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Income Tax Appellate Tribunal, DELHI BENCH: ‘I-1’ NEW DELHI
Before: SHRI N. K. SAINI & MS SUCHITRA KAMBLE
PER SUCHITRA KAMBLE, JM
This appeal is filed by the assessee against the order dated 27/11/2017 passed by DCIT, New Delhi u/s 144C read with Section 143 (3) of the Income Tax Act, 1961.
The grounds of appeal are as under:-
“1. The learned DCIT (after incorporating Hon’ble DRP’s order) has erred on facts and in law in making addition of Rs. 2,50,54,072 towards price adjustment on account of grounds mentioned at S. No. 2 to 6 below. 2. The learned DCIT (after incorporating Hon’ble DRP’s order) has erred on
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facts and in law in selecting 3 new companies and adding the same to the list of final comparable companies. 3. The learned DCIT (after incorporating Hon’ble DRP’s order) has erred on facts and in law in rejecting 3 comparable companies selected by the assessee. 4. The learned DCIT (after incorporating Hon'ble DRP’s order) has erred on facts and in law in rejecting the PLI computation of the assessee. 5. The learned DCIT (after incorporating Ld. TPO’s order) has erred on facts and in law by not computing margin of the comparable companies on the same basis as that of the assessee. 6. The learned DCIT (after incorporating Ld. TPO’s order) has erred on facts and in law in rejecting the Company’s request for working capital adjustment to the margins of comparable companies. 7. The learned DCIT (after incorporating Hon’ble DRP’s order) has erred on facts and in law in making addition of Rs. 1,83,89,307 towards interest on outstanding receivables. 8. The learned DCIT has erred on facts and in law in disallowing Rs. 46,55,953 on account of additional depreciation. 9. Without prejudice to the ground number 8 above, the order passed by learned DCIT is bad in law and deserves to be quashed having been passed in violation of principles of natural justice without giving proper opportunity to produce the evidence and show cause as to why the additional depreciation should not be disallowed. 10. The Ld. DCIT has erred on facts and in law in disallowing Rs.1,55,71,447/- (wrongly mentioned as Rs.1,55,14,447/- in the final computation) on account of professional/management fees. 11. The Ld. DCIT has erred on facts and in law in disallowing set-off of Rs.1,82,23,611/- relating to brought forward loss and Rs.65,82,558/- relating to unabsorbed deprecation while computing the assessed income. 12. The Ld. DCIT (after incorporation Hon’ble DRP’s order) has erred on facts and in law in initiating penalty proceedings u/s 271(1) (c).”
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During the year, the assessee company is engaged in the business of manufacturing of medium voltage switchgear components, ring main unit components, compact substation components, circuit breaker components, isolator switches components etc. The assessee filed the income tax return declaring income of Rs.4,97,52,850/- e- filed on 30.11.2013. The case was selected for scrutiny through CASS and statutory notice u/s 143(2) of Income Tax Act, 1961 was issued on 05.09.2014 which was duly served upon assessee. Statutory notice u/s 142(1) along with questionnaire was also issued. The Chartered Accountant & Authorized Representatives of the assessee attended the assessment proceedings from time to time and submitted details/documents which are placed on record and the case was discussed with him. The Books of account were called for & examined on test- check basis. In respect of adjustment u/s 92CA, during the year under consideration, the assessee company made the international transaction with the associated enterprises and a reference in this regard was made to Transfer Pricing Officer, New Delhi vide this office letter u/s 92CA(3) of the Income Tax Act, in respect of international transaction entered assessee during F.Y. 2012- 13. The Transfer Pricing Officer-1 (2)(2), New Delhi order dated 21.10.2016 suggested the Assessing Officer to enhance the income of the assessee by Rs.4,34,43,379/- on account of difference in Arm’s Length Price. The assessee was asked to explain as to why an addition of Rs.4,34,43,379/- should not be made to total income on a/c of aggregate difference arm’s length prices of the international transactions. During the Assessment Proceedings, the assessee reiterated more or less the same arguments which were submitted before the Transfer Pricing Officer. The Assessing Officer observed that the TPO was right in making the addition of Rs.4,3,43,379/- on account of arm’s length price for the reasons mentioned in the transfer pricing order dated 21.10.2016. The Assessing Officer adopted the arms length price determined by TPO and accordingly, an amount of Rs.4,34,43,379/- being the amount arrived at by TPO-1(2)(2), New Delhi was added back to the income of the assessee company. The Assessee filed objections before the Dispute Resolution Panel. The Dispute
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Resolution Panel-I, New Delhi (DRP) directed the TPO to (i) consider the assessee’s submission afresh and take a decision in accordance with law (ii) verify the detailed computation of working capital adjustment as submitted by the assessee and upheld the finding of AO/TPO on the issue of interest on receivables. Based on the directions of the DRP, a notice was issued to the assessee vide letter dated 22.09.2017 to submit the necessary details and documentary evidence in support of its argument before the DRP. The Assessing Officer observed that in response to the notice, the assessee submitted its reply vide letter dated 28.09.2017 which was considered but was not found tenable. The Assessing Officer further held that there is no case for a working capital adjustment being allowed to the assessee. Therefore, after giving effect as per direction of the DRP, the adjustment of Rs. 4,34,43,379/- was made by the Assessing Officer. The Assessing Officer also disallowed legal and professional charges, Management Fee and two element holding company in absence of evidence of services availed for addition of Rs.1,55,14,447/-. The Assessing Officer further made an addition on account of excess depreciation on fixed assets of Rs.46,55,953/- as well as set of losses which are carried forward from last year and unabsorbed depreciation.
