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Income Tax Appellate Tribunal, “C” BENCH : BANGALORE
Before: SHRI N.V. VASUDEVAN & SHRI CHANDRA POOJARI
IN THE INCOME TAX APPELLATE TRIBUNAL “C” BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, VICE PRESIDENT AND SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER IT(TP)A No.3343/Bang/2018 Assessment Year : 2014-15 M/s. Shindengen India Pvt. Ltd., Vs. The Deputy Commissioner of Income Tax, Plot No.283/2, Bommasandra Jigani Link Circle -6(1)(1), Road, Bengaluru – 560 105. Bengaluru. PAN : AARCS 8947 E APPELLANT RESPONDENT Appellant by : Shri. S. D. Kapila, Advocate Respondent by : Shri. Pradeep Kumar, CIT(DR)(ITAT), Bengaluru Date of hearing : 30.08.2021 Date of Pronouncement : 31.08.2021 O R D E R Per Chandra Poojari, Accountant Member This is an appeal by the assessee against the order dated 16.10.2018 passed by the DCIT, Circle 6-(1)(1), Bengaluru, u/s.143(3) read with Sec.144C (13) of the Income Tax Act, 1961 (Act), in relation to AY 2014-15.
The first issue that arises for consideration in this appeal is with regard to the addition made to the total income of the assessee of a sum of Rs.21,61,37,271 being an addition made consequent to determination of Arm’s Length Price (ALP) u/s.92 of the Act, in respect of an international transaction entered into by the assessee with its Associated Enterprise (AE). The assessee is a wholly owned subsidiary of Shindengen Electric Mfg Co., Ltd, Japan. It was incorporated in India on August 21, 2012 under the Indian
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Companies Act, 1956 to carry on the business of manufacturing of electrical components for two wheelers and trading of power system products. During the year under consideration, the assessee was engaged in the trading of power system products & electrical components for two wheelers. The assessee was in the process of setting up a manufacturing facility at Bangalore for manufacture of electrical components like Capacitor Discharge Ignitor (CDI) along with Regulator Rectifiers for two wheelers. A Return of Income in respect of AY 2014-15 was filed by the assessee on November 26, 2014 declaring a total loss of Rs.3,58,98,221/-. During the relevant year, the Assessee had entered into the following international transactions with its AEs;
Table 1- List of International Transactions Sl.No Nature of International Amount in (INR) MAM Used Transaction 1 Purchase of 77,189 Cost Plus Method Consumables 2 Purchase of Raw 1,69,25,073 Cost Plus Method Materials Purchase of Stock-in- 3 86,01,64,421 Cost Plus Method trade 4 Purchase of Capital 10,79,29,930 Cost Plus Method assets 5 Issue of Share Capital 87,00,00,000 Any Other Method 6 Reimbursement of 1,86,32,752 CUP Method expenses Total 1,87,37,29,365
The dispute in this appeal is with regard to the determination of ALP in respect of the international transaction of purchase of stock- in-trade by the Assessee from its AE. In the TP Study, the assessee aggregated and benchmarked the transactions of purchase of consumables, raw materials, stock-in-trade and capital assets by selecting Cost Plus Method (CPM) as Most Appropriate Method (`MAM') and the
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overseas AE as tested party. The Gross Profit (`GP/Cost of Goods Sold') margin earned by the comparable companies were higher than the gross margins of tested party in its respective region and accordingly those transactions were concluded to be at arm's length. The results of the comparable search and the financial and economic analysis are as below:- Comparative Analysis of Comparable Search
Particulars Details Number of Companies 10 Arithmetic Mean of Gross Profit 21.31% Margins of comparable companies Gross Profit Margins of Tested 19.90% Party
The AO made a reference to the Learned Deputy Commissioner of Income Tax, [Transfer Pricing — 2(2)(1)), Bangalore (`TPO') for computation of Arm's Length Price (`ALP') u/s 92CA(1) of the Act. Subsequently, the TPO initiated verification proceedings to determine whether the transactions undertaken by the Assessee Company adhere to the arm's length standard prescribed in the Indian Transfer Pricing Regulations. Information/explanations were sought at various instances, including but not limited to show-cause proceedings, and an order dated October 31, 2017 was passed (hereinafter referred to as `TP Order').
