IT (TP) APPEAL NO. 163 (BANG.) OF 2015
[ASSESSMENT YEAR 2010-11]

VIJAY PAL RAO, JUDICIAL MEMBER 
AND INTURI RAMA RAO, ACCOUNTANT MEMBER

Padamchand Khincha, CA for the Appellant. 
Ms. Neera Malhotra, CIT (DR) for the Respondent.

ORDER

Inturi Rama Rao, Accountant Member - This is an appeal filed by the assessee directed against the assessment order passed under section 143(3) r.w.s. 144C of the Income-tax Act, 1961 [the Act' for short] dated 05/01/2015 for the assessment year 2010-11.

2. Briefly, facts of the case are that the assessee is a company incorporated under the provisions of the Companies Act, 1956. It is engaged in the business of manufacture and sale of ready-made garments. The assessee-company is a licensee of the brand-name 'Jockey' for the exclusive and marketing of Jockey readymade garments under license agreement with Jockey International Inc, USA ['JII'], a company incorporated in USA and the owner of the brand Jockey. In consideration for granting the right to use brand-name, the assessee-company paid consideration in the form of royalty at the rate of 5% of the sales. Return of income for the assessment year 2010-11 was filed on 5/10/2005 declaring income of Rs.55,25,65,514/-. After processing the said return of income under the provisions of sec.143(1) of the Act, the case was taken up for scrutiny assessment by issuing notice under section 143(2) of the Act. During the course of assessment proceedings, the Assessing Officer [AO] found that the assessee-company returned the following international transactions in Form 3CEB:

	Name of the Associated Enterprise	Nature of International Transaction	Paid/payable
	Jockey International Inc. Kenosha, USA	Royalty@ 5% of entire sales	1,67,829,024

During the previous year relevant to assessment year under consideration, the assessee-company paid royalty of Rs.6,78,29,024/- to JII towards royalty. The assessee-company sought to justify the consideration paid for international transactions entered with JII to be at arm's length. The assessee-company submitted transfer pricing study and the rate of royalty is 5% which is within the prescribed limit as prescribed by the RBI.

3. The AO referred the matter to the Transfer Pricing Officer [TPO]. The TPO by order dated 30/01/2014 passed under section 92CA(3) of the Act computed transfer pricing adjustment of Rs.20,20,07,861/-. While doing so, the TPO has treated expenditure incurred on advertisement and marketing and product promotion is an international transaction and attempted to determine the ALP by applying Bright Line Method. Accordingly, the TPO considered comparables chosen by the assessee-company itself and arrived at the arithmetical mean 4.21% of the expenditure as under:
5.2 The calculation is made as follows-

In Crores

	Sr No (a)	Name of the Company (b)	Safes (c)	Royalty	Advertisement (e)	Total (f)	Percentage of (g)=(f)/© × 100
	1	Lovable Lingerie Ltd	104.03	00.00	01.49	0149	1.33
	2	LUX Industries Ltd	333.94	00.05	16.79	16.84	5.04
	3	Maxwell Industries Ltd	211.39	00.00	05.68	05.68	2.68
	4	Rupa & Co Ltd	519.93	00.00	40.64	40.64	7.81
		Arithmetic mean					4.21

Thereafter, computed the adjustment as under:

"6. Therefore adjustment to be made is calculated as given below:

	1.	Royalty paid by the Taxpayer Company to its AE	Royalty paid @4.95% of sales	Rs.16,78,29,024/-
	2.	Expenditure on Advertisement incurred by the Taxpayer company as directed by the AE	Advertisement Expenditure @ 5.20% of sales	Rs.17,63,62,415/-
	3.		Total Expenditure on Royalty and Advertisement	Rs.34,41,91,439/-
	4.	Arm's Length Margin (ALP) computed in para 5.1 above	4.21%
	5	Therefore ALP of International Transactions	4.21% of Rs.3,377,282,116	Rs.142,183,577

7,0 Therefore, Arm's Length Price in accordance to the provisions of Section 92CA(3) of the Act is determined at Rs 142,183477. Since Jockey international Inc USA has neither incurred expenditure on its own account nor it has compensated the Taxpayer Company towards the advertisement expenditure incurred at the instance of the AE, out of international transactions towards royalty and advertisement amount 202007,861 is considered as excessive and proposed to be added to the total income of the Taxpayer Company.

