HINDUSTAN DORR-OLIVER LTD,MUMBAI vs. ACIT-10(1)(1), MUMBAI

This appeal is filed by Hindustan Dorr Oliver Limited (the assessee/ appellant) against the order passed by Asst. Commissioner of Income-tax (10)(1)(1), Mumbai (the learned Assessing Officer) under section 143(3) read with section 144C(13) of The Income-Tax Act, 1961 (the Act) dated 30th October, 2017.

The assessee has raised the following grounds of appeal:-

The Ld. Assessing Officer has erred in passing the final assessment order under section 143(3) r.w.s. 144C(13) of the Act dated 30.10.2017 determining the total income of the Appellant at Rs. (1,55,49,10,430)/- as against returned income of Rs. (185,4573,238)/-, The Appellant strongly objects to the addition made in the assessment order.

The Ld. Assessing Officer has erred in making reference to the Ld. Transfer Pricing Officer u/s 92CA(1) of the Act. The reference made is bad in law and accordingly, the order of the Ld. Transfer Pricing Officer is void ab initio.

The Ld. Assessing Officer in pursuance of the direction of the Ld. Transfer Pricing Officer and as confirmed by the Ld. Dispute Resolution Panel, has erred in making adjustment of Rs. 23,42,64,637/- in respect of certain specified domestic transactions.

Without prejudice to the above, the deletion of clause (i) of section 92BA by Finance Act, 2017 whereby the transaction of any expenditure in respect of which payment is made to a person referred to in section 40A(2)(b) was removed from the definition of specified domestic transaction, is retrospective in

The Ld. Assessing Officer, Transfer Pricing Officer and the Ld. Dispute Resolution Panel has erred in not appreciating the fact that as a result of the impugned specified domestic transactions, there was no tax evasion in as much as the AEs as well as the assessee company are loss making companies. Thus, all the transactions with the AEs in question are tax neutral and therefore, no adjustment is required u/s 40A(2) or u/s 92(2).

The Ld. Transfer Pricing Officer has erred in making adjustment of Rs. 20,64,57,852/- by re- computing the arm's length price in respect of civil work expenditure which was sub contracted to the AE's viz. M/s IVRCL Ltd. and Palladium Infrastructure and Project Ltd. The Ld. Dispute Resolution Panel has erred in confirming the same.

The Ld. Assessing Officer has erred in disallowing a sum of Rs. 6,53,54,313/ u/s 14A of the Act. The Ld. Dispute Resolution Panel has erred in confirming the same.

The Ld. Assessing Officer has erred in disallowing a sum of Rs. 62,653/-being property taxes while computing income from house property. The Ld.

At the time of hearing, none appeared on behalf of the assessee despite issue of notices. This appeal is filed in the year 2017 and since then this appeal is fixed for hearing on seven times and out of that on last 5 occasions there is no appearance from the assessee. On earlier occasion also an advocate was appointed by the Insolvency Resolution Professional vide letter of authority dated 23 January 2019. On 17 March 2021, the said advocate withdrew his letter of authority, as he did not have any instructions from assessee. In view of the above facts, the appeal is decided on the merits of the case as per the information available on record.

The brief facts of the case shows that assessee is a company engaged in providing engineering and turnkey solutions, technology and EPC installation in liquid solid separation applications in various industry segments and sale of equipments and its parts.

It filed its return of income on 30 November 2013 at Rs. Nil. The return was picked up for scrutiny and it was found that it is a 100% export oriented unit (Research & Development Centre) for synthesizing of test compounds, which are potential drug development candidates, and preliminary testing. It is also engaged in licensing/ sub licensing of drug and maintenance of IT infrastructure.

The learned Transfer Pricing Officer examined the same and accepted Arms Length Price of majority of the transactions. The learned transfer-pricing officer disagreed with the arm’s-length price of specified domestic transactions of civil work. Assessee has sub-contracted Civil Work of Rs. 85,20,49,102/- and Rs. 6,45,78,670/- to IVRCL and Palladium Infrastructure project Ltd. The learned Transfer Pricing Officer found that though the assessee has stated ‘other method’ as the most appropriate method, however, these Civil Work transactions are benchmarked as per comparable Uncontrolled Price (CUP) method adopting internal CUP. Learned Transfer Pricing Officer rejected the contention of the assessee as no reliable documents in support of internal CUP were produced. He therefore, selected 9 comparables companies, adopted Transactional Net Margin Method (TNMM) as the most appropriate method, determined OP/OI as the profit level indicator, arrived at

The assessee has also purchased equipments of Rs. 69,51,69,632/- from its Associated Enterprises (AEs). Assessee submitted that the seller is the tested party and considering the FAR analysis 7% markup is considered at Arm’s Length Price.