Being aggrieved by the Assessment Order the assessee is before us.
The Ld. AR submitted that the return of income of the assessee is Rs. 7,45,59,022/- and four additions were made in the assessment order aggregating to Rs. 6,36,70,779. The Assessing Officer also denied benefit of Rs. 1,82,23,611 relating to brought forward loss and Rs. 65,82,558 relating to unabsorbed depreciation and thereby computing the assessed income at Rs. 13,81,72,801. This resulted in total demand (including interest) of Rs. 4,56,26,950/-. Out of total addition of Rs. 6,36,70,779 made by the Assessing Officer, TP additions aggregate to Rs. 4,34,43,379 and non-TP additions aggregates to Rs. 2,02,27,400. In the current year margin of assessee is 8.94%, whereas the margin of comparable companies determined by TPO is 12.53%.
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Therefore, the margin of comparable companies is higher by 3.59% and if permissible variation range of 3% (as per second proviso to section 92C) is considered the difference is only 0.59%. In the earlier years no additions was made by TPO although the margin in earlier years was lower than 8.94%. Margin of assessee in the immediately previous year, i.e. A.Y. 2012- 13 was 5.74%. The Ld. AR submitted the details of TP additions of Rs. 4,34,43,379/- which are as follows:
i) Rs. 2,50,54,072 on account of price adjustment due to higher margin of comparable companies; and ii) Rs. 1,83,89,307 on account of net notional interest on delayed receipt / payment from receivables / payables.
The Ld. AR submitted the details of non-TP additions of Rs. 2,02,27,400/- which are as follows: i) Rs. 46,55,953 on account of disallowance of additional depreciation ii) Rs. 1,55,71,447 on account of disallowance of Professional / management fees. iii) Rs. 1,82,23,611 relating to brought forward loss and Rs. 65,82,558 relating to unabsorbed depreciation while computing the assessed income.
The Ld. AR further submitted that as relates to Ground No. 1, the Assessing Officer after incorporating DRP’s order erred on facts and in law in making addition of Rs. 2,50,54,072 towards price adjustment on account of grounds mentioned at S. No. 2 to 6 of the appeal. This ground is general in nature, therefore, there is no need to adjudicate this ground.
As relates to Ground No. 2, the Ld. AR is not pressed the same. Thus, we dismiss this ground as not pressed by the Assessee.
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As relates to Ground No. 3, the Ld. AR submitted that the TPO has rejected the following 3 comparable companies selected by assessee: • Akasaka Electronics Ltd. (Margin(-) 13.22% • DR Electricals & Switchgears Pvt. Ltd. (Margin: 2.11%) • JK Switchgears & Cable Pvt. Ltd. (Margin: 3.78%)
The TPO has rejected all above mentioned 3 companies by making very general remark that it ‘fails on one / more of the filters’ without actually specifying such quantitative filter. The TPO discussed this issue in para 3 of the order dated 21.10.2016. The DRP dealt with this issue in para 6.4 of its order dated 19.09.2017. The DRP merely reproduced assessee’s submission in its order and without any discussion at all, the DRP has given its finding in just one line as under:
“We don’t interfere with TPO’s finding and uphold the same.”
