INFINITI WHOLESALE LTD ( FORMERLY KNWON AS WOOLWONTHS WHOLESALE (INDIA) P.LTD),MUMBAI vs. ASST CIT CIR 8(3), MUMBAI

order

: 13.10.2022 O R D E R

Per Rahul Chaudhary, Judicial Member:

Assessment Year: 2008-09 2. Appellant has raised following grounds of appeal: ―1. That on facts and circumstances of the case and in law the Ld AO erred in assessing the loss of the Appellant under the normal provisions of the Act at (Rs. 10,68.91,995) against returned loss of (Rs. 18,87,50,293) based on the directions received from Hon'ble Dispute Resolution Panel ("DRP") partially upholding the adjustment to the transfer price proposed by the learned Transfer Pricing Officer ( Ld TPO").

2. That on facts and circumstances of the case and in law the Ld AO/ TPO erred in proposing and the Hon'ble DRP further erred in partially upholding a total adjustment of Rs 6,90,21,928 in respect of the international transactions pertaining to reimbursement of expenses to its Associated Enterprises ("AE/s"), alleging the same is not at arm's length in terms of the provisions of Sections 92C(1) and 92C(2) of the Act read with Rule 10D of the Income-tax Rules 1962 ("the Rules")

2.1 That on facts and circumstances of the case and in law the Ld AO/ TPO grossly erred in ignoring the facts while proposing the adjustment and the Hon'ble DRP further erred in upholding an adjustment of Rs. 4,90,78,826 in respect of the international transactions pertaining to reimbursement of expenses to its AE, alleging that the same pertains to earlier year and cannot be allowed in the year under consideration, there by determining the Arm's Length Price ("ALP") as Nil 2.2 That on the facts and circumstances of the case and in law the Ld AO/ TPO/ DRP grossly erred in ignoring the facts and adjusting Rs. 1,50.75,835 by determining the arm's length price of reimbursement to its AE towards purchase of fixed assets by fallaciously alleging that the fixed asset have been used by the AE before it was purchased/put to use by the appellant 2.3 That on the facts and circumstances of the case and aw the d AO/ TPO/ DRP grossly erred in ignoring the facts and materiality of third party invoices submitted to the Ld TPO and Assessment Year: 2008-09 in adjusting an amount of Rs. 42,40,116 towards reimbursement of out of pocket expenses to its AE.

3. That on the facts and circumstances of the case and in law the Ld AO/ TPO erred in not considering the appellant's plea of computation of double adjustment of Rs 19,94,441 on account of out of pocket expenses in a correct perspective and in disallowing without giving any cogent reasons.

4. That on the facts and circumstances of the case and in law, Ld AO/ TPO/ DRP erred in treating IT connectivity and software expenses aggregating to Rs 80,07,197 as capital in nature.

5. That on facts and circumstances of the case and in law the Ld AO has erred in computing the loss at Rs 10,68,91,995 instead of Rs. 11,65,00,631.

4. The case of the Appellant was selected for scrutiny. During the assessment proceedings, the Assessing Officer noted that the Appellant has entered into international transactions with its Associated Enterprises (AEs) and therefore, a reference was made under Section 92CA(1) to the Transfer Pricing Officer (TPO) for the Assessment Year: 2008-09 determination of Arm‘s Length Price (ALP) of the international transactions. The TPO, vide order, dated 28.10.2011 passed under Section 92CA(3) of the Act, proposed transfer pricing adjustment aggregating to INR 9,65,96,086/- consisting of the following:

Sr. No. Particulars Amount (INR) 1 Reimbursement of Expenses to AEs 7,32,09,659/- [For Services not requested by the Assessee: (a)INR.4,90,78,826/- pertaining to Assessment Year 2007-08 and (b)INR.2,41,30,833/- pertaining to Assessment Year 2008-09, both, booked prior to execution of Inter-Corporate Agreement, dated 07.01.2008, made effective from 01.06.2006)] 2 Payment for Asset 1,91,46,116/- [IBM Server previously owned by AE] 3 Out of Pocket Expenses 42,40,116 [not supported by Bills/documents] Total 9,65,96,086/-

