under section 36(1)(iii) - allowability of depreciation under section 32(1) - application of coordinate-bench precedent on identical facts - The assessee is entitled to claim interest on borrowings used to finance the purchase of the wagons under section 36(1)(iii) and depreciation on the assets under section 32(1); the CIT(A)'s directions to verify and allow such interest and depreciation were sustained. - HELD THAT: - Having held the transaction to be a finance lease, the Tribunal accepted the view - following the Special Bench precedent (Indusind Bank Ltd.) - that the lessee (assessee) may claim interest expense attributable to financing the acquisition and depreciation on the asset. The CIT(A) had directed the AO to verify the loan amounts, interest payments, applicable rate and depreciation and allow the claims accordingly; the Tribunal found these directions appropriate and not a nullity or impermissible 'set aside' in the context of the factual enquiries directed. [Paras 2]

Direction to verify and allow interest under s.36(1)(iii) and depreciation under s.32(1) sustained; assessee entitled to claim such deductions subject to verification.

Proportionate disallowance of interest - presumption as to application of interest-free funds - application of coordinate-bench precedent on identical facts - Disallowance of interest on account of interest-free advances to sister concerns and directors was deleted; the assessee's challenge to CIT(A)'s partial disallowance succeeded following a co-ordinate Bench decision. - HELD THAT: - For advances made interest-free to sister concerns and directors, the AO had computed disallowance by imputing interest on total outstanding. The Tribunal noted that a co-ordinate Bench in the assessee's own case for AY 2006-07 had concluded that where interest-free funds (shareholders' funds/free reserves) are sufficient to meet such advances and the assessee maintains mixed accounts, a presumption arises that interest-free funds were applied, and therefore no proportionate disallowance is leviable. Applying that coordinate-bench precedent on identical facts, the Tribunal set aside the CIT(A)'s order on this issue and directed deletion of the disallowance. [Paras 3]

Disallowance of interest on interest-free advances deleted; Ground allowed for the assessee and related Revenue grounds rendered infructuous.

Compensatory v. penal character of statutory imposts under Explanation to section 37(1) - application of coordinate-bench precedent on identical facts - Punitive/punishment-styled charges paid to Railways were held to be compensatory in nature and therefore allowable, and the Revenue's challenge to the allowance was dismissed. - HELD THAT: - The Tribunal followed the earlier co-ordinate Bench decision in the assessee's own case for AY 2006-07 which analysed the nature of the charges paid for overloading. Applying the principle from Mahalaxmi Sugar Mills and subsequent authorities, the Tribunal determined that despite the label 'punitive charges', the payments were compensatory (paid for permitting overloading) and not penal within the scope of the Explanation to section 37(1), and therefore deductible. The Revenue's ground disputing that allowance was dismissed. [Paras 4]

Punitive charges to Railways held compensatory and allowable; Revenue's ground dismissed.

Final Conclusion: The assessee's appeal is partly allowed and the Revenue's appeal is dismissed. The lease was held to be a finance lease (lease rental disallowed), but the assessee is entitled to interest and depreciation subject to verification; disallowance of interest on interest-free advances and disallowance of punitive charges were deleted/held allowable following coordinate-bench precedents.

Penalty under section 271(1)(c) for concealment of income - Estimation of income by application of net profit rate - Burden of proof for penalty - mens rea and concealment - Independence of penalty proceedings from assessment proceedings - Requirement of cogent evidence to prove concealment where addition is based on estimation

Penalty under section 271(1)(c) for concealment of income - Estimation of income by application of net profit rate - Requirement of cogent evidence to prove concealment where addition is based on estimation - Burden of proof for penalty - mens rea and concealment - Independence of penalty proceedings from assessment proceedings - Whether penalty under section 271(1)(c) could be sustained where the addition upheld in appeal was made by estimating net profit rate and no independent evidence of concealment or falsity of explanation was brought on record - HELD THAT: - While framing assessments the Assessing Officer applied an estimated net profit rate (8%), which was reduced by the CIT(A) to 5.18% and that reduction was upheld by the Tribunal. The Assessing Officer imposed penalty with reference to the addition resulting from the estimation. The CIT(A) deleted the penalty after recording that no independent or cogent evidence was produced to show that the amount sustained on estimation represented income from undisclosed sources or that the assessee had the requisite guilty mind. The Tribunal examined authorities holding that mere non-acceptance of an explanation or an addition based on estimate does not, by itself, establish concealment; the burden lies on the Department to bring evidence establishing falsity of explanation and mens rea. Explanation 1 does not relieve the Department of the initial duty to record prima facie concealment. In the absence of any positive, independent material (despite search) proving that the estimated addition was concealed income, the imposition of penalty was unjustified. Applying these principles to both assessment years (facts pari materia), the Tribunal found no reason to interfere with the CIT(A)'s deletion of penalty.