The Ld. AR submitted that the detailed factual arguments were submitted to both TPO and DRP. The observations made both by the DRP and the TPO are factually incorrect, since all 3 companies passed all the quantitative filters as given below:
Filters Particulars Aksaka DR JK Electronic Electricals Switch s Ltd. & gears Switchgears & Pvt. Ltd. Cable Pvt. Ltd. Filter 1 Data 2012-13 2012-13 2012-13 available for Financial Year 2012-13
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Filter 2 Sales 19.41 5.53 6.59 income= 1 crore
Filter 3 Realted party 19.77% 0.00% 16.56% transactions =25% of sales
Filter 4 Manufacturing 96.70% 100% 100% income 75% of the total income
Filter 5 Net Positive Positive Positive worth=0
Filter 6 Companies No NO No having diminishing revenue/
persistent losses for 2 out of 3 years Companies N.A N.A N.A Filter 7 having different financial year Companies None None None Filter 8 having peculiar economic circumstance
Therefore, the Ld. AR prayed that these 3 companies should be added to the final list of comparables.
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The Ld. DR relied upon the orders of the Assessing Officer, Transfer Pricing Officer and also relied upon the directions of the DRP.
We have heard both the parties and perused all the records. The three comparables which was submitted by the Assessee before the TPO was not at all considered by the TPO as the TPO has not given a clear finding as to under which filter these comparables have been rejected. Therefore, we direct the TPO/AO to give proper findings as to whether these comparables can be included or excluded in the assessee’s case after considering all the aspect and evidences provided by the assessee before the TPO/AO. Needless to say that the assessee be given opportunity of hearing by following the principles of natural justice. Therefore, Ground No. 3 is partly allowed for statistical purpose.
As regards to Ground No. 4, the Ld. AR submitted that the Assessing Officer after incorporating DRP’s directions erred on facts and in law in rejecting the PLI computation of the assessee. The Ld. AR submitted that the assessee has considered 2 items as part of operating income while computing the PLI i.e., (a) Discount received of Rs. 14,41,756; and (b) Amount written back of Rs. 84,780 in its TP study and computed the margin of 9.27%. The legal arguments submitted to TPO are contained in detailed reply filed vide letter dated 10.10.2016 before the TPO. The TPO has reduced the margin of the assessee from 9.27% to 8.94% for the reasons that the TPO has considered the Discount received and Amount written back as non-operating income and reduced it from the total income while computing the margin. The TPO has discussed this issue in para 5 of its order. The DRP dealt with this issue in para 7.4 of its order dated 19.9.2017. The DRP merely reproduced assessee’s submission in its order and without any discussion at all, the DRP has given its finding in just one line as under:
“The DRP has perused the contentions of the TPO and the detailed submissions made by the assessee before TPO as well as DRP. There is no reason to interfere
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with the TPO’s finding. ”
The Ld. AR submitted that the assessee has shown the discount received and amount written back under the heading Other Income which do not disqualify the same as non-operating income. In support of the fact that discount received is operating income. The Ld. AR relied upon the decision of Mumbai- Tribunal in the case of DHL Express (India) (P.) Ltd. v. ACIT [2011] 11 taxmann.com 40 which is also relied upon by the TPO where it has been accepted that “ the bad debts recovered, e-mail facility charges, discount receipts and handling charges would be part of the operating income. There was no dispute on that...”. The TPO has quoted the irrelevant portion in its order as follows “...interest income, rent receipts, dividend receipts, penalty collected, rent deposit returned back, foreign exchange fluctuations and profit on sale of assets do not form part of the operational income because these items have nothing to do with the main operations of the assessee.” In support of the fact that amount written back is operations income, the Ld. AR relied upon the case of Sony India (P.) Ltd. vs. DCIT [2008] 114 ITD 448 (Delhi Trib.) para 106.02 of order. The Tribunal in this case has also relied upon the case of CIT v. S. Teja Singh [1959] 35ITR 408 (SC) where it was held that, “.... Having regard to statutory provisions, it cannot be said that provisions or writing back of liability is not .part of operating profit or would not be taken into consideration for computing the same.” The Ld. AR therefore prayed that the PLI computation of the assessee be accepted.
