The ACIT, Circle-3(1)., Visakhapatnam v. M/s Hy-grade Pellets Ltd,, Visakhapatnam

ITA 228/VIZ/2008 | 2004-2005
Pronouncement Date: 25-01-2011 | Result: Allowed

Appeal Details

RSA Number 22825314 RSA 2008
Assessee PAN AABCH4136Q
Bench Visakhapatnam
Appeal Number ITA 228/VIZ/2008
Duration Of Justice 2 year(s) 11 month(s) 9 day(s)
Appellant The ACIT, Circle-3(1)., Visakhapatnam
Respondent M/s Hy-grade Pellets Ltd,, Visakhapatnam
Appeal Type Income Tax Appeal
Pronouncement Date 25-01-2011
Appeal Filed By Department
Order Result Allowed
Bench Allotted DB
Tribunal Order Date 25-01-2011
Date Of Final Hearing 01-11-2010
Next Hearing Date 01-11-2010
Assessment Year 2004-2005
Appeal Filed On 15-02-2008
Judgment Text
ITA NO.228 OF 2008 ESSAR STEEL LTD. VISAKAPATNAM PAGE 1 OF 14 IN THE INCOME TAX APPELLATE TRIBUNAL VISAKHAPATNAM BENCH VISAKHAPATNAM BEFORE: SHRI SUNIL KUMAR YADAV JUDICIAL MEMBER AND SHRI BR BASKARAN ACCOUNTANT MEMBER ITA NO.228/VIZAG/2008 ASSESSMENT YEAR: 2004 - 05 ACIT CIRCLE-3(1) VISAKHAPATNAM VS. M/S ESSAR STEEL LTD. VISAKHAPATNAM (FORMERLY HY- GRADE PELLETS LTD) (APPELLANT) (RESPONDENT) PAN NO:AABCH 4136 Q APPELLANT BY: SHRI T.H. LUCAS PETER CIT (DR) RESPONDENT BY: SHRI G.V.N. HARI CA ORDER PER SHRI B. R. BASKARAN ACCOUNTANT MEMBER: THE APPEAL OF THE REVENUE IS DIRECTED AGAINST THE ORDER DATED 05-02- 2008 PASSED BY LEARNED CIT(A)-I VISAKHAPATNAM AND I T RELATES TO THE ASSESSMENT YEAR 2004-05. 2. FOLLOWING TWO ADDITIONS MADE BY THE ASSESSING OF FICER HAVING BEEN DELETED BY LD CIT(A) THE REVENUE IS IN APPEAL BEFO RE ASSAILING THE DECISION OF LEARNED CIT (A). A) ADDITION OF RS.1 11 68 115/- MADE U/S 92C OF THE AC T ON THE BASIS OF ARMS LENGTH PRICE DETERMINED BY TRANSFER PRICING OFFICER. B) ADDITION OF RS.18 04 599/- PERTAINING PROVISION FO R BAD AND DOUBTFUL DEBTS AND DOUBTFUL ADVANCES WHICH WAS AD DED IN COMPUTING BOOK PROFIT U/S 115JB OF THE ACT. 3. THE FACTS RELATING TO THE ISSUES ARE STATED IN B RIEF. THE APPELLANT COMPANY IS ENGAGED IN THE BUSINESS OF PRODUCTION AN D SALE OF IRON ORE PELLETS. FOR THE ASSESSMENT YEAR 2004-05 THE RETUR N OF INCOME WAS FILED BY THE ASSESSEE ON 01/11/2004 DECLARING NIL INCOME AF TER SETTING OFF OF CARRIED FORWARD LOSSES. DURING THE YEAR UNDER CONS IDERATION THE ASSESSEE ITA NO.228 OF 2008 ESSAR STEEL LTD. VISAKAPATNAM PAGE 2 OF 14 HAD ENTERED INTO TWO TYPES OF INTERNATIONAL TRANSAC TIONS VIZ. COMMISSION PAYMENTS AND SALES TO ITS ASSOCIATED ENTERPRISE (AE ) LOCATED ABROAD. THE ASSESSING OFFICER REFERRED THE MATTER OF DETERMINAT ION OF ARMS LENGTH PRICE (ALP) IN RESPECT OF THESE INTERNATIONAL TRANSACTION S TO THE TRANSFER PRICING OFFICER (TPO) IN ACCORDANCE WITH SEC. 92CA OF THE A CT. THE TPO EXPRESSED THE VIEW THAT THE COMMISSION PAYMENTS DO NOT REQUIR E ANY ADJUSTMENT. HOWEVER IN RESPECT OF SALES EFFECTED TO THE AE TH E TPO DETERMINED THE ALP OF THE SALE TRANSACTIONS AT RS.67 20 03 342/- A S AGAINST SALES VALUE OF RS.66 08 35 225/- DECLARED BY THE ASSESSEE THUS RE SULTING IN A DIFFERENCE (ENHANCEMENT) OF RS.1 11 68 115/-. THE ASSESSING O FFICER ACCEPTED THE ALP SO DETERMINED BY THE TPO AND ACCORDINGLY ADDED THE DIFFERENCE CITED ABOVE TO THE TOTAL INCOME OF THE ASSESSEE. WHILE C OMPUTING THE BOOK PROFIT AS PER THE PROVISIONS OF SEC.115JB OF THE AC T THE ASSESSEE DID NOT ADD THE AMOUNT OF RS.18 04 599/- DEBITED TO THE PRO FIT AND LOSS A/C UNDER THE HEAD PROVISIONS MADE FOR DOUBTFUL DEBTS AND D OUBTFUL ADVANCES TO THE BOOK PROFIT ON THE REASONING THAT THE SAME IS NOT AN ASCERTAINED LIABILITY. THE ASSESSING OFFICER DID NOT AGREE WITH THE ASSESSEE AND HENCE ADDED THE SAID AMOUNT TO THE BOOK PROFIT. THE ASSES SEE AGITATED BOTH ADDITIONS IN THE APPEAL FILED BEFORE LD CIT(A) AND THEY WERE DELETED BY THE FIRST APPELLATE AUTHORITY. AGGRIEVED BY THE ORDER O F LEARNED CIT(A) THE REVENUE HAS PREFERRED THIS APPEAL BEFORE US. 4. WE SHALL TAKE UP THE 2 ND ISSUE FIRST. THE LEARNED DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT AFTER THE INSERTION OF CL.