THE JT. CIT, RANGE-4, AHMEDABAD vs. M/S. MASTEK LTD.,, AHMEDABAD

PER Ms MADHUMITA ROY, JUDICIAL MEMBER:

These cross appeals filed by the assessee and by the Revenue are directed against the order passed by the Learned Commissioner of Income Tax(Appeals)-2, Ahmedabad ( hereinafter referred as to ''Ld.CIT (A)'' ), dated 20.03.2015 under section 143(3) r.w.s 144C of the Income Tax Act, 1961 (hereinafter referred as to “the Act”) arising out of the order dtd. 28.03.2013 passed by the D.C.I.T (OSD)-1, Circle-4, Ahmedabad for A.Y. 2009-10 and against the order dated 01.12.2015

ITA Nos. 1188, 1852/Ahd/2015 & IT(TP) Nos. 172 & 514/Ahd/16 A.Y.s 2009-10 & 2010-11 2 passed by the Learned Commissioner of Income Tax (Appeals)-4, Ahmedabad u/s.143 r.w.s 144C of the Income Tax Act, 1961 arising out of the order dated 14.03.2014 passed by the JCIT, Range-4, Ahmedabad for the Assessment Year 2010-11 respectively.

Since all the appeals relates to the same assessee and the issues are identical, these matters are heard analogously and are being disposed of by this common order.

ITA No.1188Ahd/2015 for A.Y. 2009-10:

ITA Nos. 1188, 1852/Ahd/2015 & IT(TP) Nos. 172 & 514/Ahd/16 A.Y.s 2009-10 & 2010-11 3 details given by the appellant, made a disallowance out of administrative expenses after applying the third limb of rule 8D.

The appellant, on the other hand, has submitted that it has not incurred any expenses for earning the dividend income as major administrative work, liaisoning work was done by mutual fund distributors and they paid brokerage by the mutual fund houses. It was not the business of the appellant to invest in mutual funds and, therefore, no direct expenses have been incurred. It is also been submitted and pointed out by the appellant that in A.Y. 2006 - 07, the CIT(A) has disallowance of Rs.2 lakh based on reasonable estimate has also submitted, on without prejudice basis, that the amount of investment made in growth oriented debt/fixed maturity plan mutual fund , which were not capable of earning any exempt income should be included for the purpose of computing 'average value of investment as per rule 8D. The appellant has also submitted that the investment made in foreign equities should also be excluded for calculating the average value of investment. It has been submitted that the investment in liquid fund with growth option should be equated with foreign investment as both were not capable of earning exempt income. On a careful consideration of entire facts of the case, it is noted that the appellant has not kept any account or record to show that no administrative expenditure has been incurred for the purpose of earning exempt income or maintaining the tax exempt investment. The appellant has itself made a disallowance of certain expenditure for this purpose. It is also an admitted fact that the appellant has not followed any scientific basis for making the disallowance. The appellant has submitted during the course of appellate proceedings that it has disallowed 10% of the salary paid to 2 persons for the purpose of section 14A. However, it is noted that no such claim was made before the AO regarding basis of calculation of disallowance. The appellant has now claimed that it has disallowed 10% salary of two employees who were partly involved in administrative and other matters relating to investment in mutual funds, appears to be an afterthought as the amount which was disallowed by the appellant in the return of income was 4,03,501/-, whereas as per the working now given it comes to Rs. 4,03,500/-. Further, the appellant has also not given the designation of these two persons who have been claimed to be involved in the work of investment. Therefore, the disallowance made by the appellant itself is not reliable and not on any scientific basis. It is also to be noted thateven if the claim of the appellant accepted the involvement of other senior functionaries of the financedepartment, as well as, the director who looks after the investment and other finance functions also must have been there, tor which no disallowance of salary has been considered by the appellant. Further, the provisions of income tax Act clearly provides a basis of working out the administrative expenses in case no actual details of expenditure incurred for earning the exempt income is available. In absence of any scientific basis of actual data, the provisions of income tax Act will have to be applied for working out the disallowance. Accordingly, the disallowance made by the appellant itself as expenditure incurred for earning the exempt income under section 14A is, therefore, not reliable. Therefore, in these circumstances also having regard to the accounts of the appellant, I am not satisfied with the correctness of the claim of the appellant in respect of no administrative expenditure in relation to income which does not form part of the total income under this Act that is the dividend income shown by the appellant.

ITA Nos. 1188, 1852/Ahd/2015 & IT(TP) Nos. 172 & 514/Ahd/16 A.Y.s 2009-10 & 2010-11 4

Therefore, after having held that the accounts of the appellant in respect of expenditure incurred for earning the income which does not form part of the total income are not correct, the expenditure incurred will have to be worked out by applying the Provisions of Rule 8D. It is noted that the AO has applied Rule 8D for working out the disallowance. Accordingly, the application of Rule 8D by the AO for making the disallowance under section 14A is upheld.

The appellant has also claimed that for A. Y. 2006-07 in disallowance of Rs. 2 lakh was upheld on estimated basis by the C1T(A) in the case of the appellant itself. The reliance placed by the appellant is not applicable as rule 8D has been made applicable from A Y 2008 - 09. The rule was not applicable for A. Y. 2006 - 07 and no method for calculating the disallowance was provided in the Act. Therefore, considering the legal provisions for that year, the order of the CIT(A) was justified but the findings would not be applicable for the current year the provision of rule 8D would be applicable for working the disallowance. It may not be out of place to mention here that the case of the appellant itself the disallowance under is section 14A has been upheld by me for A Y 2008 - 09.

For the purpose of calculating the disallowance the claim of the appellant that foreign subsidiaries investment and the investment in debt funds or fixed maturity plans should not be considered for the purpose of calculating the disallowance, as these investment does not yield any exempt income, is acceptable. The income of foreign subsidiaries in the form of dividend is taxable in India. Similarly, the income from growth oriented fund such as FMP and Debt funds are not exempt, as there is no STT payable on these transactions and, accordingly, it gives short term or long term capital gain which is taxable. Accordingly, the submission of the appellant is accepted and the AO is directed to calculate the disallowance by applying the third limb of rule 8D after excluding the investment in foreign subsidiaries and also the investment in Debt Funds. The appellant has submitted that out of the total average value of investment cf 193.57 crores, the investment in foreign companies were 101.57 crores and the average investment in growth oriented liquid/debt mutual funds was Rs. 25.00 crores. The AO, is accordingly, directed to reduce these values from the average investment calculated by it, after verifying the details, and calculate the disallowance made under section 1 4 A read with rule 8D. The ground of appeal is partly allowed.”

ITA Nos. 1188, 1852/Ahd/2015 & IT(TP) Nos. 172 & 514/Ahd/16 A.Y.s 2009-10 & 2010-11 5 purpose of computing disallowance”. A copy of the said order passed by the Hon’ble Tribunal has also been supplied to us by Ld. Sr. Counsel for the assessee. On the contrary the Ld. D.R has not raised any objection to such contention made by the Ld.AR.

ITA Nos. 1188, 1852/Ahd/2015 & IT(TP) Nos. 172 & 514/Ahd/16 A.Y.s 2009-10 & 2010-11 6 After examining all the facts and the law related to the issue it is noted that the fact that appellant has earned dividend income of Rs. 7.71 Crores and it has claimed exemption from tax on this income is undisputed. The disallowance made by the AO pertains to the administrative expenditure only and no disallowance out of interest has been made as there was no borrowing cost during the year which would have been allocated for this purpose. The appellant has itself made a disallowance of Rs.2 Lakhs on account of section 14A relating to exempt income. However, the appellant has itself admitted that the disallowance is made on an adhoc basis out of abundant precaution. It is noted that the appellant has not followed any method for making the disallowance and no details of expenditure incurred for the purpose of earning the exempt income from mutual funds have been kept so that the veracity of the disallowance made by the appellant itself can be verified. The action of theappellant clearly show that while admitting that certain expenditure has been incurred for the purpose of earning the dividend income, it has not maintained any proper account for such expenditure. It has not disallowed the expenditure on the basis of actual determination. The basis adopted by the appellant is not systematic and scientific. It is only an estimate which has been made by the appellant without any basis. It is accordingly held that the administrative expenditure disallowed by the appellant are not a reliable and therefore, not acceptable. I am therefore, not satisfied with the correctness of the claim of the appellant in respect of administrative expenditure in relation to the dividend income received by the appellant which does not form part of the total income under the Income tax Act.

The Provisions of Rule 3D have been brought in the Act to make the disallowance in these types of cases. Since the appellant itself accepts that the expenses have been incurred for earning the dividend income and it is also a fact that the appellant has not kept the actual details of expenditure the disallowance will have to be made on the basis of the Rule 8D. Accordingly, it is held that the disallowance under section 14A should be made by applying the provisions of Rule 8D which has rightly been done by the AO. The contention of the appellant is therefore, dismissed and the disallowance made by the A.O is upheld. The ground of appeal is accordingly, dismissed."

ITA Nos. 1188, 1852/Ahd/2015 & IT(TP) Nos. 172 & 514/Ahd/16 A.Y.s 2009-10 & 2010-11 7 computation formula. We conclude in these facts that both the lower authorities have acted as per law in invoking the impugned disallowance in relation to assessee's exempt income amounting to Rs.7.7 crores.More so when the assesses has not discharged prima facie onus even to justify its suomotulump sum disallowance of Rs.2 lakhs only. The impugned disallowance is accordingly confirmed in principle. 14. Mr. Soparkar at this stage raises an alternate contention that both the lower authorities have erred in not excluding the average investment made in growth oriented debt funds and fixed maturity plan funds of Rs.1,558.26 lakhs yielding only taxable income. We find that this is more a computation exercise wherein investment made in relation to taxable income has to be excluded for the purpose of computing disallowance in question. We thus direct the Assessing Officer to frame consequential computation as per law. Assessee's instant substantive ground is taken as partly accepted for statistical purposes in the above terms.

In that view of the matter we find no justification to deviate from the stand taken by the Co-ordinate Bench. Hence, we direct the AO to frame computation in the light of the order passed by the Co-ordinate Bench as discussed above. Hence, assessee’s ground appeal is disposed of accordingly.

ITA Nos. 1188, 1852/Ahd/2015 & IT(TP) Nos. 172 & 514/Ahd/16 A.Y.s 2009-10 & 2010-11 8 undertaking a credit rating analysis for the appellant and the A.E and computed adjustment on an adhoc basis.

Further that the assessee has challenged the order passed by the Ld.CIT(A) in enhancing the adjustment made in relation to the Performance Guarantee given by the appellant to the customers of the Associate Enterprise (‘’AE”). Mainly following aspect has not been appreciated by the Ld.CIT(A) which has been pointed out by the assessee in the order passed by Ld.CIT(A).

i. The service liability risk is borne by the Appellant as the services are either provided by its delivery centre in India(Offshore) or branch in UK (onsite); and ii. The said performance guarantee is in the nature of shareholder activity and quasi equity in nature. b. Without prejudice to the above, the CIT(A) has erred in not appreciating the following:

i. No cost is incurred by the Appellant in provisions of these performance guarantees; and

ITA Nos. 1188, 1852/Ahd/2015 & IT(TP) Nos. 172 & 514/Ahd/16 A.Y.s 2009-10 & 2010-11 9 ii. The said performance guarantees cannot be equated with financial guarantee.

ITA Nos. 1188, 1852/Ahd/2015 & IT(TP) Nos. 172 & 514/Ahd/16 A.Y.s 2009-10 & 2010-11 10 sales made by MUK. It has been held by the AO that since MUK does not have any financial backup or credit standing it has to rely on the comfort letter issued by Mastek India while entering into the performance guarantees and other related commitments made with the parties to sales contract with it. The AO has accordingly adopted an estimate of 2% if the gross sales as guarantee fee for the guarantees and comfort letters given by the appellant company and accordingly the cost of such guarantee have been worked out at Rs.10.87 Crores which the appellant was entitled to receive merely on the issue of providing guarantee to the AE. It has been held by the AO that since an addition of Rs.26.07 Crores has already been suggested no further adjustment was recommended by the TPO.

