Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar

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I.T.A. Nos.7662/Mum/2013 & 142/Mum/2014
Assessment year: 2008-09

Page 1 of 21

IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI ‘K’ BENCH, MUMBAI

[Coram: Pramod Kumar AM and Pawan Singh JM]

I.T.A. No.7662/Mum/2013
Assessment year: 2008
-09
A
Central Circlessistant Commissioner of Income Tax
-2, Mumbai. …..……….………………….Appellant

Vs.

Gitanjali Exports Corporation Limited
801Opera House,-802, Prasad Chambers, ……….…..…………….…Respondent

Mumbai. [PAN: AABCG 2804 N]

I.T.A. No.142/Mum/2014
Assessment year: 2008
-09
Gitanjali Exports Corporation Limited
801-802, Prasad Chambers, …..……….………………….Appellant
Opera House,Mumbai.
[PAN: AABCG 2804 N]

Vs.

Addl. Commissioner of Income Tax
Range – 5 (1), Mumbai. ……….…..…………….…Respondent

Appearances by:

Aarti Vissanji for the assessee
N
.K. Chand for Assessing Officer
Date oDate of pronouncing the orderf concluding the hearing :
: January March 3114th
st, 201, 20166

ORDER
Gitanjali exports Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar
Gitanjali exports Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar
Gitanjali exports Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar
Gitanjali exports Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar
Gitanjali exports Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar
Gitanjali exports Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar
Gitanjali exports Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Gitanjali exports Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar Pvt Ltd, tribunal mumbai, sec36(1)(iii), by pramod kumar
Per Pramod Kumar
, AM:
1. These cross appeals are directed against the order dated 9th October,
2013 passed by the learned CIT(A) in the matter of assessment under section
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I.T.A. Nos.7662/Mum/2013 & 142/Mum/2014
Assessment year: 2008-09

Page 2 of 21

143(3) r.w.s. 144C(3) of the Income Tax Act, 1961, for the assessment year
2008-09.
2. Grievances raised by the parties are as follows:
ITA No.7662/Mum/2013 (By the Assessing Officer)

“1) On the facts and in the circumstances of the case and in law, the Ld. CIT(A)
erred in deleting the disallowance of proportionate interest on capital work-in-
progress made under the proviso to section 36(1)(iii) of the I T Act, as the assessee
had not established availability of interest free funds for making advances for
purchase of units at Bharat Diamond Bourse and Gujarat Hira Bourse.

2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A)
has erred in allowing the claim of deduction u/s 10AA made by the assessee in
respect of the profits arising out of trading activity and in holding that trading is
covered within the definition of ‘services’ under the SEZ Rule, without appreciating
the fact that section 2(z) of the SEZ Act defines tradable services in general while
under the specific provisions of section 10AA of the I T Act, which is inserted in
pursuance of the SEZ Act and the general scheme of I T Act, trading activity does
not fall within the meaning of ‘services’ and hence profit from trading activity does
not qualify for the deduction provided u/s 10AA of the IT Act.

3. On the facts and in the circumstances of the case and in law, the Ld. CIT(A)
erred in holding that by virtue of section 51 of the SEZ Act, the provisions of SEZ Act
and the Rules will have overriding effect over the provisions of the Income-tax Act
without appreciating the fact the necessary amendments have already been
incorporated in various section of the Income-tax Act in pursuance of section 27
and various provisions in the Second Schedule of the SEZ Act”.

ITA No.142/Mum/2014 (By the assessee)

“1) The order passed by learned Assessing Officer is against equity and justice.

2) The learned Assessing Officer erred in making addition of R.1,17,00,000/- to
the declared income as per arm’s length price determined by Transfer Pricing
Officer being interest calculated @ 18% on delayed Export payments received from
AEs beyond 180 days, from AE (Associated Enterprise).”

3. As regards ground no.1 raised by the Assessing Officer, learned Representatives
fairly agree that this issue is directly covered by the decisions of the co-ordinate
benches in assessee’s own case for the assessment years 2006-07 and 2007-08. There
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Assessment year: 2008-09

Page 3 of 21

is no dispute that the material facts are identical. As a matter of fact that the learned
CIT(A) has given the impugned relief only by following orders of the co-ordinate
benches as evident from the following observations:-
“8.4 I have considered the facts of the case and the submission of the appellant
as against the observation/findings of the AO in his order u/s. 143(3) of the Act and
the issue was decided as under:

i. The appellant contended that deduction was allowable since the loan taken
was working capital on which the interest was paid and no interest has
been paid on the loan taken from Directors/shareholders/ex-partners.

ii. It was further stated that the Hon’ble ITAT, Mumbai had decided this issue
in its favour for AYs. 2006-07 and 2007-08 on identical facts. A copy of the
Hon’ble ITAT’s order dated 08.05.2013 produced has been perused and
contention of the appellant is found to be correct. The issue has been
discussed by Hon’ble ITAT in paras 10-14 in their order. The issue has been
decided in appellant’s favour. Respectfully, following the decision of the
Hon’ble ITAT in appellant’s own case as above, AO is directed to delete the
disallowance made u/s. 36(1)(iii).

iii.
This ground of appeal is, therefore, allowed.”

