Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, “J” BENCH, MUMBAI
Before: SHRI SHAMIM YAHYA, AM & SHRI PAWAN SINGH, JM
O R D E R Per Shamim Yahya, A. M.: This appeal by the assessee is directed against the order by the learned Commissioner of Income Tax (Appeals)-15, Mumbai (‘ld.CIT(A) for short) dated 28.05.2013 and pertains to the assessment year (A.Y.) 2008-09.
The grounds of appeal read as under:
A. ADDITION IN RESPECT WITH ADJUSTMENTS MADE BY THE TRANFER PRICING OFFICER UNDER SECTION 92CA(3) OF THEACT RS.2,44,896/- (PARA 4 OF THE ORDER
On the facts and in the circumstances of the case and in law, the Honorable Commissioner of Income Tax (Appeals) - 15 (hereinafter referred to as the "the CIT (A)") erred in confirming the action of learned Assistant Commissioner of Income Tax - Range 3(3) (hereinafter referred to as the "the learned ACIT") and the learned Transfer Pricing Officer (hereinafter referred to as TPO) in adding an amount of Rs.2,44,893/- to the total income through an adjustment made to the Wartsila India Limited Arm's Length Price with regards to international transactions entered into by the Appellant with its Associated Enterprises, without considering the facts of the case and the submission of Appellant in this respect. 2. In view of the above, the learned ACIT be directed to allow the whole of the above adjustment made.
B. DISALLOWANCE UNDER SECTION 14A OF THE ACT Rs.1,14,81,363/- (PARA 5 OF THE ORDER) 3. On the facts and in the circumstances of the case and in law, the Honorable CIT (A) erred in confirming the action of the learned ACIT in disallowing an amount of Rs. 1,14,81,363/- u/s, 14A, by applying Rule 8D , without appreciating the facts of the case and the submission of the Appellant. 4. In view of the above, the learned ACIT be directed to allow the whole of the above addition made.
C. DISALLOWANCE OF DEDUCTION UNDER SECTION 80IA OF THE ACT FOR FUTURE YEARS (PARA 8 OF THE ORDER) 5. On the facts and in the circumstances of the case and in law, the Honorable CIT (A) erred in confirming the action of the learned ACIT in disallowing the claim of deduction u/s. 80IA of the Act for future years on the plea that the Appellant has not satisfied all the conditions laid down in that section.
6. In view of the above, the learned ACIT be directed to allow the deduction under section 80IA of the Act for future years as each year's assessment is separate assessment.
D. GENERAL 7. All the above Grounds of Appeal are independent of and without prejudice to, each other.
8. The Honorable CIT (A)'s Order being contrary to the law, evidence and facts of the case, should be set aside, quashed or modified on the grounds deduced above.
Apropos ground A:
Brief facts of the case are as under:
The assessee company is engaged in the business of manufacturing and trading of diesel engine, trading in engineering goods, other engineering service. On the impugned issue, the TPO noted that the assessee has shown among others international transaction of reimbursement at cost from AE in Finland. In this connection, as regards the actual
Wartsila India Limited reimbursements made/recovered by assessee during the year, the assessee had furnished the items wise expenses which were recovered from the AEs amounting to Rs.3,84,06,755/- and expenses paid to the AEs of Rs.38,30,014/-. From examination of the reimbursement recovered by the assessee, it was noticed by the TPO that an amount of Rs.24,48,960/- has been recovered towards marketing and promotion expenses which TPO observed that prima facie, carries a service element in it. He further observed that since the recovery was towards a service rendered by the assessee to the AE, the assessee ought to have charged a mark-up on the amount of service charges recovered from the AE. The TPO also observed that since, this transaction has not been conducted at arm's length, the AR of the assessee was asked by the him to explain as to why a mark-up of 10% shall not be charged by the assessee on the above amount of services rendered to the AE.
The AR of the assessee contended that the amount represented reimbursement of actual expenditure, hence no mark-up should be charged thereon. However the TPO did not find such submission of the appellant as acceptable. He observed that the very narration of the expenditure suggested that the assessee had rendered marketing and promotional services, the cost of which has been recovered without charging any mark- up thereon. As the transaction was not at arm's length, 10% mark-up was imputed there upon to bring the transaction on par with arm's length price. Accordingly, Rs.2,44,896/- was adjusted to this transaction, representing 10% on the cost of expenditure recovered.
