Ms. Sushma Chowla, Judicial Member - Out of this bunch of appeals, cross appeals filed by the Revenue and assessee are against order of CIT(A)-III, Pune, dated 01.01.2014 relating to assessment year 2008-09 against order passed under section 143(3) of the Income-tax Act, 1961 (in short 'the Act'). The Revenue is also in appeal against the order of CIT(A)-III, Pune, dated 01.01.2014 relating to assessment year 2009-10 against order passed under section 143(3) of the Income-tax Act, 1961 (in short 'the Act').
2. This bunch of appeals relate to the same assessee were heard together and are being disposed of by this consolidated order for the sake of convenience.
3. The Revenue in ITA No.580/PN/2014 has raised the following grounds of appeal:—
| 1. |
|
The order of the Commissioner of Income-tax (Appeals) is contrary to law and to the facts and circumstances of the case. |
2. |
|
On the facts and in the circumstance of the case and in law, the learned Commissioner of Income Tax (Appeals)-IIl, Pune has erred in giving relief of Rs.92,75,656/- by holding that when the assessee exercises the option, only to losses of the year beginning form the initial assessment year are to be brought forward & not the losses of earlier years, ignoring section 80IA(5) which stipulates that for the purpose of deduction u/s 80IA(1), profits & gains of business of the assessee is to be computed as if such eligible business were the only source of income of the assessee during the previous year relevant to the initial assessment year & the subsequent assessment year. |
3. |
|
For these and such other reasons as may be urged at the time of the hearing, the order of the Commissioner of Income-tax (Appeals) may be vacated and that of the Assessing Officer be restored. |
4. |
|
The appellant craves leave to add, amend, alter or delete any of the above grounds of appeal during the course of the appellate proceedings before the ITAT . |
4. The assessee in ITA No.974/PN/2014 has raised the following grounds of appeal:—
| [1] |
|
The learned CIT(A) erred in holding that the asst. order dated 30.12.2011 was valid in law and not barred by limitation. |
[2] |
|
The learned CIT(A) erred in holding that the reference to the Transfer Pricing Officer (TPO) was valid and thereby the time limit for completion of the asst. was 31st December, 2011 and hence, the asst. was not barred by limitation. |
[3] |
|
The learned CIT(A) failed to appreciate that there was no Associated Enterprise of the assessee in this year with whom any international transactions were carried out and accordingly, there was no question of making any reference to the TPO and hence, the asst. order should have been passed by 31st December, 2010 and hence, the said asst. order dated 30.12.2011 is barred by limitation. |
[4] |
|
The learned CIT(A) erred in holding that the learned A.O. was justified in thrusting additional depreciation in respect of new plant and machinery of Rs.23,45,902/- in respect of the EOU unit while computing the deduction u/s 10B. |
[5] |
|
The learned CIT(A) erred in not appreciating that as per the provisions of section 32, the additional depreciation was not mandatory and hence, there was no reason to thrust the said additional depreciation while computing the deduction u/s 10B. |
[6] |
|
The learned CIT(A) erred in holding that the learned A.O. was justified in apportioning a further amount of Rs.3,00,000/- on ad hoc basis in respect of the administrative expenses to the EOU unit without appreciating the correct facts of the case. |
[7] |
|
The learned CIT(A) erred in confirming the disallowance of Rs.1,07,837/-u/s.14A r.w.r. 8D. |
[8] |
|
The appellant craves leave to add, alter, amend or delete any of the above grounds of appeal. |
5. The assessee and the Revenue has filed cross appeals for assessment year 2008-09 and the Revenue is also in appeal in assessment year 2009-10. All the three appeals relating to the same assessee were heard together and are being disposed of by this consolidated order for the sake of convenience.
6. First, we shall take up the appeals filed by the Revenue, wherein in both the appeals, identical issue has been raised by the Revenue against the deduction claimed under section 80IA(5) of the Act in respect of profits from windmill by the assessee by exercising the option of initial assessment year and consequently, the losses beginning from initial assessment year are to be carried forward and not the losses of earlier years which had been adjusted against other income of the assessee.
7. Briefly, the facts relating to the issue are that the assessee in addition to carrying on of its business of manufacturing of Nozzle Shroud Plates in unit No.3, which was 100% EOU and further carrying on the manufacturing activity in non-EOU units, had also declared income from electricity generated from its windmill. The assessee purchased two windmills in financial years 2001-02 and 2002-03. During the year under consideration i.e. assessment year 2008-09, the assessee had claimed deduction under section 80IA(5) of the Act at Rs.92,75,656/-. The Assessing Officer denied the claim of assessee, in view of brought forward losses in the hands of assessee from windmill unit. The Assessing Officer was of the view that the assessee is not entitled to claim the aforesaid deduction in respect of profits from eligible business without adjusting the prior year losses from such eligible business against the current year's income on the ground that prior years losses from the eligible business had already been set off against the income from business and other income. The Assessing Officer denied the deduction claimed by the assessee under section 80IA(5) of the Act on this ground.
