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Income Tax Appellate Tribunal, “K” BENCH, MUMBAI
Before: SHRI SHAMIM YAHYA & SHRI PAWAN SINGH
IN THE INCOME TAX APPELLATE TRIBUNAL “K” BENCH, MUMBAI BEFORE SHRI SHAMIM YAHYA, ACCOUNTANT MEMBER AND SHRI PAWAN SINGH, JUDICIAL MEMBER ITA no.7547/Mum/2016 (Assessment Year: 2011-12)
Asstt. Commissioner of Income Tax – 1(1)(1) 579, Aayakar Bhawan ……………. Appellant M.K.Road Mumbai- 400 020 v/s
M/s. Aeco India Pvt.Ltd. C/o. Kalyaniwalla & Mistry Kalpataru Heritage ……………. Respondent 127, MG Road Mumbai – 400 001 Revenue by : Shri. Anand Mohan Assessee by : Shri. M.M.Golvala / Shri Amey Wagle / Shri Darshit Naik
Date of Hearing –05/11/2019 Date of Order - 07.01.2020
O R D E R PER: SHAMIM YAHYA
This appeal by the revenue is directed against order of ld.CIT(A)- 2, Mumbai dated 10/08/2016 and pertains to assessment year 2011 – 12. 2. The grounds of appeal read as under:- i. Whether, on the facts and circumstances of the case and in Law, the Id. CIT(A) erred in deleting the addition of Rs. 1,25,31,547/-without giving an opportunity of being heard to the Assessing Officer (AO) to examine the additional evidence produced before him in the form of bills/vouchers, TDS Challans etc, which were not produced before the AO, as mandated by Rule 46A(3) of the Income-tax Rules, 1963 ("the Rules'% whereby the CIT(A)
ITA No.7547/Mum/2016 M/s. AECO India Pvt. Ltd
shall not take into account any additional evidence produced under Rule 46A(1) of the Rules unless the AO has been allowed a reasonable opportunity to examine the evidence or document produced by the appellant, and also to produce any evidence or document in rebuttal of the additional evidence produced by the assessee? ii. Whether, on the facts and circumstances of the case and in Law, the Id. CIT(A) erred in ignoring crucial fact - whether Tax Deducted at Source (TDS) under provisions of Chapter XVII-B of the Income-tax Act, 1961 was deposited into Government Treasury on or before due date specified in Section 139(1) of the Income-tax Act, 1961 i.e. 30-11-2011 for AY 2011-12, so as not to attract provisions of Section 40(a)ia) of the Income-tax Act, 1961 ? iii. Whether, on the facts and circumstances of the case and in Law, the Id. CIT(A) erred in deleting the addition of Rs 2,12,24,848/- by citing that the party i.e., Nomanbhoy & Sons Pte Ltd, Singapore, treated as an Associated Enterprise of assessee by A.O. is not an Associated Enterprise of assessee as per information in Form 3CEB without calling for Remand Report from the A.O. before deciding the issue in favour of the assessee?" iv. Whether, on the facts and circumstances of the case and in law, whilst it is true that it is the obligation of the AO to conduct proper scrutiny of the material, given the fact that the AO did not examine whether the conditions specified in clause (h) of Section 92A(2) of the Income-tax Act, 1961 are fulfilled so as to make i.e. Nomanbhoy & Sons Pte Ltd, Singapore an Associated Enterprise (AE) of the assessee, the obligation to conduct proper inquiry of facts would shift to Ld.CIT(A) in view of the Hon'ble Delhi High Court decision in the case of C/T Vs Jansampark. Advertising am Marketing (P) Ltd (ITA No. 525/2014) which was not discharged the Ld.CIT(A)? v. Whether, on the facts and circumstances of the case and in law, the Id. CIT(A) erred in deleting the transfer pricing adjustment of Rs.27,37,951/- & Rs.6,83,205/- without giving an opportunity of being heard to the Assessing Officer (AO) to examine the additional evidence produced before him in the form of Transfer Pricing Study Report, data on comparable companies etc, which were not produced before the AO, as mandated by Rule 46A(3) of the Income-tax Rules, 1963 ("the Rules"), whereby the CIT(A) shall not take into account any additional evidence produced under Rule 46A(1) of the Rules unless the AO has been allowed a reasonable opportunity to examine
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the evidence or document produced by the appellant, and also to produce any evidence or document in rebuttal of the additional evidence produced by the assessee?
