TaxTMI 
TaxTMI 
2013 (11) TMI 667
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.... an incorrect methodology to arrive at the Arm's Length Price. 4. Having regard to the facts and circumstances of the case, and the provisions of law, the appellant submits that the Transfer Pricing addition of Rs. 79,96,60,415/- is unjustified and is required to be deleted. 5. The AO erred in making a Transfer Pricing adjustment of Rs. 9,60,668/- in respect of expenses incurred by the appellant on behalf of its Associated Enterprises. 6. The AO erred in disallowing Rs. 16,28,733/- under section 14A. The appellant submits that the disallowance is unjustified and is required to be deleted." 3. Ground no. 1 to 4 pertain to Transfer Pricing (TP) adjustment of Rs. 79,96,60,415/- computed by the Transfer Pricing Officer (TPO) and sustained by the Dispute Resolution Panel (DRP) in the impugned order. 4. Ground no. 5 pertain to reimbursement of expenses, which also has TP adjustment, computed by the TPO and sustained by the DRP, amounting to Rs. 9,60,668/-. 5. Ground no. 6 pertains to computation of disallowance of Rs. 16,28,733/- under section 14A under domestic provisions. Grounds no. 1 to 4: 6. The facts as submitted by the AR and DR and discerned from the mater....
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....me to USD 32.9 million as against USD 13.54 million shown by the assessee. He therefore, determined the ALP of the balance and made the adjustment in INR 79,96,60,415/- 9. The assessee, approached the DRP against this order of the TPO, who sustained the findings of the TPO after going through the submissions, papers as placed before the Panel. Hence the instant appeal before the ITAT. 10. Before us, the Senior counsel, appearing before us, submitted that there was an agreement of Eastman Kodak Co., USA (EKC) for the sale of its medical business stream to Onex Healthcare Holdings Inc. on global basis (now Carestream Inc.) EKC has an Indian subsidiary, Kodak India (P) Ltd. (assessee) and Carestream Inc. has Indian subsidiary, Carestream Health India Private Ltd. Eastman Kodak Co. Onex Inc. Kodak India Private Ltd. (EKC holds 97.7% shares) Carestream Health India Private Ltd. (Carestream Inc. holds 99.9% shares) Eastman Kodak sells its health imaging, i.e. medical business to Carestream Inc. on global basis for USD 23.5 billion. Pursuant to this agreement, Kodak India sells its imaging, i.e. medical business to Carestream India which is:- Eastman Kodak Co. USA ....
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....unts Receivable; (b) Inventory; (c) Contracts; (d) Transferred Intellectual Property (as defined in the Purchase Agreement), including, without limitation, the Assigned Patents, Assigned pl, Assigned Works, Assigned Software and Assigned Trademarks (each as defined in the Intellectual Property Agreement); (e) Business Books and Records and Transferred Employees' Records; (f) Fixtures and Equipment; (g) Leased Real Property; (h) Goodwill; (i) ... (j) ... (k) ... (l) ... (m) ... (n) ... (o) ... (p) .... (q) ... (r) ... 4. Assumption of Liabilities. Effective as of the date hereof, on the terms and subject to the conditions set forth in the Purchase Agreement, Assignee hereby assumes and agrees to discharge or perform when due, the Assumed Liabilities of the Assignor. For greater certainty, the parties hereto confirm that the Assumed Liabilities do not include the Excluded Liabilities. 5. Transferred Employees. 6. Consideration. On the terms and subject to the conditions set forth in the Purchase Agreement, at the Closing, as consideration for all of the Transferred Assets covered by this Agreement, in addition to the assumpt....
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....by the AO, TPO and DRP was on section 92B(2), wherein, the provision deems an AE transaction. 15. Senior Counsel referring to the definition of international transaction as per section 92B(1) and 92B(2) "(1) For the purposes of this section and sections 92, 92C, 92D and 92E, "international transaction" means a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises, and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises. "(2) A transaction entered into by an enterprise with a person other than an associated enterprise shall, for the purposes of sub-section (1), be deemed to be a transaction entered into between two associated enterprises....
