INFINITY RETAIL LTD,MUMBAI vs. DCIT RG 10(1)(1), MUMBAI

The Appellant has raised the following grounds of appeal:

During the previous year relevant to the Assessment Year 2009-10, the Appellant recovered from its AEs INR.12,66,950/- being expenses incurred by the Appellant on their behalf. During the assessment proceedings, the Appellant was required submit third party invoices pertaining to expenses recovered. The Appellant submitted sample third party invoices for INR 743,575/-. The TPO granted benefit to the Appellant in respect of the same and proposed upward transfer pricing adjustment for the balance amount of INR.5,23,377/- on account of non-submission of third party invoices. DRP also rejected the objections of the Appellant holding that the Appellant has failed to submit the third party invoices in respect of INR.5,23,377/- recovered from the AEs.

Before us, the Learned Authorised Representative for Appellant contended that no deduction was claimed by the Appellant for INR 12,66,950/- in the return of income for the relevant Assessment Year, and therefore, addition of INR 5,23,377/- made by the Assessing Officer would imply that the Appellant would suffer disallowance for expenses never claimed as & 2297/Mum/2015 Assessment Years: 2009-10 & 2010-11 deduction in the return of income. Per contra, the contention of the Ld. Departmental Representative is that the Appellant has failed to submit third party invoices and therefore, disallowance INR.5,23,377/- was justified.

In our view, one way to look at the transfer pricing adjustment of INR.5,23,377/- is that the recoveries of INR.5,23,377/- made by the Appellant from its AEs were not matched with the corresponding expenses claimed to have been incurred and therefore, the aforesaid amount represented income in the hands of the appellant. However, on perusal of order passed by TPO and DRP, we note that this is not the case set up by the Revenue. Both, TPO and DRP have simply cited non-submission of third party invoices as the reason for making the transfer pricing adjustment treating the same at par with the reimbursement of out-of-pocket expenditure incurred despite the Appellant taking a position that deduction for INR.12,66,950/- was never claimed in the return of income which fact has not been challenged/controverted by the Revenue during appellate proceedings before us. Further, the third party invoices of INR 743,575/- submitted during the assessment proceedings were accepted. It was not the case of the Revenue that some mark-up was been charged by the Appellant while making recoveries from AEs. Accordingly, in view of the aforesaid, transfer pricing adjustment of INR.5,23,377/- made by the Assessing Officer is deleted.

Part of Ground No. 2 and Ground No. 3 are directed against the transfer pricing adjustment of INR 54,67,445/- pertaining to reimbursement of the out of pocket expenses. & 2297/Mum/2015 Assessment Years: 2009-10 & 2010-11 15. The relevant facts for the adjudication of the issue, in brief, are that the Appellant had claimed deduction for payments of INR 70,92,807/- made by the Appellant to its AEs contending the same to be reimbursement of out of pocket expenses incurred by the AEs on behalf of the Appellant. The Appellant submitted third-party invoices for INR 16,25,362/-. The TPO, after granting benefit in respect of the same, proposed transfer pricing adjustment of INR 54,67,445 taking ALP of the balance out-of- pocket expenses of INR 54,67,445/- as „Nil‟. The proposed transfer pricing adjustment of INR 54,67,445/- was incorporated in the Draft Assessment Order. The Appellant filed objections before the DRP. However, the DRP declined to grant any relief to the Appellant holding that the Appellant was not able to justify the claim with the supporting invoices/documents during the assessment proceedings. Accordingly, Assessing Officer made transfer pricing adjustment of INR 54,67,445/- in the Final Assessment Order, dated 08.01.2014. Being aggrieved, the Appellant has carried the issue in appeal before us.

The Ld. Authorised Representative for the Appellant submitted that the relevant documents supporting out of pocket expenses were filed during the assessment proceedings on sample basis. He submitted that additional third-party-invoices for INR 27,22,692/- were filed before DRP and in respect of the same remand report was called by the DRO. Assessing Officer submitted before DRP a remand report, dated 21.10.2013, accepting the said invoices. However, this remand report was not considered by DRP and transfer pricing addition was confirmed. He submitted that no defect or discrepancy was been pointed out by the TPO/DRP in the bills/documents 8 & 2297/Mum/2015 Assessment Years: 2009-10 & 2010-11 furnished by the Appellant and therefore, the Appellant has materially complied with the directions issued by the TPO by furnishing the supporting bills/documents in for around 80% of the out of pocket expenses. He submitted that the Assessing Officer was not justified in insisting upon the Appellant to furnish 100% of the bills/supporting documents in support of claim for deduction of out of pocket expenses. In view of the aforesaid, he prayed that the addition of INR 54,67,445/- be deleted.