Wartsila India Limited 5. Upon the assessee’s appeal, the ld. CIT(A) confirmed the TPO's action and inter alia observed as under:
It can be seen from the above table that the appellant has recovered expenses totaling to Rs.2,44,48,960/- which it has incurred towards Marketing and Communications expenses on behalf of the AEs. Even if these Marketing and Communication expenses were the payments initially made to the third party by the appellant then to there would be element of services rendered in identifying the parties to render services to the AEs, commensuraling paper work, utilization of appellant's money for the purposes etc, In a third party situation, there could be no such practices followed. In the facts of the case, it is clear that the appellant initially performed as an agent of the AEs through which the services rendered by the third parties were delivered the AEs. In such facts of the case, the appellant performing as an agent for delivery of such services should have been adequately at arm's length compensated.
He proceeded to affirm the TPO's order.
Against this order assessee is in appeal before us.
We have heard both the counsel and perused the records. Learned counsel of the assessee submitted that this is a mere reimbursement of some expenses on cost to cost basis. That there is no element of service; hence he submitted that the action of the revenue in providing a markup of 10% is not at all sustainable. Furthermore, the ld. Counsel of the assessee submitted that the method adopted for computing the arm's- length price by the transfer pricing officer is not as per the provision of law. In this regard he referred to that methods for computation of arm's-length price prescribed in section 92C(1). He further submitted that the other method u/s. 92C(f) has been inserted subsequently and the same is not applicable from the concerned assessment year.
Wartsila India Limited 9. Per Contra, the learned departmental representative submitted that transfer pricing officer has carefully analyzed the reimbursements. He submitted that only those reimbursements which have an element of service have been identified by the transfer pricing officer. Upon that markup of 10 % has been added. He submitted that the services are in the nature of selection of advertiser, identification for specific bookings etc. He submitted that these certainly include an element of service. However, the learned departmental representative would not dispute the proposition that the computation of arm's-length price is not as per the any prescribed provision of the Act.
Upon careful consideration we find that section 92C(1) provides the following methods for computation of arm's-length price:
Computation of arm's length price . 92C. (1) The arm's length price in relation to an international transaction or specified domestic transaction shall be determined by any of the following methods, being the most appropriate method, having regard to the nature of transaction or class of transaction or class of associated persons or functions performed by such persons or such other relevant factors as the Board may prescribe, namely :— (a) comparable uncontrolled price method; (b) resale price method; (c) cost plus method; (d) profit split method; (e) transactional net margin method; such other method as may be prescribed23 by the Board. (f)
It is undisputed that the method of computation of arm's-length price adopted by the transfer pricing officer is not as per any of the method prescribed under the act for the extant period. In similar circumstances, the Hon'ble jurisdictional High Court in the Wartsila India Limited case of CIT vs. Kodak India (P) Ltd. [2017] 79 taxmann.com 362 (Bombay) vide order dated 11.07.2016 in OF 2014 has held as under:
The assessee, an Indian subsidiary of an American company sold its imaging business to Indian subsidiary of another American company. The Assessing Officer held that even if transaction was between two domestic non-AEs, yet it would still be considered to be an international transaction and Chapter X of Act would be applicable as holding companies of both the companies had entered into a global agreement for sale of its business. On appeal, the Tribunal held that the transaction would not be covered by the definition of international transaction as ALP for transfer of its imaging business as determined by assessee was reasonable and ALP was arrived at by the Transfer Pricing Officer (TPO) by not adopting any of the methods prescribed under section 92C. The prayer for restoration to TPO to apply the prescribed method was rejected. Held that the revenue had not disputed finding of fact arrived at by the Tribunal that transfer of imaging business was independently done on its own terms and conditions de hors global agreement arrived at between their holding companies and ALP for transfer of its imaging business as determined by assessee was reasonable. The Tribunal held that method adopted by revenue to determine ALP was alien to the methods prescribed under section 92C and, therefore, declined to restore the issue to the Assessing Officer for redetermining the ALP by adopting one of the methods as listed out in section 92C. The revenue having accepted finding of fact arrived at by the Tribunal, no question of law arose from Tribunal's order.
Respectfully following the precedent we hold that since the method adopted by the transfer pricing officer for computing the arm's-length price is not as per the provision of law, the action of the authorities below is not sustainable. Hence, we direct that addition in this regard should be deleted.
Apropos ground B:
Brief facts of the case are as under:
From the accounts of the assessee. it was seen by the AO that the assessee has claimed dividend income of Rs.4,38,43,536/- as exempt from tax u/s. 10(34) of the Act.
Wartsila India Limited Though the assessee had substantial exempt income, however, the assessee had not made any disallowance u/s. 14A in respect of attributable expenses for such exempt income.
In light of the above facts in the course of assessment proceedings, the assessee was asked by the AO to furnish details of expenses incurred for earning exempt income and also show cause as to why the expenses incurred and claimed in respect of exempt income should not be disallowed as per the provisions of section 14A read with Rule 8D of Income-tax Rules, 1962.
