Before

THE HONBLE HIGH COURT OF MADRAS

At Chennai
Under Section 260A of
the Income Tax Act, 1961

Deputy Commissioner Of Income Tax

......APPELLANT
v.

Vulcantech India Pvt. Ltd.

......RESPONDENT

WRITTEN SUBMISSIONS ON BEHALF OF THE APPELLANT

5TH K.R. RAMAMANI MEMORIAL TAXATION MOOT COURT

COMPETITION, 2015.

Memorandum on behalf of the Appellant

TABLE OF CONTENTS
LIST OF ABBREVIATIONS.................................................................................................iv
INDEX OF AUTHORITIES...................................................................................................v
STATEMENT OF JURISDICTION.....................................................................................vii
STATEMENT OF FACTS......................................................................................................ix
STATEMENT OF ISSUES.....................................................................................................xi
SUMMARY OF ARGUMENTS...........................................................................................xii
ARGUMENTS ADVANCED...................................................................................................1
I.

WHETHER THE TRIBUNAL WAS RIGHT IN HOLDING THAT

CORPORATE GUARANTEES ISSUED ON BEHALF OF SUBSIDIARY IS

AN INTERNATIONAL TRANSACTION U/S 92B?.............................1
A.

ISSUING

CORPORATE GUARANTEE TO AN ASSOCIATED ENTERPRISE IS NOT AN

INTERNATIONAL TRANSACTION AS NO COSTS ARE INCURRED...............................................1

B.

ISSUING

CORPORATE GUARANTEE TO AN ASSOCIATED ENTERPRISE IS NOT A PART OF

SHAREHOLDERS ACTIVITY....................................................................................................3

II. WHETHER THE TRIBUNAL WAS RIGHT IN UPHOLDING THE

NOTIONAL INTEREST ON THE LOAN PROVIDED BY ASSESSEE TO
ITS SUBSIDIARY ASSOCIATED ENTERPRISE?...............................4
A.

THAT

THE TRANSACTION WAS WITHIN THE PURVIEW OF

TRANSFER PRICING

PROVISIONS............................................................................................................................4

B.

THAT LIBOR SHOULD NOT BE THE BENCHMARK RATE..................................................6

III.

WHETHER THE TRIBUNAL WAS RIGHT IN LAW IN HOLDING

THAT

ASSESSEE

IS

NOT

ENTITLED

FOR

BALANCE

50%

OF

ADDITIONAL DEPRECIATION IN THE CURRENT ASSESSMENT YEAR

IN RESPECT OF ASSETS ACQUIRED IN PREVIOUS YEAR AND PUT
TO USE FOR LESS THAN 180 DAYS?...........................................7
A.

THAT

BALANCE

THE DRP/AO HAS NOT ERRED IN DISALLOWING THE

50%

ASSESSEES

CLAIM OF

ADDITIONAL DEPRECIATION IN THE SUBSEQUENT YEAR, I.E. THE CURRENT

RELEVANT ASSESSMENT YEAR,

2009-2010............................................................................7
2

Memorandum on behalf of the Appellant

B.

THAT THE

DRP/AO HAS ACTED AS THE DEFENDER OF THE LEGISLATIVE INTENT AND

ITS PROTECTOR BY NOT ALLOWING A PRESUMPTUOUS CLAIM OF THE

ASSESSEE

TO CARRY

FORWARD THE UNABSORBED ADDITIONAL DEPRECIATION WHICH THE ASSESSEE COULD NOT
ABSORB DUE TO RESTRICTIONS PUT ON THE ASSESSEE BY THE ACT.....................................8

PRAYER.................................................................................................................................10

Memorandum on behalf of the Appellant

LIST OF ABBREVIATIONS

ACIT
AE
AIR
AO
CIT
CTR
DCIT
DRP
FCA
ITA
ITAT
ITR
LIBOR
OECD

Assistant Commissioner of Income Tax

Associated Enterprise
All India Reporter
Assessing Officer
Commissioner of Income Tax
Current Tax Reporter
Deputy Commissioner of Income Tax
Dispute Resolution Panel
Federal Court of Appeal Canada
Income Tax Appeal
Income Tax Appellate Tribunal
Income Tax Reporter
London Interbank Offered Rate
Organization for Economic Cooperation and
Development
Supreme Court
Supreme Court Cases
Show Cause Notice
Selected Orders of ITAT
Transfer Pricing Officer