The Ld. DR relied upon the orders of the Assessing Officer, Transfer Pricing Officer and also relied upon the directions of the DRP.
We have heard both the parties and perused all the records. It is pertinent to note that the assessee has shown the discount received and amount written back under the heading Other Income which do not disqualify the same as non-operating income. This aspect was not at all considered by
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the TPO/AO. This issue need to be verified by the TPO/AO and therefore, we remand back this issue to the file of the TPO/AO. Needless to say, the assessee be given opportunity of hearing after following principles of natural justice. Ground No. 4 is partly allowed for statistical purpose.
As regards to Ground No. 5, the Ld. AR submitted that the Assessing Officer after incorporating the TPO’s order erred on facts and in law by not computing margin of the comparable companies on the same basis as that of the assessee. The TPO in its show cause notice dated 30.09.2016 has computed the margin of the assessee company after treating the bank charges of Rs. 1,57,721 as operating expenses out of the total interest expenses of 72,51,636. The assessee has accepted this contention of the TPO and therefore, calculated the revised margin @9.25% as compared to margin of 9.27% computed earlier. The assessee also submitted the revised margins of the comparable companies to the TPO @ 11.47% as compared to margin of 12.53% computed earlier. The TPO has not taken into consideration the calculation of revised margins in its order dated 21.10.2016 and again treated the bank charges as non-operating expense. The TPO has computed the margin of comparable companies without treating the bank charges as operating expenses. The DRP has dealt with this issue in para 8.4 of its order dated 19.09.2017 as under:
“DRP directs the TPO to consider the assessee’s submission afresh and take a decision in accordance with law ”
The Ld. AR submitted that despite the DRP’s clear directions, the TPO has not discussed this issue at all while passing its order dated 25.10.2017 giving effect to the DRP’s order. Hence, the Ld. AR prayed that the TPO be directed to calculate the margin of comparable companies after treating the bank charges as operating expenses.
The Ld. DR relied upon the orders of the Assessing Officer, Transfer
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Pricing Officer and also relied upon the directions of the DRP.
We have heard both the parties and perused all the records. It is pertinent to note that despite the directions of the DRP that the submissions of the assessee be taken into consideration, the Assessing Officer has not dealt with the same. Therefore, we direct the TPO/AO to calculate the margin of comparable companies after treating the bank charges as operating expenses. Thus, we remand back this issue to the file of the TPO/AO. Needless to say, the assessee be given opportunity of hearing after following principles of natural justice. Ground No. 5 is partly allowed for statistical purpose.
As regards to Ground No. 6, the Ld. AR submitted that the Assessing Officer after incorporating TPO’s order has erred on facts and in law in rejecting the Company’s request for working capital adjustment to the margins of comparable companies. The assessee has sought for working capital adjustment [“WCA”] in its TP study. The assessee has demonstrated that difference in the working capital deployed is making a difference in the margin earned by the assessee and the comparable companies. The assessee had submitted the detailed computation of WCA before the TPO during assessment proceedings. The TPO has not discussed this issue at all in its order dated 21.10.2016 and has not allowed any working capital adjustment. The DRP has merely reproduced assessee’s submission in its order and without any discussion at all in para 9.5 of its order as under :
“The TPO is directed to verify the detailed computation of working capital adjustment as submitted by the assessee and take a view as per extant rules ”
The Ld. AR submitted that the direction given by the DRP is ambiguous and not clearly demonstrate how to compute the WCA. The DRP in various cases have explained the proper methodology as how to compute the WCA. The assessee had filed letter dated 28.09.2017 with the TPO to give effect to DRP order dated 19.09.2017. Vide Annex-3 to the said letter, margin of comparable
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companies was computed after giving effect to working capital adjustment. However, the TPO giving effect to ambiguous directions of the Ld. DRP has passed an order dated 25.10.2017 without any working capital adjustment and has held as under:
"On the issue of working capital adjustment the assessee has not demonstrated that there is a difference in the level of working capital employed by it vis-a-vis the comparables. The claim of working capital adjustment is not a matter of right as in the case of risk adjustment it must be based on some data. The audited accounts of the assessee do not show it has received any advance from its AEs. The OECD guidelines also mentions that no adjustment can be allowed in the absence of reliable data. ”
The observation of TPO that assessee has not demonstrated that there is a difference in the level of working capital employed by it vis-a-vis the comparable companies is factually incorrect. The assessee has filed letter giving details of its working capital & that of comparable companies. It appears that the TPO without going into details submitted by the assessee has denied the working capital adjustment. The details of working capital adjustment sought are as under:
• Margin of assessee : 8.94%
• Average Margin of the comparable companies before WCA: 12.53%
. Average Margin of the comparable companies after WCA: 9.66%
Hence, the margin of the assessee falls within the range of (+/-)3% prescribed under the Act. The Ld. AR relied upon the decision of the Delhi tribunal in case of ITO v/s M/s H&S Software Development & Knowledge Management Centre Pvt. Ltd. (ITA No. 6662/Del/2014) dated 04.01.2018. The Ld. AR therefore, prayed that proper directions may be given to the TPO to allow working capital adjustment on similar lines as contained in the aforesaid judgment.
