ACIT, CHENNAI vs. M/S. MASCON GLOBAL LTD., CHENNAI

आयकर अपील�य अ�धकरण, ‘‘डी’’ �यायपीठ, चे�नई IN THE INCOME-TAX APPELLATE TRIBUNAL ‘D’ BENCH, CHENNAI �ी ए. मोहन अलंकामणी, लेखा सद�य एवं �ी धु�वु� आर.एल रे�डी, �या�यक सद�य के सम� Before Shri A. Mohan Alankamony, Accountant Member & Shri Duvvuru RL Reddy, Judicial Member I.T.A. Nos. 1139/Chny/2008, 1135 & 1136/Chny/2010, 632, 633 & 634/Chny/2017 Assessment Years: 2003-04, 04-05, 05-06, 03-04, 04-05 & 2009-10 & C.O. No. 69/Chny/2010[In I.T.A. No. 1135Chny/2010] The Assistant/Deputy Commissioner The Official Liquidator, of Income Tax, Vs. M/s. Mascon Global Ltd. [in liquidation], Company Circle IV(1), High Court of Madras, Corporate Bhavan, 2nd Floor, 29, Rajaji Salai, Chennai 600 034. Chennai 600 001. [PAN:AAACA0666K] (Appellant) (Respondent/Cross Objector) Department by : Shri Srinivasa Rao, CIT Assessee by : None सुनवाई क� तार�ख/ Date of hearing : 18.06.2018 घोषणा क� तार�ख /Date of Pronouncement : 22.06.2018 आदेश /O R D E R PER DUVVURU RL REDDY, JUDICIAL MEMBER: These six appeals filed by the Revenue pertaining to the same assessee are directed against different orders of the Commissioner of Income Tax (Appeals), Chennai relevant to various assessment years as stated above. The assessee also filed cross objection in C.O. No. 69/Chny/2010 against the appeal of the Revenue for the assessment year

2 I.T.A. No.1139/Chny/08, 1135/Chny/10 & C.O. No. 69/Chny/17, 1136/Chny/10 & 632-634/Chny/17 2004-05 in I.T.A. No. 1135/Mds/2010. For the sake of convenience, first shall take up the Cross Objection filed by the assessee for adjudication since the assessee has raised legal issue with regard to the confirmation of reopening of assessment under section 147 of the Income Tax Act, 1961 [“Act” in short].

2.1 Per contra, the ld. DR has submitted that the reassessment under section 147 of the Act was validly taken up in this case, which was confirmed by the ld. CIT(A) and the same should be further sustained.

2.2 Despite service of notice by the Tribunal as well as through the Department, there was no representation from Official Liquidator even since

3 I.T.A. No.1139/Chny/08, 1135/Chny/10 & C.O. No. 69/Chny/17, 1136/Chny/10 & 632-634/Chny/17 the appeals of the Revenue are posted for hearing since 07.10.2014 onwards. Hence we proceeded to decide the appeals and Cross Objection after considering the submissions of the ld. DR and the facts of the case.

2.3 We have heard the ld. DR, perused the materials available on record and gone through the orders of authorities below. The assessee is engaged in the business of software export and filed its return of income for the assessment year 2004-05 on 30.10.2004 declaring a total loss of ₹.6,08,46,856/-. The return filed by the assessee was processed under section 143(1) of the Act on 11.02.2006. Subsequently, the case of the assessee was reopened under section 147 of the Act on 26.06.2006 and notice under section 148 of the Act was served on the assessee for the following reasons: “In Form 3CEB the assessee has not disclosed any variation in Arm’s Length price in respect International transactions had with associated enterprises and whereas on reference to Transfer Pricing Office II, Chennai for the AY 2003-04, it has been found that there was a shortfall in the operating profit of the assessee company to the tune of ₹.32.63 crores as determined by the TPO-II. The sale sum of ₹.32.63 crores has been brought to tax in the assessment completed u/s. 143(3) on 29.03.2006 for the AY 2003-04. For the AY 2004-05 as per Form 3CEB and its annexures the assessee has not shown any variation in the international transaction had with associated enterprises. Considering the hue variation in the Arm’s Length Price in the earlier year, escapement of income on account of Transfer Pricing is required to be ascertained and as the Arm’s Length Price is to be determined for this assessment year also in consultation with TPO-II, Chennai, the assessment is reopened u/s. 147 of the I.T. Act, 1961.” 2.4 However, reassessment under section 143(3) r.w.s. 147 of the Act has been completed by making various other disallowances. By relying on the

