\u0906\u092f\u0915\u0930 \u0905\u092a\u0940\u0932\f\u092f \u0905\f\u0927\u0915\u0930\u0923, \u0905\u0939\u092e\u0926\u093e\u092c\u093e\u0926 \f\u092f\u093e\u092f\u092a\u0940\u0920
\nIN THE INCOME TAX APPELLATE TRIBUNAL
\n\u201cSPECIAL BENCH,\u201d AHMEDABAD
\nBEFORE JUSTICE P.P. BHATT, PRESIDENT,
\nSHRI RAJPAL YADAV, JUDICIAL MEMBER,
\n&
\nSHRI WASEEM AHMED, <\/p>\n
Date of Hearing : 06.08.2019 \u0918\u094b\u0937\u0923\u093e \u0915\f \u0924\u093e\u0930\f\u0916 \/Date of Pronouncement: 24.10.2019 \u0906\u0926\u0947\u0936\/O R D E R PER WASEEM AHMED ACCOUNTANT MEMBER:<\/p>\n
These four appeals have been filed at the instance of the Assessee and
\nRevenue against the separate orders of the Ld. Commissioner of Income-Tax
\n(Appeals)-XIV, Ahmedabad [”Ld.CIT(A)\u201d in short] relevant to Assessment Years
\n2006-07, 2007-08, & 2008-09.
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\nITA Nos. 1352, 1258, 1822 & 1874\/Ahd\/2011-2012& 2014
\nAYs :2006-07 to 2008-09
\n2. The Hon’ble President of the Income Tax Appellate Tribunal on a reference
\nmade by a Division Bench vide order dated 15-06-2016 constituted
\nthis Special Bench under section 255(3) in the above matter to decide the following
\nquestion of law:
\n\u201cWhether or not the provisions of Section 92 can be invoked in a situation in which income
\nof the assessee is eligible for tax exemption or tax holiday and thus not actually chargeable
\nto tax in India, or in a situation in which there cannot be any motive in manipulating the
\nprices at which international transactions have been entered into?\u201d
\nThe subject matter of the above question is emanating in almost all the
\nappeals under consideration. Therefore, for the sake of convenience, we are taking
\nup the facts involved in the issue for the previous year 2005-06 relevant to the
\nassessment year 2006-07, which is the first year under reference.
\n3. Briefly stated facts of the case are that the assessee is a private limited
\ncompany and engaged in the activity of business process outsourcing (BPO)
\nservices in the field related to accounting & taxation such as book-keeping, VAT
\nreturns, payroll, management accounting, and audit. The major shareholder in the
\ncompany is Mr. Dhiren Doshi, who is also the sole proprietor of the firm M\/s Doshi
\n& Co. based in the United Kingdom. The Assessee is providing these services to the
\nfirm, which is an AE of the assessee within the meaning of Section 92A of the Act.
\nThe assessee provides these services from the unit situated at Baroda which is an
\nSTPI unit eligible for deduction\/exemption u\/s 10A of the Act. The assessee
\ncompany is 99.99% subsidiary of Doshi & Co., a proprietary firm of Mr. Dhiren
\nDoshi based in United Kingdom (UK).
\n3.3 The assessee in the year under consideration provided services equating to
\n1,60,378 hours to its AE and 380 hours services provided to NON-AEs located in
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\nITA Nos. 1352, 1258, 1822 & 1874\/Ahd\/2011-2012& 2014
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\nZambia, Africa. The assessee in the year under consideration in the case of AE has
\ncharged a rate of GBP 5 per hour from April 2005 to Feb 2006 and in March at the
\nrate of GBP 6 per hour whereas in case of non-AEs it has charged GBP 4.50 to 4.85
\nper hour during the same period. Accordingly, the assessee contended that the
\nsimilar nature of services was provided to both AE and non-AEs from the same
\nfacility, but the rate charged to the AE was higher than the average rate charged
\nto NON-AEs. The average rate corresponding to the AE works out to be GBP 5.09
\nper hour whereas in case of non-AEs it stood at GBP 4.95 per hour. After that, the
\nassessee benchmarked its transaction with AE by applying internal CUP method
\nprescribed under section 92C of the Act and claimed that its transactions with the
\nAE are at Arm Length Price.
\n3.4 The assessee during the assessment proceedings vide letter dated
\n18\/02\/2009 also made available the details of the external comparables (CUP)
\nbased upon the quotations of Independent Enterprises where the average rate
\nquoted by them figuring at GBP 5.71 per hour was greater than the rate charged
\nfrom the AE. However, the assessee contended that difference in the rates arrived
\nin pursuing internal CUP method being GBP 5.09 and external CUP method being
\nGBP 5.71, arose due to the unevenness of the terms and conditions between the
\nsubject entities and their clients.
\n3.5 Nevertheless, the TPO rebutted the rationale proffered by the assessee in
\nthe above paragraph for preferring the internal CUP method of benchmarking the
\ntransaction with the AE, counter-reasoning that services provided to AE and NONAE
\nmay be similar, but are unalike in quantity and involve dissimilar markets. As
\nsuch, the TPO was of the view that CUP method requires a high degree of
\ncomparability such as the volume, credit terms, timing & geographical area of
\ntransaction\/services, etc. which is not comparable in the present case.
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\n3.6 Further, the TPO opined that given the facts and circumstances, TNMM is
\nthe most appropriate method as in the case of TNMM a high degree of similarity of
\nproduct\/services is not necessary.
\n3.7 Thus, the TPO employed certain filters in prowess database to adopt more
\naccurate comparables, wherein the process he picked up a set of four such
\ncomparables to work out the operating profit\/ operating cost as PLI and show
\ncaused the assessee for application of TNMM
\n3.8 In reciprocation, the assessee objected to TNMM as the most appropriate
\nmethod. However, the assessee at the same time without prejudice also submitted
\nthat except one, all the comparables selected by the TPO are involved in different
\nkind of services and business segment. The assessee further filed two comparables
\nand contended that finally, these three comparables should be considered where
\nthe average margin would come to 6.82%, and therefore, no adjustment is
\nwarranted.
\n3.9 However, the TPO disregarded the contention of the assessee and
\ncalculated the average margin of the comparables which was worked out by him as
\n33.10% whereas in the case of the assessee it was 7.97% only. Accordingly, the
\nTPO made the upward adjustment of Rs. 1,48,23,848\/-.
\n4. Aggrieved by the order of TPO\/AO, assessee carried the matter to Ld. DRP
\nand vehemently objected the rejection of CUP Method, selection of TNM Method by
\nTPO as most appropriate method, comparable selected by the TPO, comparable
\nrejected by the TPO as suggested by the assessee.
\n4.1 The assessee also propositioned that it is enjoying the benefit of deduction
\nu\/s 10A of the Act. Therefore, there is no reason to charge a lower price from the
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\nITA Nos. 1352, 1258, 1822 & 1874\/Ahd\/2011-2012& 2014
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\nAE. Moreover, given the circumstances of the case, the effective tax rate in the UK
\nwould be higher than the effective tax rate in India, which as a result of section
\n10A of the Act is 0%. As such, there was no motive and incentive in shifting the
\nprofits from India to the UK, where the rate of tax is comparatively higher. The
\nassessee in support of its contention also relied on ITAT Bangalore in case of Philip
\nSoftware Pvt. Ltd. vs. ACIT (119 TTJ 721).
\n5. However, Ld. DRP rejected the contention of the assessee after relying on
\nthe order of Aztec software & technology services Ltd ( for short ASTSL) (107 ITD
\n141) and ITAT Mumbai in case of Gharda chemicals Ltd vs. DCIT (2009-TIOL-790-
\nITAT-Mumbai).
\nAggrieved by the order of Ld. DRP, the assessee is in appeal before this
\nTribunal. Before the Division Bench, assessee took the plea that since, it is eligible
\nfor tax exemption and not actually chargeable to tax in India, therefore there
\ncannot be any motive to shift the profit from India to U.K. Thus no reference to
\nTPO ought to have been made. The Bench found contradictory orders of the ITAT
\non the above plea and therefore, recommended the question for determination by
\nthe Special Bench. Thus this special bench has been constituted to decide the
\nabove-mentioned question.
\n6.1 Ld. Counsel for the assessee while appraising us with the facts and
\ncircumstances very eloquently contended that when an explanation or defence of
\nan assessee based on interpretation of law as well as on number of facts
\nsupported by evidence required consideration, whether the explanation is sound or
\nnot must be determined not by considering the weight to be attached to each
\nsingle factor in isolation but by assessing the cumulative effect of all the facts and
\nlaw in their setting as a whole. He submitted that endeavour at the end of
\nassessee is to demonstrate that though chapter X in the Income Tax Act was
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\nITA Nos. 1352, 1258, 1822 & 1874\/Ahd\/2011-2012& 2014
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\nintroduced for eliminating the efforts of avoidance of taxes, but can provision in
\nthis chapter be implemented without construing the true import of the provision.
\nAccordingly to him, the special provisions relating to avoidance of tax in chapter X
\nbe construed in harmonious way and not be impleaded according to thumb rule.
\nHe further submitted that in order to bring his point at home, he has divided his
\narguments in V compartments viz:
\n(a) purposive of interpretation of Tranfer Pricing provisions …… …
\n(b) purpose of introducing Transfer Pricing provisions…….
\n(c) why Aztec Software & Technology Services Ltd. v. Asstt. CIT , 107 ITD
\n141 (Banglore-Special Bench) is no more good law …..
\n(d) Income is sine qua non to apply the provisions of Chapter X ….. and
\n(e) other arguments in support of this interpretation.
\n6.2. As far as submissions under first two folds are concerned, they are just two
\nsides of same coin and in a way inter-connected with each other. The ld.counsel
\nfor the assessee appriased us purpose and objects required to be achieved by
\nintroducing TP regulations in Chapter X of the Income Tax Act. In his stride, he
\ncontended that by way of two amendments effected in Finance Act, 2001 and
\n2002, TP provisions were brought on the statute book. In order to demonstrate
\nthe objective required to be achieved through these provisions, he made reference
\nto the speech of the Finance Minister made in the Parliament while introducing the
\nFinance Act, 2001 reported in 248 ITR (Statute) pages 1, 34, 162 and 181 wherein
\nmemorandum explaining provisions in the Finance Bill, 2001 is reported in the
\njournal. According to the ld.counsel for the assessee, it was explained that since
\nparticipation of multinational group companies in the economic activities of the
\ncountry has arisen, and new complex issues have emerged from the transactions
\nentered between two or more enterprises belonging to the same multinational
\ngroup, therefore, possibility of manipulation of price charged or paid as such in
\ntheir group concerns, cannot be ruled out, and can lead to erosion of tax revenue
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\nITA Nos. 1352, 1258, 1822 & 1874\/Ahd\/2011-2012& 2014
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\nto the country. With a view to provide statutory framework, which can lead to
\ncomputation of reasonable, fair and equitable profits and tax in India, in the cases
\nof such multi-national enterprises, new provisions were introduced in the Income
\nTax Act. The ld.counsel for the assessee, thereafter brought to our notice Circular
\nBearing No.12 of 2001 dated 23.8.2001 reported in 251 (Statute) ITR page 15
\nissued by the CBDT for explaining the purpose and objects of these TP provisions
\nand how they are to be implemented. According to the ld.counsel for the
\nassessee, the CBDT had contemplated that these TP provisions have been
\nincorporated with a view to provide a statutory framework which can lead to
\ncomputation of reasonable, fair and equitable profits and taxes in India so that the
\nprofits chargeable to tax in India did not get diverted elsewhere by altering the
\nprice charged and paid in their group concern, leading to erosion of tax revenue.