In response, the assessee vide its letter dated 21.10.2011 made the written submissions wherein it had stated that it has not incurred any expenditure in relation to exempt income and hence no disallowance was called for. Without prejudice to the above contention, it has worked out the disallowance under Rule 8D at Rs.52,99,794/- being the 0.5% of average investments.
The submission of the assessee was considered, however, the same was not found to be acceptable by the AO as the assessee failed to compute the attributable expenses for earning exempt income. Further, the argument of the assessee that it has not utilized interest bearing funds was not found to be acceptable as assessee has not furnished any fund.flow statement in this regard. The AO in this regard referred to and relied upon decision of Hon'ble Bombay High Court dated 12.8.2010 in the case of M/s. Godrej & Bo'yce Mfg. Co. Ltd., Mumbai and accordingly observed that the provisions of Rule 8D of the I.T. Rules 1-962 is applicable for the A.Y.2008-09 onwards. Therefore attributable expenses for earning exempt income have to be computed as per the procedure mentioned in the said rules.
Wartsila India Limited However, as the assessee had failed to compute the same as per Rule 8D of Income-tax Rules, 1962, though notified and applicable for the current assessment year under consideration, therefore the AO computed the disallowance as per Rule 8D as under :-
Working of expenses attributable to exempt income as per Rule 8D of the Income-tax Rules, 1962 I Expenses directly attributable to exempt Rs. Nil income II Formula : A X B /C Rs.61,81,569 A : Expenses not directly related to exempt income (interest) i.e. 16064854 B: Average value of investment on the opening and closing day of the previous year i.e. (890397722+ 1229520019)72= 1059958871 C : Average value of assets on the opening and closing day of the previous year i.e. ( 2575255721 + 2934052783)72 = 2754654252 16064854 x 1059958871 2754654252 =618569 III 0.5% of average value of investment on the Rs.52,99,794 opening and closing day of the previous year i.e. 0.5% of B- 52,99,794 Aggregate of I+II+III Rs. 1,14,81,363/- From the above working, the attributable expenses for earning exempt income as per Rule 8D of the Income-tax Rules, 1962 was at Rs. 1,14,81,363/- which as per the AO needed to be disallowed as per section 14A of the I.T. Act.
Upon the assessee’s appeal, the ld. CIT(A) affirmed the A.O.’s action interalia placing reliance on Hon'ble Bombay High Court decision in the case of Godrej & Boyce
Wartsila India Limited Mfg. Co. Ltd. v. Dy. CIT [2010] 328 ITR 81 (Bom) that rule 8D is applicable for A.Y.
2008-09. He also noted that the assessee’s estimate of Rs.5 lacs expenses in this regard is not acceptable.
Against this order assessee is in appeal before us.
We have heard both the counsel and perused the records. Learned counsel of the assessee submitted in assessment year 2007-08 that the learned CIT-A had remitted this issue to the file of the assessing officer for examining the assessee's claim that the interest-bearing funds have been specifically utilized and have not been diverted for making investments. Learned counsel submitted that the assessing officer has passed the giving effect order in which he has found that these funds have not been utilized for making investments for obtaining tax free dividend. Hence, he submitted that no addition is permissible for disallowance of interest. Furthermore, the learned counsel submitted that in assessment year 2010-11 in assessee’s case this tribunal had held that addition u/s.14A is not sustainable inasmuch as there is no satisfaction by the assessing officer. He submitted that in the present case also there is no satisfaction by the assessing officer that assessee has incurred expenditure for earning the interest-free income. Hence, the ld. Counsel of the assessee submitted that no addition in this regard is sustainable.
Furthermore, learned counsel submitted that assessee has sufficient interest-free funds.
Hence referring to the decision of Hon’ble Bombay High Court in the case of HDFC Bank Ltd., Mumbai vs. Dy. CIT (in Writ Petition No. 1753 of 2016 vide order dated 25.02.2016), the learned counsel submitted that no addition for the disallowance of Wartsila India Limited interest is sustainable. Furthermore, without prejudice to the above, the learned counsel referred to the decision of ITAT Special Bench in the case of the ACIT vs. Vireet Investment Pvt. Ltd. (in and CO No.68/Del/2014 vide order dated 16.06.2017 (SB)(Del)) for the proposition that only investments which earn exempt income should be considered for computing the average value of investment.
Per Contra, the learned departmental representative submitted that there is due satisfaction by the assessing officer. He submitted that the issue was duly raised by the assessing officer and the assessee could not provide cogent answer. He submitted that even before the learned CIT(A), the assessee himself offered Rs.5 lakh as expenditure incurred for earning of exempt income. Hence, the learned counsel submitted that the addition in this regard is fully justified.