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....the scope of the definition of international transaction by providing that a transaction entered into with an unrelated person shall be deemed to be a transaction with an associated enterprise, if there exists a prior agreement in relation to the transaction between such other person and the associated enterprise, or the terms of the relevant transaction are determined by the associated enterprise. An illustration of such a transaction could be where the assessee, being an enterprise resident in India, exports goods to an unrelated person abroad, and there is a separate arrangement or agreement between the unrelated person and an associated enterprise which influences the price at which the goods are exported. In such a case the transaction with the unrelated enterprise will also be subject to transfer pricing regulation." 18. Referring to section 92B(2), the Senior Counsel submitted that even to invoke the deeming provision, with regard to the international transaction and also to fall within Chapter X of the Income Tax Act, three conditions are necessary, i.e. a) there must be 2 AEs b) one of them must be a non resident c) there must be a sale of some property. 19.....
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....(vi) and has to be deducted as allowance". In CIT v. Ravi Industries [1963] 49 ITR 145 (Bom), the same position has been clarified by the Bombay High Court. The court has observed that the unabsorbed depreciation does not lose its character and attributes when it is carried forward to the following year; such unabsorbed depreciation of the earlier year, which is carried forward to the current year and which is deemed to be of the current year under proviso (b) of section 10(2)(vi) can be set off, unlike other business losses, against income under other heads. Such being the purpose for which the legal fiction is created, it is difficult to extend the same beyond its legitimate field and will have to be confined to that purpose" 21. He, further, referred to the Special Bench case of Sumitomo Mitsui Banking Corp. vs Dy Director of Income Tax (SB), reported in 16 ITR 116 (Trib), (reading from the headnote), he submitted, "Deeming provision must be confined for its purpose only & not beyond the fiction". The Senior Counsel submitted that in the context of the instant appeal, to import the deeming provisions of section 92B(2), the context was to examine the transaction entered int....
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....ed international transaction, it is essential that the AE of the assessee should have influence over the third party in terms of determining the terms and conditions of such transaction. It is only in such a situation that the transaction with such third party is deemed to be an international transaction. We are convinced with the submissions advanced on behalf of the assessee in this regard but only to the extent of not ignoring the legal character of the Indian AE simply because of the close relationship between the two enterprises. If we proceed with the presumption that since the foreign enterprise has influence over the economic behavior of the assessee and hence the separate legal character of the Indian enterprise should be overlooked, then it would mean that the such separate legal character of the assessee will be lost not for one transaction but for all practical purposes. In that case only the foreign entity will survive as a taxable unit even under the Act. Probably it is not the case of the Revenue also as it is the Indian entity which has been subjected to the present assessment" 24. The Senior Counsel submitted that under no case, the impugned transaction could....
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....plus, as prescribed by the legislature. Since the TPO did not refer even this method to compute the ALP, provisions of section 92C went beyond the scope of the TPO. He submitted that the cost plus method could be tested by applying the same on inventories, would come to the mean of 14% on the last four years. The Senior Counsel further submitted that since there was no immovable asset which was transferred the cost plus method on current assets, in monetary terms would come to Rs. 4.44 crores, which is less then what has actually been charged by the assessee, which was at 5.89 crores (page 1189 APB). 28. He, therefore, submitted that from all angles, the transaction cannot be found to be eligible for TP regulations and hence no adjustment is required to be made. 29. After discerning the facts of the instant case, that the transaction entered into by the two Indian companies and such a transaction could not be held to be international transaction, the Senior Counsel placed reliance on the decision rendered by coordinate Bench at Hyderabad in the case of Swarnandhra IJMII Integrated Township Development Company Pvt. Ltd. vs DCIT, in ITA no. 2072/Hyd/2011, wherein there was a tr....
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....m transaction should be between two or more AEs and either or both of whom should be non resident and to further buttress the argument, DR submitted that section 92B(2) will come into play only when assessee is dealing with an unrelated party who may be in India or outside. He further argues that the decision of Special Bench in LG Electronics pertained only to section 92B(1) and it explained that how a transaction could be termed as international transaction and that the decision did not examine the circumstances under which provisions of section 92B(2) could be invoked. 33. The DR also submitted that the entire computation of the assessee needs a review because the transaction does not show any transfer of intangibles, like goodwill, because the transfer pertained to the ongoing imaging business segment of the assessee. The DR referring to the accounts of the assessee submitted that goodwill does not appear anywhere, which, according to him were an integral part of the transaction. 34. The DR in his synopsis explained through diagrammatic illustrations how there existed AEs of both the contracting entities, who were non residents and how the transaction between the two fore....