4. Respectfully following the views so taken by the co-ordinate bench, we uphold
the conclusions arrived at by the learned CIT(A) and decline to interfere in the matter.
Ground no.1 is thus dismissed.

5. As regards ground nos.2 & 3 raised by the Assessing Officer, which are
interlinked, the learned Representatives fairly agree that this issue is also covered by
the decisions of co-ordinate bench in assessee’s own case for the assessment years
2006-07 and 2007-08. As a matter of fact, in this respect also, learned CIT(A) has only
followed the views of the co-ordinate bench as evident from the following observations
of the ld. CIT(A) :-
“The appellant has made detailed submissions and stated that Hon’ble ITAT has
decided the issue in its favour for A.Y. 2006-07 and 2007-08 on identical facts. The
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Assessment year: 2008-09

Page 4 of 21

contention of the appellant on perusal of the order is found to be correct. Hon’ble
ITAT in paras 20, 21 & 22 have discussed the issue and the points raised by the
CIT(A) have been upheld. In the final findings the CIT(A) had allowed deduction
u/s.10AA on goods exported and imported from SEZ. It was also observed that no
such benefit should be given for the local purchase and sale made by the appellant.
The AO is directed to follow the direction of the Hon’ble ITAT and delete the
disallowances after due verification. Further, the effect of the disallowance upheld
with reference to FD interest as discussed in ground no.3 also has to be taken into
account
while giving effect to this order.”
6. Respectfully following the views so taken by the co-ordinate bench, we see no
reasons to take any other view of the matter than the view so taken by the co-ordinate
bench in assessee’s own case the assessment years 2006-07 and 2007-08. These
grounds of appeal are, thus, allowed too.

7. The appeal filed by the Assessing Officer is, therefore, dismissed.

8. As regards solitary grievance of the assessee, i.e. with regard to the arm’s length
price adjustment of Rs.1,17,00,000 in respect of realization of export proceeds beyond
180 days from the AEs.

9. So far as this grievance of the assessee is concerned, the relevant material facts
are like this. The Transfer Pricing Officer, during the course of proceedings before him,
noticed that in several cases, the export proceeds that the assessee has realized much
beyond 180 days from its AEs. The assessee did submit that the assessee does not
anyway charge interest on delayed realization from the non AEs. The argument was
noted and brushed aside. The Transfer Pricing Officer was of the view that “even for
international transaction, 180 days credit period is long enough a period for the AE to
make the payment”. The Transfer Pricing Officer thus proceeded to conclude that “these
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Page 5 of 21

norms have not been followed and, therefore, I believe that the extra credit period is a
kind of loan given to the AE”. It was in this backdrop that the TPO proposed an
adjustment of Rs 1,17,00,000 which was computed on the basis of 18% pa interest.
Accordingly, the ALP adjustment was made by the Assessing Officer. Aggrieved,
assessee carried the matter in appeal before the CIT(A) but without any success. The
assessee is not satisfied and is in further appeal before us.

10. We have heard the rival submissions, perused the material on record and duly
considered the facts of the case in the light of the applicable legal position.

11. We find that this is uncontroverted stand of the assessee that he has not charged
interest on delay in realization of debts in non AE situations as well. Once it is not in
dispute, as is the case before us, that no interest is charged from the non AEs, i.e.
independent transactions, as well, there cannot be any occasion to make an ALP
adjustment, for notional interest, on delay in realization of trade debts from the AEs.
The very purpose of the arm’s length price adjustments is to neutralize the impact of
intra AE relationship on commercial transaction, but, given the above facts, there is no
impact of intra AE relationship in the above case. As regards, the rechracterization of
transaction as an unsecured loan, we find that CIT Vs EKL Appliances Limited [(2012)
345 ITR 241 (Del)], Hon’ble Delhi High Court has held that recharacterization of a
transaction is possible in only two situations – i.e. (i) where the economic substance of a
transaction differs from its form and (ii) where the form and substance of the
transaction are the same but arrangements made in relation to the transaction, viewed
in their totality, differ from those which would have been adopted by independent
enterprises behaving in a commercially rational manner. None of these conditions is
satisfied in the present case. The form and substance of the transactions are the same.
The Transfer Pricing Officer has not brought on record any material to demonstrate
and establish that the form and substance of transactions are different. It is not, and it
cannot be, the case of the Transfer Pricing Officer that the export transaction was a
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sham transaction to finance the AE. The assessee has also behaved in a commercially
rational manner inasmuch as whatever are the terms of realization of his exports
proceeds, the same are the terms of realization of exports from the non AEs.
Recharcaterization of this transaction, therefore, is not permissible. The very
foundation of the Transfer Pricing Officer is thus wholly unsustainable in law. In any
event, by our order of even date in the case of Rusabh Diamonds Vs. ACIT and vice versa
(I.T.A. Nos. 2497 and 689/Mum/2010, Assessment year: 2009-10), we have held
this issue, in general, in favour of the assessee, by observing as follows:
12. In our considered view, even if we proceed on the basis that Explanation to
Section 92B is indeed retrospective in effect and it does cover delay in realization
of debts, as long as sale is benchmarked on TNMM basis, as in this situation before
us, there cannot be any occasion to make a separate adjustment for delay in
realization of debts. The reason is that the interest income is an integral part of
the PBIT inasmuch as interest income, in cases other than finance companies, is
required to be included in the ‘other income’ and thus affects the profit before
interest and taxes. While profit before interest and taxes does not take into
account ‘interest expenditure’, it does take into account ‘interest income’ because
the interest income is part of the ‘other income’, under pre amended as well as
post amended schedule VI to the Companies Act, which is duly taken into account
into computation of PBIT. In a way PBIT is a misnomer, as while PBIT does not
take into account interest expenditure, it does take into account interest income-
appearing in the other income. Once the profitability, as per PBIT, is found to be
comparable, there cannot be a separate adjustment for interest income on
delayed realization which is an integral part of the PBIT figure.