8.0 Therefore, the Arm's Length Price in accordance with the provisions of Section 92CA(3) of the Act is determined at Rs 142,183,477/-.

And the resultant adjustment u/s 92CA(3) of the IT Act is Rs.20,20,07,861/-."
4. Pursuant to the TPO's order, draft assessment order was passed by the AO wherein the following disallowances were proposed:

i.	Adjustment on account of transfer pricing Rs.20,20,07,861/-
ii.	Disallowance under section 14A read with rule 8D(2)(iii) of Rs.20,51,175/-
iii.	Disallowance of Rs.74,08,961/- under the provisions of sec.80JJAA of the Act.

5. Being aggrieved by the draft assessment order, the assessee-company filed objections before the Dispute Resolution Panel [DRP] contesting all the additions. It was contended by the assessee-company before the DRP inter alia that the said transactions do not constitute international transaction as the assessee-company and JII do not constitute Associated Enterprise (AE). It is submitted that the conditions specified u/s 92A(1) of the Act are not existing between the assessee-company and JII. In the absence of relationship of assessee-company between two companies, the transaction does not constitute international transaction within the meaning of sec.92B of the Act. It was further contended that in any event, transaction of payment of royalty is at arm's length as the rate of royalty is less than the rate prescribed by the RBI and also disputed it was international transaction. The objections have been turned down by the DRP as under:

"5.5 The argument of the taxpayer is that it has not actually incurred the said expenditure and that the stipulated terms in the agreement are therefore only academic in nature. Assessee has filed a letter from Jockey International to substantiate its claim that the terms of the agreement have not been strictly enforced. From a reaching of the order of the TPO and the submissions of the taxpayer, we find force in the reasoning given in the order of the TPO in coming to the conclusion that the terms and conditions in the License Agreement entered With jockey Inc. clearly indicates that there exists a prior agreement between the two entities in the nature of certain specific terms in the agreement to convince the Panel that the transactions with Jockey Inc are in the nature of deemed international transactions. The provisions of subsection 2 of section 92B are clearly attracted and the TPO has rightly invoked the same in the case of the taxpayer. We have no hesitation in upholding the stand of the TPO in solar as invoking the deeming provisions of section 92B(2) of the Act. It is immaterial at this juncture to go into the facts as to whether these terms were actually met or not by the respective parties. It would suffice to say that prior agreement exists between the two parties and that the conditions for the application of sec 92B(2) of the Act are therefore satisfied to conclude that the two entities are deemed AEs and the transactions between them are consequently international transactions."

5.1 In computing ALP, the DRP held as follows:

"7.1 The TPO has adopted the CUP method to determine the ALP of the international transaction. This is discussed in para 5.1 of the TP order. The TPO has used the bright 1111C method to determine the arm's length price of advertisement, marketing and promotion expense. Having determined the ALP using the Bright, line method, the TPO has used the CUP method to analyse and compare the cost of the AMP expenditure of the taxpayer with that of the comparables selected by the taxpayer, itself. This method of analysis has been upheld by the Chennai bench of ITAT in the case of Asendas and by the Bangalore bench in the case of Tally Solutions. In these cases, the Hon Benches of Tribunal had occasion to conclude that the TPO was correct in determining the price or the value of the international transaction using a stand ard and acceptable method and then selecting the most appropriate method prescribed under the Act for the purpose of comparison of such ALPs. We therefore find no infirmity in the methodology followed by the TPO. The submission of the taxpayer that the TPO has used cost plus method is examined and found that it is only a typographical error.

Ground No 4: Clubbing of royalty with the advertising and marketing expenditure.

The next objection of the taxpayer is the clubbing of royalty with the advertising and marketing expenditure. The TPO's reasoning in the 'IV order is that payment of royalty is intrinsically linked with the marketing expenses as per the contents of the licence Agreement. There is no dispute that the brand JOCKEY and its logo are the advertising tools for the taxpayer. It is also a fact that the taxpayer, Page Industries Ltd is the exclusive licensee of Jockey International Inc USA. It is engaged in the business of manufacturing and distribution of the Jockey brand innerwear/leisure wear for men and women in lndia/Sri Lanka, and Maldives.

