TaxTMI 
TaxTMI 
2016 (3) TMI 1337
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....s of the case and in law, the Ld. CIT(A) has erred in allowing the claim of deduction u/s 10AA made by the assessee in respect of the profits arising out of trading activity and in holding that trading is covered within the definition of 'services' under the SEZ Rule, without appreciating the fact that section 2(z) of the SEZ Act defines tradable services in general while under the specific provisions of section 10AA of the I T Act, which is inserted in pursuance of the SEZ Act and the general scheme of I T Act, trading activity does not fall within the meaning of 'services' and hence profit from trading activity does not qualify for the deduction provided u/s 10AA of the IT Act. 3. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in holding that by virtue of section 51 of the SEZ Act, the provisions of SEZ Act and the Rules will have overriding effect over the provisions of the Income-tax Act without appreciating the fact the necessary amendments have already been incorporated in various section of the Income-tax Act in pursuance of section 27 and various provisions in the Second Schedule of the SEZ Act". ITA No.142/Mum/2014 ....
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....t, in this respect also, learned CIT(A) has only followed the views of the co-ordinate bench as evident from the following observations of the ld. CIT(A) :- "The appellant has made detailed submissions and stated that Hon'ble ITAT has decided the issue in its favour for A.Y. 2006-07 and 2007-08 on identical facts. The contention of the appellant on perusal of the order is found to be correct. Hon'ble ITAT in paras 20, 21 & 22 have discussed the issue and the points raised by the CIT(A) have been upheld. In the final findings the CIT(A) had allowed deduction u/s.10AA on goods exported and imported from SEZ. It was also observed that no such benefit should be given for the local purchase and sale made by the appellant. The AO is directed to follow the direction of the Hon'ble ITAT and delete the disallowances after due verification. Further, the effect of the disallowance upheld with reference to FD interest as discussed in ground no.3 also has to be taken into account while giving effect to this order." 6. Respectfully following the views so taken by the co-ordinate bench, we see no reasons to take any other view of the matter than the view so taken by the co-ordinate bench in a....
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....nsaction as an unsecured loan, we find that CIT Vs EKL Appliances Limited [(2012) 345 ITR 241 (Del)], Hon'ble Delhi High Court has held that recharacterization of a transaction is possible in only two situations - i.e. (i) where the economic substance of a transaction differs from its form and (ii) where the form and substance of the transaction are the same but arrangements made in relation to the transaction, viewed in their totality, differ from those which would have been adopted by independent enterprises behaving in a commercially rational manner. None of these conditions is satisfied in the present case. The form and substance of the transactions are the same. The Transfer Pricing Officer has not brought on record any material to demonstrate and establish that the form and substance of transactions are different. It is not, and it cannot be, the case of the Transfer Pricing Officer that the export transaction was a sham transaction to finance the AE. The assessee has also behaved in a commercially rational manner inasmuch as whatever are the terms of realization of his exports proceeds, the same are the terms of realization of exports from the non AEs. Recharcaterization of ....
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....tion 92C of the Income Tax Act, 1961". In this backdrop, we can usefully refer to the decision of Hon'ble Delhi High Court, in the case of Sony Ericsson Mobile Corporation Pvt Ltd Vs ACIT [(2015) 374 ITR 118(Del)] wherein Their Lordships had, inter alia, observed as follows: "Where the Assessing Officer/TPO accepts the comparables adopted by the assessed, with or without making adjustments, as a bundled transaction, it would be illogical and improper to treat AMP expenses as a separate international transaction, for the simple reason that if the functions performed by the tested parties and the comparables match, with or without adjustments, AMP expenses are duly accounted for. It would be incongruous to accept the comparables and determine or accept the transfer price and still segregate AMP expenses as an international transaction," 8. By way of an example, this aspect of the matter was then explained by Hon'ble Delhi High Court as follows: "An example given below would make it clear: Particulars Case 1 Case 2 Sales 1000 1,000 Purchase Price 600 500 Gross Margin 400 (40%) 500 Marketing Sale promotion 50 150 Overhead expense 300 300 N....