8. Before the CIT(A), the claim of assessee was that it had exercised the option of initial assessment year and assessment year 2007-08 was his initial assessment year and the losses arising therefrom had to be carried forward and not the losses of earlier years which have already been adjusted against income from other sources. The CIT(A) in turn, relying on various decisions including the decision of Tribunal in Serum International Ltd. held that the assessee had the option to pick up the initial assessment year and consequently, only the losses from initial assessment year were to be carried forward and the losses of earlier years were not to be adjusted against the current year's income, before claiming the deduction under section 80IA(5) of the Act.
9. We have already adjudicated similar issue vide order of even date in cross appeals in Serum Institute of India v. Addl. CIT [IT Appeal Nos. 1578/PN/2012 and 1618/PN/2012, dated 29-4-2016], relating to assessment year 2008-09, holding as under:—
"26. We have heard the rival contentions and perused the record. The assessee was engaged in the business of trading and dealing in pharmaceuticals. Further, the assessee had set up two windmills for generation of power in assessment year 2002-03. The assessee opted for assessment year 2004-05 as the first year for claim of deduction by exercising the option available under section 80IA(2) of the Act. The Assessing Officer however, denied the deduction claimed under section 80IA(5) of the Act, in view of the option of initial assessment year. The CBDT recently vide Circular No.1/2016, dated 15.02.2016 had clarified the term initial assessment year under section 80IA(5) of the Act. The CBDT has clarified that it is abundantly clear from sub-section 2 of section 80IA of the Act that the assessee has the option to choose the first year. It is also clarified that initial assessment year would mean the first year opted by the assessee for claiming deduction under section 80IA of the Act. The CBDT has also directed the Assessing Officers to allow deduction under section 80IA of the Act in accordance with this clarification. It has also directed that pending litigation on allowability of deduction under section 80IA of the Act shall not be pursued to the extent it relates to interpreting 'initial assessment year' as mentioned in sub-section (5) of section 80IA of the Act. The copy of Circular is placed on record. Further, similar issue of claim of initial assessment year arose before the Tribunal in assessee's own case relating to assessment years 2004-05 to 2006-07 and the Tribunal in ITA Nos.290 to 292/PN/2010, vide order dated 28.09.2011 accepted the plea of assessee and held that the assessee has the option in choosing the initial assessment year i.e. 2004-05 in the instant case and held that only the losses of the year beginning from initial assessment year were to be brought forward and not the losses of earlier year which had already been set off against the other income of assessee. It was further held by the Tribunal that the revenue could not notionally bring forward any loss of earlier years which had already been set off against any other income of the assessee and set off the same against the current income of the eligible business. Applying the said decision in assessee's own case and in view of the Circular of CBDT (supra), we uphold the order of CIT(A) and dismiss the grounds of appeal raised by the Revenue."
10. In view of binding precedent of Pune Bench of Tribunal and in view of recent instructions of CBDT videCircular No.1/2016, dated 15.02.2016, wherein it has been instructed that the Revenue is not to press the appeals against adoption of initial assessment year, we find no merit in the grounds of appeal raised by the Revenue and the same are dismissed.
11. The issue in assessment year 2009-10 in the appeal filed by the Revenue is identical to the issue before us in assessment year 2008-09 and following the same parity of reasoning, we dismiss the grounds of appeal raised by the Revenue in assessment year 2009-10.
12. Now, coming to the appeal filed by the assessee in assessment year 2008-09.
13. The issue which has to be adjudicated vide grounds of appeal Nos.1 to 3 raised by the assessee i.e. the order passed by the Assessing Officer whether valid in law being barred by limitation. The grounds of appeal Nos. 4, 5 and 7 raised by the assessee are not passed and hence, the same are dismissed as not pressed. The issue in ground of appeal No.6 is against ad hoc allocation of administrative expenses to the tune of Rs.3 lakhs to the EOU unit, against which the assessee is in appeal.