The Transfer Pricing Officer rejected the contention of the assessee, analyzed the financials of the Associated Enterprises, and found that the profit earned by the Associated Enterprises from the sale to third party would be lower by 3.6% and therefore, associated enterprise has overcharged assessee to that extent. Therefore, he made an adjustment of Rs. 2,78,06,785/-. Accordingly, learned TPO passed order u/s 92 CA (3) of the income tax act on 31 October 2016 proposing an adjustment of ₹ 234,264,637/– to the arm’s-length price of the specified domestic transactions towards civil work and purchase of equipment.

Based on that, learned Assessing Officer while passing draft assessment order included the above adjustment. It further found that the assessee has earned rental income of Rs. 2.28 crore, however claimed deduction of full property tax of Rs. 16,97,305/- despite 50% of the property being occupied by the assessee for its own use. Therefore, Rs. 8,48,653/- was disallowed out of the

Assessee filed objection before the learned dispute resolution panel – 1 (WZ), Mumbai who passed direction on 16 August 2017 confirming action of the learned Transfer Pricing Officer and the learned Assessing Officer. Consequently assessment order u/s 143 (3) read with Section 144C (13) of the income tax act dated 61 was passed on 30/10/2017 determining the total income of the assessee at a loss of ₹ 1,554,910,431/–. Aggrieved with that order assessee has preferred appeal before us as per grounds of appeal.

Grounds no. 2 to 7 are with respect to determination of Arms Length Price of specified domestic transactions.

The learned Departmental Representative vehemently supported the orders of the learned lower authorities.

We have carefully considered the rival contentions and perused the orders of the lower authorities. Now as the adjustment has been proposed by the learned transfer- pricing officer to the specified domestic transactions determining the arm’s-length price. According to the provisions of Section 92BA, the specified domestic transaction, in case of an assessee, covers the transaction of any expenditure in respect of which payment has been made or is to be made to a person referred to in clause (b) of subsection (2) of Section 40 A of the Act. To such transactions, the provisions of Section 92, 92C, 92D and 92B were made applicable. However with effect from 1/4/2017 The Finance Act, 2017 omitted Section 92BA (i) of the act. In view of the above omission, the controversy arose that whether transfer-pricing provisions are applicable to transactions covered under that clause or not. The honourable Karnataka High Court in case of PCIT vs. Texport Overseas (P.) Ltd. [2020] 114 taxmann.com 568 (Karnataka), held that when clause (i) 92BA is omitted with effect from 1st April, 2017, the resultant effect is that it had never been passed and to be considered as law never existed. Therefore, the Hon'ble

However, we hastened to add that only the arm’s-length price of such specified domestic transactions could not be determined by applying the above provisions as contained in Chapter X of The Income Tax Act. Still the provisions of Section 40 A (2) are on the statute book, which governs the deductibility of such expenses.

Issue before the honourable Karnataka High Court in the case of Texport overseas private limited (supra) challenging the order of the coordinate bench which held as Under :-

Therefore, we set aside the issue to the file of the learned Assessing Officer to examine the transactions covered under 40A (2) (b) of the Act and decide issue afresh. Accordingly, grounds no. 2 to 7 of these appeals are allowed for statistical purposes. The learned Assessing Officer is directed to grant the opportunity of hearing to the assessee and decide the same in accordance with law.

Ground no. 9 is with respect to property tax. The facts clearly show that the learned Assessing Officer found that assessee has occupied 50% of the property for its own use. Therefore, he disallowed the 50% of the property tax amounting to Rs. 8,46,635/-. Before the learned DRP, the assessee submitted that it has already disallowed Rs

Accordingly, the appeal of the assessee is party allowed.