SC
SCC
SCN
SOT
TPO

Memorandum on behalf of the Appellant

INDEX OF AUTHORITIES
CASES
ACIT v. SIL Investments Ltd., [2012] 54 SOT 54 (Delhi)..........................................................9
Aurionpro Solutions Ltd v. ACIT, ITA No.7872/Mum/2011..................................................6, 7
Brakes India Ltd. v. DCIT, I.T.A. Nos.1069/Mds/2010.............................................................9
DCIT v. Cosmo Films Ltd., 2012 (13) ITR (Trib) 340 (Delhi)..................................................9
Four Soft Pvt Ltd v. DCIT, 2014 SCC ITAT 647.......................................................................3
G.E Capital Canada v. Her Majesty The Queen, 2010 FCA 344..............................................4
Godrej Household Products Ltd v. ACIT, 2013 ITAT 5929.......................................................3
Hiralal Ratanlal v. Sales Tax Officer, AIR 1973 SC 1034........................................................2
Keshavji Ravji & Co. v. CIT, [1990] 183 ITR 1/49 Taxman 87 (SC)........................................2
M.M. Forgings v. ACIT, (2011) 11 Taxmann.com 367 (Mad)...................................................9
Modern Fibotex India Ltd. and Anr. v. Deputy Commissioner of Income Tax and Ors, (1995)
126 CTR (Cal) 69.......................................................................................................................8
Nimbus Communications Limited v. ACIT, 2013 ITAT 2653.....................................................3
Perot System TSI India Limited v. DCIT, ITA No.2320/DEL/2008...........................................5
PMP Auto Components v. DCIT, ITA No.1484/Mum/2014..................................................6, 7
Prolifics Corporation Limited v. DCIT, ITA No.237/HYD/2014;.............................................3
Pumps Pvt. Ltd. v. ACIT,[2013] 34 taxmann.com 123 (Chennai - Trib.)...................................9
Tata Autocomp Systems Ltd v. ACIT, ITA No. 7354/Mum/2011............................................6, 7
VVF limited v. DCIT, ITA No.673/Mum/06...............................................................................6
STATUTES
The Finance Act, 2005 w.e.f 1-4-2006.....................................................................................10
ARTICLES & GUIDELINES

Memorandum on behalf of the Appellant

Memorandum to the Finance Bill, 2012....................................................................................2
OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations,
2010........................................................................................................................................1, 3

Memorandum on behalf of the Appellant

STATEMENT OF JURISDICTION
The Appellant has come before this court under Section 260A of the Income Tax Act, 1961
read with Section 106 of the Code of Civil Procedure, 1908.
Section 260A reads:
260A. (1) An appeal shall lie to the High Court from every order passed in appeal by the
Appellate Tribunal [before the date of establishment of the National Tax Tribunal], if the
High Court is satisfied that the case involves a substantial question of law.
(2) [The Chief Commissioner or the Commissioner or an Assessee aggrieved by any order
passed by the Appellate Tribunal may file an appeal to the High Court and such appeal
under this sub-Section shall be]
(a) filed within one hundred and twenty days from the date on which the order appealed
against is [received by the Assessee or the Chief Commissioner or Commissioner];
(c) in the form of a memorandum of appeal precisely stating therein the substantial question
of law involved.
(3) Where the High Court is satisfied that a substantial question of law is involved in any
case, it shall formulate that question.
(4) The appeal shall be heard only on the question so formulated, and the respondents shall,
at the hearing of the appeal, be allowed to argue that the case does not involve such
question.
Provided that nothing in this sub-Section shall be deemed to take away or abridge the power
of the court to hear, for reasons to be recorded, the appeal on any other substantial question
of law not formulated by it, if it is satisfied that the case involves such question.
(5) The High Court shall decide the question of law so formulated and deliver such judgment
thereon containing the grounds on which such decision is founded and may award such cost
as it deems fit.
(6) The High Court may determine any issue which
(a) has not been determined by the Appellate Tribunal; or

Memorandum on behalf of the Appellant

(b) has been wrongly determined by the Appellate Tribunal, by reason of a decision on such
question of law as is referred to in sub-Section (1).
(7) Save as otherwise provided in this Act, the provisions of the Code of Civil Procedure,
1908 (5 of 1908), relating to appeals to the High Court shall, as far as may be, apply in the
case of appeals under this Section.]
Section 107 of the Code of Civil Procedure, 1908 reads:
107. Powers of Appellate Court (1) Subject to such conditions and limitations as may be
prescribed, an
Appellate Court shall have power
(a) to determine a case finally;
(b) to remand a case;
(c) to frame issues and refer them for trial;

All of which is most humbly and respectfully submitted.