(I) IN EXPLN.1 TO S.115JB BY FINANCE (NO.2) ACT 2009 WITH RETROSPECT IVE EFFECT THE AMOUNTS SET ASIDE AS PROVISION FOR DIMINUTION IN THE VALUE OF ANY ASSET HAVE TO BE INCLUDED IN THE BOOK PROFIT. HE DREW SUPPORT IN THI S REGARD FROM THE DECISION OF HONBLE KARNATAKA HIGH COURT IN THE CAS E OF CIT VS. MYSORE BREWERIES LTD (2009) 227 CTR (KAR.) 569. WHEREIN I T HAS BEEN HELD THAT SUCH KIND OF PROVISIONS HAVE TO BE ADDED WHILE COMP UTING THE BOOK PROFIT IN VIEW OF THE RETROSPECTIVE AMENDMENT CITED ABOVE. ITA NO.228 OF 2008 ESSAR STEEL LTD. VISAKAPATNAM PAGE 3 OF 14 4.1 IN THE INSTANT CASE THE IMPUGNED PROVISIONS PERTAIN TO PROVISION FOR BAD AND DOUBTFUL DEBTS FOR RS.2 82 301/- AND PROVIS ION FOR DOUBTFUL ADVANCES FOR RS.15 22 298/-. UNDISPUTEDLY BOTH TH E PROVISIONS HAVE BEEN MADE FOR DIMINUTION IN THE VALUE OF ASSET. HENCE AS SUBMITTED BY THE LEARNED DEPARTMENTAL REPRESENTATIVE BOTH THE PROVI SIONS ARE HIT BY THE RETROSPECTIVE AMENDMENT CITED ABOVE. HOWEVER THE LD AR REQUESTED THAT THIS ISSUE MAY BE SET ASIDE TO THE FILE OF THE ASSE SSING OFFICER AS HE HAS NOT EXAMINED IT AS PER THE AMENDED LAW. THE LEARNED DE PARTMENTAL REPRESENTATIVE DID NOT OBJECT TO THE PLEA OF THE AS SESSEE. ACCORDINGLY WE SET ASIDE THE ORDER OF THE LEARNED CIT (A) ON THIS ISSUE AND RESTORE THE SAME TO THE FILE OF THE ASSESSING OFFICER WITH A DI RECTION TO RE-EXAMINE THE IMPUGNED ADDITIONS IN THE LIGHT OF AMENDED LAW DISC USSED ABOVE AFTER AFFORDING NECESSARY OPPORTUNITY OF BEING HEARD TO T HE ASSESSEE. 5. NOW WE SHALL TAKE UP THE FIRST ISSUE. IT RELATE S TO THE ADDITION OF RS.1.11 CRORES MADE BY THE A.O U/S 92CA(4) OF THE A CT IN RESPECT OF INTERNATIONAL TRANSACTIONS RELATING TO THE SALES MA DE TO THE AE. THE FACTS RELATING TO THIS ISSUE ARE STATED IN BRIEF. DURING THE YEAR UNDER CONSIDERATION THE ASSESSEE COMPANY SOLD IRON ORE PE LLETS TO M/S STEMCOR (S.E.A) PTE LTD SINGAPORE IN PURSUANCE OF THE AGRE EMENT DATED 12-06- 2003 ENTERED WITH THAT COMPANY. M/S STEMCOR IS AN ASSOCIATED ENTERPRISE. THE ASSESSEE ADMITTED SALES AMOUNT AT RS.66 08 35 225/- IN RESPECT OF THE SAID SALE TRANSACTIONS. THE ASSESSE E HAD ALSO SOLD SIMILAR ITEMS TO NON ASSOCIATED ENTERPRISES (NAE) LOCATED IN HONG KONG AND SWITZERLAND. THE A.O REFERRED THE MATTER TO TRANSF ER PRICING OFFICER (TPO) HYDERABAD FOR DETERMINATION OF ARMS LENGTH PRICE ( ALP) IN RESPECT OF THESE SALES TRANSACTIONS. 5.1 SEC. 92C OF THE ACT READ WITH THE RULES MA DE THERE UNDER PRESCRIBES VARIOUS METHODS FOR DETERMINATION OF ALP . THE MOST APPROPRIATE METHOD OF DETERMINATION OF ALP IS SELEC TED FROM AMONGST SUCH METHODS SO PRESCRIBED IN THE ACT AND RULES. IN THE I NSTANT CASE BOTH THE ITA NO.228 OF 2008 ESSAR STEEL LTD. VISAKAPATNAM PAGE 4 OF 14 PARTIES HAVE ADOPTED COMPARABLE UNCONTROLLED PRICE METHOD (CALLED CUP METHOD) FOR DETERMINATION OF ALP. 5.2 THE TPO VIDE HIS ORDER DATED 21-12-2006 D ETERMINED THE ALP AT RS.67.20 CRORES BY COMPARING THE RATIO OF NET PROF IT/COST IN THE TRANSACTIONS ENTERED WITH AE AND NAE. THE NP/COST R ATIO WAS 12.35% IN RESPECT OF AE WHILE IT WAS 14.04% IN RESPECT OF NA E. THUS THERE WAS A SHORTAGE OF 1.69% IN RESPECT OF TRANSACTION ENTERED WITH AE VIS--VIS NAE. BEFORE THE TPO THE ASSESSEE CONTENDED THAT THE SAL E PRICE DECLARED BY THE ASSESSEE NEED NOT BE DISTURBED AS THE VARIATION BE TWEEN IN TRANSACTIONS WITH AE AND NAE WAS LESS THAN 5%. IN THIS