During, the course of appellate proceedings, the appellant has submitted that the service liability risk was borne by the appellant and the performance guarantee given to the customer with respect to the performance of software services was not on behalf of the AE. It has been submitted by the appellant that the MUK was the distributor of the appellant and does not provide any software services to the customers. The on-site component of the contract was provided by a branch of the appellant in UK whereas the offshore component was provided by the appellant from India. Effectively all the services to the customers in UK region were provided by the appellant either through its offshore facility or its branch in UK. It has given an example of Vijay sales, which is a popular electronic showroom in India and sells various electronic equipments. It is submitted by the appellant that in the event of some defect in the TV of a particular brand sold by Vijay sales the guarantee and services would be borne by the manufacturer and not the selling person. It has further been submitted by the appellant that as a result of performance guarantee given by the appellant, the revenues from the MUK has increased and the appellant has benefited from the same. The appellant has therefore, submitted that both on the count of being the ultimate service provider and on the principle of business rationale, the adjustment on the performance Guarantee should not be considered.

It was noted from the order of the TPO that the basis on which the adjustment was made was not very clear. Accordingly the TPO was requested vide this office letter dated 12/02/2014 to give the basis of such estimation. The TPO, Additional C.I.T. TPO-I has informed vide his letter dated 20/03/2014 about the basis adopted by him while taking the rate of 2%. The relevant extracts of the letter sent by him is reproduced in the preceding discussion. The report given by the TPO was given to the appellant for submitting its comment thereon. The appellant has also submitted its report vide letter dated 05/05/2014. The objection and rejoinder of the appellanthas also been reproduced in the preceding discussion.

The TPO has informed that the basis of 2% was the financial guarantees given by various Institutions and the rating of the companies by CRISIL. It has been held and observed by him that the rating of the

ITA Nos. 1188, 1852/Ahd/2015 & IT(TP) Nos. 172 & 514/Ahd/16 A.Y.s 2009-10 & 2010-11 11 appellant company was AA and accordingly the credit risk was taken by him on a conservative basis at 2% as the issue was related to performance guarantee. The TPO has also tried to justify the rate of 2% on the basis of details of performance guarantee commission charged by the Central Bank of India in certain cases.

The appellant on the other hand has submitted that the performance guarantee was provided to ensure quality and timely services whereas financial guarantee was provided to make available loans or cash credit facility to thebeneficiary of the guarantee. The appellant had given performance guaranteeand not the financial Guaranty. The approach of the TPO to equate performanceguarantee with the financial Guaranty was not justified. It has been submitted andclaimed by the appellant that there was a fundamental difference betweenperformance guarantee and the financial Guaranty. In case of financial Guarantythe AE obtains loan or cash credit facility and the benefit accruing to the AE is inthe form of reduced interest rate or favourable terms of loan, whereas no suchbenefit accrues to the AE in case of performance guarantee. It has accordinglybeen submitted by the appellant that the methodology considered by the TPO wasnot justified. It has been pointed out by the appellant that it has not incurred any expenses while providing the performance guarantee and historically no customer has invoked the performance guarantee given by the appellant till date. Theperformance guarantee given by the appellant does not have a bearing onprofit, income, losses or assets and was therefore not covered under the TP regulations.

The appellant has also submitted that financial position and credit rating of the subsidiary would also be in line with the parent company as the same are to betreated collectively as group. Since the credit ratings of both are same no difference in the corresponding prevailing interest rate and the adjustment was required. The appellant has also submitted that the TPO has used 'naked quotes' without factoring the terms and condition of the loan, risk undertaken, relationship between bank and the client, credit ratings, economic and business interests et cetera. The appellant has also objected that the TPO has not followed the principles of natural justice and opportunity of being heard was not given to the appellant.

On an overall consideration of the entire facts related to the issue it is noted that there is merit in the observations made by the TPO that the income of its subsidiary MUK has increased due to the performance guarantee given by theappellant. The facts show that the prices of various products which are sold and marketed by MUK are fixed by it. The claim of the appellant that its case is similar to a distributor of TV is without basis as in that case the price is fixed by the TV manufacturer and the distributor only gets a fixed commission on the sale price. In case of the appellant the price is fixed by the distributor and the commission which certain percentage of the sale price accordingly decreases or increases with thevariation in sale price in absolute terms. Higher the price, higher is the commission earned by the distributor. As the appellant company has given

ITA Nos. 1188, 1852/Ahd/2015 & IT(TP) Nos. 172 & 514/Ahd/16 A.Y.s 2009-10 & 2010-11 12 performance guarantee, the distributor is able to fetch better price in the market as the performance of the product is guaranteed by somebody else. Accordingly out of the profits earned by MUK certain percentage of it is attributable to the performance guarantee given by the appellant. In case there was no performance guarantee the commission would have been less as the sale price would be less without the guarantee. Therefore, I am of the considered opinion that some upward adjustment on account of the performance guarantee given by the appellant is required to be made and the action of the TPO to that extent is justified.

The submission of the appellant that no opportunity has been given is also not justified at this stage as the comments given by the AO has been given to the appellant and it has offered its comment on all the aspects stated by the TPO in the report. Therefore, the contention of the appellant is rejected.

The other contention which has been taken by the appellant is that performance guarantee and financial Guaranty are entirely different products and therefore, it would not be appropriate to adopt the rates given for financial Guaranty for evaluating the performance guarantee. The contention of the appellant is justified. The criteria for giving the performance guarantee for a particular product would be entirely different than that of the financial Guaranty for a particular loan or credit. The performance guarantee would depend on the technical expertise and the skills of the company and the historical performance data of the product which is being sold by the distributor. It has been observed that the performance guarantee is worked out by evaluating the historical data of similar claims made in the past and the value of the product for which the performance guarantee that have been claimed, it is noted from the facts that no such historical figure or any comparable data is available for deciding the issue. The appellant is giving a commission of 5.5% of the revenues generated through MUK. It is this commission which varies in absolute terms in accordance with the price fixed by MUK while selling a product, which is guaranteed by the appellant company. The appellant has furnished a copy of sample performance guarantee agreement entered by it with British Telecommunication and it is noted that it has guaranteed due and punctual performance by MUK of each and all of the obligations, warranties or representations due to it etc. It also had agreed to indemnify the British Telecom against all losses which may incur due to breach of contract by the MUK and also the losses which may incur due to certain guaranteed obligations being enforceable, invalid or illegal. It is an admitted fact that out of the total sale consideration received by the MUK, it is retaining only 5.5% of the sales value and balance is given to the appellant company. The performance guarantee component in thiscommission can be only certain Percentage of the 5.5% commission retained by MUK. It is also a fact that MUK is also undertaking other functions of selling and distribution. It is making efforts in marketing the product and undertaking activities so as to achieve the maximum possible sales. However, the contracts are signed by MUK and manage the customer

ITA Nos. 1188, 1852/Ahd/2015 & IT(TP) Nos. 172 & 514/Ahd/16 A.Y.s 2009-10 & 2010-11 13 relationships until the point of final delivery of the product to the buyer. Therefore, the majority of the commission given by the appellant to UK is attributable to the activities as a distributor or the marketing agent of the appellant company and only a small component or certain percentage of that commission can be attributed due to performance guarantee given by the appellant. It is noted that the TPO has evaluated this commission at 2% of the total sales made by the appellant company. After considering overall facts and circumstances, it would be appropriate if the upward adjustment on account of performance guarantee is pegged at 2% of the sale consideration retained by the MUK. Since the MUK is retaining 5.67% of the sale consideration the amount would come to 2% of 5,67% i.e. 0.11% (rounded off) of the sales.

The appellant has objected that even if certain percentage is to be attributed to the performance guarantee, it can only be attributed to the sales made by the appellant company through MUK on which the performance guarantee was given by the appellant. The objection and argument of the appellant is justified as this can only be applied to those sales made through MUK on which to performance guarantee has been given by the appellant. Accordingly, the sales made through MUK on which the performance guarantee was given by the appellant should only be considered for applying the above rate. The appellant has submitted that it has given performance guarantee on the sales of Rs.260.35 Crores made through MUK. The AO is directed to verify this figure and apply the above rate accordingly. The addition made by the AO, on without prejudice basis, is accordingly upheld to that extent.

The ground of appeal is partly allowed.”

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

ITA Nos. 1188, 1852/Ahd/2015 & IT(TP) Nos. 172 & 514/Ahd/16 A.Y.s 2009-10 & 2010-11 14 by pointing out that this issue has been dealt with in detail by decision of a coordinate bench in the case of Micro Ink vs ACIT [(2016) 176 TTJ 8 (Ahd)] wherein the coordinate bench has, inter alia, observed as follows:

'92B - Meaning of international transaction

(1) For the purposes of this section and sections 92, 92C, 92D and 92E, "international transaction'' means a transaction between two or more associated enterprises, either or both of whom are non- residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to anyone or more of such enterprises.

(2) A transaction entered into by an enterprise with a person other than an associated enterprise shall, for the purposes of sub-section (1), be deemed to be a transaction entered into between two associated enterprises, if there exists a prior agreement in relation to the relevant transaction between such other person and the associated enterprise, or the terms of the relevant transaction are determined in substance between such other person and the associated enterprise.

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— (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;

ITA Nos. 1188, 1852/Ahd/2015 & IT(TP) Nos. 172 & 514/Ahd/16 A.Y.s 2009-10 & 2010-11 15 (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 knowhow; (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;

ITA Nos. 1188, 1852/Ahd/2015 & IT(TP) Nos. 172 & 514/Ahd/16 A.Y.s 2009-10 & 2010-11 16 (h) human capital related intangible assets, such as, trained and organised workforce, 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.'

'25. An analysis of this definition of 'international transaction' under Section 92B, as it stood at the relevant point of time, and its break- up in plain words, shows the following:

An international transaction can be between two or more AEs, at least one of which should be a non-resident.

An international transaction can be a transaction of the following types:

in the nature of purchase, sale or lease of tangible or intangible property,

in the nature of provision of services,

in the nature of lending or borrowing money, or

in the nature of any other transaction having a bearing on the profits, income, losses or assets of such enterprises

An international transaction shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to anyone or more of such enterprises.

Section 92B (2), covering a deeming fiction, provides that even a

ITA Nos. 1188, 1852/Ahd/2015 & IT(TP) Nos. 172 & 514/Ahd/16 A.Y.s 2009-10 & 2010-11 17 transaction with non-AE in a situation in which such a transaction is de facto controlled by prior agreement with AE or by the terms agreed with the AE.

ITA Nos. 1188, 1852/Ahd/2015 & IT(TP) Nos. 172 & 514/Ahd/16 A.Y.s 2009-10 & 2010-11 18

ITA Nos. 1188, 1852/Ahd/2015 & IT(TP) Nos. 172 & 514/Ahd/16 A.Y.s 2009-10 & 2010-11 19 the significance of expression 'having a bearing on profits, income, losses or assets' appearing in Section 92B(1).