Penalty imposed under section 271(1)(c) deleted for the additions based on estimation; appeals of the Revenue dismissed.

Final Conclusion: The Tribunal affirmed the CIT(A)'s deletion of penalty u/s 271(1)(c) for assessment years 2004-05 and 2005-06, holding that additions sustained purely on estimation without independent evidence of concealment or mens rea do not justify levy of penalty; Revenue's appeals are dismissed.

Deduction under section 10A - tax holiday travels with the undertaking on slump sale subject to factual verification - exclusion of foreign currency expenses from both export turnover and total turnover for section 10A computation - comparability and turnover filter in transfer pricing - functional comparability under TNMM - use of segmental profit margin for comparables having product and service segments - working capital adjustment in transfer pricing comparables - consistency/continuity in transfer pricing treatment across assessment years - remand for verification

Deduction under section 10A - tax holiday travels with the undertaking on slump sale subject to factual verification - Claim for deduction under section 10A in respect of the STPI unit transferred to the assessee on a going-concern slump sale - HELD THAT: - The Tribunal examined the Business Transfer Agreement evidencing a transfer of the STPI unit as a going concern. It considered precedents of the Tribunal and the jurisdictional High Court and the Board's Circular No.01/2013 clarifying that change of ownership by itself should not deny tax holiday to an otherwise eligible undertaking, subject to absence of splitting or reconstruction. Applying these authorities and the contractual documentary record, the Tribunal held that the STPI undertaking continued to be an eligible undertaking and directed allowance of deduction under section 10A. Separately, the Tribunal held that for computation of relief under section 10A the foreign currency expenses excluded from export turnover must also be reduced from the total turnover so as to maintain parity between numerator and denominator when computing the deduction. [Paras 3]

The assessee's claim of deduction under section 10A for the STPI unit is allowed; the AO is directed to exclude foreign currency expenses from both export turnover and total turnover while computing the deduction.

Comparability and turnover filter in transfer pricing - functional comparability under TNMM - working capital adjustment in transfer pricing comparables - use of segmental profit margin for comparables having product and service segments - Validity of the Transfer Pricing Officer's selection of comparables and the ALP determination for software research and development services - HELD THAT: - The Tribunal applied precedents of the Bangalore Benches regarding appropriate turnover range for comparables and comparability tests under TNMM. It held that companies with turnover materially exceeding the assessee (identified as companies with turnover above the Rs.1-200 crore range in earlier decisions) must be excluded; it also held that two companies (Avani Cimcom Technologies Ltd. and Celestial Labs Ltd.) were functionally dissimilar and must be excluded. For Megasoft Ltd., the Tribunal accepted the comparable but directed use of the segmental (software service) margin of 23.11% rather than entity-level margin. After excluding the specified companies and applying the directed segmental margin, the Tribunal directed the AO to recompute the ALP with working capital adjustments and to make transfer pricing adjustment if the difference exceeds the statutory 5% band. [Paras 4]

Eight high turnover companies and two functionally dissimilar companies are to be excluded from the TPO's comparable set; Megasoft's segmental margin is to be used; the AO is directed to recompute ALP in accordance with these directions and make adjustment only if the margin difference exceeds the 5% band.

Functional comparability under TNMM - consistency/continuity in transfer pricing treatment across assessment years - remand for verification - Arm's length determination for pre sales and marketing support services and whether the same treatment adopted in AY 2008 09 must be applied for AY 2007 08 - HELD THAT: - The Tribunal found that the assessee did not have authority to bind the principal and therefore the TPO's characterization of the services as commission agency was inappropriate; however, because the TPO's comparables included commission agents and the factual matrix required verification regarding continuity of treatment, the Tribunal relied on precedent requiring uniformity across years where facts are the same. The Tribunal remitted the matter to the TPO/AO to verify whether the TPO had accepted similar transactions as ALP for AY 2008 09 and, if so, to adopt the assessee's TP analysis for AY 2007 08. [Paras 5]

The characterization as commission agency is inappropriate; the issue is remitted to the TPO/AO to examine AY 2008 09 treatment and, if similar transactions were accepted as ALP, to adopt the assessee's TP analysis for AY 2007 08.