Through the said TP Order, TPO has conducted a fresh benchmarking analysis in respect of the international transaction of purchase of stock-in- trade (INR 86,01,64,421) using Comparable Uncontrolled Price Method (‘CUPM’) disregarding the benchmarking analysis carried out by the assessee in respect of purchase of consumables, raw materials, stock-in-trade and capital assets by selecting Cost Plus Method (CPM') as Most
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Appropriate Method (MAM') and the overseas AE as tested party. In this process, the TPO compared the prices at which stock-in-trade were purchased by SIPL with the prices at which they were sold to third parties and considered the differential gross margins for application of CUPM. Those gross margins were applied on the sale prices of SIPL to arrive at the Arm's Length Price (ALP') of purchase of stock- in-trade effectively using Resale Price Method (RPM) while claiming to have applied the CUPM. Upon comparison of such ALP determined by the Ld TPO with the purchase price of SIPL, the TPO computed an adjustment of INR 21,61,37,271/- to the value of international transaction of purchase of stock-in-trade.
The Assessee in a letter dated 3.6.2017 submitted before the TPO that it had chosen the foreign AE as a tested party because it was least complex (amongst the parties to the transaction), reliable and accurate date was available for comparison and available data can be used with minimal adjustments.
The Transfer Pricing Officer to whom a reference was made by the Assessing Officer (AO) u/s.92CA of the Act, rejected the Transfer Pricing analysis of the Assessee for the following reasons: “Based on the functional analysis mentioned above, it is noted that Shindengen, Japan is engaged in the business of manufacturing and sale of semiconductors, electric equipments and power supply products. From the functional analysis of SIPL, it is round that the taxpayer is simpler party and having lesser risks as compared to the AE. Further, due to availability of the reliable data of the comparables in the case of taxpayer, SIPL is considered as tested party. Based on the above discussion, TP report is rejected and the TP0 proceeds to determine the Arm’s length price by conducting an independent search for comparables considering the functions performed and the result of the search is given in the following paras.”
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Thereafter the TPO proposed to adopt Resale Price Method (RPM) as the MAM but gave up the proposal with the observation in paragraph 8.2 of her order u/s.92CA of the Act that RPM method is rejected due to non- availability of sufficient number of comparables. Thereafter the TPO observed in paragraph 8.3 to 8.5 of her order that the purchase price from the AE was higher than the price at which the assessee sold the products in India and that adopting 10% margin on sales and by adopting Comparable Uncontrolled Price (CUP) Method for determining ALP. The assessee submitted that the proposal of the TPO to apply 10% margin on sales and adopt CUP method is alien to the relevant statutory provisions. The assessee submitted that CUPM compares the price charged for property transferred in a controlled transaction to the price charged for property transferred in a comparable uncontrolled transaction in comparable circumstances. CUPM is a more direct measure of the ALP than the other methods, all of which indirectly determine ALP through evaluation of the arm's length profits. It compares the consideration for a comparable product in comparable circumstances instead of seeking to compute the margin the enterprise might be expected to achieve for functions undertaken, assets utilized and risks assumed. The Assessee pointed out that contrary to be above process adopted in CUPM, the adoption of profit margin percentage to benchmark the purchase transaction price is in violation of the CUPM, though, CUPM only considers the price charged for property transferred in a comparable uncontrolled transaction which can be compared to the price charged for the property in the controlled transaction.
The TPO accepted in paragraph 9.2.1 of her order that in CUP method margin at 10% on sales to third parties cannot be assumed. The TPO however got the details of purchase price of each item of the international transaction of purchase of stock in trade from AE and the price at which the Assessee sold each of the items to third parties. Thereafter the
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TPO computed ALP of the international transaction of purchase of stock in trade as follows:
“9.2.3 Determination of ALP: 9.2.3.1 Method :CUP as MAM 9.2.3.2 Data: Current year data F.Y 2013-14. 9.2.3.3 The average price of the purchase and sale were taken to benchmark the transaction. Few products were purchased at lower than sales made to the third parties. Taxpayer has submitted comparison chart for 3 products i.e. Filter Sub Noice, Unit Assy Generator Control, Unit Comp Inverter. The average gross margin on these products is considered same as taxpayer calculated, where as in other 2 products i.e Reg rect com & Unit Assy Spark-3 lowest purchase price is considered to arrive the average margin. 9.2.3.4 Average margin is calculation as follows: Purchase Gross Gross S.No. Product Description price Sale Price (INR) Margin Margin (INR) % 1 Filter Sub Noise (AC) 88.82 93.39 4.57 5.15 2 Reg rect com 252 285 33 13.10 3 Unit Assy Spark 392 453 61 15.56 4 Unit Assy Generator Control 6903 7409 506 7.33 5 Unit Comp Inverter 14443 1699 11.77 16142 9.2.3.5 The gross margin arrived with those respective products is considered to calculate the arm's length price in this purchase transaction. Hence there is no question of assuming the margin, but margin is taken from their own transaction applying CUP method.