13. It is in this background that we may refer to the observations made by a
coordinate bench of this Tribunal, in the case of Micro Ink Ltd Vs ACIT (supra), as
follows:
7. We find that, as evident from audit report on form 3CEB (pages 39 to 52
of the paper-book), the arm’s length price of exports to the AEs, including
Micro USA, has been determined on the basis of the transactional net
margin method (TNMM). By way of a note at page 51, it is specifically
stated that “further, the said amount of Rs 2428.26 millions has also been
determined/ computed by the assessee having regard to the arm’s length
price on application of Transactional Net Margin Method (TNMM), on
aggregation of transactions, as prescribed under section 92C of the Income
Tax Act, 1961”. In this backdrop, we can usefully refer to the decision of
Hon’ble Delhi High Court, in the case of Sony Ericsson Mobile Corporation
Pvt Ltd Vs ACIT [(2015) 374 ITR 118(Del)] wherein Their Lordships had,
inter alia, observed as follows:
“Where the Assessing Officer/TPO accepts the comparables adopted by the
assessed, with or without making adjustments, as a bundled transaction, it
would be illogical and improper to treat AMP expenses as a separate
international transaction, for the simple reason that if the functions
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performed by the tested parties and the comparables match, with or
without adjustments, AMP expenses are duly accounted for. It would be
incongruous to accept the comparables and determine or accept the
transfer price and still segregate AMP expenses as an international
transaction,”

8. By way of an example, this aspect of the matter was then explained by
Hon’ble Delhi High Court as follows:

“An example given below would make it clear:

Particulars Case 1 Case 2
Sales 1000 1,000
Purchase Price 600 500
Gross Margin 400 (40%) 500
Marketing Sale 50 150
promotion
Overhead expense 300 300
Net profit 50 (5%) 50 (5%)

The above illustrations draw a distinction between two distributors having
different marketing functions. In case 2, a distributor having significant
marketing functions incurs substantial expenditure on AMP, three times
more than in case 1, but the purchase price being lower, the Indian AE gets
adequately compensated and, therefore, no transfer pricing adjustment is
required. In case we treat the AMP expenses in case 2 as Rs.501-, i.e.
identical as case 1 and AMP of Rs. 100 as a separate transaction, the
position in case 2 would be:

Particulars Case 2
Sales 1,000
Purchase Price 500
Gross Margin 500 (50%)
Overhead expenses 300
Marketing expenses 50
Net profit 150 (15%)

It is obvious that this would not be the correct way and method to compute
the arm’s length price. The purchase price adjustments/set off would be
mandated to arrive at the arm’s length price, if the AMP expenses are
segregated as an independent international transaction…..”

9. By the same logic, even making an adjustment for interest on excess
credit allowed on sales to AEs will vitiate the picture, inasmuch as what
has already been factored in the TNMM analysis, by taking operating
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profit figure which incorporate financial impact of the excess credit period
allowed, will be adjusted again separately as well. Of course, in the
example used by Hon’ble Delhi High Court, the AMP expenses are
deductibles in computation of operating profit but that does not make any
material difference because the interest levy for late realization of debtors,
being inextricably connected with the sales, is also part of operating
income. In the case of Nirma Industries Limited Vs DCIT [(2006) 283 ITR
402 (Guj)], Hon’ble High Court has dealing with the nature of interest on
debtors, held it to be integral to business income. The same is the principle
for the transfer pricing cases to that extent interest is to be taken as
integral to sale proceeds, and, as such, includible in operating income.
When such an interest is includible in operating income and the operating
income itself has been accepted as reasonable under the TNMM, there
cannot be an occasion to make adjustment for notional interest on delayed
realization of debtors. One can understand separate adjustment for excess
credit period when the arm’s length price for exports has been
benchmarked on the CUP basis but not in a case when the arm’s length
price of the exports has been benchmarked on the basis of TNMM. The very
conceptual foundation, for separate adjustment for delayed realization of
debtors and on the facts of this case, is thus devoid of legally sustainable
merits.