4 I.T.A. No.1139/Chny/08, 1135/Chny/10 & C.O. No. 69/Chny/17, 1136/Chny/10 & 632-634/Chny/17 decision in the case of CIT v. Shri Ram Singh 306 ITR 343 (Raj), the assessee contended before the ld. CIT(A) that the reassessment order under section 143(3) r.w.s. 147 of the Act cannot survive and deserves to be annulled. However, the ld. CIT(A) held that the reassessment proceedings are validly initiated and sustained the reassessment order.

2.5. Now, the question arises for consideration is when no addition was made on the reason, for which the assessment was reopened, is it open to the Assessing Officer to assess some other income independently other than the reasons recorded? This question was examined by the Bombay High Court in Jet Airways (I) Ltd. [2011] 331 ITR 236. The Bombay High Court, after considering the judgment of Punjab & Haryana High Court in Vipan Khanna (2002) 255 ITR 220, found that Explanation 3 to Section 147 of the Act lifts the embargo, which was inserted by judicial interpretation, on the making of assessment or reassessment on the grounds other than those on the basis of which a notice was issued under Section 148 of the Act. Referring to Explanation 3 to Section 147 of the Act, inserted by Finance (No.2) Act of 2009, the Bombay High Court found that Explanation 3 does not and cannot override the necessity of fulfilling the conditions set out in the substantive part of section 147 of the Act. It was further observed that an Explanation to a statutory provision is intended to explain its contents and cannot be construed to override or render the substance and core nugatory.

5 I.T.A. No.1139/Chny/08, 1135/Chny/10 & C.O. No. 69/Chny/17, 1136/Chny/10 & 632-634/Chny/17 The Bombay High Court further found that after issuing notice under section 148 of the Act, if the Assessing Officer accepted the contention of the assessee and holds that the income which he has initially formed a reason to believe had escaped assessment, has as a matter of fact not escaped assessment, it is not open to him independently to assess some other income. The Bombay High Court further found that it is open to the Assessing Officer to issue a fresh notice under Section 148 of the Act and the legality of which would be tested in the event of a challenge by the assessee. In fact, the Bombay High Court observed as follows:- “Explanation 3 lifts the embargo, which was inserted by judicial interpretation, on the making of an assessment of reassessment on grounds other than those on the basis of which a notice was issued under section 148. Setting out the reasons, for the belief that income had escaped assessment. Those judicial decisions had held that when the assessment was sought to be reopened on the ground that income had escaped assessment on a certain issue, the Assessing Officer could not make an assessment or reassessment on another issue which came to his notice during the proceedings. This interpretation will no longer hold the field after the insertion of Explanation 3 by the Finance (No. 2) Act of 2009. However, Explanation 3 does not and cannot override the necessity of fulfilling the conditions set out in the substantive part of section 147. An Explanation to a statutory provision is intended to explain its contents and cannot be construed to override it or render the substance and core nugatory. Section 147 has this effect that the Assessing Officer has to assess or reassess the income ("such income") which escaped assessment and which was the basis of the formation of belief and if he does so, he can also assess or reassess any other income which has escaped assessment and which comes to his notice during the course of the proceedings. However, if after issuing a notice under section 148, he accepted the contention of the assessee and holds that the income which he has initially formed a reason to believe had escaped assessment, has as a matter of fact not escaped assessment, it is not open to him independently to assess some other income. If he intends to do so, a fresh notice under section 148 would be necessary, the legality of which would be tested in the event of a challenge by the assessee.”

6 I.T.A. No.1139/Chny/08, 1135/Chny/10 & C.O. No. 69/Chny/17, 1136/Chny/10 & 632-634/Chny/17 2.6 In view of this judgment of Bombay High Court, this Tribunal is of the considered opinion that when no addition was made in respect of Transfer Pricing Issue – computation of Arms Length Price, for which the assessment was reopened by recording reasons under section 148 of the Act, it is not open to the Assessing Officer to make any assessment in respect of various other issues. Further, we find that the Assessing Officer has not issued any fresh notice under Section 148 of the Act.