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The Ld. DR relied upon the orders of the Assessing Officer, Transfer Pricing Officer and also relied upon the directions of the DRP.
We have heard both the parties and perused all the records. It is pertinent to note that the assessee has furnished the calculation for adjustment on account of working capital before the TPO/AO. But the TPO has not considered the same. The Ld. AR relied upon the decision of the Tribunal in case of ITO v/s M/s H&S Software Development & Knowledge Management Centre Pvt. Ltd. which is relevant in the present case. Therefore, we direct the TPO/AO to take into account the calculation for adjustment on account of working capital provided by the assessee and thereafter passed a reasoned order. Thus, this issue is remanded back to the file of the TPO/AO. Needless to say, the assessee be given opportunity of hearing after following principles of natural justice. Ground No. 6 is partly allowed for statistical purpose.
As regards to Ground No. 7, the Ld. AR submitted that the Assessing Officer after incorporating DRP’s order erred on facts and in law in making addition of Rs. 1,83,89,307 towards interest on outstanding receivables. The assessee has outstanding receivables and payables with Associated Enterprises [“AEs”] in its books of accounts. The TPO has discussed only the legal issue in para 11 of its order dated 21.10.2016. In light of amendment to explanation (l)(c) of Section 92B which has been made by Finance Act 2012 with effect from 01.04.2002, the TPO has treated the delay in receipt of receivables from the AEs and delay in payment of payables to the AEs as interest free loan. Therefore, the TPO has characterized the debit balance i.e. receivables as ‘loans advanced to AEs’ beyond the period of 60 days in the nature of loan and computed notional interest thereon. Similarly, the TPO has characterized the credit balance i.e. payables as ‘loans received from AEs’ beyond the period of 60 days in the nature of loan received and computed notional interest using the SBI Benchmark Prime Lending rate [“SBI BPLR”] as on 14.09.2013 i.e., @ 14.55% thereon. Thereafter, he has made the upward adjustment of the net
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notional interest of Rs. 1,83,89,307 (i.e., total notional interest on receivables less total notional interest on payables. The DRP has not discussed as to why submissions made by the assesee are not acceptable to it. Further, the DRP has also not discussed in its order why the jurisdictional High Court decision in the case of Pr. CIT -V vs. Kusum Health Care Pvt. Ltd. dated 25.04.2017 in ITA No. 765/2016 is not being followed by it. The DRP has again merely reproduced assessee’s submission in its order and without any discussion at all has upheld the addition by making a general remark in para 10.4 of its order (internal page 13) as under:
“DRP upholds the finding of the AO/TPO.”
The Ld. AR submitted that as contended before the DRP, the Hon’ble jurisdictional Delhi High Court in the case of Pr. CIT -V vs. Kusum Health Care Pvt. Ltd. dated 25.04.2017 in ITA No. 765/2016, after considering the amendment made by Finance Act 2012 has held “ With the Assessee having already factored in the impact of the receivables on the working capital and thereby on its pricing/profitability vis-a-vis that of its comparables, any further adjustment only on the basis of the outstanding receivables would have distorted the picture and re-characterised the transaction. This was clearly impermissible in law as explained by this Court in CIT v. EKL Appliances Ltd. (2012) 345 ITR 241 (Delhi).” The Ld. AR also pointed out that it has taken the effect of receivables & payables while computing the working capital adjustment and calculated the margins accordingly. This decision has been followed recently by the Hon’ble Delhi High Court in the case of Avenue Asia Advisors (P.) Ltd. vs. DCIT [2017] 85 taxmann.com 311 (Delhi). Without prejudice to above, the Ld. AR submitted that the assessee had raised its invoices on its AEs in foreign currency i.e., in either USD or EUR. The TPO has computed the interest on receivables on the basis of SBI Benchmark Prime Lending rate as on 14.09.2013 i.e., @ 14.55%. However, the same should be calculated on the basis of LIBOR. In support of this proposition, reliance is
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placed on the order of Jurisdictional Delhi High Court in the case of Commissioner of Income-tax -I v. Cotton Naturals (I) (P.) Ltd. [2015] 55 taxmann.com 523. In addition to above it was also contended before DRP that TPO has computed interest after taking the credit period of 60 days instead of 90 days and there were certain computational errors. Hence, the Ld. AR prayed that this addition should be directed to be deleted.