14. Briefly, in the facts of the present case, the assessee had furnished return of income on 25.03.2009 declaring total income of Rs.7,54,81,220/-. The Assessing Officer issued first notice under section 143(2) of the Act on 07.09.2009 which was served upon the assessee on 08.09.2009. The case was assigned by the CIT-III, Pune and in view of the provisions of section 129 of the Act, fresh notices under sections 143(2) and 143(1) of the Act were issued on 26.07.2010, in response to which, the assessee attended from time to time and furnished the details as asked for. The Assessing Officer noted that the assessee had claimed deduction under section 10B of the Act at Rs.3,17,85,946/-. The assessee had three units, out of which two units were non-EOU and one unit was 100% EOU. In the EOU unit, the assessee manufactures Nozzle Shroud plates which were exported to Cummins Turbo Technologies, USA. The Assessing Officer further noted that 100% EOU unit was established exclusively to manufacture the plates for export to Cummins Turbo Technologies, USA. The agreement with Cummins Turbo Technologies, USA was filed by the assessee before the Assessing Officer. The assessee's case for assessment year 2008-09 was referred under section 92CA(1) of the Act to the Transfer Pricing Officer (TPO) after obtaining statutory approval of CIT-III, Pune and the order of TPO under section 92CA(3) of the Act was also received, wherein the value of international transaction with regard to arm's length price was not disturbed. The assessee took exception to the reference made to the TPO arguing that it was covered by the provisions of Chapter X of the Act as no associate enterprise was established, hence, it was contended that the assessment for assessment year 2008-09 was barred by limitation. The Assessing Officer noted that during the year under consideration, the assessee had imported items worth Rs.2,06,58,677/- with respect to unit-3 and total export sales to Cummins Turbo Technologies, USA were to the tune of Rs.9,49,62,887/-. Since the transaction exceeded sum of Rs.5 crores as per the Assessing Officer, CBDT Instruction No.3 of 2003, was to be applied and the case was referred to the TPO. The Assessing Officer also noted that the assessee had not filed any Form 3CEB report with respect to international transaction as it contended that it was not attracted by the provisions of Chapter X of the Act. From the submissions made by the assessee before the TPO and during the course of assessment proceedings, the Assessing Officer noted that major part of sales to Cummins Turbo Technologies, USA was Nozzle Shroud Plates although the assessee contends that it exports other articles also to Cummins Turbo Technologies, USA, the sales of Nozzle Shroud Plates was more than 95%. The total export sales of the assessee were to the tune of Rs.49.73 crores, out of which Rs.9.33 crores was to Cummins Turbo Technologies, USA which was about 18.76% of total sales of the assessee. The Assessing Officer further vide para 3.2 of the assessment order observed that the purchase agreement with Cummins Turbo Technologies, USA provided that the price of items exported by the assessee to Cummins Turbo Technologies, USA was regulated by Cummins, in the sense that if any alternative supplier offers the product at a more competitive cost, then the assessee would have 30 days to response to the competitive threat and if it does not meet the new product target or provides redesign suggestions to meet the target, the party, Cummins would have the right to explore new sourcing options. The Assessing Officer was of the view that the assessee falls under the clause (i) and clause (m) of section 92A(2) of the Act and it was concluded that the interaction between the assessee and Cummins Turbo Technologies, USA part take the character of international transaction. Hence the contention of assessee that there is no associate enterprise or deemed associate enterprise within the meaning of section 92A of the Act was held to be incorrect. Before the TPO, the assessee had submitted that it applied Cost Plus Method and TNM method for determining arm's length price and the result is that the transaction with Cummins was at arm's length price since the margins of unit-3 were better than those of unit-1 and unit-2. This contention of the assessee was without prejudice to its contention that there was no associate enterprise and no international transaction to attract transfer pricing provisions. The TPO did not make any variation in the arm's length price vis-à-vis international transaction. The Assessing Officer further relied on the decision of Bangalore Bench of Tribunal in the case of Tally Solutions and decided that there was nothing in section 92CA of the Act that requires the Assessing Officer to first form a considered opinion to make reference to the TPO. The Tribunal further held that it was sufficient for him to form a prima facie opinion that it is necessary and expedient to make a reference and such a reference was a step in the collection of material in passing the assessment order and does not visit the assessee with civil consequences. Accordingly, the Assessing Officer held that the reference to the TPO was valid and assessment order for assessment year 2008-09 was not barred by limitation. The Assessing Officer thereafter, worked out the disallowance under section 80IA(5) of the Act, against which the Revenue is in appeal. We have already adjudicated the said issue.