2.7 Moreover, we find that the Gujarat High Court in the case of CIT v. Mohmed Juned Dadani (2013) 355 ITR 172 (Guj) considered an identical issue. In fact, the Gujarat High Court framed the following substantial question of law for adjudication: "Whether the Income-tax Appellate Tribunal was right in law in coming to the conclusion that when on the ground on which the reopening of assessment is based, no additions are made by the Assessing Officer in the order of assessment, he cannot make additions on some other grounds which did not form part of the reasons recorded by him." The Gujarat High Court, after referring to the various case laws on the subject, including that of Bombay High Court in Jet Airways Ltd. (supra), judgment of Delhi High Court in Ranbaxy Laboratories Ltd. v. CIT 336 ITR 136, judgment of Chhattisgarh High Court in ACIT v. Major Deepak Mehta (2012) 344 ITR 641, judgment of Rajasthan High Court in CIT v. Shri Ram Singh 306 ITR 343, concurred with the judgment of Bombay High Court and answered the question in favour of the assessee. In view of this factual and

7 I.T.A. No.1139/Chny/08, 1135/Chny/10 & C.O. No. 69/Chny/17, 1136/Chny/10 & 632-634/Chny/17 legal position, we are of the considered opinion that the assessment order passed under section 143(3) r.w.s. 147 of the Act by making various other additions for which no notice under section 148 of the Act was issued is not legally valid. Accordingly, we set aside the orders of authorities below an quash the assessment order passed under section 143(3) r.w.s. 147 of the Act. Thus, the Cross Objection filed by the assessee stands allowed. Similarly, the appeal of the Revenue for the assessment year 2004-05 does not survive since we have quashed the assessment order passed under section 143(3) r.w.s. 147 of the Act dated 19.12.2008.

2.8 Accordingly, I.T.A. No. 1135/Chny/2010 filed by the Revenue is dismissed and C.O. No. 69/Chny/2010 filed by the assessee is allowed.

8 I.T.A. No.1139/Chny/08, 1135/Chny/10 & C.O. No. 69/Chny/17, 1136/Chny/10 & 632-634/Chny/17 I.T.A. No. 1139/Chny/2008 [AY 2003-04] 3.1 The first ground raised in the appeal of the Revenue is that the ld. CIT(A) erred in deleting the adjustment of ₹.32.63 crores by holding that the ALP determined by the TPO at ₹.239.54 crores is unwarranted. In the assessment order, the Assessing Officer observed that the assessee had international transactions with its associate concerns and for the purpose of determining the arms length price in respect of such transactions the matter was referred to the Transfer Pricing Officer-III, Chennai as required under section 92CA(1) of the Act. The TPO determined the arms length price at ₹. 239.54 crores and shortfall in the operating profit at ₹. 32.63 crores. This shortfall was directed to be brought to tax as per section 92C(4) of the Act.

3.2 On appeal, it was the submission before the ld. CIT(A) that the assessee company's transactions with Associate Enterprise (AE) had not resulted in any adjustment of income between the assessee company and the AE. Further, it was submitted that the entire income /expenditure of the AE had been passed on to the assessee company, the transactions are at arms length. In addition to the above, the assessee filed detailed written submissions before the ld. CIT(A) and are reproduced hereunder: “The appellant is a listed company carrying on business, inter-alia, in software solutions and services. The company is eligible for exemption u/s 10A of the Act. 2. For the assessment year 2003-04 under appeal the appellant company declared loss of Rs.17,88,68,890/-. The assessing officer took up the case for

