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TMI Blog2013 (12) TMI 241X X X X Extracts X X X X X X X X Extracts X X X X ..... detailed order after discussing and analysing the issue relating to transfer pricing adjustment, for coming to his conclusion regarding transfer pricing adjustment in favour of the assessee. Therefore, he pleaded that appeal for the assessment year 2005-06 be taken up first. The learned Departmental representative did not object to this contention of learned counsel for the assessee. 3. In the Revenue's appeal in ITA No. 4444/Mum./2011, for the assessment year 2005-06, following grounds have been raised : "1. On the facts and in the circumstances of the case and in law, the learned Commissioner of Income-tax (Appeals) erred in deleting the addition made by the Transfer Pricing Officer/Assessing Officer on account of sale of films amounting to Rs. 3,38,93,862, and ignoring the fact that the global average price adopted by the Transfer Pricing Officer/Assessing Officer for the U. K. and the U. S. A. is a good comparable price. 2. On the facts and in the circumstances of the case and in law, the learned Commissioner of Income-tax (Appeals) erred in reducing the adjustment o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ciate enterprises. S. No. Name of transaction Amount (Rs.) Method 1. Sale of plain film to GPF 13,85,98,000 CUP 2. Sale of sun control film to GPIL 12,56,91,000 CUP 3. Sale of sun control film to GPF 22,71,64,000 CUP 4. Payment of commission to GPL 1,01,87,553 CUP 5. The assessee, in its report in Form No. 3CEB, has benchmarked its transactions by applying comparable uncontrolled price method, wherein average price charged to associate enterprises for sun control films and plain films have been compared with the average price for these products charged to local customers of the assessee in India. The payment of commission to those associate enterprises has also been benchmarked by applying comparable uncontrolled price method at 12.9 percent A reference was made under section 92CA(1) to the Transfer Pricing Officer (for short "TPO") by the Assessing Officer, to examine and determine the assessee's arm's length price of its transactions with its associate enterprises. 6. The Transfer Pricing Officer held that the approach of the assessee for comparing local sale price in the Indian market with the price charged from the associate enterprises is not a correct ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with the prices charged to non-associate enterprises (who operate in the countries falling within Asian, African, Middle-east, Far East, Russia and other CIS countries) is erroneous and devoid of business realities as it does not take into consideration geographical, economic and market differences. The associate enterprises are operating in American markets and European markets which are developed markets. In contrast to that, exports sales to non-associate enterprises are in Asian, African, Middle-East, Far East, Russia and other CIS countries which are either developing markets or not so developed markets. Hence, there are geographical differences between associate enterprises export sales and non-associate enterprises export sales. These differences are on account of market size, market location and level of competition and overall economic development of respective markets. The appellant's export prices substantially differ from country to country for variety of economic reasons and market forces, few of them are as follows : i. Availability of locally manufactured material ; ii. Presence of competitor in the territory ; iii. Duties and tax structure of the country ; iv. G ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of market realities as it fails to appreciate that the American and the European markets in which associate enterprises operate is a distinct market geography with distinct features as compared to other countries (as a class) where non-associate enterprises operates. Merely averaging the sales to non-associate enterprises of two or three countries does not eliminate the pricing differences that exist on account of geographical and market factors. 2.11 To support its submission that there exist substantial price variation from country to country and market to market, the appellant relied on the details of non-associate enterprises export sales filed before the Transfer Pricing Officer and submitted that even the export prices charged to non-associate enterprises located in different countries differs substantially for the same product due to differences in economical, geographical and market conditions and other factors pointed out above. The appellant also relied on the judicial pronouncement in the cases of Intervet India P. Ltd. v Asstt. CIT [2010] 130 TTJ (Mumbai) 301 and Asst. CIT, Mumbai v. Dufon Laboratories [2010] 39 SOT 59 (Mumbai) and also on para 1.30 of transfer pricin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rprises which are around 20 percent to 25 percent of the landed cost of the goods sold. Operating results of associate enterprises do not justify transfer pricing adjustment : 2.14 In this regard, contentions of appellant are as follows : (a) The associate enterprises are working as distributors solely for the appellant. Therefore, the financial results of associate enterprises get affected solely on account of its transactions with the appellant. Both GPF and GPIL have been consistently either suffering losses or are making only very nominal profits. In support of this contention, the appellant furnished