ITA Nos. 1188, 1852/Ahd/2015 & IT(TP) Nos. 172 & 514/Ahd/16 A.Y.s 2009-10 & 2010-11 20 24. As for Hon'ble High Court's judgment in the case of Everest Kanto Cylinders Ltd. (supra), it is necessary to appreciate the fact the assessee was charging a .5% commission on issuance of corporate guarantees, on behalf of the AEs, and it could not, therefore, be said that the transaction will have no impact on "profits, incomes, losses or assets of such enterprise". This aspect of the matter is clear from an observations in the related Tribunal order, which is reported as Everest Kanto Cylinders Ltd (supra), to the effect that "However, in this case, the assessee has itself charged 0.5% guarantee commission from its AE and, therefore, it is not a case of not charging any kind of commission from its AE". The Tribunal did note, in the immediately following sentence in paragraph 23 itself, that "the only point to be seen in this case is whether the same is at ALP or not". The very fact of charging this guarantee commission brings the issuance of corporate guarantees to the net of transfer pricing. Nevertheless, the ALP adjustment made by the TPO was deleted by the Tribunal. Aggrieved by the relief so given by the Tribunal, the matter was carried in further appeal, by the Commissioner, before the Hon'ble Bombay High Court which eventually upheld the relief granted by the Tribunal. The appeal before the Hon'ble High Court was by the Commissioner, and not by the assessee, and, therefore, the grievance against the issuance of corporate guarantee being held to be an international transaction could not have come up for consideration. Of course, the assessee had no occasion to challenge the stand of the Tribunal on this aspect since the addition, on merits, was deleted anyway making revenue's success in this respect hollow and of no damage to the interests of the assessee. It was in this backdrop that the action of the Tribunal was upheld in granting relief to the assessee on merits. It is difficult to understand as to how this decision is taken as supporting the proposition that the issuance of corporate guarantee, even in a case in which neither any guarantee commission is charged nor any costs are incurred, is an international transaction. In any case, there is nothing in the operative portion which even remotely suggests that Their Lordships had any occasion to address themselves to the question as to whether the issuance of corporate guarantee amounts to international transaction. The operative portion of the judgment is reproduced below for ready reference:

"…………In the matter of guarantee commission, the adjustment made by the TPO were based on instances restricted to the commercial banks providing guarantees and did not contemplate the issue of a Corporate Guarantee. No doubt these are contracts of guarantee, however, when they are Commercial banks that issue bank guarantees which are treated as the blood of commerce being easily encashable in the event of default, and if the bank guarantee had to be obtained from Commercial Banks, the higher commission could have been justified. In the present case, it is assessee company that is issuing Corporate Guarantee to the effect that if the subsidiary AE does not repay loan availed of it from ICICI, then in such event, the assessee would make good the amount and repay the loan. The considerations which applied for issuance of a Corporate guarantee are distinct and separate from that of bank

ITA Nos. 1188, 1852/Ahd/2015 & IT(TP) Nos. 172 & 514/Ahd/16 A.Y.s 2009-10 & 2010-11 21 guarantee and accordingly we are of the view that commission charged cannot be called in question, in the manner TPO has done. In our view the comparison is not as between like transactions but the comparisons are between guarantees issued by the commercial banks as against a Corporate Guarantee issued by holding company for the benefit of its AE, a subsidiary company. In view of the above discussion we are of the view that the appeal does not raise any substantial question of law and it is dismissed."

'213. The amendment to section 2(47) raises several important questions of fact and of law. Whether or not it affects the proceedings which were the subject matter before the Supreme Court is not relevant for the purpose of this Writ Petition. But, whether it is relevant or not for the purpose of the assessment proceedings in respect of the petitioner which are the subject matter of this Writ Petition, is relevant. The effect of the amendment would have to be considered. It cannot be brushed aside.

(a) Direct or indirect. (b) Absolute or conditional. (c) Voluntary or involuntary.

ITA Nos. 1188, 1852/Ahd/2015 & IT(TP) Nos. 172 & 514/Ahd/16 A.Y.s 2009-10 & 2010-11 22 (d) By amendment or otherwise.

(iv) A non-obstante provision regarding the nature of a transfer. If an act, arrangement, transaction etc. constitutes a transfer as defined in the section it would be so notwithstanding the transfer of rights having been categorised as being effected or dependent upon or flowing from the transfer of a share or shares of a company registered or incorporated outside India.

It would be evident, therefore, that a lot more must now be seen and considered than before while arriving at a conclusion whether the terms and conditions of the Framework agreement constituted a transfer or assignment of the call options by one party to another.

ITA Nos. 1188, 1852/Ahd/2015 & IT(TP) Nos. 172 & 514/Ahd/16 A.Y.s 2009-10 & 2010-11 23 petitioner to contend, therefore, that the judgment of the Supreme Court would remain entirely unaffected for the Supreme Court must be deemed to have considered the term as per its true ambit, as always intended by the Parliament. On the other hand, it may be equally open to the Revenue to contend that certain ingredients of a transfer were not considered by the Revenue itself in the proceedings relating to Vodafone's case on account of the Revenue itself not having appreciated or realized the actual ambit of the term "transfer" which are now clarified by the amendment. Even assuming that the Revenue cannot re-open the Vodafone case, it cannot be barred from relying upon the true ambit of the term "transfer" in future cases, including the proceedings in respect of the petitioner. Thus, even assuming that the judgment of the Supreme Court remains unaffected by the clarificatory amendment, the Revenue would be entitled hereafter in other cases, at least, to appreciate, analyze and construe the transactions relating to call options, including the Framework agreements in a proper perspective which it may not have done earlier.

ITA Nos. 1188, 1852/Ahd/2015 & IT(TP) Nos. 172 & 514/Ahd/16 A.Y.s 2009-10 & 2010-11 24 connotations of 'transfer'. As learned counsel rightly contends, in the light of Hon'ble Bombay High Court's judgment in the case of Sudhir JayantilalMulji (supra) "ratio of a decision alone is binding, because a case is only an authority for what it actually decides and not what may come to follow from some observations which find place therein". In view of these discussions, the reliance placed on Vodafone India Services (P.) Ltd. (supra) is also equally misplaced and devoid of legally sustainable merits. In any case, as is noted by Hon'ble Supreme Court in the case of CIT v. Sun Engg. Works (P.) Ltd. [1992] 198 ITR 297/64 Taxman 442 (SC), "It is neither desirable nor permissible to pick out a word or a sentence from the judgment of this Court, divorced from the context of the question under consideration and treat it to be the complete "law" declared by this Court. The judgment must be read as a whole and the observations from the judgment have to be considered in the light of the questions which were before this Court" Their Lordships further noted that "A decision of this Court takes its colour from the questions involved in the case in which it is rendered and, while applying the decision to a later case, the Courts must carefully try to ascertain the true principle laid down by the decision of this Court and not to pick out words or sentences from the judgment, divorced from the context of the questions under consideration by this Court, to support their reasoning" It was also recalled that in Madhav Rao Jivaji Rao Scindia Bahadur v. Union of India AIR 1971 SC 530, Hon'ble Supreme Court had cautioned that "It is not proper to regard a word, clause or a sentence occurring in a judgment of the Supreme Court, divorced from its context, as containing a full exposition of the law on a question when the question did not even fall to be answered in that judgment." That precisely, however, has been the approach of the revenue authorities in placing reliance on Vodafone India Services (P.) Ltd. (supra) decision. We reject this approach.

ITA Nos. 1188, 1852/Ahd/2015 & IT(TP) Nos. 172 & 514/Ahd/16 A.Y.s 2009-10 & 2010-11 25 would, in principle, at least need to cover the cost that it incurs with respect to providing the guarantee" and that "these costs may include administrative expenses as well as the costs of maintaining an appropriate level of cash equivalents, capital, subsidiary credit lines or more expensive external funding conditions on other debt finance". The DRP had also noted that "in addition, the guarantor would want to receive appropriate compensation for the risk it incurs" and concluded that "following the above discussions, an arm's length guarantee fees is typically required to be determined by establishing a range of fees that the guarantor would, at least, want to receive and the fees that the guaranteed group company would be willing to pay depending on the prevailing conditions within financial markets in practice".

(7.1) Sub-section (2) does not apply to adjust an amount of consideration paid, payable or accruing to a corporation resident in Canada (in this sub-section referred to as the "parent") in a taxation year of the parent for the provision of a guarantee to a person or partnership (in this sub-section referred to as the "lender") for the repayment, in whole or in part, of a particular amount owing to the lender by a non-resident person, if (a) the non-resident person is a controlled foreign affiliate of the parent for the purposes of section 17 throughout the period in the year during which the particular amount is owing; and (b) it is established that the particular amount would be an amount owing described in paragraph 17(8)(a) or (b) if it were owed to the parent.

(http://www.fin.gc.ca/drleg-apl/ita-lrir-dec12-l-eng.pdf)

ITA Nos. 1188, 1852/Ahd/2015 & IT(TP) Nos. 172 & 514/Ahd/16 A.Y.s 2009-10 & 2010-11 26 247(1) of the Canadian Income-tax Act, 1985; http://laws- lois.justice.gc.ca/eng/acts/I-3.3/page-419.html#h-156] coupled with the legal position that arm's length adjustment to the prices of such transaction come into play "Where a taxpayer or a partnership and a non-resident person with whom the taxpayer or the partnership, or a member of the partnership, does not deal at arm's length" [See Section 247(2) ibid]. When one takes into account these variations in the statutory provisions, it will become very obvious that the provisions of the Indian Income-tax Act, 1961 and the Canadian Income-tax Act, 1985 are so radically different that just because a particular transaction is to be examined on arm's length principle in Canada cannot be a reason enough to hold that it must meet the same in India as well. While the Canadian transfer pricing legislation, as indeed the transfer pricing legislation in many other jurisdictions, does not put any fetters on the nature of transactions between the AEs, so as to be covered by the arm's length price adjustment, and, therefore, covers all transactions between the related enterprises, Indian transfer pricing legislation covers only such transactions as are "in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises". Our transfer pricing provisions, perhaps being in the quest of comprehensive coverage, have ended up in a limited scope of the transactions being covered by the arm's length price adjustments for transfer pricing. In any event, as emphasized earlier as well, the decision was in the context of the deduction, and, post this decision, a specific amendment was introduced in the Canadian transfer pricing law to clarify the position that all corporate guarantees issued by the assessee, in support of its subsidiaries, are not necessarily international transactions. Revenue, therefore, does not derive any advantage from the Tax Court of Canada's decision in the case of GE Capital Canada. There are many more aspects which make this decision wholly irrelevant in the present context but suffice to say that relevant legal provisions and context being radically different, the reliance of this decision must be rejected for this short reason alone.

ITA Nos. 1188, 1852/Ahd/2015 & IT(TP) Nos. 172 & 514/Ahd/16 A.Y.s 2009-10 & 2010-11 27 The fact that this discussion paper did not travel beyond the stage of the discussion paper is not really relevant for the present purposes because all that we are concerned with right now is understanding the conceptual basis on which, contrary to popular but apparently erroneous belief, the issuance of corporate guarantees can indeed be kept outside the ambit of services. The relevant extracts from this document are as follows:

"102. An independent company that is unable to borrow the funds it needs on a stand-alone basis is unlikely to be in a position to obtain a guarantee from an independent party to support the borrowings it needs. Where such a guarantee is given it compensates for the inadequacies in the financial position of the borrower; specifically, the fact that the subsidiary does not have enough shareholders' funds. .....

ITA Nos. 1188, 1852/Ahd/2015 & IT(TP) Nos. 172 & 514/Ahd/16 A.Y.s 2009-10 & 2010-11 28 broader term "stewardship activity" and thus highlighting narrow scope of shareholder activity, it states that "Stewardship activities covered a range of activities by a shareholder that may include provision for services to other group members, for example services that would be provided by a coordinating centre". It proceeded to add, in the immediately following sentence at page 207 of 2010 Guidelines, that "These latter type of non- shareholder activities could include detailed planning services for particular operations, management or technical advice (trouble shooting) or in some cases assistance in day-to-day management". The shareholder activities are thus seen as conceptually distinct from the provision of services. The issuance of corporate guarantee, as long as it is in the nature of shareholder activity, can not, therefore, amount to a "provision for services".