7.3 As per the admission of the taxpayer itself in the 'IT document, on page 4, in early 1990s when globalization was unfolding in India, inner wear was a low involvement category for consumers. There was no organized inner wear brand in India. Page Industries Ltd identified this need and introduced a wide range of quality products for men and women employing modern global marketing and distribution methods. The company commenced operations in 1995 with the manufacturing, distribution, and marketing of jockey products. The taxpayer was also awarded the best 'licensee of the year' by Jockey International Inc., as recognition of its outstanding achievement in establishing and strengthening the Jockey brand as a market leader in India In the year 2005 and 2009. In 2010, it received 'International Licensee of the decade' award for achieving record growth year after year, offering world class products and maintaining global quality standard across all operations. As per the license agreements with the brand owner, Ms Jockey International Inc, USA and M/s Page Industries Ltd, the licensee is entitled to manufacture licensed products arid distribute market, promote, retail the licensed products carrying jockey label. For' this purpose jockey Inc., the brand owner has undertaken to provide manufacturing knowhow, merchandising and market knowhow. Under the terms of license agreements licensee is liable to pay a royalty of 5% on revenue according to the method of calculation given in the License Agreement.

7.4 It becomes clear from a further reading of the terms of the License Agreement that the licensee or the taxpayer is expected to undertake certain amount of advertisement and promotion expenditure. The relevant portion of the TPO's order is reproduced below:

The License agreement has stipulated a minimum of 40% on this kind of expense. In page 29 in para 18(b), the Licensee agrees to expend within each license year for advertising and promotion, not less than the Minimum Advertising Expenditure. Licensee shall regard such expenditure as part of the normal cost of doing business not deductible from any money owning to Jockey. It is also mentioned in paragraph 18 (c), the Licensee acknowledges that brand and image advertisement programs may be developed by or for Jockey. Upon request from Jockey, and upon mutual agreement by both parties, Licensee agrees to pay an amount equal to 40 percent of the Minimum Advertisement Expenditure directly to Jockey to support such brand and image advertising, marketing and promotional activity. Such payments shall be paid by the licensee to Jockey within 30 days after the end of each license quarter. Said amount shall be credited against Licensee's Minimum Advertising Expenditures. In para 18(e) it is mentioned that all artwork and designs involving the Jockey Mark or any reproduction thereof shall, not withstanding their creation or use by the Licensee be and remain the property of Jockey and Jockey shall be entitled to use the same and to license the use of the same to others. The Agreement started on January 1, 2005 and expires on December 31,2009. S per term S8 of the schedule to the agreement the target of minimum sales have been fixed for each year. For instance, for the period January 1, 2009 to December 31, 2009 the target sales of licensed product have been fixed at fixed at Rs 821 Millions. If the target sales are not met, Licensee will pay to Jockey within 30 days after completion of second and fourth quarters of each License Year, the difference between Royalties paid and Target Sales for the previous two quarters.

3.1.4 Therefore, I am of the view that the Taxpayer should have also included in 3CEB expenditure which the Taxpayer Company has incurred on Advertisement and Sales Promotion also.

7.5 It is amply clear from the terms of the agreement that the conditions prescribed that Page Industries is expected to market the Jockey Brand for which royalty is paid by it for the use of brand name and trademark of JOCKEY to Jockey Inc., which is the legal owner of the brand and the logo. During the year there is a payment of royalty by the Taxpayer for Rs 16,78,29,024/- to Jockey International Inc. Considering the terms and conditions of the License Agreement, this Panel finds force in the argument of the TPO that Page Industries is paying royalty for use of brand name and trademark of jockey which is in fact beneficial to Jockey Inc and not to the taxpayer. This is also evident from the bill boards and advertisements put up at retail stores where only Jockey name and its logo are used with the black background and no trace of Page Industries visible anywhere on the Board. The marketing strategy and the expenditure of the taxpayer involve activities relating to advertising and marketing the brandname, trademark along with the products of JOCKEY. The fact that Page Industries has been awarded "The Best Licensee of the year for 2005 and 2009 in recognition of its outstanding achievement in establishing and strengthening the Jockey brand as a market leader in India, bears testimony to the stand taken by the TPO that the AMP expenditure of the taxpayer includes brand development expenditure. The TPO, therefore has used the 13right Line method to arrive at the average reasonable rate of advertisement and marketing (AMP) expenditure comparable companies engaged in similar businesses have spent during the year. The TPO has used the same comparables that the assessee has used to arrive at the same. Since royalty is part of the brand building expenditure, we find no infirmity In the TPO clubbing the royalty paid with the AMP expenditure for the purposes of benchmarking. The TPO has taken the support of Tribunal decision of Chennai Bench of ITAT rendered in the case of Ascendas (India) Private Limited, to support the adoption of the Bright Line method for arriving at the value of the AMP expense reasonably expected to be spent by comparable companies. In the case of Ascendas, the Hon Tribunal has upheld the use of a method (the discounted cash flow method) not prescribed in the Act but widely followed internationally to ascertain the value of an asset. The methodology used to arrive at the market value of the asset is different from the methodology used for benchmarking the international transaction prescribed in section 92C(1) of the Act.