Final Conclusion: The appeal is partly allowed: deduction under section 10A for the STPI unit is permitted and the AO is directed to exclude foreign currency expenses from both export and total turnover when computing the deduction; for software R&D services certain high turnover and functionally dissimilar comparables are excluded, Megasoft's segmental margin is to be used and the ALP is to be recomputed (adjustment only if outside the 5% band); the pre sales/marketing services issue is remitted for verification of consistency with AY 2008 09 and fresh consideration by the TPO/AO.

Reopening of assessment under section 147/notice under section 148 - failure to disclose fully and truly all material facts - change of opinion - reason to believe - tangible material - assessing officer's power to reassess versus power to review - deduction under section 80IA - market value for transfer to related concerns - borrowed satisfaction

Reopening of assessment under section 147/notice under section 148 - failure to disclose fully and truly all material facts - change of opinion - tangible material - assessing officer's power to reassess versus power to review - borrowed satisfaction - Validity of reopening the assessments (issuance of notice under section 148 and assumption of jurisdiction under section 147) for the assessment years 2003-04 to 2005-06. - HELD THAT: - The Tribunal upheld the CIT(A)'s conclusion that the reassessments were invalid. Where an assessment under section 143(3) has been completed and a notice under section 148 is issued beyond four years, the proviso to section 147 applies and reopening is permissible only if there was a failure by the assessee to disclose fully and truly all material facts. The AO's reasons merely re-stated audit objections and amounted to a fresh application of mind prompted by those objections rather than the discovery of any new tangible material. The AO had on record the assessee's disclosures (including Form No.10CCB and notes stating transfers were at fair market value) and had earlier examined and allowed the 80IA deduction; the reasons recorded did not identify any tangible material demonstrating escapement of income. Reliance on audit observations to found reopening, where the AO himself had earlier disagreed with those observations, amounted to impermissible "borrowed satisfaction" and a change of opinion, which is not a valid basis for reopening. Applying the binding principles in Kelvinator and the decisions of the Bombay High Court (including Asian Paints and IL&FS), the Tribunal found the conditions precedent for exercise of jurisdiction under section 147 were not fulfilled and quashed the notices and consequential reassessments. [Paras 3, 6, 9]

Reopening of the assessments for AY 2003-04, AY 2004-05 and AY 2005-06 is invalid; the notices under section 148 and the consequential reassessments under section 147 are quashed.

Deduction under section 80IA - market value for transfer to related concerns - tangible material - academic issue - Whether the deduction claimed under section 80IA (on self-utilised electricity and the valuation/market value question) should be disallowed on merits. - HELD THAT: - The Tribunal did not decide the substantive claim on section 80IA because the reopening itself was quashed. The Tribunal noted that the question as to whether the transfer price for captive consumption should be the tariff fixed by regulatory authorities or an open-market price requires detailed adjudication and is pending consideration in another assessment year. Given the annulment of reassessment, the merits were treated as academic in these appeals and were not adjudicated. [Paras 7]

The merits of the section 80IA claim are not decided in these appeals and are treated as academic; no adjudication on the substantive claim was undertaken.

Final Conclusion: The Tribunal upheld the CIT(A)'s quashing of the reassessments for AY 2003-04, AY 2004-05 and AY 2005-06 on the ground that the conditions for reopening under section 147 were not satisfied (reopening amounted to a mere change of opinion/borrowed satisfaction and lacked tangible material); consequently, the notices under section 148 and resulting reassessments are annulled and the merit issues under section 80IA were not decided as they were rendered academic.

Deduction under section 80IA(4) - developer versus contractor test - clarificatory retrospective effect of amendment - binding effect of jurisdictional High Court directions - application of section 255(4) - opinion of Third Member and effect on Division Bench

Binding effect of jurisdictional High Court directions - application of section 255(4) - opinion of Third Member and effect on Division Bench - Tribunal's power to consider and follow the jurisdictional High Court decision in ABG Heavy Industries while giving effect to the Third Member's opinion under section 255(4). - HELD THAT: - The Tribunal observed that the Hon'ble Bombay High Court, in the appeals filed by the assessee, expressly permitted withdrawal and directed the Tribunal to take into account the decision in ABG Heavy Industries and other decisions while deciding afresh. In view of that clear direction from the jurisdictional High Court, the Tribunal was bound to consider the High Court's decision while giving effect to the Third Member s opinion under section 255(4). The Tribunal accordingly applied the High Court's reasoning when revisiting the matter and gave effect to that view notwithstanding the earlier opinion of the Third Member. [Paras 6]

Tribunal can and should consider the Bombay High Court decision in ABG Heavy Industries and other relevant decisions while giving effect to the Third Member's opinion under section 255(4).