10. The other aspect of the matter is that a separate adjustment for
delayed realization of debtors can, even in a fit case, can only be made only
to the extent the credit period allowed to the associated enterprises is
more than the credit period allowed to independent enterprise in respect
of the same or materially similar transactions. In the present case, it is an
undisputed position that semi finished goods, as sold to Micro USA, is not
sold to any other independent enterprises. The assessee did have trading
transactions in respect of the finished goods with trading subsidiaries in
China and Hong Kong but it is not even the case of the TPO that excessive
credit period was allowed to these AEs vis-à-vis the credit period allowed
to independent enterprises, nor any ALP adjustment has been
recommended in connection with the same. This fact, if anything, shows
that the credit period allowed to the AEs is comparable with credit period
of non AEs in respect of similar goods. To compare credit period in respect
of finished goods with the credit period in respect of semi-finished goods,
is, therefore, somewhat fallacious in approach and untenable in law. In our
considered view, merely because there is a delay in realization of debts
cannot be reason enough to make an addition as long as such a delay is
peculiar to the transactions with AEs. The adjustment before us is an
adjustment to arrive at an arm’s length price and unless there is
something, more than sweeping generalizations as implicit in the
arguments before us, to at least indicate that such a delay in realization of
debts in similar transactions is absent in arm’s length transactions, these
adjustments cannot be made even when sales are benchmarked on CUP
basis. The delay in realization of debts, resulting in a continuing debit
balance, is not a standalone international transaction per se, but is a
result of the international transaction as it only reflects that the related
payment has not been made by the debtor. As for the learned Departmental
Representative’s stand that “the supplier is entitled to receipt of payment
immediately on delivery irrespective of whether the finished goods is sold
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in the market, get spoiled in manufacturing or is damaged” would
probably be valid in the perfect market conditions which are more of a
myth than reality. The only other merit of this approach is its simplicity,
or, to put it more appropriately, naivety. The real life trade and commerce
is seldom so simple. It is not at all necessary that a payment is to be made
as soon as goods or services are delivered. A call is to be taken by the
vendor, in consultation with its client and based on the business exigencies,
as to what should be the terms on which payments for the supplies is to be
made. It is a harsh commercial reality that immediate payments are more
of exceptions rather than rule, and more so in a complex case in which the
assessee is sole vendor and the very existence of the buyer is to process the
semi- finished goods and sell it to the end buyers. Many factors, such
normal business practices and the commercial exigencies, influence the
fact of payment in respect of a commercial transaction. Whether a
payment is made immediately by the AE or is made after six months
cannot, therefore, be seen in isolation with what is the position is with
respect to similar payments due from non AEs. The whole exercise of ALP
adjustments is to neutralize the impact of inter se relationships between
the AEs and it is, therefore, not the delay simplictor in payment but delay
in payment vis-à-vis similar situations with non AEs (i.e. independent
enterprises) which is of crucial consideration. Such a comparison cannot
be based on the hypothesis as to what would have, in the wisdom of the
TPO, happened if assessee was to have similar transactions with non- AEs.
The comparison has to be based on real transactions of similar nature, if
at all such transactions have taken place. When no such transactions have
taken place, as is the case before us, there is obviously no occasion of any
comparison. The stand taken by the learned Departmental Representative,
therefore, is not only quite detached from commercial reality but also
wholly untenable in law. In any case, what can be examined on the
touchstone of arm’s length principles is the commercial transaction itself,
as a result of which the debit balance has come into existence, and the
terms and conditions, including terms of payment, on which the said
commercial transaction has been entered into. In this view of the matter,
learned Departmental Representative’s reliance on Aztec decision (supra)
is of no assistance to the case of the revenue. The international transaction
is exports of goods which been benchmarked on TNMM basis and which is
duly accepted by the TPO. In view of these discussions, and respectfully
following the decision of the coordinate bench in assessee’s own case for
the earlier years, we uphold the grievance of the assessee and direct the
Assessing Officer to delete the impugned ALP adjustment of Rs 2,10,95,346.

14. As regards learned Departmental Representative’s contention that Sony
Ericsson Mobile Corporation decision (supra) will not apply in the case before us
in the context of interest on delayed realization of debts for the simple reason
that while AMP expenses, as in that case, are taken into account in the
computation of the PLI, interest on delayed realization of debts is not taken into
account in computation of the PLI, we can only say that it proceeds on the
fallacious assumption that interest income is not taken into account in
computation of profit before interest and taxes. The profit before tax and interest
(PBIT) so computed takes into account interest income because, on the given
facts, it is in the nature of ‘other income’ which is duly included in the PBIT figure.
It is only interest expenditure which is not taken into account in the PBIT
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computation. There is no warrant for the proposition that interest expenditure
taken into account is net of interest income on account of delay in realization of
debts. We, therefore, reject this contention of the Departmental Representative.