9.2.3.6 Computation: The details of computation is as under:
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SI. Product Purchase Sale ALP Margin ALP price Difference Quantity Adjustment Price margin price per for of purchased No (H)=(F)*(G) Description price (INR) on GP product purchase Purchase (G) (INR) (B) (%) price (1))=(B)*(C) (E) = (B)- (A) (C) (D) &ALP (F) 1 Filter Sub 87 90 5.15 4.64 85.37 1.64 25123 41076 Noise (AC) 37.34 247.67 69.34 948068 65734295 285 13.1 2 Reg rect 317 corn Unit Assy 70.49 382.51 108.49 874949 94920417 491 453 15.56 3 Spark Unit Assy 6241 7.33 457.47 5783.53 785.47 13008 10217333 6569 4 Generator Control Unit Comp 13078 11.77 1539.28 11538.72 2944.28 15360 45224150 14483 5 Inverter Total 216137271
Accordingly, an amount of Rs. 21,61,37,271/- is the TP adjustment u/s 92CA of IT Act.” 10. The Addition suggested by the TPO in his order in her order dated 31.10.2017 was incorporated by the AO in his draft order of assessment. Against the said addition, the assessee preferred objections before the Dispute Resolution Panel (DRP) u/s.144C of the Act. The specific objections raised by the assessee before the DRP were (i) correctness of the rejection of the Transfer Pricing study of the assessee by adopting the foreign AE as a tested party; (ii) correctness of adopting CUP as MAM; (iii) Correctness of method of computation of ALP by applying CUP as MAM; (iv) action of the TPO in applying margins under CUP method based on difference in purchase ands sale price of the assessee; (v) not accepting the purchase price at ALP when the very same purchases were held to be not influenced by the relationship existing between the assessee and AE by the Special Valuation Branch of Customs. Detailed submissions were made from page-1 to 75 of Form No. 35A besides submissions dated
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4.7.2018 copy of which are at pages 483 to 517 of assessee’s paper book. The argument of the assessee on application of CUP method by the TPO was that CUPM compares the price charged' property transferred in a controlled transaction to the price charged for property transferred in a comparable uncontrolled transaction in comparable circumstances. But, the TPO has selected various margins as stated in para 9.2.3.4 of the TP Order to benchmark the sales of the Assessee, based on which, the TPO is expecting the purchases of the Assessee to be at such prices which would fetch upon sale the .margins sated in the said paragraph. Thus the TPO erred in adopting the margins under CUPM fundamentally in violation of the CUPM as there were neither internal comparable nor external comparable in case of SIPL. The Assessee drew attention of the DRP to Rule 10B(1)(a) of the Income Tax Rules, 1962 which explains how ALP in relation to an international transaction is determined by applying CUP method
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 and the comparable uncontrolled transactions or between the enterprises entering into such transactions, which could materially affect the price in the open market; (iii)the adjusted price arrived at under sub-clause (ii) is taken to be an arm's length price in respect of the property transferred or services provided in the international transaction; The Assessee summarized the steps involved in applying CUPM as given below: 1. Identification of comparable uncontrolled transaction
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Identification of price charged in such comparable uncontrolled transaction 3. Identification of differences between controlled and uncontrolled transaction 4. Adjustment of price to account for the differences It was pointed out that the CUP method evaluates the arm's-length character of controlled transaction by comparing its price and conditions to the price and conditions of comparable uncontrolled transaction. This principle is already settled and well agreed by judiciary also. Furthermore, an uncontrolled price is the price agreed between unrelated/ independent parties for the transfer of goods/ services. Though no distinction is recognized in the Act or Rules, a CUP, however, can be either (a) Internal CUP - is available if either of the party to a controlled transaction enters into transaction with unrelated party and the goods or services under consideration, other terms and circumstances are comparable, or (b) External CUP - is available if a transaction between two independent enterprises involves comparable goods or services under comparable conditions The Assessee pointed out that in the case of the Assessee, CUP method in respect of 'Purchase of Stock-in-trade' from AE may be applicable only under following situations:
The Assessee buys similar stock-in-trade, in similar quantities and under similar terms from an independent enterprise in a similar market (Internal CUP-1) 2. The AE i.e. Shindengen Japan or another member of the group sells similar stock-in-trade, in similar quantities and under similar terms to an independent enterprise in a similar market (Internal CUP-2). 3. An independent enterprise sells/buys same products, in similar quantities and under similar terms to another independent enterprise in a similar market (External CUP)
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The Assessee reiterated submission that , a) Internal CUP is not Available: The Assessee has not purchased similar goods from an independent party. Furthermore, Shindengen Japan has not sold similar goods to an independent party. Since, these goods have specifically been manufactured by the Shindengen Japan for Assessee. Accordingly, there was no such internal comparable was available to invoke the CUP. b) External CUP is not Available: The products identical to those supplied by Shindengen Japan do not exist, as they are manufactured based on the specific requirements of only one customer of the assessee. Hence, there is no uncontrolled external comparable with which the prices charged in the international transaction can be compared. It was thus submitted that the TPO has failed to apply the CUPM as contemplated in Rule 10B(1)(a),in arriving at ALP without identification of any uncontrolled transactions against the comparability analysis embodied in the Indian TP Regulations. In the absence of any comparable, there is no benchmark against which the transaction can be examined.”
The DRP in its directions dated 28.9.2018 has reproduced the grounds of objection 1 to 6 and has extracted the relevant observations of the TPO and concluded as follows in para 3.3:
“3.3 Having considered the submissions of the assessee made before the DRP and also the TPO, we are of the view that in the peculiar facts and circumstances of the case as extracted above, the TPO has correctly made computation of arm's length price (ALP). Accordingly, we find no reason to interfere with the approach and method adopted by the TPO. Grounds of objection 2 to 6 are rejected accordingly.”
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It is clear from a perusal of the order of the DRP that the DRP has not dealt with the objections of the Assessee as to why its TP study choosing the foreign AE as tested party was not accepted by the AO and as to how the choice of foreign AE as a tested party was not correct because it was not the least complex (amongst the parties to the transaction), reliable and accurate date was not available for comparison and how the available data cannot be used with minimal adjustments. So also the DRP has not dealt with the correctness of adoption of CUP as the MAM and other objections with regard to method of computation of ALP under CUP method.
The addition suggested by the TPO in the order dated 31.10.2017 by the TPO at Rs.21,61,37,271/- was reduced by the TPO in an order u/s.154 of the Act dated 16.10.2018 to Rs.16,97,85,298 as therefore was some computation errors which was rectified by the TPO/AO. Therefore the addition that is impugned in the appeal by the Assessee is only the sum of Rs.16,97,85,298/-.
The learned counsel for the Assessee submitted that the TPO ought not to have rejected the claim of the Assessee that RPM was the MAM for determination of ALP. He submitted that if RPM and adoption of the foreign AE as a tested party is accepted than the price paid in the international transaction would be at Arm’s length. He reiterated submissions made before the DRP in this regard. It was argued that adoption of CUP method was contrary to the relevant statutory provisions and therefore the claim of the Assessee in its TP study that the price paid to the AE is at Arm’s length should be accepted. He also made reference to several decisions in this regard. The submissions made in this regard were that the methodology adopted by the TPO was flawed in as much as
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the TPO collected complete list of products purchased by the Assessee from AE and sold to third parties. The Average price for purchase and sale were taken to benchmark the same. The gross margin arrived with these respective products was considered to calculate the arm's length price in this purchase transaction. In other words, the TPO has compared the assessee's own purchases with its sales. The TPO calculates percentage of gross margin for each component and after reducing the Purchase price by the gross profit margin so calculated, to arrive at the so-called arm's length price of the purchases from the AE.