The brief facts of the case are that assessee company is engaged in the business of trading of iron ore . The Assessing Officer observed that the quantitative details and other relevant information on trading activity have not been provided by the assessee. He noted that Auditor’s report as well as tax audit report vide form No. 3 CD also do not provide any information in this regard. Thereafter, the Assessing Officer dealt with the issue of disallowance of expenses to the tune of Rs. 1,25,31,547.
The Assessing Officer noted that while filing the revised return, the assessee has made various adjustments to the amount of income declared vide original return. That one of the adjustments relates to claim for expenses to the tune of Rs.1,25,31,547. The Assessing Officer referred to the assessee’s note in this regard as under:-
The assessee company undertook during the year under consideration a transaction of export of iron ore fines to China from Goa, During the course of statutory audit for the subsequent financial year ending 31st March, 2011, had erroneously not been booked as expenditure in the said financial year, but were instead booked in the financial year ending 31" March, 2012 on receipt, of the relevant bills from the respective parties. The said amounts have been classified in the subsequent financial year in the accounts as "prior period expense". Date Name Nature Amount (Rs.) 2,800,000 31.03.2031 Premier Marine Barge hire 72,798 28.03.20J I Machado & Sons Agency charges 618,770 28.03.2011 Machado & Sons Charges 1,221,619 25.03.2011 Laxmikant Parab Mineral Traders Transport Handling Charges 7,818,360 26.03.2011 Counto Metals Renting and using Jetty plots 12,531,547 ======== 'Note 2 .
ITA No.7547/Mum/2016 M/s. AECO India Pvt. Ltd
The Return of Income for the current fiscal year is being revised to claim the above expenses which relate to the year under consideration. No deduction has been claimed for the above expenses in the Return of Income for the subsequent assessment year A.Y. 2012-13.
AO noted that assessee has not furnished any details/supporting with regard to the said expenses/charges. That assessee was specifically requested to furnish complete details/information. Further, the Assessing Officer noted that these expenses are of such nature which would attract provisions of chapter XVII B of the Income Tax Act. That no information or detail has been given by the assessee to confirm the compliance. Hence, the Assessing Officer disallowed the claim of Rs. 1,25,31,547. Services Fee Income Rs.30,06,152 6. In this regard the Assessing Officer referred to assessee’s note in the revised return as under:- “The assessee is a low risk service support provider to its Foreign Associate Enterprise. This activity continued till 3T' December, 2010. From January 2011 the assessee commenced its trading business of exporting iron ore. The staff of the assessee was almost entirely involved in the said business. as the Return of Income is being revised, by way of abundant caution, the assessee is making a transfer pricing adjustment to charge Hongkong for all personnel and other expenses (other than those incurred at Goa office) on its regular basis of cost plus 10% mark up.” 7. The Assessing Officer noted that assessee has not furnished any details or information in this regard. That the assessee has not furnished Transfer Pricing certificate as mentioned in the statement of revised return of income. He noted that assessee has contended that 10% mark-up would be appropriate for Transfer Pricing adjustment. However, in absence of any further details and information the AO considered 35% margin as appropriate. Hence, the Assessing Officer added a sum of Rs. 6,83,205.
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Sales/export 8. The Assessing Officer noted that as per profit and loss account assessee has undertaken export the tune of Rs.12,40,69,985. That the said sale/export was done by the assessee company in favour of Nomanbhoy & Sons Pte Ltd. (Singapore). In this regard the Assessing Officer referred to the provisions of section 92 whereby the said company shall be regarded as AE for the purpose of chapter X dealing with special provisions relating to avoidance of tax .he noted that the assessee has not filed any report or information in compliance to the provisions of said chapter X. He noted that since, the assessee has not filed information and documents which would enable the transfer pricing officer to determine and confirm the arm’s-length price, he computed, the arm’s-length price as under:- It is felt that a markup of 20% on trading activity should be reasonable and should represent Arms Length price. Consequently, 20% mark up on the expenses, as detailed below, incurred by the assessee has been considered to arrive at the Arms Length price. Nature of Expenses Amount (Rs.) Purchases 93,660,724 Custom duty 24,853,400 54,885 Shipment insurance Clearing and forwarding charge 303,312 Loading port charges 2,204,379 Total expenses 121,076,700 Add mark up @ 20% of total expenses 24,215,340 145,292,040 Arms Length Price (A) 21,224,848 Adjustment (price declared by the assessee Rs; 12,40,69,985 less A above)
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Accordingly, adjustment of Rs.21,224,848/- is proposed to be made to the amount of total income.