15. As for learned Departmental Representative’s suggestion that it is to be
verified whether the comparables include interest income, if any, all we can say is
that the statutory provisions requires the interest income, unless it is an interest
income of the finance and banking companies, to be included in the other income
which is taken into account for computing PBIT (i.e. profit before interest and
taxes). The presumption therefore is that the accounts are drawn up as per the
statutory requirements, and the exclusions from ‘other income’ are specifically
discussed on the facts of each case, and as such constitute integral part of the
transfer pricing documentation. There is nothing on record to show these
exclusions.

16. As regards the contention that normally all interest incomes are excluded
in the computation of PBIT as such incomes rarely constitute operational income,
we see no need to be guided by such hypothesis and generalities. There is nothing
on the records, as we have noted earlier, such exclusions on the facts of this case.
In any event, setting off of interest expenditure with interest on account of delay
in realization of debts, even if so, is not too common an occurrence and more of an
exceptions than the rule. The apprehensions of the learned DR are purely
hypothetical and, therefore, devoid of legally sustainable merits.

17. In view of these discussions, as also bearing in mind entirety of the case,
we are of the considered view that no ALP adjustments can be made, on the facts
of this case, in respect of delay in realization of sale proceeds. Such being our
conclusions, we also see no need to address ourselves to the specific factual
arguments advanced by the learned counsel. In effect thus, we uphold the
grievance of the assessee, and direct the Assessing Officer to delete the impugned
arm’s length price adjustment.

18. As we have upheld the grievance of the assessee, and thus deleted the
impugned ALP adjustment, grievance raised by the Assessing Officer, which was in
respect of the interest rate on the basis of which ALP adjustment was required to
be made, is rendered academic and it does not call for any adjudication at this
stage.

19. There is, however, one more aspect of the matter for which the impugned
ALP adjustment may be deleted.

20. In order to explain this line of reasoning, a few material factual
developments and the legal analysis will have to be taken note of. We have noted
that everything hinges on application of Explanation to Section 92B, vide Finance
Act 2012, though with retrospective effect from 1 st April 2002. This Explanation
provides as follows:
Explanation*: – For the removal of doubts, it is hereby clarified that —
(*inserted by the Finance Act 2012, though with retrospective effect from
1st April 2002)

(i) the expression “international transaction” shall include —

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(a) the purchase, sale, transfer, lease or use of tangible property including
building, transportation vehicle, machinery, equipment, tools, plant,
furniture, commodity or any other article, product or thing;

(b) the purchase, sale, transfer, lease or use of intangible property,
including the transfer of ownership or the provision of use of rights
regarding land use, copyrights, patents, trademarks, licences, franchises,
customer list, marketing channel, brand, commercial secret, know -how,
industrial property right, exterior design or practical and new design or
any other business or commercial rights of similar nature;

(c) capital financing, including any type of long -term or short -term
borrowing, lending or guarantee, purchase or sale of marketable securities
or any type of advance, payments or deferred payment or receivable or any
other debt arising during the course of business;

(d) provision of services, including provision of market research, market
development, marketing management, administration, technical service,
repairs, design, consultation, agency, scientific research, legal or
accounting service;

(e) a transaction of business restructuring or reorganisation, entered into
by an enterprise with an associated enterprise, irrespective of the fact that
it has bearing on the profit, income, losses or assets of such enterprises at
the time of the transaction or at any future date;

(ii) the expression “intangible property” shall include —

(a) marketing related intangible assets, such as, trademarks, trade names,
brand names, logos;

(b) technology related intangible assets, such as, process patents, patent
applications, technical documentation such as laboratory notebooks,
technical know -how;

(c) artistic related intangible assets, such as, literary works and
copyrights, musical compositions, copyrights, maps , engravings;

(d) data processing related intangible assets, such as, proprietary
computer software, software copyrights, automated databases, and
integrated circuit masks and masters;

(e) engineering related intangible assets, such as, industrial design ,
product patents, trade secrets, engineering drawing and schematics,
blueprints, proprietary documentation;

(f) customer related intangible assets, such as, customer lists, customer
contracts, customer relationship, open purchase orders;

(g) contract related intangible assets, such as, favourable supplier,
contracts, licence agreements, franchise agreements, non -compete
agreements;
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(h) human capital related intangible assets, such as, trained and organised
work force, employment agreements, union contracts;

(i) location related intangible assets, such as, leasehold interest, mineral
exploitation rights, easements, air rights, water rights;

(j) goodwill related intangible assets, such as, institutional goodwill,
professional practice goodwill, personal goodwill of professional, celebrity
goodwill, general business going concern value;

(k) methods, programmes, systems, procedures, campaigns, surveys,
studies, forecasts, estimates, customer lists, or technical data;

(l) any other similar item that derives its value from its intellectual
content rather than its physical attributes.’.