Memorandum on behalf of the Appellant

STATEMENT OF FACTS
I.

Vulcantech India Pvt. Ltd. hereinafter referred to as the Assessee is engaged primarily
in trading, reselling and distribution of Information Technology and office automation
products.

II.

The Assessee in the financial year 2007-08, had set up an Associated Enterprise, by
the name of Vulcantech Gulf FZE, hereinafter referred to as Vulcantech Gulf, which
is a wholly owned subsidiary of the Assessee.

III.

Thereinafter in the financial year 2008-09, the Assessee had set up another Associated
Enterprise by the name of Vulcantech Singapore Pte. Ltd., hereinafter referred to as
the Vulcantech Singapore, in which the Assessee had 51% shareholding.

IV.

In the FORM 3CEB the Assessee had disclosed a transaction entered into with
Vulcantech Singapore in the nature of an interest-free loan for an amount of Rs.
10,23,45,680/-. No interest was charged by the Assessee on the grounds of it being a
quasi-equity transaction.

V.

However, corporate guarantee issued to its wholly owned subsidiary, Vulcantech Gulf,
was concealed from the FORM 3CEB and the Assessee had not charged any
commission for issuing such a guarantee.

VI.

This fact was only unearthed by the Department when it issued a SCN to the
Assessee.

VII.

Subsequently, the matter was taken up by the TPO, who made adjustments for the said
transactions by computing a 1.5% commission for the corporate guarantee and a
notional interest @ 11% for the interest-free advance.

VIII.

Thereafter, the Assessee appealed before the DRP, which upheld the adjustment made
by the TPO. Aggrieved by this the Assessee appealed to the ITAT, Chennai, which
provided partial relief to the Assessee.

IX.

In the assessment year 2008-09, the Assessee had acquired and installed new assets
which were used for less than 180 days.

Memorandum on behalf of the Appellant

X.

Thus, the Assessee was allowed to claim only 50% of the calculable rate of additional
depreciation as prescribed in Section 32(1)(iia) of the Income Tax Act, 1961.

XI.

The Assessee seeks to exercise a presumptuous vested right to claim the balance 50%
of additional depreciation in the subsequent year which is the current impugned
assessment year, 2009-10. However, the AO disallowed the residual additional
depreciation in the subsequent assessment year which decision was upheld by the
DRP. Furthermore, the ITAT Chennai Bench has rightfully upheld the AO and the
DRPs decision, thus disallowing the carry forward of the balance 50% additional
depreciation the subsequent year, the impugned assessment year in the present case,
2009-10.

XII.

Aggrieved by the order of the ITAT Chennai Bench, the Deputy Commissioner of
Income Tax, Chennai, hereinafter referred to as DCIT, filed an appeal before the
Honourable Bench of the Madras High Court by virtue of Section 260A of the
Income-Tax Act, 1961.

10

Memorandum on behalf of the Appellant

STATEMENT OF ISSUES
I.

WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE

THE TRIBUNAL WAS RIGHT IN LAW IN HOLDING THAT CORPORATE
GUARANTEE

ISSUED

ON

BEHALF

OF

SUBSIDIARY

IS

AN

INTERNATIONAL TRANSACTION U/S 92B?

II.

WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE

THE TRIBUNAL WAS RIGHT IN LAW IN UPHOLDING THE NOTIONAL
INTEREST ON THE LOAN PROVIDED BY ASSESSEE TO ITS SUBSIDIARY
ASSOCIATED ENTERPRISE?

III.

WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE

THE TRIBUNAL WAS RIGHT IN LAW IN HOLDING THAT ASSESSEE IS NOT
ENTITLED FOR BALANCE 50% ADDITIONAL DEPRECIATION IN THE
CURRENT ASSESSMENT YEAR IN RESPECT OF ASSETS ACQUIRED IN
PREVIOUS YEAR AND PUT TO USE FOR LESS THAN 180 DAYS?