15. The grievance of the assessee before the CIT(A) was that the order passed by the Assessing Officer on 30.12.2011 was barred by limitation. The CIT(A) forwarded the objections of assessee to the Assessing Officer and sought his comments on the issue of assessment being time barred. The report of the Assessing Officer in this regard, was that the Addl.CIT, Range -6, who was the Assessing Officer at that time had made a reference to CIT-III, Pune vide letter dated 10.12.2010 and it was mentioned that the unit-3 was 100% export oriented unit set up on 13.10.2005 for manufacturing Nozzle Shroud Plates which were to be exported exclusively to Cummins, USA. The total export sales made to the said concern were Rs.9.33 crores. As per the Assessing Officer, Cummins was an associate enterprise and the same was covered under the provisions of clauses (i) and (m) to section 92A(2) of the Act and since total transactions with the associate enterprise exceeded the limits prescribed by CBDT vide Instruction No.3/2003, approval under section 92CA(1) of the Act was sought. The CIT-III, Pune conveyed the approval vide letter dated 13.12.2012. The CIT(A) while disposing of the appeal of assessee noted that the Assessing Officer had satisfied herself that the assessee had entered into an international transaction with its associate enterprise and in this regard, reliance was placed on the ratio laid down by the Hon'ble Delhi High Court in Sony India (P) Ltd. v. CBDT reported in 157 taxmann 125. The CIT(A) thus, was of the view that at the reference stage, a prima facie opinion on the part of Assessing Officer has to be made that it is necessary to make such reference to the TPO and where the Assessing Officer had reached such a prima facie view, on examination of purchase agreement with the associate enterprise in the present case, then the necessary circumstances existed for making such a reference. The second objection of the assessee was with regard to considering Cummins as deemed AE under clause (i) to section 92A(2) of the Act. The CIT(A) in view of section 92A(2)(i) of the Act was of the view that the Legislature had considered any situation where the AE is able to influence the pricing of product sold by the Indian company, then the same would become a deemed AE and transaction between the parties would therefore, become international transaction. The CIT(A) noted that though the exports to Cummins constituted only around 18.76% of the assessee's total turnover and therefore, the assessee did not fall within clause (h) of section 92A(2) of the Act, however, the provisions of clause (i) could be applied as clauses (h) and (i) of section 92A(2) of the Act were mutually exclusively for each other. The CIT(A) noted the contents of agreement and was of the view that under clause 4.7, there was a requirement on the assessee for reducing cost within 30 days of any competitive pricing offer received by Cummins. Therefore, where Cummins had an upper hand so far as the pricing was concerned, then the provisions of clause (i) to section 92A(1) of the Act were attracted. Further, reference was made to the other clauses i.e. clauses 9.1, 11.3, 12.2 and 12.4 and it was held that there were stringent responsibility and requirements from the side of the assessee. Further, reference was made to the order passed by the TPO with regard to value of international transaction, wherein he had made no adjustment to the arm's length price and the very fact that an order under section 92CA(3) of the Act was passed by the TPO stating that the international transaction was at arm's length price establish the fact that Cummins was deemed AE under the provisions of the Act. The objection of the assessee that Cummins could not be deemed AE under clause (m) of section 92A(2) of the Act, was accepted by the CIT(A), however, it was held that the reference was made by the Assessing Officer to the TPO was fully justified and therefore, assessment completed on 30.12.2011 was not barred by limitation.
16. The assessee is in appeal against the finding of CIT(A) and has raised grounds of appeal Nos.1 to 3 in this regard.
17. The learned Authorized Representative for the assessee pointed out that in respect of its EOU unit, the assessee had claimed deduction under section 10B of the Act, wherein it was manufacturing Nozzle Shroud Plates which were part of Turbo chargers, which in turn, were part of diesel engines manufactured by Cummins. The case of the assessee before us was that though the assessee had entered into agreement with Cummins, Cummins, USA was not an AE of the assessee. No declaration in Form No.3CEB was made by the assessee. The learned Authorized Representative for the assessee further contended that if there is no AE, there is no question of any reference to the TPO and assessment had to be completed by 31.12.2010 and not by 30.12.2011. He stressed that the reference made by the Assessing Officer to TPO was incorrect. Our attention was drawn to the correspondence with the TPO in this regard, wherein he had stressed that Cummins was not the AE of assessee. He further pointed out that the TPO had not made any adjustment on account of arm's length price of international transaction and our attention was then drawn to the definition of deemed AE under section 92A(2) of the Act. He pointed out that clauses (h) and (m) to section 92A(1) of the Act have not been applied by the CIT(A) and only recourse is made to clause (i) to the said section. The learned Authorized Representative for the assessee pointed out that DTAA did not recognize the concept of deemed AE. As per Article 9 of DTAA, where Cummins either directly or indirectly does not control the assessee, then it does not fall within the definition of clause (a) to Article 9 and also does not fall within clause (b) i.e. any concern controlling both the assessee and Cummins. Since the DTAA was available between India and USA, the provisions of DTAA would prevail in this regard. The learned Authorized Representative for the assessee placed reliance on the ratio laid down by the Hon'ble Supreme Court in Union of India v. Azadi Bachao Andolan [2003] 263 ITR 706/132 Taxman 373 (SC). Our attention was further drawn to the agreement between the assessee and Cummins. The said agreement was filed during the assessment proceedings. The learned Authorized Representative for the assessee took us to the various clauses of agreement and pointed out that the profit of Rs.3 crores was declared on turnover of Rs.12 crores. He further stressed that even under the Act, there is no concept of deemed AE, where the assessee had right to walk out and also the right to negotiate prices. In this regard, he stressed that the assessment should be considered as time barred.
