Page 1 of 14 IN THE INCOME TAX APPELLATE TRIBUNAL ... - ITAT

ITA No.228 of 2008 Essar Steel Ltd., Visakapatnam4.1 In the instant case, the impugned provisions pertain to Provision forbad and doubtful debts for Rs.2,82,301/- and Provision for doubtfuladvances for Rs.15,22,298/-. Undisputedly, both the provisions have beenmade for diminution in the value of asset. Hence, as submitted by theLearned Departmental Representative, both the provisions are hit by theretrospective amendment cited above. However, the Ld AR requested thatthis issue may be set aside to the file of the assessing officer, as he has notexamined it as per the amended law. The Learned DepartmentalRepresentative did not object to the plea of the assessee. Accordingly, weset aside the order of the Learned CIT (A) on this issue and restore thesame to the file of the Assessing Officer with a direction to re-examine theimpugned additions in the light of amended law discussed above, afteraffording necessary opportunity of being heard to the assessee.5. Now we shall take up the first issue. It relates to the addition ofRs.1.11 crores made by the A.O u/s 92CA(4) of the Act in respect ofinternational transactions relating to the sales made to the AE. The factsrelating to this issue are stated in brief. During the year underconsideration the assessee company sold iron ore pellets to M/s STEMCOR(S.E.A) PTE Ltd, Singapore in pursuance of the agreement dated 12-06-2003 entered with that company. M/s STEMCOR is an AssociatedEnterprise. The assessee admitted sales amount at Rs.66,08,35,225/- inrespect of the said sale transactions. The assessee had also sold similaritems to “Non Associated Enterprises” (NAE) located in Hong Kong andSwitzerland. The A.O referred the matter to Transfer Pricing Officer (TPO)Hyderabad for determination of Arm’s Length Price (ALP) in respect ofthese sales transactions.5.1 Sec. 92C of the Act, read with the rules made there under,prescribes various methods for determination of ALP. The mostappropriate method of determination of ALP is selected from amongst suchmethods so prescribed in the Act and Rules. In the instant case, both thePage 3 of 14

ITA No.228 of 2008 Essar Steel Ltd., Visakapatnamparties have adopted “Comparable uncontrolled price method” (called CUPmethod) for determination of ALP.5.2 The TPO, vide his order dated 21-12-2006, determined the ALP atRs.67.20 crores by comparing the ratio of “Net Profit/Cost” in thetransactions entered with AE and NAE. The NP/Cost ratio was 12.35% inrespect of AE, while it was 14.04% in respect of NAE. Thus there was ashortage of 1.69% in respect of transaction entered with AE vis-à-vis NAE.Before the TPO, the assessee contended that the sale price declared by theassessee need not be disturbed, as the variation between in transactionswith AE and NAE was less than 5%. In this regard, the assessee placedreliance on the Circular No.12 dated 23.8.2001 issued by CBDT which, interalia, stated as under:“that the AO shall not make any adjustment to the ALPdetermined by the tax payer, if such price is up to 5% less or5% more than the price determined by the AO. In such case,the price declared may be accepted.”However, the TPO rejected the said contentions of the assessee with thefollowing observations:“For application of this provision, there should bemore than one price (or comparable prices) then theArithmetical mean of such prices is required to betaken. After that, a price which may vary from theArithmetical mean by an amount not exceeding 5% of suchArithmetical mean shall be taken as ALP. In this case, suchsituation does not arise. First of all, there is only one pricei.e. internal comparison with all similar conditions.Comparisons of margins of domestic segment was notpreferred by the tax payer. But they requested to comparewith the net margins on exports to unrelated parties……In view of the amendment to this proviso which wassubstituted by Finance Acct 2002, with effect from 1.4.2002,and subsequent to the CBDT’s Circular dt. 23.8.2001,referred the content of the provision will prevail over thecontent of the Circular dt.23.8.2001. Accordingly, the ALP isdetermined as under..Page 4 of 14