21. Shortly before the 2012 amendments were brought, a coordinate bench of
this Tribunal, in the case of Nimbus Communications Ltd Vs ACIT [(2011) 139
TTJ 214 (Bom)] and speaking through one of us, had observed as follows:

4. It is only elementary, in terms of the provisions of Section 92,
any income arising from an international transaction has to be
computed having regard to the arm’s length price (ALP), and that this
exercise includes the allowance for any expense or interest arising
from an international transaction as well. That is the only provisions
under which ALP adjustments can be made. In other words, therefore,
arm’s length price adjustments can only be made in respect of an
‘international transactions’. The expression ‘international
transaction’, on the other hand, is defined under section 92 B as a
transaction between two or more associated enterprises, either or
both of them are non-residents, “in the nature of purchase, sale or
lease of tangible or intangible property, or provision of services, or
lending or borrowing of money, or any other transaction having a
bearing on the profits, incomes, losses or assets of such enterprises”
as also transaction in the nature of cost or expense sharing
arrangement. The question that we must address ourselves to is
whether a continuing debit balance constitutes a ‘transaction’ in
terms of the provisions of Section 92 B.

5. A continuing debit balance, in our humble understanding, is not an
international transaction per se, but is a result of the international
transaction. In plain words, a continuing debit balance only reflects
that the payment, even though due, has not been made by the debtor.
It is not, however, necessary that a payment is to be made as soon as
it becomes due. Many factors, including terms of payment and normal
business practices, influence the fact of payment in respect of a
commercial transaction. Unlike a loan or borrowing, it is not an
independent transaction which can be viewed on standalone basis.
What can be examined on the touchstone of arm’s length principles is
the commercial transaction itself, as a result of which the debit
balance has come into existence, and the terms and conditions,
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including terms of payment, on which the said commercial
transaction has been entered into. The payment terms are an integral
part of any commercial transaction, and the transaction value takes
into account the terms of payment, such as permissible credit period,
as well. The residuary clause in the definition of ‘international
transaction’, i.e. any other transaction having a bearing on the
profits, incomes, losses or assets of such enterprises, does not apply
to a continuing debit balance, on the given facts of the case, for the
elementary reason that there is nothing on record to show that as a
result of not realizing the debts from associated enterprises, there
has been any impact on profits, incomes, losses or assets of the
assessee. In view of these discussions, in our considered view, a
continuing debit balance per se, in the account of the associated
enterprises, does not amount to an international transaction under
section 92 B in respect of which ALP adjustments can be made. The
factum of payment has to be considered vis-a-vis terms of payment set
out in the transaction arrangement, and not in isolation with the
commercial terms on which transaction in respect of which payment
is, according to the revenue authorities, delayed.

22. We have noted the learned Departmental Representative’s contention that
the above decision is no longer good in law since a coordinate bench of this
Tribunal, in the case of i-Gate Computer Systems Ltd Vs ACIT and vice versa
(ITA No. 2504/PN/2012 has, inter alia, stated that “the Hon’ble Bombay High
Court, in assessee’s own case relating to the assessment year 2002-03 in
Income Tax Appeal No. 1148/2012, vide judgment dated 28.2.2013, has held
that in view of the amendment by the Finance Act 2012 with retrospective
effect from 1st April 2002, the said transaction of charging of interest from
the AEs is covered under the amended provision of Section 92B(1) of the Act”.

23. However, when we perused Hon’ble Bombay High Court’s judgment
referred to in this coordinate bench’s order, we found the factual position to be
slightly, but very materially, different.

24. The relevant question before Their Lordships, in the said case and as set
out at page 2 of this judgment, was “(c) whether, on the facts and
circumstances of the case and in law, the Tribunal did not err in holding
that the loss suffered by the assessee by allowing excess period of credit to
the associated enterprises without charging any interest during such period
would not amount to international transaction whereas Section 92B(1) of
the Income Tax Act, 1961, refers to ‘any other transaction having a bearing
on the profits, income, losses or assets of such enterprise’ ”. Rather than
answering this question on merits, and with the consent of both the parties, Their
Lordships sent the matter back for fresh consideration of the Tribunal. While
doing so, at page 3-4 of the judgment, Their Lordships observed as follows:

2. So far as question (c) is concerned, counsel for the parties state
that in view of the amendment to Section 92B(1) of the Income Tax Act,
1961 (‘Act’ for short) by Finance Act, 2012 with retrospective effect from
1st April 2002, the question as framed may be restored to the file of the
Tribunal for fresh decision in light on the amendment. Accordingly, this
issue is remitted to the file of the Tribunal for fresh decision on merits
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25. The observations so made by Hon’ble jurisdictional High Court, in our
limited understanding, cannot be construed as holding that “in view of the
amendment by the Finance Act 2012 with retrospective effect from 1 st April
2002, the said transaction of charging of interest from the AEs is covered
under the amended provision of Section 92B(1) of the Act”. As it appears from
the plain words of the statute- as extracted earlier, the issue is left open for
adjudication by this Tribunal.