18. The learned Departmental Representative for the Revenue strongly placed reliance on the order of CIT(A) in this regard.
19. We have heard the rival contentions and perused the record. The definition of associate enterprise is provided in section 92A of the Act, which reads as under:—
'92A. Meaning of associated enterprise.—(1) For the purposes of this section and sections 92, 92B, 92C, 92D, 92E and 92F, "associated enterprise", in relation to another enterprise, means an enterprise—
| (a) |
|
which participates, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise; or |
(b) |
|
in respect of which one or more persons who participate, directly or indirectly, or through one or more intermediaries, in its management or control or capital, are the same persons who participate, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise. |
(2) For the purposes of sub-section (1), two enterprises shall be deemed to be associated enterprises if, at any time during the previous year,--
| (a) |
|
one enterprise holds, directly or indirectly, shares carrying not less than twenty-six per cent of the voting power in the other enterprise; or |
(b) |
|
any person or enterprise holds, directly or indirectly, shares carrying not less than twenty- six per cent of the voting power in each of such enterprises; or |
(c) |
|
a loan advanced by one enterprise to the other enterprise constitutes not less than fifty-one per cent of the book value of the total assets of the other enterprise; or |
(d) |
|
one enterprise guarantees not less than ten per cent of the total borrowings of the other 9 ITA 3749/Mum/14 enterprise; or |
(e) |
|
more than half of the board of directors or members of the governing board, or one or more executive directors or executive members of the governing board of one enterprise, are appointed by the other enterprise; or |
(f) |
|
more than half of the directors or members of the governing board, or one or more of the executive directors or members of the governing board, of each of the two enterprises are appointed by the same person or persons; or |
(g) |
|
the manufacture or processing of goods or articles or business carried out by one enterprise is wholly dependent on the use of know- how, patents, copyrights, trade-marks, licences, franchises or any other business or commercial rights of similar nature, or any data, documentation, drawing or specification relating to any patent, invention, model, design, secret formula or process, of which the other enterprise is the owner or in respect of which the other enterprise has exclusive rights; or |
(h) |
|
ninety per cent or more of the raw materials and consumables required for the manufacture or processing of goods or articles carried out by one enterprise, are supplied by the other enterprise, or by persons specified by the other enterprise, and the prices and other conditions relating to the supply are influenced by such other enterprise; or |
(i) |
|
the goods or articles manufactured or processed by one enterprise, are sold to the other enterprise or to persons specified by the other enterprise, and the prices and other conditions relating thereto are influenced by such other enterprise; or |
(j) |
|
where one enterprise is controlled by an individual, the other enterprise is also controlled by such individual or his relative or jointly by such individual and relative of such individual; or |
(k) |
|
where one enterprise is controlled by a Hindu undivided family, the other enterprise is controlled by a member of such Hindu undivided family or by a relative of a member of such Hindu undivided family or jointly by such member and his relative; or |
(l) |
|
where one enterprise is a firm, association of persons or body of individuals, the other enterprise holds not less than ten per cent interest in such firm, association of persons or body of individuals; or |
(m) |
|
there exists between the two enterprises, any relationship of mutual interest, as may be prescribed.' |
20. Admittedly, the case of the Revenue authorities against the present assessee is that the assessee which had entered into an agreement for the supply of Nozzle Shroud Plates to Cummins and as per the terms of the said agreement, Cummins was the deemed AE of the assessee before us. The conclusion of the authorities below was on account of two factors i.e. first, it was covered by the definition of deemed AE under section 92A(2)(i) of the Act. Further, in view of various clauses of the agreement entered into between the parties, the Assessing Officer and CIT(A) were of the view that where Cummins controlled the prices of items to be purchased by it, then in such circumstances, the case of assessee squarely fell within the definition of deemed AE under clause (i) to section 92A(1) of the Act. The fall out, the assessee having a deemed AE was the reference made to the TPO for determining the arm's length price of international transaction entered into by the assessee and further, as against the year of completion of assessment in the ordinary cases by 31.12.2010, where reference is made to the TPO in respect of determination of arm's length price of international transaction, then the time period for completion of assessment stands extended by one year i.e. by 31.12.2011. The vehement proposition raised by the learned Authorized Representative for the assessee before us is that in the case of assessee, where it had no AE, no reference to the TPO was warranted and the assessment had to be completed by 31.12.2010. However, since the assessment was completed on 30.12.2011, the same was invalid.