REGARD THE ASSESSEE PLACED RELIANCE ON THE CIRCULAR NO.12 DATED 23.8.2001 ISSU ED BY CBDT WHICH INTER ALIA STATED AS UNDER: THAT THE AO SHALL NOT MAKE ANY ADJUSTMENT TO THE A LP DETERMINED BY THE TAX PAYER IF SUCH PRICE IS UP TO 5% LESS OR 5% MORE THAN THE PRICE DETERMINED BY THE AO. IN SU CH CASE THE PRICE DECLARED MAY BE ACCEPTED. HOWEVER THE TPO REJECTED THE SAID CONTENTIONS OF T HE ASSESSEE WITH THE FOLLOWING OBSERVATIONS: FOR APPLICATION OF THIS PROVISION THERE SHOULD BE MORE THAN ONE PRICE (OR COMPARABLE PRICES) THEN THE ARITHMETICAL MEAN OF SUCH PRICES IS REQUIRED TO BE TAKEN. AFTER THAT A PRICE WHICH MAY VARY FROM THE ARITHMETICAL MEAN BY AN AMOUNT NOT EXCEEDING 5% OF SUCH ARITHMETICAL MEAN SHALL BE TAKEN AS ALP. IN THIS C ASE SUCH SITUATION DOES NOT ARISE. FIRST OF ALL THERE IS O NLY ONE PRICE I.E. INTERNAL COMPARISON WITH ALL SIMILAR CONDITION S. COMPARISONS OF MARGINS OF DOMESTIC SEGMENT WAS NOT PREFERRED BY THE TAX PAYER. BUT THEY REQUESTED TO COMPARE WITH THE NET MARGINS ON EXPORTS TO UNRELATED PARTIE S IN VIEW OF THE AMENDMENT TO THIS PROVISO WHICH WAS SUBSTITUTED BY FINANCE ACCT 2002 WITH EFFECT FROM 1.4.2002 AND SUBSEQUENT TO THE CBDTS CIRCULAR DT. 23.8.2001 REFERRED THE CONTENT OF THE PROVISION WILL PREVAIL OVER THE CONTENT OF THE CIRCULAR DT.23.8.2001. ACCORDINGLY THE ALP IS DETERMINED AS UNDER.. ITA NO.228 OF 2008 ESSAR STEEL LTD. VISAKAPATNAM PAGE 5 OF 14 ACCORDINGLY THE TPO DETERMINED THE ALP ON THE IMPUG NED SALES BY ADDING 1.69% WHICH HAS RESULTED IN THE INCREASE OF SALES AMOUNT BY RS.1 11 68 115/-. AS STATED EARLIER THE SAID DIFF ERENCE WAS ADDED BY THE ASSESSING OFFICER. 6. BEFORE THE LEARNED CIT (A) THE ASSESSEE REI TERATED ITS RELIANCE ON CIRCULAR NO.12 DATED 23-8-2001 ISSUED BY CBDT REFER RED SUPRA AND ACCORDINGLY CONTENDED THAT NO ADJUSTMENT IS REQUIRE D TO BE MADE TO THE SALES VALUE DECLARED BY IT AS THE DIFFERENCE BETWE EN THE SAID AMOUNT AND THE ALP DETERMINED BY THE TPO IS LESS THAN 5%. THE LEARNED CIT (A) AGREED WITH THE CONTENTIONS OF THE ASSESSEE AND ACC ORDINGLY DELETED THE IMPUGNED ADDITION OF RS.1.11 CRORES. THE OBSERVATIO NS OF THE LEARNED CIT (A) ARE EXTRACTED BELOW: AS PER THE COPY OF THE AUDITORS REPORT U/S 92E IN FORM NO.3CEB FILED ALONG WITH THE RETURN OF INCOME IT I S NOTED THAT THE APPELLANT COMPANY ADOPTED CUP METHOD AS THE PRI CES OF THE PRODUCT THAT WAS MANUFACTURED BY THE APPELLANT COMPANY WERE NOT STABLE AND KEPT ON CHANGING WITH THE INTER NATIONAL MARKET. THE TPO ALSO WHILE DETERMINING THE ALP ACCE PTED THE CUP METHOD ADOPTED BY THE APPELLANT COMPANY. THEREF ORE THERE WAS ONLY ONE PRICE. IN THIS CONTEXT RELIANCE WAS PLACED UPON THE CIRCULAR NO.12 OF CBDT DATED 23/08/2001 WH EREIN IT WAS STATED THAT WHERE THE PRICE DETERMINED BY THE A PPELLANT IS WITHIN THE RANGE OF +/ - 5% OF THE PRICE DETERMINED BY THE TPO NO ADJUSTMENT TO THE ALP SHOULD BE MADE. THE TPO REJECTED THE SAID CONTENTION IN VIEW OF THE AMENDME NT BROUGHT ABOUT TO THE PROVISO TO SECTION 92C(2) WHIC H ACCORDING TO THE ASSESSING OFFICER OVERRIDES THE CIRCULAR DATED 23/08/2001. HOWEVER THIS VIEW OF THE TPO PRIMA FACIE APPEARS TO BE INCORRECT. VIDE CIRCULARNO.8 OF 2002 DATED 27/08/2002 THE EXPLANATORY NOTES ON PROVISIONS RELATING TO DIRECT TAXES INTRODUCED BY FINANCE ACT 2002 WERE GIVEN. THE SAID CIRCULAR CLEARLY STATES THAT THE PROVISO TO SECTION 92C(2) AS AMENDED APPLIES ONLY WHEN THE APPROPRIATE METHOD RESULTS IN MORE THAN ONE PRICE . THIS IS CLEAR FROM PARA 50.4.1 OF THE SAID CIRCULAR WHIC H IS REPRODUCED AS UNDER; WITH A VIEW TO ALLOW A DEGREE OF FLEXIBILITY IN ADO PTING AN ARMS LENGTH PRICE THE FINANCE ACT 2002 HAS AMEND ED THE PROVISO TO SUB-SECTION (2)OF SECTION 92C