ITA Nos. 1188, 1852/Ahd/2015 & IT(TP) Nos. 172 & 514/Ahd/16 A.Y.s 2009-10 & 2010-11 29 '7.6 Under the arm's length principle, the question whether an intra- group service has been rendered when an activity is performed for one or more group members by another group member should depend on whether the activity provides a respective group member with economic or commercial value to enhance its commercial position. This can be determined by considering whether an independent enterprise in comparable circumstances would have been willing to pay for the activity if performed for it by an independent enterprise or would have performed the activity in- house for itself. If the activity is not one for which the independent enterprise would have been willing to pay or perform for itself, the activity ordinarily should not be considered as an intra-group service under the arm's length principle.

7.7 The analysis described above quite clearly depends on the actual facts and circumstances, and it is not possible in the abstract to set forth categorically the activities that do or do not constitute the rendering of intra-group services. However, some guidance may be given to elucidate how the analysis would be applied for some common types of activities undertaken in MNE groups.

7.8 Some intra-group services are performed by one member of an MNE group to meet an identified need of one or more specific members of the group. In such a case, it is relatively straightforward to determine whether a service has been provided. Ordinarily an independent enterprise in comparable circumstances would have satisfied the identified need either by performing the activity in- house or by having the activity performed by a third party. Thus, in such a case, an intra-group service ordinarily would be found to exist. For example, an intra-group service would normally be found where an associated enterprise repairs equipment used in manufacturing by another member of the MNE group.

7.9 A more complex analysis is necessary where an associated enterprise undertakes activities that relate to more than one member of the group or to the group as a whole. In a narrow range of such cases, an intra-group activity may be performed relating to group members even though those group members do not need the activity (and would not be willing to pay for it were they independent enterprises). Such an activity would be one that a group member (usually the parent company or a regional holding company) performs solely because of its ownership interest in one or more other group members, i.e. in its capacity as shareholder. This type of activity would not justify a charge to the recipient companies. It may be referred to as a "shareholder activity", distinguishable from the broader term "stewardship activity" used in the 1979 Report. Stewardship activities covered a range of activities by a shareholder that may include the provision of services to other group members, for example services that would

ITA Nos. 1188, 1852/Ahd/2015 & IT(TP) Nos. 172 & 514/Ahd/16 A.Y.s 2009-10 & 2010-11 30 be provided by a coordinating centre. These latter types of non- shareholder activities could include detailed planning services for particular operations, emergency management or technical advice (trouble shooting), or in some cases assistance in day-to-day management.

7.10 The following examples (which were described in the 1984 Report) will constitute shareholder activities, under the standard set forth in paragraph 7.6:

(a) Costs of activities relating to the juridical structure of the parent company itself, such as meetings of shareholders of the parent, issuing of shares in the parent company and costs of the supervisory board; (b) Costs relating to reporting requirements of the parent company including the consolidation of reports; (c) Costs of raising funds for the acquisition of its participations. In contrast, if for example a parent company raises funds on behalf of another group member which uses them to acquire a new company, the parent company would generally be regarded as providing a service to the group member. The 1984 Report also mentioned "costs of managerial and control (monitoring) activities related to the management and protection of the investment as such in participations". Whether these activities fall within the definition of shareholder activities as defined in these Guidelines would be determined according to whether under comparable facts and circumstances the activity is one that an independent enterprise would have been willing to pay for or to perform for itself.' (Emphasis supplied)

ITA Nos. 1188, 1852/Ahd/2015 & IT(TP) Nos. 172 & 514/Ahd/16 A.Y.s 2009-10 & 2010-11 31 recipient's commercial position, or that may be reasonably anticipated to do so". The expression "activity", in turn is defined, as "including the performance of functions; the assumption of risks; the use by a rendered of tangible or intangible property or other resources capabilities or knowledge (including knowledge of and ability to take advantage of a particularly advantageous situation or circumstances); and making available to the recipient any property or other resources of the rendered" [Regulation 1.482-9(1)(2)]. The issuance of guarantees is not within the ambit of transfer pricing in United States because it is a service but because it is covered by the specific definition discussed above. As a matter of fact, David S Miller, in a paper titled 'Federal Income Tax Consequences of Guarantees; A Comprehensive Framework for Analysis' published in the 'The American Lawyer Vol. 48, No. 1 (Fall 1994), pp. 103-165 (http://www.jstor.org/stable/20771688), has stated that a guarantee is not a service. The following observations, at pages 114, are important:

The position that guarantees are services has been discredited by the courts with good reason38. Guarantee fees do not represent payments for services any more than payments with respect to other financial instruments constitute payment for services39. A guarantor does not arrange financing for the debtor, but merely executes a financial instrument in its favour.

38See. e.g., Centel Communications Co. v. Commissioner, 92 T.C. 612, 632 (1989), aff d, 920 F2d 1335 (7th Cir. 1990); Bank of Am. v. United States, 680 F.2d 142, 150 (Cl. Ct. 1982). The Service's current position on the characterization of guarantee fees as payment for services under section 482 is inconsistent with its treatment of guarantee fees under other provisions. See P.L.R. 9410008 (Dec. 13, 1993). 39But cf Federal Nat'l Mortgage Ass'n v. Commissioner, 100 T.C. 541, 579 (1993) (Fannie Mae provided services by buying mortgages).

ITA Nos. 1188, 1852/Ahd/2015 & IT(TP) Nos. 172 & 514/Ahd/16 A.Y.s 2009-10 & 2010-11 32 "We have given anxious thoughts to the persuasive arguments of Mr Sharma. His arguments, if accepted, will certainly soften the rigour of this extremely drastic provision and bring it more in conformity with logic and equity". However, Their Lordships declined to do so on the ground that "There is no scope for importing into the statute the words which are not there. Such importation would be not to construe but to amend the statute". Their Lordships noted that "Even if there be casus omissus, the defect can be remedied only by legislation and not by judicial interpretation". The benefit test, which is set out in the OECD Guidance and which finds its place in the international best practices, does not find its place in the main definition of international transaction, even though there is a reference to the expression 'benefit' in the context of cost or expense sharing arrangements but that is a different aspect of the matter altogether. In the absence of benefit test being mentioned in the definition for the present purposes, we cannot infer the same.

ITA Nos. 1188, 1852/Ahd/2015 & IT(TP) Nos. 172 & 514/Ahd/16 A.Y.s 2009-10 & 2010-11 33 consideration for issuance of corporate guarantees are of a different character altogether.

ITA Nos. 1188, 1852/Ahd/2015 & IT(TP) Nos. 172 & 514/Ahd/16 A.Y.s 2009-10 & 2010-11 34

'16. The Organization for Economic Co-operation and Development ('OECD', for short) has laid down "transfer pricing guidelines" for Multi-National Enterprises and Tax Administrations. These guidelines give an introduction to the arm's length price principle and explains article 9 of the OECD Model

ITA Nos. 1188, 1852/Ahd/2015 & IT(TP) Nos. 172 & 514/Ahd/16 A.Y.s 2009-10 & 2010-11 35 Tax Convention. This article provides that when conditions are made or imposed between two associated enterprises in their commercial or financial relations which differ from those which would be made between independent enterprises then any profit which would, but for those conditions, have accrued to one of the enterprises, but, by reason of those conditions, if not so accrued, may be included in the profits of that enterprise and taxed accordingly. By seeking to adjust the profits in the above manner, the arm's length principle of pricing follows the approach of treating the members of a multi-national enterprise group as operating as separate entities rather than as inseparable parts of a single unified business. After referring to article 9 of the model convention and stating the arm's length principle, the guidelines provide for "recognition of the actual transactions undertaken" in paragraphs 1.36 to 1.41. Paragraphs 1.36 to 1.38 are important and are relevant to our purpose. These paragraphs are reproduced below:—

"1.36 A tax administration's examination of a controlled transaction ordinarily should be based on the transaction actually undertaken by the associated enterprises as it has been structured by them, using the methods applied by the taxpayer insofar as these are consistent with the methods described in Chapters II and III. In other than exceptional cases, the tax administration should not disregard the actual transactions or substitute other transactions for them. Restructuring of legitimate business transactions would be a wholly arbitrary exercise the inequity of which could be compounded by double taxation created where the other tax administration does not share the same views as to how the transaction should be structured.

1.37 However, there are two particular circumstances in which it may, exceptionally, be both appropriate and legitimate for a tax administration to consider disregarding the structure adopted by a taxpayer in entering into a controlled transaction. The first circumstance arises where the economic substance of a transaction differs from its form. In such a case the tax administration may disregard the parties' characterization of the transaction and re- characterise it in accordance with its substance. An example of this circumstance would be an investment in an associated enterprise in the form of interest-bearing debt when, at arm's length, having regard to the economic circumstances of the borrowing company, the investment would not be expected to be structured in this way. In this case it might be appropriate for a tax administration to characterize the investment in accordance with its economic substance with the result that the loan may be

ITA Nos. 1188, 1852/Ahd/2015 & IT(TP) Nos. 172 & 514/Ahd/16 A.Y.s 2009-10 & 2010-11 36 treated as a subscription of capital. The second circumstance arises where, while the form and substance of the transaction are the same, the 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 and the actual structure practically impedes the tax administration from determining an appropriate transfer price. An example of this circumstance would be a sale under a long-term contract, for a lump sum payment, of unlimited entitlement to the intellectual property rights arising as a result of future research for the term of the contract (as previously indicated in paragraph 1.10). While in this case it may be proper to respect the transaction as a transfer of commercial property, it would nevertheless be appropriate for a tax administration to conform the terms of that transfer in their entirety (and not simply by reference to pricing) to those that might reasonably have been expected had the transfer of property been the subject of a transaction involving independent enterprises. Thus, in the case described above it might be appropriate for the tax administration, for example, to adjust the conditions of the agreement in a commercially rational manner as a continuing research agreement.

1.38 In both sets of circumstances described above, the character of the transaction may derive from the relationship between the parties rather than be determined by normal commercial conditions as may have been structured by the taxpayer to avoid or minimize tax. In such cases, the totality of its terms would be the result of a condition that would not have been made if the parties had been engaged in arm's length dealings. Article 9 would thus allow an adjustment of conditions to reflect those which the parties would have attained had the transaction been structured in accordance with the economic and commercial reality of parties dealing at arm's length."

ITA Nos. 1188, 1852/Ahd/2015 & IT(TP) Nos. 172 & 514/Ahd/16 A.Y.s 2009-10 & 2010-11 37 create double taxation if the other tax administration does not share the same view as to how the transaction should be structured.