26. In any event, to this extent, this judgment does not involve an adjudication
on a legal issue as it is a result of consensus of the parties. When both the parties
before Their Lordships agreed, and so ‘stated’ before Their Lordships, to let the
matter be restored to the file of the Tribunal, there could not have been, and there
was no, adjudication on any legal issue.

27. It is for this reason that the said decision of the Pune bench of the
Tribunal, relied upon by the learned Departmental Representative, is per
incurium and does not bind the coordinate benches.

28. The question then is as to what is the impact of amendment in section 92B,
by the virtue of Finance Act 2012, on the definition of ‘international transaction’
so far as the interest on delayed realization of debt is concerned.

29. The amendment so made by the Finance Act 2012, stated to be with
retrospective effect 1st April 2002, inserts an Explanation to Section 92 B which,
inter alia, that “For the removal of doubts, it is hereby clarified that (c) capital
financing, including any type of long -term or short -term borrowing,
lending or guarantee, purchase or sale of marketable securities or any type
of advance, payments or deferred payment or receivable or any other debt
arising during the course of business”. In plain words, this amendment inter
alia implies that capital financing of any type, including by way of “deferred
payment or receivable or any other debt arising during the course of business”
will constitute an international transaction under section 92B. Going by this
definition “any debts arising during the course of business” will constitute an
international transaction. A trade debt is, accordingly, covered by this definition.
However, since the assessment year that we are dealing with is prior to the
assessment year 2012-13, the next important question is whether this amendment
could be held to be applicable in the assessment year before us as well.
Undoubtedly, the amendment is said to be retrospective but then the question
really is whether just stating the law to be retrospective will make it retrospective
in effect.

30. The fact that judicial precedents, prior to the insertion of Explanation to
Section 92B, held that a continuing debit balance, on a standalone basis, does not
constitute an international transaction required to be benchmarked assumes
considerable significance in the light of a new judicial development that we will
deal with in a short while now. In the present case, we are dealing with a
situation in which the amendment was made with retrospective effect and it
covered certain issues which were already subjected to a judicial interpretation in
a particular manner. The judicial interpretation so given was certainly not the
end of the road. The matter could have been carried in appeal before higher
judicial forums. If the decision of a judicial body does not satisfy the tax
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administration, nothing prevents them from going to the higher judicial forum or
from so amending the law, with prospective effect, that there is no ambiguity
about the intent of legislature and it is conveyed in unambiguous words.

31. Nullifying a judicial interpretation though legislative amendment, much as
many of us may abhor it, is not too uncommon an occurrence. Of course, when
legislature has to take an extreme measure to nullifying the impact of a judicial
ruling in taxation, it is the time for, at least on a theoretical note, introspection
for the draftsman as to what went so wrong that fundamental intent of law of law
could not be conveyed by the words of the statute, or, perhaps for the judicial
forums, as to what went so wrong that the interpretation was so off the mark vis-
à-vis fundamental principles of taxation or the sound policy considerations.
However, amendment so made are generally prospective, and there is a sound
conceptual foundation, as has been highlighted in the binding judicial precedents
that we will deal with in a short while, for that approach. There is no dearth of
examples on this aspect of the matter. Take for example, the amendment to
Section 263 by the Finance Act, 1961. In many judicial precedents, [such as in the
case of CIT Vs Sunbeam Auto Limited (332 ITR 167) wherein it was held that
“Learned counsel for the assessee is right in his submission that one has to keep in
mind the distinction between “lack of inquiry” and “inadequate inquiry”. If there
was any inquiry, even inadequate that would not by itself give occasion to the CIT
to pass orders under s. 263 of the Act, merely because he has different opinion in
the matter. It is only in cases of “lack of inquiry” that such a course of action
would be open”], it was reiterated that it was only the lack, not the adequacy, of
inquiry which could confer jurisdiction under section 263 on the Commissioner.
By inserting Explanation 2 to Section 263(1), which inter alia provided that
powers under section 263 could also be invoked in the cases where “the order is
passed without making inquiries or verification which should have been made”,
all ratio of all these decisions was nullified. That, however, is done with
prospective effect, i.e. with effect from 1st June 2015. As a matter of fact, it is a
laudable policy of the present tax administration to stay away from making the
retrospective amendments, and thus contribute to greater certainty and congenial
business climate. Nothing evidences it better than this subtle, but easily
discernible, paradigm shift in the underlying approach to the amendments made
in Section 263 in the very first full budget of the present Government.