Upon careful consideration we note that the submission that there is no satisfaction of the assessing officer the same is not sustainable. Inasmuch as in the assessment order for the current year the assessing officer has duly raised his dissatisfaction and the assessee has not been able to cogently rebut the same. Furthermore, the assessee has himself agreed that expenditure has been incurred for earning the exempt income before the authorities below and has offered Rs.5 lacs in this regard. Hence, the plea that there is no satisfaction by the assessing officer is not sustainable on the facts of the present case.
As regards the plea for disallowance of interest for earning the exempt income, we find that assessing officer for assessment year 2006-07 has given a finding that the interest- bearing funds have been specifically utilized. He has observed as under:
Wartsila India Limited (a) The entire Interest expenditure is in respect of Term Loan taken from ICICI bank for power conversion facility at Haldia. The capital borrowed by way of Term Loan for this project is used for the purpose of business and the entire income in respect thereof is correspondingly credited in the P&L A/c. (b) The borrowed funds have not been used for making investments. The interest expenditure is incurred entirely for the purpose of its business and therefore there is no question of attributing interest being incurred for earning exempt income as no part of borrowed funds have been utilized by the assessee for making investments. (c) The total investments made by the assessee as on 31.3.2007 of Rs.89.04 crores are in Mutual funds and have been made out of assesse's own free funds, held by way of capital plus Free Reserves aggregating to Rs.218.07 crores as on 31.3.2007.
It is the case of the assessee that financials for the current year are same. In this view of the matter disallowance on account of interest for making the tax-free investments is not sustainable. Furthermore, the learned counsel of the assessee placed reliance upon the decision of Hon'ble jurisdictional High Court in the case of HDFC Bank Ltd.(supra) is also cogent in this regard. Further, we find that as regards the disallowance of 0.5% on the average value of investment is concerned the submission of the learned counsel of the assessee is cogent that the special bench in the case of Vireet Investment Pvt. Ltd. (supra) has held that for computing the average value of investment only investments which yield exempt income is to be considered. Accordingly, we remit this issue to the file of assessing officer to consider the issue afresh in light of the decision of special bench in the case of ACIT vs. Vireet Investment Pvt. Ltd. (supra) for the necessary computation in this regard.
Apropos ground no. 3:
Brief facts of the case are as under:
Wartsila India Limited The Assessing Officer observed that in Exhibit 12 of Clause 26 of notes to the account, the assessee company have claimed that it has an option of claiming the deduction u/s.80IA of the Act and it has opted not to claim the deduction under this section for the current year and the deduction will be claimed by it for 10 consecutive years beginning from any of the subsequent assessment year as may be decided by the company. In this regard, in the course of assessment proceeding, the assessee was asked to furnish the separate profit and loss account and balance sheet if it is maintained. In response to same, the assessee simply stated that it has not claimed any deduction u/s.80IA of the Act. In view of the same, the assessee has not maintained any separate books of account and balance sheet in this regard as also provided by the assessee company in the said data. Considering the same and also that the assessee has not satisfied all conditions laid down in the provisions of section 80IA of the Act, the claim of assessee company for deduction u/s.80IA for future profit shall not be held as eligible for deduction u/s.80IA of the Act.
Upon the assessee’s appeal, the ld. CIT(A) affirmed the A.O.’s action.
Against the above order, the assessee is in appeal before us.
We have heard both the counsel and perused the records. The ld. Counsel of the assessee stated that this issue is covered in favour of the assessee by the ITAT decision in assessee’s own case for A.Y. 2007-08. We find that the ITAT decision in assessee’s own case the ITAT has dealt with this issue vide order dated 05.06.2015 for A.Y. 2007-08 as under:
Wartsila India Limited 4. The next ground pertains to disallowance of deduction u/s the Act for future years. The crux of arguments advanced on behalf of the assessee is that the learned Commissioner of Income Tax (Appeals) wrongly confirmed the disallowance claimed u/s 80IA of the Act, because no claim was made by the assessee, therefore, there is no question of fulfilling the conditions required under the section. The learned D.R. consented that no claim was made by the assessee. 4.1 In view of the assertion of the learned Counsel for the assessee that no claim was made by the assessee u/s 801A of the Act and admission by the learned D.R. that no such claim was made, there is no question of making any addition/disallowance.
Since the ITAT has decided the same issue in favour of the assessee and it is not Revenue’s case that the Hon'ble jurisdictional High Court has reversed this decision, we set aside the orders of the authorities below and decide the issue in favour of the assessee.
In the result, the assessee’s appeal is partly allowed. Order pronounced in the open court on 04.10.2018