\nSimilarly, he brought to our notice other circulars viz. Circular No.14 of 2001, 8 of
\n2002 and contended that basic thrust of all these circulars is to propound that new
\nprovision was intended to ensure the profit taxable in India are not under-stated
\n(or loss are not overstated) by declaring lower receipts or higher outgoings than
\nthose which would have been declared by the persons entered into with similar
\npersons with unrelated parties in the same or similar circumstances. The basic
\nintention underline with new TP regulation is to prevent shifting out of profit by
\nmanipulating prices charged or paid in international transactions. He also drew or
\nattention towards decision of Hon\u2019ble Supreme Court in the case of Morgan Stanley
\n& Co. 292 ITR 416 in order to contend that object of the TP provisions is to protect
\nIndia\u2019s tax base.
\n6.3 On the strength of the above, he emphases that fundamental object of
\nthese provisions is to ensure that India\u2019s tax base should not erode or profits
\ntaxable in India should not be shifted to other tax jurisdiction. If in a given
\nsituation, there is no motive or object to shift the taxability of profit then there
\nshould not be any determination of arm\u2019s length price for international transactions
\nbecause the very object would frustrate. Once it is demonstrated that there is no
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\nITA Nos. 1352, 1258, 1822 & 1874\/Ahd\/2011-2012& 2014
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\nchance of avoiding payment of taxes, then this Chapter should not have been
\napplied on such international transactions.
\n6.4. The ld.counsel for the assessee further contended that assessee is entitled
\nfor exemption under section 10A on its eligible profit at the rate of hundred
\npercent. This factor is required to be kept in mind while construing or interpreting
\nTP provisions in Chapter-X. The object of introducing these provisions in Chapter-
\nX was to avoid erosion of tax revenue from Indian tax jurisdiction to foreign tax
\njurisdiction. If there is no chance to shift such tax basis on the ground that the
\nassessee is eligible for tax exemption at the rate of hundred percent, then the
\nprovisions is to be construed which will achieve the objectives. Taking us through
\njudgment of Hon\u2019ble Supreme Court in the case of Goodyear India Ltd. & Others
\nvs. State of Haryana and others (1992) Volme-2 SCC page no.71, whose copy has
\nbeen placed on 404 of the case law compilation, he contended that Hon\u2019ble
\nSupreme Court in that case held that reasonable construction must be followed
\nand literal construction may be avoid, if that defeats the objects and purpose of
\nthe Act. Similarly, he put reliance on the decision of Hon\u2019ble Supreme Court in the
\ncase of Allied Motors P.Ltd. Vs. CIT, 224 ITR 677 and submitted that adjudicator
\nshould remember that statutes have some purpose and object to accomplish
\nwhose sympathetic and imaginative discovery is the surest guide to their meaning.
\nThus, rule of reasonable interpretation should be applied.
\n6.5 In the third fold of contentions, Shri Hemani, the ld.counsel for the assessee
\nhas putforth the stand of the assessee as to why earlier Special Bench order of the
\nITAT in the case of Aztec Software & Technology Services Ltd. , 107 ITD 141 be
\nnot considered as governing the field. The facts in the case of Aztec
\nSoftware & Technology Services Ltd. (supra) are that the assessee was an Indian
\ncompany engaged in the business of development and export of software. It was
\nalso entitled to deduction under section 10A of the Income Tax Act in respect of
\nprofits and again derived from export of software. It has filed its return of income
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\nfor the Asstt.Year 2002-03 declaring total income at Rs.44,60,830\/- after claiming
\ndeduction of Rs.7,53,69,376\/- under section 10A of the Act. Since there were
\ninternational transactions with associated enterprise exceeding Rs.5 crores, its case
\nwas selected for scrutiny assessment and a reference was sent to the TPO for
\ndetermining arm\u2019s length price of international transaction with AE. The
\nld.Revenue authorities noticed that the assessee had received a sum of Rs.7.96
\ncrores from its AE i.e. DB Software solutions and it had paid a sum of Rs.37.64
\ncrores on account of marketing services of Rs.9.32 crores and on site software
\ndevelopment services of Rs.28.32 crores. While determining ALP of both these
\ntransactions, the ld.TPO has recommended upward adjustment of Rs.18.18 crores.
\nThis was added in the income of the assessee. Dissatisfied with the adjustment in
\nthe assessment order, the assessee went in appeal before the ld.CIT(A). It took
\nvarious grounds viz.
\n\u201c(a)There is no finding anywhere before or after reference in the communication under
\nsection 92CA that transactions were entered into in a manipulative manner so as to avoid
\nthe tax payment in India as mentioned in Circular No. 12 of 2001 issued by :-; Board. In
\nthis case no such possibility exists as the entire income from the new industrial undertaking
\nis eligible for deduction under section 10A, hence the very assumption of jurisdiction for
\nALP determination is erroneous and unsustainable in law.
\n(b)The reference made to the TPO is without jurisdiction as reasons for such reference has
\nnot been furnished to the assessee.
\n(c)The TPO ought to have insisted from Assessing Officer the material in his possession
\nwhich would conclusively establish that the impugned transaction were entered into by the
\nassessee with an intention to avoid the tax before acting upon the purported reference. It
\nmay be noted that only those cases which have been entered into with an intention to
\navoid tax alone are covered under Chapter X and not regular commercial transaction. It is
\nessential that incontrovertible evidences are in the possession of the Assessing Officer
\nbefore a reference is made as held by the Supreme Court in K.P. Varghese v. [TO [1981]
\n131 ITR 5971 The onus is on the revenue to establish any transaction leading to the
\navoidance of tax. From the Circular No. 12 of 2001 issued, under Transfer Pricing, it is clear
\nthat only in cases where profits taxable in India are diverted only then transfer pricing
\nprovisions are applicable. In this case no such findings are given.
\n(d)In the absence of any evidence to show that the assessee has paid or received or
\nentitled to receive more than what is accounted for, the reference to the TPO could not be
\nmade.
\n(e)The mandatory conditions provided in sub-section (3) to section 92CA have not been
\nfollowed.
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\n(f)The order of the TPO passed under section 92CA is not binding on the Assessing Officer
\nand the Assessing Officer has to I independently verify and convince himself of the legality
\nof the order before any action is taken.\u201d
\n6.6. The ld.CIT(A) considered the contentions of the assessee on these grounds
\nand held that before invoking Chapter X-A there should be existence of an
\navoidance of tax by way of transfer price mechanism. These provisions cannot be
\nresorted to in a mechanical manner. The AO must demonstrate on the basis of
\nmaterial\/information and documents in its possession that there is an avoidance of
\ntax. Secondly, it was held that before embarking on any determination of ALP, the
\nassessing authority has to pass through the process as prescribed under clause (a)
\nto (d) of sub-section 3 of section 92C of the Income Tax Act not only where the
\nassessing authority does it himself but also made reference to the TPO. In other
\nwords, before making reference to the TPO, the AO ought to have passed through
\nthe process as prescribed under clause (a) to (d) of section 92C(3). In his third
\nreasoning, the ld.CIT(A) has held that before making reference satisfaction ought
\nto be recorded by the AO for invoking provisions of Chapter X. The ld.CIT(A) in
\nthis way has assigned broadly six reasons which were considered by the ITAT.
\nUnder these circumstances, the ITAT has formulated the following questions
\nrequire to be considered by the Special Bench:
\nWhether is this a legal requirement under the provisions contained in Chapter X of the
\nIncome Tax Act, 1961 that the AO should prima facie demonstrate that there is a tax
\navoidance before invoking relevant provision ?
\n6.7 This question has been replied in favour of the Revenue and against the
\nassessee by Five Members of the Special Bench of ITAT, Bangalore. Anticipating
\nthe stand of the Revenue, on the strength of this order, the ld.counsel for the
\nassessee has submitted as to how ratio laid down in this case is no more a good
\nlaw. He contended that an identical question was considered by the Hon\u2019ble
\nBombay High Court in the case of Vodafone India Services P.Ltd., 361 ITR 531.
\nThe question before Hon\u2019ble Bombay high Court was \u2013
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\nWhether the existence of a potentially taxable income or an expenditure (capital or
\nrevenue) that impacts computation of taxable is a sine qua non for the invocation of
\njurisdiction under Chapter X ?
\n6.8 This question has been answered in affirmative i.e. in favour of the assessee
\nand against the Revenue. Hence, Hon\u2019ble Bombay High Court has expressly
\noverruled the ratio laid down in the case of Aztec Software & Technology Services
\nLtd. (supra). He further contended that the question before the Special Bench in
\nthe case of Aztec Software & Technology Services Ltd. was not dealing with the
\nquestion posed before the Special Bench, and those observations or the finding in
\nthe case of Aztec Software & Technology Services Ltd. is concerned, they are
\nobiter in a sense for the purpose of adjudicating this issue before the Special
\nBench. He drew our attention towards paragraph nos.20 and 22 of the Special
\nBench order in the case of Aztec Software & Technology Services Ltd. and
\ncontended that the ld.counsel for the assessee in the case of Aztec
\nSoftware & Technology Services Ltd. had submitted that even the claim of
\ndeduction under section 10A, 10AA and 10B would not alter the situation in so far
\nas answer to the question is concerned. In this background, the Hon\u2019ble Special
\nBench only noted that claim of deduction under section 10A, AA and B would not
\ncompel the AO to prima facie demonstrate that there is a tax avoidance before
\ninvoking relevant provisions. Thus, this observation was merely an argument by
\nthe ld.counsel for the assessee on which the Hon\u2019ble Special Bench has expressed
\nits view. It was not expressly adjudicated and would just an obiter which has no
\nbinding value. For buttressing his contentions, he relied upon the judgment of
\nHon\u2019ble Gujarat High Court in the case of CIT Vs. Baroda People\u2019s Cooperative
\nBank reported in 280 ITR 282. Similarly, he relied upon the decision of Hon\u2019ble
\nMadras High Court in the case of Gerard Perira v. ITO, 389 ITR 547. He placed on
\nrecord copies of both these decisions in the compilation. The ld.counsel for the
\nassessee further relied upon the decision of Full Bench of Hon\u2019ble Andhra Pradesh
\nHigh Court in the case of Central Wines Vs. Ito, 244 ITR 307. He emphasised that
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\nratio of law laid down in any of decisions is to be appreciated in the light of facts
\nand the dispute involved in that case.