ITA Nos. 1188, 1852/Ahd/2015 & IT(TP) Nos. 172 & 514/Ahd/16 A.Y.s 2009-10 & 2010-11 38 thrust is on the services like market research, market development, marketing management, administration, technical service, repairs, design, consultation, agency, and scientific research, legal or accounting service or coordination services. As a matter of fact, even in the Explanation to Section 92B- which we will deal with a little later, guarantees have been grouped in item 'c' dealing with capital financing, rather than in item 'd' which specifically deals with 'provision for services'. When the legislature itself does not group 'guarantees' in the 'provision for services' and includes it in the 'capital financing', it is reasonable to proceed on the basis that issuance of guarantees is not to be treated as within the scope of normal connotations of expression 'provision for services'. Of course, the global best practices seem to be that guarantees are sometimes included in 'services' but that is because of the extended definition of 'international transaction' in most of the tax jurisdictions. Such a wide definition of services, which can be subject to arm's length price adjustment, apart, "Transfer Pricing and Intra-Group Financing – by Bakker &Levvy" (ibid) notes that "the IRS has issued a non- binding Field Service Advice (FSA 1995 WL 1918236, 1 May 1995) stating that, in certain circumstances (emphasis supplied), a guarantee may be treated as a service". If the natural connotations of a 'service' were to cover issuance of guarantee in general, there could not have been an occasion to give such hedged advice. This will be stretching the things too far to suggest that just because when guarantees are included in the international transactions, these guarantees are included in service segment in contradistinction with other heads under which international transactions are grouped, the guarantees should be treated as services, and, for that reason, included in the definition of international transactions. That is, in our considered view, purely fallacious logic. In our considered view, under Section 92B, corporate guarantees can be covered only under the residuary head i.e. "any other transaction having a bearing on the profits, income, losses or assets of such enterprise". It is for this reason that Section 92B, in a way, expands the scope of international transaction in the sense that even when guarantees are issued as a shareholder activity but costs are incurred for the same or, as a measure of abundant caution, recoveries are made for this non-chargeable activity, these guarantees will fall in the residuary clause of definition of international transactions under section 92B. As for the learned Departmental Representative's argument that "whether the service has caused any extra cost to the assessee should not be the deciding factor to determine whether it is an international and then gives an example of brand royalty to make his point. What, in the process, he overlooks is that Section 92B(1) specifically covers sale or lease of tangible or intangible property". The expression "bearing on the profits, income, losses or assets of such enterprises" is relevant only for residuary clause i.e. any other services not specifically covered by Section 92B. It was also contended that, while rendering Bharti Airtel decision, the Delhi Tribunal did go overboard in deciding something which was not even raised before us. In the written submission, it was stated that "Hon'ble Delhi ITAT was not requested by the contesting parties to decide the issue as to whether the provision of guarantee was a service or not". That's not factually correct. We are unable to see any merits in learned Departmental Representative's contention,

ITA Nos. 1188, 1852/Ahd/2015 & IT(TP) Nos. 172 & 514/Ahd/16 A.Y.s 2009-10 & 2010-11 39 particularly as decision categorically noted that not only before the Tribunal, but this issue was also raised before the DRP- as evident from the text of DRP decision. We now take up the issue with respect to specific mention of the words in Explanation to Section 92B which states that "For the removal of doubts, it is hereby clarified that (i) the expression "international transaction" shall include…….. (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." There is no dispute that this Explanation states that it is merely clarificatory in nature inasmuch as it is 'for the removal of doubts', and, therefore, one has to proceed on the basis that it does not alter the basic character of definition of 'international transaction' under Section 92B. Accordingly, this Explanation is to be read in conjunction with the main provisions, and in harmony with the scheme of the provisions, under Section 92B. Under this Explanation, five categories of transactions have been clarified to have been included in the definition of 'international transactions'. The first two categories of transactions, which are stated to be included in the scope of expression 'international transactions' by virtue of clause (a) and (b) of Explanation to Section 92B, are transactions with regard to purchase, sale, transfer, lease or use of tangible and intangible properties. These transactions were anyway covered by transactions 'in the nature of purchase, sale or lease of tangible or intangible property'. The only additional expression in the clarification is 'use' as also illustrative and inclusive descriptions of tangible and intangible assets. Similarly, clause (d) deals with the " 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" which are anyway covered in "provision for services" and "mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to anyone or more of such enterprises ". That leaves us with two clauses in the Explanation to Sect ion 92B which are not covered by any of the three categories discussed above or by other specific segments covered by Section 92B, namely borrowing or lending money. The remaining two items in the Explanation to Section 92B are set out in clause (c) and (e) thereto, dealing with (a) capital financing and (b) business restructuring or reorganization. These items can only be covered in the residual clause of definition in international transactions, as in Section 92B (1), which covers "any other transaction having a bearing on profits, incomes, losses, or assets of such enterprises". It is, therefore, essential that in order to be covered by clause (c) and (e) of Explanation to Section 92B, the transactions should be such as to have bearing on profits, incomes, losses or assets of such enterprise. In other words, in a situation in which a transaction has no bearing on profits, incomes, losses or assets of such enterprise, the transaction will be outside the ambit of expression 'international transaction'. This aspect of the matter is further highlighted in clause (e) of the Explanation dealing with

ITA Nos. 1188, 1852/Ahd/2015 & IT(TP) Nos. 172 & 514/Ahd/16 A.Y.s 2009-10 & 2010-11 40 restructuring and reorganization, wherein it is acknowledged that such an impact could be immediate or in future as evident from the words "irrespective of the fact that it (i.e. restructuring or reorganization) has bearing on the profit, income, losses or assets of such enterprise at the time of transaction or on a future date". What is implicit in this statutory provision is that while impact on " profit, income, losses or assets" is sine qua non, the mere fact that impact is not immediate, but on a future date, would not take the transaction outside the ambit of 'international transaction'. It is also important to bear in mind that, as it appears on a plain reading of the provision, this exclusion clause is not for "contingent" impact on profit, income, losses or assets but on "future" impact on profit, income, losses or assets of the enterprise. The important distinction between these two categories is that while latter is a certainty, and only its crystallization may take place on a future date, there is no such certainty in the former case. In the case before us, it is an undisputed position that corporate guarantees issued by the assessee to the various banks and crystallization of liability under these guarantees, though a possibility, is not a certainty. In view of the discussions above, the scope of the capital financing transactions, as could be covered under Explanation to Section 92B read with Section 92B(1), is restricted to such capital financing transactions, including inter alia any guarantee, deferred payment or receivable or any other debt during the course of business, as will have "a bearing on the profits, income, losses or assets or such enterprise". This precondition about impact on profits, income, losses or assets of such enterprises is a precondition embedded in Section 92B(1) and the only relaxation from this condition precedent is set out in clause (e) of the Explanation which provides that the bearing on profits, income, losses or assets could be immediate or on a future date. These guarantees do not have any impact on income, profits, losses or assets of the assessee. There can be a hypothetical situation in which a guarantee default takes place and, therefore, the enterprise may have to pay the guarantee amounts but such a situation, even if that be so, is only a hypothetical situation, which are, as discussed above, excluded. When an assessee extends an assistance to the associated enterprise, which does not cost anything to the assessee and particularly for which the assessee could not have realized money by giving it to someone else during the course of its normal business, such an assistance or accommodation does not have any bearing on its profits, income, losses or assets, and, therefore, it is outside the ambit of international transaction under section 92B (1) of the Act.

"We find that the TP legislation provides for computation of income from international transaction as per Section 92B of the Act. The

ITA Nos. 1188, 1852/Ahd/2015 & IT(TP) Nos. 172 & 514/Ahd/16 A.Y.s 2009-10 & 2010-11 41 corporate guarantee provided by the assessee company does not fall within the definition of international transaction. The TP legislation does not stipulate any guidelines in respect to guarantee transactions. In the absence of any charging provision, the lower authorities are not correct in bringing aforesaid transaction in the TP study. In our considered view, the corporate guarantee is very much incidental to the business of the assessee and hence, the same cannot be compared to a bank guarantee transaction of the Bank or financial institution."

"34. There is one more aspect of the matter. The Explanation to Section 92B has been brought on the statute by the Finance Act 2012. If one is to proceed on the basis that the provisions of Explanation to Section 92B enlarges the scope of Section 92B itself, even as it is modestly described as 'clarificatory' in nature, it is an issue to be examined whether an enhancement of scope of this anti avoidance provision can be implemented with retrospective effect. 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. However, as we have decided the issue in favour of the assessee on merits and even after taking into account the amendments brought about by

ITA Nos. 1188, 1852/Ahd/2015 & IT(TP) Nos. 172 & 514/Ahd/16 A.Y.s 2009-10 & 2010-11 42 Finance Act 2012, we need not deal with this aspect of the matter in greater detail."

ITA Nos. 1188, 1852/Ahd/2015 & IT(TP) Nos. 172 & 514/Ahd/16 A.Y.s 2009-10 & 2010-11 43 49. The second issue is this. We must deal with the question whether in this case the matter should have been referred to a larger bench. The parties before us were opposed to the matter being sent for consideration by the special bench, and at least one of the reasons for which the grievance of the assessee is upheld, i.e. guarantees being in the nature of shareholder activity and excludible from the scope of services for that reason alone, is an area which had come up for consideration for the first time. In effect, therefore, there was no conflict on this issue of and the other issues, given decision on the said issue, were wholly academic. It cannot be open to refer the academic questions to the special bench. No doubt, some decisions of the coordinate benches which have reached the different conclusions. There is, however, no conflict in the reasoning. Four Soft Ltd. decision (supra) had decided the issue in favour of the assessee but that was with respect to the law prior to insertion to Explanation to Section 92B. As for the post- amendment law and the impact of amendment in the definition of 'international transaction', the matter was again decided in favour of the assessee by Bharti Airtel Ltd. decision (supra) on the peculiar facts of that case. The decisions like Everest Kento Cylinders Ltd. (supra) and Aditya Birla Minacs Worldwide (supra) were decisions in which the assessee had charged the fees and, for that reason, such cases are completely distinguishable as discussed above. In Prolific' Corp Ltd. case (supra), as indeed in any other case so far, it was not the case of the assessee that corporate guarantees are quasi-capital, or shareholder activity, in nature, and, for that reason, excludible from chargeable services, even if these are held to be services in nature. That plea has been specifically accepted in the present case. Therefore, the question whether issuance of corporate guarantee per se in general constitutes a 'international transaction' under section 92B would have been somewhat academic question on the facts of this case. In any event, in Prolific' Corp Ltd. case (supra), an earlier considered decision on the same issue by coordinate bench of equal strength was simply disregarded and that fact takes this decision out of the ambit of binding judicial precedents. We have also noted that in view of the decision a coordinate bench, in the case of JKT Fabrics v. Dy. CIT [2005] 4 SOT 84 (Mum.) and following the Full bench decision of Hon'ble AP High Court in the case of CIT v. BR Constructions [1993] 202 ITR 222/[1994] 73 Taxman 473 (AP), a decision disregarding an earlier binding precedent on the issue is per incurium. Such decisions cannot be basis for sending the matters to special bench since occasion for reference to special bench arises when binding and conflicting judicial precedents from coordinate benches come up for consideration. That was not the case here. All these factors taken together, in our considered view, it was not possible in this case to refer the matter for constitution of a special bench. In any case, whatever we decide is, and shall always remain, subject to the judicial scrutiny by Hon'ble Courts above and our endeavour is to facilitate and expedite, within our inherent limitations, that process of such a judicial scrutiny, if and when occasion comes, by analyzing the issues in a comprehensive and holistic manner.

ITA Nos. 1188, 1852/Ahd/2015 & IT(TP) Nos. 172 & 514/Ahd/16 A.Y.s 2009-10 & 2010-11 44 50. In the light of the detailed discussions above, and for the detailed reasons set out above, we uphold the grievance raised by the assessee. The impugned ALP adjustment of Rs 2,23,62,603, thus stands deleted. As we do so, however, we must add that, in our considered view, the way forward, to avoid such issues being litigated and to ensure satisfactorily resolution of these disputes, must include a clear and unambiguous legislative guidance on the transfer pricing implications of the corporate guarantees as also on the methodology of determining its ALP, if necessary. Of course, no matter how good is the legislative framework, the importance of a very comprehensive analysis, in the transfer pricing study, of the nature of corporate guarantees issued by the assessees, can never be overemphasized. The sweeping generalizations, vague statements and evasive approach in the transfer pricing study reports, which are quite common in most of the transfer pricing reports, cannot do good to a reasonable cause. When judicial calls on the complex transfer pricing issues are to be taken, utmost clarity in the legislative framework and a comprehensive analysis of relevant facts, in the transfer pricing documentation, are basic inputs. Unfortunately, both of these things leave a lot to be desired. We can only hope, and we do hope, that things will change for better.

