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Income Tax Appellate Tribunal, ‘B’ BENCH : BANGALORE
Before: SHRI. B. R. BASKARAN & SMT. BEENA PILLAI
ORDER PER BEENA PILLAI, JUDICIAL MEMBER Present appeal has been filed by assessee against final assessment order under section 143 (3),r.w.s. 144C (1) of the Act passed by Ld. DCIT circle-4 (1) (1), Bangalore is for assessment year 2013-14 on following grounds of appeal:
Page 2 of 16 IT(TP)A No.2207/Bang/2017 A. Y: 2013 – 14 Based on the facts and circumstances of the case and in law, Lotus Labs Private Limited (hereinafter referred to as "Appellant"), respectfully craves leave to prefer an appeal against the assessment order passed by the learned Assessing Officer [hereinafter referred to as the "learned AO"] in pursuance of the Directions of the Dispute Resolution Panel ("DRP") under section 143(3) read with section 144C of the Income-tax Act, 1961 ("the Act") on the following grounds:
That on the facts and circumstances of the case and in law,
1. The order of the learned Transfer Pricing Officer ("TPO")/ AO and directions of the Hon'ble DRP are based on incorrect interpretation of law and therefore are bad in law. GROUNDS OF OBJECTION RELATING TO TRANSFER PRICING MATTERS 2 The learned TPO and the learned AO grossly erred in determining a transfer pricing adjustment on account of the interest on outstanding receivables amounting to Rs. 3,25,37,057.
3. The learned TPO and the learned AO have erred, in law and in facts, by considering the outstanding dues from the AEs to be in the nature of loan and not considering the business/ commercial expediencies of the arrangement.
4. The learned TPO and the learned AO have erred, in law and in facts, by treating the outstanding receivables from Associated Enterprises (AEs") as a separate international transaction and not considering the same to be closely linked with the main transaction of provision of service to AE.
5. Without prejudice to the above, the learned TPO and the learned AO have erred, in law and in facts, in not providing the benefit of working capital adjustment by adjusting the net margins of the Non-AE segment. Further, no adjustment on account of interest for delay in receivables from AE is warranted as it is already factored in the margins earned from AEs.
6. Without prejudice to the above, the Assessee wishes to submit that the Hon'ble bench in Appellant's own case has adjudicated the above matter for AY 2010-11, AY 2011-12 & AY 2012-13, and considered the outstanding dues from AEs as closely linked to the main transaction and restored the issue to the file of AO/ TPO for re-determination of ALP by clubbing and aggregating both the transactions.
7. The Hon'ble DRP erred, in law and on facts in upholding transfer pricing adjustment made by learned TPO/ AO, by disregarding the commercial agreements produced during the course of proceedings and by disregarding the judicial precedents set out in Appellant's own case.
8. The learned TPO and the learned AO have erred, in law and in facts, in determining a transfer pricing adjustment without appreciating the fact that the Appellant has not charged interest on outstanding dues in both AE and Non-AE case.
9. Without prejudice to the above, the learned TPO and the learned AO have erred, in law and in facts, in not objectively selecting the interest rate Page 3 of 16 IT(TP)A No.2207/Bang/2017 A. Y: 2013 – 14 to determine the arm's length rate of interest applicable for outstanding dues from the AEs. GROUNDS OF OBJECTION RELATING TO CORPORATE TAX MATTERS 10. The learned AO has erred in law and on facts by not granting the Appellant deduction under section 80-IB(8A) of the Act, in respect of additions to the income under the head Profits and Gains from Business', arising from the following disallowances: a. Stamp duty of Rs. 5,13,360 paid by the Appellant on registration of lease deed, on the basis that the same is capital in nature; b. Provision for expenses amounting to Rs.10,11,320, on the basis that such expenses are contingent in nature.
11. The Hon'ble DRP has erred in law and on facts, in not adjudicating on the additional ground filed by the Appellant for granting the corresponding deduction under section 80-lB(8A) of the Act, in respect of additions to the income under the head 'Profits and Gains from Business' with respect to stamp duty and provision for expenses.