21. First, let us look at the relevant provisions of section in this regard for the purpose of Chapter X of the Act. The requirement is that where there is a transaction between two parties, who are associate enterprises in relation to the other, then international transactions have to be computed having regard to the arm's length price. The meaning of associate enterprise is defined by section 92A of the Act, which recognized not only the associate enterprise but also defines the situation where two enterprises shall be deemed to be associate enterprises. Various situations are enlisted under sub-section (2) to section 92A of the Act and for deciding the present issue before us, the relevant clause is clause (i), which provides that where goods or articles manufactured or processed by one enterprise, or sold to the other enterprise and the price and other conditions relating thereto, are influenced by such other enterprises, then the two enterprises are deemed to be associate enterprises. The case of the assessee before us is that the assessee company was a closely held Public Limited Company and the shareholders and its Directors had direct and full control over the management, control and capital of the company. Further, there were no intermediaries in the management, control or capital of the company or business of the company. The assessee company had no third person outside the family members, who were the shareholders or Directors. The shareholders and Directors of the assessee company were not the Directors / Shareholders in any concern, who had any direct or indirect interest in any concern outside India. The assessee further claimed before the TPO that it had not taken any loan from any third party, except the Directors and the shareholders and it had not given any loan to any third parties or any guarantee was taken or given to any party. More than 70% of suppliers of raw materials and consumables were domestic suppliers. The assessee has placed on record the list of shareholders at page 20 of the Paper Book. The TPO while issuing the notice under section 92CA(2) of the Act, had show caused that where the assessee was manufacturing Nozzle Shroud Plates in its unit-3 which was 100% export oriented unit and where the plates were exported exclusively to Cummins and in view thereof, the assessee company and Cummins shall be deemed to be associate enterprises as per the provisions of section 92A(2)(h) and (i) of the Act. It may be clarified herein that though the show cause notice was given in this regard, the CIT(A) has held the assessee and Cummins to be associate enterprises, in view of clause (i) to section 92A(2) of the Act.
22. Now, coming to the provisions of section 92A(1) of the Act, wherein the term associate enterprise is defined i.e. it relates to an enterprise which participates directly or indirectly or through one or more intermediaries in the management or control or capital of the other enterprise. As per clause (b) to section 92A(1) of the Act, where one or more persons, who participates directly or indirectly or through one or more intermediaries in its management or control or capital or the same persons who participate directly or indirectly, or through one or more intermediaries in the management or control or capital of the enterprise. The scope of associate enterprises is enlarged by clause (b), wherein in addition to the one or more persons participating in the management or control or capital of both enterprises and if through one or more intermediaries is also held to be associate enterprises. Clause (2) to section 92A of the Act starts with the Preamble 'for the purpose of sub-section (1)', two enterprises shall be deemed to be associate enterprises, if at any time during the previous year it fulfils the conditions laid down in clauses (a) to (m) to section 92A(2) of the Act. Under section 92A(2) of the Act, it illustrates the situations where two enterprises as envisaged in sub-section (1) can be held to be associate enterprises. In this regard, we find support from the ratio laid down by the Mumbai Bench of Tribunal in Diageo India (P.) Ltd. v. Dy. CIT [2011] 47 SOT 252/13 taxmann.com 62, wherein it was held as under:—
'10. We find that, in terms of the provisions of section 92A(1)(a), the expression 'associated enterprises' refers to an enterprises "which participates, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise". The scope of 'associated enterprises' is expanded further by section 92A(1)(b), taking into account group concerns, and it is provided that 'associated enterprises' covers an enterprise "in respect of which one or more persons who participate, directly or indirectly, or through one or more intermediaries, in its management or control or capital, are the same persons who participate, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise." In effect, thus, when same persons participate, directly or indirectly or through an intermediary, in the management or control or capital of two or more enterprises, such enterprises are required to be treated as 'associated enterprise'. Interestingly, even as definition of 'associated enterprises' has crucial references to 'participation in management or control or capital' at some places, the precise scope of this expression has not been defined under the provisions of the Income-tax Act, and it has not come up for judicial adjudication either. This expression has been used in Article 9(1) of OECD and UN model conventions, but we find no assistance from the OECD and UN commentaries either. All that the OECD commentary says on the scope of this expression is that it refers to "parent and subsidiary companies and companies under common control". The true test of associated enterprise thus is control by one enterprise over the other, or control of two or more associated enterprises by a common interests, and such a control is essentially an effective control in decision making process.