gross profit and net profit analysis of associate enterprises for several years since commencement of their operations. Based on this analysis, it was contended that on an aggregate basis, the gap between the prices at which associate enterprises procured products from the appellant and the price at which they sold the products does not exceed 10 percent In contrast to that, the Transfer Pricing Officer's working of transfer pricing adjustment highlights that the difference between the associate enterprises prices and non-associate enterprises prices is as high as 30 percent to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t plants runs at the maximum capacity, books the orders even from third parties at the prices which are far below the standard list prices of the appellant, so long such sales result into 'contribution' towards the fixed overheads. It was submitted that this fact can be gathered from the comparative statement of product wise details of sales to associate enterprises and non-associate enterprises, which clearly reflects that even in case of sales to non-associate enterprises customers, prices fluctuate widely. 2.17 It was also submitted that associate enterprises have to further process the products by undertaking slitting, repackaging, labelling as per local standards and laws, etc., for which expenses are incurred by the associate enterprises. In case of sale of products to associate enterprises GPF, GPF sells and markets some of the products purchased from the appellant under its own GPF brand and trade marks, whereas the appellant's sales to non-associate enterprises customers in all other geographies are sold under the appellant's own brand. Thus, GPF need to incur additional cost and expenses for development of the brand, 1:c, which are borne by GPF only. GPF also has to bear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on. 2.20 Geographical adjustment : The appellant reiterated its submissions as regards geographical and markets differences and submitted that on an average a price variation always exists to the extent of 20 percent to 30 percent on account of geographical differences between the American and the European markets on the one hand and Asian, African, Far East and Middle East Markets on the other hand. It submitted that adjustment on account of geographical differences to the extent of approximately 20 percent has been judicially approved by the hon'ble Mumbai, Income-tax Appellate Tribunal in the case of Intervet India (P.) Ltd. v Asstt. CIT [2010] 130 TTJ (Mumbai) 301. 2.21 Selling and marketing cost : for making sales to non-associate enterprises, selling and marketing costs are incurred. For making sales to associate enterprises, such costs are not required to be incurred. In case of sales to non-associate enterprises the appellant needs to pay commission to intermediateries, which ranges from three percent to 10 percent, with average commission of five percent Therefore, an adjustment on account of saving in selling and marketing cost in case of sales to associate enterprises ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... commercial aspects and circumstances of each specific case to derive a fair and proper analysis. The facts and circumstances in totality need to be taken into consideration to come to conclusion on whether or not in particular case the condition of arm's length standard (or price) is satisfied. 2.27 There is force in the first contention of the appellant that while applying the comparable uncontrolled price method the approach of the Transfer Pricing Officer of comparing the export prices charged to associate enterprises (who operates in U. S. and European geographies) with the prices charged to non-associate enterprises (who operate in the countries falling within Asian, African, Middle-east, Far East, Russia and other CIS countries) is erroneous and devoid of business realities as it does not take into consideration geographical, economic and market differences. Under the comparable uncontrolled price method, the price of the goods or services is directly compared with the price in uncontrolled transaction under similar conditions. Though the comparable uncontrolled price appears simple in concept, it is very difficult to apply i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... geographical differences and one has to take into account variations on account of geographical differences for arriving at the comparable uncontrolled price in the case of international transactions, the Transfer Pricing Officer concludes that prices charged from non-associate enterprises do reflect the international prices of products as nonassociate enterprises are based in more than one country and that the comparison of these prices vis-a-vis the price charged to the associate enterprises without any adjustment would reflect the comparable uncontrolled price. There is an apparent contradiction between the admitted facts and the ultimate conclusion. While the Transfer Pricing Officer was bold enough to enter the chopping seas of the comparable uncontrolled price method but was unable to navigate it on account of ignoring the core tenets of reasonably accurate adjustments to be made thus leading to an erroneous arm's length price computation mechanism. The Transfer Pricing Officer's assumption that since the appellant's non-associate enterprises sales comprise of many countries, the average of such non-associate enterprises sale prices do reflect the international prices of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rate are matured, highly