\n6.9 In his fourth fold of contentions, he submitted that income is a sine qua non
\nto apply provisions of Chapter X and in support of his contentions, he relied upon
\nthe decision of Hon\u2019ble Bombay High Court in the case of Vodafone India Services
\nP.Ltd. (supra). Thereafter, he compiled twenty orders at the end of Hon\u2019ble
\nBombay high Court, Karnataka High Court as well as of ITAT. Copies of these
\ndecisions have been placed in the paper book started from page no.7 upto 371.
\nApart from these decisions of Hon\u2019ble Bombay High Court in the case of Vodafone
\nServices P.Ltd. and Karnataka High Court decision in the case of Phillips Software,
\nhe drew or attention towards order of the ITAT, Mumbai in the case of Tata
\nConsultancy Services. He pointed out that subsequent to the decisions of Hon\u2019ble
\nHigh Courts, even CBDT has issued circular recognising that this procedure
\nrequired to be followed. The AO ought to have not made reference blindly to the
\nTPO for determination of ALP of international transaction. He has to first prima
\nfacie look into whether any element of income or loss is involved in such
\ntransaction or not. He drew our attention towards circular nos.15 of 2015 and 3 of
\n2016 which are placed on page no.185 and 181 of case law compilation.
\nAnticipating interdiction provided in sub-clause (4) of section 92C along with its
\nprovisions, he contended that no doubt this clause provides that in case of any
\nadjustment was being recommended either upward side or downward side in the
\nvalue of ALP deduction under section 10A, 10B, 80IA etc. has been prohibited. He
\nalso submitted that he is conscious of the contentions of the Revenue that if
\narguments of the assessee is being accepted then section 92C(4) would become
\nredundant. According to him, Chapter X is a machinery provisions and not a
\ncharging one. Once the income of the assessee is eligible for hundred percent
\ndeduction under section 10A then by applying the machinery provision an artificial
\nchargeabilty cannot be invoked upon the assessee. The provision to section 92C is
\nagain a step down machinery provisions which gets triggered only when section 92
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\nis found to be applicable. In other words, the stand of the assessee on this issue
\nis that Chapter X itself is a machinery provision, first some adjustment in the value
\nof international transaction would be found out by application of machinery
\nprovision, and thereafter that will be disqualified for grant of deduction with help of
\nproviso which is one more step down of the machinery provisions. This proviso
\ncannot be given preference over the section 10A of the Act. For buttressing his
\ncontentions, again put reliance upon the decision of Hon\u2019ble Bombay High Court in
\nthe case of Vodafone India Services P.Ltd. (supra).
\n6.10 In the last fold of contentions, he took all residuary arguments of this issue.
\nAccording to him, sections 10A\/10B\/10AA and the TP provisions operate in
\nseparate and mutually exclusive sphere. On plain reading of these provisions, it
\nwould reveal that neither supersede nor overrule the other one. In a case of
\noverlapping there is no legislative or judicial clarity as to which will prevail over the
\nother. In order to buttress this proposition, he took us through section 10A and
\nsubmitted that this section provides exemptions on the profits derived from eligible
\nbusiness by a newly established undertaking in a free trade zone. In order to
\ndetermine eligible business for the purpose of computing eligible profits, the
\nLegislature have put various restrictions also, and for that purpose he took us
\nsection 80IA and (8) and 10 which have been made applicable to section 10A of
\nthis section wherein it has been contemplated that value of all goods and services
\nundertaken by any assessee from the eligible business should correspond
\nequivalent to the market value. If in the opinion of the AO the computation of
\nprofits and gain of eligible business in the manner provided in the Act presents
\nexceptional difficulty then the AO may compute such profits and gain as
\nreasonable basis as deemed fit. Similarly, upto Asstt.Year 2012-13, expression
\n\u201cmarket value\u201d used in section (8) has been explained by way of an explanation.
\nAccording to this explanation, the expression \u201cmarket value\u201d in relation to any
\ngoods and services means the price that such goods or services would ordinarily
\nfetch in the market. After Asstt.Year 2013-14, the scope of expression \u201cmarket
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\nvalue\u201d used in sub-section(8) has been enhanced and it has been provided that it
\nshould be at an arm\u2019s length price as defined in clause (ii) of section 92F where the
\ntransfer of such goods or services is a specified domestic transaction referred to in
\nsection 92BA. He further pointed out that in sub-section (10) of section 80IA
\nwhich is applicable on the computation admissible under section 10A, it has been
\nprovided that if the assessee owing to onerous connection between him and any
\nother person arranged, in such a manner which result more than the ordinary
\nprofit, then the AO has been empowered to compute reasonably according to his
\nwisdom. Thus, section 10A is a complete code in itself, which authorise the AO to
\ndetermine the eligible profit for grant of exemption at the rates specified in section.
\nIt takes care of any unreasonable profit if computed by the assessee. In other
\nwords, the eligible profit has to be computed keeping in view the market value of
\ngoods and services transacted by the assessee with any other concern, who may
\nhappen to closely associated concern in the domestic market. Referring to section
\n92C which provides mechanism for computation of ALP, he contended that this
\nalso provides for determination of ALP of an international transaction; but under
\nthe TP provisions, transaction between associated enterprises can be recomputed.
\nOne of the enterprises is a non-resident, and only upward adjustments are
\npermissible. Thrust of his arguments is that when the AO can accept working of
\neligible profits of which tax exemption at the rate of hundred percent is being
\nprovided under identical regulations as are provided in transfer pricing. In other
\nwords, eligible profits is to be computed keeping in mind, the market value of the
\ngoods and services transacted by the assessee, and it is to be calculated that even
\non reasonable basis on which hundred percent exemption to be granted to the
\nassessee, then how same computation will be inadmissible for the purpose of ALP
\nof international transactions, which is identical. In these circumstances, though
\ncomputation under one Chapter and under one scheme of the Act was not
\ndisturbed by the AO, but some computation is being sought to be disturbed for the
\npurpose of TP provisions and on such disturbed result, the assessee has been
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\ndeprived of exemption under section 10A because of section 92(4) of TP
\nprovisions. He culled out the conflicts between both the sections as under:
\ni) S. 10A rws 80IA (8) talks about ‘market value’ whereas S. 92 talks about ALP.
\n(ii) S.10A rws 80IA(10) talks about reducing ‘more than the ordinary profits’ whereas S.
\n92 talks about increasing the profits so as to increase the ALP.
\n(iii) After AY 13-14, under both the sub-sections the Explanations do make a reference
\nto domestic ALP though.
\n(iv) Further conflict would arise when there is a transaction between closely associated
\nenterprises, one of which is a non-resident, as both, s.10(7) and TP Provisions become
\napplicable to re-determine the profits and transaction price respectively. There is no clarity
\nas to whether the adjustment made by the AO or TPO will prevail.
\n6.11 He further contended that since none of the provisions starts with nonobstante
\nclause exhibiting the overriding effect given to any of the provisions, then
\nsection 10A being substantive provisions provide incentive from taxation and also a
\nmachinery provisions providing the mode of computation, it should be given
\npreference over the TP provisions. Therefore, once it is held that the assessee is
\nentitled for hundred percent exemption of its profit under section 10A, then TP
\nprovision ought not to be applied. He relied upon the decision of Hon\u2019ble
\nKarnataka High Court in the case of CIT V. Hewlett Packard Global Soft Ltd., 403
\nITR 453. He also relied upon the decision of Hon\u2019ble Bombay High Court in the
\ncase of Vodafone India P.Ltd. (supra) as well as made reference to the decision of
\nHon\u2019ble Supreme Court in the case of Bajaj Tempo Ltd., 196 ITR 188. On the
\nstrength of Hon\u2019ble Supreme Court decision, he submitted that section 10A of the
\nAct being a provision intended to promote for economic growth it should be
\nconstrued liberally with an idea to achieve both these sections and not to frustrate
\nsuch objects. The ld.counsel for the assessee further contended that Shri Diren
\nDoshi is holding 99% of the shares of the assessee-company. He has a
\nproprietorship concern in UK viz. Doshi & Company. Accordingly, he is a resident
\nof UK. He drew our attention towards clause (4) of Article 26 of the Indo-UK DTA
\nand submitted that this clause is directly applicable to the assessee. India cannot
\nsubject the assessee to taxation or requirements more onerous than the similar
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\nenterprises in India. In other words, tax authorities in India cannot discriminate
\nbetween the assessee vis-\u00e0-vis an identical assessee situated in India dealing with
\nidentical transaction to other residents in India. Expounding his arguments, he
\npointed out that when an eligible unit under section 10A of the Act transacts with a
\nrelated resident, the only action that can be taken is to deduce profit as per section
\n80IA(8) and 10 of the Act. However, when an eligible unit under section 10 of the
\nAct transacts with a related non-resident, its profit can be re-determined, reduced
\nas per 80IA(10) of the Act, and the transaction price can also be replaced and the
\nassessee\u2019s income enhanced under the TP provisions. He drew our attention
\ntowards provision to section 92C(4) of the Act wherein it has been provided that if
\nthere is an upward adjustment in the ALP of a international transaction, then
\ndeduction under section 10A will not be granted on such adjustment. This creates
\na discrimination between the resident vis-\u00e0-vis non-resident and in view of Article
\n26 of Indo-UK DTA, this cannot be allowed to happen. He made reference to the
\ndecision of Hon\u2019ble Delhi High Court in the case of CIT Vs. Herbalife International
\nIndia P.Ltd., reported in 384 ITR 276. He also relied upon the order of the ITAT,
\nSpecial Bench, Ahmedabad in the case of Rajeev Sureshbhai Gajwamo v.
\nACIT, 129 ITD 145. He further contended that when two views are possible, then
\nthe view which is favourable to the assessee should prevail. For buttressing his
\ncontentions, he made reference to Hon\u2019ble Supreme Court in the case of CIT Vs.
\nVegetable products India Ld., 88 ITR 192. He also relied upon the judgment of
\nHon\u2019ble Supreme Court in the case of CIT Vs. Vatika Township, 367 ITR 466.
\n7. On the other hand, Shri Vinod Talwani, Ld. Sr. DR objected to the
\nlanguage of question formulated for reference to the Special Bench and before us
\nsubmitted that there are two limbs of the question referred to the Special Bench.
\nThe first limb is the phrase used \u2018chargeable to tax\u2019 which denotes liable to tax.