ITA No.228 of 2008 Essar Steel Ltd., VisakapatnamAccordingly the TPO determined the ALP on the impugned sales by adding1.69%, which has resulted in the increase of sales amount byRs.1,11,68,115/-. As stated earlier, the said difference was added by theAssessing Officer.6. Before the learned CIT (A), the assessee reiterated its reliance oncircular No.12 dated 23-8-2001 issued by CBDT referred supra andaccordingly contended that no adjustment is required to be made to thesales value declared by it, as the difference between the said amount andthe ALP determined by the TPO is less than 5%. The learned CIT (A)agreed with the contentions of the assessee and accordingly deleted theimpugned addition of Rs.1.11 crores. The observations of the learned CIT(A) are extracted below:“As per the copy of the auditor’s report u/s 92E in FormNo.3CEB filed along with the return of income, it is noted thatthe appellant company adopted CUP method as the prices ofthe product that was manufactured by the appellant companywere not stable and kept on changing with the internationalmarket. The TPO also while determining the ALP accepted theCUP method adopted by the appellant company. Therefore,there was only one price. In this context, reliance was placedupon the Circular No.12 of CBDT dated 23/08/2001 wherein itwas stated that where the price determined by the appellant iswithin the range of +/ - 5% of the price determined by theTPO no adjustment to the ALP should be made. The TPOrejected the said contention in view of the amendmentbrought about to the proviso to section 92C(2) whichaccording to the Assessing Officer overrides theCircular dated 23/08/2001. However, this view of theTPO prima facie appears to be incorrect. Vide circularNo.8of 2002 dated 27/08/2002, the explanatory notes on provisionsrelating to direct taxes introduced by Finance Act, 2002 weregiven. The said circular clearly states that the proviso tosection 92C(2) as amended applies only when theappropriate method results in more than one price. Thisis clear from Para 50.4.1 of the said circular which isreproduced as under;“With a view to allow a degree of flexibility in adopting anarm’s length price, the Finance Act, 2002 has amended theproviso to sub-section (2)of Section 92C to provide that wherethe most appropriate method result in more than one price, aPage 5 of 14

ITA No.228 of 2008 Essar Steel Ltd., Visakapatnamprice which differs from the arithmetical mean by an amountnot exceeding five per cent of such mean may be taken to bethe arm’s length price, at the option of the assessee”.In the case of the appellant there was only one pricedetermined under the CUP method which was also accepted bythe TPO vide his order dated 21/12/2006 as the mostappropriate price. The TPO has not determined any other priceby following any other method. Under these circumstances,the directions issued vide Circular No.12 of CBDT dated23/08/2001 squarely applies. In the said Circular, it has beenclearly stated as under:“The Assessing Officer shall not make any adjustment to thearm’s length price determined by the taxpayer, if such price isunto 5% less or unto 5%more than the price determined bythe Assessing Officer. In such cases the price declared by thetaxpayer may be accepted”.In the case of the appellant, the difference works out to only1.6% which is within the permissible range of + /- 5% asprescribed by the CBDT. Hence, such difference should beignored and there was no need to determine the ALP of saleprice by adopting the said difference of 1.6%. Hence theaddition made on this account of Rs. 1,11,68,115/- was notwarranted and the same is hereby deleted. This ground ofappeal is allowed.”Thus, it can be seen that the Learned CIT(A) agreed with the view of theTPO that the amended proviso to sec. 92C(2), which gives concession of5%, shall apply only if more than one price is determined. However, he didnot accept with the view of the TPO that the amended proviso shall override the Circular No.12 dated 23-8-2001 issued by the CBDT. Accordingly,the Learned CIT(A) decided the issue in favour of the assessee by placingfull reliance on the Circular No.12 of CBDT cited above.7. The learned Departmental Representative endorsed the views of theTPO and submitted that the concession given by the CBDT in its Circularno.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 saidcircular can no longer have application after the said amendment.According to the amended proviso, the concession of 5% shall be availablePage 6 of 14