11

Memorandum on behalf of the Appellant

SUMMARY OF ARGUMENTS.
I. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE THE
TRIBUNAL WAS RIGHT IN LAW IN HOLDING THAT CORPORATE GUARANTEE
ISSUED ON BEHALF OF SUBSIDIARY IS AN INTERNATIONAL TRANSACTION
U/S 92B?
The TPO was correct in law in taking suo-moto cognizance and enhancing the income of the
respondent on account of commission for corporate guarantee issued by the Respondent in
favour of its subsidiary. The TPO was correct in holding that there is always an element of
risk when corporate guarantee is issued in favour of another enterprise and hence, it cannot be
said that the corporate guarantees are issued without costs. Lastly, the TPO was correct in
ruling out the possibility of corporate guarantees being a form of shareholders activity as
envisaged under the OECD Guidelines.
II. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE THE
TRIBUNAL WAS RIGHT IN LAW IN UPHOLDING THE NOTIONAL INTEREST ON
THE LOAN PROVIDED BY ASSESSEE TO ITS SUBSIDIARY ASSOCIATED
ENTERPRISE?
The TPO correctly computed notional interest for the interest-free loan provided by the
Assessee in favour of its AE. The TPO on facts and in law rightfully held that the transaction
in question came under the purview of Transfer Pricing provisions. The TPO correctly
disregarded LIBOR Rate as the benchmark for the said transaction whereas, the learned ITAT
Chennai Bench, erred in disregarding the decision of the TPO. The learned ITAT Chennai
Bench failed in considering that under Arms Length computation, the tested party is always
the tax payer and not the AE.
III.

WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE THE

TRIBUNAL WAS RIGHT IN LAW IN HOLDING THAT ASSESSEE IS NOT
ENTITLED FOR BALANCE 50% ADDITIONAL DEPRECIATION IN THE
CURRENT ASSESSMENT YEAR IN RESPECT OF ASSETS ACQUIRED IN
PREVIOUS YEAR AND PUT TO USE FOR LESS THAN 180 DAYS?

The thrust of the arguments of the Assessee lies on the plank of there being a vested right to
claim additional depreciation and principles of liberal interpretation and harmonious

12

Memorandum on behalf of the Appellant

construction in order for the incentive to be effective. The Department primarily has
objections to the wide interpretation scope applied by the Assessee which has distorted the
statutory stipulation of restriction to the incentives and misinterpretation of judicial
precedents. It is however true, that the vested right concept depends upon the provisions of
the Income Tax Act, 1961, the setting in which the provision exists and consequent
implications. Therefore, it is wrong to adopt a narrow and literal interpretation of the Section
in question. Fundamentally, the department has objections to the idea of carry forward of an
incentive deduction like additional depreciation because it is conceptually impossible to
equate deductions based on the actual cost with those based on the written down value of the
block of those assets
.

13

Memorandum on behalf of the Appellant

ARGUMENTS ADVANCED
I.

WHETHER THE TRIBUNAL WAS RIGHT IN HOLDING THAT

CORPORATE

GUARANTEES

ISSUED

ON

BEHALF

OF

SUBSIDIARY IS AN INTERNATIONAL TRANSACTION U/S 92B?

The TPO was correct in taking suo-moto cognizance and enhancing the income of the
Respondent by 17,01,990 on account of commission for corporate guarantee issued by the
Respondent in favour of its subsidiary Vulcantech Singapore by charging commission at
1.5% of 11,34,65,780.
That the AO/TPO was correct in holding:
(a) That corporate guarantee is an International Transaction as per the provisions of Section
92B.
(b) That there is always an element of risk when an AE issues a corporate guarantee in favour
of another and it cannot be said that corporate guarantees are issued without cost.
(c) That the TPO was correct in interpreting the concept of shareholder services contained in
the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations
released by the OECD Guidelines1 and ruling out the possibility of corporate guarantee being
a form of a shareholders activity.
Moving on to the substantive issues involved:
A. ISSUING

CORPORATE GUARANTEE TO AN ASSOCIATED ENTERPRISE IS NOT

AN INTERNATIONAL TRANSACTION AS NO COSTS ARE INCURRED.

The Explanation to Section 92B of the Income Tax Act, 1961 was inserted vide Finance Act,
2012 with retrospective effect from April to provide a definition for the words 'international
transaction'.
The principles of statutory interpretation suggest that an Explanation may be added to a
statutory provision to sometimes include within or to exclude something from the ambit of
the main statutory provision or the connotation of some word occurring in it.
1 OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, 2010.