ITA Nos. 1188, 1852/Ahd/2015 & IT(TP) Nos. 172 & 514/Ahd/16 A.Y.s 2009-10 & 2010-11 45 any kind of commission from its AE. The only point which has to be seen in this case is whether the same is at ALP or not”. Learned Departmental Representative has invited our attention to a decision of the Bangalore benches, in the case of Advanta India Limited Vs ACIT [(2015) TII-294-ITAT-BAN], which is in favour of the assessee. While learned Departmental Representative is indeed right, that is a case in which the assessee did infact recover charges, which included more than the cost incurred, from the beneficiary, and, as such, it clearly had an impact on the profits of the assessee. That is a case distinct from the present situation in which there is no impact on the profits or losses or assets or income of the assessee. In Advanta decision (supra), this aspect of the matter and the distinguishing feature has been discussed at considerable length. Learned Departmental Representative has then invited our attention to the fact a substantial question of law has been admitted by Hon’ble Delhi High Court in ITA No. 607/2014 against the order passed by the Tribunal in the case of Bharti Airtel (supra). While no doubt the matter is now pending before Hon’ble High Court for the judicial scrutiny by Their Lordships, that fact by itself does not reverse the stand taken by the Tribunal in the order so impugned. As regards the decision of Bharati Airtel being on its own peculiar facts, there can be no denial of this position but that does not mean that the so far as issues of general application are concerned, the stand of the Tribunal cannot hold good. Learned Departmental Representative then takes us through the Explanation to Section 92 B to explain its true scope and through Bharti Airtel decision as to how fallacious is its logic. Its emphasized that the impact of issuance of bank guarantees, on the profits, income, losses or assets of such enterprises, is ‘real’ and not ‘contingent’ as held in Bharti’s case. It is also emphasized, apparently to highlight the fact that it is not only the impact on entity issuing the guarantee but also beneficiary of the guarantee that matters in this context, that the word used in section 92 B is ‘enterprises’ and not ‘enterprise’. It is thus contended that the impact on the profits, incomes, losses or assets of the entity issuing guarantee is important, but the impact on the profits, income, losses or assets of the entity, which is beneficiary of the guarantee, is also important. It is pointed out that Bharti Airtel decision has examined this aspect only from the point of view of the entity issuing the guarantee and that has also been decided wrongly. As for these issues being raised by the learned Departmental Representative, suffice to say that even if reasoning adopted by Bharti Airtel decision is incorrect, it is not for us to examine that aspect of the matter. Now that the matter is before Hon’ble High Court, and the matter is already under hearing, there is no point in going into these fine points, which may at best be errors of judgment rather than a glaring error rendering the decision to be per incurium, at this stage. In any case, there is a subtle difference in ‘impact on’ and ‘influence on’. The issuance of a corporate guarantee may have an influence on the profits, incomes, losses and assets of an entity, in whose favour the guarantee is issued, but it has no impact on the same as long as it is issued without a consideration. To treat this phrase as implying a benefit test, will, in our considered view, stretching the things too far. We are, therefore, not swayed by the arguments, though extremely well researched and thought provoking, of the learned Departmental Representative- particularly at this stage. He has raised a number of other arguments as well but as those arguments are already dealt with in the case of Micro Ink decision reproduced above, we see no need to again deal with the same.

ITA Nos. 1188, 1852/Ahd/2015 & IT(TP) Nos. 172 & 514/Ahd/16 A.Y.s 2009-10 & 2010-11 46 9. In the Micro Ink decision (supra), we had, amongst other things, taken not of the judicial developments leading to the insertion of Explanation to Section 92B and how within four months of Four Soft decision (supra) being announced, it was nullified by a legislative amendment. This aspect of the matter has been dealt with in paragraph 46 and 47 of this decision, which has been reproduced earlier in this order, at considerable length. It assumes even more 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. Learned Departmental Representative does not even dispute it. He is candid enough to place on record the fact, by way of a written note, that the one of the reasons of insertion of Explanation to Section 92 B was to nullify the Four Soft decision (supra). The judicial interpretation so given was certainly not the end of the road. The matter could have been carried in appeal before higher judicial forums. If the decision of a judicial body does not satisfy the tax administration, nothing prevents them from going to the higher judicial forum or from so amending the law, with prospective effect, that there is no ambiguity about the intent of legislature and it is conveyed in unambiguous words.

ITA Nos. 1188, 1852/Ahd/2015 & IT(TP) Nos. 172 & 514/Ahd/16 A.Y.s 2009-10 & 2010-11 47 paradigm shift in the underlying approach to the amendments made in Section 263 in the very first full budget of the present Government.

ITA Nos. 1188, 1852/Ahd/2015 & IT(TP) Nos. 172 & 514/Ahd/16 A.Y.s 2009-10 & 2010-11 48 (Emphasis, by underlining, supplied by us)

ITA Nos. 1188, 1852/Ahd/2015 & IT(TP) Nos. 172 & 514/Ahd/16 A.Y.s 2009-10 & 2010-11 49 international transactions in past and thus expecting them to do the impossible, his stock reply is that the amendment only clarifies the law, it does not expand the law.

The other relevant maxim is, lex non cogitadimpossibilia—the law does not compel a man to do what he cannot possibly perform. The law itself and its administration is understood to disclaim as it does in its general aphorisms, all intention of compelling impossibilities, and the administration of law must adopt that general exception in the consideration of particular cases. [See : U.P.S.R.T.C. vs. Imtiaz Hussain 2006 (1) SCC 380, Shaikh Salim Haji Abdul Khayumsab vs. Kumar &Ors. 2006 (1) SCC 46, Mohammod Gazi vs. State of M.P. &Ors. 2000 (4) SCC 342 and Gursharan Singh vs. New Delhi Municipal Committee 1996 (2) SCC 459].

ITA Nos. 1188, 1852/Ahd/2015 & IT(TP) Nos. 172 & 514/Ahd/16 A.Y.s 2009-10 & 2010-11 50 precedent requires us to deviate from the specific words of the provisions of the statute in a particular manner, we have to do so. There is no escape from this call of duty. Of course, whatever we do is, and shall always remain, subject to the approval by Hon’ble Courts above.

ITA Nos. 1188, 1852/Ahd/2015 & IT(TP) Nos. 172 & 514/Ahd/16 A.Y.s 2009-10 & 2010-11 51 of tax at source, even in a situation in which corresponding income is brought to tax in the hands of the recipient. The scheme of Section 40(a)(ia), as we see it, is aimed at ensuring that an expenditure should not be allowed as deduction in the hands of an assessee in a situation in which income embedded in such expenditure has remained untaxed due to tax withholding lapses by the assessee. It is not, in our considered view, a penalty for tax withholding lapse but it is a sort of compensatory deduction restriction for an income going untaxed due to tax withholding lapse. The penalty for tax withholding lapse per se is separately provided for in Section 271 C, and, section 40(a)(ia) does not add to the same. The provisions of Section 40(a)(ia), as they existed prior to insertion of second proviso thereto, went much beyond the obvious intentions of the lawmakers and created undue hardships even in cases in which the assessee’s tax withholding lapses did not result in any loss to the exchequer. Now that the legislature has been compassionate enough to cure these shortcomings of provision, and thus obviate the unintended hardships, such an amendment in law, in view of the well settled legal position to the effect that a curative amendment to avoid unintended consequences is to be treated as retrospective in nature even though it may not state so specifically, the insertion of second proviso must be given retrospective effect from the point of time when the related legal provision was introduced. In view of these discussions, as also for the detailed reasons set out earlier, we cannot subscribe to the view that it could have been an “intended consequence” to punish the assessee’s for non deduction of tax at source by declining the deduction in respect of related payments, even when the corresponding income is duly brought to tax. That will be going much beyond the obvious intention of the section. Accordingly, we hold that the insertion of second proviso to Section 40(a)(ia) is declaratory and curative in nature and it has retrospective effect from 1st April, 2005, being the date from which sub clause (ia) of section 40(a) was inserted by the Finance (No. 2) Act, 2004.

ITA Nos. 1188, 1852/Ahd/2015 & IT(TP) Nos. 172 & 514/Ahd/16 A.Y.s 2009-10 & 2010-11 52 In our considered view, and for the detailed reasons set out above, at best the amendment in Section 92B, at least to the extent it dealt with the question of issuance of corporate guarantees, is effective from 1st April 2012. The assessment year before us being an assessment year prior to that date, the amended provisions of Section 92 B have no application in the matter.

Taking into consideration the ratio laid down by the Co-ordinate Bench in assessee’s own case, we find no justification in making upward adjustment and thus, we delete the same. Assessee’s appeal is thus allowed on both the grounds.

ITA Nos. 1188, 1852/Ahd/2015 & IT(TP) Nos. 172 & 514/Ahd/16 A.Y.s 2009-10 & 2010-11 53 The Revenue appeal No.1852/Ahd/2015 A.Y. 2009-10.

During the course of assessment proceeding it was noticed that the assessee has claimed an amount of Rs.4,10,94,558/- as recruitment and training expenses against which complete details regarding expenses and the justification of its allowability were placed by the assessee. Ultimately since similar disallowance were made in earlier A.Ys 2006-07, 2007-08 and 2008-09 a reasonable amount being 20% of recruitment & training expenses to the tune of Rs. 82,18,912/- was disallowed as not incurred for the purpose of business activities by the assessee and added back to the total income of the assessee by the Assessing Officer, which was, in turn, deleted by Ld.CIT(A) in appeal.

ITA Nos. 1188, 1852/Ahd/2015 & IT(TP) Nos. 172 & 514/Ahd/16 A.Y.s 2009-10 & 2010-11 54

own case whereby and whereunder the issue has been decided in favour of the assessee by deleting the addition made by the AO.

“10. The ground No.3 is regarding disallowance of 20% of recruitment and training charges amounting to Rs.81,35,447/-:- During the course of assessment proceedings, the A.O. noted that the assessee has incurred an amount of Rs.4,06,67,236/- for recruitment and training expenses for its various units. He also noted that the assessee recruited the persons for twin purpose for its business and for its Associated Enterprises (AE's). He also noted that the assessee had seconded as many as 148 persons to AE's. He further noted that the persons were recruited and trained at company's expenses and at the time of secondment, it was not decided as to when the said persons will come back to the company. He accordingly concluded that the benefit out of recruitment and training of the persons are received by the company as well as AE's of the company outside India. In the absence of information as to how many persons were trained during the year, 20% of the recruitment and training expenses amounting to Rs.81,33,447/- was disallowed by holding that it was not incurred for the business. Aggrieved by the order of the A.O., assessee carried the matter before Ld. CIT(A). Before Ld. CIT(A), the assessee inter alia submitted that none of the recruitment and training expenses were practically incurred to recruit and train employees for the purpose of deputation to its subsidiaries. It was further submitted that there was no direct linkage of recruitment and training expenses with the employees' deputation to subsidiaries. It was further submitted that as an integral part of its aforesaid business and course performing HRM function which includes recruitment of employees and career counseling. It was further submitted that HRM function was carried on only for the purpose of business of the company. Ld. A.R. further submitted that in the assessee's own case for the assessment year 2005-06, Ld. CIT(A) has deleted the disallowance made on account of recruitment and training expenses. After considering the submissions of the assessee, Ld. CIT(A) deleted the addition by holding as under: iii. "7.4 I have considered the facts and the submissions of the Ld A.R. carefully. I am of the considered view that in a situation where the requisite detail in respect of training of employees and the genuineness of the expenditure was very much before the AO and in respect of these two reasons, no disallowance was suggested, then it was unjustifiable on the part of the AO to say that a 20% recruitment and training expenses would be disallowed on mere presumption that it was not wholly beneficial to the appellant. There is no evidence in the possession of the AO to hold that a particular expenditure on training was not business related. In fact, the argument of the appellant appears to be logical that considering the nature of the services provided a training of the technical staff is always a business necessity and because of the trained staff the appellant's revenue has substantially gone up. 7.5 In view of the above discussion and following the order of the ITAT for AY 2006-07 and my predecessor for AY 2005-06, I find the view of appellant, tenable from the above mentioned facts and direct the AO to delete the disallowance of Rs.81,33,447 on account of recruitment and training expenses."