The Ld. DR relied upon the orders of the Assessing Officer, Transfer Pricing Officer and also relied upon the directions of the DRP.
We have heard both the parties and perused all the records. It is pertinent to note that the assessee has outstanding receivables and payables with Associated Enterprises [“AEs”] in its books of accounts. As per records it can be seen that the assessee has taken the effect of receivables & payables while computing the working capital adjustment and calculated the margins accordingly. This aspect was not properly examined by the TPO/AO. Therefore, this issue is remanded back to the file of the TPO/AO. Needless to say, the assessee be given opportunity of hearing after following principles of natural justice. Ground No. 7 is partly allowed for statistical purpose.
As regards to Ground No. 8 & 9, the Ld. AR submitted that the Assessing Officer erred on facts and in law in disallowing Rs. 46,55,953 on account of additional depreciation. The assessee has claimed additional depreciation of Rs.46,55,953 on addition of new plant and machinery of Rs. 3,91,50,789 (i.e., tools, dies, jigs & fixtures of Rs. 1,79,89,001 + other plant & machinery of Rs. 2,11,61,788). The assessee has claimed additional depreciation on new plant & machinery purchased and installed during the year as per the provisions of section 32(l)(iia) of the Income-tax Act. The details of fixed assets including plant and machinery were submitted to the Assessing Officer as well as before the DRP. The AO has discussed this issue in para 5 of the assessment order u/s 143(3) r.w.s 144C dated 27.11.2017. The DRP has not discussed why Circular No. 3/2006 dated 27.02.2006 cannot be relied upon. The DRP has
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again merely reproduced assessee’s submission on this ground and without any discussion at all has upheld the addition has passed order by giving a general remark in para 11.4 as under:
“After taking all facts into consideration, we find no reason to interfere with the AO’s finding."
The Ld. AR submitted that the addition has been confirmed by DRP without considering the applicable provision of law and by relying on old provision of law. We rely upon the amendments made in the law regarding additional depreciation by Finance Act, 2005. Kind attention is invited to para 3.6 of the explanatory notes on the provisions of the Finance Act, 2005 - Circular No. 3/2006 dated 27.02.2006 which states as under:
“ in order to encourage investment the Finance Act, 2005 has amended section 32 to increase the rate of additional depreciation to twenty per cent on new machinery and plant other than ships and aircraft, acquired and installed after the 31st day of March, 2005 and dispensed with the condition of additional depreciation to be allowed to a new industrial undertaking and the condition of expansion in installed capacity ”.
In view of the above, the Ld. AR prayed that the benefit of additional depreciation may be allowed to the assessee and addition be deleted.
The Ld. DR relied upon the orders of the Assessing Officer, Transfer Pricing Officer and also relied upon the directions of the DRP.
We have heard both the parties and perused all the records. It is pertinent to note that the assessee claimed additional depreciation of Rs.46,55,953 on addition of new plant and machinery of Rs. 3,91,50,789 (i.e., tools, dies, jigs & fixtures of Rs. 1,79,89,001 + other plant & machinery of Rs. 2,11,61,788). The assessee also claimed additional depreciation on new plant
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& machinery purchased and installed during the year as per the provisions of section 32(l)(iia) of the Income-tax Act. The details of fixed assets including plant and machinery were submitted to the Assessing Officer as well as before the DRP. But both the authorities failed to examine this issue properly without taking into consideration the provisions of the Income Tax Act, 1961. Therefore, this issue is remanded back to the file of the Assessing Officer. Needless to say, the assessee be given opportunity of hearing after following principles of natural justice. Ground No. 8 and 9 are partly allowed for statistical purpose.