9 I.T.A. No.1139/Chny/08, 1135/Chny/10 & C.O. No. 69/Chny/17, 1136/Chny/10 & 632-634/Chny/17 scrutiny and referred the case to the Transfer Pricing Officer III, Chennai(TPO) u/s 92CA(1) of the Act for determining the Arm's Length Price. By his order dated 16.03.2006 u/s 92CA(3) the TPO fixed the Arm's Length Price as Rs.243.45 Crores (Correct amount Rs.239.54 Crores), as against the value of sales admitted by the appellant as Rs.206.91 Crores, and the short fall as Rs.32.63 Crores. 3. Pursuant to the order of the TPO the assessing officer has in his assessment order u/s 143(3) dated 29.03.2006 added the "Shortfall in Operating Profit" of Rs.32,63,00,000/- as determined by the TPO. The main issue in this present appeal relates to the addition of Rs.32.63 Crores. 4. Perusal of the TPO's order will show that the appellant has objected to the provisions of section 92 of the Act being invoked in its case on the ground that the said provisions have relevance and are applicable only in cases in which "International Transactions" with "Associate Enterprises" have the effect of reducing the income chargeable to tax or increasing the loss. In this connection, the appellant had explained the nature of transactions between the appellant and "Associate Enterprises" in respect of software services. Bills were raised by the appellant on the associates, who, in turn, had raised bills on their clients of the same amounts. In other words, the entire billing by the associates on the ultimate clients had been passed on to the appellant company. The expenditure incurred by the associates was debited to the appellant's accounts and the amounts were reimbursed on actuals. 5. In the background of the above facts in relation to the pattern of billing the appellant had urged before the TPO that there is no adjustment of income between the appellant and its associates to call for determination of Arm's Length Price. The appellant had submitted to the TPO that the rationale behind the Transfer Pricing Regulations is to prevent shifting out of profit by manipulating prices charged or paid in International transactions thereby eroding the Country's tax base. In the present case there is no such shifting of Profits and as such the provisions of section 92 are inapplicable. 6. It is clear from the TPO's order that while recording the appellant's objections the TPO has not applied his mind at all to the objections raised and has proceeded to deal with the appropriate method to be adopted etc. There is no discussion or finding by the TPO or the assessing officer on the relevance and the applicability of the Transfer Pricing Regulations to the appellant company and the case been dealt with in a routine manner on the incorrect assumption that the Transfer Pricing Regulations have to be invoked in the appellant's case as in other cases? From the TPO's observation: "Further the assessee company has posted a net loss" it is evident that the negative results for the year have provoked the TPO to invoke

10 I.T.A. No.1139/Chny/08, 1135/Chny/10 & C.O. No. 69/Chny/17, 1136/Chny/10 & 632-634/Chny/17 the Transfer Pricing Regulations and justify the need for adjustment and the quantum thereof. 7. The appellant submits and urges that the Transfer Pricing Regulations have no applicability to its case and have been wrongly invoked on the facts and circumstances of the appellant's case. The appellant invites the Commissioner (Appeals) kind attention to the decision of the ITAT, Mumbai Bench 'A' in DCIT Vs. Rohm & Hass (India)(P.) Ltd reported in [2006] 8 SOT 803 (Mum) wherein the scope and ambit of section 92 of the Act has been discussed in detail. A copy of the said order of the !TAT Mumbai Bench is enclosed for the Commissioner (Appeals) ready reference. Commissioner (Appeals) will notice that in the reported decision, as in the appellant's case, there was loss and the ITAT Mumbai Bench has held that this fact cannot lead to the conclusion that the business between the parties has been arranged in such a manner as to attract section 92 of the Act. The appellant relies on the reasoning and conclusion of the ITAT Mumbai Bench. 8. Without prejudice to the above contention regarding inapplicability of Transfer Pricing Regulations to the appellant company, the appellant submits as follows: (i) Referring to the Statement of Facts and Ground No.I.2(a) of the Grounds of Appeal it is submitted that the operating profit adopted by the TPO as Rs.4.98 Crores is incorrect as it ignores the following unusual items of loss/expenditure: (1) Exchange Rate Difference (Loss) - Rs.3,79,21.414/- (2) Bad Debts Written off - Rs.10,12,585/- (3) Donations - Rs.1,98,097/- Under Rule 10B(e)(iii) the above items are required to adjusted to arrive at the net profit margin. Doing so, the operating profit will work out to Rs.8.89 Crores or 4.296554% (of the value of sales of Rs.206.91 Crores - I.2(b) of Grounds of Appeal). (ii) The TPO's working of Arm's Length Price/shortfall suffers from serious infirmities which are evident in the Annexure to the TPO's order. Commissioner (Appeals) will see that while the appellant company's value of sales (software services to associate enterprises) is Rs.206.91 Crores, the TPO has for comparison purposes taken concerns whose value of sales ranges from Rs.106.37 Crores (45% of the appellant's sales) to Rs.222.2 Crores (94% of the appellant's sales), Clearly, adoption of such a widely different range of sales is bound to result in incorrect averages/results. Again it can be seen that the instances of ratio of operating profit adopted by the TPO for purpose of average ranges from 1.41% to 36.98%. Averaging of such extreme figures can only produce incorrect results. The appellant submits that the "ratio of operating profit to sales for the comparables" as