ITA Nos. 1188, 1852/Ahd/2015 & IT(TP) Nos. 172 & 514/Ahd/16 A.Y.s 2009-10 & 2010-11 55 iv. 11. Before us, Ld. D.R. relied on the order of the A.O. whereas on the other hand Ld. A.R. submitted that the facts of the present year on this issue are identical to that of the earlier year and, further CIT(A) has followed Hon'ble ITAT's order for earlier year while deciding the addition and, therefore, the order of Ld. CIT(A) be upheld. v. 12. We have considered the rival submissions and perused the material on record. We find that Ld. CIT(A) while deleting the addition has held that's the facts of the case of the year under appeal are identical to that of earlier year (assessment year 2005-06) and has followed the order of his predecessor. Further, he has also relied on the decision of Coordinate bench of the Tribunal in the assessee's own case for assessment year 2005-06 for deleting this addition. The finding of Ld. CIT(A) could not be controverted by the Ld. D.R. by bringing any contrary material on record. We, therefore, find no reason to interfere in the order of Ld. CIT(A). This ground of the revenue is also dismissed.”

Respectfully, relying upon the judgment passed by the Co-ordinate Bench, we find no infirmity in the order passed by the ''Ld. CIT(A)'' so as to warrant interference. Hence, we pass the order in affirmative i.e. in favour of the assessee and against the Revenue.

“3. The first ground is with regard to deduction u/s 10A:- During the course of assessment proceedings the A.O. observed that the assessee had foreign exchange gain of Rs.1,16,62,641/- in Mahape unit and the gain of Rs.18,49,487/- in Pune unit. He further noted that the assessee had not excluded the aforesaid gain from

ITA Nos. 1188, 1852/Ahd/2015 & IT(TP) Nos. 172 & 514/Ahd/16 A.Y.s 2009-10 & 2010-11 56 the profit of the business for claiming deduction u/s 10A. The A.O. was of the view that the profit of business for the purpose of Section 10A means profit derived from export business. Receipt like exchange gain are not derived form export business and therefore, are not eligible for deduction u/s 10A. He further noted that though the Tribunal in the assessee's own case for the assessment years 1999-2000 and 2000-01 has held that the exchange fluctuation gain accrued on account of change in foreign currency is incidental to business operation and, therefore, eligible for deduction u/s 10A, but since the Department has preferred appeal before the Hon'ble High Court, he disallowed the assessee's claim. He accordingly held that the assessee was not eligible for deduction u/s 10A on the exchange fluctuation and accordingly reworked the deduction u/s 10A at Rs.85,69,52,644/-. Aggrieved by the aforesaid action of A.O., assessee carried the matter before Ld. CIT(A). Ld. CIT(A) after considering the submissions of the assessee and relying on the decision of the Tribunal in the assessee's own case, allowed the appeal of the assessee by holding as under:

"4.2 I have considered the facts and submission of the Ld. A.R carefully. I find considerable force in the submissions of the Ld. A.R. This is a recurring issue which has been decided earlier in the favour of the appellant. Further, the Hon'ble ITAT, Ahmedabad in the case of ITO vs. Gami Exports (94 TTJ 557) has held that the gains from foreign exchange fluctuations are eligible for deduction u/s.80HHC. Therefore, considering the same analogy, the gains would also be eligible for deduction u/s.10A of the Act. In this regard the relevant extracts of the said decision of the Hon'ble ITAT Ahmedabad as referred to above are as under.- "Export bills are drawn in foreign currency and entries are made in the books in terms of Rupees on the basis of notional rate of exchange of foreign currency prevailing on the date of making of the sale bill. When the foreign bills are realized by tile foreign buyers, what the assessee receives is exactly the amount of foreign currency mentioned in the bill and the assessee's bankers credit the actual amount of such, foreign currency by converting the same into Indian Rupee at the rate prevailing on the date of conversion. In this process assessee receives some times more and some time less amount in India Rupee then the notional value of goods shown in the books at the time of exports. Thus, there is a direct nexus between amount realized on account of export sales and exchange rate difference whether treated by the assessee in the books as receives from export sales or from exchange rate fluctuation." 4.3 . Therefore, in view of the above, deduction should be allowed to the appellant u/s.l0A on the surplus from exchange rate fluctuations arising on account of exports and restatement of debtors and creditors. As such, the AO is directed to calculate/ascertain the nature of exchange gain and grant the deduction u/s 10A on the exchange rate fluctuations on arising on account of exports as has been held by the ITAT, Ahmedabad in the appellant's own case for AY 06-07 and prior years as the issue in this year is identical to AY 06-07 and earlier years."

ITA Nos. 1188, 1852/Ahd/2015 & IT(TP) Nos. 172 & 514/Ahd/16 A.Y.s 2009-10 & 2010-11 57 recalculation and to ascertain the exchange gain to the file of the A.O. for verification and allowing the same. He thus, supported the order of Ld. CIT(A). 6. We have heard the rival submissions and perused the material on record. It is an undisputed fact that the issue in the present appeal is identical to that of earlier assessment year and the exchange fluctuation gain was held to be arising from export business in assessment year 2001- 02 to 2005-06. Nothing has been brought on record by Revenue to controvert the findings of Ld. CIT(A) and, therefore, we find no reason to interfere in order of CIT(A) on this issue. Thus, this ground of the Revenue is dismissed.”

In view of the order passed by the Hon’ble Apex Court, we find no merit in the appeal preferred by the Revenue and, hence, the same is dismissed.

“…13. The next ground is with respect to the addition of Rs.26,02,07,754/- made by TPO u/s 92CA(3):- During the course of assessment proceedings, the A.O. noted that the assessee company had international transactions as defined in Section 92B of the Act with the associate enterprise. The associated transactions were made for software development and related services rendered for India to onsite software project execution etc. Reference was made to TPO who held that adjustment are required to be made with respect to international transactions by any amount paid towards software services, repair & maintenance services and adjustment on account of excess credit provided to AEs. The total adjustment of

ITA Nos. 1188, 1852/Ahd/2015 & IT(TP) Nos. 172 & 514/Ahd/16 A.Y.s 2009-10 & 2010-11 58 income as proposed by TPO was Rs.26,02,07,754/-. Aggrieved by the aforesaid action of the A.O., the assessee carried the matter before Ld. CIT(A) who after considering detailed submissions of the assessee, deleted the addition by holding as under:

"11:10 I have considered the facts and submissions of the Ld. AR and the ITAT order for AY 2006-07 carefully. I agree with the appellant that the facts for .AY 07-08 are no different from the facts brought forth in the ITAT order for AY 06-07. Accordingly, my views are as under. The appellant has submitted the following to evidence the activities performed by MUK vis-a-vis the customers: • Master Agreement between MUK and Mastek; • detailed FAR analysis of MUK and India; • details of employees of MUK, including their roles, designations and. qualifications; • case studies demonstrating selling function performed by employees of MUK • Another aspect which merits consideration is that the employees of sales team of MUK were incentivized to achieve increase in sales, by paying a percentage of sales achieved by them, over and above their fixed pay. The above evidences support the appellant's contentions that it has its own set of people in a position to negotiate and conclude contracts both in terms of the scope of work and the pricing of the same. Therefore, in my considerate view, the appellant, over and above marketing, carries out selling functions also and should therefore be characterized as a distributor. As MUK is held to be a distributor and not a marketing service provider, ft is prudent that the remuneration to be earned by MUK should be linked to its selling function and should therefore be related to sales i.e. Return on Sales (ROS) and not on a cost plus mark up basis. A company, which has achieved a substantial increase in revenues on a year over year basis and whose employees too are incentivized on the basis of sales achieved by them, cannot be remunerated on a cost plus mark up basis. ... Further, the TPO has looked at the comparable companies with an assumption that MUK is engaged in providing marketing services and therefore rejected the comparables considered by the appellant in the Transfer Pricing study. Now that MUK has been held to be a distributor, the comparability approach adopted by the TPO is rejected. 11.11 Based on the facts and evidences provided by the appellant for AY 07- 08 and the conclusions of the IT AT Ahmedabad bench for identical facts for AY 06-07, the appellant's contentions find favour. Therefore, MUK's operations can be considered to be correctly characterized as a distributor and a return based on sales which incentives MUK to generate more revenue appears to be appropriate. Accordingly, this ground no. 10 is fully allowed."

ITA Nos. 1188, 1852/Ahd/2015 & IT(TP) Nos. 172 & 514/Ahd/16 A.Y.s 2009-10 & 2010-11 59 15. We have considered the rival submissions and perused the material on record. We find that Ld. CIT(A) while deleting the addition has held that the facts of the case of the year under appeal are identical to that of earlier year and has followed the order of his predecessor. Further, he has also relied on the decision of Hon'ble ITAT in the assessee's own case for assessment year 2006-07 for deleting this addition. The finding of Ld. CIT(A) could not be controverted by the Ld. D.R. by bringing any contrary material on record. We, therefore, find no reason to interfere in the order of Ld. CIT(A). Thus this ground of the Revenue is also dismissed.”

Since the issue has already been decided by the Ld. Tribunal, we do not find any reason to deviate from the stand taken by the Co-ordinate Bench and we do not find any infirmity in the order passed by the ''Ld.CIT (A)'' so as to warrant interference, hence, this ground of appeal preferred by the Revenue is dismissed.

ITA Nos. 1188, 1852/Ahd/2015 & IT(TP) Nos. 172 & 514/Ahd/16 A.Y.s 2009-10 & 2010-11 60 that the TPO had made adjustment on account of Arm's Length Price of the charges levied by the appellant on HRM function. The appellant had not taken this transact/on as the International transactions and accordingly the same was not referred by the AO to the TPO. However, the TPO considered the same as international transaction holding that it was a separate service and made an adjustment by computing the arms length price of the same. The appellant on the other hand has objected that it is not a separate service and the HRM function forms an integral part of the software development service and therefore, it should not have been regarded as a separate international transaction.

The appellant has explained that it was engaged in providing offshore software development and technical support services while, it's ABs primarily Act as distributors of software development services to their respective customers. For enabling ABs to provide on-site services, the appellant seconds employees to them. Such secondment of employees for providing on-site services brings back more offshore work as well as skills and competencies. The appellant has further submitted that HRM function was not a separate service and it forms an integral pan of the software services and hence the same should not be regarded as separate international transaction. It has been pointed out by the appellant that during the FY 2007 - 08 no separate HRM services were provided by the appellant to the AEs, The expenses in relation to performing the HRM functions were entirely incurred in relation to the recruitment of the employees. The appellant has further pointed out that while making the functional analysis for International transactions related to the software services it has included the HRM functions as part of that analysis, it has done detailed analysis of the specific activity forming a subset of the main international transaction. It has therefore, been submitted by the appellant since it was a subset of the main international transaction no separate adjustment treating the same as an independent transaction should be made. On a careful consideration of the overall facts and circumstances it is noted that the similar issue had arisen during the course of assessment for A. Vs. 2002-03, 2003-04, 2004-05 and 2006-07 and the same have been decided in favour of the appellant by ITAT Ahmedabad. The honourable ITAT has held that the appellant had made out a case that by arrangement for sending employees to AEs the appellant had a/so been benefited, it was held that that it was not appropriate to hold that HRM function should be taken as recruitment service. The relevant extracts of the findings given by the honourable ITAT for A. V. 2006-07 are reproduced here under:-

"26. We have heard both the sides at length. We have perused the orders of the Revenue Authorities in the light of the voluminous compilation filed. It is true that the assessee is engaged in providing 'offshore' software development. The Associate Enterprises are also in the business of providing related services for software development 'onsite'. Facts have revealed that for enabling the AEs to provide 'onsite' service, the assessee has seconded its employees to those AEs.

