UTTAM BHARAT ELECTRICALS PVT. LTD.,JAIPUR vs. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-4, JAIPUR

PER VIJAY PAL RAO, J.M. This appeal by the assessee is directed against the order dated 20th March, 2019 of ld. CIT (A)-2, Jaipur arising from assessment order passed under section 143(3) read with section 144C of the IT Act for the assessment year 2014-15. The assessee has raised the following grounds of appeal :-

2. In the facts and circumstances of the case and in law, the ld. CIT (A) has erred in confirming the order of ld. AO in making disallowance of Rs. 1,03,508/- u/s 36(1)(va) and, thereby, adding the same as income u/s 2(24)(x). The action of the ld. CIT (A) is illegal, unjustified, arbitrary and against the facts of the case. Relief may please be granted by allowing the expense of Rs. 1,03,508/- u/s 36(1)(va).

Ground No. 1 is regarding the addition made by the TPO/AO on account of adjustment in respect of the payment of interest to related parties.

Accordingly the AO made a reference under section 92CA to the TPO for determination of Arm’s Length Price in respect of the Specified Domestic Transactions entered into by the assessee with the Associated Enterprises. The assessee filed its Transfer Pricing Study Analysis under Rule 10D of IT Rules before the TPO and submitted that the transactions of payment of loan to the related parties are at Arm’s length as the interest paid to the unrelated parties along with brokerage is more than the interest paid to the related parties. Thus the assessee adopted Internal CUP comparable as most appropriate method to benchmark its Specified Domestic Transactions. The assessee pointed out that the effect cost of loans taken from unrelated parties comes at an average rate of 15.36% in comparison to the interest paid to the related parties @ 15%. Accordingly, the assessee contended before the TPO that the Specified Domestic Transactions of payment of interest on loans taken from the related parties are at Arm’s Length and no adjustment is called for. The TPO did not accept this contention of the assessee as well as the benchmarking and proceeded to apply External CUP as most appropriate method for determination of Arm’s Length Price as the interest paid to the related parties. The TPO accordingly applied average SBI Base Rate for the financial year 2013-14 at 9.83% and further added 300 basis points to the Base Rate on account of unsecured loan and risk factors. Thus the TPO has applied the Arm’s Length Price of interest at 12.83% based on External CUP in comparison to the interest paid by the assessee at 15% to the related parties and consequently proposed an adjustment of Rs. 6,53,288/- under section 92CA(2) of the Act. The AO consequently passed a draft assessment order dated 30.11.2017. However, the assessee did not prefer to file the objection against the draft assessment order before the DRP and choose to file the Appeal with ld. CIT (A). Consequently, the AO passed the final assessment order dated 05.12.2017 whereby an addition of Rs. 6,53,288/- was made on account of adjustment proposed by the TPO in respect of the Specified Domestic Transactions payment of interest to the related parties. The assessee filed the appeal before the ld. CIT (A) and contended that when the Specified Domestic Transaction is at Arm’s Length if tested with the Arm’s Length Price based on Internal CUP, then no adjustment is called for on this account. The ld. CIT (A) accepted the claim of the assessee regarding most appropriate method being Internal CUP. However, while computing at Arm’s Length Price, the ld. CIT (A) has taken the interest paid to the unrelated parties and excluded the brokerage paid by the assessee in respect of such transactions of loan taken from unrelated parties.

Therefore, the ld. CIT (A) has arrived to the Arm’s Length interest rate at 14.5% being the average interest rate excluding brokerage paid by the assessee to the unrelated parties.

3. Before us, the ld. A/R of the assessee has submitted that when the Internal CUP is accepted by the ld. CIT (A) as most appropriate method then the actual cost of finance obtained from the unrelated parties ought to have been taken at Arm’s Length Price to benchmark the Specified Domestic Transactions of payment of interest to the related parties. He has referred to the details of the interest paid to the related parties as well as to unrelated parties and submitted that the TPO as well as the AO has not disputed the actual cost of loan taken from the unrelated parties being interest and brokerage at 15.36% in comparison to the interest paid to the related parties at 15%. Therefore, the ld. A/R has submitted that the transaction of payment of interest to the related parties is at Arm’s Length and no adjustment/addition is called for on this account. Therefore the addition made by the AO and sustained by the ld. CIT (A) is unjustified.