12. Disallowance of stamp duty paid by the Appellant on registration of lease deed: a. The learned AO has erred, in law and on facts, in disallowing stamp duty of Rs.5,13,360 paid by the Appellant on registration of lease deed with stamp authorities, on the basis that the same is capital in nature, without appreciating the fact that such stamp duty is a revenue expenditure eligible for deduction u/s 37 of the Act. b. The learned AO/ Hon'ble DRP has erred, in law and on facts, in relying on the judgement of Karnataka High Court in case of Hotel Rajmahal vs CIT (Kar) 152 ITR 218, without appreciating the fact that the stamp duty was incurred for the renewal of lease deed for an existing premise, therefore would be a revenue expenditure. Provision for expenses for normal tax computation 13. The learned AO/ Honble DRP has erred, in law and on facts, in disallowing provision for expenses of Rs. 10,11,320 created by the Appellant for the subject AY, under section 37 of the Act, on the basis that invoice for such expense has not been raised during the subject AY and hence such expense is contingent in nature, without appreciating that: a. The Appellant has actually incurred such expenditure during the AY 2013-14; b. The Appellant has recorded such expenditure in the books of accounts maintained under mercantile system of accounting; c. The Appellant was mandatorily required to create provisions on estimate basis for all known liabilities as per Accounting Standard prescribed under the section 145(2) of the Act as well as Companies Act, 1956.
Page 4 of 16 IT(TP)A No.2207/Bang/2017 A. Y: 2013 – 14 Provision for expenses for computation of MAT under section 115JB of the Act 14. The learned AO/ Hon'ble DRP has erred, in law and on facts, in adding back the provision for expenses of Rs.10,11,320 created by the Appellant to the book profits as per section 115JB of the Act on the basis that such provision is for unascertained liability and contingent in nature, without appreciating the fact that: a. The Appellant has actually incurred such expenditure during the AY 2013-14; b.The Appellant has recorded such expenditure in the books of accounts maintained under mercantile system of accounting; c. The financial statement for subject AY has been prepared by the Appellant in accordance with the Companies Act, 1956 and such provision has been verified and accepted by the Statutory Auditor. 15.The learned AO/ Hon'ble DRP has erred, in law and on facts, in adding back the provision for expenses of Rs.10,11,320 created by the Appellant to the book profits as per section 115JB of the Act without considering the submissions made and judicial precedents relied on by the Appellant.
The learned AO has erred, in law and on facts, in not granting credit of Tax Deducted at Source ('TDS") amounting to Rs.2,61,461 for the subject AY. The Appellant submits that each of the above grounds is independent and without prejudice to one another. The Appellant craves leave to add, alter, amend, vary, omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of the appeal, so as to enable the Hon'ble Tribunal to decide on the appeal in accordance with the law.
Brief facts of the case are as under: 2. Assessee is a company in contract research organisation and conduct clinical research and analysis for by bioequivalence and bioavailability studies of drugs, drug- drug interaction and early and late phase clinical trials. It has been submitted that it filed its return of income on 29/11/2013 declaring total income of Rs.3,67,53,960/-. Subsequently, case was selected for scrutiny and notice under section 143(2) of the Act, along with notice under section 142 (1) of the act and questionnaire was issued to assessee.
Page 5 of 16 IT(TP)A No.2207/Bang/2017 A. Y: 2013 – 14 In response to statutory notices, representatives of assessee appeared before Ld.AO and filed requisite details from time to time.
Ld.AO observed that assessee had international transaction exceeding Rs.15 crores and therefore case was referred to Transfer Pricing officer for determining arms length price in respect of international transaction.