Deduction under section 80IA(4) - developer versus contractor test - clarificatory retrospective effect of amendment - Whether the assessee is entitled to deduction under section 80IA(4) for the specified projects for A.Y. 2000-01 and A.Y. 2001-02 in light of the High Court's interpretation in ABG Heavy Industries and factual matrix showing assumption of investment and technical risk. - HELD THAT: - Relying on the jurisdictional High Court's interpretation in ABG Heavy Industries, the Tribunal held that (i) the clarificatory insertion of 'or' by the Finance Act, 2001 is to be treated as clarificatory and applicable from A.Y. 2000-01; (ii) an assessee need not develop an entire project to qualify - part performance and assumption of investment and technical risk with liability (including liquidated damages and bank guarantees) suffice to characterise the assessee as a developer rather than a mere contractor; and (iii) where the contractual and factual matrix (including tripartite agreements, work completion certificates, assignment/back-to-back arrangements and assumption of obligations) shows that the assessee effectively carried out and bore the risks of the project or its allotted portion, the assessee satisfies the conditions for deduction. Applying these principles to the facts, including the tripartite agreements, back-to-back arrangements, work completion certificates and the assessee's assumption of obligations, the Tribunal concluded that the assessee meets the requirements of section 80IA(4) for the projects in question. [Paras 10, 11, 14]

Assessing Officer is directed to allow the deduction under section 80IA(4) to the assessee for the projects in question for A.Y. 2000-01 and A.Y. 2001-02.

Final Conclusion: Following the jurisdictional High Court's decision in ABG Heavy Industries and on the facts showing assumption of investment and technical risk and direct contractual recognition, the Tribunal directed that the assessee be allowed deduction under section 80IA(4) for A.Y. 2000-01 and A.Y. 2001-02 and gave effect to the High Court-led view while departing from the earlier Third Member opinion.

Allowability of deduction under sections 80I and 80HH - netting of income and expenditure (benefit of netting) - nexus between income and expenditure for netting - treatment of specific non-core receipts for deduction computation (discounts, transport income, sale of waste and similar receipts) - deletion of disallowance of interest expenditure where overdraft not exclusively for advance tax - allowability of deduction under section 80HHC (90% exclusion) and netting for computing deduction - allowability of project expenses (other than interest) and remit to adjudication - deduction under section 35AB - verification of year of expenditure and six year instalment condition - application of section 234C in case of amalgamation with effect from a specified date - disallowance under section 40A(2) - reasonableness of related party prices

Allowability of deduction under sections 80I and 80HH - netting of income and expenditure (benefit of netting) - nexus between income and expenditure for netting - Allowability of deductions under sections 80I and 80HH in respect of various specified receipts and the scope for netting - HELD THAT: - For multiple items of income across Mandali, Kanpur, Indore and other divisions the Tribunal confirmed that the primary question of allowability of deduction under sections 80I/80HH is against the assessee (following earlier years), but held that where the assessee can establish a nexus between interest (or other) expenditure and the relevant income, the Assessing Officer should allow benefit of netting and exclude only the net income from business profit for the purpose of computing the deduction. Two items - discount and transport income - were specifically held in favour of the assessee by following the Tribunal's earlier decisions. For the remaining items the matters were set aside to the Assessing Officer to decide the netting aspect after the assessee establishes nexus; netting is to be allowed only to the extent the nexus is proved. [Paras 6, 7, 8, 9, 10]

Primary disallowance confirmed against the assessee for the specified incomes, but remitted to the Assessing Officer to decide netting on proof of nexus; discount and transport income allowed in favour of the assessee.

Deletion of disallowance of interest expenditure where overdraft not exclusively for advance tax - Disallowance of interest expenditure of Rs.56,670 was unjustified and deleted - HELD THAT: - The Tribunal observed that business receipts and payments were through the same bank accounts and there was no conclusive finding that the overdraft arose solely for payment of advance tax. The Assessing Officer and CIT(A) had not addressed the assessee's contentions that the overdraft was temporary and business-related and that the assessee also had substantial interest income. On these facts the disallowance was found not justified. [Paras 13]

Disallowance deleted.