\nThus the person enjoying tax exemption is chargeable to tax though the person
\nmay not be actually taxed upon the fulfillment of certain conditions.
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\n7.1 Similarly, the second limb deals with the motive of tax avoidance before
\ninvoking the computation machinery, which is an incorrect onus on the Revenue.
\n7.2 Accordingly, the ld. DR claimed that the question referred to the special
\nbench is not proper, i.e., chargeable to tax means liable to tax, and accordingly, he
\nsuggested the questions as under :
\nWhether or not the provisions of section 92 can be invoked in a situation
\nin which the assessee is eligible for tax exemption or tax holiday and thus
\nactually not taxed in India?
\nWhether or not the provisions of section 92 can be invoked in a situation
\nin which the Assessing Officer cannot demonstrate that there is tax avoidance
\nor possible tax avoidance?
\n7.3 The ld. DR further submitted that the ratio laid down by the Tribunal in the
\ncase of ASTSL is squarely applicable to the facts of the instant case.
\n7.4 The literal interpretation shall be applied where there is no ambiguity in the
\ninterpretation of the provisions of the law. Thus there is no need to take any aid
\nfrom the rule of the interpretation, as in the case on hand the provisions are clear
\nand unambiguous as specified in the proviso to section 92C(4) of the Act. Thus the
\nargument of the ld. AR to consider the motive of transfer pricing provision is not
\nrelevant.
\n7.5 The power to levy tax is an attribute of Sovereignty. The exercise of this
\npower is controlled by the Constitution wherein Article 265 provides that
\n“Taxes not to be imposed save by authority of law. No tax shall be levied or
\ncollected except by authority of law.”
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\n7.6 Thus, in the case on hand, the tax has been levied even on the
\nundertakings enjoying the benefit of the tax holiday in the circumstances specified
\nunder the proviso to section 92C(4) of the Act. Accordingly, the tax in India cannot
\nbe subject to tax laws prevailing outside India.
\n7.7 There are incomes which are chargeable to tax, albeit they do not form part
\nof the total income as understood under section 4 r.w.s. 5 of the Act. These
\nincomes are specified under section 158BA r.w.s. 113, section 68 r.w.s. 115BBE of
\nthe Act. Similarly, when the proviso to section 92C(4) of the Act comes into play
\nresulting in a disallowance out of the exempted part of income, allowed under
\nsection 10A of the Act, will be subject to tax.
\n7.8 The ld. DR consented to the proposition put forth by the Ld. AR that
\nprovisions of section 10A of the Act are a complete code in itself, but qualified that
\nthe same is limited for the purpose of the computation.
\n7.9 The ld. DR further contended that the words used \u201cavoidance of tax\u201d in the
\nheading of chapter X are not to limit the scope only for the cases involving tax
\navoidance. Instead, it is to include inter-alia the cases involving tax avoidance.
\nAccordingly, if the transaction qualifies to be an international transaction within the
\nmeaning of section 92B of the Act than the same has to be seen at arm\u2019s length
\nirrespective of the fact that there is or there is not any tax avoidance.
\n7.10 The facts in the case of Vodafone India Services (P.) Ltd, vs. UOI (2013) 39
\ntaxmann.com 201 (Bombay) (Vodafone-III) are different from the case on hand as
\nthere was no income or potential impact on income before referring the matter to
\nthe TPO. But the international transaction in the case on hand is relating to sales
\nand chargeable to tax under the Act as per section 2(24) of the Act. Accordingly,
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\nthe case of Vodafone will not impact the invocation of Chapter X of the Act in the
\ninstant case.
\n7.11 The ld. DR also claimed that the assessee could not be given the benefit of
\nthe undue advantage on account of the non-discrimination clause in the DTAA
\nbetween the UK and India. The ld. DR also submitted that the general clause in the
\nDTAA could not be given wider meaning than the specific provisions of section 92
\nof the Act.
\n7.12 The Ld. DR vehemently argued based on findings culled by the AO and
\nsubsequently upheld by the ld. DRP in their respective orders.
\n8. The Ld. AR in his rejoinder objected on the change of the question either in
\nform or in substance amidst the proceedings. Accordingly, the ld. AR claimed that
\nthe assessee is not \u201cchargeable\u201d to tax by virtue of 100% tax holiday u\/s 10A of
\nthe Act.
\n8.1 In the case on hand, the AO is not necessitated by the statute to determine
\nthe motive of the Assessee. Rather, there is no question of determining the motive
\nof the Assessee in a case such as this where the assessee is
\nreceiving\/claiming\/entitled to 100% tax exemption. Provided the state of affairs,
\nthere is no commercial prudence in shifting profits to the UK when the same is
\nexempt in the home country, India. Hence, the argument of the assessee was
\nnever that AO should determine motive before invoking Chapter X, but that there
\ncannot be any motive and hence, Chapter X is not to be invoked.
\n8.2 The question before the Bench in the case of ASTSL was different from the
\nquestion referred to the present special bench. Hence, it cannot be inferred that
\nthe ASTSL case and the present case align with each other.
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\n8.3 The ld. AR also reiterated that while interpreting the provision, one should
\nkeep in mind the intent and object of the provision. In the present case, the
\ntransfer pricing provisions are intended to prevent shifting of profits outside India,
\nand without establishing such intent, the transfer pricing provisions remain untriggered.
\n8.4 There is discrimination between a resident assessee and non-resident
\nassessee, within the meaning of section 6 of the Act, which is against the
\nprovisions of the DTAA between India and the UK.
\n8.5 There is a notional\/book adjustment on account of the transfer pricing
\nprovisions. As such, there will not be any inflow of the foreign currency even when
\nthe exemption is denied by virtue of the proviso to section 92C of the Act.
\n9. We have duly considered the rival contentions of both the parties and
\ngone through the records carefully. Before, we embark upon an inquiry as to what
\nwould be correct interpretation or construction of section 92CA, we think it
\nappropriate to bear in mind certain basic principles of interpretation of statute.
\nBoth the sides have referred number of authoritative pronouncement on this
\naspect. ITAT Special Bench, in the case of Aztec (supra) has also considered a
\nlarge number of decisions on this issue. We think it is not necessary to
\nrecapitulate and recite all the decision on this legal aspects, but suffice it is to say
\nthat core of all the decisions of the Hon\u2019ble Supreme Court, or Hon\u2019ble High Courts
\nor ITAT is to the effect that it is cardinal rule of interpretation that where the
\nlanguage used by the legislature is clear and unambiguous then plain and natural
\nmeaning of those words should be applied to the language and resort to any rule
\nof interpretation to unfold intentions is permissible where the language is
\nambiguous. The Special Bench of ITAT in Aztec (supra) made reference to the
\nfollowing decision:
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\n\u201cThe Hon’ble Supreme Court, in the case of Smt. Tarulata Shyam v. CIT 108 ITR 345 SC, approved the
\nobservations in the case of Cape Brandy Syndicate v. Inland Revenue Commission (1921) 1 KB 64 by
\nobserving as under:
\nTo us, there appears no justification to depart from the normal rule of construction
\naccording to which the intention of the Legislature is primarily to be gathered from the
\nwords used in the statute. It will be well to recall the words of Rowlatt, J. in Cape Brandy
\nSyndicate v. Inland Revenue Commissioners (1921) 1 KB 64 (KB) at page 71, that :
\n…in the taxing Act one has to look merely at what is clearly said. There is no room for any
\nintendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is
\nto be read in, nothing is to be implied. One can only look fairly at the language used.
\nOnce it is shown that the case of the assessee comes within the letter of the law, he must
\nbe taxed, however, great the hardship may appear to the judicial mind to be.:
\n9.1 In the case of Keshavji Ravji & Co. v. CIT , the Apex Court observed as under:
\n\u201cAs long as there is no ambiguity in the statutory language, resort to any interpretative
\nprocess to unfold the legislative intent becomes impermissible. The supposed intention of
\nthe Legislature cannot then be appealed to whittle down the statutory language which is
\notherwise unambiguous. If the intendment is not in the words, it is nowhere else. The need
\nfor interpretation arises when the words used in the statute are, on their own terms,
\nambivalent and do not manifest the intention of the Legislature.\u201d
\n9.2 In the case of Guru Devdata VKSSS Maryadit v. State of Maharashtra , their
\nLordships of the Apex Court held as under:
\n\u201cIt is a cardinal principle of interpretation of statute that the words of a statute must be understood
\nin their natural, ordinary or popular sense and construed according to their grammatical meaning,
\nunless there is something in the context or in the object of the statute to suggest to the contrary.
\nThe golden rule is that the words of a statute must prima facie be given their ordinary meaning. It is
\nyet another rule of construction that when the words of the statute are clear, plain and
\nunambiguous, then the Courts are bound to give effect to that meaning irrespective of
\nconsequences. It is said that the words themselves best declare the intention of the Law give. The
\nCourts have adhered to the principle that effort should be made to give meaning to each and every
\nword used by the Legislature and it is not a sound principle of construction to brush aside words in a
\nstatute as being inapposite surplus if they can have a proper application in circumstances
\nconceivable within the contemplation of the Statute.\u201d
\n9.3 Though there are various judgments upholding the above principle but we
\nmay only mention that Constitution Bench of the Hon’ble Supreme Court in the
\ncase of CIT v. Anjum M.H. Ghaswala , has endorsed the above view by observing
\nas under:
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\n\u201cThis exercise of purposive interpretation by looking into the object and scheme of the Act
\nand the legislative intendment would arise, in our opinion, if the language of the statute is
\neither ambiguous or conflicting or gives a meaning leading to absurdity.\u201d
\n9.4 Similarly in the case of Prakash Nath Khanna and Anr. v. CIT and Anr. 266
\nITR 1 (S.C), their Lordships have observed as under:
\n\u201cIt is well settled principle in law that the court cannot read anything into a statutory provision
\nwhich is plain and unambiguous. A statute is an edict of the Legislature. The language employed in a
\nstatute is the determinative factor of legislative intent. The first and primary rule of construction is
\nthat the intention of the legislation must be found in the words used by the Legislature itself. The
\nquestion is not what may be supposed and has been intended but what has been said. “Statutes
\nshould be construed, not as theorems of Euclid”. Judge Learned Hand said, “but words must be
\nconstrued with some imagination of the purposes which lie behind them.
\n**** **** ****
\nWhile interpreting a provision the court only interprets the law and cannot legislate it. If a provision
\nof law is misused and subjected to the abuse of process of law, it is for the Legislature to amend,
\nmodify or repeal it, if deemed necessary. (see Rishabh Agro Industries Ltd. v. P.N.B. Capital Services
\nLtd. ). The legislative causus omissus cannot be supplied by judicial interpretative process.