It was submitted that the methodology adopted by the TPO is a distorted version of RPM, though without bringing any comparable on record. A comparison of purchase price paid by the tested party with the sale price charged by it from its customers is unknown to any method prescribed in Rule 10(1)(a). The TPO has not followed any method prescribed by Rule 10B of the Rules. The learned counsel for the Assessee relied on decision of ITAT Hyderabad Bench in the case of Trinity Advanced Software Labs (P) Ltd. [2015] 55 Taxmann.com 210 (Hyd.) explaining CUPM, as follows: "Rule 10B(1)(a) of IT Rules prescribes the method for determination of ALP under CUP. As per the said provision, TPO at first has to find out the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction or a number of such transactions and thereafter making necessary adjustments of such price on account of differences between the international transactions and comparable uncontrolled transactions or between the enterprises entering into such transactions which could materially affect the price in the open market, TPO will have to determine ALP. Therefore, unless, comparables are brought on to benchmark the price charged by a particular assessee, it cannot be said that the price charged by assessee is not within the arm's length. However, on a perusal of the order dated 23/05/2013 of the TPO passed in pursuance to the direction of the Tribunal, it is very much clear, TPO has expressed his inability in finding a comparable under CUP method. In these circumstances, there was no other choice left to TPO but to accept the price charged by assessee as ALP."
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(Pg. 732 at 737/Vol- VI) "Thus, it is pre-requisite essential condition for determination of ALP applying CUP method in relation to the international transaction that the price paid in a comparable uncontrolled transaction has to be taken into consideration. In other words, for the purpose of computation of ALP in relation to an international transaction, the price charged or paid for a uncontrolled transaction which is comparable with the nature of international transaction; but at the same time an uncontrolled transaction. Therefore, both these conditions i.e., comparable and uncontrolled transactions must exist for taking a price as ALP for an international transaction. [Para 12.51 As it is evident from the record that the assessee had been taking royalty paid to AE as comparable for purpose of determination of ALP, which was absolutely contrary to the very basic and fundamental requirement of the provisions of Chapter X as well as rule JOB; when the most essential requirement ofa comparable being uncontrolled transaction was not satisfied, then the method adopted by the assessee cannot be accepted...... " 16. The learned counsel for the Assessee submitted that the method adopted by the TPO flouts the principle that the two methods cannot be combined for determining the ALP of purchases from AE. In this regard reference was made to decision in the case of Sony Ericsson Mobile Communications India (2015) 374 ITR 118 (Del.) the Delhi High Court observed: "(vii) When the Assessing Officer/Transfer Pricing Officer rejects the method adopted by the assessee, he is entitled to select the most appropriate method, and undertake a comparability analysis. Selection of the method and comparables should be as per the command and directive of the Act and Rules and justified by giving reasons." Reference was also made to decision in the case of L. G. Electronics India (2013) 22 1TR (Trib) (Del. SB) wherein it was held: "(xxix) Sub-section (1) of section 92C provides that the arm's length price of an international transaction shall be determined by "any" of the five prescribed methods, being the most appropriate method. The word "any" used under section 92C(1) would
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ordinarily imply that any specific or non-specific method or even a combination of one or more prescribed methods is sufficient. However, the ambit of the word "any" in sub-section (1) has been restricted by the `following" five specific methods given in the later part of the provision. There cannot be a combination of one or more of the five methods for determining the arm's length price. The Transfer Pricing Officer or for that matter any other authority cannot apply or direct to apply any other method. It is equally not permissible to invent a new procedure and try to fit such procedure within any of the existing procedures prescribed under these methods. However, although there is no express reference to any method employed for determining the arm's length price of the international transaction this factor in itself would not be detrimental to the computation of the arm's length price, if in substance it has actually been computed by any of the prescribed methods. (xxx) A comparable uncontrolled transaction to be considered for benchmarking the normal gross profit mark-up has to be similar to the international transaction under consideration. Consequently, the profit mark-up should be the rate which an independent third party earns for creating marketing intangible for and on behalf of the foreign enterprise. The arm's length price is a price which is applied in a transaction between non-associated enterprises in uncontrolled conditions. What is required to be done is to first find out some comparable uncontrolled transaction ; then ascertain the profit mark-up of such comparable uncontrolled transaction ; and then adjust it to bring it at par with the international transaction under consideration by removing the effect of factors of non-comparability. The cost plus method under rule 10B(1)(c) does not provide for assuming a hypothetical profit mark-up for determining the arm's length price. It has to be a profit mark-up of a comparable uncontrolled transaction. When the rule prescribes a particular method to be followed and the steps so given are unambiguous, it is impermissible to substitute such steps with any other mode." 17. It was submitted that the DRP apart from reproducing Grounds of Objections and the TPO's order, the DRP passes a laconic and non speaking order upholding the TPO's order. The DRP has totally ignored and failed to consider the assessee's detailed ground-wise submissions filed on 31.1.2018. No cogent reason whatever have been given for not considering or for rejecting the assessee's objections. It was submitted that an order has to be a reasoned or speaking order. The failure to give
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reasons could lead to a very justifiable complaint that there was a breach of natural justice. Reasons if given would substitute objectivity for subjectivity. (Maruti Udyog Ltd. Vs. ITAT (2000) 244 ITR 303 Delhi.)