Income from services in foreign currency 9. The Assessing Officer noted that as per profit and loss account and details furnished by the assessee and income of Rs. 1,20,46,986 has been credited by the assessee company in profit and loss account. The assessee has not filed any detail/information in this regard even though the same was called for. The assessing officer concluded that the transactions shall come in the purview of the provisions of chapter X. The AO concluded as under:-
6.2 Having regard to Note no. 3, as reproduced above, provided by the assessee to the statement of revised income, it would-imply that the assessee company has adopted 10% mark up to arrive at this income. For the reasons at para 4 above, a mark up of 35% appears to be appropriate. Consequently, a sum of Rs. 2,737,951/- is proposed to be added to the income of the assessee (12,046,986/110 x 135 less 12,046,986). . 7. Subject to above remarks the total income of the assessee is computed as under:- I Income from Business 499,951 (as per revised computation of income) Add : Disallowance of expenditure (as 1,25,31,547 discussed in para-3 above) Add : Addition on account of inappropriate percentage of mark up on 683,205 Service Fee Income (as per para-4 above) Add : Addition on account of incorrect Arms length price of 21,224,848 sale / export transaction (as per para-5 above) Add: Addition on account of inappropriate percentage of mark up on 2,737,951 income from Sale/Export (as per para-6 above) 37,677,502 Gross Total Income 37,677,502 Less Deduction under Chapter. VIA -
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Total income 37,677,502 Rounded off to 37,677,502
Against the order, assessee appeal before the learned CIT(A). 11. The CIT(A) noted the assessee’s objection that Assessing Officer has not provided proper opportunity. He held that although it is apparent from the manner in which the additions have been made that the Assessing Officer did not grant opportunity before making additions of such a magnitude. However, he held that he has heard the assessee at substantial length and also called for certain details in order to render a correct and judicious decision. Therefore, he was of the opinion that assessment cannot be cancelled as he has heard the assessee fully and rendered decisions on merits of the addition. 12. As regards the disallowance of Rs.1,25,31,547 the learned CIT(A) reproduced to the assessee submission in statement of facts. He noted the assessee submissions that a lot of information was already provided to the Assessing Officer. Thereafter, he held as under :-
“In any event, in order to do Justice to the matter, I requested the appellant, in the light of the powers vested in me, to submit copies of the relevant bills, TDS challans, etc. The appellant submitted all the relevant bills to me during the course of appeal proceedings. I have perused the relevant bills and found that there is no reason why the disallowance should be upheld. Firstly, the Assessing Officer states that details were not furnished, but the details were clearly available in the notes appended to the revised return, which the Assessing Officer himself culled out in the assessment order. If the Assessing Officer felt that he required to verify the bills, he should have called for the same, but has certainly not done so. I have, therefore, verified the said bills in the course of appeal proceedings. The details of bills and TDS deducted are as under:-
ITA No.7547/Mum/2016 M/s. AECO India Pvt. Ltd
Nature Amount (Rs.) Remarks Remarks Date Name TDS deducted 31.03.2011 Premier Marine Barge hire 28,00,000 Rs. 56,243/- Bill (Page 27 of TDS challan compilation) Page 28 of compilation) 28.03.2011 Machado & Sons Agency charges 72,798 Rs. 1.456/- Bill (Page 29 of TDS challan compilation) Page 32 of compilation) 28.03.2011 6,18,770 Rs. 12,133/- Machado & Sons Charges Bills (Page TDS challan 306531 of Page 32 of compilation) compilation) 25.03.2011 12,21,619 Nil Laxmikant Parab Transport Bill (Page 33 of Transporter Mineral Traders compilation) Handling giving PAN Charges specifically excluded under Section 194C (6) Counto Renting 78,18,360 Bill (Page 26.03.2011 Rs.7,81,836/ TDS Metals and 35 of - challan compilation) using Page 37 of Jetty compilation) plots
1,25,31,547 7.3. Secondly, I am of the opinion that having regard to the fact that iron ore fines were exported to China, the above expenses were necessary to be incurred at the port of shipment at the time of loading and despatch of the consignment and are normal expenditure incurred at the time of export. It is relevant that the Assessing Officer does not dispute the facts of exports having taken place and, in fact, taxes the sale transaction. 7.4 The appellant has also explained the TDS deducted details in page 7 in the tabular format which indicates that the appellant has duly paid TDS and that due taxes have been deducted and paid into Government Treasury, except in case of transport charges where an exemption is available U/S.194C.”