competitive and bigger size markets as compared to Asian, African, Middle-East, Far East and Russian markets which consists of mostly economically underdeveloped nations except some of the countries like Japan, Australia and that these markets are fragmented in nature. The market prices in the American and the European markets, which are developed and highly competitive markets, are generally lower than other markets. This fact is established from material placed on record by the appellant. For example, the table below reflects some of instances where wholesale prices of AE GPF for its US based customers itself, are lower than the sale prices charged by the appellant to its nonassociate enterprises customers : Sr. No. Product quality Appellant's non-AE prices (US$/ lakhs sq.ft) AE GPF's whole-sale price in US to unrelated customers (US$/lakhs sg.ft) 1. GRD/BLUE/GREY 20 SRC 0.35 0.26 2. GRD/BLUE/GREY 5 SRC 0.35 0.25 3. GRD GOLD/BRONZE 15 0.35 0.30 4. GRD SIL/GREY 20 SRC 0.33 0.25 5. MATTE BRONZE 0.28 0.20 6. R BLUE 15 SRC 0.27 0.22 7. R BRONZE 10 SRC 0.28 0.26 8. R GOLD 15 SRC 0.27 0.25 2.31 The Am ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m the financial statements of respective associate enterprises itself, subject to adjustment for the expenses that the associate enterprises need to incur to consummate the transactions and sell the products. The associate enterprises are selling products purchased from the appellant to the third party unrelated customers. Thus, sale prices charged to such third party unrelated customers for the particular quality of the product represent comparable uncontrolled prices on aggregate basis in the respective comparable market under comparable circumstances. In this regard, perusal of statement furnished by the appellant setting out the prices at which AE GPF sold plain film products and sun control products to its third party customer and AE GPF's corresponding landed cost of those products purchased from the appellant and the gross margin earned by the AE GPF, reveals that the gross difference between the landed cost of goods sold and the price at which the associate enterprises sells those products to the third party customers in its designated territory is very nominal and in some cases even not sufficient to cover the overheads of associate enterprises which are around 20 percent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omparable transactions. 2.35 The appellant also furnished associate enterprises profitability margin statement since their inception till the relevant financial period. On a perusal of the said statement it is observed that the associate enterprises are either suffering losses consistently for the years or are earning only nominal net profit margins. Had it been the case that appellant has charged lower prices to its associate enterprises than prevailing market prices in the respective geographical market the associate enterprises would have been making significant profits year by year, rather than suffering losses or earning only nominal profits. The fact that the marginal rates of tax are higher in the U. S. A. and the U. K. also acts as a dampener in shifting profits. 2.36 It is a cliche in transfer pricing circles but none the less true that the transfer pricing is more of an art than a science. This proposition allows the degree of the judgment about the level of evidence that is required to evaluate a transfer price and to ascertain that a particular method is a reasonable estimation of the arm's length price. Based on the level of evidence filed and brought on record a jud ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r pricing adjustment. The appellant submitted that such highly priced, solitary, low volume non-associate enterprises transactions are not at all comparable with associate enterprises transactions. On perusal of details placed on record, it is noted that the Transfer Pricing Officer has compared associate enterprises transaction of sale of plain film product "GARFILM MATT (MT-12)" to associate enterprises PF of 70,601.90 kgs with a high priced solitary transaction with a Japan based nonassociate enterprises customer wherein quantity of only 4395 kgs is involved and this transaction alone has led to the transfer pricing adjustment of Rs. 50,03,428. In terms of quantity, these two transactions are not comparable at all. Hence, the transfer pricing adjustment of Rs. 50,03,428 on account of said transaction is unjustified. The Transfer Pricing Officer has compared associate enterprises transaction of sale of sun control film product "GRD Silver Grey 05" to associate enterprises GPIL of 1,19,331 kg with a high priced transaction with two Noil-associate enterprises customers wherein total quantity of only 2,167 kgs is involved, leading to transfer pricing adjustment of Rs. 6,08,811. In t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2003-04, which has been reported in Form No. 3CEB, for the financial year 2003-04. This mistake needs to be rectified. On merits, it was submitted that the assessee has benchmarked its commission to associate enterprises applying comparable uncontrolled price method wherein commission to associate enterprises at 12.5 percent has been compared with commission ranging from three percent to 10 percent paid to several non-associate enterprises foreign agents of the assessee. It was submitted before the Commissioner (Appeals) that increase rate of 12.50 percent is justified on account of significant differences in the assessee's agency arrangement with its associate enterprises foreign