5. In addition to the above transfer pricing adjustments which were incorporated in the Draft Assessment Order, dated 18.11.2011, the Assessing Officer also proposed addition of INR 80,07,197/- on account of software expenses and addition of INR 24,855/- on account of difference in the information contained in Annual Information Return pertaining to contract receipt from Bajaj Electrical Ltd in the Draft Assessment Order. The Appellant filed objections to the aforesaid additions proposed in the Draft Assessment Order, dated 18.11.2011, before Dispute Resolution Panel-II, Mumbai (hereinafter referred to as the ‗DRP‘). The DRP, vide order dated 30.07.2012, disposed off the aforesaid objections and confirmed the transfer pricing adjustment of ÏNR 42,40,116/- relating to Out of Pocket Expenses and the transfer pricing adjustment of INR.4,90,78,826/-being reimbursement of expenses Assessment Year: 2008-09 pertaining to the Assessment Year 2007-08 booked before the execution of the Inter-Corporate Agreement, dated 07.01.2008. As regards reimbursement expenses of INR 2,41,30,833/- pertaining to the Assessment Year 2008-09 booked before the execution of the Inter-Corporate Agreement, dated 07.01.2008, the DRP directed the Assessing Officer to verify the expenses and to allow legitimate expenses incurred for business purposes. Granting some relief to the Appellant in respect of the transfer pricing adjustment in relation to purchase price of the asset (i.e. IBM Server), the DRP directed the Assessing Officer to re-calculate the ALP of the asset purchased by reducing the cost of asset by the depreciation for one year (i.e. Financial Year 2006-07 relevant to Assessment Year 2007- 08) as according to DRP the asset was put to use during that year only. On the basis of the aforesaid direction issued by the DRP, the Assessing Officer passed the Final Assessment Order, dated 30.10.2012, computing the income of the Appellant as under: I Total income as per (-) 18,87,50,293 computation of income Add: Addition/disallowance as discussed above i) Addition on account of 9,65.96,086 adjustment u/s 92CA(1) Less : Relief as discussed above a) On a/c of reimbursement 2,35,03,682 of expenditure for AY 2008-09 [INR 2,41,30,833 – INR 6,27,151/-] b) On a/c of purchase price 40,70,476 of asset ii) Software expenses 80,07,197 iii) Different in AIR 24,855 7,70,53,980 (-) 11,16,96,313 Less Depreciation on software exp. 48,04,318 Capitalized @ 60% Total taxable income (-) 10,68,91,995 Assessment Year: 2008-09 6. Being aggrieved, the Appellant is now in appeal before us challenging the Final Assessment Order, dated 30.10.2012, on the grounds reproduced in paragraph 2 above. We have heard the rival contention and perused the material on record including the judicial precedents cited during the course of hearing. The grounds raised by the Appellant are taken up in seriatim hereinafter.

Ground No. 1 & 2 7. Ground No. 1 and 2 are general in nature and therefore does not require adjudication.

Ground No. 2.1 8. Ground No. 2.1 pertains to addition on account of transfer pricing adjustment of INR 4,90,78,826/- made in respect of reimbursement of expenses on the ground that the same pertained to Assessment Year 2007-08 (and not the relevant Assessment Year 2008-09), a period prior to the execution of the Inter-Corporate Agreement, dated 07.01.2008, and therefore, no deduction could be allowed in respect of the same.

Ground No. 2.2 10. Ground No. 2.2 pertains to addition on account of transfer pricing adjustment of INR 1,50,75,835/- made in the Final Assessment Order, dated 30.10.2012, on account of upward adjustment of ALP of transaction of purchase of asset.