TO PROVIDE THAT WHERE THE MOST APPROPRIATE METHOD RESULT IN MORE THAN ONE PRICE A ITA NO.228 OF 2008 ESSAR STEEL LTD. VISAKAPATNAM PAGE 6 OF 14 PRICE WHICH DIFFERS FROM THE ARITHMETICAL MEAN BY A N AMOUNT NOT EXCEEDING FIVE PER CENT OF SUCH MEAN MAY BE TAK EN TO BE THE ARMS LENGTH PRICE AT THE OPTION OF THE ASSESS EE. IN THE CASE OF THE APPELLANT THERE WAS ONLY ONE PRIC E DETERMINED UNDER THE CUP METHOD WHICH WAS ALSO ACCE PTED BY THE TPO VIDE HIS ORDER DATED 21/12/2006 AS THE MOST APPROPRIATE PRICE. THE TPO HAS NOT DETERMINED ANY O THER PRICE BY FOLLOWING ANY OTHER METHOD. UNDER THESE CIRCUMST ANCES THE DIRECTIONS ISSUED VIDE CIRCULAR NO.12 OF CBDT D ATED 23/08/2001 SQUARELY APPLIES. IN THE SAID CIRCULAR I T HAS BEEN CLEARLY STATED AS UNDER: THE ASSESSING OFFICER SHALL NOT MAKE ANY ADJUSTMEN T TO THE ARMS LENGTH PRICE DETERMINED BY THE TAXPAYER IF S UCH PRICE IS UNTO 5% LESS OR UNTO 5%MORE THAN THE PRICE DETERMIN ED BY THE ASSESSING OFFICER. IN SUCH CASES THE PRICE DECLA RED BY THE TAXPAYER MAY BE ACCEPTED. IN THE CASE OF THE APPELLANT THE DIFFERENCE WORKS O UT TO ONLY 1.6% WHICH IS WITHIN THE PERMISSIBLE RANGE OF + /- 5% AS PRESCRIBED BY THE CBDT. HENCE SUCH DIFFERENCE SHOU LD BE IGNORED AND THERE WAS NO NEED TO DETERMINE THE ALP OF SALE PRICE BY ADOPTING THE SAID DIFFERENCE OF 1.6%. HENC E THE ADDITION MADE ON THIS ACCOUNT OF RS. 1 11 68 115/- WAS NOT WARRANTED AND THE SAME IS HEREBY DELETED . THIS GROUND OF APPEAL IS ALLOWED . THUS IT CAN BE SEEN THAT THE LEARNED CIT(A) AGREED WITH THE VIEW OF THE TPO THAT THE AMENDED PROVISO TO SEC. 92C(2) WHICH GIVES CONCESSION OF 5% SHALL APPLY ONLY IF MORE THAN ONE PRICE IS DETE RMINED. HOWEVER HE DID NOT ACCEPT WITH THE VIEW OF THE TPO THAT THE AMENDE D PROVISO SHALL OVER RIDE THE CIRCULAR NO.12 DATED 23-8-2001 ISSUED BY T HE CBDT. ACCORDINGLY THE LEARNED CIT(A) DECIDED THE ISSUE IN FAVOUR OF T HE ASSESSEE BY PLACING FULL RELIANCE ON THE CIRCULAR NO.12 OF CBDT CITED A BOVE. 7. THE LEARNED DEPARTMENTAL REPRESENTATIVE ENDOR SED THE VIEWS OF THE TPO AND SUBMITTED THAT THE CONCESSION GIVEN BY THE CBDT IN ITS CIRCULAR NO.12 HAS BEEN BROUGHT INTO THE STATUTE BY FINANCE ACT 2002 W.E.F. 1.4.2002 BY AMENDING THE PROVISO TO SEC. 92C(2) AND HENCE THE SAID CIRCULAR CAN NO LONGER HAVE APPLICATION AFTER THE S AID AMENDMENT. ACCORDING TO THE AMENDED PROVISO THE CONCESSION OF 5% SHALL BE AVAILABLE ITA NO.228 OF 2008 ESSAR STEEL LTD. VISAKAPATNAM PAGE 7 OF 14 ONLY IF ARITHMETICAL MEAN IS REQUIRED TO BE TAKEN I N VIEW OF DETERMINATION OF MORE THAN ONE PRICE UNDER MOST APPROPRIATE METHOD. IN THE INSTANT CASE SINCE THE TPO HAS WORKED OUT ONLY ONE PRICE THE QU ESTION OF ALLOWING CONCESSION DOES NOT ARISE. IN THIS REGARD THE LEA RNED DR RELIED UPON THE FOLLOWING CASE LAW: A) PEROT SYSTEMS TSI (INDIA) LTD. VS. D.C.I.T (130 T TJ 685 (DELHI)) B) GLOBAL VANTEDGE (P) LTD. VS. D.C.I.T (37 SOT 1 (DELHI)) (1 ITR (TRIB) 326) 8. ON THE OTHER HAND THE LEARNED AR HEAVILY PLACED RELIANCE ON THE CIRCULAR NO.12 ISSUED BY CBDT (SUPRA) AND SUBMITTE D THAT THE CBDT HAS CONSIDERED THE PRACTICAL SITUATION WHILE IMPLEMENTI NG THE NEW PROVISIONS IN INITIAL YEARS SINCE THERE MAY BE ROOM FOR DIFFEREN T INTERPRETATIONS IN IMPLEMENTING THE NEW LEGISLATION AND ACCORDINGLY GR ANTED CONCESSION OF +/- 5%. THE LEARNED AR ALSO SUBMITTED THAT THERE I S AN ARITHMETICAL ERROR IN COMPUTATION OF ARMS LENGTH PRICE BY THE TPO. 9. WE HAVE HEARD THE RIVAL CONTENTIONS AND CAREFULL Y PERUSED THE RECORD. ON A CAREFUL CONSIDERATION OF THE FACTS R ELATING TO THE ISSUES THE ORDERS OF TPO AND CIT(A) AND THE RIVAL CONTENTIONS WE NOTICE THAT THE FOLLOWING ISSUE ACTUALLY EMERGES OUT: WHETHER THE CIRCULAR NO.12 DATED 23.8.2001 ISSUED BY THE CBDT WILL HAVE APPLICATION FOR THE YEAR UNDER CONSIDERATION O VER THE PROVISO TO SEC. 92C(2) AS AMENDED BY THE FINANCE ACT 2002. WHILE THE ASSESSEE PLACES RELIANCE ON THE SAID CIRC ULAR THE REVENUE IS CONTESTING THAT THE PROVISO SHALL HAVE APPLICATION. THERE APPEARS TO BE NO DISPUTE WITH REGARD TO THE FACT THAT THE AMENDED PR OVISO TO SEC. 92C(2) SHALL HAVE APPLICATION ONLY IF MORE THAN ONE PRICE IS DETERMINED BY THE MOST APPROPRIATE METHOD. 