\nTwo principles of construction – one relating to casus omissus and the other in regard to reading the
\nstatute as a whole – appear to be well settled. Under the first principle a casus omissus cannot be
\nsupplied by the court except in the case of clear necessity and when reason for it is found in the four
\ncorners of the statute itself but at the same time a casus omissus should not be readily inferred and
\nfor that purpose all the parts of a statute or section must be construed together and every clause of
\na section should be construed with reference to the context and other clauses thereof so that the
\nconstruction to be put on a particular provision makes a consistent enactment of the whole statute.\u201d
\n9.5 We also support and guidance from the judgment in the case of Mathuram
\nAgrawal vs. state of Madhya Pradesh (Appeal (civil) 1990 of 1995) wherein it was
\nheld as under:
\n\u201cIt is not the economic results sought to be obtained by making the provision which is
\nrelevant in interpreting a fiscal statute. Equally impermissible is an interpretation which
\ndoes not follow from the plain, unambiguous language of the statute. Words cannot be
\nadded to or substituted so as to give a meaning to the statute which will serve the spirit and
\nintention of the legislature. The statute should clearly and unambiguously convey the three
\ncomponents of the tax law i.e., the subject of the tax, the person who is liable to pay the tax
\nand the rate at which the tax is to be paid. If there is any ambiguity regarding any of these
\ningredients in a taxation statute then there is no tax in law. Then it is for the legislature to
\ndo the needful in the matter.\u201d
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\n9.6 We also support and guidance from the judgment of Hon\u2019ble High court of
\nPunjab & Haryana (309 ITR 194) in case of coca cola India Inc vs. ACIT wherein it
\nwas held as under:
\n\u201c24. The Legislature best understands needs of the people and how best the policy of
\ntaxation can be advanced. More elasticity is permissible to Legislature in taxing Statutes
\nand it may be open to the Legislature to deal with apparently overlapping situations by
\ndifferent provisions.
\n25. Though Article 14 of the Constitution applies even to a taxing statute, it does not
\nprevent Legislature from making classification having intelligible differentia and nexus with
\nthe object of classification.
\n26. Principles of interpretation are applied to ascertain the intention of the Legislature and
\nthough they are considered to be good servants, they are bad masters. Intention of
\nLegislature is best understood from the language used, which is the golden rule of
\ninterpretation. Only when there is ambiguity or absurdity, external aids may be pressed
\ninto service. Statement of objects and reasons or the speech of the Finance Minister may
\nbe referred to, to ascertain the history and object, but cannot control meaning of a
\nprovision when language is clear and free from ambiguity.
\nxxxxxxx
\n44. There is, thus, no departure from the settled principle that primary rule of construction
\nis the language used and in case of ambiguity or absurdity, meaning consistent with object
\nand purpose of a statute has to be assigned without doing violence to the statute.
\nStatement of objects can be referred to find out the history and object of the statute and
\ndoes not control the interpretation when language is clear. We are unable to read the
\njudgments relied upon to the contrary.\u201d
\n9.7 The above judgment makes it vivid and beyond any reasonable doubt that
\ncourts are not required to look into the object or intention of the Legislature by
\nresorting to the aids of interpretation where the language used in the statute is
\nclear and free from any ambiguity. To strengthen our findings, we also find support
\nand guidance from the Apex court in case of M\/s Rishabh agro industries Ltd vs.
\nP.N.B. Capital services Ltd. (5 SCC 515) (2000) wherein it was held as under:
\n\u201cWhile interpreting, this Court only interprets the law and cannot legislate it. If a
\nprovision of law is misused and subjected to the abuse of process of law, it is for
\nthe Legislature to amend modify or repeal it by having recourse to appropriate
\nprocedure, if deemed necessary.\u201d
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\n9.8 Now, the controversy in the instant case is disguised in the question as to
\nwhether the provisions of chapter X shall be invoked in a situation where the
\nassessee is enjoying tax exemption under section 10A of the Act and\/or where
\nthere is no motive to avoid tax. We find that the purpose of enacting transfer
\npricing provisions was to put a stop to the avoidance of tax by shifting taxable
\nincome outside India. Similarly, extending the fundamental of intendment to
\nsection 10A of the Act, we comprehend that this particular section is purported to
\nboost the business of those undertakings which are situated in free trade zones
\n(FTZ) and engaged in export of article or things or computer software services etc.
\nby exempting their income from levy of tax. Thus, here the question arises as to
\nwhether the transfer pricing provisions can be invoked concerning the international
\ntransaction carried out by the assessee with its AE where the former is enjoying
\nexemption under section 10A of the Act. It is because, in such a situation, the
\nassessee might not have any motive to shift the income from India to a foreign
\ncountry as the same has already been exempted under section 10A of the Act.
\n9.9 In this connection, section 92C has direct bearing on the controversy on
\nhand. Therefore, it is imperative upon to take note of this section. It reads as
\nunder:
\n92C. (1) The arm’s length price in relation to an international transaction or specified domestic
\ntransaction shall be determined by any of the following methods, being the most appropriate method,
\nhaving regard to the nature of transaction or class of transaction or class of associated persons or
\nfunctions performed by such persons or such other relevant factors as the Board may prescribe36,
\nnamely :\u2014
\n(a) comparable uncontrolled price method;
\n(b) resale price method;
\n(c) cost plus method;
\n(d) profit split method;
\n(e) transactional net margin method;
\n(f) such other method as may be prescribed36 by the Board.
\n(2) The most appropriate method referred to in sub-section (1) shall be applied, for determination of
\narm’s length price, in the manner as may be prescribed36 :
\nProvided that where more than one price is determined by the most appropriate method, the arm’s
\nlength price shall be taken to be the arithmetical mean of such prices:
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\nProvided further that if the variation between the arm’s length price so determined and price at which
\nthe international transaction or specified domestic transaction has actually been undertaken does not
\nexceed such percentage not exceeding three per cent of the latter, as may be notified by the Central
\nGovernment in the Official Gazette in this behalf, the price at which the international transaction or
\nspecified domestic transaction has actually been undertaken shall be deemed to be the arm’s length
\nprice :
\nProvided also that where more than one price is determined by the most appropriate method, the arm’s
\nlength price in relation to an international transaction or specified domestic transaction undertaken on
\nor after the 1st day of April, 2014, shall be computed in such manner as may be prescribed and
\naccordingly the first and second proviso shall not apply.
\nExplanation.\u2014For the removal of doubts, it is hereby clarified that the provisions of the second proviso
\nshall also be applicable to all assessment or reassessment proceedings pending before an Assessing
\nOfficer as on the 1st day of October, 2009.
\n(2A) Where the first proviso to sub-section (2) as it stood before its amendment by the Finance (No. 2)
\nAct, 2009 (33 of 2009), is applicable in respect of an international transaction for an assessment year
\nand the variation between the arithmetical mean referred to in the said proviso and the price at which
\nsuch transaction has actually been undertaken exceeds five per cent of the arithmetical mean, then, the
\nassessee shall not be entitled to exercise the option as referred to in the said proviso.
\n(2B) Nothing contained in sub-section (2A) shall empower the Assessing Officer either to assess or
\nreassess under section 147 or pass an order enhancing the assessment or reducing a refund already
\nmade or otherwise increasing the liability of the assessee under section 154 for any assessment year the
\nproceedings of which have been completed before the 1st day of October, 2009.
\n(3) Where during the course of any proceeding for the assessment of income, the Assessing Officer is, on
\nthe basis of material or information or document in his possession, of the opinion that\u2014
\n(a) the price charged or paid in an international transaction or specified domestic transaction has
\nnot been determined in accordance with sub-sections (1) and (2); or
\n(b) any information and document relating to an international transaction or specified domestic
\ntransaction have not been kept and maintained by the assessee in accordance with the
\nprovisions contained in sub-section (1) of section 92D and the rules made in this behalf; or
\n(c) the information or data used in computation of the arm’s length price is not reliable or correct;
\nor
\n(d) the assessee has failed to furnish, within the specified time, any information or document which
\nhe was required to furnish by a notice issued under sub-section (3) of section 92D,
\nthe Assessing Officer may proceed to determine the arm’s length price in relation to the said
\ninternational transaction or specified domestic transaction in accordance with sub-sections (1) and
\n(2), on the basis of such material or information or document available with him:
\nProvided that an opportunity shall be given by the Assessing Officer by serving a notice calling upon
\nthe assessee to show cause, on a date and time to be specified in the notice, why the arm’s length
\nprice should not be so determined on the basis of material or information or document in the
\npossession of the Assessing Officer.
\n(4) Where an arm’s length price is determined by the Assessing Officer under sub-section (3), the
\nAssessing Officer may compute the total income of the assessee having regard to the arm’s length
\nprice so determined :
\nProvided that no deduction under section 10A or section 10AA or section 10B or under Chapter VI-A
\nshall be allowed in respect of the amount of income by which the total income of the assessee is
\nenhanced after computation of income under this sub-section :
\nProvided further that where the total income of an associated enterprise is computed under this
\nsub-section on determination of the arm’s length price paid to another associated enterprise from
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\nwhich tax has been deducted or was deductible under the provisions of Chapter XVIIB, the income of
\nthe other associated enterprise shall not be recomputed by reason of such determination of arm’s
\nlength price in the case of the first mentioned enterprise.
\n…..
\n92CA. (1) Where any person, being the assessee, has entered into an international transaction or
\nspecified domestic transaction in any previous year, and the Assessing Officer considers it necessary
\nor expedient so to do, he may, with the previous approval of the Principal Commissioner or
\nCommissioner, refer the computation of the arm’s length price in relation to the said international
\ntransaction or specified domestic transaction under section 92C to the Transfer Pricing Officer.
\n(2) Where a reference is made under sub-section (1), the Transfer Pricing Officer shall serve a notice
\non the assessee requiring him to produce or cause to be produced on a date to be specified therein,
\nany evidence on which the assessee may rely in support of the computation made by him of the
\narm’s length price in relation to the international transaction or specified domestic transaction
\nreferred to in sub-section (1).
\n(2A) Where any other international transaction [other than an international transaction referred
\nunder sub-section (1)], comes to the notice of the Transfer Pricing Officer during the course of the
\nproceedings before him, the provisions of this Chapter shall apply as if such other international
\ntransaction is an international transaction referred to him under sub-section (1).
\n(2B) Where in respect of an international transaction, the assessee has not furnished the report
\nunder section 92E and such transaction comes to the notice of the Transfer Pricing Officer during the
\ncourse of the proceeding before him, the provisions of this Chapter shall apply as if such transaction
\nis an international transaction referred to him under sub-section (1).
\n(2C) Nothing contained in sub-section (2B) shall empower the Assessing Officer either to assess or
\nreassess under section 147 or pass an order enhancing the assessment or reducing a refund already
\nmade or otherwise increasing the liability of the assessee under section 154, for any assessment
\nyear, proceedings for which have been completed before the 1st day of July, 2012.