ITA No.228 of 2008 Essar Steel Ltd., Visakapatnamonly if arithmetical mean is required to be taken in view of determination ofmore than one price under most appropriate method. In the instant case,since the TPO has worked out only one price, the question of allowingconcession does not arise. In this regard, the learned DR relied upon thefollowing case law:a) Perot Systems TSI (India) Ltd. Vs. D.C.I.T (130 TTJ 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 theCircular No.12 issued by CBDT (supra), and submitted that the CBDT hasconsidered the practical situation while implementing the new provisions ininitial years, since there may be room for different interpretations inimplementing the new legislation and accordingly granted concession of+/- 5%. The learned AR also submitted that there is an arithmetical errorin computation of arm’s length price by the TPO.9. We have heard the rival contentions and carefully perused therecord. On a careful consideration of the facts relating to the issues, theorders of TPO and CIT(A) and the rival contentions, we notice that thefollowing issue actually emerges out:“Whether the Circular No.12 dated 23.8.2001 issued by the CBDT willhave application for the year under consideration over the proviso tosec. 92C(2), as amended by the Finance Act 2002.”While the assessee places reliance on the said circular, the revenue iscontesting that the proviso shall have application. There appears to be nodispute with regard to the fact that the amended proviso to sec. 92C(2)shall have application only if more than one price is determined by themost appropriate method.10. For the sake of convenience, we extract below the sub Sec. 1 and 2of sec. 92C along with the proviso:Page 7 of 14

ITA No.228 of 2008 Essar Steel Ltd., Visakapatnam“(1) The arm’s length price in relation to an international transactionshall be determined by any one of the following methods, beingthe most appropriate method having regard to the nature oftransaction or class of transaction or class of associated persons orfunctions performed by such persons or such other relevant factorsas 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 Arm’s Length price, in themanner as may be prescribed.Provided that where more than one price is determined by themost appropriate method, the Arm’s Length price shall be takento be the arithmetical mean of such prices, or, at the option of theassessee, a price which may vary from the arithmetical mean by anamount not exceeding five percent of such arithmetical mean”.The CBDT has prescribed the Rule10B to 10E in this regard. Rule 10Bprescribes the methodology to be adopted for determination of arm’slength price and Rule 10C defines “Most appropriate method” and thefactors to be taken into account for that purpose.11. On a careful reading of both the sub-sections cited above, followingpoints emerge out:-(a) The ALP shall be determined by any of the methods prescribedu/s 92C(1).(b) As per Rule 10C(1), the most appropriate method shall be themethod which is best suited to the facts and circumstances ofeach particular international transaction, and which provides themost reliable measure of an arm’s length price in relation to theinternational transaction.(c) The “Most appropriate method” shall be selected having regardto the nature of transaction or class of transaction or class ofassociated persons or functions performed by such persons orsuch other relevant factors as the Board may prescribe. Thevarious factors have been prescribed under Rule 10C(2).Page 8 of 14

ITA No.228 of 2008 Essar Steel Ltd., Visakapatnam(d) The most appropriate method so selected shall be applied fordetermination of ALP.(e) However, if more than one price is determined by the mostappropriate method then the ALP shall be(i) taken to be the arithmetic mean of such pricesor(ii) at the option of the assessee, a price which may vary fromthe arithmetical mean by an amount not exceeding five percent of such arithmetical mean.12. The assessee places reliance on the circular no.12 dated 23.8.2001issued by CBDT explaining the provisions governing transfer price in aninternational transaction, as amended by Finance Act 2001. For the sake ofconvenience, we extract below the relevant portions of the circular:“The Finance Act, 2001 has substituted the existingsection 92 of the Income tax Act by new sections 92 and92A to 92F. These new provisions lay down that incomearising from an international transaction between associatedenterprises shall be computed having regard to the arm’slength price. The term ‘associated enterprise’ has beendefined in section 92A. Section 92B defines an ‘internationaltransaction’ between two or more associated enterprises.The provisions contained in section 92C provide for methodsto determine the arm’s length price in relation to theinternational transaction, and the most appropriate methodto be followed out of the specified methods….However, this is a new legislation. In the initial years of itsimplementation, there may be room for differentinterpretations leading to uncertainties with regard todetermination of arm’s length price of an internationaltransaction. While it would be necessary to protect our taxbase, there is a need to ensure that the taxpayers are notput to avoidable hardship in the implementation of theseregulations.In this background the Board have decided the following:(i)The Assessing Officer shall not make any adjustmentto the arm’s length price determined by the taxpayer,if such price is unto 5% less or unto 5% more thanthe price determined by the Assessing Officer. In suchPage 9 of 14