The learned DR relied on the order of the DRP. We have carefully considered the rival submissions and are of the view that the issue needs to be remanded to the DRP for consideration afresh as the DRP as a first appellate authority has not given any findings on the factual and legal submissions made by the assessee before it. Since the order of the DRP is completely non-speaking order, we cannot on that basis uphold the claim of the assessee that the price paid in the international transaction is at Arm’s length. As provided in section 92C of the Act, such arms’s length price is to be determined by one of the methods prescribed, which is found to be the most appropriate method having regard to the nature of transaction or class of transaction or class of associated persons or functions performed by such persons or such other relevant factors as may be prescribed. The manner in which such most appropriate method is to be applied for determination of arm’s length price is prescribed in Rule 10B of Income-tax Rules, 1962. While rule 10B(1) of the Income Tax Rules 1962, provides that arm’s length price in relation to an international transaction shall be determined by any of the methods, "being the most appropriate method", set out therein,Rule 10 C(1) provides the mechanism for selecting the most appropriate method "which is best suited to the facts and circumstances of each particular transaction" and "which provides the most reliable measure of arm’s length price of the international transaction". Rule 10C (2) further provides that in selecting the most appropriate method as specified in rule 10C(1), certain factors are to be taken into account:
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(a) the nature and class of the international transaction; (b) the class or classes of associated enterprises entering into the transaction and the functions performed by them taking into account assets employed or to be employed and risks assumed by such enterprises; (c) the availability, coverage and reliability of data necessary for application of the method; (d) the degree of comparability existing between the international transaction and the uncontrolled transaction and between the enterprises entering into such transactions; (e) the extent to which reliable and accurate adjustments can be made to account for differences, if any, between the international transaction and the comparable uncontrolled transaction or between the enterprises entering into such transactions; (f) the nature, extent and reliability of assumptions required to be made in application of a method
What is clear from the above analysis is that a method for determining arm’s length price, to be held as a ‘most appropriate method’ (MAM), should be, as provided in rule 10C(1). A method "which is best suited to the facts and circumstances of each particular transaction" and a method and "which provides the most reliable measure of arm’s length price of the international transaction" Under rule 10C(2)(c), "the availability, coverage and reliability of data necessary for application of the method" is one of the crucial factors determining suitability of a method of determination of arm’s length price in a particular fact situation. Similarly, it is also important to determine whether accurate adjustments can be made for the differences between the international transactions and the comparable uncontrolled transactions, and unless such adjustments can be made the related method cannot be said to be most appropriate method. Determination of ALP on the basis of facts and circumstances and as per the requirements of the relevant statutory provision is mandatory and cannot be accepted owing to default. We therefore set aside the order of the AO/TPO on the issue and the directions of the DRP on the issue and remand the issue to the
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DRP for passing a speaking order after meeting the specific objections raised by the Assessee. The relevant grounds of appeal being Gr.No.1 to 12 are accordingly treated as allowed for statistical purpose. 