10. FOR THE SAKE OF CONVENIENCE WE EXTRACT BEL OW THE SUB SEC. 1 AND 2 OF SEC. 92C ALONG WITH THE PROVISO: ITA NO.228 OF 2008 ESSAR STEEL LTD. VISAKAPATNAM PAGE 8 OF 14 (1) THE ARMS LENGTH PRICE IN RELATION TO AN INTER NATIONAL TRANSACTION SHALL BE DETERMINED BY ANY ONE OF THE FOLLOWING METHODS BEING THE MOST APPROPRIATE METHOD HAVING REGARD TO THE NATURE OF TRANSACTION OR CLASS OF TRANSACTION OR CLASS OF ASS OCIATED PERSONS OR FUNCTIONS PERFORMED BY SUCH PERSONS OR SUCH OTHER R ELEVANT FACTORS AS THE BOARD MAY PRESCRIBE NAMELY:- (A) COMPARABLE UNCONTROLLED PRICE METHOD; (B) RESALE PRICE METHOD; (C) COST PLUS METHOD (D) PROFIT SPLIT METHOD (E) TRANSACTIONAL NET MARGIN METHOD (F) SUCH OTHER METHOD AS MAY BE PRESCRIBED BY THE BOARD. (2) THE MOST APPROPRIATE METHOD REFERRED TO IN SUB-SECTION (1) SHALL BE APPLIED FOR DETERMINATION OF ARMS LENGTH PRICE IN THE MANNER AS MAY BE PRESCRIBED. PROVIDED THAT WHERE MORE THAN ONE PRICE IS DETERMINED BY THE MOST APPROPRIATE METHOD THE ARMS LENGTH PRICE SHALL BE TAKEN TO BE THE ARITHMETICAL MEAN OF SUCH PRICES OR AT THE OPTION OF THE ASSESSEE A PRICE WHICH MAY VARY FROM THE ARITHMETI CAL MEAN BY AN AMOUNT NOT EXCEEDING FIVE PERCENT OF SUCH ARITHMETI CAL MEAN. THE CBDT HAS PRESCRIBED THE RULE10B TO 10E IN THIS REGARD. RULE 10B PRESCRIBES THE METHODOLOGY TO BE ADOPTED FOR DETERM INATION OF ARMS LENGTH PRICE AND RULE 10C DEFINES MOST APPROPRIATE METHOD AND THE FACTORS TO BE TAKEN INTO ACCOUNT FOR THAT PURPOSE. 11. ON A CAREFUL READING OF BOTH THE SUB-SECTION S CITED ABOVE FOLLOWING POINTS EMERGE OUT:- (A) THE ALP SHALL BE DETERMINED BY ANY OF THE METHODS P RESCRIBED U/S 92C(1). (B) AS PER RULE 10C(1) THE MOST APPROPRIATE METHOD SHA LL BE THE METHOD WHICH IS BEST SUITED TO THE FACTS AND CIRCUM STANCES OF EACH PARTICULAR INTERNATIONAL TRANSACTION AND WHIC H PROVIDES THE MOST RELIABLE MEASURE OF AN ARMS LENGTH PRICE IN R ELATION TO THE INTERNATIONAL TRANSACTION. (C) THE MOST APPROPRIATE METHOD SHALL BE SELECTED HA VING REGARD TO THE NATURE OF TRANSACTION OR CLASS OF TRANSACTIO N OR CLASS OF ASSOCIATED PERSONS OR FUNCTIONS PERFORMED BY SUCH P ERSONS OR SUCH OTHER RELEVANT FACTORS AS THE BOARD MAY PRESCR IBE. THE VARIOUS FACTORS HAVE BEEN PRESCRIBED UNDER RULE 10C (2). ITA NO.228 OF 2008 ESSAR STEEL LTD. VISAKAPATNAM PAGE 9 OF 14 (D) THE MOST APPROPRIATE METHOD SO SELECTED SHALL BE AP PLIED FOR DETERMINATION OF ALP. (E) HOWEVER IF MORE THAN ONE PRICE IS DETERMINED BY TH E MOST APPROPRIATE METHOD THEN THE ALP SHALL BE (I) TAKEN TO BE THE ARITHMETIC MEAN OF SUCH PRICES OR (II) AT THE OPTION OF THE ASSESSEE A PRICE WHICH M AY VARY FROM THE ARITHMETICAL MEAN BY AN AMOUNT NOT EXCEEDING FI VE PER CENT OF SUCH ARITHMETICAL MEAN. 12. THE ASSESSEE PLACES RELIANCE ON THE CIRCULA R NO.12 DATED 23.8.2001 ISSUED BY CBDT EXPLAINING THE PROVISIONS GOVERNING TRANSFER PRICE IN AN INTERNATIONAL TRANSACTION AS AMENDED BY FINANCE AC T 2001. FOR THE SAKE OF CONVENIENCE WE EXTRACT BELOW THE RELEVANT PORTIONS OF THE CIRCULAR: THE FINANCE ACT 2001 HAS SUBSTITUTED THE EXISTING SECTION 92 OF THE INCOME TAX ACT BY NEW SECTIONS 92 AND 92A TO 92F. THESE NEW PROVISIONS LAY DOWN THAT INC OME ARISING FROM AN INTERNATIONAL TRANSACTION