As regards to Ground No. 10, the Ld. AR submitted that the Assessing Officer erred on facts and in law in disallowing Rs. 1,55,71,447 by wrongly mentioning as Rs. 1,55,14,447 in the final computation on account of professional / management fees. The assessee has paid legal & professional expenses and management fees, the details of which are as follows:
Name of the Company Nature Amount (In Rs.) C& S Efacec MV India Pvt. Ltd. Management fees 87,765 Efacec India Pvt. Ltd. [“EIPL”] Management fees 11,66,288 Sub-total (a) 12,54,053 Efacec India Pvt. Ltd. [“EIPL”] Legal & Professional Charges 1,43,17,394
sub total (b) 1,43,17,394 Total (a+b) 1,55,71,447
The details / facts & legal arguments in relation to amount paid towards legal & professional expenses of Rs. 1,43,17,394 and management fees of Rs. 12,54,053 were submitted to the AO vide letter dated are contained in letter dated 31.01.2014 filed before the AO. The AO has discussed this issue in para 4 of the assessment order dated 27.11.2017. The AO in para 4.4 of its order stated that “ ....the assessee failed to submit the how services have been actually provided to the assessee and who has actually provided services, how
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such services were delivered to the assessee...” Further, in para 4.5 of its order stated that “...assessee has failed to furnish any detail in connection with the above expenses that how services cost was justified for the business purposes..” The DRP has again merely reproduced assessee’s submission on this ground also and without going into the detailed facts and giving proper reason for disallowance had given a general remark in para 13.4 of its order as under:
“DRP finds no reason to interfere with AO’s contention and upholds the same. ”
The Ld. AR submitted that the detailed submissions along with the supporting evidences and justifications in relation to amount paid towards legal & professional expenses of Rs. 1,43,17,394 and management fees of Rs. 12,54,053 were submitted to the Assessing Officer and the relevant points are summarized below:
� Regarding Rs. 87,765 paid as management fees: The assessee company has paid management fees of Rs. 87,765 for the period April 2012 to June 2012 to C&S Efacec (a company incorporated as per Joint Venture Agreement dated 31.08.2008 between Efacec group and C&S group, and, in which C&S group holds a majority stake). As can be seen from the Board Resolution dated 17.03.2011 (at page 302 of PB), in the initial years the amount was higher (since more time was spent by employees of C&S Efacec) and in the current year the amount is lower (since less time was spent by employees of C&S Efacec in view of the disputes between the JV partners).
� Regarding Rs. 11.66.288 paid as management fees & 1.43.17.394 paid as Legal & Professional Charges :
• Management fees was charged on account of 3 existing employees working in the Finance department of EIPL namely Mr. Amit Dwivedi; Mr. Diwakar Kumar; and Mr. Vivek Singhal who also provided support to the assessee. EIPL
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has charged the entire monthly salary of these 3 employees to the assessee company with appx. 23.50% mark up. This calculation is also filed with the AO & Ld. DRP.
• The senior management personnel of EIPL have rendered services to the assessee and a part of their salary and other costs (such as rent, vehicle expenses, etc.) has been charged by EIPL to the assessee as legal & professional charges. The details of persons are :
a) Guilherme Pedro Conclaves Assis : Senior finance personnel
b) Joao Oliveira Sousa : Head of the marketing function.
The calculation is also filed with the AO & DRP.
• Copies of invoices raised by Efacec India Pvt. Ltd. in proof of services rendered were submitted.
• Copies of some e-mails evidencing their involvement in the management function of the assessee evidencing the actual services provided. In fact, the cost of services availed by the assessee is much lower than the cost it would have incurred had it employed all management personnel and other employees itself.
The detailed facts & legal arguments were also submitted to the DRP. Vide these detailed submissions, the assessee has explained the nature of payments, the rationale of the expense incurred which fully commensurate with the business needs and requirements of the assessee. The answers to all the questions raised by the Assessing Officer are duly contained in the detailed reply submitted to the Assessing Officer. The Ld. AR further pointed out that the assessee has duly complied with applicable TDS provisions and deducted tax at source on all the above mentioned expenses. It is submitted that these expenses have been wholly incurred for the business purposes of the assessee
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and, hence, the same is allowable as a deductible expense u/s 37(1) while computing the total income. The DRP has not gone into the detailed facts and our submissions and has upheld the AO’s order. Hence, the Ld. AR prayed that the said addition should be deleted.