20. In ground No.13, the Assessee has raised ground with regard to disallowance of reimbursement of expenses amounting to Rs.20,81,884/- by invoking the provisions of Sec.40(a)(ia) of the Act. The submission of the Assessee on the aforesaid disallowance was that the reimbursements were purely on a cost to cost basis and there was no margin whatsoever and therefore there was no question of deduction of tax at source on such reimbursements. It was the plea of the Assessee that the reimbursements were wrongly treated as fees for services rendered. It was submitted that the supporting documents to prove that the payments were purely reimbursements were given before the AO and in this regard our attention was drawn to pages 545 to 616 of the paper book. The DRP on this issue did not allow any relief to the assessee by following the decision of the Hon’ble Supreme Court in the case of Transmission corporation of AP Ltd. 239 ITR 589 (SC) wherein it was held that the payee cannot decide taxability or otherwise of a payment in the hands of the recipient and choose not to deduct tax at source. It was submitted by the learned counsel for the assessee that the decision in the case of Transmission Corporation (supra) has been explained by the Supreme Court in G E Technologies (327 ITR 456), wherein it is held that in a case where the amount remitted is not subject to tax, no tax u/s 195 need to deducted. It was reiterated that reimbursement of expenses is not taxable as income and in this regard reference was made to the following decisions: i. Mahindra & Mahindra Ltd. v. Dy. CIT TDS. Mumbai 122 ITD 216. (SB)
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ii. Goldratt Consulting Ltd. v. ADIT Circle-1(2), N. Delhi I. T.A .No.- 4586/Del/2011, 1111/D/12 A. Y. 2006-07 & 2008-09 Order dated 24.01.2017 iii. Honda Motor Co. Ltd. v. Assistant Director of Income-tax 120181 92 taxmann.com 353 (SC) iv. INDUSTRIAL ENGINEERING PROJECTS PVT. LTD. 202 ITR 1014 (Del.)
The learned DR relied on the order of the DRP.
After considering the rival submissions, we are of the view that the DRP fell into an error in refusing to examine the plea of the assessee that the sum paid were mere reimbursement with no element of income by following the decision of the Hon’ble Supreme Court in the case of Transmission Corporation AP Ltd. (supra). The said decision has been explained in a later decision in the case of GE Technologies (supra) and in terms of the said judgment the chargeability of the sum paid in the hands of the recipient has to be gone into. If the payments were mere reimbursement, then there would not no income chargeable in the hands of the recipient and hence no requirement of deduction of tax at source. Since this exercise is required to be carried out by the DRP, we deem it proper to remit this issue also to the DRP.
The assessee raised an additional ground of appeal which reads thus: “In the facts and circumstances of the case, the Ld. Assessing Officer erred in law in computing total income of Rs.21,82,19,160/- without adjusting the declared loss of Rs.3,59,98,221/-.” The reasons for raising the additional ground of appeal are that vide 23. order dt. 16.10.2018 the AO while giving effect to the Directions u/s 144C of the DRP dt. 28.9.2018 determined the total income of Rs. 21,82,19,160/-
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and raised tax demand 11,46,26,360/-. The assessee had filed return on 26.11.2014 declaring loss of Rs. 3,58,98,221/-. This factual position is admitted by the AO in the very first paragraph of the Impugned Assessment Order. However, the declared loss has not been adjusted while computing total income. Hence the Assessee has raised the aforesaid additional ground.
The aforesaid additional grounds of appeal raise questions of law, which can be decided on the basis of material available on record. The omission to raise the aforesaid grounds of appeal is bonafide. In view of the decision of the Hon'ble Supreme Court in the case of National Thermal Power Co Ltd vs CIT (229 ITR 383) and Jute Corporation of India vs CIT (187 ITR 688) and the discretion vested in your Honours under Rule 11 of the Income-tax (Appellate Tribunal) Rules, 1963, the additional grounds of appeal is admitted for adjudicated on merits.
As far as the merits of the claim made in the additional ground is concerned, the issue requires examination by the AO when he gives effect to the order. Ends of justice will be met, if the AO is directed to consider the claim of the assessee and if found correct give appropriate adjustment to the total income.
In the result, the appeal is treated as allowed for statistical purpose. Pronounced in the open court on the date mentioned on the caption page. Sd/- Sd/- (N. V. VASUDEVAN) (CHANDRA POOJARI) VICE PRESIDENT ACCOUNTANT MEMBER Bangalore, Dated : 31.08.2021. /NS/*
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Copy to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. By order
Assistant Registrar ITAT, Bangalore.