BETWEEN A SSOCIATED ENTERPRISES SHALL BE COMPUTED HAVING REGARD TO THE ARMS LENGTH PRICE. THE TERM ASSOCIATED ENTERPRISE HAS BEEN DEFINED IN SECTION 92A. SECTION 92B DEFINES AN IN TERNATIONAL TRANSACTION BETWEEN TWO OR MORE ASSOCIATED ENTERPR ISES. THE PROVISIONS CONTAINED IN SECTION 92C PROVIDE FOR METHODS TO DETERMINE THE ARMS LENGTH PRICE IN RELATION TO THE INTERNATIONAL TRANSACTION AND THE MOST APPROPRIATE METHOD TO BE FOLLOWED OUT OF THE SPECIFIED METHODS. HOWEVER THIS IS A NEW LEGISLATION. IN THE INITIAL YEARS OF ITS IMPLEMENTATION THERE MAY BE ROOM FOR DIFFERENT INTERPRETATIONS LEADING TO UNCERTAINTIES WITH REGAR D TO DETERMINATION OF ARMS LENGTH PRICE OF AN INTERNATI ONAL TRANSACTION. WHILE IT WOULD BE NECESSARY TO PROTECT OUR TAX BASE THERE IS A NEED TO ENSURE THAT THE TAXPAYERS ARE NOT PUT TO AVOIDABLE HARDSHIP IN THE IMPLEMENTATION OF THESE REGULATIONS. IN THIS BACKGROUND THE BOARD HAVE DECIDED THE FOLLO WING: (I) THE ASSESSING OFFICER SHALL NOT MAKE ANY ADJUSTMENT TO THE ARMS LENGTH PRICE DETERMINED BY THE TAXPAYE R IF SUCH PRICE IS UNTO 5% LESS OR UNTO 5% MORE THAN THE PRICE DETERMINED BY THE ASSESSING OFFICER. IN S UCH ITA NO.228 OF 2008 ESSAR STEEL LTD. VISAKAPATNAM PAGE 10 OF 14 CASES THE PRICE DECLARED BY THE TAXPAYER MAY BE ACCEPTED. (II) THE PROVISIONS OF SECTIONS 92 AND 92A TO 92F COME INTO FORCE WITH EFFECT FROM 1 ST APRIL 2002 AND ARE ACCORDINGLY APPLICABLE TO ASSESSMENT YEAR 2002-03 AND SUBSEQUENT YEARS. THUS IT CAN BE SEEN THAT THE FINANCE ACT 2001 HAS INSERTED NEW SECTIONS 92 AND 92A TO 92F IN THE PLACE OF OLD SECTION 92. THE ABOVE SAID CIRCULAR HAS BEEN ISSUED IN ORDER TO EXPLAIN THE AMENDMENTS SO MADE BY THE FINANCE ACT 2001 WHICH WERE MADE APPLICABLE FROM T HE ASSESSMENT YEAR 2002-03 ONWARDS. 13. THE PROVISO TO SECTION 92C(2) WHICH WAS IN SERTED BY THE FINANCE ACT 2001 WITH EFFECT FROM 1.4.2002 (I.E. ASSESSMEN T YEAR 2002-03 ONWARDS) READS AS UNDER: PROVIDED THAT WHERE MORE THAN ONE PRICE MAY BE DETERMINED BY THE MOST APPROPRIATE METHOD THE ARM S LENGTH PRICE SHALL BE TAKEN TO BE THE ARITHMETICAL MEAN OF SUCH PRICES. THE CBDT VIDE ITS CIRCULAR NO.14/2001 DATED 12.12. 2001 (2001) (252 ITR (ST.) 65) EXPLAINED THE SCOPE AND EFFECT OF NEW PR OVISIONS. THE RELEVANT PARAGRAPH DEALING WITH THE PROVISO CITED ABOVE READ S AS UNDER : APPLYING THE MOST APPROPRIATE METHOD TO DIFFERENT SETS OF COMPARABLE DATA CAN POSSIBLY RESULT IN COMPUTATION OF MORE THAN ONE ARMS LENGTH PRICE. WITH A VIEW TO AVOID UNNECESSARY DISPUTES THE PROVISO TO SECTION 92C(2) PROVIDES THAT IN SUCH A CASE THE ARITHMETIC MEAN OF THE PRIC ES SHALL BE ADOPTED AS THE ARMS LENGTH PRICE. IN THE NORMAL C OURSE IF THE DIFFERENT SETS OF COMPARABLE DATA ARE EQUALLY R ELIABLE THERE MAY NOT BE ANY SIGNIFICANT DIVERGENCE BETWEEN THE VARIOUS ARMS LENGTH PRICES DETERMINED. THUS IT CAN BE SEEN THAT UNDER THE PROVISO TO SEC. 92C(2) AS INSERTED BY THE FINANCE ACT 2001 ONLY ARITHMETICAL MEAN OF TH E PRICES HAS TO BE TAKEN AND THE STATUTE DID NOT PROVIDE FOR ANY CONCESSION. HENCE CONSIDERING THE PRACTICAL DIFFICULTIES IT APPEARS THAT THE CBDT HA S ISSUED CIRCULAR NO.12 DATED 23.8.2001 WHICH WAS RELIED UPON BY THE ASSES SEE IN ORDER TO GIVE ITA NO.228 OF 2008 ESSAR STEEL LTD. VISAKAPATNAM PAGE 11 OF 14 CONCESSION OF +/- 5%. THOUGH THE CBDT HAS EXPLAIN ED THE AMENDMENTS BROUGHT OUT BY FINANCE ACT 2001 IN A SUBSEQUENT CI RCULAR NO. 14 DATED 12.12.2001 YET IT DID NOT PREFER TO REFER THERE IN ITS PREVIOUS CIRCULAR NO.12 DATED 23.8.2001. 