Allowability of deduction under section 80HHC - 90% exclusion and netting for computation of deduction - nexus between income and expenditure for netting - Exclusion under section 80HHC and treatment of certain receipts - remit for netting where nexus can be established - HELD THAT: - The Tribunal directed that for receipts analogous to those considered under sections 80I/80HH, the Assessing Officer should examine and allow benefit of netting for computing deduction under section 80HHC if the assessee establishes nexus between expenditure and the receipts. Ninety percent of such net income only should be excluded from business profit. The matter was remitted to the Assessing Officer for this verification. [Paras 16]

Matter remitted to Assessing Officer to examine netting and, if nexus proved, allow 90% of net income exclusion under section 80HHC.

Treatment of receipts such as discount, transport income, sale of waste and similar receipts - Discounts, transport income and receipts from sale of poster papers/iron scrap/gunny bags/plastic waste held not to require exclusion from business profit in certain divisions - HELD THAT: - Following the Tribunal's earlier orders in the assessee's own case and the jurisdictional High Court precedent on similar receipts, the Tribunal allowed deduction in respect of discount and transport income (Indore) and similarly allowed treatment in favour of the assessee for sale of poster papers, iron scrap, gunny bags and plastic waste in the relevant divisions. No distinguishing facts were identified for the year under appeal. [Paras 9, 10, 27, 29]

These specific receipts were held in favour of the assessee and not required to be excluded from business profit.

Application of precedents of jurisdictional High Court and higher courts on interest from debtors and similar receipts - Interest from debtors and certain receipts treated per binding high court precedents - HELD THAT: - The Tribunal followed the jurisdictional High Court decisions (including Nirma Industries Ltd. and Harjivandas Juthabhai Zaveri) in holding that interest from debtors is to be considered part of sale price and no exclusion is warranted for computing certain deductions; similarly, receipts reducing cost (e.g., sale of waste materials) were treated in accordance with those precedents. [Paras 23, 29, 31, 56, 57]

Issues decided in favour of the assessee by following the cited high court precedents.

Remand for determination of netting in respect of various miscellaneous receipts (truck hire, insurance claim, exchange differences, interest on loans to staff, sale of diesel, etc.) - nexus between income and expenditure for netting - Various miscellaneous receipts were remitted to the Assessing Officer for fresh decision on netting subject to proof of nexus - HELD THAT: - For items such as truck hire charges, insurance claims, exchange rate differences, interest on loans to staff, sale of diesel and similar receipts the Tribunal set aside the CIT(A) orders and directed the Assessing Officer to re-examine allowability of netting; the burden is on the assessee to establish that relevant expenditure was incurred for earning these receipts and only net income, to the extent proved, is to be excluded. [Paras 27, 29, 33, 59]

Matters remitted to Assessing Officer to decide netting after affording opportunity and on proof of nexus; netting allowed only to the extent nexus is established.

Allowability of project expenses (other than interest) - remit to adjudication - Soda ash and Lab project expenditures (other than interest) remitted to the CIT(A) for fresh decision - HELD THAT: - While the Tribunal confirmed the CIT(A)'s finding on allowability of interest expenditure by following the jurisdictional High Court authority, it observed that CIT(A) had not specifically decided allowability of the remaining project expenses (depreciation and other expenses). The matter was therefore set aside and remitted to the CIT(A) for fresh adjudication of non interest project expenditures after hearing parties and considering relevant authorities. [Paras 41]

Order of CIT(A) set aside insofar as non interest project expenses are concerned and remitted for fresh decision; interest disallowance affirmed.

Deduction under section 35AB - verification of year of expenditure and six year instalment condition - Claim under section 35AB remitted to Assessing Officer for verification of year of incurrence and compliance with six year instalment rule - HELD THAT: - Because section 35AB relief is available in six yearly instalments from the year of expenditure, the Tribunal set aside the CIT(A)'s order and remitted the matter to the Assessing Officer to verify the year in which the relevant expenditure was incurred, whether the present year falls within the six year period and whether the claimed amount corresponds to the statutory instalment; allowance to follow if statutory conditions are met. [Paras 44]

Matter remitted to Assessing Officer for factual verification and decision in accordance with section 35AB.

Application of section 234C in case of amalgamation with effect from a specified date - Question of interest under section 234C in respect of advance tax installments around amalgamation remitted for fresh computation - HELD THAT: - The Tribunal held that since the amalgamation was with effect from 01-09-1996 (though court approval came later), income from that date is includible in the assessee's income for the year; interest under section 234C for installments falling after that date is payable unless advance tax was already paid by the amalgamating companies on the relevant dates, in which case such payments must be accounted. The matter was remitted to the Assessing Officer to compute interest after considering any advance tax paid by the amalgamating companies and giving the assessee opportunity to be heard. [Paras 61, 62]

Order of CIT(A) set aside; Assessing Officer to recompute interest under section 234C taking into account advance tax paid by amalgamating companies and effect of amalgamation from 01-09-1996.

