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Income Tax Appellate Tribunal, “C’’ BENCH: BANGALORE
Before: SHRI N.V. VASUDEVAN & SHRI B.R. BASKARAN, ACCOUTANT MEMBER
PER B.R. BASKARAN, ACCOUNTANT MEMBER:
Assessee has filed this appeal challenging the assessment order passed by the Assessing Officer for assessment year 2015-16 u/s 143(3) r.w.s. 144C of the Income-tax Act,1961 ['the Act' for short] in pursuance of directions issued by Ld. Dispute Resolution Panel (DRP).
At the time of hearing, the Ld. AR submitted that the assessee is pressing grounds numbered as 4 (b) to 4(d) and ground No.6. Accordingly, the remaining grounds are dismissed as not pressed. The ground Nos.4(b) to 4(d) relates to Transfer Pricing adjustment
IT(TP)A No.2309/Bang/2019 M/s. Lineage Power Pvt. Ltd., Bangalore
Page 2 of 9 made in respect of specified domestic transactions and ground No.6 relates to interest charged u/s 234A of the Act.
The assessee company is engaged in the business of providing energy management solutions to telecom and telecom tower operators. During the year under consideration the assessee has entered into specified domestic transaction with its associated enterprises as detailed below: Specified Domestic transactions as per Form 3CEB Particulars Amount in Total payable Purchase of Power 324575469 324575469 management item and spares Remuneration 2700000 2700000 327275469
The assessee adopted TNMM as most appropriate method and OP/OR as profit level indicator. The PLA of the assessee was worked out at 4.24% by the assessee. The assessee had chosen two comparable companies whose arithmetical mean margin was 7.42%. Accordingly, the assessee submitted that specified domestic transactions are at arm’s length after considering the range of +/- 3%.
The TPO however, noticed that the other income of the assessee is Rs.3,42,04,985/-. However, the assessee has taken the other income at Rs.31,51,104/-. Accordingly, the TPO computed the operating profit of the assessee by taking other income as Rs.3,42,04,985/-. Accordingly, the PLI of the assessee was worked out at 2.16% by TPO. For the sake of convenience, we extract below the workings furnished by the assessee and also the working made by the TPO.
IT(TP)A No.2309/Bang/2019 M/s. Lineage Power Pvt. Ltd., Bangalore
Page 3 of 9 The financials of the taxpayer for the F.Y. 2014-15 as per the TP document in respect of AE transactions are as under: Particulars Total amount Total revenue 1209752366 Less: Other income 3151104 Less: Interest received on fixed 5559513 deposits Operating Revenue 1201041750 Total cost: 1171416508 Less: Finance cost 21243109 Less: Preliminary Expenses 26652 Written off Operating cost 1150146747 Operating profits 50895002 Operating profits/Operating 4.24% revenue
The segmental financials of the taxpayer for the F.Y. 2014-15 as computed by the TRPO are as under: Particulars Amount in INR Total income 1209752366 Less: Other income 34204985 Total Operating income 1175547381 Total expenses 1171416508 Less: Finance cost 21243109 Total Operating expenses 1150173399 Total Operating Profit 25373982 OP/OC 2.21% OP/OR 2.16%
The assessee had also sought for working capital adjustment and it was rejected by the TPO by observing that the adjustments cannot be provided in a generic manner without showing as to how difference in working capital has impacted profit margins of each of the comparable companies. Accordingly, the TPO made adjustment of Rs.6,18,51,634/-.
Before Ld. DRP, the assessee submitted that the difference in other income has arisen on account of the fact that the assessee has IT(TP)A No.2309/Bang/2019 M/s. Lineage Power Pvt. Ltd., Bangalore
Page 4 of 9 set off reimbursement received by it in relation to a rental expenditure incurred by it. The assessee made detailed submissions before Ld. DRP in this regard. Accordingly, the assessee contended before Ld. DRP that either both rental expenditure and reimbursement should be removed from the workings or both should be taken into account by netting off the rent expenditure and reimbursement. The Ld. DRP did not agree with the contentions of the assessee with regard to the claim of assessee for working capital adjustment also, the Ld. DRP did not agree with the contentions of the assessee. The assessee also contended that the TPO has made adjustment at entity level instead of restricting the same to SDT transactions only. Ld DRP agreed with the same and accordingly directed the TPO to restrict the adjustment to SDT transactions only. In view of the same, the TP adjustment came down to Rs.1,75,92,364/-, which was added by the Assessing Officer in the final assessment order.