Upon receipt of the reference, Ld.TPO called for economic details of international transaction between assessee and associated enterprises in Form 3 CEB. Ld.TPO observed that following was international transaction reported in the documents filed by assessee: Particulars Amount (in Rs.) Provision of by Bio-equivalents study services 51,60,61,586/-
Ld.AO observed that assessee used OP/OC as PLI and TNMM as method for determining margin of assessee at 29.92%. Ld.TPO also observed that non-AE segment margin was determined by assessee at 7.41% and therefore is no adverse inference was drawn in respect of the international transaction.
However, Ld.TPO from the trans-apprising study observed that assessee had a realised amounts of Rs.61,14,96,507/- out of which Rs.22,94,57,383/- was outstanding for more than 6 months. Ld. TPO thus held it to be an international transaction in terms of section 90 2B (2) (c) (i) of the Act. Ld.TPO characterised it as a loan transaction as outstanding receivables was exceeding more than 6 months. After calling for various details from assessee, Ld.TPO Page 6 of 16 IT(TP)A No.2207/Bang/2017 A. Y: 2013 – 14 computed arm’s length price of this transaction at 14.18% per an amount outstanding receivables exceeding 6 months. He thus proposed an adjustment of Rs.3,25,37,057/-. 7. Ld.AO subsequently while passing the draft assessment order, observed that assessee has claimed expenses towards provision of legal and professional charges amounting to Rs.10,11,320/-. It was observed that assessee booked the provision towards expenses mentioned during the year although invoices for the same were not received. Ld.AO rejected submissions of assessee and disallowed provision of Rs.10,11,320/-. 8. It was also observed by Ld.AO that, assessee claimed expenditure of Rs.5,13,960/- towards stamp duty on lease deed. Assessee was called upon to substantiate the claim. Assessee vide letter dated 07/12/2016 submitted that assessee has entered into lease agreement for office premises for a period of 5 years to carry out its business of scientific research and development in by opening balance and bio availability studies. In regards to the same standard duty expenses was incurred by assessee to register the lease deed with stamp authorities. Explanation offered by assessee was rejected by Ld.AO and disallowance under section 37 amounting to Rs.5,13,360/- was made. Aggrieved by proposed additions in draft assessment order, assessee preferred objections before DRP who upheld draft order passed by Ld. TPO/AO.
Page 7 of 16 IT(TP)A No.2207/Bang/2017 A. Y: 2013 – 14 9. Upon receipt of DRP directions, Ld.AO passed final assessment order computing income in the hands of assessee at Rs.7,08,15,697/-. Aggrieved by order of Ld.AO, assessee is in appeal before us now.
Ground No. 1 is general in nature and therefore do not require adjudication.
Ground No.2-9 are in respect of interest on receivables computed by Ld.AO/TPO. We have heard both sides of the submissions made before us on this issue. 11.1. At the outset Ld.AR objected to characterize the transaction to be international transaction. However by virtue of special bench decision delivered by Kolkata Tribunal in case of Instrumentation Corpn. Ltd. v. Asstt. DIT in and 1549 (Kol.) of 2009, dated 15-7-2016, , this argument stands rejected. 11.2. Admittedly, this issue has been consistently sent back by this Tribunal to Ld.TPO to verify whether these outstanding receivables have been subsumed in computing working capital adjustment in the hands of assessee where TNMM has been used as most appropriate method. Admittedly in the present case assessee has used TNMM to compute ALP of the transaction. 