Therefore, the transaction of payment of interest falls in the category of Specified Domestic Transactions required to be examined as per the provisions of Transfer Pricing. Before the TPO, the assessee filed its Transfer Pricing Study Analysis and claimed that as per the Internal CUP of payment of interest to the unrelated parties, the assessee is paying average interest and brokerage amounting to 15.36%. The assessee claimed that the Specified Domestic Transaction interest to the related parties at 15% is at Arm’s Length. The TPO has proceeded to adopt External CUP as most appropriate method instead of Internal CUP. We find that for rejecting the Internal CUP as most appropriate method by the TPO, no plausible reason have been given except the statement that for the purpose of benchmarking, he proposed External CUP as most appropriate method. Once the transaction of interest paid to the unrelated parties is available on record, then the Internal CUP should be preferred as against the External CUP as most appropriate method for determination of Arm’s Length Price. We find that the assessee has paid interest to 16 related parties and 15 unrelated parties. Therefore, almost equal numbers of transactions of payment of interest to related parties as well as unrelated parties have been entered into by the assessee during the year under consideration. The details of the related party transactions as well as unrelated party transactions are as under :-

S. Name PB Rela- Interest Interest Brokera Total Frequen-cy Effective No. No. tive rate Amount -ge (Interest + Interest Brokerage) rate 1 Abhas Agarwal 18 Y 15% 185,614 - 15% Annually 15% 2 Akhil Agrawal 19 Y 15% 403,339 - 15% Annually 15% 3 Akhil Agrawal 20 Y 15% 86,970 - 15% Annually 15% HUF 4. Alok Agrawal 21 Y 15% 577,555 - 15% Annually 15% 5. Alok Agrawal 22 Y 15% 297,714 - 15% Annually 15% HUF 6. Atul Agrawal 23- Y 15% 578,513 - 15% Annually 15% 24 7. Atul Agrawal 25 Y 15% 327,449 - 15% Annually 15% HUF

UNRELATED PARTIES 17. Harshit Sharma 35 N 14.40% 48,000 1.20% 15.60% Bi-monthly 16.65% 18 Smt Shakuntala 36 N 13.20% 20,198 - 13.20% Quarterly 13.87% Bajaj 19 Kirti Garg 37 N 13.20% 39,600 - 13.20% Quarterly 13.87% 20 Rekha Tiwari 38 N 14.40% 74,200 1.20% 15.60% Bi-monthly 16.65% 21 Amrita Bajaj 39 N 13.20% 5,500 - 13.20% Quarterly 13.87% 22 Vinod Kumar 40 N 14.40% 74,200 1.20% 15.60% Bi-monthly 16.65% Agrawal HUF 23 Usha Bajaj 41 N 13.20% 112,860 - 13.20% Quarterly 13.87% 24 Anuradha Rawla N 12.00% 180,000 3.60% 15.60% Bi-monthly 16.65% 25 Dhurlabhji N 12.00% 185,500 3.60% 15.60% Bi-monthly 16.65% Properties Pvt. Ltd. 26 Deepak Kumar 42 N 13.20% 26,400 2.40% 15.60% Bi-monthly 16.65% Sharma 27 Kusum Bansal 43 N 13.20% 125,868 - 13.20% Annually 13.20% 28 Om Kumar Govil 44- N 13.20% 303,600 - 13.20% Monthly 14.03% 45 29 Pushpa Devi 46 N 13.20% 105,600 2.40% 15.60% Bi-monthly 16.65% Sharma 30 Kanchan Devi N 13.80% 26,833 1.20% 15.00% Bi-monthly 15.97% Godika 31 Seema Sharma N 14.40% 26,200 1.20% 15.60% Bi-monthly 16.65% AVERAGE 13.09% 1,354,559 14.51% 15.36% There is no dispute that the interest paid to the related parties is at 15% per annum whereas the interest paid to the unrelated parties varies from 13.20% to 15.60%.

Apart from the interest, the assessee has also paid brokerage in respect of the payment to the unrelated parties. Thus the effective rate of interest inclusive of brokerage comes to 15.36% on average. Once the average effective rate of interest paid to the unrelated parties is not in dispute at 15.36%, then the Specified Domestic Transactions of payment of interest to the related parties have to be tested with the Internal CUP being average rate of interest paid to the unrelated parties. The assessee has also taken a plea before the authorities below that the payment of interest to the unrelated parties is bi-monthly/quarterly as against annually to the related parties. This is also a cost adding factor in respect to the unrelated party payment of interest. Having regard to the undisputed fact that the assessee has paid the effective average rate of interest inclusive of brokerage at 15.36%, then the payment of interest to related parties at 15% is at Arm’s Length.

It is also pertinent to note that even by applying the Arm’s Length Interest at 14.50% based on the Internal CUP which is an average of 15 transactions then the tolerance range provided under second proviso to section 92C(2) is also applicable in the case of the assessee and, therefore, in any case the Specified Domestic Transactions price falls in the tolerance range of (+)(-) 3%. Accordingly, the addition sustained by the ld. CIT (A) is deleted.

Ground No. 2 is regarding disallowance of Employees Contribution to PF & ESI paid after the due date as provided under the relevant Acts.

However, it was paid before the due date of filing the return of income under section 139(1) of the Act.