\n(3) On the date specified in the notice under sub-section (2), or as soon thereafter as may be, after
\nhearing such evidence as the assessee may produce, including any information or documents
\nreferred to in sub-section (3) of section 92D and after considering such evidence as the Transfer
\nPricing Officer may require on any specified points and after taking into account all relevant
\nmaterials which he has gathered, the Transfer Pricing Officer shall, by order in writing, determine
\nthe arm’s length price in relation to the international transaction or specified domestic transaction
\nin accordance with sub-section (3) of section 92C and send a copy of his order to the Assessing
\nOfficer and to the assessee.
\n(3A) Where a reference was made under sub-section (1) before the 1st day of June, 2007 but the
\norder under sub-section (3) has not been made by the Transfer Pricing Officer before the said date,
\nor a reference under sub-section (1) is made on or after the 1st day of June, 2007, an order under
\nsub-section (3) may be made at any time before sixty days prior to the date on which the period of
\nlimitation referred to in section 153, or as the case may be, in section 153B for making the order of
\nassessment or reassessment or recomputation or fresh assessment, as the case may be, expires:
\nProvided that in the circumstances referred to in clause (ii) or clause (x) of Explanation 1 to section
\n153, if the period of limitation available to the Transfer Pricing Officer for making an order is less
\nthan sixty days, such remaining period shall be extended to sixty days and the aforesaid period of
\nlimitation shall be deemed to have been extended accordingly.
\n(4) On receipt of the order under sub-section (3), the Assessing Officer shall proceed to compute the
\ntotal income of the assessee under sub-section (4) of section 92C in conformity with the arm’s length
\nprice as so determined by the Transfer Pricing Officer.
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\n(5) With a view to rectifying any mistake apparent from the record, the Transfer Pricing Officer may
\namend any order passed by him under sub-section (3), and the provisions of section 154 shall, so far
\nas may be, apply accordingly.
\n(6) Where any amendment is made by the Transfer Pricing Officer under sub-section (5), he shall
\nsend a copy of his order to the Assessing Officer who shall thereafter proceed to amend the order of
\nassessment in conformity with such order of the Transfer Pricing Officer.
\n(7) The Transfer Pricing Officer may, for the purposes of determining the arm’s length price under
\nthis section, exercise all or any of the powers specified in clauses (a) to (d) of sub-section (1) of
\nsection 131 or sub-section (6) of section 133 or section 133A.
\nExplanation.\u2014For the purposes of this section, “Transfer Pricing Officer” means a Joint
\nCommissioner or Deputy Commissioner or Assistant Commissioner authorised by the Board to
\nperform all or any of the functions of an Assessing Officer specified in sections 92C and 92D in
\nrespect of any person or class of persons.\u201d
\nOn the perusal of the above provision, it is very clear that the purpose behind the
\nprovision of transfer pricing is to determine true profits\/income as if such
\ninternational transaction has been entered with an unrelated party or non-AE,
\nirrespective of the fact that the income of the assessee was eligible for exemption.
\n9.10 Further, there is no express provision under the Act restricting the
\napplication of section 92C of the Act for determining the income at arm\u2019s length
\nwhere such income is eligible for deduction u\/s 10A of the Act. On the contrary,
\nthere is a proviso to section 92C(4) of the Act which prohibits the deduction u\/s
\n10A of the Act on the income to the extent enhanced as an effect of a
\ndetermination of ALP. The relevant proviso to section 92C(4) of the Act reads as
\nunder:
\n\u201cProvided that no deduction under section 10A34[or section 10AA] or section 10B or under
\nChapter VI-A shall be allowed in respect of the amount of income by which the total income
\nof the assessee is enhanced after computation of income under this sub-section :\u201d
\n9.11 Thus, the proviso itself vividly reflects the intent of lawmakers that the
\nprovisions of chapter X of the Act shall prevail in all the cases of international
\ntransactions falling under the umbrella of section 92 of the Act including the
\nincome-qualified for exemption under section 10A of the Act. In other words, it can
\nbe said that the intention of the statute was very much lucid that section 92 of the
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\nAct should be invoked even when the assessee is entitled to deduction u\/s 10A of
\nthe Act.
\nIn the light of above perceivance, we are of the view that there is no need to refer
\nto other means of interpretation if the words are clear and free from any
\nambiguity. However, if the words in the statute are vague and ambiguous, then
\nexternal aid may be consulted for interpretation. This connotes that the statute
\nshould be read as a whole; therefore, the point which is not clear in one section
\nmay be explained in another section.
\n9.12 Accordingly, we are also of the view that if the purpose or object of Chapter
\nX and\/or Section 10A of the Act is being defeated, then it is up to the legislature, if
\nthey think so, to reconstruct the law as per the required object.
\n9.13 However, we have already held above that language used in sections 92 of
\nthe Act is clear, unambiguous, and do not lead to any absurd meaning. Thus we
\nconstrue that there is no need to look into the intention or purpose of the statute
\nor application of reasonable construction. Accordingly, it is meaningless to apply
\nthe principles of purposive or object-based rules of interpretation as contended by
\nthe Ld. Counsel for the assessee, consequently it was fallacious to place reliance
\non Goodyear India Ltd & ors. vs. State of Haryana & Anr and others case laws
\ncited by the ld. AR for the assessee. Therefore we are reluctant to place our
\nreliance on the rulings referred by the ld. AR.
\n9.14 Before parting with this issue, we would deal with another contention of the
\nassessee where he relied on apex court in case of Allied Motors (P) Ltd vs. CIT
\n(supra ). However, on perusal of above case (supra ), we find that the observation
\ndrawn therein were in respect of the first proviso to section 43B inserted with
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\neffect from 1-4-1988 and the question before the Hon\u2019ble Court was whether this
\nproviso should be applied retrospectively or not. In this regard, the Hon\u2019ble court
\nafter considering the fact that since the proviso inserted was curative; therefore,
\nthe same should be applied retrospectively. The facts of the above case and the
\nquestion before us are entirely different.
\n9.15 Regarding the budget speech & memorandum explaining the provisions, we
\nnote that it is also a settled legal position that headings or marginal notes do not
\ngovern a provision where the legislature has used plain and unambiguous
\nlanguage. It is when the language is equivocal only then, help can be taken from
\nthe circulars, marginal notes or the Finance Minister speech or memorandum
\nexplaining the provisions to interpret the provision of the Act. In holding so, we
\ndraw support from the judgment of the Supreme Court in the case of Anandji
\nHaridas & Co. Pvt. Ltd vs. Engineering Mazdoor Sangh & Anr (Civil Appeal No.
\n2053 of 1971) wherein it was held as under:
\n\u201cWe are afraid what the Finance Minister said in his speech cannot be imported into this
\ncase and used for the construction of Clause (e) of Section 7. The language of that provision
\nis manifestly clear and unequivocal. It has to be construed as it stands, according to its
\nplain grammatical sense without addition or deletion of any words. As a general principle
\nof interpretation, where the words of a statute are plain, precise and unambiguous, the
\nintention of the Legislature is to be gathered from the language of the statute itself and no
\nexternal evidence such as Parliamentary Debates, Reports of the Committees of the
\nLegislature or even the statement made by the Minister on the introduction of a measure or
\nby the framers of the Act is admissible to construe those words. It is only where a statute is
\nnot exhaustive or where its language is ambiguous, uncertain, clouded or susceptible of
\nmore than one meaning or shades of meaning, that external evidence as to the evils, if any,
\nwhich the statute was intended to remedy, or of the circumstances which led to the passing
\nof the statute may be looked into for the purpose of ascertain- ing the object which the
\nLegislature had in view in using the words in question.\u201d
\nIn view of the above, the Finance Minister speech and memorandum
\nexplaining the bill will not provide any aid to the assessee in the given facts &
\ncircumstances.
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\n10. In the context of the CBDT Circulars bearing Nos. 12\/2001 dated 23-08-
\n2001 AND 14\/2001 dated 9-11-2001, we are of the view that it is merely explaining
\nthe understanding of statutory provisions regarding the transfer pricing. Further, it
\nis a well-settled principle that the departmental circulars are not binding on us.
\nThese circulars cannot be used to usurp the power of a judicial body while
\nexercising its jurisdiction, including interpreting the statutory provisions. In this
\nregard, we draw support and guidance from the Apex court in case of Sanjeev
\ncoke manufacturing company vs. Bharat coking coal Ltd and another (1983 AIR
\n239) wherein it was held as under:
\n\u201cNo one may speak for the Parliament and Parliament is never before the Court.
\nAfter Parliament has said what it intends to say, only the Court may say what the
\nParliament meant to say. None else. Once a statute leaves Parliament House, the
\nCourt’s is the only authentic voice which may echo (interpret) the Parliament.
\nThis the court will do with reference to the language of the statute and other
\npermissible aids. The executive Government may place before the court their
\nunderstanding of what Parliament has said or intended to say or what they think
\nwas Parliament’s object and all the facts and circumstances which in their view
\nled to the legislation. When they do so, they do not speak for Parliament. No
\nAct of Parliament may be struck down because of the understanding or
\nmisunderstanding of Parliamentary intention by the executive government\u201d
\n10.1 Without prejudice to the above, if we agree to apply the purposive
\ninterpretation while invoking the provisions of chapter X of the Act in the given
\nfacts and circumstances, then in our considered view, the same interpretation
\nshould also be extended in the context of the provision of section 10A of the Act. It
\nis because we cannot see the provision of chapter X in isolation as the issue on
\nhand has direct nexus with the provision of section 10A of the Act. Thus it
\nbecomes pertinent to refer to the purpose of introducing section 10A of the Act. In
\nthis regard, the Memorandum explaining the provision of Finance Bill, 1988 reads
\nas under:
\nINCENTIVES FOR EARNING FOREIGN EXCHANGE
\nClarificatory amendment to extend tax holidy to the units in free trae zones engaged in
\ndevevelping software as also in processing or assembling.
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\n24. Under the existing provisions of section 10A of the Income-tax Act, any profits and
\ngains of an industrial undertaking engaged in the manufacture or production of articles or
\nthings in a free trade zone are exempt from tax for a certain number of years.
\nWith a view to providing further incentives for earning foreign exchange, it is proposed to
\nclarify that manufacture for the above purposes will include the activities of processing and
\nassembling. It will further include recording of programmes on any disc, tape, perforated
\nmedia or other information storage device.
\nThe amendment will take effect retrospectively from 1st April, 1981, and will, accordingly,
\napply in relation to the assessment year 1981-82 and subsequent years.