Per contra, the Ld. Departmental Representative submitted that the TPO had asked for the bills/supporting vouchers in relation to third party expenses claimed to have been incurred by the Appellant and which the Appellant had, admittedly, failed to furnish. Therefore, the transfer pricing adjustment of INR 54,67,445/- was justified.

We have heard the rival submissions and perused the material on record. It is factually correct that the Assessing Officer had vide Remand Report, dated 21.10.2013, conveyed his consent for admission of additional evidence in the form of third-party invoices aggregating to INR 27,22,692/- and requested the DRP to decide the issue on merits. However, the remand report was not considered by DRP. Thus, from the total out of pocket expenses of INR 70,92,807/- expenses of INR 16,25,362 (constituting around 22% of the aforesaid expenses) have been examined on merits and found to be correct. We, therefore, remand this issue back to DRP for fresh adjudication as per law after giving Appellant a reasonable opportunity of being heard. While doing so the DRP shall take into consideration the third- party-invoices aggregating to INR.27,22,692/- already filed by & 2297/Mum/2015 Assessment Years: 2009-10 & 2010-11 the Appellant and the Remand Report, dated 21.10.2013, submitted by Assessing Officer in respect of the same as well as any further invoices/documents that may be filed by the Appellant before DRP to support the claim. Accordingly, addition of INR 54,67,445/- on account of the transfer pricing adjustment is set aside.

In view of the above, Ground No. 2 is partly allowed, Ground No. 3 is partly allowed and Ground No.4 is allowed.

The Ld. Authorised Representative for the Appellant appearing before us submitted that the aforesaid expenses were & 2297/Mum/2015 Assessment Years: 2009-10 & 2010-11 disallowed during the Assessment Year 2008-09 on the ground that the same were capital in nature and depreciation @ 60% was allowed in respect of the same. By way of present ground, the Appellant is claiming consequential depreciation in respect of the aforesaid software expenses for the Assessment Year 2009-10.

We note that the Appellant had not pressed the ground relating to disallowance of aforesaid software expenses in appeal before the Tribunal for the Assessment Year 2008-09 (ITA No. 7718/Mum/2012) disposed vide order dated 13.10.2022. Accordingly, the Appellant is entitled to claim of depreciation in respect of Software Expenses of INR 80,07,197/- disallowed during the Assessment Year 2008-09 as capital in nature as per the provisions of the Act. Accordingly, the Assessing Officer is directed to allow depreciation at the rate of 60% in respect of aforesaid Software Expenses of INR 80,07,197/- for the Assessment Year 2009-10. Ground No. 6 raised by the Appellant is allowed.

We would now take up appeal for the Assessment Year 2010- 11 directed against Final Assessment Order dated, 27.02.2015, passed under Section 143(3) read with Section 144C(13) of the Income Tax Act, 1961 [hereinafter referred to as „the Act‟], as per directions issued by Dispute Resolution Panel-II, Mumbai (hereinafter referred to as „the DRP‟) under Section 144C(5) of the Act pertaining to the Assessment Year 2010-11.

The Appellant has raised the following grounds of appeal: Transfer Pricing Grounds

Based on the facts and circumstances of the case and in law, the Ld. AO, relying on the directions of the DRP, erred in disallowing software expenses incurred by the appellant amounting to Rs.1,00,56,108 on the ground that the same was capital expenditure.

Based on the facts and circumstances of the case and in law, the Ld. AO erred in not granting depreciation @ 60% on software expenditure of Rs.80,07,197 and Rs.74,71,642 considered as capital expenditure in AY 2008-09 and AY 2009-10 respectively.

Disallowance of lease rental a. Based on the facts and circumstances of the case and in law, the Ld. AO, relying on the directions of the DRP, erred in not allowing lease rent payments of Rs.1,00,59,112 on the ground that the same was capital expenditure. & 2297/Mum/2015 Assessment Years: 2009-10 & 2010-11 b. Without prejudice to the above, the learned AO erred in not allowing depreciation on the principal payment of lease rental treated as capital in nature

Based on the facts and circumstances of the case and in law, the Ld. AO, relying on the directions of the DRP, erred in not allowing the write off of negative balance of creditors amounting to Rs.2,60,035 claimed as bad debts.

Based on the facts and in the circumstances of the case and in law, the Ld. AO erred in not granting deduction of expenditure amounting to Rs.3,16,53,132 while computing income of the appellant inspite of deciding the said issue in favour of the appellant in the aforesaid assessment order.