The Ld. DR relied upon the orders of the Assessing Officer, Transfer Pricing Officer and also relied upon the directions of the DRP.
We have heard both the parties and perused all the records. It is pertinent to note that the assessee duly complied with applicable TDS provisions and deducted tax at source on all the above mentioned expenses. Prima facie, these expenses appears that it was entirely incurred for the business purposes of the assessee and, hence, the same is allowable as a deductible expense u/s 37(1) while computing the total income. But both the authorities failed to examine this issue properly without taking into consideration the evidences provided by the Assessee during the Assessment Proceedings. Therefore, this issue is remanded back to the file of the Assessing Officer. Needless to say, the assessee be given opportunity of hearing after following principles of natural justice. Ground No. 10 is partly allowed for statistical purpose.
As regards to Ground No. 11, the Ld. AR submitted that the Assessing Officer erred on facts and in law in disallowing set-off of Rs. 1,82,23,611 relating to brought forward loss and Rs. 65,82,558 relating to unabsorbed depreciation while computing the assessed income. The Assessing Officer in final assessment order dated 27.11.2017 vide para 6 has denied benefit of Rs. 1,82,23,611 relating to brought forward loss and Rs. 65,82,558 relating to unabsorbed depreciation and stated that benefit to the extent of additions made in earlier years in which appeals are pending for disposal before CIT(A) is not allowed to the assessee. The Ld. AR submitted that the issue regarding denial of benefit of brought forward losses was never discussed with the assessee and also does not form part of the draft assessment order dated
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22.12.2016. Hence, no opportunity was given to the assessee to justify the claim of brought forward losses, which is against the principals of natural justice. Hence, the addition should be quashed. Further, the Assessing Officer was principally wrong in making the disallowance of entire brought forward loss and unabsorbed depreciation for earlier years. It is an usual practice to compute the brought forward loss & unabsorbed depreciation available after considering the effects of the orders passed by all appellate authorities as on the date of the assessment order. The details of disallowance made by the Assessing Officer are as under: Assessment year Business Unabsorbed loss depreciation AY 2010-11 1,71,40,928 27,82,239 AY 2012-13 10,82,683 38,00,319 1,82,23,611 65,82,558
After considering the additions made in the earlier years by the Assessing Officer and the relief granted in appellate proceedings, the brought forward losses available for set off for A.Y. 2013-14 as on the date of the assessment order is as under:
Assessment Year Business Unabsorbed loss depreciation
AY 2010-11 1,71,40,928/- 27,82,239 AY 2012-13 NIL 12,41,365 1,71,40,928/- 40,23,604/-
Therefore, the Ld. AR prayed that the Assessing Officer be directed to compute the figure of brought forward losses correctly as on the date of assessment
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order and allow the set off of the same.
The Ld. DR relied upon the order of the TPO, DRP & Assessing Officer .
We have heard both the parties and perused the material available on record. It is pertinent to note that the issue regarding denial of benefit of brought forward losses was never discussed with the assessee and also does not form part of the draft assessment order dated 22.12.2016, thus, no opportunity was given to the assessee to justify the claim of brought forward losses, which is against the principals of natural justice. Therefore, this issue is remanded back to the file of Assessing Officer. Needless to say, the Assessing Officer must give opportunity of hearing to the assessee by following principal of natural justice.
In result, the appeal of the assessee is partly allowed for statistical purpose.
Order pronounced in the Open Court on 13th June, 2018. Sd/- Sd/-
(N. K. SAINI) (SUCHITRA KAMBLE) ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated: 13/06/2018 R.N.* Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(Appeals) 5. DR: ITAT
ASSISTANT REGISTRAR ITAT NEW DELHI
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Date 1. Draft dictated on 21/05/2018 PS 2. Draft placed before author 21/05/2018 PS 3. Draft proposed & placed before .2018 JM/AM the second member 4. Draft discussed/approved by JM/AM Second Member. 5. Approved Draft comes to the PS/PS Sr.PS/PS .06.2018 6. Kept for pronouncement on PS 7. File sent to the Bench Clerk .06.2018 PS 8. Date on which file goes to the AR 9. Date on which file goes to the Head Clerk. 10. Date of dispatch of Order.