Disallowance under section 40A(2) - reasonableness of related party prices - Disallowance under section 40A(2) rejected where price difference to related party was immaterial - HELD THAT: - The Tribunal observed that the price differential between related party and outsider was Rs.0.01 per kg (less than 2%) and that possible non price benefits (timely supply, credit terms, etc.) could exist; given the smallness of the difference, the Tribunal declined to interfere with the CIT(A)'s deletion and rejected the Revenue's ground. [Paras 50]

Disallowance under section 40A(2) rejected.

Entertainment expenses - onus to prove employee tea/coffee expenditure - Entertainment expenses remitted to Assessing Officer for fresh decision to the extent assessee can prove amounts incurred for tea/coffee for employees - HELD THAT: - Noting absence of clear discussion in earlier orders, the Tribunal directed the Assessing Officer to re examine the disallowance of entertainment expenses and to accept the part of expenditure established to be for tea and coffee for employees; the assessee must demonstrate the actual amount incurred. [Paras 36]

Matter remitted to Assessing Officer for fresh decision after providing opportunity to assessee to prove employee related tea/coffee expenditure.

Final Conclusion: Both appeals are partly allowed: several specific receipts (discount, transport income, sales of waste materials and certain interest from debtors) were allowed in favour of the assessee by following earlier Tribunal and High Court decisions; many other items were remitted to the Assessing Officer/CIT(A) for fresh consideration of netting or factual verification (nexus between income and expenditure, project expenses other than interest, section 35AB instalment eligibility, treatment of advance tax and section 234C on amalgamation, entertainment expenses), and one small interest disallowance and the section 40A(2) disallowance were deleted. Orders were passed subject to the directions and verifications indicated above.

Dependent agent permanent establishment - permanent establishment under Article 5(4) and 5(5) - Force of attraction rule (Article 7) - attribution of profits to permanent establishment - arm's length principle in related party compensation - application of Rule 10 for estimating attributable profit - section 9(1)(i) - income attributable to operations in India - matching of revenue and expenses / mercantile system of accounting

Matching of revenue and expenses / mercantile system of accounting - prior period expenses - Deductibility in AY 2002-03 of dealers' commission debited in that year though sales were executed in earlier years. - HELD THAT: - The Assessing Officer disallowed part of dealers' commission claimed in AY 2002-03 on the ground that the sales to which the commission related were executed in earlier years and, under mercantile accounting, expenses relating to those sales must be matched to the year of sale. The assessee contended that its practice was to recognise commission on receipt of dealer invoices after completion of installation and other formalities and produced no agreement showing that liability crystallised only on such completion. The Tribunal accepted the authorities below that, in the absence of a specific contractual arrangement fixing the liability to a later year, the commission attributable to earlier year's sales must be accounted in the year of sale; allowing the claim would amount to adopting a mixed/cash system and would not provide certainty as to the year of accrual. Accordingly the disallowance was sustained. [Paras 5, 8]

Disallowance of dealers' commission for AY 2002-03 affirmed; ground dismissed.

Dependent agent permanent establishment - permanent establishment under Article 5(4) and 5(5) - Force of attraction rule (Article 7) - attribution of profits to permanent establishment - arm's length principle in related party compensation - section 9(1)(i) - income attributable to operations in India - application of Rule 10 for estimating attributable profit - Whether the Indian branch (VIB) constituted a permanent establishment of Varian group enterprises (Varian Inc. U.S.A., Varian Australia, Varian Italy) and whether profits of those enterprises could be taxed in India by application of the Force of Attraction rule; and whether the AO's Rule 10 attribution (10% of operating profit) was sustainable. - HELD THAT: - On the facts and the D.R. Agreements, the Tribunal examined the three alternative tests in Article 5(4) (authority to conclude contracts; maintenance of stock from which deliveries are made; habitually securing orders wholly or almost wholly) and the twin conditions in Article 5(5) (activities devoted wholly or almost wholly to one enterprise and transactions not at arm's length). The Tribunal found that: (i) orders introduced by the assessee were not binding on the suppliers and the assessee had no authority to negotiate or conclude contracts; (ii) the assessee did not maintain inventory of the manufacturers' instruments (it held only spare parts on principal to principal basis) nor bear the market, credit, product liability, R&D or other entrepreneurial risks of the suppliers; and (iii) the assessee's commission income was received from multiple Varian entities and did not show devotion 'wholly or almost wholly' to any single enterprise, while the TPO had found the commission to be at arm's length. The Tribunal accordingly concluded that the Indian branch was not a dependent agent P.E. of the three foreign Varian companies; therefore the Force of Attraction rule (Article 7) could not be invoked to bring the foreign enterprises' global profits to tax in India, and the AO's attribution by applying Rule 10 at 10% of operating profit was unsustainable. The Tribunal also noted that, in any event, the assessee had offered income reasonably attributable to operations in India under section 9(1)(i). [Paras 29, 33, 40]