agents. Such differences are in terms of obligation undertaken functions performed, products covered under the agency arrangement risk assumption, etc. In support of this difference, the assessee filed copy of agency agreements with its associate enterprises and non-associate enterprises foreign agents. Various differences were pointed out before the Transfer Pricing Officer from these agreements. The Commissioner (Appeals) analysed the agency agreement with associate enterprises GPIL and with non-associa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lity differs from other based on customers specific requirement, specifications, etc. For example, in case of building industry, mainly for use in window application, customer may require particular VLT percent (visual light transmission within the limit of particular country's specific parameters), particular colour, particular thickness for safety purposes, etc. IPD products are sold only in a maximum 12 to 16 qualities. In case of CPD products, substitute products are available in the market which almost looks similar as the appellant's products but performance wise it is of inferior quality. But one cannot make out these differences unless practically it has been used. IPD products are commodity products. Almost all competitors' products are alike with little variation. Resultantly, it is very difficult to develop market for these products. One has to make extra efforts to sell these products like organising video film presentations, make advertise-ments by various medium such as taking part in exhibitions, do a market survey on a regular basis to check the customers tastes, etc. For CPD products, customer is king and one has to depend purely on customers re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er the fact that generally consumer products are sold in retail outlets and for this purpose organisation, co-ordination and management of larger supply chain (such as stockist, distributor/wholesaler, retailer, etc.,) needs to be undertaken. All these involve increased level of expenses for the agent, especially when the associate enterprises agent has undertaken contractual obligation to undertake market development. On a perusal of financial statements of the associate enterprises it was observed that they did incur advertisement expenses, travel and entertainment expenses and employee salaries at considerable levels. Further, it was submitted that it is a fact that not much efforts are required for promotion of industrial products and there is no need to hunt for the potential customers for such industrial products. Potential customers are few specialised industrial customers who either use the product as raw materials or as component parts for manufacture of finished goods or any activity ancillary to manufacture of products. Hence, the purchaser of the industrial products is generally aware of the potential suppliers by way of its internal market intelligence. They approach s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not the case that increased rate of commission have been paid only to associate enterprises. In case of nonassociate enterprises also, wherever the perceived benefit from agent's activities are higher, increased rate of commission is paid as compared to normal rate of commission of five percent Considering the fact that (a) associate enterprises GPIL is a full fledged agent ; (b) agency arrangement with associate enterprises covers all types of products, (i.e., industrial product as well as consumer products) ; and (c) that there is increased scope and intensity of risk assumed and functions performed by the associate enterprises, it deserves more commission compared to limited risk non-associate enterprises agents. Hence, in my opinion, determination of the arm's length commission for associate enterprises GPIL at 10 percent would be in conformity with arm's length standard. This commission is worked out by adding two percent for additional risks attached to full fledged agent on the eight percent commission paid by appellant to limited risk non-associate enterprises agent." 13. The Commissioner (Appeals), however, gave the benefit of +/- five percent. range held that the same sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther added that in the countries where associate enterprises are dealing, there are third parties who are involved in such business, the same can also be considered. Lastly, he submitted that if there are no internal and external comparables, then the most appropriate method which should be adopted is that of transactional net margin method. The learned Departmental representative further submitted that the geographical and marketing difference in the countries where associate enterprises are operating and other countries have a significant difference, then also how can the Commissioner (Appeals) delete the entire adjustment when none of the approach either of the Transfer Pricing Officer or of the assessee has been found to be acceptable by him. Regarding adjustment on account of commission, he submitted that there is no difference in the activities carried out by the non-associate enterprises agents and the associate enterprises, then why should five percent not be taken as held by the Transfer Pricing Officer. He further submitted that the learned Commissioner (Appeals) erroneously given the standard deduction of +/- five percent which is not permissible as per law specifically ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ises have been compared with the average export prices charged to local