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....been benchmarked on the CUP basis but not in a case when the arm's length price of the exports has been benchmarked on the basis of TNMM. The very conceptual foundation, for separate adjustment for delayed realization of debtors and on the facts of this case, is thus devoid of legally sustainable merits. 10. The other aspect of the matter is that a separate adjustment for delayed realization of debtors can, even in a fit case, can only be made only to the extent the credit period allowed to the associated enterprises is more than the credit period allowed to independent enterprise in respect of the same or materially similar transactions. In the present case, it is an undisputed position that semi finished goods, as sold to Micro USA, is not sold to any other independent enterprises. The assessee did have trading transactions in respect of the finished goods with trading subsidiaries in China and Hong Kong but it is not even the case of the TPO that excessive credit period was allowed to these AEs vis-à-vis the credit period allowed to independent enterprises, nor any ALP adjustment has been recommended in connection with the same. This fact, if anything, shows that t....
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....six months cannot, therefore, be seen in isolation with what is the position is with respect to similar payments due from non AEs. The whole exercise of ALP adjustments is to neutralize the impact of inter se relationships between the AEs and it is, therefore, not the delay simplictor in payment but delay in payment vis-à-vis similar situations with non AEs (i.e. independent enterprises) which is of crucial consideration. Such a comparison cannot be based on the hypothesis as to what would have, in the wisdom of the TPO, happened if assessee was to have similar transactions with non- AEs. The comparison has to be based on real transactions of similar nature, if at all such transactions have taken place. When no such transactions have taken place, as is the case before us, there is obviously no occasion of any comparison. The stand taken by the learned Departmental Representative, therefore, is not only quite detached from commercial reality but also wholly untenable in law. In any case, what can be examined on the touchstone of arm's length principles is the commercial transaction itself, as a result of which the debit balance has come into existence, and the terms and c....
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....al part of the transfer pricing documentation. There is nothing on record to show these exclusions. 16. As regards the contention that normally all interest incomes are excluded in the computation of PBIT as such incomes rarely constitute operational income, we see no need to be guided by such hypothesis and generalities. There is nothing on the records, as we have noted earlier, such exclusions on the facts of this case. In any event, setting off of interest expenditure with interest on account of delay in realization of debts, even if so, is not too common an occurrence and more of an exceptions than the rule. The apprehensions of the learned DR are purely hypothetical and, therefore, devoid of legally sustainable merits. 17. In view of these discussions, as also bearing in mind entirety of the case, we are of the considered view that no ALP adjustments can be made, on the facts of this case, in respect of delay in realization of sale proceeds. Such being our conclusions, we also see no need to address ourselves to the specific factual arguments advanced by the learned counsel. In effect thus, we uphold the grievance of the assessee, and direct the Assessing Officer to dele....
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.... or assets of such enterprises at the time of the transaction or at any future date; (ii) the expression "intangible property" shall include - (a) marketing related intangible assets, such as, trademarks, trade names, brand names, logos; (b) technology related intangible assets, such as, process patents, patent applications, technical documentation such as laboratory notebooks, technical know -how; (c) artistic related intangible assets, such as, literary works and copyrights, musical compositions, copyrights, maps , engravings; (d) data processing related intangible assets, such as, proprietary computer software, software copyrights, automated databases, and integrated circuit masks and masters; (e) engineering related intangible assets, such as, industrial design , product patents, trade secrets, engineering drawing and schematics, blueprints, proprietary documentation; (f) customer related intangible assets, such as, customer lists, customer contracts, customer relationship, open purchase orders; (g) contract related intangible assets, such as, favourable supplier, contracts, licence agreements, franchise agreements, non -compete agreements; (h) human ....