Assessment Year: 2008-09 11. The facts relevant for adjudication of the issue before us, in brief, are that According to the TPO the Appellant had purchased IBM Server (hereinafter referred to as ‗the Asset‘) for INR 2,51,26,392/- from its AE on 24.06.2007 which had in turn purchase it from a third party [i.e., Redington (India) Ltd.] for the same price on 29.11.2005. The TPO was of the view that the Asset purchased by the Appellant was an old asset purchased by the AE of the Appellant during the financial year 2005-06 and sold to the Appellant during the financial year 2007-08. Accordingly, the TPO reduced the purchase price of the Asset by charging depreciation for the proportionate period for financial years 2005-06 (for half year), 2006-07 (for full year) and 2007-08 (for April to June 2007) for to arrive at Written Down Value (WDV) of the Asset at INR 59,80,081/- and thus, proposed upward transfer pricing adjustment of INR 1,91,46,311/- being excess purchase price paid by the Appellant to its AE for the purchase of the Asset which was incorporated in the draft assessment order, dated 18.11.2011, by the Assessing Officer. In the objections filed by the Appellant on this issue, the DRP granted relief to the Appellant and directed the TPO to re-calculate the ALP by reducing the purchase price of the Asset by the depreciation for financial year 2006-07 only. As per the directions of the DRP the WDV of the Asset was re-calculated at INR 1,00,50,557/-. Accordingly, in the Final Assessment Order, dated 30.10.2012, the addition was reduced to INR 1,50,75,835/- as against INR 1,91,46,311/- proposed in the Draft Assessment Order. Being aggrieved, the Appellant has carried the issue in appeal before us challenging the aforesaid addition of INR 1,50,75,835/-.

"10B(1) For the purpose of sub-section (2) of section 92C, the arm's length price in relation to an international transaction [or a specified domestic transaction] shall be determined by any of the following methods, being the most appropriate method, in the following manner namely:— (a) Comparable uncontrolled price method, by which- (i) The price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions, is identified. ( (ii) Such price is adjusted to account for differences, if any, between the international transaction [or the specified i domestic transaction] and the comparable uncontrolled i transactions or between the enterprises entering into ) such transactions, which could materially affect the price in the open market.

Assessment Year: 2008-09 (iii) ( The adjusted price arrived at under sub-clause (ii) is taken to be an arm's length price in respect of the property i transferred or services provided in the international i transaction….. i ) As rightly submitted the by the ld. Representative for the assessee, when the transaction was compared by taking CUP method as the most appropriate method, the price charged or paid by the assessee for the property transferred needs to be compared in a comparable uncontrolled transaction or a number of such transactions, as identified. Therefore, it is obligatory on the part of the TPO to identify the comparable transaction in the uncontrolled transaction for the purpose of determining the ALP. In this case, the TPO has not taken any pain to identify the comparable transaction so as to compare the price paid by the assessee for purchasing the machinery from its holding company. When the price was determined by comparing the uncontrolled transaction, the difference between the price paid by the assessee and the price so determined in a comparable uncontrolled transaction has to be worked out and the difference between the two shall be taken as the ALP. Unfortunately, the TPO has not taken any pain either to identify the comparable transaction or to identify the price paid by the third party company in the uncontrolled transaction. The TPO has simply compared the written down value of the machinery.

―19. However, the Assessing Officer ignored this material available on record and proceeded to determine the ALP basing on the written down value of the cranes as recorded in the books of the seller by applying the CUP method. Ld.DRP accepted the contention of the assessee that the written down value of cranes in the books of the associated enterprise of the assessee cannot be considered as ALP and is not derived from the transaction between enterprises other than associated enterprises. Further ld. DRP observed that it is nobody's case that an old asset cannot be sold at a price exceeding net book value. Having considered the decisions relied upon by the assessee in support of their contention that either the valuation done by the chartered engineer, or the value accepted by the custom authorities, or the value derived by DCF method could be considered for a determination of the ALP. Ld. DRP considered the details furnished by the assessee as per these 3 valuations namely, as valued by the chartered engineer, are as valued by the customs Assessment Year: 2008-09 authorities, or as valued by following the DCF method and having done all this exercise DRP reach the conclusion that the method adopted by the Assessing Officer is not an acceptable one.