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.... Bengal Immunity Co. Ltd. v. State of Bihar 2 SCR 603; 6 STC 446. The marginal note to section 52, as it now stands, was originally a marginal note only to what is presently sub-section (1), and significantly enough, this marginal note remains unchanged even after the introduction of sub-section (2), suggesting clearly that it was meant by Parliament to apply to both sub-sections of section 52 and it must, therefore, be taken as indicating that, like sub-section (1), sub-section (2) is also intended to deal with cases where there is an understatement of the consideration in respect of the transfer. But apart from these considerations, the placement of sub-section (2) in section 52 does indicate in some small measure that Parliament intended that sub-section to apply only to cases where the consideration in respect of the transfer is understated by the assessee. It is not altogether without significance that the provision in sub-section (2) was enacted by Parliament not as a separate section, but as part of section 52 which, as it originally stood, dealt only with cases of under- statement of consideration. If Parliament intended sub-section (2) to cover all cases where the condi....
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.... already have the element of cost plus gross profit and the other asset was stocks, which were already at cost. 40. He, therefore, submitted that, in fact, the APA involved only the current assets and intangibles. 41. Closing his rejoinder, the Senior Counsel reiterated that section 92B(2), cannot be read independently, because, the section specifically talks about, "for the purposes of sub-section (1)", therefore, it would be incorrect to read the section independently. Besides that, the prior agreement if at all to be considered, it is between two independent foreign companies. Both these companies may be holding companies of contracting domestic companies, cannot be held to be AE of other enterprise in the instant contracting domestic companies. 42. We have heard both the parties at length, and have perused the orders of the revenue authorities and papers placed before the revenue authorities. We find that the assessee has filed APA, entered between Eastman Kodak Company and Onex Healthcare Holdings Inc., dated 09.01.2007 (APB 1 to 1090), (holding companies of the Indian subsidiaries, i.e. Kodak India and Carestream India). 43. It is undisputed that the transaction i....
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....n other than an associated enterprise shall, for the purposes of sub-section (1), be deemed to be a transaction entered into between two associated enterprises, if there exists a prior agreement in relation to the relevant transaction between such other person and the associated enterprise, or the terms of the relevant transaction are determined in substance between such other person and the associated enterprise". when we read the two sections by inserting the meaning of expressions, used therein, into one another, a transaction could only become international transaction, if either of both the AEs or one of the AEs is a non-resident. 47. Since the entire foundation is on 92B(2), we must examine interpretation made by the DR, that the section talks of "a transaction" and not "an international transaction", hence the expression in sub section (1) has to be read independently in sub section (2), cannot be accepted. We are dealing in Chapter X of the Income Tax Act, 1961, and the heading of the relevant provisions, which is being examined fall within the heading "Meaning of International Transaction" and even in the relevant sub section, i.e. 92B(2), prescribes, "......the tran....
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....egards for this sale transaction. Further the entire receipt from this sale of Health Imaging business was received by Kodak India and no amount has been transferred back to Kodak US. Hence there was no payment by Kodak India to Kodak US as well as Kodak US has not charged to Kodak India in connection with this sale. As, the terms and conditions of sale are not decided by the Associated enterprise (AE) and there was no prior agreement between Carestream India and Kodak US as required by sec 92B(2) for terming it as deemed international transaction as reproduced below: d. Kodak India has independently obtained a report from Chartered accountant in Form 3CEA relating to computation of capital gains in case of sale of health imaging business to Carestream India. The certificate covers the valuation of health imaging business. Hence, Kodak India, on its independent capacity has valued the business and sold to the third party. Form 3CEA is attached as per Annexure 1. Hence considering the above points, your goodself will agree that the sale of healthcare business is a domestic transaction of Kodak India." 51. When we peruse the various recitals of the APA between Eastman ....