Based on the facts and circumstances of the case and in law, the Ld. AO/DRP erred in granting a tax credit of Rs.1,42,35,125 as against Rs.1,63,92,446 claimed in the Return of Income thereby granting a short credit of Rs.21,57,321 Each of the above grounds is independent and without prejudice to the other grounds of appeal

The relevant facts for the adjudication of the issue, in brief, are that the Appellant had claimed deduction for payments of INR 62,90,123/- made by the Appellant to its AEs contending the same to be reimbursement of out of pocket expenses incurred by the AEs on behalf of the Appellant. The Appellant submitted third-party invoices for INR 47,252,311/-. The TPO, after granting benefit in respect of the same, proposed transfer pricing adjustment of INR 15,37,812 taking ALP of the balance out-of-pocket expenses of INR 15,37,812/- as „Nil‟. The aforesaid transfer pricing adjustment was incorporated in the Draft Assessment Order. The Appellant filed objections before the DRP on the proposed addition. However, the DRP declined to grant any relief to the Appellant holding that the Appellant was not able to justify the claim by following the order of DRP for the Assessment Year 2008-09. Accordingly, Assessing & 2297/Mum/2015 Assessment Years: 2009-10 & 2010-11 Officer made transfer pricing adjustment of INR 15,37,812/- in the Final Assessment Order, dated 27.02.2015. Being aggrieved, the Appellant has carried the issue in appeal before us.

We note that the DRP had rejected the objections filed by the Appellant on the issue under consideration by following the decision of DRP for the Assessment Year 2008-09. In appeal preferred by the Appellant for the Assessment Year 2008-09 identical issue has been decided in favour of the Appellant and the addition has been deleted. The relevant extract of the decision of the Tribunal passed in on 13.10.2022 reads as under:

The facts in the Assessment Year 2010-11 are identical to those in the Assessment Year 2008-09 with only difference being that for the Assessment Year 2008-09 Appellant had not furnished third-party invoices or other supporting documents for 22% out of pocket expenses reimbursed which is 24% for the Assessment Year 2010-11 which is in issue before us. TPO/Assessing Officer has not pointed out any defect/discrepancy in the bills/supporting documents furnished by the Appellant as the same have been examined and accepted. Since there is no change in the facts and circumstances in the assessment year 2010-11 before us as compared to the Assessment Year 2008-09, adopting the reasoning given by the Tribunal in paragraph 18 of the order of the Tribunal for the Assessment Year 2008-09 reproduced hereinabove, we delete the transfer pricing addition of INR 15,37,812/- made in relation to reimbursement of out of pocket expenses to AE. Accordingly, Ground No. 2 raised in the appeal is allowed. 18 & 2297/Mum/2015 Assessment Years: 2009-10 & 2010-11 Ground No. 3 & 4 37. Ground No. 3 is directed against the transfer pricing adjustment of INR 24,69,193/- pertaining to reimbursement of software maintenance expenses (connectivity charges).

During the previous year relevant to the Assessment Year 2010-11, the Appellant made a payment of INR 24,69,193/- to it's AE (i.e., Woolworths limited, Australia) claiming the same to be reimbursement of software maintenance expenses incurred by the AE in the form of connectivity charges which were in addition to Software Maintenance Expenses of INR 66,37,337/- paid by the Appellant to the same AE during the relevant Assessment Year. During the assessment proceedings, TPO issued a notice, dated 05.11.2013, to the Appellant asking the Appellant to show cause why the value of this international transaction of reimbursement of Software Maintenance Expenses of INR 24,69,193/- should not be determined at "Nil". In response, the Appellant filed submission, dated 25.11.2013, explaining that the IT Connectivity Charges of INR.24,69,193/- pertain to IT Connections expenses incurred in relation to the contractual arrangement with a third party contractor to provide connectivity whereas the software development expenses amounting to INR 66,37,327/- were incurred for customization of AS-400 software. The TPO was not satisfied with the explanation furnished by the Appellant as the TPO concluded that Appellant had failed to furnished the third party contractor bills/invoices. Scrutiny of the Project Closer Report issued by the third party contractor (M/s. Telstra Corporation Limited) showed that the report was prepared on 10.10.2006 and the services were availed for the previous year ending 19 & 2297/Mum/2015 Assessment Years: 2009-10 & 2010-11 31.03.2007. The expenses did not pertaining to the previous year 2009-2010 relevant to the Assessment Year 2010-2011. Thus, the TPO proposed transfer pricing adjustment of INR.24,69,193/- determining the arms length price of this transaction as „Nil‟. The aforesaid transfer pricing adjustment was incorporated by the Assessing Officer in the Draft Assessment order. The Objections filed by the Appellant against Draft Assessment Order on this issued were dismissed resulting in addition of INR.24,69,193/- on account of the said transfer pricing adjustment. Being aggrieved the Appellant has carried the issue in appeal before us.