ITA No.228 of 2008 Essar Steel Ltd., Visakapatnamcases the price declared by the taxpayer may beaccepted.(ii)The provisions of sections 92 and 92A to 92F comeinto force with effect from 1 st April, 2002 and areaccordingly applicable to assessment year2002-03 and subsequent years….”Thus it can be seen that the Finance Act 2001 has inserted new sections92 and 92A to 92F in the place of old section 92. The above said circularhas been issued in order to explain the amendments so made by theFinance Act 2001, which were made applicable from the assessment year2002-03 onwards.13. The proviso to section 92C(2), which was inserted by the FinanceAct, 2001 with effect from 1.4.2002 (i.e. assessment year 2002-03onwards) reads as under:“Provided that where more than one price may bedetermined by the most appropriate method, the arm’slength price shall be taken to be the arithmetical mean ofsuch 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 provisions. The relevantparagraph dealing with the proviso cited above reads as under:“Applying the most appropriate method to different sets ofcomparable data can possibly result in computation of morethan one arm’s length price. With a view to avoidunnecessary disputes, the proviso to section 92C(2) providesthat in such a case the arithmetic mean of the prices shall beadopted as the arm’s length price. In the normal course, ifthe different sets of comparable data are equally reliablethere may not be any significant divergence between thevarious arm’s length prices determined.”Thus it can be seen that under the proviso to sec. 92C(2) as inserted bythe Finance Act, 2001, only arithmetical mean of the prices has to be takenand the statute did not provide for any concession. Hence, considering thepractical difficulties, it appears that the CBDT has issued circular no.12dated 23.8.2001, which was relied upon by the assessee, in order to givePage 10 of 14

ITA No.228 of 2008 Essar Steel Ltd., Visakapatnamconcession of +/- 5%. Though the CBDT has explained the amendmentsbrought out by Finance Act, 2001 in a subsequent circular no. 14 dated12.12.2001, yet it did not prefer to refer there in, its previous circularNo.12 dated 23.8.2001.14 However, it is pertinent to note that the Finance Act, 2002 hasamended 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 assessmentyear 2002-03 onwards. The amended proviso which is applicable fromassessment year 2002-03 reads as under.“Provided that where more than one price isdetermined by the most appropriate method, theArm’s Length price shall be taken to be the arithmeticalmean of such prices, or, at the option of the assessee, aprice which may vary from the arithmetical mean by anamount not exceeding five percent of such arithmeticalmean”.The CBDT has explained the said amendment in its Circular No.8/2002dated 27.8.2002 (2002) (258 ITR (St.) 13) as under:“Under the existing provisions contained in the proviso tosub-section (2) of section 92C of the Income tax Act, if theapplication of the most appropriate method leads todetermination of more than one price, the arithmetical meanof such prices shall be taken to be the arm’s length price inrelation to the international transaction.With a view to allow a degree of flexibility in adopting anarm’s length price, the Finance Act, 2002, has amended theproviso to sub-section (2) of section 92C to provide thatwhere the most appropriate method results in more thanone price, a price which differs from the arithmetical meanby an amount not exceeding five per cent of such mean maybe taken to be the arm’s length price, at the option of theassessee.”15. It is interesting to note that the Finance Act 2001 has originallyinserted sec. 92C along with the impugned proviso with effect from1.4.2002, i.e. assessment year 2002-03 onwards. However the Finance Act2002 amended the proviso so inserted by Finance Act 2001 and thePage 11 of 14