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Transfer Pricing Adjustment for Sale/ Export 13. As regards the transfer pricing adjustment made by the Assessing Officer, the learned CIT(A) reproduced the assessee submission in this regard and thereafter, he held as under:- “I have considered the matter very carefully. The facts are that the appellant filed a Transfer Pricing certificate in Form 3CEB. It is to be noted that the said Nomanbhoy & Sons Pte. Ltd. (Singapore), treated by the Assessing Officer as an Associated Enterprise, was not indicated as an Associated Enterprise in Form 3CEB. The Assessing Officer refers to Section 92A(2) to hold Nomanbhoy & Sons Pte. Ltd. (Singapore) as an Associated Enterprise, without confronting the appellant. It is difficult to understand which sub- section of 92A(2) the Assessing Officer wanted to apply. I have further perused the following: a) Transfer Pricing certificate in Form 3CEB. b) Transactions with related parties disclosed in Schedule 8 in the Notes to Accounts. c) The statement of the appellant that the said alleged Associated Enterprises, Nomanbhoy & Sons Pte. Ltd. is a completely unrelated party. d) In details of export sales submitted vide letter dated 21st October 2013 where there was a specific Section whether the party is a related party, the appellant clearly answered 'NO'. The only issue involved in this ground of appeal is M/s. Nomanbhoy & Sons Pte. Ltd. (Singapore) treated by the Assessing Officer as an Associated Enterprise of the appellant company whereas the AR of the appellant argues that as per Form 3CEB, it is not mentioned as Associated Enterprise. Accordingly he has filed a copy of Form 3CEB wherein at page 3 of Form 3CEB the appellant company has mentioned Abdoolally Ebrahim & Co.(HK) Ltd. Abdoolally House, 1st floor, 20, Stanley Street, Central, Hongkong as its Associated Enterprise whereas vide page 3, para 5.1 of the assessment order, the Assessing Officer has only mentioned that the assessee has undertaken export of Rs. 12,40,69,985/- in favour of Nomanbhyoy & Songs Pte. Ltd.(Singapore). The explanation given by the AR of the appellant appears to be acceptable one hence the AO is^directecl Lo UeleletEeTabove addition as tfie AR of the appellant established that Nomanbhoy & Songs Pte. Ltd. (Singapore) is not an Associated Enterprise”.
Transfer Pricing addition of Rs. 27, 37, 951
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In this regard the learned CIT(A) referred to the above adjustment made by the assessing officer in respect of business of the assessee of providing back-office market services to its AE 15. In this regard the CIT(A) noted that assessee has charged a markup of 10% but the Transfer Pricing adjustment has been made by the Assessing Officer by increasing the markup from 10% to 35%. The learned CIT(A) noted the submission of the assessee that no information was called for from the assessee.. Thereafter the learned CIT(A) directed the Assessing Officer to verify the assessee submission as under:- “The appellant has carried out a detailed search on Prowess database to select companies carrying on similar activities. The summary of the search and the shortlisted companies matching the criteria carried of the business carried on by the appellant forms part of the study report furnished before me in the compilation. It is noticed that the comparables have a PLI of 6.50%, which is lower than that of the appellant's margin of 10%. The AO is directed to verify the above fact and allow accordingly. Hence this ground of appeal is allowed.”