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....will be required in connection with the execution, delivery and performance by any Affiliate of Seller of the Ancillary Agreements or Closing documents to which such Affiliate is a party signatory". At (APB 70 and 71) " Commercially Reasonable Efforts : Section 5.3(f)" In the event that Buyer or any of its Affiliates enters into any transaction, or any contract to effect any transaction (including any merger or acquisition) (i) before the date of this Agreement that causes the representation and warranty contained in Section 4.11 to be inaccurate (assuming such representation and warranty is read without giving effect to the words "to the Knowledge of Buyer" contained therein) or (ii) between the date of this Agreement and the Closing that would cause the representation and warranty contained in section 4.11 to be inaccurate (assuming that such representation and warranty were made on the date of such contract or transaction and is read without giving effect to the words "to the knowledge of the Buyer" contained therein), and in either case entry into such transaction or contract materially delays or prevents the consummation of the Transaction under any antitrust, competition o....
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....s not applicable on the impugned transaction. 53. We cannot accept the arguments of the TPO/DR to disregard the legal character of the assessee and the other enterprise, due to the influence of the agreement between foreign holding companies, because when we examine the instant case in the light of the decision of Vodafone International Holdings BV vs UOI, reported in 341 ITR 1 (SC), we find the ratio decidendi emerging is, if there are two separate but related entities, their separate legal character cannot be disregarded under normal circumstances. This can only be done where the revenue positively proves the factum of influence of foreign AE over the affairs of the domestic entity. We also find, as an undisputed fact by the revenue authorities that the funds received as sale consideration were entirely received by the assessee company. This fact, though extracted by the TPO in his order, has not been rebutted by him, along with other clauses of APA (as reproduced in pre paras). If we proceed on the presumption, as founded by the AO/TPO/DR that the instant transaction had a positive economic behavior by the foreign holding companies and therefore, the instant transaction shoul....
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....nly to clarify that, in the instant case, the deeming provision finds itself accosted within the definitions of international transaction and associated enterprise. In these circumstances, the citations submitted by the Senior Counsel gathers relevance, i.e. CIT vs C.P. Sarathy Mudaliar, reported in 83 ITR 170 (SC, CIT vs Mother India Refrigeration Industries P Ltd., reported in 155 ITR 711 and the Special Bench decision in the case of Sumitomo Mitsui Banking Corp. vs Dy Director of Income Tax (SB) (supra). 59. When we read the deeming provision of section 92B(2), we cannot slip out of the definition of international transaction, that too, when the deeming provision, itself says, "for the purposes of sub section (1)". As observed by their Lordships, in the case of K.P. Varghese (supra), "the Parliament would have enacted that provision as a separate section and not pitchforked it into section 52 with a total stranger under an appropriate marginal note". The similar course could have been adopted by the legislature to place section 92B(2), independently, not under the heading of international transaction. Another important observation has to be made in this context is that the le....
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.... Act, 1987 to hold that in exercising its power under Chapter XIX-A it has almost an unbridled power to arrive at a settlement. This exercise of purposive interpretation by looking into the object and scheme of the Act and legislative intendment would arise, in our opinion, if the language of the Statute is either ambiguous or conflicting or gives a meaning leading to absurdity. We do not find any such problem in the provisions of the Act to which we have already referred to Sections 234A, 234B and 234C in clear terms impose a mandate to collect interest at the rates stipulated therein. The expression "shall" used in the said Section cannot by any stretch of imagination be construed as "may". There are sufficient indications in the scheme of the Act to show that the expression "shall" used in Sections 234A, 234B and 234C is used by the Legislature deliberately and it has not left any scope for interpreting the said expression as "may". 66. By the use of the word "shall", for computing the ALP in one of the following methods, the legislature has cast an embargo that no seventh method could be adopted by the TPO for computing the ALP. Even the Special Bench of the ITAT in the case....