\n10.2 From the above, it is clear that the spirit behind introducing section 10A was
\nto bring foreign exchange in India. Granting exemption from Tax under section 10A
\nof the Act was incidental and not the main object. Furthermore where amount
\nfetched by the Indian AE as revenue and\/or the amount paid to its counter-part,
\nAE outside India, as expenditure is lower and higher respectively and does not
\ncorrespond to an ALP, the same will adversely affect the inflow of foreign exchange
\nin India. Perhaps this was the reason to insert the proviso in section 92C(4) of the
\nAct. Accordingly, even if we apply the purposive interpretation in respect to the
\nprovisions of chapter X along with provisions of section 10A of the Act, we are not
\ninclined to hold that provision of chapter X should not be applied where the
\nassessee is eligible for the benefit of section 10A of the Act. It is because, in such a
\nsituation, the object of inserting section 10A in the statute will stand
\nunaccomplished.
\n10.3 Indeed, in the instant case, albeit the adjustment in the ALP for the year
\nunder consideration may be of notional value, and the same may not actually
\nresult in an inflow of foreign exchange. But the said proviso to section 92C(4) of
\nthe Act shall deter the practice of manipulating the prices as suiting to the parties.
\nConsequently, the purpose of the provisions of section 10A of the Act will not be
\ndefeated.
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\n10.4 We further note that assessee though claiming the exemption under section
\n10A of the Act can also manipulate the ALP with an objective to avoid corporate
\ndividend tax by shifting its profits to AE. Supposing, the Non-Resident AE being a
\nshareholder in the instant case intends to claim\/ draw a share out of profits from
\nthe business of the assessee, then the only option available would be to route it by
\nway of dividend which is subject to tax under the provisions of DTAA. Thus the
\nassessee on the disbursement of dividend has to pay tax at the rate mentioned in
\nthe DTAA. Now the issue arises that if the Resident AE desires to escape from such
\ntax (CDT), then it can disguise the income transmitted to its Offshore AE within the
\nmanipulated transaction price which otherwise, would have been distributed as
\ndividend. This also might be the reason for inserting a proviso to section 92C(4) of
\nthe Act as the lawmakers were very much aware of the possibility of manipulating
\nthe prices as discussed above.
\n11. Now coming towards the issue dealt by the Hon\u2019ble Special Bench in ASTSL
\n(supra) we note that the question before it was dissimilar from the one in the
\npresent case. As such, the Hon\u2019ble Special Bench in ASTSL case has given its
\nobservation only in response to the argument placed by the ld. Counsel for the
\nassessee regarding the invocation of chapter X with respect to the assessee
\nenjoying 100% tax exemption under section 10A of the Act. Accordingly, no
\nspecific question, for invoking the provision of section 92 of the Act, was raised
\nbefore the ITAT with respect to the assessee claiming the deduction\/exemption
\nunder section 10A of the Act. Therefore, the observations\/findings given in this
\nregard by the Hon\u2019ble special bench are \u201cobiter dicta\u201d and hence hold no binding
\nvalue.
\n11.1 In this regard, we note that the relevant finding of the ITAT in the case of
\nASTSL (supra) to hold it as ratio decidendi has to pass the test as detailed under:
\ni. Find out the proposition considered as to be ratio decidendi.
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\nii. Remove the proposition from the judgment or reverse its meaning.
\niii. Observe whether the judgment in the absence of such a proposition is
\nstill for good.
\niv. If yes, then such a proposition cannot be categorized as ratio decidendi
\nirrespective of the fact it was the relevant proposition.
\n11.2 If we apply the steps above to test whether the findings laid down by the
\nLd. ITAT in case of ASTSL (supra) in the context of the provisions of section
\n10A\/10AA of the Act is obiter dicta, we note that there will not be any change in
\nthe decision of the Ld. ITAT, in the case of ASTSL (supra) qua the question framed
\nbefore it. Accordingly, we concur with the argument of the Ld. AR that the finding
\ngiven by the Ld. ITAT, in the case of ASTSL (supra), is obiter dicta. Therefore, we
\nare reluctant to be guided by the order of the Ld. ITAT in the case of ASTSL
\n(supra) for deciding the question framed before us.
\n12. Proceeding further towards the argument of the ld. AR of the assessee that
\nthe question decided by the special bench in ASTSL (supra) case is no longer a
\ngood law as the Bombay High court has expressly overruled it in case of Vodafone
\nIndia Services (P) Ltd vs. UOI (361 ITR 531) by deciding a similar question against
\nthe findings drawn in the case of ASTSL(supra) . In this connection, we turn our
\nattention towards the question and findings of the Hon\u2019ble Bombay High Court,
\nwhich is as under:
\n\u201c3. Ld.counsel for the petitioner has raised the following questions for
\nconsideration by this Court:
\n“(1) Whether the existence of a potentially taxable income or an expenditure
\n(capital or revenue) that impacts computation of taxable income is a sine qua
\nnon for the invocation of jurisdiction under Chapter X ?\u201d
\nThe relevant finding of the Hon\u2019ble Bombay high court in the case, as discussed
\nabove stands as under:
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\n32. It is clear that in view of Section 92(1) , there must be income arising and\/or
\naffected or potentially arising and\/or affected by an International Transaction for
\nthe purpose of application of Chapter X . This would appear to be in the nature of
\njurisdictional requirement and the Assessing officer must be satisfied that there is
\nan income or a potential of an income arising and\/or being affected on
\ndetermination of an ALP before he proceeds further in determining the ALP or
\nreferring the issue to the TPO to determine the ALP. In this case, we find that the
\npetitioner has from the very beginning been challenging the jurisdiction to apply
\nChapter X on the ground that no income arises and\/or is affected or potentially
\narises and\/or is affected on account of issue of its shares to its holding company.
\nThe Assessing officer does not deal with this objection\/issue before referring the
\nmatter to the TPO. The TPO does not deal with the above objection on the ground
\nthat in terms of Section 92CA, his mandate is only to compute the ALP in relation to
\nthe International Transaction. The TPO in the impugned order dated 28 January
\n2012 meets the petitioner’s objection by stating that the same would be dealt with by
\nthe Assessing Officer. However, when the same objection was raised before the
\nAssessing Officer post the order of the TPO, the Assessing Officer does not consider
\nthe same in the impugned draft assessment order dated 22 March 2013 on the
\nground that in view of Section 92 CA (4) , the Assessing Officer is obliged to pass an
\norder in conformity with the ALP determined by the TPO. This jurisdictional issue
\nhas to be dealt with either by the TPO or the Assessing Officer when specifically
\nraised by the petitioner\/assessee.
\n12.1 However, it is also pertinent to mention here that the facts of the case
\ngiving rise to the question pleaded before this bench and in case of Vodafone
\n(supra) are different. In that case, it was held, after considering section 2(24) and
\n56(2)(viib), that there was no income accruing in the hands of the assessee. Hence
\nno question arises for invoking of chapter X of the Act. But in the instant case, the
\nassessee has income accruing from the export to the UK based AE, which is on
\n\u201crevenue account\u201d as defined under section 2(24) of the Act. Hence, the same has
\nto be governed by the provisions of chapter X of the Act. As such, there was no
\nincome accruing in the case of Vodafone as defined under the section 2(24)
\nwhereas in the case on hand there is an income accruing to the assessee from the
\nexport of services. Therefore, we are reluctant to place our reliance on the
\nproposition laid down in the case of Vodafone (supra) .
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\nMoreover, we also find that the cabinet in its press note dated 28.01.2015
\naccepted the judgment of Hon\u2019ble Bombay High Court in the case of Vodafone
\n(Supra) by clearly observing that transaction is on \u201ccapital account\u201d and hence
\nthere is no \u2018income\u2019 to be chargeable to tax. Hence we disagree with the
\ncontention of ld. AR for the assessee.
\n12.2 Similarly, we also note that there is difference between the income and total
\nincome as held by the Hon\u2019ble Punjab & Haryana court in case of CIT, Rohtak vs.
\nShri Lalita ashram trust (19 taxmann.com 243). Hon\u2019ble P&H high court held that
\nthere is a difference between \u2018income\u2019 and \u2018total income\u2019 as defined under section
\n11 and section 5 of the Act. Similarly, we also find that the word used under
\nsection 92(1) is \u2018income\u2019 and not \u2018exempted income\u2019. Any gain accruing from the
\nactivities defined under section 2(24) will first be construed as \u2018income,\u2019 and after
\nthat, due to the applicability of any particular provision, it may be qualified as
\n\u2018exempted income\u2019 as in the case in hand, i.e., due to section 10A of the Act. Thus
\nthe income of assessee which accrued from the export of services will eventually
\nbecome \u2018exempted income\u2019. Therefore, even when the income of the assessee is
\nexempted under section 10A of the Act, it still fits in the definition of \u2018income\u2019
\ngiven under section 2(24) of the Act. Since the word \u2018income\u2019 is used under section
\n92(1) of the Act, we are of the view that the basic requirement of chapter X is
\nfulfilled and it shall correspondingly apply in the case of the assessee.
\n13. In respect of opportunity ought to have been given by the AO in terms of
\nthe instruction No. 15\/2015 and instruction No. 3\/2016 which replaced the earlier
\none, to the assessee before referring to TPO owing to the fact that the assessee
\nwas covered by section 10A of the Act and also objected to the applicability of
\nchapter-X of the Act. In this regard, we note that the auditor of the assessee
\ncompany did not make any qualifying remarks that the impugned international
\ntransactions do not impact its income as required in the instruction above. Thus in
\nthe absence of such remarks by the auditor in his report u\/s 92E of the Act, we are
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\nnot inclined to uphold the contention of the Ld. AR regarding the instructions
\nissued by the CBDT.
\n13.1 The Ld. AR has in his rejoinder counter-argued the allegation put forth by
\nthe Ld. DR that no objection was posed by the assessee before AO while reference
\nwas made to the TPO stating that although the assessee did not object to the
\nreference initially, he raised a contention before the Ld. DRP which can be deemed
\nto have been posed to AO.
\n13.2 In our humble understanding, the contention of Ld. AR is not in
\naccordance of instruction No. 15 of 2015 as replaced by Instruction No 3 of 2016
\nas it is mentioned therein that the qualifying remarks should be made in
\naccountant\u2019s report. Therefore, even if the objection was raised before the AO
\nprior to the final order passed in pursuance of the direction issued by ld. DRP, it
\ndoes not fulfill the requirement of instruction No. 15 of 2015 as replaced by
\nInstruction No 3 of 2016.
\n13.3 Moreover, when the AO received the order of Ld. DRP, he has to pass the
\norder following the direction issued by the Ld. DRP. Since the Ld. DRP has rejected
\nthe objection raised by the assessee; AO would also reject the same. As there
\nwere no qualifying remarks regarding the income in the accountant\u2019s report, it was
\nnot possible for the AO to give him an opportunity of being heard in this regard. As
\nthe assessee itself has admitted that the objection was raised first time before the
\nLd. DRP which was subsequently rejected, it shall be deemed to have been
\nrejected by the AO as well.