are devoid of merits and the appeal is liable to be dismissed. Consequently while upholding the directions given by the ld. DRP, we dismiss the appeal of the Revenue. In view of the dismissal of the appeal, cross objection preferred by the assessee becomes in fructuous and therefore, the Cross Objection is also dismissed.‖

15. In the case before us, the TPO has determined ALP by computing WDV of the Asset without making any effort to identify a comparable transaction or the price paid by third party. Further, while doing so the TPO has taken depreciation rate of 60% as per the provisions of the Act without considering any other factor(s). Therefore, respectfully following the above decision of the Tribunal, we delete the transfer pricing addition of INR 1,50,75,835/-. Ground No. 2.2 raised by the Appellant is allowed.

Ground No. 2.3 16. Ground No. 2.3 pertains to addition on account of transfer pricing adjustment of INR 42,40,116/- made in the Final Assessment Order, Assessment Year: 2008-09 dated 30.10.2012, on account of reimbursement of out of pocket expenses by the Appellant to its AE.

Ground No. 3 19. In Ground No. 3, the Appellant has contended that the double adjustment to the extent of INR 19,94,441/- has been made in the Final Assessment Order leading to double addition. The Ld. Authorised Representative for the Appellant, referring to the calculation of the double adjustment of INR 19,94,441/- (at page 288 of the paper book), submitted that this issue can be remanded back to the file of Assessing Officer for verification. We note that the amount of INR 19,94,441/- has been computed taking into 17 Assessment Year: 2008-09 account the adjustment/disallowance made in respect of expenses pertaining to Assessment Year 2007-08 and 2008-09 for the period preceding the date of execution of Inter-Corporate Agreement, dated 07.01.2008 and reimbursement of out of pocket expenses. While disposing off Ground No. 2.2 and 2.3 hereinabove, we have deleted the additions made in respect of the aforesaid expenses. Accordingly, we remand this issue back to the file of Assessing Officer for verification/re-computation, keeping in view our findings in relation to Ground No. 2.2 & 2.3 above, as well as the contentions of the Appellant. In view of the aforesaid, Ground No. 3 is allowed for statistical purposes.

Ground No. 4 &5 20. Ground No. 4 pertains to disallowance of IT Connectivity Charges and Software Expenses aggregating to INR 80,07,197/-. The Ld. Authorised Representative for the Appellant appearing before us submitted that the aforesaid expenses were disallowed on the ground that the same were capital in nature and depreciation @ 60% was allowed in respect of the same. The appellant does not wish to press this Ground of appeal. Accordingly, Ground No. 4 of the appeal is dismissed as not pressed.

21. Ground No. 5 pertains to computation of loss at INR 10,68,91,995/- instead of INR 11,65,00,631/-. The Ld. Authorised Representative for the Appellant submitted that while computing the total loss the Assessing Officer has committed computation error. The Assessing Officer has disallowed IT Connectivity Charges and Software Expenses aggregating to INR 80,07,197/- and thereby, correctly reduced the loss claimed by the Appellant. However, while granting corresponding deprecation of INR 48,04,318/- [INR 80,07,197 @ 60%], the Assessing Officer has not increased the amount of loss Assessment Year: 2008-09 claimed by the corresponding depreciation amount and committed the computational error by reducing the loss claimed by the depreciation amount. We have perused the record and find merit in the submissions advanced by the Ld. Authorised Representative for the Appellant. We note that the Assessing Officer has after adding the additions/disallowance to the loss of INR 18,87,50,293/- declared by the Appellant arrived at reduced loss of INR 11,16,96,313/-. Though, in the computation table, the Assessing Officer has correctly stated that as under: (-) 11,16,96,313/- Less depreciation on software @ 60% 48,04,318/- The Assessing Officer has incorrectly added the depreciation amount of INR 48,04,318/- to arrive at incorrect figure of loss of INR 10,68,91,995/- instead of correct figure of INR 11,65,00,631/-. In view of the aforesaid, the Assessing Officer is directed to increase the amount of loss by the amount of by the depreciation amount of INR 48,04,318/-. Ground No. 5 raised by the Appellant is allowed.