7.6 Having arrived at the Arm's length margin or the allowable AMP expenditure vis-a-vis the comparables, the TPO has used the CUP method as the most appropriate method for the purpose of comparison. As stated earlier, the mention of cost plus method is only a typographical error. We therefore, uphold the use of the CUP method as the most appropriate method adopted by the TPO."

5.2 The DRP also confirmed the disallowance under the provisions of sec.80JJA by holding the disallowance is as per the manner laid down by the Rules. The disallowance of Rs.20,50,175/- under rule 8D(3) was also confirmed vide paras.9.2 & 9.3 :

"9.2 This panel is not able to accept the interpretation offered by the assessee in view of his submission that 'there is in fact no expenditure incurred for the purpose of earning the exempted income'

9.3 Section 14A was introduced in the Indian Income Tax Act, 1961 (ITA) vide the Finance Act 2001 with retrospective effect from 1 April 1962 for the purpose of disallowing the expenditure incurred in relation to earning of exempt income. Central Board of Direct Taxes (CBDT)'s Circular No. 5/2014 dated 11 February 2014 has stated that disallowance of expenditure for earning exempt income under section 14A read with Rule BD would be attracted even if the corresponding exempt income has not been earned during the financial year. The circular states that the legislative intent of section 14A is to allow only that expenditure which is relatable to earning of taxable income. It therefore follows that the expenses relatable to earning of exempt income have to be considered for disallowance, irrespective of whether any such income has been earned during the financial year or not. "

6. Pursuant to the directions of the DRP, the AO passed the assessment order dated 5/1/2015 u/s 143(3) r.w.c. 144C of the Act.

7-8 Being aggrieved, assessee-company is in appeal before us in the present appeal raising the following grounds of appeal:

General and Legal grounds

1.	The learned Deputy Commissioner of Income-tax, Circle 5(1), Bangalore (hereinafter referred as 'the AO' for brevity), learned Deputy Commissioner of Income-tax (Transfer Pricing) -VI, Bangalore (hereinafter referred as TPO' for brevity) and the Honourable DRP-II ('AO', TPO, and DRP collectively referred as lower authorities ' for brevity) have erred in passing the orders:
	(a) Without proper application of mind. The orders passed being bad in law are liable to be quashed.
	(b) without considering all the submissions and/or without appreciating properly the facts and circumstances of the case and the law applicable;
	(c) making transfer pricing adjustment of Rs 20,20,07,881/-;
	(d) making an adjustment to the returned income without issuing any show cause notice or giving any opportunity of filing objections thereby violating of principles of natural justice; and
	(e) at the fag end of the limitation period.
2.	The assessing officers has erred in:
	(a) making a reference for the determination of the Arm's Length Price of the international transactions to the TPO without demonstrating as to why it was necessary and expedient to do so; and
	(b) making reference to the TPO without disposing the jurisdictional issue as to whether there exists an associated enterprises ("AE") relationship between the Appellant and Jockey International Inc.("Jockey Inc.")
3.	The lower authorities have erred in:
	(a) not appreciating that there is no amendment to the definition of "income" and the charging or computation provision relating to income under the head "Profits & Gains of Business or Profession" do not refer to or include the amounts computed under Chapter X' and therefore addition under Chapter X is bad in law.
	(b) passing the order without demonstrating that the Appellant had motive of tax evasion.
	Grounds relating to treatment as Associated enterprise
4.	The lower authorities have erred in:
	(a) considering Jockey Inc.as AE, without demonstrating that the conditions laid down in 92(A)(2) of the Act are satisfied.
	(b) not appreciating that Jockey Inc. was reported as associated enterprise in the Form 3CEB only out of abundant caution.
	Ground relating to treating Advertisement, Marketing and Promotions ("AMP") expenditure as an international transaction
5.	Assuming without admitting that AE relationship exists, the lower authorities have erred in concluding that AMP expenses is an international transaction and computing ALP for the same, without appreciating that the AMP expenses were incurred by the Appellant for its own business purposes and are not in excess of bright line test.
	TP Analysis under TNMM
6.	The lower authorities have erred in:
	(a) not accepting the transfer pricing analysis under TNMM ;
	(b) not appreciating that the Appellant had adopted the TNMM at the entity level, in which process, the royalty payment and advertisement expenses were considered and hence was subsumed into the expenditure and accordingly considered in the comparability exercise; and
	(c) not appreciating that once the net profit margin is tested on the touchstone of arm's length price under TNMM, it pre-supposes that the various components of income and expenditure considered in the process of arriving at the net profit are also at arms length.
	Aggregation of Royalty and Advertisement Expenditure
7.	The lower authorities have erred in:
	(a) aggregating royalty and advertisement expenditure for determining ALP without appreciating the fact that both the transactions are distinct and have different FAR.
	(b) not appreciating the Royalty payments have nothing to do with incurring of AMP expenses.
	(c) not selecting appropriate comparables.
	(d) comparing combined royalty and AMP expenses of the Appellant with the advertisement expenses of the comparables.
	(e) not appreciating that comparables are doing in-house research and development and not thereby incurring any expense on royalty.
	Grounds relating to selection of most appropriate method
8.	The learned TPO has erred in mentioning CUP Method as well as Cost Plus Method as the most appropriate method at different places in the order. The Honourable DRP has erred in concluding that CUP Method is most appropriate method on the ground that mentioning of Cost Plus Method by the TPO is only a typographical error, without seeking any clarification from the TPO. In either case, it has not been justified how CUP Method is the most appropriate method in the facts and circumstances of the case.
	Grounds relating to computation of ALP
9.	Assuming without admittingthat CUP method is the most appropriate method, the lower authorities has erred in:
	(a) passing the order bereft of proper understanding of the industry, business, economic and commercial realities in the case of the Appellant;
	(b) unilaterally adopting comparables selected by the Appellant under TNMM as comparable under CUP Method without demonstrating how they remain comparable under the CUP Method also;
	(c) not appreciating that during the year under consideration the Appellant incurred additional AMP expenses for new events, campaign and launches of new product, which had a substantial impact on the revenue of succeeding years and thereby it was incumbent to adopt multi-year average; and
	(d) considering only advertisement expenses in the case of comparables whereas considering marketing and sales promotionsexpenses in the case of Appellant for computing the AMP ratio.
10.	The lower authorities have erred:
	(a) not appreciating the fact that the royalty paid was approved and permitted by the Government authorities and was thus at ALP;
	(b) not appreciating that various judicial precedence have concurred on the view that payment of royalty at the rate of 5% is considered at ALP; and
	(c) not appreciating the fact that the royalty is incurred towards manufacturing know- how, merchandising and marketing, Know-how and Jockey marks.
11.	The lower authorities have erred in:
	(a) applying bright line test to compute alleged excessive AMP expenses; and
	(b) not appreciating that the tax authorities cannot question the commercial decisions of the Appellant as long as the expenditure incurred is for the purpose of own business requirements.
12	The lower authorities have erred in not allowing the benefit of arm's length range while computing ALP.
	Grounds related to Corporate tax Disallowance under section 14A
13	The learned AO and DRP have erred in:
	(a) disallowing a sum of Rs. 20,51,175/-a/s 14A r/w/r 8D without appreciating that the Appellant did not incur any expenditure towards earning the exempt income;
	(b) not appreciating that the AO cannot apply provisions of Rule 8D without demonstrating the incorrectness of the claim of Appellant, that it has not incurred any expenditure towards earning exempt income;
	(c) assuming that disallowance as to be computed as per Rule 81), the learned AO has erred in considering investments that generate taxable income as a base for computing disallowance; and
	(d) without prejudice, in any case disallowance cannot exceed the exempt income earned during the year under consideration.
	Disallowance under section 80JJAA
14	The AO and the DRP have erred in:
	(a) disallowing deduction u/s 80JJAA to the extent of Rs. 74,08,9 16 on the ground that the deduction cannot be given in respect to additional wages paid in the preceding years;
	(b) not appreciating that the Appellant had complied with all the conditions to be eligible to deduction under section 80JJAA; and
	(c) disallowing the deduction u/s 80JJA without appreciating that the conclusions reached are contrary to the provision of the Act and the binding precedents, especially in the Appellants own case.
	Addition made by AO
15	The learned AO has erred in:
	(a) adding interest of Rs. 295,531 on delayed payment of dividend distribution tax ("DDT") to the tax payable in the Order passed without appreciating that the proceeding under section 143(3) is for assessing total income and tax thereon and not for determining shortfall, if any in payment of dividend distribution tax.
	(b) not detailing the basis of determining shortfall in payment of dividend distribution tax.
	(c) Levying a sum of Rs. 295,531 as interest for delayed payment of DDT. On the facts and circumstances of the case, interest under section 115P is not leviable. The appellant denies its liability to pay interest under section 115P. Even otherwise, the interest levied is excessive.
	(d) Levying a sum of Rs. 4,49,95,680/- as interest under section 234B. On the facts and circumstances of the case, interest under section 234B is not leviable. The appellant denies its liability to pay interest under section 234B. Even otherwise, the interest levied is excessive.
	(e) Levying a sum of Rs 7,62,976/- as interest under section 234C. The interest levied is excessive; and
	(f) Not considering self assessment tax paid amounting to Rs 23,425,000 for computation of interest under section 234B.