“ 3.3. I have perused the facts of the case, the assessment order and the submissions of the appellant. The ld. Authorized Representative argued that assessee deposited ESI and PF contribution after the due date but before due date of filing of return of income. I find that in a recent case of M/s. Rajasthan Renewable Energy Corporation Limited, Jaipur for Assessment Years 2012-13, 2010-11 and 2011-12 in D.B.I.T. Appeal Nos. 10/2018, 11/2018 and 12/2018 dated 13.03.2018 the Hon’ble Rajasthan High Court has decided the following questions of law.

“ II. Whether in the facts and circumstances of the case and in law the ITAT was justified in deleting the addition of Rs. 3,95,066/- made for deposition the employee’s contribution to PF and ESI beyond the prescribed time limit provided in the respective Acts.

III. Whether in the facts and circumstances of the case and in law the ITAT was justified in holding that employee’s contribution to PF and ESI governed by the provision of section 43B and not by section 36(I)(va) r.w.s. 2(24)(x) of the I.T. Act ?

The Hon’ble Jurisdictional Court has decided as follows :

“6. With regard to issue No. 2 and 3 the controversy is pending before the Supreme Court in CIT, Jaipur vs. M/s. State Bank of Bikaner and Jaipur in SLP © No. 16249/2014, therefore, subject to decision of SLP, for the present, these issues are decided in favour of the department and against the assessee. It will be open for the department to recover the amount if the decision is in their favour.”

In view of the same the disallowance made by the Assessing Officer is confirmed. This ground of appeal is dismissed.”

The ld. A/R of the assessee has submitted that the ld. CIT (A) has misunderstood the decision of Hon’ble Jurisdictional High Court and an identical issue has been considered by the Tribunal in case of Rajasthan Cottage Industries vs. ITO in vide decision dated 24.04.2019. At the outset, we note that this Tribunal has taken a consistent view on this issue and in case of Rajasthan Cottage Industries vs. ITO (supra) the Tribunal after considering the decision of Hon’ble Jurisdictional High Court in case of PCIT vs. M/s. Rajasthan Renewable Energy Corporation Limited in DB IT Appeal No. 10, 11 & 12/2018 dated 13.03.2018 which was followed by the ld. CIT (A) while passing the impugned order, has decided this issue in favour of the assessee in para 2 as under :-

“2. The only issue in this appeal is regarding disallowance of employees contribution to PF & ESI after the due date of payment as per respective Acts PF & ESI however, it was paid before the due date of filing of return of income U/s 139(1) of the Act. The ld. CIT(A) has accepted the fact that the assessee has paid the contribution towards to PF & ESI prior to due date of filing of return of income U/s 139(1) of the Act but the claim was disallowed on the basis of the decision of Hon’ble jurisdictional High Court in case of in case of PCIT vs. M/s Rajasthan Renewable Energy Corporation Limited in DB & 12/2018 dated 13.03.2018 which was misunderstood by the ld. CIT(A). We note that there was typographical mistake in the said decision of the Hon’ble jurisdictional High Court whereas the Hon’ble High Court has followed the earlier decision in case of CIT vs. Jaipur Vidyut Vitran Nigam Ltd. 363 ITR 307. The ld. AR has pointed out that the decision of Hon’ble Jurisdictional High Court in case of PCIT vs. Rajasthan State Beverages Corporation Ltd. 250 taxmann 32 has been upheld by the Hon’ble Supreme Court reported in 250 taxmann 16. Thus, the issue is covered by a series of decisions of Hon’ble Jurisdictional High Court including the decision in case of PCIT vs. Rajasthan State Beverages Corporation Ltd. (supra) as held in para 5 as under:- “5. So far as the question relating to privilege fees amounting to Rs.26.00 Crores in the instant year as well as the deduction of claim of Rs.17,80,765/- on account of Provident Fund (PF) and ESI is concerned, this Court has extensively considered the aforesaid two questions in assessee's own case vide judgment and order dt.26.05.2016 referred to (supra) and has held that the privilege fees being a revenue expenditure, is required to be allowed as a revenue expenditure. This court in the aforesaid case has also allowed the claim of the assessee, in so far as payment of PF & ESI etc. is concerned, on the finding of fact that the amounts in question were deposited on or before

10 M/s. Uttam Bharat Electricals Pvt. Ltd., Jaipur. the due date of furnishing of the return of income and taking in consideration judgment of this Court in Commissioner of Income Tax Vs. State Bank of Bikaner & Jaipur and Commissioner of Income Tax Vs. Jaipur Vidyut Vitaran Nigam Ltd. (2014) 363 ITR 70 (Raj.) and accordingly both the questions are covered by the aforesaid judgment and against the revenue.” The said decision was challenged by the Revenue before the Hon’ble Supreme Court but the SLP filed by the Revenue has been dismissed by the Hon’ble Supreme Court reported 250 taxmann 32. Accordingly, disallowances/additions made by the AO on account of employees contribution to PF & ESI is deleted and claim of the assessee is allowed.”