The Ld. AR submitted the assessee was earlier known as Pace Solar Farms (I) Pvt. Ltd. During the financial year relevant to the assessment year under consideration, it occurred a business of M/s. GE Power Electronics India Power Limited by entering into an agreement dated 8.5.2014. The assessee purchased business of GE Power as a going concern on slum sale basis on mutually agreed terms and conditions as laid out in the agreement. Post the purchase of business, the name of the assessee was changed to M/s. Lineage Power Pvt. Ltd.
As per the agreement, all the contracts entered into by GE Power hither to shall be transferred to the assessee. It was noticed the assessee had entered into a lease agreement for fixed period of 9
IT(TP)A No.2309/Bang/2019 M/s. Lineage Power Pvt. Ltd., Bangalore
Page 5 of 9 years with a lock in period of 9 years. The submissions made in respect of the lease agreement before Ld. DRP are extracted below.
• “The Agreement on page 21 para 6.1.3 clause (iii) also provides that the lease agreement as entered into by GE Power shall be taken over by the Assessee and the premises as previously occupied by GE Power will now be taken on lease by the Assessee. • GE Power had originally entered into a lease agreement with Sita Ratan Foundation Pvt. Ltd. (Sub-lessee, who had taken properly on lease from Sri. Ramesh Chand Nahar who was the sole and absolute owner of the immovable property situated at survey No. 186/3 khawha,No. 117, Hoodi Village, Krishnarajapuram Hobli, Mahadevpura Post, Whitefield Road, Bangalore for the said premises) along with hire of furniture. Subsequently the premise was transferred to MNG Estates Pvt Ltd on March 16, 2011. The said lease agreement was originally entered for a period of 9 years beginning from 27 September 2008 and ending' on 26 September 2017. The entire term of the lease was under a lock-in period, which meant that both the parties were obliged to honour the Agreement or else pay rent for balance months as penalty. • During the course of negotiation of business transfer, the Assessee became aware of Lease Agreement. The Assessee realized that this meant that. post the.purchase of the business from GE Power, along with other obligations' of GE Power the lease agreement also had to be honored by the Assessee for the balance period of 39 months (i.e. 9 years - 69 months occupied by GE Power). • Assessee owing to the financial viability of business post take over and the fact that Pace Group already had a business premises through which it was conducting its existing business operations, communicated its concern to GE Power that it could not take over the lease premises and bear the rental expenditure as it would increase its operating cost and impact its working capital requirements. • GE Power, realizing the fact that the Assessee had reservation on taking over the lease property and this would act as a hinderance in successful transfer of the business to the Assessee, as a matter of business prudence agreed to bear the cost of rental expenditure for further period of 24 months post the business transfer and such amount would be transferred immediately to the Assessee. Post 24 months, the Assessee had to bear the rental expense. Accordingly, GE Power made a onetime transfer of Rs.7,79,48,305/ - to assessee through electronic bank transfer (RTGS) on 30.06.2014 (Relevant extract of bank statement attached as Annexure 41. This fact is also brought out in the Business Transfer Agreement which clearly stales that the seller (GE Power) would maintain a fixed deposit of Rs. 7,79,48,305/- at the time of transfer The relevant extract of the agreement is attached below: (v) The Seller shall have a balance of atleast Rs. 7,79,48,305/- (Rupees Seven Crore Seventy Nine, Lakhs Forty Eight thousand Three Hundred and Five only) in fixed deposits maintained with banks (*Fixed Deposits"); and Since, the lessor had sold the said premises to M/S MNG Estates Private Limited; the Assessee entered into a lease agreement with M/s. MNG Estates Private Limited
IT(TP)A No.2309/Bang/2019 M/s. Lineage Power Pvt. Ltd., Bangalore
Page 6 of 9 on 01.07.2014 (Rent Agreement attached as Annexure 5). As per lease Agreement, Page 8 Clause b(1)(i) the Assessee had obligation to open fixed deposit with Canara bank, Accordingly, the Assessee transferred the amount received from GE power to Escrow account with a standing instruction to transfer every month a predetermined amount of rent to the account of Mis MNG Estates Private Limited (copy of communication to Canard Bank providing the instructions attached as Annexure 6). For the balance period of 15 months the Assessee agreed to provide a bank guarantee to the lessor (break-up of Rent calculation attached as Annexure 7). • For FY 2014-15, Assessee occupied the above leased property for a period of 9 months starting from 01.07.2014 and ending on 31.03.2015. During FY 2014-15, Assessee has incurred a total of Rs.2,75,55,090/- as rental expenditure. Out of the said expenditure, Rs.2,54,94,368/- was relating to the premises for which it had received reimbursement from GE Power. Accordingly, while computing its operating margins, the Assessee considered Rs. 2,75,55,090/- as part of its operating cost and the reimbursements received in respect of rental expenditure amounting to Rs.2,54,94,3681-. as part of operating revenue. The reimbursement received is also offered to Tax by the Assessee. • However, while computing operating margin of the Assessee, the learned TPO has excluded reimbursements received from operating revenue but at the, same time included, the total rental expenditure as part of operating expenditure. • In this regard, the Assessee submits that the reimbursements received by it from GE Power in relation to rental expenditure needs to be considered as operating income. The Assessee has received the reimbursements towards rental expenditure, which is part of its operating expenditure. Therefore, reimbursement received towards rental expenditure should be considered as operating in nature.”