11.3. We note that all these submissions have been addressed by coordinate bench of this Tribunal in case of Instrumentation Corpn. Ltd. v. Asstt. DIT(supra), which is reproduced hereunder: Ld.AR placed reliance on decision of Delhi Tribunal in Kusum Healthcare Pvt.Ltd vs. ACIT reported in (2015) 62 Taxmann.com 79, deleted addition by considering Page 8 of 16 IT(TP)A No.2207/Bang/2017 A. Y: 2013 – 14 the above principle, and subsequently Hon’ble Delhi High Court in Pr. CIT vs. Kusum Health Care Pvt. Ltd. (2017) 398 ITR 66 (Del), held that no interest could have been charged as it cannot be considered as international transaction. He also placed reliance upon decision of Delhi Tribunal in case of Bechtel India vs DCIT reported in (2016) 66 taxman.com 6 which subsequently upheld by Hon’able Delhi High Court vide order dated 21/07/16 in also upheld by Hon’ble Supreme Court vide order dated 21/07/17, in CC No. 4956/2017. 3.5.3. It has been submitted by Ld.AR that outstanding receivables are closely linked to main transaction and so the same cannot be considered as separate international transaction. He also submitted that into company agreements provides for extending credit period with mutual consent and it does not provide any interest clause in case of delay. He also argued that the working capital adjustment takes into account the factors related to delayed receivables and no separate adjustment is required in such circumstances. 3.5.4. On the contrary Ld.CIT.DR submitted that interest on receivables is an international transaction and Ld.TPO rightly determined its ALP. In support of her contentions, she placed reliance on decision of Delhi Tribunal order in Ameriprise India Pvt. Ltd. vs. ACIT (2015- TII-347-ITAT-DEL-TP) wherein it is held that, interest on receivables is an international transaction and the transfer pricing adjustment is warranted. He stated that Finance Act, 2012 inserted Explanation to Section 92B, with retrospective effect from 1.4.2002 and sub- clause (c) of clause (i) of this Explanation provides that: (i) the expression "international transaction" shall include— …… (c) capital financing, including any type of long-term or short-term borrowing, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business;….’ . 3.5.5. Ld.CIT DR submitted that expression ‘debt arising during the course of business’ refers to trading debt arising from sale of goods or services rendered Page 9 of 16 IT(TP)A No.2207/Bang/2017 A. Y: 2013 – 14 in course of carrying on business. Once any debt arising during course of business is an international transaction, he submitted that any delay in realization of same needs to be considered within transfer pricing adjustment, on account of interest income short charged or uncharged. It was argued that insertion of Explanation with retrospective effect covers assessment year under consideration and hence under/non-payment of interest by AEs on debt arising during course of business becomes international transactions, calling for computing its ALP. He referred to decision of Delhi Tribunal in Ameriprise (supra), in which this issue has been discussed at length and eventually interest on trade receivables has been held to be an international transaction. Referring to discussion in said order, it was stated that Hon’ble Delhi Bench in this case noted a decision of the Hon’ble Bombay High Court in the case of CIT vs. Patni Computer Systems Ltd., (2013) 215 Taxmann 108 (Bom.), which dealt with question of law: (c) `Whether on the facts and circumstances of the case and in law, the Tribunal did not err in holding that the loss suffered by the assessee by allowing excess period of credit to the associated enterprises without charging an interest during such credit period would not amount to international transaction whereas section 92B(1) of the Income-tax Act, 1961 refers to any other transaction having a bearing on the profits, income, losses or assets of such enterprises?’ 3.5.6. She submitted that, while answering above question, Hon’ble Bombay High Court referred to amendment to section 92B by Finance Act, 2012 with retrospective effect from 1.4.2002. Setting aside view taken by Tribunal, Hon’ble Bombay High Court restored the issue to file of Tribunal for fresh decision in light of legislative amendment. It was thus argued that non/under- charging of interest on excess period of credit allowed to AEs for realization of invoices, amounts to an international transaction and ALP of such international transaction has to be determined by Ld.TPO. In so far as charging of rate of interest is concerned, he relied on decision of the Hon’ble Delhi High Court in CIT vs. Cotton Naturals (I) Pvt. Ltd (2015) 276 CTR 445 (Del) holding that Page 10 of 16 IT(TP)A No.2207/Bang/2017 A. Y: 2013 – 14 currency in which such amount is to be re-paid, determines rate of interest. He, therefore, concluded by summing up that interest on outstanding trade receivables is an international transaction and its ALP has been correctly determined. 