Memorandum on behalf of the Appellant

The Honble Supreme Court2 while dealing with the scope of an Explanation has held that
there is no general theory as to the effect and intendment of an Explanation except that the
purposes and intendment of the Explanation are determined by its own words. An
Explanation, depending on its language, might supply or take away something from the
contents of a provision. Further, in another case3 it was held by the Hon'ble Supreme Court
that in case on a true reading an Explanation widens the scope of the main Section, effect
must be given to widened meaning.
If we draw reference to the Memorandum4 explaining the provisions of the Finance Bill, 2012
which explained the insertion of the Explanation to Section 92B of the Act in the following
words:
Section 92B of the Act, provides an exclusive definition of International Transaction.
Although, the definition is worded broadly, the current definition of International
Transaction leaves scope for its misinterpretation. Certain judicial authorities have
taken a view that in cases of transactions of business restructuring etc. where even if
there is an international transaction, Transfer Pricing provisions would not be
applicable if it does not have bearing on profits or loss of current year or impact on
profit and loss account is not determinable under normal computation provisions other
than Transfer Pricing regulations. The present scheme of Transfer Pricing provisions
does not require that international transaction should have bearing on profits or
income of current year.
In view of the above, it appears that the intention was to amend the definition of 'international
transaction' in a manner which reflects the true scope of the expression and it also witnesses
the intention of the legislature that Transfer Pricing provisions do not require that
international transaction should have bearing on profits or income of current year.
Hence, the argument put forth by the Assessee that issuing corporate guarantee is not an
International Transaction as it does not have any bearing on the Profit and Loss of the
Assessee, is without substance and was correctly ruled out by the Learned ITAT Chennai.
In Arguendo, even if it is assumed that International Transactions should have a bearing on
the Profit and Loss of the Assessee, a plethora of judgments 5 affirm that issuing corporate
2 Keshavji Ravji & Co. v. CIT, [1990] 183 ITR 1/49 Taxman 87 (SC).
3 Hiralal Ratanlal v. Sales Tax Officer, AIR 1973 SC 1034.
4 Memorandum to the Finance Bill, 2012

Memorandum on behalf of the Appellant

guarantees always have an inherent risk and it cannot be said that it does not have a bearing
on the profits and losses of the Enterprise6.
B. ISSUING

CORPORATE GUARANTEE TO AN ASSOCIATED ENTERPRISE IS NOT

A PART OF SHAREHOLDERS ACTIVITY.

It was argued by the Assessee that since the Assessee is the Holding Company of the AE, it
was the duty of the Assessee to gather funds for its subsidiary. However, if we refer to the
OECD Guidelines7, the test to determine whether a particular transaction is a part of
shareholders activity is to check as to whether an independent party would have, under
similar facts and circumstances, been willing to pay for itself or perform for itself.
Now if we refer to the facts of the case, the only reason why Vulcantech Dubai was able to
avail loans from Standard Chartered Bank was because of the corporate guarantee issued by
its parent Company. Hence, it goes without saying that under uncontrollable circumstances,
Vulcantech Dubai would have been willing to pay for the services provided in lieu of the
benefits gained.
Here it is imperative to refer to the OECD Guidelines8 which says:
7.13 Similarly, an associated enterprise should not be considered to receive an intragroup service when it obtains incidental benefits attributable solely to its being part of
a larger concern, and not to any specific activity being performed. For example, no
service would be received where an associated enterprise by reason of its affiliation
alone has a credit-rating higher than it would if it were unaffiliated, but an intra-group
service would usually exist where the higher credit rating were due to a guarantee by
another group member, or where the enterprise benefited from the group's reputation
deriving from global marketing and public relations campaigns. In this respect, passive
association should be distinguished from active promotion of the MNE group's
attributes that positively enhances the profit making potential of particular members of
the group. Each case must be determined according to its own facts and
circumstances.
5Four Soft Pvt Ltd v. DCIT, 2014 SCC ITAT 647; Godrej Household Products Ltd v. ACIT, 2013
ITAT 5929.
6 Prolifics Corporation Limited v. DCIT, ITA No.237/HYD/2014; Nimbus Communications Limited
v. ACIT, 2013 ITAT 2653.
7 Supra Note 1.
8 id.

Memorandum on behalf of the Appellant

This brings out a clear distinction between implicit and explicit guarantee and whereas in the
case of the latter, a charge is always warranted which has also been substantiated in the
Judgment by the Canadian Tax Court9.
As it is an undisputed fact that the Assessee had issued corporate guarantee which falls under
explicit support, it goes without saying that the same requires a charge. Hence, the addition
made by the TPO was correct under the law.
II.