The Appellant submits that each of the above grounds/sub-grounds are independent and without prejudice to one another.

The Appellant craves leave to add, alter, vary, omit,
substitute or amend the above grounds of appeal, at any time before or at, the time of hearing, of the appeal, so as to enable the Income-tax Appellate Tribunal to decide the appeal according to law."

9. Ground Nos. 1 to 12 relates to transfer pricing adjustment u/s 92CA of the Act. In these grounds of appeal, the assessee- company raised the jurisdiction issue for invoking the provisions of chapter X of the Act i.e. the assessee-company contends the existence of relationship of AE between assessee-company and JII. Since this issue goes to the very root of the matter as far as transfer pricing adjustments are concerned, we shall delve on these grounds of appeal at first instance.

10. The assessee-company entered into license agreement with JII, the important terms of which are reproduced below:

"(1)	The license agreement grants license to manufacture, distribute, market licensed products in the territory and to use manufacturing know how, merchandising and marketing knowhow and use of Jockey marks.
(2)	Entire manufacturing establishment/infrastructure/manufacturing costs and related risks are borne by the licensee.
	Essentially, the brand owner has ensured the branded goods conforms to the quality bench-marks and the usage of the brand label to ensure the brand value.
	The non-compete clause restricts, the manufacture and usage of Jockey labels in liens d products within the specified territory during the subsistence of the license agreement."

Thus, the assessee-company is merely a licensee of the brand- name 'Jockey' for exclusive manufacture and marketing of goods under license agreement. The assessee-company owns entire manufacturing facility, capital investment of Rs.100 crores and 15000 employees. There is no participation of JII in the capital and management of the assessee-company. In the light of these facts, we have to examine whether both the entities can be termed as 'AE' within the meaning of provisions of sec.92A(1) and 92A(2) of the Act. The relevant provisions of these sections are reproduced hereunder:

'Meaning of associated enterprise.

92A.(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 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.'