customers in India. The Transfer Pricing Officer has rejected the assessee's comparison of export sales charged to associate enterprises with local sales price and compared the average nonassociate enterprises export price with the price charged to two associate enterprises. The learned Commissioner (Appeals) accepted the contentions of the assessee that the Transfer Pricing Officer has failed to take into consideration the geographical, economical market differences where the associate enterprises and non-associate enterprises agents are carrying out their business activities. He also appreciated that the export price of the proceeds varies considerably from country to country and specifically in a developed market of the U. S. and the U. K. in comparison to Asian and African countries. He analysed the prices and also the nature of market which has been advertum discussed in detail in the foregoing paragraphs. However, after having come to the conclusion that the Transfer Pricing Officer's approach is not correct and he has not taken into account the vital factor of geographical, economical market differences, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee or its group entity enters into a comparable transaction with unrelated party where the goods or services under consideration are same or similar. On the other hand, there could be an external comparable uncontrolled price if a transaction between two independent enterprises involves comparable goods or services under comparable conditions. The comparable uncontrolled price method also requires a very high degree of comparability with regard to the quality of products or services, contractual terms, level of the market, geographical market in which the transaction takes place and host of other factors. 19. Once the learned Commissioner (Appeals) found that there are so much of variables for applying either internal comparable uncontrolled prices and has not applied external comparable uncontrolled price, probably, due to this factor, then the entire application of comparable uncontrolled price fails in this case. The learned Commissioner (Appeals) cannot go to examine, independently the operating expenditure and operating profits of the associate enterprises for determining the arm's length price. A comparability analysis has to be carried out for determining the arm' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be two rates for payment of commission. Payment of commission at 12.5 percent is definitely excessive and the Transfer Pricing Officer has rightly taken at five percent based on rates of commission paid to non-associate enterprises foreign agents. On the other hand, learned counsel for the assessee had submitted that the agency arrangements with the associate enterprises were entirely different from that of non-associate enterprises foreign agents and this analysis has been discussed in detail by the learned Commissioner (Appeals). He also pointed out the relevant obligations which were to be carried out by the associate enterprises which were not there in case of non-associate enterprises foreign agents. He, thus, strongly relied upon the findings and the conclusion drawn by the learned Commissioner (Appeals). 21. After carefully considering the rival contentions, we find that the Trans fer Pricing Officer has made the adjustment on the ground that commission rate of 12.5 percent paid to the associate enterprises are far more than the commission rate paid to the non-associate enterprises foreign agents which were ranging from three percent to 10 percent and has bench marked the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by both parties, identical issue has been decided by the coordinate Bench of this Tribunal in ITA No. 7394/Mum./2007 and ITA No. 7687/Mum./2007, wherein the issue was restored to the file of the Assessing Officer with certain directions. 25. After going through the said order, we find that similar issue has been decided by a co-ordinate Bench of the Tribunal in the assessee's own case in ITAs No. 7394 and 7687/Mum./2007, for the assessment year 2004-05, vide order dated July 2, 2009, wherein it has been observed and held as under: "5.4 We have considered the rival submissions made by both the sides, perused the orders of the authorities below. We have also considered the paper book filed on behalf of the assessee. We find the proviso of section 36(1) (iii) as amended by the Finance Act, 2003, with effect from April 1, 2004, is very clear which reads as under : [Provided that any amount of the interest paid, in respect of capital borrowed for acquisition of an asset for extension of existing business or profession (whether capitalised in the books of account or not) ; for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st on the shortfall of payment of advance tax under section 115JB ignoring the submissions made by the appellant that in case of liability under section 115JB no interest can be levied for shortfall in payment of advance tax as has been held by various High Court's decisions. 27. Ground No. 1, relates to transfer pricing adjustment of Rs. 2,03,94,752, in relation to the commission paid to the associate enterprises. 