32. What has, however, been done in the case before us is to amend the law
with retrospective effect. Of course, it happened much before the current
awareness about the evils of retrospective taxation having been translated into
action.

33. Dealing with such a situation, Hon’ble Delhi High Court has, in the case of
DIT vs New Skies Satellite BV [TS-64- HC -DEL (2016)], observed as follows:

30. Undoubtedly, the legislature is competent to amend a
provision that operates retrospectively or prospectively. Nonetheless,
when disputes as to their applicability arise in court, it is the actual
substance of the amendment that determines its ultimate operation
and not the bare language in which such amendment is couched……..

36. A clarificatory amendment presumes the existence of a
provision the language of which is obscure, ambiguous, may have
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made an obvious omission, or is capable of more than one meaning.
In such case, a subsequent provision dealing with the same subject
may throw light upon it. Yet, it is not every time that the legislature
characterizes an amendment as retrospective that the Court will give
such effect to it. This is not in derogation of the express words of the
law in question, (which as a matter of course must be the first to be
given effect to), but because the law which was intended to be given
retrospective effect to as a clarificatory amendment, is in its true
nature one that expands the scope of the section it seeks to clarify,
and resultantly introduces new principles, upon which liabilities
might arise. Such amendments though framed as clarificatory, are in
fact transformative substantive amendments, and incapable of being
given retrospective effect. ………………….

37. An important question, which arises in this context, is
whether a “clarificatory” amendment remains true to its nature
when it purports to annul, or has the undeniable effect of annulling,
an interpretation given by the courts to the term sought to be
clarified. In other words, does the rule against clarificatory
amendments laying down new principles of law extend to situations
where law had been judicially interpreted and the legislature seeks
to overcome it by declaring that the law in question was never meant
to have the import given to it by the Court? The general position of
the courts in this regard is where the purpose of a special
interpretive statute is to correct a judicial interpretation of a prior
law, which the legislature considers inaccurate, the effect is
prospective. Any other result would make the legislature a court of
last resort. United States v. Gilmore 8 Wall [(75 US) 330, 19L Ed 396 (1869)]
Peony Park v. O’Malley [223 F2d 668 (8th Cir 1955)]. It does not mean that the
legislature does not have the power to override judicial decisions
which in its opinion it deems as incorrect, however to respect the
separation of legal powers and to avoid making a legislature a court
of last resort, the amendments can be made prospective only [Ref County
of Sacramento v State (134 Cal App 3d 428) and In re Marriage of Davies (105 III App 3d 66)]
(Emphasis, by underlining, supplied by us)

34. Quite clearly, in view of the law so laid down by Their Lordships also, just
because a provision is stated to be clarificatory, it does not become entitled to be
treated as ‘clarificatory’ by the judicial forums as well. The view taken by Hon’ble
Delhi High Court support this line of reasoning. Even without the benefit of
guidance of Their Lordships, the views articulated by a coordinate bench of this
Tribunal, in the case of Bharti Airtel (supra) were of a somewhat similar opinion
when it was observed that, “Undoubtedly, the scope of a charging provision
can be enlarged with retrospective effect, but an anti-avoidance measure,
that the transfer pricing legislation inherently is, is not primarily a source
of revenue as it mainly seeks compliant behaviour from the assessee vis-à-
vis certain norms, and these norms cannot be given effect from a date
earlier than the date norms are being introduced”. We may add that right now
we are only concerned with the question of retrospective amendment in the
transfer pricing legislation, which has, as we will see, its own peculiarities and
significant distinction with normal tax laws which simply impose tax on an
income.
———————Page 17———————

I.T.A. Nos.7662/Mum/2013 & 142/Mum/2014
Assessment year: 2008-09

Page 17 of 21

35. Legislature may describe an amendment as ‘clarificatory’ in nature, but a
call will have to be taken by the judiciary whether it is indeed clarificatory or not.
This determination, i.e. whether the amendment in indeed clarificatory or is the
amendment to overcome a judicial precedent, assumes great significance because
when it is found that the purpose of such interpretive statute, or clarificatory
amendment, is “correct a judicial interpretation of prior law, which the
legislature considers inaccurate, the effect is prospective” and, as in this case, it
deals with transfer pricing legislation which essentially seeks a degree of
compliant behavior from the assessee vis-à-vis certain norms- the norms the
assessee should know at the time of entering into the transactions rather than at
the time of scrutiny of his affairs at a much later stage.

36. It is very important to bear in mind the fact that right now we are dealing
with amendment of a transfer pricing related provision which is in the nature of a
SAAR (specific anti abuse rule), and that every anti abuse legislation, whether
SAAR (specific anti abuse rule) or GAAR (general anti abuse rule), is a legislation
seeking

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Ashni Shah is pursuing Chartered Accountancy and is currently engaged as Article Assistant at Rasesh Shah and Associates and can be reached at ashnishah2017@gmail.com. She loves Dancing and Gyming.

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