ITA No.228 of 2008 Essar Steel Ltd., Visakapatnamamended proviso was also made applicable from 1.4.2002, i.e assessmentyear 2002-03 onwards, meaning there by, the proviso, which was insertedby the Finance Act 2001, never came into operation. It can be noticed thatthe Circular No.12 of 2001 was issued only to explain the amendmentsmade by the Finance Act 2001, which never came into operation.16. Now the question that arises is whether an assessee could place hisreliance on a circular issued for explaining certain provisions, which nevercame into operation. The CBDT derives its power to issue the circularsfrom sec. 119 of the Act. The observations made by Hon'ble SupremeCourt in this regard in the case of Union of India Vs. Azadi Bachao Andolan(2003) (263 ITR 706 (S.C)) has been judicially noticed in the case of thedecision of Hon'ble jurisdictional A.P. High Court’s decision in the case ofCIT Vs. Raajendra Prasad (299 ITR 227 (AP)) as under:“Reliance has also been placed by Mr. Swamy on the judgmentreported in Union of India v. Azadi Bachao Andolan [2003] 263ITR 706 (SC). While dealing with the powers of the Central Boardof Direct Taxes, the Supreme Court, in this judgment, consideredthe effect of circular under section 119 of the Act and was of theview (page 727):“Section 119, strategically placed in Chapter XIII whichdeals with “income-tax authorities” is an enabling powerof the Central Board of Direct Taxes, which isrecognised as an authority under the Income tax Actunder section 116(a). The Central Board of Direct Taxesunder this section is empowered to issue such orders,instructions and directions to other income-taxauthorities ‘as it may deem fit for properadministration of this Act’. Such authorities and allother persons employed in the execution of this Act arebound to observe and follow such orders, instructionsand directions of the Central Board of Direct Taxes. Theproviso to sub-section (1) of section 119 recognises twoexceptions to this power. The first, that the CentralBoard of Direct Taxes cannot require any income-taxauthority to make a particular assessment or to disposeof a particular case in a particular manner. The secondis with regard to interference with the discretion of theCommissioner (Appeals) in exercise of his appellatefunctions. Sub-section (2) of section 119 provides forPage 12 of 14

ITA No.228 of 2008 Essar Steel Ltd., Visakapatnamthe exercise of power in certain special cases andenables the Central Board of Direct Taxes, if it considersit necessary or expedient so to do for the purpose ofproper and efficient management of the work ofassessment and collection of revenue, to issue generalor special orders in respect of any class of incomes orclass of cases, setting forth directions or instructions asto the guidelines, principles or procedures to befollowed by other income-tax authorities in thedischarge of their work relating to assessment orinitiating proceedings for imposition of penalties. Thepowers of the Central Board of Direct Taxes are wideenough to enable it to grant relaxation from theprovisions of several sections enumerated in clause (a).Such orders may be published in the Official Gazette inthe prescribed manner, if the Central Board of DirectTaxes is of the opinion that it is so necessary. The onlybar on the exercise of power is that it is not prejudicialto the assessee. We are not concerned with theprovisions in clauses (b) and (c) in the present appeals.”Thus the CBDT is empowered under section 119 of the Act to issue suchorders, instructions and direction to other income tax authorities, as it maydeem fit for proper administration of Act. In the instant case, the proviso,for which the Circular no.12, (Supra) was issued, has never come intooperation and hence the question of the administration of the said provo tosec. 92C(2) does not arise at all. In view of the subsequent amendmentbrought in by Finance Act, 2002, the said circular has become otiose. Inview of the above, we are of the view that the assessee could not placereliance on the Circular no.12 and for the year under consideration, onlythe proviso to sec. 92C(2), as amended by Finance Act 2002 is applicable.In that case, the said proviso shall apply only if the “most appropriatemethod” results in more than one price, in which case the arithmeticalmean of such prices shall be taken as the ALP. However, the assesseeshall have an option to adopt a price which may vary from the arithmeticalmean by an amount not exceeding five percent of such arithmeticalmean.Page 13 of 14

ITA No.228 of 2008 Essar Steel Ltd., Visakapatnam16. In the instant case, only one price has been determined under “Mostappropriate method”. Hence, in our view, the question of application ofthe proviso does not arise. Accordingly, we hold that the assessee is notentitled to the concession, as prescribed in the proviso to sec. 92C(2).Accordingly we reverse the order of Ld CIT(A) on this issue and restore theorder of the assessing officer.17. In the result, the appeal of the revenue is treated as allowed forstatistical purposes.Pronounced in the open Court on 25/1/2011.Sd/-(SUNIL KUMAR YADAV)Judicial MemberSd/-(B R BASKARAN)Accountant MemberPVV/SPSVisakhapatnam,Date: 25/1/2011Copy to1 The ACIT Circle-3(1) Visakhapatnam2 M/s Essar Steel Ltd., Near Flyover, Scindia Road, Visakhapatnam3 The CIT –1, Visakhapatnam4. The CIT(A)-1, Visakhapatnam5 The DR, ITAT, Visakhapatnam.6 Guard file.By OrderSenior Private SecretaryINCOME TAX APPELLATE TRIBUNALVISAKHAPATNAMFIT FOR PUBLICATION(SUNIL KUMAR YADAV)Judicial Member(B R BASKARAN)Accountant MemberPage 14 of 14