WHETHER THE TRIBUNAL WAS RIGHT IN UPHOLDING THE

NOTIONAL INTEREST ON THE LOAN PROVIDED BY ASSESSEE
TO ITS SUBSIDIARY ASSOCIATED ENTERPRISE?

The TPO was correct in computing notional interest for the loan provided by the Assessee in
favour of its AE without any interest. The AO/TPO was correct in holding:
a) The TPO was correct in holding that the transaction came under the purview of Transfer
Pricing provisions.
b) The TPO was correct in interpreting a financing relationship between holding company
and subsidiary as a lender and borrower simplicitor.
c) The TPO was correct in not adopting LIBOR as the benchmark rate for the transaction
entered into and the learned ITAT erred in disregarding it.
The brief facts pertaining to the issue in question are that the Assessee advanced loans to its
AE without charging any interest on the grounds that such a transaction was quasi-equity in
nature.
Moving on the substantive issues involved.
A THAT

THE

PRICING

TRANSACTION

WAS

WITHIN

THE

PURVIEW

OF

TRANSFER

PROVISIONS.

The undisputed facts pertaining to the issue here are that the Assessee was a 51% Shareholder
of the AE, the transaction in question had no special feature to even suggest that it was quasiequity in nature and that in the assessment year under consideration such amounts were not
converted into equity. In the light of these facts, it is pertinent to examine the position of law.
9 G.E Capital Canada v. Her Majesty The Queen, 2010 FCA 344.

Memorandum on behalf of the Appellant

The Court has held in a certain case10 that
There is no case that any special feature in the contract that makes the transaction
capital in nature. It is also an admitted proposition that the Assessee has extended the
loan to its AE's who are 100% subsidiaries. The Assessee's case is that it has actually
not earned any interest and it was commercially expedient to extend these interest free
loans. Now it is noted that this is not a case of ordinary business transaction. The
question relates to scrutiny of international transaction to determine whether or not the
same it as arm's length. The principle of Transfer Pricing aims at determining the
pricing in the situations of cross border international transactions, where two
enterprises which are subject to the same centre or direction or control (associated
enterprise) maintain commercially or financially relation with other. The aim is to
examine whether there is anomaly in the transaction which arise out of special
relationship between the creditor and the debtor. Hence the contention of having
actually not earned any income cannot come to the rescue of the Assessee in this
scenario.
We have not come across any feature in the agreement to accept the contention of the
counsel that loan was quasi capital. It is also not the case that there was any technical
problem that loan could not have been contributed as capital originally if it was
actually meant to be capital contribution. If the Assessee's contention that whenever
interest free loan is granted to associated enterprises, there should not be any
adjustment is accepted, it will tantamount to taking out such transactions from the
realm of Section 92(1) and Section 92B of the IT Act.
From the above, it is clear that lending or borrowing money between two associated
enterprises comes within the ambit of international transaction and whether the same
is at arms length price has to be considered.
Similar propositions were also laid down in another case11.
Another issue here is whether the argument, of the transaction being commercially expedient
is sustainable. Again, examining the position of law here, in the case 12 decided by the ITAT it
was held:
Therefore, having commercial consideration, no adjustment of transfer price is
justified. We do not agree with the contention of the ld AR because, the objective behind
the Transfer Pricing Regulation that the profits taxable in India are not shifted out of
India by manipulating the price charged between the AEs; however, as per the Transfer

10 Perot System TSI India Limited v. DCIT, ITA No.2320/DEL/2008.

11 VVF limited v. DCIT, ITA No.673/Mum/06.
12 Aurionpro Solutions Ltd v. ACIT, ITA No.7872/Mum/2011, PMP Auto Components v. DCIT, ITA
No.1484/Mum/2014.

Memorandum on behalf of the Appellant

Pricing Regulations, there is no such condition of existence or non existence of
commercial consideration between the Assessee and the AEs.
Similar propositions were laid down in various cases13.
In the light of the above, the clear intention of the legislature that Transfer Pricing provisions
envisage to prevent shifting out taxable profits by manipulating the prices charged by the AE
is apparent. In the light of the above, the concept of Real Income which holds value for other
provisions of the Income Tax Act, 1961 has no applicability under Transfer Pricing
provisions. Hence, the arguments of such nature from the side of the Assessee fall and it
becomes clear that the aforementioned transaction clearly comes under the purview of
Transfer Pricing provisions. Hence, it is fair to conclude that the Adjustment made by the
TPO was in accordance with the law.
C. THAT

LIBOR SHOULD NOT BE THE BENCHMARK RATE.