The Ld. AR submitted that the reimbursement received by the assessee was to offset the rent paid by it. Since the rental expenditure has been taken as operating expenditure, the reimbursement received towards the rent should also be taken as operating income. Accordingly, he prayed that the prayer of the assessee be considered favourably.
We heard Ld. D.R. and perused the record. From the submissions made by Ld. AR before us and also before Ld. DRP, we notice that the assessee was binding agreement to pay rent to M/s. MNG Estates Pvt. Ltd. during the lock in period as per the original agreement entered by M/s. GE Power, the erstwhile Landlord. Since
IT(TP)A No.2309/Bang/2019 M/s. Lineage Power Pvt. Ltd., Bangalore
Page 7 of 9 the assessee found to be a financial burden, an understanding has been reached by the assessee and M/s. GE Power as per which a sum of Rs.7,79,48,305/- was to be paid by M/s. GE Power which amount shall be appropriated proportionately towards rental expenditure. Accordingly, a sum of Rs.2,54,94,368/- was appropriated towards the rental expenditure during the year under consideration and accordingly, the assessee has treated the above said amount as reimbursement received by it towards rental expenditure. It is pertinent to note that the assessee has paid rent of Rs.2,75,55,090/- during the year under consideration.
The question that arises is whether the reimbursement amount received by the assessee can be ignored while considering the rental expenditure as operating expenditure.
In our considered view, it is imperative to examine as to whether the assessee has utilised the premises for which rental has been paid for the purpose of business carried on by the assessee. If the said premises has been so utilised, then the rental expenditure should be taken as operating expenditure. It is an undisputed fact that M/s. GE Power has given the money to the assessee only in respect of rental expenditure burden that is going to be borne by the assessee. In that case, the reimbursement of rental expenditure, in our view, is intricately related to the rental expenditure. Accordingly, if rental expenditure is considered as an operating expenditure, then the reimbursement should be set off against the rental expenditure and net rent expenditure should be taken as operating expenditure. On the other hand, if the rental expenditure is not considered as operating expenditure, then both rental expenditure and reinvestment of reimbursement received by the assessee should be excluded while computing PLI of the assessee.
IT(TP)A No.2309/Bang/2019 M/s. Lineage Power Pvt. Ltd., Bangalore
Since the above facts require examination, we feel it proper to restore this issue to the file of A.O./TPO to examine it afresh in the light of discussions made (supra).
With regard to the claim of working capital adjustment, it was the submissions of the assessee that the relevant details have been furnished to the tax authorities. The Ld. A.R. submitted that the assessee would be in a position to furnish explanations and information in this regard to the A.O./TPO. In view of the above, we are of the opinion that the claim of working capital adjustment also requires examination at the end of A.O./TPO.
In view of the above, we restore the issue of transfer pricing adjustment to the file of A.O./TPO.
The next issue relates interest charged u/s 234A of the Act. It is the submission of the assessee that the return of income has been filed by it within the due date prescribed u/s 139(1) of the Act and hence no interest is chargeable u/s 234A of the Act. Since the facts relating to this issue also require examination, we restore this issue also to the file of A.O.
IT(TP)A No.2309/Bang/2019 M/s. Lineage Power Pvt. Ltd., Bangalore
In the result, the appeal filed by the assessee is treated as allowed for statistical purposes. Order pronounced in the open court on 28th Sept, 2020.