Ground No. 6 22. The Ld. Authorised Representative for the Appellant appearing before us submitted that the amount in dispute is only INR 24,855/-. Therefore, on account of the smallness of the amount in dispute, the Appellant does not wish to press this ground. Accordingly, Ground No. 6 is disposed off as not pressed.

Ground No. 7 23. Ground No. 7 pertains to disallowance of INR 6,27,151/- made by the Assessing Officer after carrying out verification of total expenses of INR 2,41,30,833/- incurred by the Appellant during the relevant previous year but prior to execution of the Inter-Corporate Assessment Year: 2008-09 Agreement dated 07.01.2008. The relevant extract of the Final Assessment Order read as under:

―Further, vide para 10 of the directions the Hon‘ble DRP directed to the Assessing Officer to verify expenditure incurred of Rs. 2,41,30,833/- prior to signing of agreement. Following the direction of Hon‘ble DRP, the assessee was given an opportunity to make his submission in this regard required for verification of expenditure. In response to same the assessee made submission vide letter dated 09.10.2012. The submission made by the assessee was carefully perused and considered. This exercise revealed that out of expenses of Rs. 2,41,30,833/- the assessee made a payment of Rs. 6,27,151/- to M/s KPMG. On enquiry it has been noticed that this expenditure was mainly incurred by way of payment of professional fees to KPMG for rendition of services to expats. This act of the assessee tantamount of bearing the expenses of employees i.e. third party which cannot be considered for allowance especially in the light of the fact that the assessee at no point of time produced any evidence to show that this amount has been included in the hands of expats employees as perquisites as required by the provisions of 17(2)(iv) of the Income Tax Act, 1961. Therefore, the disallowance to the extent of Rs. 6,27,151/- is sustained. As a result, the addition to the extent of difference Rs. 2,35,03,682/- (2,41,30,833 – 6,27,151) stands deleted as the expenditure has been incurred wholly and exclusively for the purpose of business.‖ 24. The Ld. Authorised Representative for the Appellant submitted that all the necessary documents supporting the fact that the aforesaid expenses were incurred wholly and exclusively for the purpose of business of the Appellant were placed before the Assessing Officer. In this regard, he referred to the details of third party invoices given at page 231 of the paper-book, as well as letter dated 23.10.2012, filed before the Assessing Officer. He submitted that the aforesaid payments were incidental to the business of the Appellant. The services provided by expats helped the Appellant to establish efficient business structure. The aforesaid payments were to facilitate the business of the Appellant and were not in the nature of personal services rendered by the third party service provider to Assessment Year: 2008-09 the employees of the Appellant. Per contra, the Ld. Departmental Representative referred to invoices (placed at page 75 to 81 of the paper-book) and submitted that the services were essentially for the benefit of the employees of the Appellant and not the Appellant. The Assessing Officer has returned a finding that during the assessment proceedings, the Appellant had failed to produce any evidence to show that this amount has been included in the hands of expats employees as perquisites as required by the provisions of 17(2)(iv) of the Act. Therefore, the Assessing Officer was justified in making the addition of INR.6,27,151/-.

Additional Grounds 27. The Appellant had, vide letter dated 17.04.2014, raised an additional ground(s) pertaining to claiming deduction for INR 71,93,907/- pertaining to payment made to non-resident in the financial year relevant to Assessment Year 2008-09 on which tax was deducted/deposited on 26.06.2009. In view of the statement made by the Ld. Authorised Representative for the Appellant under instructions, the additional ground(s) are disposed off as being not pressed.