14 HOWEVER IT IS PERTINENT TO NOTE THAT THE FI NANCE ACT 2002 HAS AMENDED THE ABOVE SAID PROVISO TO SEC. 92C(2) WITH EFFECT FROM 1.4.2002 I.E. THE AMENDMENT SO MADE SHALL ALSO BE APPLICABLE FROM THE ASSESSMENT YEAR 2002-03 ONWARDS. THE AMENDED PROVISO WHICH IS APPLICABLE FROM ASSESSMENT YEAR 2002-03 READS AS UNDER. PROVIDED THAT WHERE MORE THAN ONE PRICE IS DETERMINED BY THE MOST APPROPRIATE METHOD THE ARMS LENGTH PRICE SHALL BE TAKEN TO BE THE ARITHME TICAL MEAN OF SUCH PRICES OR AT THE OPTION OF THE ASSES SEE A PRICE WHICH MAY VARY FROM THE ARITHMETICAL MEAN BY AN AMOUNT NOT EXCEEDING FIVE PERCENT OF SUCH ARITHMETI CAL MEAN. THE CBDT HAS EXPLAINED THE SAID AMENDMENT IN ITS CI RCULAR NO.8/2002 DATED 27.8.2002 (2002) (258 ITR (ST.) 13) AS UNDER: UNDER THE EXISTING PROVISIONS CONTAINED IN THE PRO VISO TO SUB-SECTION (2) OF SECTION 92C OF THE INCOME TAX ACT IF THE APPLICATION OF THE MOST APPROPRIATE METHOD LEADS TO DETERMINATION OF MORE THAN ONE PRICE THE ARITHMETI CAL MEAN OF SUCH PRICES SHALL BE TAKEN TO BE THE ARMS LENG TH PRICE IN RELATION TO THE INTERNATIONAL TRANSACTION. WITH A VIEW TO ALLOW A DEGREE OF FLEXIBILITY IN ADO PTING AN ARMS LENGTH PRICE THE FINANCE ACT 2002 HAS AMEN DED THE PROVISO TO SUB-SECTION (2) OF SECTION 92C TO PROVID E THAT WHERE THE MOST APPROPRIATE METHOD RESULTS IN MORE T HAN ONE PRICE A PRICE WHICH DIFFERS FROM THE ARITHMETI CAL MEAN BY AN AMOUNT NOT EXCEEDING FIVE PER CENT OF SUCH ME AN MAY BE TAKEN TO BE THE ARMS LENGTH PRICE AT THE OPTIO N OF THE ASSESSEE. 15. IT IS INTERESTING TO NOTE THAT THE FINANCE A CT 2001 HAS ORIGINALLY INSERTED SEC. 92C ALONG WITH THE IMPUGNED PROVISO W ITH EFFECT FROM 1.4.2002 I.E. ASSESSMENT YEAR 2002-03 ONWARDS. HO WEVER THE FINANCE ACT 2002 AMENDED THE PROVISO SO INSERTED BY FINANCE ACT 2001 AND THE ITA NO.228 OF 2008 ESSAR STEEL LTD. VISAKAPATNAM PAGE 12 OF 14 AMENDED PROVISO WAS ALSO MADE APPLICABLE FROM 1.4.2 002 I.E ASSESSMENT YEAR 2002-03 ONWARDS MEANING THERE BY THE PROVISO WHICH WAS INSERTED BY THE FINANCE ACT 2001 NEVER CAME INTO OPERATION. IT CAN BE NOTICED THAT THE CIRCULAR NO.12 OF 2001 WAS ISSUED ONLY TO EXPLA IN THE AMENDMENTS MADE BY THE FINANCE ACT 2001 WHICH NEVER CAME INTO OPERATION. 16. NOW THE QUESTION THAT ARISES IS WHETHER AN ASSESSEE COULD PLACE HIS RELIANCE ON A CIRCULAR ISSUED FOR EXPLAINING CERTAI N PROVISIONS WHICH NEVER CAME INTO OPERATION. THE CBDT DERIVES ITS POWER TO ISSUE THE CIRCULARS FROM SEC. 119 OF THE ACT. THE OBSERVATIONS MADE BY HON'BLE SUPREME COURT IN THIS REGARD IN THE CASE OF UNION OF INDIA VS. AZADI BACHAO ANDOLAN (2003) (263 ITR 706 (S.C)) HAS BEEN JUDICIALLY NOTI CED IN THE CASE OF THE DECISION OF HON'BLE JURISDICTIONAL A.P. HIGH COURT S DECISION IN THE CASE OF CIT VS. RAAJENDRA PRASAD (299 ITR 227 (AP)) AS UNDE R: RELIANCE HAS ALSO BEEN PLACED BY MR. SWAMY ON THE JUDGMENT REPORTED IN UNION OF INDIA V. AZADI BACHAO ANDOLAN [ 2003] 263 ITR 706 (SC). WHILE DEALING WITH THE POWERS OF THE CENTRAL BOARD OF DIRECT TAXES THE SUPREME COURT IN THIS JUDGMEN T CONSIDERED THE EFFECT OF CIRCULAR UNDER SECTION 119 OF THE ACT AND WAS OF THE VIEW (PAGE 727): SECTION 119 STRATEGICALLY PLACED IN CHAPTER XIII WHI CH DEALS WITH INCOME-TAX AUTHORITIES IS AN ENABLING POWER OF THE CENTRAL BOARD OF DIRECT TAXES WHICH IS RECOGNISED AS AN AUTHORITY UNDER THE INCOME TAX ACT UNDER SECTION 116(A). THE CENTRAL BOARD OF DIRECT T AXES UNDER THIS SECTION IS EMPOWERED TO ISSUE SUCH ORDER S INSTRUCTIONS AND DIRECTIONS TO OTHER INCOME-TAX AUTHORITIES AS IT MAY DEEM FIT FOR PROPER ADMINISTRATION OF THIS ACT. SUCH AUTHORITIES AND ALL OTHER PERSONS EMPLOYED IN THE EXECUTION OF THIS ACT ARE BOUND TO OBSERVE AND FOLLOW SUCH ORDERS INSTRUCTIO NS AND DIRECTIONS OF THE CENTRAL BOARD OF DIRECT TAXES . THE PROVISO TO SUB-SECTION (1) OF SECTION 119 RECOGNISE S TWO EXCEPTIONS TO THIS POWER. THE FIRST THAT THE CENTR