Transfer Pricing adjustment of Rs. 6, 83, 205 16. In this regard also the ld.CIT(A) noted that submissions of the assessee and remitted the issue to the file of Assessing Officer as under:-
“In respect of the very same business of providing back office marketing services, the appellant shut its operations with effect from 31st December, 2010. From January 2011, the assessee commenced its trading business of exporting iron ore. The staff of the assessee was entirely involved in the trading business of exporting iron ore. In the course of shutting down the back office marketing services, some persons in the Accounts Department were required to continue in order to wind down the business. Although no services were rendered to the Associated Enterprise from January to March 2011, since the appellant was filing a revised Return of Income, by way of
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abundant caution, it made a Transfer Pricing adjustment in the revised Return of Income of Rs.30,06,152/- computed as under: Export Back office segment Segment Expenses as per audited accounts for 54,15,049 1,09,37,528 the year Add: Expenses for Jan - March (27,47,097) 27,47,097 allocated to Back Office segment Adjusted expenses 26,67,952 1,36,84,625 Add: Markup® 10% - 13,68,463 Total Amount chargeable 26,67,952 1,50,53,088 Less: Back-office Revenue already (1,20,46,986) declared in audited accounts Suo-moto Transfer Pricing Addition 30,06,102 by Appellant
Against the order, revenue is in appeal before us. 18. We have heard both the Counsel and perused the record. 19. The revenue’s grievance is that learned CIT(A) has passed order without giving the Assessing Officer an opportunity to go through the additional documents and submissions made by the assessee before him. 20. Per Contra, learned counsel of the assessee has given Catena of case laws for the proposition that learned CIT (A) is fully empowered to call for details and pass order accordingly and in that case it cannot be said that there is violation of rule 46A( 3)
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Upon careful consideration, we note that as regards the deletion of addition of Rs. 1,25,31,547 the learned CIT(A) has given the finding that he has called for the relevant documents and examined the same himself. He has rejected the Assessing Officer’s contention that details were not furnished by noting that the details were clearly available in the notes appended to the revised return which the Assessing Officer himself culled out in the assessment order but he has not done so. Learned CIT(A) noted that he has verified the said bills in the course of appeal proceedings. He has also noted the bills and TDs deducted. Thereafter he has gone on the general premise that expenditure must have been incurred for the said transportation. In this regard we note that learned CIT(A) has noted that the details were mentioned in the note. By no stretch of imagination this can mean that the relevant supporting vouchers where available with the Assessing Officer. Just giving the note will not serve the purpose. Admittedly the various details which have been referred by the learned CIT(A) were not before the assessing officer. Moreover after noting that he has himself examined the bills he has given a general assumption that expenditure must have been incurred for such transportation. When learned CIT (A) has himself verified the bills there was no need of giving such doubtful observation. In this view of the matter there is certainly violation of 46 A and the finding of learned CIT (A) is also not categorical. Accordingly, in our considered opinion the submissions and documents on the basis of which learned CIT (A) has granted relief need to be remitted to the file of Assessing Officer. The Assessing Officer is directed to go through the same and decide as per law. Transfer Pricing adjustment of Singapore AE 22. As regards the Transfer Pricing adjustment, ld CIT(A) has noted that assessee’s explanation appears to be acceptable and hence the assessing officer is directed to delete the above addition as the AR has established that
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the said Nomanbhoy & Sons Pte Ltd (Singapore) is not an associated enterprise. In this regard we note that ld CIT(A) has not given a categorical finding. He has used the expression that it “appears” to him that assessee submissions are correct. In our considered opinion such vague orders are not sustainable. There should have been a categorical finding to be sustainable in law. In our considered opinion, this issue also needs to be remitted to the file of Assessing Officer. The Assessing Officer is directed to consider the issue afresh in light of the submissions and explanations given before the learned CIT (A). 23. As regards the other Transfer Pricing adjustment, CIT(A) has referred to the assessee submissions and has directed the Assessing Officer to verify and allow. We fail to understand as to how the learned CIT(A) can give such suggestions. Firstly, the learned CIT(A) has no power of remand. Moreover the learned CIT(A) has directed to verify and in the same breath he is directing to be allowed. The direction if any in this regard can be to verify and allow as per law. Be as it may we modify order of learned CIT(A) and remit the issues to the file of assessing officer. Assessing officer is directed to examine the same afresh and pass an order according to law after giving the assessee proper opportunity appeal heard. 23. In the result this appeal by the revenue stands allowed for statistical purposes Order pronounced in the Open Court on 07.01.2020
Sd/- Sd/- PAWAN SINGH SHAMIM YAHYA JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI, DATED: 07.01.2020
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Copy of the order forwarded to: (1) The Assessee; (2) The Revenue; (3) The CIT(A); (4) The CIT, Mumbai City concerned; (5) The DR, ITAT, Mumbai; (6) Guard file. By Order Karuna Sr. Private Secretary (Dy./Asstt.Registrar) ITAT, Mumbai