11. In our considered view, therefore, the definition of associated enterprises in section 92A(1)(a) and (b) is, what can be termed as, basic rule. In plain terms, the basic rule is that when one enterprise participates in the control or management or capital of the other enterprise (directly or indirectly or through one or more intermediaries) or when persons participating (directly or indirectly or through one or more intermediaries) in control or management or capital of two or more enterprises are the same, the enterprises are said to be associated enterprise. The expression used in the statute is 'participation in control or management or capital', but essentially all these three ingredients refer to de facto control on decision making. In terms of the basic rule thus, whether one enterprise controls the decision making of the other or whether decisions making of two or more enterprise are controlled by same interests, these enterprises are required to be treated as 'associated enterprise'. Section 92A(2) gives practical illustrations of this kind of a control. All these illustrations deal with simple situations of dealing with two enterprise, as envisaged in section 92A(1)(a), but these are equally good for application in situations involving more than two enterprise, as envisaged in section 92A(1)(b). Section 92A(2)(e), for example, refers to a situation in which "more than half of the directors or members of the governing board, or one or more of the executive directors or members of the governing board, of each of the two enterprises are appointed by the same person or persons" but this deeming fiction is equally applicable when the same person appoints, say, more than half of the directors of the governing board for three or more enterprises. A literal interpretation to this clause will mean that if this relationship is between two enterprises, these two enterprises are required to be treated as 'associated enterprises' but when the same basis extends to more than two enterprises, these enterprises will not be associated enterprises. That is clearly an incongruous result. In our considered view, as all clauses of deeming fictions set out in section 92A(2) are only illustration of the manner in which this de facto control on decision making exists, it is necessary that, while interpreting these deeming fictions, we interpret the same in such a manner as to make them workable rather than redundant (ut res magis valeat quam pereat), and that the same test of effective control on decision making as are implicit in deeming fiction under section 92(A)(2) we also apply to the situations of more than two associated enterprises envisaged in section 92A(1)(b). In this light, let us analyse the situation before us. The manufacture of goods is carried out by the CBU Konkan Agro, which is controlled by the assessee inasmuch as the CBU is wholly dependent on the use of trade-marks in respect of which the assessee has exclusive rights. This relationship meets the test of de facto control on decision making as set out in section 92A(2)(g). The assessee in turn, as evident from information in Form 3CEB, is controlled, by way of equity participation, by Diageo PLC which also similarly controls other entities in the Diageo group, including the entities from which CBU has imported the raw materials. Diageo PLC thus, through the assessee as an intermediary, controls the CBU as also the Diageo group entities from which the CBU has imported raw materials. Clearly, therefore, the assessee, as also the CBU and its Diageo group supplier of raw materials are associated enterprises, and de facto all these enterprises are controlled, directly or indirectly or through intermediaries, by the same person i.e. Diageo PLC. In this view of the matter, as also bearing in mind entirety of the case, the relationship of AEs exist between the assessee, the CBU and Diego group entities from which raw materials were purchased by the CBU. In any case, since the costs of all the raw materials is picked up by the assessee, for all effective purposes, the transaction is actually between the assessee and the Diageo group concerns supplying the raw material to the CBU, and since the assessee as also these vendors are admittedly under the control of Diageo PLC, the transactions are clearly between the associated enterprises. The objection raised by the assessee to the effect that the transactions of imports of raw material by the CBU, i.e. Konkan Agro, from Diageo group entities cannot be treated as international transactions between the associated enterprises, therefore, is rejected.'
23. Where the section itself provides that in order to be associate enterprises, there should be participation, directly or indirectly or through an intermediary, in the management or control or capital of two or more enterprises, as the basic condition to qualify as associate enterprises, then in cases where this situation is not fulfilled, the provisions of Chapter X of the Act are not applicable. Even Article 9 of DTAA between India and USA refers to participation in management or control or capital and where such management, control or capital is missing between two enterprises, they cannot be referred as associate enterprises.