Learned Authorised Representative for Appellant appearing before us submitted that the findings returned by the TPO/Assessing Officer are factually correct. Taking us through the Project Closure Report issued by M/s. Telstra Corporation Limited (placed at pg 128 to 134 of the paper-book as Annexure 10 and Annexure 11 to submission dated 25.11.2013 filed by the Appellant before the TPO) he submitted that the Appellant was required to incur monthly charges on connectivity in respect of which rates were prescribed in the aforesaid report. He submitted that the connectivity charges were incurred for taking dedicated lease lines, and were separate/distinct from the software maintenance expenses incurred for customization of AS-400 ERP Software.

Per Contra, the Learned Departmental Representative relied upon the order passed by the TPO/DRP.

We have considered the rival submission and perused the material on record including Annexure 10 and 11 to submission & 2297/Mum/2015 Assessment Years: 2009-10 & 2010-11 dated 25.11.2013 filed by the Appellant before TPO and the Project Closure Report. The Project Report is dated 10.10.2006. During the hearing the Learned Authorised Representative for Appellant had relied upon Section 2 to the said report giving „Cost and Pricing Summary‟ to contend that total amount of USD 5,440/- reflected at the bottom on the column with heading „Months 1 to 48‟ payments to contend that this was the communication charge which was reflected in monthly inter-group account statement under the head „communication charges‟. On closure scrutiny we note that the amount of USD 5,440/- is the sum total of amount reflected in column with heading Supply and Installation – „Total Monthly Cost‟ and the column with heading „Manage and Maintain (per Month). However, on perusal of „Tesla Scope Statement‟ it becomes clear that project is for obtaining Global IP VPN connection to help in connectivity between Chullora, Sydney, Australia and Mumbai, India. Thus, the connectivity expenses of INR INR.24,69,193/- are separate from Software Maintenance Expenses of INR 66,37,327/-. Further, as per the Project Closure Report and the monthly intra-group account statements, the same are being reimbursed at cost. In view of the aforesaid, transfer pricing addition of INR 24,69,193/- is deleted. Ground No.3 is allowed. Ground No. 4 is disposed off as being infructuous.

The Ld. Authorised Representative for the Appellant appearing before us submitted that the aforesaid expenses were disallowed during the Assessment Year 2008-09 and 2009-10 on the ground that the same were capital in nature and depreciation @ 60% was allowed in respect of the same. By way of present ground, the Appellant is claiming consequential depreciation in respect of the aforesaid software expenses for the Assessment Year 2008-09 and 2009-10.

We note that the Appellant had not pressed the ground relating to disallowance of aforesaid software expenses in appeal before the Tribunal for the Assessment Year 2008-09 (ITA No. 7718/Mum/2012) disposed vide order dated 13.10.2022 and in appeal for the Assessment Year 2009-10 being disposed of by way of present order. Accordingly, the Appellant is entitled to & 2297/Mum/2015 Assessment Years: 2009-10 & 2010-11 claim the depreciation in respect of the aforesaid Software Expenses pertaining to the Assessment Year 2008-09 and 2009-10 and therefore, the Assessing Officer is directed to allow depreciation at the rate of 60% in respect of aforesaid Software Expenses of INR 80,07,197/- and INR 74,71,642/- (INR 1,06,73,775/- Less INR 32,02,133/-) disallowed during the Assessment Year 2008-09 and Assessment Year 2009-10. Ground No. 6 raised by the Appellant is allowed.

Learned Authorised Representative for Appellant submitted that the Assessing Officer has incorrectly disallowed lease rent payments of INR 1,00,59,112/- by considering the same as capital expenditure by misleading himself in believing that the „Agreement For Provision For Warehousing Services‟ between the Appellant and DHL Lemuir Logistic Private Ltd (hereinafter referred to as the „Lease Agreement‟) was in the nature of a finance lease. He took us through the relevant terms of the contract to support his contention and submitted that the Appellant is engaged in the business wholesale cash and carry and the warehouse taken on lease are used for the purpose of the business, hence, lease rentals paid to DHL Lemuir Logistics Private Limited (for short „DHL‟) are allowable as a deduction while computing the taxable income.