The Transfer Pricing regulations are based on the deeming principle by taking into account a
hypothetical situation that instead of having transaction with AE had the Assessee transacted
with an unrelated party, what would have been the financial result of that transaction. Thus,
the effect of the transaction on the income of the Assessee is to be seen and considered and
not effect on the cost or income of the AE. Therefore, the tested party is always the taxpayer
and not the AE. None of the factors under the Transfer Pricing regulations require considering
whether the AEs would have incurred or earned more or less; but it is always considered
whether the Assessee had earned more or less by doing a similar transaction with an unrelated
party.14 Even under Rule 10B of the Income Tax Rules, 1962, the factors prescribed for
inclusion or exclusion of comparables to determine the Arms Length Price are also based on
the comparison of the Assessee with an unrelated entity and the AE has no role in the exercise
of selecting the comparables.15
In the light of the above it becomes clear that LIBOR has no application to transactions where
loans are advanced by Indian Companies to their AE abroad but the applicable comparable
transaction would be the amount of interest the AE would have earned had it transacted with
13 Tata Autocomp Systems Ltd v. ACIT, ITA No. 7354/Mum/2011;id.;
14 id.
15 Supra Note 12.

Memorandum on behalf of the Appellant

an independent entity instead of the AE. The safest comparables, which can be taken as Arm's
Length interest rate in such a case would be the interest on Fixed Deposit with the bank for a
term equivalent to the term for which the loans were given to the AEs.
III.

WHETHER THE TRIBUNAL WAS RIGHT IN LAW IN HOLDING

THAT ASSESSEE IS NOT ENTITLED FOR BALANCE 50% OF
ADDITIONAL DEPRECIATION IN THE CURRENT ASSESSMENT
YEAR IN RESPECT OF ASSETS ACQUIRED IN PREVIOUS YEAR
AND PUT TO USE FOR LESS THAN 180 DAYS?
A THAT

THE DRP/AO HAS NOT ERRED IN DISALLOWING THE

CLAIM OF BALANCE

50%

ASSESSEES

ADDITIONAL DEPRECIATION IN THE SUBSEQUENT

YEAR, I.E. THE CURRENT RELEVANT ASSESSMENT YEAR,

2009-2010.

A bare reading of Section 32(1)(iia) clearly says that in case a new machinery or plant was
acquired and installed after 31-03-2005 by an Assessee, who is engaged in the business of
manufacture or production of articles or things, then, a sum equal to 20% of the actual cost of
the machinery and plant shall be allowed as a deduction. It is not in dispute that the Assessee
has acquired and installed the machinery after 31-03-2005. Therefore, the Assessee is eligible
for additional depreciation on the actual cost of such machinery. The dispute is the year in
which the depreciation has to be allowed.
The thrust of the arguments of the Assessee lies on the plank of there being a vested right to
claim additional depreciation and the principles of liberal interpretation and harmonious
construction of Section 32(1)(iia) in order for the incentive to be effective. However, the
Assessee has misinterpreted the intent of the legislation to mean and include that he may
carry forward the balance 50% additional depreciation. The Department primarily has
objections to the wide interpretation scope applied by the Assessee which has distorted the
statutory stipulation of restriction to the incentive and in fact the judicial precedents in favour
of the Assessee being per incuriam.
The Assessee in the present case places reliance on their accrual of a vested right considering
the interpretation of the word shall which has a mandatory connotation to it, as has been