24. Now, coming to the facts of the present case, the assessee is engaged in the manufacture and sale of Nozzle Shroud Plates at unit-3, which is 100% EOU. The assessee is wholly owned closely held Public Limited Company and its shareholders / Directors have not participated in any foreign company by way of management, control or capital, whereas, Cummins, USA is separate entity and have not participated by way of management, control or capital in the running of assessee company through its directors or any subsidiary. The connection between the two is commercial arrangement. The assessee was supplying the Shroud Plates to Cummins, which in turn, were required for one type of Turbo chargers, which was exclusively used in that type of diesel engines. Cummins was manufacturing Turbo chargers required for several types of diesel engines. The total turnover of the assessee for the year was Rs.48.45 crores, out of which export sales to Cummins was Rs.9.34 crores i.e. 19.26% of the total sales. Further, the total material consumed for all the products including Shroud Plates was Rs.24.10 crores and as per the assessee, the corresponding consumption for Cummins products was Rs.2.72 crores. The assessee had entered into a purchase agreement with Cummins for the supply of Shroud Plates in August, 2005. The perusal of terms of the agreement reflects the understanding between the assessee with its purchaser Cummins for the supply of goods within time frame and the pricing of said goods. The pricing has been fixed as per mutual understanding of the parties and further, there was a clause to negotiate the price in the event of any engineering changes. In this regard, the assessee has stressed that in assessment year 2007-08, when there was design change made by Cummins, the additional cost for the same was reimbursed by it by way of one time additional cost settlement. Much emphasis has been laid on clause 4.7 of the said agreement, under which it was agreed upon that the supplier i.e. assessee had to offer goods at competitive market rates and in case an alternate supplier was found, who offers more competitive cost, then the assessee would get 30 days time to respond to the competitive threat and in case, the assessee is unable to meet the competitive threat and then, mutually acceptable phase out would be negotiated between the parties. The aforesaid clause agreed upon between the parties is used by the authorities below to imply that Cummins regulates the price at which the goods have to be sold and hence, it fulfils the conditions of deemed AE as provided in section 92A(2)(i) of the Act. We find no merit in the said stand of revenue authorities, where the understanding between the parties is for the purpose of carrying on the business at competitive rates and where there is an alternate provided in the purchase agreement to determine the cost of goods, the same does not lead to the conclusion that the price is controlled by purchaser. The clause itself provides that the current supplier i.e. the assessee would have 30 days time to respond to competitive threat and if he so responds, then, may be there is no change in the understanding between the parties. In any case, the total exports of the assessee to Cummins constitute 18.76% of the total turnover and the extent of exports cannot be held to influence the price of assessee's goods. The TPO while starting the TP proceedings had observed that the assessee has shown total earning in foreign currency at Rs.9.40 crores, against which the export sales made to Cummins were to the tune of Rs.9.33 crores. However, in view of the entirety of the facts, where the exports to Cummins constitute about 18.76% of the total export turnover, we find no merit in the stand taken by the Revenue authorities.
25. Another aspect to be noted in the present case is that the total turnover of the assessee was Rs.48.45 crores. However, Cummins Turbo Technologies, USA was a subsidiary of Cummins INC, USA, which is a Multinational Fortune 500 Companies, whose turnover of Turbo chargers was close to about Rs.3500 crores. In the entirety of the above said facts and circumstances, we hold that since both the enterprises have not fulfilled the conditions laid down in section 92A(1) of the Act and where there is no connection whatsoever by way of participation in management or control or capital by the entities or its subsidiaries, either directly or indirectly the assessee and Cummins cannot be said to be associate enterprises in order to apply the provisions of Chapter X of the Act. In the absence of assessee having entered into any international transactions with any associate enterprises, there is no requirement for making a reference to the TPO in the present facts of the case. Accordingly, reference made by the Assessing Officer though with the prior permission of CIT-III, Pune is not justified since the assessment to be completed in the hands of assessee was a normal assessment, hence the assessment order should have been passed by 31.12.2010. However, the present assessment order having been passed on 30.12.2011 is barred by limitation and is invalid. Before parting, we would like to clarify herein that admittedly, in case the two concerns satisfy the conditions of section 92A(1) of the Act to be deemed associate enterprises of each other, then on fulfilment of such preliminary conditions, the Assessing Officer has the power on prima facie satisfaction that the international transaction between two such enterprises is required to be benchmarked, can make a reference to the TPO, but the first condition to be satisfied is whether the connection between the two concerns by way of management, control or capital in either of two enterprises makes them associate enterprises. In the absence of such finding, the reference made by the Assessing Officer to the TPO even with prior permission of the concerned CIT would not justify the action of Assessing Officer in this regard. Accordingly, we hold so. Consequently, the addition made in the hands of assessee does not stand. We allow the grounds of appeal Nos.1 to 3 raised by the assessee.
26. The issue in ground of appeal No.6 i.e. apportionment of Rs.3 lakhs out of administrative expenses to the EOU unit does not survive in view of our holding the assessment order passed to be beyond limitation. Accordingly, the grounds of appeal Nos.1 to 3 and 6 are allowed. The grounds of appeal Nos.4, 5 and 7 raised by the assessee are not pressed and hence, the same are dismissed as not pressed. The grounds of appeal raised by the assessee are thus, partly allowed.
27. In the result, appeals of the Revenue are dismissed and the appeal of assessee is partly allowed.