ITA Nos. 1188, 1852/Ahd/2015 & IT(TP) Nos. 172 & 514/Ahd/16 A.Y.s 2009-10 & 2010-11 61

26.1. To deal with this problem it is better to first examine the correct meaning of this notion i.e. "Secondment" and have found that a 'secondment' takes place when an employee or a group of employees are temporarily assigned to work for an another organization. The 'secondment' is a practice through which one entity makes the services of it's employee/ employees available to another entity for a short period of time while continuing to treat that person as if's employee either by remunerating him or by not removing from the roll of employment. Possible reasons for the 'secondment' are viz, career development, to gain new skill/experience, enabling such employee to remain with the parent-employer so as to preserve benefits such as pension benefit etc., income generation for the parent-employer, to provide cover for offshore short term projects, to provide cover for short term absence etc. The idea behind a 'secondment arrangement' is that the 'secondee' (the employee) will remain employed with the 'seconder' (the parent or seconding-employer) during the period of secondment and following the termination of requirement of the 'host' (the other absorbing unit) such persons "'return' to the 'seconder'. The benefit of such "arrangement is the continuity of the employment. The 'secondee' remains employed by the 'seconder' so that the statutory period of continuous employment remain unbroken, to qualifying for pension or other employment rights. The payment of fees or remuneration depends upon the 'secondment agreement' from party to party, but the primary liability is of the "seconder". Now the argument is that by such secondment of trained employees, in return, the assessee has substantially been benefited and because of the 'onsite' services provided by AEs, in the result, there was 'offshore' work was generated for the assessee. As far as the assessee is, concerned, its 'offshore' revenue has admittedly increased. A fundamental question has cropped up because of TPO's decision that whether the HRM function can be said to be "an integral part' of the overall software development services of the assessee? If we consider the overall scenario and the globalization of such services, then what is apparent is that the entities which are in the business of software development have to engage technically expert employees. Those employees perform their duties 'onsite1 as well as sometime 'offshore'. Such entrepreneurs provide cushion to those employees if they have been sent abroad for an 'onsite' deployment. Whether it was justifiable on the part of the TPO, to hair-split these two activities? As far as our common understanding of the business model of this assessee is concerned, as also the prevailing business pattern all over the world is concerned, the deployment of Human Resources is inter-linked with the business activity of the assessee, then such HRM activity can be said to be the intricately linked activity with the main business activity of an entrepreneur. Reason being, in the present case, software development services cannot be performed independently or in isolation with the deployment of technical persons. In such business model, there is an established existence of AEs abroad. Those AEs generally demand for supply of technical employees/engineers so as to accomplish the software development project "onsite'. Such facility is provided by the Head Office,

ITA Nos. 1188, 1852/Ahd/2015 & IT(TP) Nos. 172 & 514/Ahd/16 A.Y.s 2009-10 & 2010-11 62 i.e. MIL In return, MIL has also heaped the prize i.e. high revenue generation. By displaying different FAR, the TPO had made an attempt to distinguish the two activities. Nevertheless, the law prescribes that FAR should be appropriately documented, so that the correct figures is in the knowledge of the Revenue Department.

26.2. As far as the Commercial and business expediency is concerned, we have been informed that the Id. CIT(A) in past four years has decided this issue in favour of the assessee. It was held that in the business Interest of the assessee to second its employees to its AEs, the MIL has seconded the employees. However, the allegation of the TPO is that the AEs have been benefited from such secondments. Be that the position, even if it was so, that Associate Enterprise is benefited, then there should not be any scope to draw an adverse inference that MIL should also snatch the profit out of the pockets of AEs. As long as the MIL has got his pound of flash and disclosed better-revenue generation, there should not be any objection to the revenue.

26.2. As far as the non-mentioning of HRM function in Form No.2CEB is concerned a clarification has been given that no international transaction of HRM services had actually been carried out with any of the AEs in respect of secondment of employees, hence there was no question about reporting the same in the said prescribed form. The expenses in relation to performing the HRM function are stated to be entirely incurred and borne by MIL Expenditure on training is also borne by MIL. Those were not recruited on the basis of any request of AEs. At the time of recruitment there was no surety given of their off-shore appointment immediately but they could be seconded at a later stage. Hence at first instance, none of the expense relate to the employees was meant for sending them to AEs. The purpose of recruitment at the first stage is their in-house absorption. No pan of the expenditure was on behalf of AE hence there was no transaction which could be alleged as international Transaction. We find this explanation a reasonable explanation because admittedly there was no International transaction with AEs for charging the HRM services but the TPO had made out a case that there ought to be some mark up and hence he has opined for an addition in the total income. There was no such case that an upward adjustment was recommended by the TPO in respect of an International transaction already executed between the parties.

ITA Nos. 1188, 1852/Ahd/2015 & IT(TP) Nos. 172 & 514/Ahd/16 A.Y.s 2009-10 & 2010-11 63 action of the TPO primarily on the ground that by the deployment of skilled engineers at the services of AEs, those AEs have been benefited, hence, in return, the assesses should have recovered some compensation on secondments. It is not a correct approach because one has to examine the business strategies and the business model of an Enterprise and if it is found that other benefits are much higher than the small amount of compensation, then naturally applying a common business acumenship, no compensation or mark-ups should be asked for. In the present case as well, facts and figures have revealed that following the said business strategy the business growth as a whole was much higher than the impugned compensation amount. This allegation is also to be ruled out that those very employees were otherwise regular employees of the assessee-company and they have been absorbed after their return for the period for which they were sent abroad and worked "offshore" with AEs. It is true that such employees are the regular group of experts but they have been paid by AEs when worked on-site abroad, which means the burden of salary for the "offshore" period was in fact borne by AEs, otherwise to maintain bunch of trained employees the MIL had to incur the expenditure on salary. Therefore, there was an argument of counter claims and in support reliance was placed on Boston Scientific International VV (210-TII-16-ITAT-MUM- TP). For these reasons we also hold that the secondee-provider is not akin to recruitment service-provider or that "secondment" is different from "recruitment". Finally, we hold that there was no legal basis for the impugned upward adjustment and the same is hereby directed to be deleted. This ground is allowed.

Since the facts of the present year are similar to the one decided by honourable (TAT, Ahmedabad, respectfully following the decision the upward adjustment made by the TPO/AO is directed to be deleted this year as well.

The ground of appeal is accordingly allowed."

In view of the order passed by the Co-ordinate Bench in identical issue, we find no justification in interfering the the order passed by the ''Ld.CIT (A)'' in deleting the disallowance made on account of Human Resource Management

ITA Nos. 1188, 1852/Ahd/2015 & IT(TP) Nos. 172 & 514/Ahd/16 A.Y.s 2009-10 & 2010-11 64 function. Hence, Revenue’s appeal is found to be devoid of any merit and thus dismissed.

ITA No.172/Ahd/2016 for A.Y. 2010-11

ITA Nos. 1188, 1852/Ahd/2015 & IT(TP) Nos. 172 & 514/Ahd/16 A.Y.s 2009-10 & 2010-11 65 Ground No.2 : The assessee has further challenge the confirmation of 30. disallowance computed u/s.14A r.w.Rule 8D(2)(iii) while computing the Book Profit under section 115JB of the Act.

However, we note that in the recent judgment passed by the Special Bench of Hon'ble Delhi Tribunal in the case of ACIT vs. Vireet Investment Pvt. Ltd. reported in 82 Taxmann.com 415 has held that the disallowances made u/s 14A r.w.r. 8D cannot be the subject matter of disallowances while determining the net profit u/s 115JB of the Act, The relevant portion of the said order is reproduced hereinbelow: "In view of above discussion, the computation under clause (f) of Explanation 1 to section 115JB(2), is to be made "without resorting to the computation as contemplated under section 14A, read with rule 8D of the Income-tax Rules, 1962 "

The ratio laid down by the Hon'ble Tribunal is squarely applicable to the facts of the case in hand. Thus it can be concluded that the disallowance made under section 14A r.w.r. 8D cannot be resorted while determining the expenses as mentioned under clause (f) to explanation 1 to section 115JB of the Act. Hence, addition is deleted. Assessee’s appeal is, thus, allowed.

ITA Nos. 1188, 1852/Ahd/2015 & IT(TP) Nos. 172 & 514/Ahd/16 A.Y.s 2009-10 & 2010-11 66 assessee’s own case for A.Y 2008-09. In the absence of any change circumstances the same shall apply Mutatis mutandis.

ITA Nos. 1188, 1852/Ahd/2015 & IT(TP) Nos. 172 & 514/Ahd/16 A.Y.s 2009-10 & 2010-11 67 In view of the order passed by the Co-ordinate Bench, we find no justification in sustaining such upward adjustment of Rs.1,75,40,109/-. This ground of appeal preferred by Revenue is, thus, dismissed. This ground of appeal is, thus, dismissed.

Ground No.5 : This ground of appeal preferred by the assessee is asking to 36. the ground no.3 of appeal bearing ITA No.1188/Ahd/2015 for A.Y. 2009-10 preferred by the assessee which has already been decided in favour of the assessee. Respectfully, relying upon the order passed by the Co-ordinate Bench in assessee’s own case in ITA Nos. 2879 and 2985/Ahd/2014 for A.Y. 2008-09. Hence in the absence of any change circumstances the same shall apply Mutatis mutandis.

ITA No. 513/Ahd/2016 for A.Y. 2010-11

ITA Nos. 1188, 1852/Ahd/2015 & IT(TP) Nos. 172 & 514/Ahd/16 A.Y.s 2009-10 & 2010-11 68 09. In the absence of any change circumstances the ratio laid down thereon shall apply Mutatis Mutandis. Hence, this ground of appeal preferred by the Revenue is dismissed.

Order pronounced in the Court on 03/09/2019 at Ahmedabad.

Sd/- Sd/- (PRAMOD KUMAR) (Ms MADHUMITA ROY) VICE PRESIDENT JUDICIAL MEMBER

Ahmedabad; Dated 03/09/2019 Priti Yadav, Sr.PS

ITA Nos. 1188, 1852/Ahd/2015 & IT(TP) Nos. 172 & 514/Ahd/16 A.Y.s 2009-10 & 2010-11 69

आदेश क� ��त�ल�प अ�े�षत/Copy of the Order forwarded to : 1. अपीलाथ� / The Appellant 2. ��यथ� / The Respondent. 3. संबं�धत आयकर आयु�त / Concerned CIT 4. आयकर आयु�त(अपील) / The CIT(A) 5. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण / DR, ITAT, 6. गाड� फाईल / Guard file. आदेशानुसार/BY ORDER, True copy उप/सहायक पंजीकार (Dy./Asstt. Registrar) आयकर अपील�य अ�धकरण, अहमदाबाद / ITAT, Ahmedabad Date of dictation : …..-07-2019 1. 2. Date on which the typed draft is placed before the Dictating Member 3. Date on which the approved draft comes to the Sr.P.S./P.S. - 4. Date on which the fair order is placed before the Dictating Member for Pronouncement ……………….. 5. Date on which the file goes to the Bench Clerk .. : -08-2019 6. Date on which the file goes to the Head Clerk……………………………. 7. The date on which the file goes to the Assistant Registrar for signature………