11. It is the case of the AO that the assessee-company and JII are AEs as they fall within the parameters of clause (g) of sub-sec.(2) of sec.92A of the Act. It is not the case of the AO that the present case falls within parameters of sub-section (1) of sec.92A of the Act. In this background, we are called upon to adjudicate whether both the entities are AEs within the meaning of sec.92A of the Act. The definition of the term 'AE' is divided into two sub- sections (1) and (2). Sub-sec.(1) contains(means) definition of AE is .para meters of management control or capital of that enterprise. Sub-sec.(2) contains a deeming provision and also enumerates circumstances when the enterprise can be deemed to be AE. The opening words of sub-sec.(2) are amended by Finance Act, 2002 w.e.f. 1/4/2002 . The amendment was explained as follows by the Memorandum of Finance Bill 2002:

"It is proposed to amend sub-sec.(2) of the said section to clarify that the mere fact of participation of one enterprise in the management or control or capital of the other enterprise or the participation of one or more persons in the management or control or capital of both the enterprises shall not make them associated enterprise unless the criteria specified in sub-sec(2) are fulfilled."

The resultant of the amendment is thus explained that unless the requirements of sub-sec.(2) are fulfilled, the sub- section (1) cannot be applied at all. This implies that in order to constitute relationship of an AE, the parameters laid down in both sub- sections (1) and (2) should be fulfilled. If we were to hold that there is a relationship of AE, once the requirements of sub-sec.(2) are fulfilled, then the provisions of sub-sec.(1) renders otiose or superfluous. Now, it is well settled canon interpretation of statutes that while interpreting the taxing statute, construction shall not be adopted which renders particular provision otiose. When interpreting a provision in a taxing statute, a construction, which would preserve the purpose of the provision, must be adopted.

11.1 As observed in State of Tamil Nadu v. M.K. Kandaswami [1975] 36 STC 191 (SC), in interpreting a provision, a construction which would defeat its purpose and, in effect, obliterate it from the statute book should be eschewed. If more than one construction is possible, that which preserves its workability and efficacy is to be preferred to the one which would render it otiose or sterile. In that view of the matter, courts should not adopt construction which would upset or even impair the purpose in introducing a particular provision in the statute [Calcutta Jute Manufacturing Co. v. CTO [1997] 106 STC 433 (SC). Therefore, following this principle, we hold that it is since the parameters laid down in sub-section (1) are not fulfilled, there is no relationship of AE between assessee-company and JII and therefore, the provisions of chapter X of the Act have no application.

11.2 In the result, the transfer pricing adjustment made by the TPO is not valid in law.

12. Now, we shall deal with grounds of appeal relating to corporate issues.

12.1 Ground No.13 relates to disallowance of an amount of Rs.20,15,175/- u/s 14A read with rule 8D of the IT Rules. During the course of assessment proceedings, the AO noticed that the assessee-company earned dividend income of Rs.6,86,839/- from shares and mutual funds which is exempt under the provisions of sec.10(34) of the Act. It is the claim of the assessee-company that there was no expenditure which is incurred to earn the dividend income. The AO held that no dividend can be earned without incurring any expenditure. He, accordingly, applying rule 8D(2)(iii) made addition of Rs.20,51,175/-.

12.2 It is the contention of the assessee-company that no addition u/s 14A can be made without rendering a finding as to how the claim of the assessee-company that no expenditure was incurred, was incorrect.

12.3 We heard the rival submissions and perused material on record. Now, law is fairly settled that no disallowance under clause (iii) of sub-rule (2) of rule 8D can be made without rendering a finding as to how the claim of the assessee that no expenditure was incurred, is incorrect. When the assessee had not incurred any expenditure, the question of disallowance u/s 14A does not arise as per law laid down by the Hon'ble Karnataka High Court in the case of Canara Bank v. Asstt. CIT [2014] 52 taxmann.com 162/[2015] 228 Taxman 212. In the circumstances, we remit the matter back to the file of the AO for de novo assessment on this issue as per law.

13. Ground No.14 relates to disallowance of deduction u/s 80JJAA of the Act. This ground is covered in favour of the assessee-company in its own case for assessment years 2007-08 and 2008-09 in ITA Nos.1231 to 1233/Bang/2014 dated 24/7/2015. Respectfully following the order of the Tribunal, we remit the issue back to the file of the AO for de novo examination of the claim in accordance with provisions of law.

14. Ground No.15 is consequential in nature and does not require any adjudication.

15. In the result, appeal of the assessee is partly allowed for statistical purposes.