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....either superseded or ignored, it straightaway affects the jurisdiction. In the instant case, we have to mention that it was a case of suo moto reference to the TPO and it is the case of the revenue authorities, to import the provisions of Chapter X. In this circumstance, since the TPO did not adhere to the prescribed methods consciously, another innings to rectify the mistake cannot be allowed, as the TPO infringed the relevant provision of the Income Tax Act and Rules. 70. We, therefore, negate and hold that the computation of ALP on "purchase parity" (APB 1191) is void. 71. The Senior Counsel submitted that even if the ALP is to be determined & profit on the same is to be computed, even then, the assessee's computation was most reasonable, because, according to him, in the transfer of business of imaging segment, mean of last four years Gross Profit came at 14%, which in monetary terms came to Rs. 4.49 crores, as against which, the assessee had declared the GP at 5.98 crores, which according to us is quite reasonable and should not be disturbed. 72. On these observations, in our opinion the entire case both on legality and on facts, as developed by the AO/TPO/DRP were in....
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....tment sought by the TPO and sustained by the DRP is falling within the margin provided by the proviso. 85. In, these circumstances, we are of the opinion that on facts, the addition/adjustment needs to be knocked down, as the adjustment has been made by applying 12.5% mark up as against 10% markup shown by the assessee. 86. We, therefore, set aside the orders of the DRP and TPO on this issue and direct the AO to delete the addition on account of adjustment suggested by the TPO at Rs. 9,60,668/-. 87. Ground no. 6 is addition on account of disallowance of Rs. 16,28,733/- under section 14A under domestic provisions. 88. In the assessment proceedings, the AO noticed that the assessee has received Rs. 22.37 lacs as dividend and has claimed the same as exempt. 89. On being asked as to why the provisions of section 14A be not applied, the assessee vide submissions dated 26.08.2011 submitted that it has not attributed any expense against the exempt income. Since it is case of debt free company, no interest could be attributable towards the investments made by it from its own funds, from which it has generated the impugned exempt income, and hence, no disallowance is called f....
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....usiness measure invested temporary surplus funds into mutual funds and thereby earned exempt dividend income The Assesses submitted that no expenditure has been incurred to earn dividend income because the expenses debited to the Assesses's Profit and Loss Account are those which have been incurred in relation to 'the manufacturing and trading activities of the assesses and which are allowable under section 37. No part of the expenditure is expenditure under section 57, which requires to be considered under section 14A. The dividend is directly credited to the bank account by ECS. Further, no monitoring is required of the Mutual Funds as that is done by the brokers who earn brokerage from the assessee". "Assessee has also submitted alternative working of the disallowance. Reliance was on the following decisions:- Daga Capital Management P. Ltd. ITA no.8057/M/03 (Mum.)(SB) Godrej & Boyce Mfg. Co. Ltd. 328 ITR 81 (Bom.) GIC Ltd. 254 ITR 203 (Bom.) Central Bank of India 264 ITR 522 (Bom.) Bombay High Court in GIC Ltd. 203 ITR 203 6.3 Discussion and decision:- We have considered the AO's order and assessee's submissions. The decision of the Hon....
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....iture incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed, if AO having regard to the accounts of assessee, is not satisfied with the correctness of the claim of assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act" 97. The issue impugned before us has been examined by the coordinate Bench(s) at Mumbai and also by some of the Hon'ble High Courts at length. In the case of JK Investors (Bombay) Ltd. vs ACIT, ITA No. 7858 and 7851/Mum/2011, (where one of us was the party, the case pertained to assessment year 2008-09) to the decision, and have examined the words that need reference in the section are "if AO having regard to the accounts of assessee, is not satisfied with the correctness of the claim...", means that before going to the computation, AO has to cross the barrier of the satisfaction with the correctness of the claim, then AO can be permitted to straightaway apply the computation under Rule 8D. In this case, the coordinate Bench was dealing with the objection taken by the AO on account of administrative expen....
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....t portions of the judgment of Hon'ble Delhi High Court are as under:- 29. Sub-section (2) of Section 14 A of the said Act provides the manner in which the AO is to determine the amount of expenditure incurred in relation to income which does not form part of the total income. However, if we examine the provision carefully, we would find that the AO is required to determine the amount of such expenditure only if the AO, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under the said Act. In other words, the requirement of the AO embarking upon a determination of the amount of expenditure incurred in relation to exempt income would be triggered only if the AO returns a finding that he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. Therefore, the condition precedent for the AO entering upon a determination of the amount of the expenditure incurred in relation to exempt income is that the AO must record that he is not satisfied with the correctness of the claim of the ass....