Findings that VIB is not a dependent agent P.E. of the Varian group; Force of Attraction rule inapplicable; additions made by attributing 10% of global profit under Rule 10 deleted; appeals allowed.

Final Conclusion: Appeal for AY 2002-03 partly dismissed (disallowance of dealer commission upheld). On the central international tax issue, the Tribunal held that the Indian branch is not a dependent agent permanent establishment of the relevant Varian group enterprises, the Force of Attraction rule therefore does not apply, the Rule 10 attribution is unsustainable, and the additions on account of attributed profits are deleted; consequent appeals for AYs 2003-04 to 2006-07 are allowed.

Characterisation of royalty and know how payments as revenue or capital expenditure - transactional net margin method (TNMM) versus comparable uncontrolled price (CUP) as most appropriate method - aggregation of transactions for entity level TNMM benchmarking - use of future year data for comparables - treatment of cost sharing/intranet (NICE NET) payments as business expenditure - associated enterprise status and scope under transfer pricing provisions - role of customs valuation in transfer pricing adjudication - remand for fresh determination of arm's length price with suitable adjustments

Characterisation of royalty and know how payments as revenue or capital expenditure - Royalty payments made to Denso Corporation (Japan) and know how fees were held to be revenue expenditure and allowable. - HELD THAT: - The Tribunal applied its earlier decisions in the assessee's own cases and relevant precedents to conclude that the royalty and know how payments were linked to manufacturing operations, bore a direct nexus to production volume, and were payments for technical information/consultancy rather than acquisition of an enduring capital asset. The agreements and factual parity with earlier years led the Tribunal to follow binding orders which treated such payments as revenue in nature and allowable (including allowance of depreciation where previously treated as intangible capital). [Paras 6, 7, 8, 9]

The orders of the CIT(A) deleting additions in respect of royalty and know how payments are upheld; the payments are revenue expenditure and allowable.

Treatment of cost sharing/intranet (NICE NET) payments as business expenditure - Payments to Denso Haryana for use of the intranet (NICE NET) were held to be genuine business expenditures allowable under section 37. - HELD THAT: - The Tribunal found there was no dispute that services were rendered and used by the assessee, and that the AO's findings of sham, lack of RBI approval or absence of quantification in the agreement were unsustainable. Where Denso Haryana had incurred the expenditure and recovered cost from user companies, and receipts were offered to tax, the Tribunal held the disallowance rested on conjecture and surmise and therefore upheld the CIT(A)'s allowance for business purposes. [Paras 10, 11, 12, 13]

The CIT(A)'s deletion of the addition in respect of intranet/NICE NET charges is upheld and the expenditure is allowable.

Characterisation of technical services and training expenses as revenue expenditure - Technical services and training expenses paid to Denso Corporation (Japan) were held to be revenue in nature and deductible. - HELD THAT: - Relying on the tribunal's earlier findings in the assessee's own case, the expenditure was found to facilitate the assessee's manufacturing and trading operations (training of employees) and to be of a nature that enables more efficient carrying on of business rather than acquisition of an enduring capital asset. The CIT(A)'s deletion of the addition on this ground was therefore sustained. [Paras 13, 14]

The addition in respect of technical services and training expenses is deleted; the expenses are revenue in nature and allowable.

Deduction under section 35AB and alternative treatment by depreciation - Claims relating to know how under section 35AB/section 32 were resolved in accordance with prior tribunal findings: portions treated as intangible assets and allowed by depreciation, other portions held revenue and allowed accordingly. - HELD THAT: - The Tribunal followed its earlier orders in the assessee's own case which had examined the classification between deduction under section 35AB and claim under section 32 for depreciation. Where earlier proceedings had led to acceptance of depreciation for certain amounts and allowance of other amounts as revenue, the CIT(A)'s approach adopting those findings was sustained. [Paras 15, 16, 17]

The CIT(A)'s treatment (allowing depreciation where appropriate and allowing revenue treatment otherwise) is upheld; the Revenue's grounds on section 35AB are dismissed.