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.... not been made by the debtor. It is not, however, necessary that a payment is to be made as soon as it becomes due. Many factors, including terms of payment and normal business practices, influence the fact of payment in respect of a commercial transaction. Unlike a loan or borrowing, it is not an independent transaction which can be viewed on standalone basis. What can be examined on the touchstone of arm's length principles is the commercial transaction itself, as a result of which the debit balance has come into existence, and the terms and conditions, including terms of payment, on which the said commercial transaction has been entered into. The payment terms are an integral part of any commercial transaction, and the transaction value takes into account the terms of payment, such as permissible credit period, as well. The residuary clause in the definition of 'international transaction', i.e. any other transaction having a bearing on the profits, incomes, losses or assets of such enterprises, does not apply to a continuing debit balance, on the given facts of the case, for the elementary reason that there is nothing on record to show that as a result of not realizi....
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....he parties state that in view of the amendment to Section 92B(1) of the Income Tax Act, 1961 ('Act' for short) by Finance Act, 2012 with retrospective effect from 1st April 2002, the question as framed may be restored to the file of the Tribunal for fresh decision in light on the amendment. Accordingly, this issue is remitted to the file of the Tribunal for fresh decision on merits 25. The observations so made by Hon'ble jurisdictional High Court, in our limited understanding, cannot be construed as holding that "in view of the amendment by the Finance Act 2012 with retrospective effect from 1st April 2002, the said transaction of charging of interest from the AEs is covered under the amended provision of Section 92B(1) of the Act". As it appears from the plain words of the statute- as extracted earlier, the issue is left open for adjudication by this Tribunal. 26. In any event, to this extent, this judgment does not involve an adjudication on a legal issue as it is a result of consensus of the parties. When both the parties before Their Lordships agreed, and so 'stated' before Their Lordships, to let the matter be restored to the file of the Tribunal, there could not....
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....icular manner. The judicial interpretation so given was certainly not the end of the road. The matter could have been carried in appeal before higher judicial forums. If the decision of a judicial body does not satisfy the tax administration, nothing prevents them from going to the higher judicial forum or from so amending the law, with prospective effect, that there is no ambiguity about the intent of legislature and it is conveyed in unambiguous words. 31. Nullifying a judicial interpretation though legislative amendment, much as many of us may abhor it, is not too uncommon an occurrence. Of course, when legislature has to take an extreme measure to nullifying the impact of a judicial ruling in taxation, it is the time for, at least on a theoretical note, introspection for the draftsman as to what went so wrong that fundamental intent of law of law could not be conveyed by the words of the statute, or, perhaps for the judicial forums, as to what went so wrong that the interpretation was so off the mark visà- vis fundamental principles of taxation or the sound policy considerations. However, amendment so made are generally prospective, and there is a sound conceptual fou....
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....operation and not the bare language in which such amendment is couched........ 36. A clarificatory amendment presumes the existence of a provision the language of which is obscure, ambiguous, may have made an obvious omission, or is capable of more than one meaning. In such case, a subsequent provision dealing with the same subject may throw light upon it. Yet, it is not every time that the legislature characterizes an amendment as retrospective that the Court will give such effect to it. This is not in derogation of the express words of the law in question, (which as a matter of course must be the first to be given effect to), but because the law which was intended to be given retrospective effect to as a clarificatory amendment, is in its true nature one that expands the scope of the section it seeks to clarify, and resultantly introduces new principles, upon which liabilities might arise. Such amendments though framed as clarificatory, are in fact transformative substantive amendments, and incapable of being given retrospective effect. ...................... 37. An important question, which arises in this context, is whether a "clarificatory" amendment remains true to its ....