Memorandum on behalf of the Appellant

argued by them in the ITAT. The same question came up in a case 16 in the High Court of
Calcutta where the Honble Judge while interpreting Section 143(3) of the Income Tax Act
was of the view that
The respondents' submission that, the issuance of an intimation is compulsory, is incorrect.
To accept the submission would be to read the provisions of Section 143(1)(a) in a manner
not warranted by the language. It is true that the word shall has been used in connection
with the issuance of an intimation but it is well-established that the construction of the
expression shall depends upon the provisions of the Act, the setting in which the direction
is given and the consequences that would follow from the infringement of the direction and
other such considerations. The context in which the word shall has been used in Section
143(2) has to be read in the background of the proviso to the Section.
Our contention regarding the principles of harmonious construction is that for it to exist, a
holistic view of the statutory provisions related to the incentive provision must be analysed
and examined. This issue came up before the High Court of Madras17 wherein it was held that
when there was a statutory stipulation providing for restriction then the balance additional
depreciation could not be claimed in the subsequent year.
Fundamentally, additional depreciation was to be allowed only in the year in which there was
a substantial increase in the installed capacity. Thus, it was clear that additional depreciation
on the new plant and machinery could be granted only in the year in which the capacity
expansion has been achieved and there was no provision for carry forward and allowance of
the residual additional depreciation.18 Also, ITAT rulings19 which have allowed for carryover
of balance depreciation opinions have not considered contrary rulings given by the High
Court of Madras and ITAT Bench of Chennai20, therefore are per incuriam.
16 Modern Fibotex India Ltd. and Anr. v. Deputy Commissioner of Income Tax and Ors, (1995) 126
CTR (Cal) 69.
17 M.M. Forgings v. ACIT, (2011) 11 Taxmann.com 367 (Mad).
18 Brakes India Ltd. v. DCIT, I.T.A. Nos.1069/Mds/2010.
19 DCIT v. Cosmo Films Ltd., 2012 (13) ITR (Trib) 340 (Delhi); ACIT v. SIL Investments Ltd.,
[2012] 54 SOT 54 (Delhi).
20 CRI Pumps Pvt. Ltd. v. ACIT,[2013] 34 taxmann.com 123 (Chennai - Trib.).

Memorandum on behalf of the Appellant

D. THAT

THE DRP/AO HAS ACTED AS THE DEFENDER OF THE LEGISLATIVE

INTENT AND ITS PROTECTOR BY NOT ALLOWING A PRESUMPTUOUS CLAIM

OF THE

ASSESSEE

DEPRECIATION

TO CARRY FORWARD THE UNABSORBED ADDITIONAL

WHICH

THE

RESTRICTIONS PUT ON THE

ASSESSEE

ASSESSEE

COULD

NOT

ABSORB

DUE

TO

BY THE ACT.

It is our contention that the concepts of additional depreciation and normal depreciation are
fundamentally different since additional depreciation is investment based, while the regular
depreciation is period based and both are unrelated to each other. Normal depreciation and
additional depreciation are independent and two separate deductions available to an assessee.
The expressions further sum and shall be allowed in clause (iia) of Section 32(1) are
indicative of this proposition. The word further means something in addition to. Additional
depreciation is computed on the basis of actual cost of the eligible asset and is in a sense
independent from normal depreciation which is computed on the basis of written down
value of the block of asset. A block of asset symbolizes the merger of various assets of a
common group. The individual identity of the assets is lost. The price tag of individual asset
has little significance. For an asset entering the block, its actual cost is reckoned for
increasing the numerical figure of the block. For subsequent years, only the written down
value remains relevant. The concept of actual cost in subsequent years is irrelevant. In other
words, the concept of actual cost is relevant only in the year of acquisition of asset. The
concept of actual cost generally does not survive in the second & subsequent years.
Additional depreciation is computed with reference to actual cost so if the concept of actual
cost does not survive in the second year, the balance of additional depreciation, if allowed,
would be against the concept of the additional depreciation itself, hence making the
proposition impossible.
In Arguendo, even if one assumes that the legislation envisaged that the balance 50%
additional depreciation should be carried forward to the subsequent year, which is not the
case, the accounting impossibility does not cease to exist. If the balance 50% additional
depreciation is allowed to be carried forward it would go against the very principle of the
legislation which prescribes additional depreciation only on the actual cost of the asset. This
would in fact defeat the very purpose and spirit of the legislation.

Memorandum on behalf of the Appellant

The Amendment provisions introduced in 200521 allowed for increments in the rate of
additional depreciation. The increment in the rate of allowable additional depreciation was
brought about for the purpose of encouraging more investment in the production sector as
claimed by the Assessee. This increment was in furtherance of the legislative intent and the
net result of even half of the new rate of allowable depreciation was an adequate incentive as
envisaged by the legislation.

21 The Finance Act, 2005 w.e.f 1-4-2006.

10

Memorandum on behalf of the Appellant

PRAYER
Wherefore, in the light of facts stated, issues raised, arguments advanced and
authorities cited, it is most humbly and respectfully prayed before this Honble Court that it
may be pleased to:

Uphold the adjustment with respect to corporate guarantee as was done by the

TPO;
Make adjustment with respect to notional interest for the interest free loan
provided by the Assessee to Vulcantech Singapore in accordance with the

appropriate comparable uncontrolled price (FD rate);

Uphold the decision of the DRP/AO to disallow the balance 50% additional
depreciation in the relevant assessment year 2009-10.

11