Transactional net margin method (TNMM) versus comparable uncontrolled price (CUP) as most appropriate method - aggregation of transactions for entity level TNMM benchmarking - TNMM applied at entity level (aggregating diverse transactions including imports and domestic purchases) was held not to be the most appropriate method; CUP is the preferred method for adjudicating ALP of imported components from the associated enterprise. - HELD THAT: - The Tribunal examined OECD guidance, statutory scheme and precedents and concluded TNMM does not permit aggregation of unrelated classes of transactions into an entity level margin where transactions are dissimilar. Given the high degree of product comparability for the imported components, CUP (a traditional transactional method) offers a more direct and reliable measure. The Tribunal also rejected the assessee's contention that earlier levels had accepted entity level TNMM, noting that the TPO had rejected TNMM and the issue was open for adjudication. The Special Bench precedent (LG Electronics) was followed to deny entity level aggregation under TNMM in these facts. [Paras 34, 36, 37, 38, 42]

TNMM at entity level is not the most appropriate method; CUP is to be applied for determining ALP of imports from the associated enterprise.

Remand for fresh determination of arm's length price with suitable adjustments - The matter of determining ALP of imported components by CUP was remitted to the Assessing Officer/ TPO for fresh adjudication with directions to obtain appropriate comparable export/domestic AE prices or domestic comparable import prices and to make suitable adjustments. - HELD THAT: - Recognising practical difficulties and precedents (including Maruti Suzuki), the Tribunal directed that the AO/TPO should attempt to ascertain prices at which the AE exported such components outside Japan or sold them in its domestic market, or alternatively the price a comparable Indian independent purchaser would have paid, and make requisite adjustments for comparability. The Tribunal emphasised CUP as most appropriate but remitted the factual application for fresh determination. [Paras 44, 45]

Issue remanded to the AO/TPO to determine ALP by CUP (or by ascertaining suitable comparable prices) with necessary adjustments; matter set aside for fresh adjudication.

Use of future year data for comparables - Use of future financial year data by the TPO for comparables was held to be impermissible under the Transfer Pricing Regulations. - HELD THAT: - The Tribunal agreed with the CIT(A) that transfer pricing proceedings contemplate use of contemporaneous data available for the year under consideration, and reliance on prices from subsequent years (future data) for determining ALP is not in consonance with the rules. Accordingly, the TPO's use of future year data for seven components was disallowed. [Paras 25, 40]

The TPO's use of future year data for comparables is disapproved; such data cannot be used for benchmarking.

Role of customs valuation in transfer pricing adjudication - Customs valuation was held not to be determinative of arm's length price for transfer pricing purposes. - HELD THAT: - The Tribunal observed that customs valuations are made for different statutory purposes and may not reliably reflect ALP for transfer pricing; acceptance by customs does not preclude a TP adjustment. Decisions relied upon by the assessee were found distinguishable and the argument that customs acceptance bars TP adjustment was rejected. [Paras 41]

Customs valuation is not binding for transfer pricing; the assessee's reliance on customs acceptance is rejected.

Foreign exchange gain or loss as operating adjustment in transfer pricing - Foreign exchange loss/gain was held to be operating in nature and the Assessing Officer should grant suitable adjustment when determining ALP. - HELD THAT: - The Tribunal accepted the CIT(A)'s view that foreign exchange fluctuations in the year affected the assessee's operating results and are part of business operations; consequently, appropriate adjustments for forex loss/gain should be allowed in the transfer pricing computation. [Paras 51]

AO to grant suitable adjustment for foreign exchange gain/loss while re adjudicating transfer pricing issues.

Final Conclusion: Appeals partly allowed. For A.Y. 2002 03 and A.Y. 2003 04 the Tribunal upheld the CIT(A)'s deletions and allowed in favour of the assessee on issues of royalty, know how, intranet cost, technical services/training and treatment under section 35AB/32. On transfer pricing, the Tribunal held that entity level TNMM aggregation was not appropriate for the imported components, preferred CUP as the most appropriate method, disallowed use of future year data and rejected reliance on customs valuation; the matter of determining ALP by CUP (with suitable adjustments, including for foreign exchange) was remitted to the Assessing Officer/TPO for fresh adjudication in accordance with law.