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....uliarities and significant distinction with normal tax laws which simply impose tax on an income. 35. Legislature may describe an amendment as 'clarificatory' in nature, but a call will have to be taken by the judiciary whether it is indeed clarificatory or not. This determination, i.e. whether the amendment in indeed clarificatory or is the amendment to overcome a judicial precedent, assumes great significance because when it is found that the purpose of such interpretive statute, or clarificatory amendment, is "correct a judicial interpretation of prior law, which the legislature considers inaccurate, the effect is prospective" and, as in this case, it deals with transfer pricing legislation which essentially seeks a degree of compliant behavior from the assessee vis-à-vis certain norms- the norms the assessee should know at the time of entering into the transactions rather than at the time of scrutiny of his affairs at a much later stage. 36. It is very important to bear in mind the fact that right now we are dealing with amendment of a transfer pricing related provision which is in the nature of a SAAR (specific anti abuse rule), and that every anti abuse legislati....
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....f compelling impossibilities, and the administration of law must adopt that general exception in the consideration of particular cases. [See : U.P.S.R.T.C. vs. Imtiaz Hussain 2006 (1) SCC 380, Shaikh Salim Haji Abdul Khayumsab vs. Kumar & Ors. 2006 (1) SCC 46, Mohammod Gazi vs. State of M.P. & Ors. 2000 (4) SCC 342 and Gursharan Singh vs. New Delhi Municipal Committee 1996 (2) SCC 459]. 39. It is for this reason that the Explanation to Section 92 B, though stated to be clarificatory and stated to be effective from 1st April 2002, has to be necessarily treated as effective from at best the assessment year 2013-14. In addition to this reason, in the light of Hon'ble Delhi High Court's guidance in the case of New Skies Satellite BV (supra) also, the amendment in the definition of international transaction under Section 92B, to the extent it pertains to the issuance of delayed realization of debtors being outside the scope of 'international transaction', cannot be said to be retrospective in effect. The fact that it is stated to be retrospective, in the light of the aforesaid guidance of Hon'ble Delhi High Court, would not alter the situation, and it can only be treated as prospecti....
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....e payments of this nature cannot be treated as an "intended consequence" of Section 40(a)(ia). If it is not an intended consequence i.e. if it is an unintended consequence, even going by Bharti Shipyard decision (supra), "removing unintended consequences to make the provisions workable has to be treated as retrospective notwithstanding the fact that the amendment has been given effect prospectively". Revenue, thus, does not derive any advantage from special bench decision in the case Bharti Shipyard (supra). 9. On a conceptual note, primary justification for such a disallowance is that such a denial of deduction is to compensate for the loss of revenue by corresponding income not being taken into account in computation of taxable income in the hands of the recipients of the payments. Such a policy motivated deduction restrictions should, therefore, not come into play when an assessee is able to establish that there is no actual loss of revenue. This disallowance does deincentivize not deducting tax at source, when such tax deductions are due, but, so far as the legal framework is concerned, this provision is not for the purpose of penalizing for the tax deduction at source lapse....
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....orresponding income is duly brought to tax. That will be going much beyond the obvious intention of the section. Accordingly, we hold that the insertion of second proviso to Section 40(a)(ia) is declaratory and curative in nature and it has retrospective effect from 1st April, 2005, being the date from which sub clause (ia) of section 40(a) was inserted by the Finance (No. 2) Act, 2004. 42. While approving this approach, and upholding the decision of the Tribunal do read these provisions as effective from 1st April 2005, Hon'ble Delhi High Court, in case of CIT Vs Ansal Landmark Townships Pvt Ltd [(2015) 377 ITR 635 (Del)], has observed as follows: 14. The Court is of the view that the above reasoning of the Agra Bench of ITAT as regards the rationale behind the insertion of the second proviso to Section 40(a) (ia) of the Act and its conclusion that the said proviso is declaratory and curative and has retrospective effect from 1st April 2005, merits acceptance. 15. In that view of the matter, the Court is unable to find any legal infirmity in the impugned order of the ITAT in adopting the ratio of the decision of the Agra Bench, ITAT in (Rajiv Kumar Agarwal v. ACIT). 43....