28. Having heard the rival contentions and having perused the material on record as well as the findings of the learned Commissioner (Appeals) and the Assessing Officer, we find that the issue before us is identical to the issue arising out of ground No. 2, decided by us in the Revenue's appeal in ITA No. 4444/Mum./2011, in the assessee's own case for the assessment year 2005-06. In this year, the learned Commissioner (Appeals) has confirmed the adjustment made on account of commission paid to the associate enterprises. The Assessing Officer found that the assessee has paid commission to its two subsidiary companies (A.Es) at 12.5 percent wherein, on same kind of export sales, the parties have been paid commission at five percent and 10 percent respectively. The Assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as well as the findings of the learned Commissioner (Appeals) and the Assessing Officer, we find that in so far as the chargeability of interest under section 234B is concerned, the same is payable on failure to pay the advance tax in respect of the tax payable under section 115JB, keeping in view the law settled by the hon'ble Supreme Court in Rolta India Ltd. [2011] 330 ITR 470 (SC), wherein their Lordships have observed and held as under (page 478) : "9. The question which remains to be considered is whether the assessee, which is a MAT company, was not in a position to estimate its profits of the current year prior to the end of the financial year on 31st March. In this connection the assessee placed reliance on the judgment of the Karnataka High Court in the case of Kwality Biscuits Ltd. v. CIT [2000] 243 ITR 519 (Karn) and, according to the Karnataka High Court, the profit as computed under the Income-tax Act, 1961 had to be prepared and thereafter the book profit as contemplated under section 115J of the Act had to be determined and then, the liability of the assessee to pay tax under section 115J of the Act arose, only if t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance tax in respect of tax payable under section 115JB, it was liable to pay interest under sections 234B and 234C of the Act. Thus, it can be concluded that interest under sections 234B and 234C shall be payable on failure to pay advance tax in respect of tax payable under section 115JA/115JB. For the aforestated reasons, Circular No. 13 of 2001, dated November 9, 2001 issued by Central Board of Direct Taxes reported in [2001] 252 ITR (St.) 50 has no application. Moreover, in any event, para 2 of that circular itself indicates that a large number of companies liable to be taxed under MAT provisions of section 115JB were not making advance tax payments. In the said circular, it has been clarified that section 115JB is a self-contained code and thus, all companies were liable for payment of advance tax under section 115JB and consequently provisions of sections 234B and 234C imposing interest on default in payment of advance tax were also applicable. 10. For the aforestated reasons the Commissioner of Income-tax succeeds in the civil appeal arising out of SLP (C) No. 25746 of 2009 (Jt. CIT v. Rolta India Ltd.) as also in the civil appeal arising out of SLP (C) No. 18367 of 2010 (CI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmed." 35. Thus, the learned Commissioner (Appeals) has confirmed the findings of the Assessing Officer on the ground that by the Finance Act, 2009, amendment has been brought on statute in Explanation-1 clause (i) with retrospective effect from April 1, 2001, therefore, the same has been rightly added. In case of such a situation where any amount is being added as income in the computation under section 115JB, which has been brought on statute by retrospective amendment, has been dealt with by their Lordships of the Calcutta High Court in Emami Ltd. [2011] 337 ITR 470 (Cal), after analysing the provisions of section 115JB, section 234B and 234C, provisions relating to payment of advance tax and provisions of sections 207, 208 and 2011, have come to the following conclusion (page 480) : "8. In the case before us, the last date of the relevant financial year was March 31, 2001 and on that day, admittedly, the appellant had no liability to pay any amount of advance tax in accordance with the then law prevailing in the country. Consequently, the appellant paid no advance tax and submitted its regular return on October 31, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... v. Rolta India Ltd. [2011] 330 ITR 470 (SC), we find that in that case the question was whether interest under section 234B of the Act could be charged on the tax calculated on the book profit under section 115JA and in other words, whether advance tax was at all payable on book profits under section 115JA of the Act. The Supreme Court answered the said question in the affirmative and further held that the provisions of interest on default as provided in sections 234B and 234C would also apply. We have already pointed out that Mr. Bajoria, at the very outset, conceded that the said decision should be applied for answering the first question formulated in this appeal against his client. In our opinion, the said decision is not relevant for considering the second and the third questions as to whether an assessee can be said to be a defaulter in payment of advance tax if he had no liability to make payment of such tax on the last date of a financial year preceding the relevant assessment year as such question did not arise in the said case before the Supreme Court. It appears that the learned Tribunal has not at all considered the aforesaid aspect as to the liability of the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ceeding paragraphs. 39. In the result, the assessee's appeal is partly allowed. 