3.5.7. We have perused the submissions advanced by both the sides in the light of the records placed before us. This Bench referred to decision of Special Bench of this Tribunal in case of Special Bench of ITAT in case of Instrumentation Corpn. Ltd. v. Asstt. DIT in and 1549 (Kol.) of 2009, dated 15-7-2016, held that outstanding sum of invoices is akin to loan advanced by assessee to foreign AE., hence it is an international transaction as per explanation to section 92 B of the Act. We also perused decision relied upon by Ld.AR. In our considered opinion, these are factually distinguishable and thus, we reject argument advanced by Ld.AR. 3.5.7. Alternatively, it has been argued that working capital adjustment subsumes sundry creditors. In such situation computing interest on outstanding receivables and lones and advances to international transaction would amount to double taxation. Hon’ble Delhi Tribunal in case of Orange Business Services India Solutions Pvt. Ltd. vs. DCIT in ITA No. 6570/Del/2016 vide its order dated 15.2.2018 has observed that: “There may be a delay in collection of monies for supplies made, even beyond the agreed limit, due to a variety of factors which would have to be investigated on a case to case basis. Importantly, the impact this would have on the working capital of the assessee would have to be studied. It went on to hold that, there has to be a proper inquiry by the TPO by analysing the statistics over a period of time to discern a pattern which would indicate that vis-à-vis the receivables for the supplies made to an AE, the arrangement reflected an international transaction intended to benefit the AE in some way. Similar matter once again came up for consideration before the Hon’ble Delhi High Court in Avenue Asia Advisors Pvt. Ltd. vs. DCIT (2017) 398 ITR 120 (Del). Following the earlier decision in Kusum Healthcare (supra), it was observed that there are several factors which need to be considered before holding that every receivable is an international transaction and it requires an assessment on the working capital of the Page 11 of 16 IT(TP)A No.2207/Bang/2017 A. Y: 2013 – 14 assessee. Applying the decision in Kusum Health Care (supra), the Hon’ble High Court directed the TPO to study the impact of the receivables appearing in the accounts of the assessee; looking into the various factors as to the reasons why the same are shown as receivables and also as to whether the said transactions can be characterized as international transactions.” 3.5.8. In view of the above, we deem it appropriate to set aside the impugned order on this issue and remit the matter to the file of the Assessing Officer/TPO for deciding it in conformity with the above referred judgment. Needless to say, the assessee will be allowed a reasonable opportunity of being heard in such fresh proceedings. Accordingly these ground raised
by assessee stands allowed for statistical purposes. Respectfully following the same we direct Ld.AO to decide the issue in confirming the with the decisions referred to herein above.. Accordingly these grounds raised by assessee stands allowed for statistical purposes.
12. Ground No. 10-11 is in respect of disallowances made by Ld. AO towards provision of expenses and stamp duty paid for registration the lease deed. 12.1. Ld.AR submitted that identical issue was considered by this Tribunal in assessee’s own case for assessment year 2009-10. It was submitted that Ld.AO disallowed these expenses however deduction claimed under section 80 IB (8A) of the act was not enhanced but limited to the actual claim in the return. 12.2. Ld.DR also submitted that whatever was duly claimed by assessee was granted by Ld.AO and supported the orders of authorities below.