\n13.4 It is also pertinent to note here that Hon\u2019ble Delhi high court in case of
\nIndorama Synthetics (India)Ltd vs. ACIT (71 taxmann.com 349) held the
\ninstructions issued by the CBDT as discussed above are a valid legal proposition.
\nThe relevant extract is as under:
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\n\u201cAlthough Mr. Manchanda tried to contend that the above instruction of the CBDT
\nwas prospective, in the considered view of the Court, the above CBDT\u2019s Instruction
\nNo. 15 of 2015 as replaced by CBDT Instruction No.3 of 2016 dated 10th March
\n2016 clarifies the correct legal position and cannot be construed as not applying to
\nthe facts on hand.\u201d
\n13.5 As the Hon\u2019ble Delhi high court has held the said instruction No. 15 of 2015
\nas replaced by Instruction No 3 of 2016 are valid, respectfully following the same
\nwe disagree with the contentions of the ld. AR for the assessee.
\n13.6 At the same time we also find that the Hon\u2019ble Gujarat High Court also
\ndecided a similar question in case of Veer Gems (204 Taxman 16) by observing as
\nunder:
\n\u201c13. We do not find any provision under Chapter-X, which would require the
\nAssessing Officer to hear the assessee, consider his objections and only thereafter
\nmake a reference to the TPO to compute the arm’s length price. As already
\nobserved, it is true that the question of reference to the TPO would arise only in the
\ncase where there has been an international transaction between the assessee and
\nthe associated person. Such a question in a given case may also be highly disputed
\nquestion. However, we do not find that under the scheme of the provision contained
\nin Chapter-X of the Act, the Assessing Officer is obliged to grant hearing to the
\nassessee, invite and consider the objections with respect to the question whether
\nduring the previous year relevant to the assessment year under consideration, there
\nhad been any international transaction between the assessee and the associated
\nenterprise before making a reference to the TPO. Such opinion the Assessing
\nOfficer would have to form on the basis of available material on record and such
\nopinion would be having ad-hoc finality in the sense that for the purpose of
\nreference to the TPO and till the stage that the TPO passes an order under subsection
\n(3) of Section 92CA of the At, such issue would be closed.
\n14. Before making any such reference, sub-section (1) of Section 92C itself provides
\ncertain inbuilt safeguards. Firstly, the Assessing Officer has to consider it necessary
\nor expedient to make a reference to the TPO and secondly the reference has to be
\nmade with the previous approval of the commissioner. Thus, not only the Assessing
\nOfficer before making a reference should be satisfied that with respect to an
\ninternational transaction entered into by the assessee, it is necessary or expedient to
\nrefer the computation of arm’s length price to the TPO, such opinion of the
\nAssessing Officer would have to be approved by the Commissioner, before the same
\ncan be acted upon. This is one more filter provided by the statute to ensure that the
\nreference is made only in appropriate cases with approval of the higher authority.
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\n13.7 Our jurisdiction being in Gujarat; therefore, we are bound by
\nJudgment\/order passed by the Hon\u2019ble Gujarat High Court. Accordingly, we
\nconcluded that there is no expressed provision contained within chapter X
\nadvocating to afford a hearing to the assessee before referring to TPO. The
\nHon\u2019ble Gujarat HC in case of Veer Jems has also put forth that the lack of an
\nexpressed provision within the chapter X of giving an opportunity is because there
\nare already two levels of requirements that have to be satisfied before determining
\nALP. These checks and balances are as 1; AO has to deem it necessary or
\nexpedient before making a reference to TPO 2; previous approval of commissioner
\nis required. Accordingly, the contention of the assessee is hereby rejected.
\n14. In the present case, the Ld. AR for the assessee also argued that the tax
\nrate in the United Kingdom is higher than the tax rate in India. Therefore, there
\nwas no reason for the assessee to shift its profit to a foreign country having a
\nhigher tax rate, which in the instant case is the UK. However, we note that the Ld.
\nAR has not substantiated his argument based on any documentary evidence. We
\nfurther note that the Revenue has also not controverted the argument of the Ld.
\nAR. Therefore we can safely presume that the tax rate in the United Kingdom is
\ngreater than India.
\n14.1 Now the question arises, whether the tax levied in pursuance of the
\nprovisions laid down in article 265 of the constitution of India can be the subjected
\nto foreign tax laws. In our considered view, the tax laws enacted in India cannot
\nbe contingent upon the tax laws of the foreign country. The article 265 of the
\nConstitution of India reads as under:
\n\u201c265. Taxes not to be imposed save by authority of law No tax shall be levied or
\ncollected except by authority of law.\u201d
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\n14.2 In this regard, we also find it relevant to refer the OECD guidelines which
\nprovide as under:
\n1.8 There are several reasons why OECD member countries and other countries
\nhave adopted the arm’s length principle. A major reason is that the arm’s length
\nprinciple provides broad parity of tax treatment for members of MNE groups and
\nindependent enterprises. Because the arm’s length principle puts associated and
\nindependent enterprises on a more equal footing for tax purposes, it avoids the
\ncreation of tax advantages or disadvantages that would otherwise distort the
\nrelative competitive positions of either type of entity. In so removing these tax
\nconsiderations from economic decisions, the arm’s length principle promotes the
\ngrowth of international trade and investment.
\n14.3 As a consequence, in consonance with the aforementioned article and OECD
\nextracts, it is manifestly clear that tax laws in India cannot be subjected to tax laws
\nof a Foreign country.
\n14.4 We further note that to maintain harmony and avoid double taxation, there
\nhave been made various treaties with different countries under section 90 of the
\nAct. Thus the taxes levied under Article 265 of the constitution of India will be
\nsubject to such treaties which do not even connote being subject to foreign tax
\nlaw.
\n15. In the context of the provision of section 10A of the Act, we opine to hold
\nthat although it is a code, the same is limited to the manner of the computation of
\ndeduction for the income of the eligible undertaking. In this regard, we draw
\nsupport from the judgment of Hon\u2019ble Madras High Court in the case of Camiceria
\nApparels India (P.) Ltd. Vs. ACIT reported in 103 taxmann.com 238 wherein it was
\nheld as under:
\n\u201cthat “Section 10A\/10B of the Act is a complete code providing the mechanism for
\ncomputing the ‘profits of the business’ eligible for deduction u\/s 10B of the Act.
\nOnce an income forms part of the business of the income of the eligible undertaking
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\nof the assessee, the same cannot be excluded from the eligible profits for the
\npurpose of computing deduction u\/s 10B of the Act.\u201d
\n15.1 However, in the instant case we find that the provisions of chapter X are not
\nimpeding with the manner of the computation of exemption under section 10A of
\nthe Act, but it is to work out the true ALP qua the sale price of the impugned
\ninternational transaction. Therefore we disregard the contentions of the ld. AR for
\nthe assessee that no reference to the TPO can be made for determining the ALP.
\n15.2 The Ld. AR also contended that it is a settled legal position that where two
\nviews are possible, the one in favor of the assessee should prevail. The Ld. AR to
\nsupport his contention, also placed reliance on a series of case laws. In this regard,
\nwe concur with the view of the ld. AR for the assessee. But in the case on hand
\nthere are contrary views on the impugned issue, accordingly, this special bench
\nhas been constituted to decide the question referred to it after considering the
\nfact, rival submissions, and the legal position.
\n16. The next controversy arises about the interpretation of the provision of the
\nAct, which gives rise to two different possible views. In the case on hand, the issue
\nrelates to the provisions of section 10-A viz-a-viz Chapter-X of the Act which
\noperates in different domains and has different objects. As such, none of the
\nprovision has neither been made subject to each other nor superseded by each
\nother. Therefore we are of the view that the question of two views about the
\ninterpretation to section 10-A viz a viz chapter-X in the given facts and
\ncircumstances does not arise. But these provisions co-exits and their concordance
\nare facilitated by the proviso to section 92C(4) of the Act. As such, there is a direct
\nprovision under chapter X of the Act restricting the deduction\/ exemption to the
\nassessee in this particular case, which will prevail in the given facts &
\ncircumstances.
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\n17. At one point of hearing the Ld. DR also argued to reframe the question as
\ndiscussed above; we note that the question framed referred to the special bench
\nwas approved by the order of the ITAT dated 15-4-2016. The relevant extract of
\nthe order is reproduced as under:
\nWhether or not the provisions of Section 92 can be invoked in a situation in which
\nincome of the assessee is eligible for tax exemption or tax holiday and thus not
\nactually chargeable to tax in India, or in a situation in which there cannot be any
\nmotive in manipulating the prices at which international transactions have been
\nentered into?
\n18. A copy of the order above was made available to the Revenue, and it did
\nnot register any objection qua the question framed for this special bench.
\n18.1 We further note that the matter was fixed for hearing on several occasions
\nas evident from order sheet entry maintained by the Registry of this office after
\ntreating the same as part-heard. But the Ld. DR never raised any objection on the
\nquestion framed for the special bench till his turn came for the argument.
\nTherefore, after hearing the Ld. AR in length for the question as discussed above,
\nwe are not inclined to entertain the plea of the Ld. DR for framing the question
\ndifferently. Hence, we reject the plea of the Ld. DR.
\n19. Regarding the Non-discrimination clause in the DTAA between India and UK,
\nwe find that the learned counsel\u2019s arguments proceed on the fallacious
\nassumptions that while examining the applicability of the non-discrimination
\nprovisions, the transactions with a resident assessee can be compared with
\ntransactions of non-resident. Even if at the most the company was to transact
\nbusiness with its non-resident related party, the same course was to follow. There
\nis thus no discrimination viz a viz the assessee and the domestic enterprises.
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\n20. In view of the above discussion, we are of the view that even if an assessee
\nis eligible for tax exemption at the rate of hundred percent under section 10A\/10B
\nof the Act, then also the arm\u2019s length price on international transactions deserve to
\nbe determined under section 92C of the Act. Hence, question posed before the
\nSpecial Bench is answered in negative against the assessee and in favour of the
\nRevenue.
\n21. In the result, the question is answered in negative i.e. against the assessee. Order pronounced in the Court on 24th October 2019 at Ahmedabad. – S d – -Sd- -Sd- JUSTICE( SHRI) P.P. BHATT
\nPRESIDENT
\n(RAJPAL YADAV) (WASEEM AHMED)
\nJUDICIAL MEMBER ACCOUNTANT MEMBER (True Copy) Ahmedabad; Dated 25\/10\/2019 Manish
\nhttp:\/\/itatonline.org<\/p>\n","protected":false},"excerpt":{"rendered":"
The provisions of chapter X are not impeding with the manner of the computation of exemption under section 10A of the Act, but it is to work out the true ALP qua the sale price of the impugned international transaction. Therefore we disregard the contentions of the ld. AR for the assessee that no reference to the TPO can be made for determining the ALP<\/p>\n