40. We now take up the Revenue's appeal in ITA No. 4418/Mum./2010, for assessment year 2003-04, vide which, following grounds have been raised : "1. On the facts and in the circumstances of the case and in law, the learned Commissioner of Income-tax (Appeals) erred in deleting the addition of Rs. 3,68,37,122, under section 80HHC on the book profit under section 115JB without appreciating the fact that there is no such provision in the Act to deal with section 80HHC differently if the assessee is paying tax under section 115JB. 2. On the facts and in the circumstances of the case and in law, the learned Commissioner of Income-tax (Appeals) erred in allowing depreciation on know-how fees amounting to Rs. 77,89,026 without appreciating the facts of the case." 41. In so far as ground No. 1, is concerned, the learned Commissioner (Appeals) has discussed this issue in the following manner : "4. 4 The second ground of appeal relates to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2001 was specifically meant to phase out the deduction completely for the assessment year 2005-06 in which event on an application of the sub-section only a portion of the amount computed under section 80HHC is allowable for the assessment year 2004-05. This is in accordance with the decision of the Bombay High Court in Ajanta Pharma [2009] 318 ITR 252 (Bom). 4.5. However, the method of computation of deduction under section 80HHC is to be in accordance with the decisions of the Special Bench in Dy. CIT v. Syncome Formulation (I) Ltd. [2007] 292 ITR (AT) 144 (Mumbai) [SB]. The Assessing Officer is directed accordingly." 42. At the outset, both parties agreed that this issue stands covered by the judgment of hon'ble Supreme Court in Ajanta Pharma Ltd. v. CIT [2010] 327 ITR 305 (SC). 43. After hearing both parties and on perusal of the material available on record, we find that the issue of computation of book profit under section 115JB and deduction under section 80HHC have been decided by the hon'ble Supreme Court in the following manner : "9. On the other hand, sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n'. As earlier stated, section 115JB is a self-contained code. It taxes deemed income. It begins with a non obstante clause. Section 115JB refers to computation of 'book profits' which have to be computed by making upward and downward adjustments. In the downward adjustment, vide clause (iv) it seeks to exclude 'eligible' profits derived from exports. On the other hand, under section 80HHC(1B) it is the extent of deduction which matters. The word 'thereof' in each of the items under section 80HHC(1B) is important. Thus, if an assessee earns Rs. 100 crores then for the assessment year 2001-02, the extent of deduction is 80 percent thereof and so on which means that the principle of proportionality is brought into scale down the tax incentive in a phased manner. However, for the purposes of computation of book profits which computation is different from normal computation under the 1961 Act/computation under Chapter VI-A. We need to keep in mind the upward and downward adjustments and if so read it becomes clear that clause (iv) covers full export profits of 100 per cent as 'eligible profits' and that the same cannot be reduced to 80 per cent by relying on section 80HHC(1B). Thus, fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (subject to the conditions specified in sub-sections (4) and (4A) of that section) to obliterate the difference between 'eligibility' and 'deductibility' of profits as contended on behalf of the Department." 44. In view of the law laid down by the hon'ble Supreme Court, we direct the Assessing Officer to compute the deduction under section 80HHC in the light of the aforementioned judgment of hon'ble Supreme Court. Thus, ground No. 1, raised by the Revenue is dismissed. 45. The additional ground raised by the assessee in its ITA No. 4189/Mum./ 2010, as reproduced above, is hereby disposed of in favour of the assessee as the same is covered by the aforementioned judgment of the hon'ble Supreme Court in Ajanta Pharma [2010] 327 ITR 305 (SC). Respectfully following the same, the additional ground raised by the assessee is hereby allowed. 46. Ground No. 2, relates to depreciation on know-how fees of Rs. 77,89,026. 47. The learned Commissioner (Appeals) has dealt with this issue in the following manner : "7. The fifth ground of appeal relates to depreciation on technical know-how fees of Rs. 77,89,026. The Assessing Office ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r section 32 (56,40,216) aggregating to Rs. 1,72,26,384. The said learned Commissioner of Income-tax (Appeals) erred in observing that this matter has to be decided by the Assessing Officer when all the details were submitted at the time of hearing of the appeal and the question of allowability of the deduction was required to be taken by him.'" 12. The observations of the Commissioner of Income-tax (Appeals) on this issue were as follows : The Assessing Officer disallowed Rs. 1,22,18,252 but the correct amount was Rs. 1,03,85,368 being depreciation on technical know-how on the ground that no such depreciation was allowable on cost paid for acquiring technical knowhow. The alternative claim for deduction under section 35AB was also not allowed as the same had already been exhausted. The Assessing Officer in the assessment order disallowed the claim under section 35AB holding that the allowance of one-sixth of the technical knowhow expenses already stood exhausted. The Assessing Officer also did not allow the depreciation stating that this issue was covered by the decision of the hon'ble Income-tax Appellate Tribunal, vide order bear ..... X X X X Extracts X X X X X X X X Extracts X X X X
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