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....he amount of the expenditure in relation to such income in accordance with the provisions of sub-rule (2) of Rule 8D. We may observe that Rule 8D(1) places the provisions of Section 14A(2) and (3) in the correct perspective. As we have already seen, while discussing the provisions of Sub-sections (2) and (3) of Section 14A, the condition precedent for the AO to himself determine the amount of expenditure is that he must record his dissatisfaction with the correctness of the claim of expenditure made by the assessee or with the correctness of the claim made by the assessee that no expenditure has been incurred. It is only when this condition precedent is satisfied that the AO is required to determine the amount of expenditure in relation to income not includable in total income in the manner indicated in sub-rule (2) of Rule 8D of the said Rules. 31. It is, therefore, clear that determination of the amount of expenditure in relation to exempt income under Rule 8D would only come into play when the AO rejects the claim of the assessee in this regard. If one examines sub-rule (2) of Rule 8D, we find that the method for determining the expenditure in relation to exempt income has th....
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....w stands] as also in its initial avatar as section 14A. It is only the prescription with regard to the method of determining such expenditure which is new and which will operate prospectively. In other words, section 14A, even prior to the introduction of sub- sections (2) and (3) would require the AO to first reject the claim of the assessee with regard to the extent of such expenditure and such rejection must be for disclosed cogent reasons. It is then that the question of determination of such expenditure by the AO would arise. The requirement of adopting a specific method of determining such expenditure has been introduced by virtue of sub-section (2) of section 14A. Prior to that, the assessing was free to adopt any reasonable and acceptable method. 100. The Hon'ble Punjab & Haryana High Court in the case of CIT vs Hero Cycles Ltd 323 ITR 518 (P&H) has also held that disallowance under section 14A could not stand where it was found that for earning exempted income, no expenditure has been incurred. 101. The Coordinate Bench in the case of Justice Sam P Bharucha vs Addl. CIT in ITA No. 3889/Mum/2011 dated 25.07.2012 has analyzed similar issue and came to the following con....
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....nt and immediate connection between the expenditure incurred and taxable income, then no disallowance can be made under section 14A merely because some tax exempt income is received by the assessee. 5.2 Averting to the facts of the case in hand, the assessee had made a claim that no expenditure has been incurred or claimed for earning the exempt income. From the details of the expenditure, it is clear that the expenditure incurred and claimed by the assessee has direct nexus with the professional income of the assessee. It is not the case of the revenue that the assessee has used his official machinery and Establishment for earning the exempt income. The AO has not given any finding that any of the expenditure incurred and claimed by the assessee is attributable for earning the exempt income. In other words when the AO has not pointed out that certain expenditure is not incurred for earning the professional income; but are incurred in relation to dividend income or such expenditure is incurred for inseparable and indivisible activities comprising professional as well as the activities on which is exempt income has been earned by the assessee, then in the absence of any such i....
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....ting disallowance under Rule 8D. Disallowance under section 14A required, a finding, of incurring of expenditure, and where no expenditure had been incurred, disallowance under section 14A would depend upon the facts, evidenced by the assessee and examination of those facts by the AO. 105. In the instant case, the facts as mentioned in pre para is that the assessee had not attributed any expenditure towards the income claimed as exempt, and thus the facts are distinct from the case of JK Investors (supra). But this is also a fact that the AO has not examined the reasons for not attributing any expenditure towards income claimed as exempt. Whereas, the DRP in the impugned order, has held that "the disallowance as not arbitrary, and that some expenditure has obviously been incurred to manage and monitor the investments, yielding the dividend income". The observation, "that some expenditure has obviously been incurred to manage and monitor..." made by the DRP, is per se, hypothetical. 106. In our opinion, Rule 8D is not automatic, it is for the AO to examine, at the outset, the correctness of the claim of the assessee, whether he has incurred any expenditure or not and has to gi....