AL BOARD OF DIRECT TAXES CANNOT REQUIRE ANY INCOME-TAX AUTHORITY TO MAKE A PARTICULAR ASSESSMENT OR TO DIS POSE OF A PARTICULAR CASE IN A PARTICULAR MANNER. THE SE COND IS WITH REGARD TO INTERFERENCE WITH THE DISCRETION OF THE COMMISSIONER (APPEALS) IN EXERCISE OF HIS APPELLATE FUNCTIONS. SUB-SECTION (2) OF SECTION 119 PROVIDES FOR ITA NO.228 OF 2008 ESSAR STEEL LTD. VISAKAPATNAM PAGE 13 OF 14 THE EXERCISE OF POWER IN CERTAIN SPECIAL CASES AND ENABLES THE CENTRAL BOARD OF DIRECT TAXES IF IT CO NSIDERS IT NECESSARY OR EXPEDIENT SO TO DO FOR THE PURPOSE OF PROPER AND EFFICIENT MANAGEMENT OF THE WORK OF ASSESSMENT AND COLLECTION OF REVENUE TO ISSUE GENE RAL OR SPECIAL ORDERS IN RESPECT OF ANY CLASS OF INCOME S OR CLASS OF CASES SETTING FORTH DIRECTIONS OR INSTRUC TIONS AS TO THE GUIDELINES PRINCIPLES OR PROCEDURES TO BE FOLLOWED BY OTHER INCOME-TAX AUTHORITIES IN THE DISCHARGE OF THEIR WORK RELATING TO ASSESSMENT OR INITIATING PROCEEDINGS FOR IMPOSITION OF PENALTIES. THE POWERS OF THE CENTRAL BOARD OF DIRECT TAXES ARE WID E ENOUGH TO ENABLE IT TO GRANT RELAXATION FROM THE PROVISIONS OF SEVERAL SECTIONS ENUMERATED IN CLAUSE (A). SUCH ORDERS MAY BE PUBLISHED IN THE OFFICIAL GAZETT E IN THE PRESCRIBED MANNER IF THE CENTRAL BOARD OF DIRE CT TAXES IS OF THE OPINION THAT IT IS SO NECESSARY. TH E ONLY BAR ON THE EXERCISE OF POWER IS THAT IT IS NOT PREJ UDICIAL TO THE ASSESSEE. WE ARE NOT CONCERNED WITH THE PROVISIONS IN CLAUSES (B) AND (C) IN THE PRESENT AP PEALS. THUS THE CBDT IS EMPOWERED UNDER SECTION 119 OF THE ACT TO ISSUE SUCH ORDERS INSTRUCTIONS AND DIRECTION TO OTHER INCOME TAX AUTHORITIES AS IT MAY DEEM FIT FOR PROPER ADMINISTRATION OF ACT. IN THE INSTANT CASE THE PROVISO FOR WHICH THE CIRCULAR NO.12 (SUPRA) WAS ISSUED H AS NEVER COME INTO OPERATION AND HENCE THE QUESTION OF THE ADMINISTRAT ION OF THE SAID PROVO TO SEC. 92C(2) DOES NOT ARISE AT ALL. IN VIEW OF THE S UBSEQUENT AMENDMENT BROUGHT IN BY FINANCE ACT 2002 THE SAID CIRCULAR HAS BECOME OTIOSE. IN VIEW OF THE ABOVE WE ARE OF THE VIEW THAT THE ASSE SSEE COULD NOT PLACE RELIANCE ON THE CIRCULAR NO.12 AND FOR THE YEAR UND ER CONSIDERATION ONLY THE PROVISO TO SEC. 92C(2) AS AMENDED BY FINANCE A CT 2002 IS APPLICABLE. IN THAT CASE THE SAID PROVISO SHALL APPLY ONLY IF T HE MOST APPROPRIATE METHOD RESULTS IN MORE THAN ONE PRICE IN WHICH CA SE THE ARITHMETICAL MEAN OF SUCH PRICES SHALL BE TAKEN AS THE ALP. HOW EVER THE ASSESSEE SHALL HAVE AN OPTION TO ADOPT A PRICE WHICH MAY VAR Y FROM THE ARITHMETICAL MEAN BY AN AMOUNT NOT EXCEEDING FIVE PERCENT OF SUCH ARITHMETICAL MEAN. ITA NO.228 OF 2008 ESSAR STEEL LTD. VISAKAPATNAM PAGE 14 OF 14 16. IN THE INSTANT CASE ONLY ONE PRICE HAS BEEN DETERMINED UNDER MOST APPROPRIATE METHOD. HENCE IN OUR VIEW THE QUEST ION OF APPLICATION OF THE PROVISO DOES NOT ARISE. ACCORDINGLY WE HOLD T HAT THE ASSESSEE IS NOT ENTITLED TO THE CONCESSION AS PRESCRIBED IN THE PR OVISO TO SEC. 92C(2). ACCORDINGLY WE REVERSE THE ORDER OF LD CIT(A) ON TH IS ISSUE AND RESTORE THE ORDER OF THE ASSESSING OFFICER. 17. IN THE RESULT THE APPEAL OF THE REVENUE IS TREATED AS ALLOWED FOR STATISTICAL PURPOSES. PRONOUNCED IN THE OPEN COURT ON 25/1/2011. SD/- SD/- (SUNIL KUMAR YADAV) (B R BASKARAN) JUDICIAL MEMBER ACCOUNTANT MEMBER PVV/SPS VISAKHAPATNAM DATE: 25/1/2011 COPY TO 1 THE ACIT CIRCLE-3(1) VISAKHAPATNAM 2 M/S ESSAR STEEL LTD. NEAR FLYOVER SCINDIA ROAD VISAKHAPATNAM 3 4. THE CIT 1 VISAKHAPATNAM THE CIT(A)-1 VISAKHAPATNAM 5 THE DR ITAT VISAKHAPATNAM. 6 GUARD FILE. BY ORDER SENIOR PRIVATE SECRETARY INCOME TAX APPELLATE TRIBUNAL VISAKHAPATNAM FIT FOR PUBLICATION (SUNIL KUMAR YADAV) (B R BASKARAN) JUDICIAL MEMBER ACCOUNTANT MEMBER