Per contra, the Learned Departmental Representative contended that the Appellant was setting up a new case before the Tribunal. Referring to submission dated 12.02.2014 filed by & 2297/Mum/2015 Assessment Years: 2009-10 & 2010-11 the Appellant before the Assessing Officer during the course of assessment proceedings, he submitted that the Appellant had itself submitted that warehouse was taken from DHL on a finance lease. The Appellant was not the owner of the warehouse and has not claimed depreciation. The Appellant had claimed deduction for the lease rental payment of INR 1,00,59,112/- while computing taxable income.

In rejoinder, the Ld. Authorised Representative for the Appellant submitted that the submissions were advanced on incorrect understanding of facts. He vehemently contended that the Appellant had placed on record, the Lease Agreement which was not in the nature of a finance lease.

We have heard the rival contention and perused the material on record. We note that the Appellant is in the business of wholesale cash and carry and it has taken warehouse on lease from DHL. Some of the relevant clauses of the Lease Agreement are as under:

Perusal of the above extracts of the contract shows that the Lease Agreement is not in the nature of a finance lease. Schedule 1 to the Lease Agreement provides that the details of the premises admeasuring 100,000/- Square Feet to be provided to the Appellant. Schedule 2 provides description of service charges which includes monthly warehouse charge of INR 6,25,000/-

We have perused the orders passed by the Assessing Officer and DRP on this issue. The Appellant had itself contended before the authorities that the Lease Agreement was in the nature of finance lease and therefore, the discussion proceeds on that premise.

It is admitted position that lease payment of INR 1,00,59,112/- were made by the Appellant to DHL and had also claimed deduction for the same in the computation of taxable income. In appellate proceedings before us, it has been contended that on behalf of the Appellant that the warehouse not been taken on finance lease and the aforesaid amount is allowable as revenue deduction under Section 37(1) of the Act having been incurred wholly and exclusively for the purpose of business. However, we note that in cash flow statement lease rent paid on finance lease of INR 1,00,59,111/- has been shown under the head „cash flow from the financing activity‟ . Under Schedule 15 – „Operating and Administrative Expenses forming part of financial statement for the previous year relevant to the Assessment Year 2009-10, rent is shown as INR 5,50,82,263/-, and warehouse and facility charges are shown at INR 26 & 2297/Mum/2015 Assessment Years: 2009-10 & 2010-11 3,45,86,682/-. Further, Schedule 17 – Notes to Accounts mentioned the maturity profile of finance lease obligations. Thus, it is not clear whether the payment of INR 1,00,59,111/- pertain to operating or finance lease obligations of the Appellant. Further, before the Assessing Officer as well as before the DRP the Appellant has maintained the position that the payments of INR 1,00,59,111/- pertain to finance lease. In view of the aforesaid facts, we hold that the issue requires verification by the Assessing Officer. Accordingly, this issue is remanded back to the file of Assessing Officer for fresh adjudication. Ground No. 7(a) and 7(b) are allowed for statistical purposes.

The Ld. Authorised Representative for the Appellant submitted the Appellant made 100% payment for purchases made and subsequently returned some portion of the purchases. Accordingly, the creditors‟ accounts were debited and amount pertaining to purchases returned was recoverable from the creditors. However, the Appellant realized that these amounts were not recoverable and therefore, the same were claimed as an expense as bad debts written off.

Per contra, Ld. Departmental Representative relying upon the order passed by the Assessing Officer as well as DRP submitted that the aforesaid amount represented the negative balances of creditors which were never offered to tax. Merely because & 2297/Mum/2015 Assessment Years: 2009-10 & 2010-11 the said amounts have been written off in the books of account would not entitle the appellant to claim of bad debt under Section 36(1)(vii) of the Act. Further, no evidence was brought on record to show the aforesaid amounts were not recoverable.

Having considered the rival submission we are of the view that the INR 2,60,035/- is not in the nature of a debt which has gone bad. It cannot be said that the Appellant has indirectly offered to tax amount of INR 2,60,035/- representing purchase returns by claiming deduction for the correct amount of purchase cost pertaining to goods received and accepted. Therefore, deduction under Section 36(1)(vii) of the Act cannot be allowed. In our view, the amount of INR 2,60,035/- is in the nature of advance for purchases in respect of which goods were never received resulting in loss from business operations. Accordingly, the issue is remanded back to the file of Assessing Officer to examine the allowability of deduction of INR.2,60,035/- representing negative balance of creditors written off during the relevant previous year in terms of Section 37 of the Act after giving appellant an opportunity of being heard. Ground No. 8 raised by the Appellant is allowed for statistical purposes.