Page 12 of 16 IT(TP)A No.2207/Bang/2017 A. Y: 2013 – 14 12.3. We have perused submissions advanced by both sides in light of records placed before us. It is observed that for assessment year 2009-10 certain disallowances made by Ld.AO for which identical treatment was given was considered by this Tribunal in assessee’s own case in as under: “5. We have perused the orders and considered the rival submissions. Disallowance of Rs.1,80,658/-, no doubt, was due to the failure of assessee to bring evidence to prove that it was paid as insurance premium. However, such disallowance admittedly had gone to increase profits and gains of the assessee since assessee had not returned any income under other heads. There is no case for revenue that enhancement resulted in a source of income which was something other than profits and gains from business. This being so, in our opinion, assessee in terms of sub-sec.(8A) of sec.80-IB of the Act, was well eligible for such claim on the enhanced amount as well. This view has been taken by the Hon'ble bombay High Court in the case of Gem Plus Jewellery India Ltd. (supra) where the disallowance had resulted in enhancing the claim for deduction u/s 10A of the Act. We are of the opinion that no good reason whatsoever has been shown by the learned Departmental Representative to disturb the finding of ld.CIT(A) in this regard. Ground No.2 of the revenue stands dismissed.” 12.4. The view of this Tribunal is fortified by Hon’ble Bombay High Court in case of CIT vs Gem Plus Jewellery reported in (2011) 330 ITR 175. DRP while considering the issue has observed as under: Panel: the contentions of the assessee are considered. The lease is for 5 years and the expenditure towards registration are incurred for that purpose. On the same issue, i.e., Registration and legal charges incurred for leaving a building is held to be capital expenditure by Karnataka High Court in the following case. • Hotel Rajmahall vs CIT (Kar) 152 ITR 218” DRP took following view:
Page 13 of 16 IT(TP)A No.2207/Bang/2017 A. Y: 2013 – 14 “With respect to the claim of depreciation on this amount it is seen that the assessee is not the owner of the asset and hence depreciation is not allowable. Ground is rejected.” 12.5. The disallowance has resulted in enhancing the claim of deduction under section 80 IB (8A) of the act. The disallowance has been made because of the statutory provisions under section 37 and as a consequence of such disallowance there is an increase in the income in the hands of assessee. We are therefore unable to accept the contentions of authorities below that in computing deduction under section 80 IB (8A) of the act in the hands of assessee the disallowance so made ought to be ignored. We direct the Ld.AO to compute the deduction under section 80 IB (8A) of the act in the hands of assessee in accordance with law having regard to ratio laid down by Hon’ble Bombay High Court in case of CIT vs Gem Plus Jewellery (supra). Accordingly this ground stands allowed.
Ground 12-13 is consequential to ground 10-11. As we have directed Ld. AO to recompute deduction under section 80 IB (8A) of the act considering the disallowances made this grounds become infructuous. Accordingly these grounds stands dismissed.
Ground 14-15 Ld.AR submitted that assessee had actually incurred the expenses during assessment year 2013-14 and has placed on record the details of accounts maintained under Mercantile system of accounting. It has been submitted that the authorities below has Page 14 of 16 IT(TP)A No.2207/Bang/2017 A. Y: 2013 – 14 not verified these expenses and has some really rejected the provision for expenses amounting to Rs. 10, 11, 320/-created by assessee in the books of account as per section hundred and 15 JB of the act. 14.2. Ld.CIT.DR submitted that the issue may be sent back to learnt AO for due verification of the details based upon the submissions made by assessee. 14.3. We have perused submissions advanced by both sides in light of records placed before us. 14.3. It is observed that Ld.AO has not verified the claim and has denied it to assessee. We direct Ld.AO to verify the claim of assessee and if found eligible the same should be granted to assessee in accordance with law. Accordingly this ground raised
by assessee stands allowed for statistical purposes.
15. Ground No.16 is in respect of TDS credit amounting to Rs.2,61,461/-being denied to assessee. It has been submitted that DRP declined from adjudicating this ground by observing that under section 144C, DRP has jurisdiction to adjudicate only the variations proposed to the returned income in draft assessment order. Ld.AR submitted that Ld.AO while passing final assessment order also did not verify TDS credit. It has been submitted that all the details relevant for verification of the claim are available on record. 15.1. Both sides admitted for this issue being set aside to Ld.AO for due verification.
Page 15 of 16 IT(TP)A No.2207/Bang/2017 A. Y: 2013 – 14 15.2. We are accordingly, direct Ld.AO to verify and consider the claim of assessee based upon the documents filed in accordance with law. Accordingly this ground raised by assessee stands allowed for statistical purposes. In the result appeal filed by assessee stands partly allowed. Order pronounced in the open court on 13th May, 2020.