11 I.T.A. No.1139/Chny/08, 1135/Chny/10 & C.O. No. 69/Chny/17, 1136/Chny/10 & 632-634/Chny/17 per Annexure to the TPO's order worked out as 13.69% is incorrect and exaggerated and the consequent addition of 11.59% is wholly unjustified. iii. Commissioner (Appeals) will see that the only instance of comparable sales is in the case of CMS Computers, whose sales is Rs.222.20 Crores against the appellant's sale value of Rs.237.12 Crores. The ratio of operating profit to sales in the case of CMS Computers is 9.51%. It is submitted that the shortfall being 0.62% (9.51 - 8.89) only, which is negligible, there is no justification for invoking the provisions of section 92. To sum up the appellant submits that: (i) For the reasons set out earlier, the provisions of section 92 regarding Transfer Pricing Regulations are not applicable to this company; and (ii) With reference to the Annexure to the TPO's order and considering the only comparable case no adjustment for Arm's Length Price is called for. 3.3 Upon the above submissions of the assessee, the same were notified to the Assessing Officer for his comments. After considering the above submissions, in the remand report, the Assessing Officer gave a finding that the assessee has not brought on record any fresh material or arguments regarding the issue of transfer pricing, he has requested that the assessment order be upheld.

3.4 The ld. CIT(A) considered the rejoinder of the assessee and Explanatory Circular No. 14 on provisions relating to Finance Act, 2001 as well as Circular No. 12 of 2001 dated 23.08.2001. Moreover, by considering various decisions including the decision of Delhi Benches of the Tribunal in the case of Mentor Graphics (Noida) (P) Ltd. v. DCIT [2009] 109 ITD 101, wherein, the observations of the Tribunal as well as findings of the ld. CIT(A) are reproduced as under:

12 I.T.A. No.1139/Chny/08, 1135/Chny/10 & C.O. No. 69/Chny/17, 1136/Chny/10 & 632-634/Chny/17 “1. Whether ‘transfer pricing’ is not an exact science, evaluation of transactions through which process of determination is carried is an art where mathematical certainty is indeed not possible and some approximation cannot be ruled out, yet it has to be shown that analysis carried was 'judicial' and was done after taking into account all relevant facts and circumstance so case - Held yes 2. Whether minimum requirement is to prima facie show that controlled international transaction was properly examined, comparable and Arm's length price fixed objectively, honestly and in a bona fide manner as required by statutory regulations - Held yes 3. Whether Arm's lengh price is determined by taking result of a comparable transaction in comparable circumstances and by making suitable adjustments for differences - Held yes 4. Whether first step in determination of Arm's Length price is to analyse specific characteristics of controlled transaction whether it relates to transfer of goods, services or intangible and without proper study of specific characteristics of controlled transaction, no meaningful comparison or location of comparable is possible - Held yes 5. Whether if there are material and significant differences in risk involved, then comparables identified are not correct as appropriate adjustments for differences in such cases are not possible and, therefore, while performing searches for potential comparable companies, not only turnover and operating profit but functions performed and risk profile are also to be considered - Held, yes 6. Whether even when Transactional Net Margin Method (TNM method) is applied to determine Arm's Length Price as per DECD guidelines, functional profile, assets employed, risk assumed of controlled and uncontrolled transactions are to be seen while screening comparable companies - Held, yes 7. Whether rule lOB has force of law and notwithstanding DECD Guidelines, TPD cannot refuse to consider specific characteristics of transaction, functions performed and assets employed - Held, yes.” 3.5 Accordingly, the ld. CIT(A) observed as under: 6.18. In the above referred case, the appellant company had prima facie demonstrated that its prices are comparable and Arm's length price fixed objectively, honestly and in a bona fide manner as required by statutory regulations. This being directly explained by the appellant and as held by the Delhi Bench of the Income Tax Appellate Tribunal, the same cannot be varied

13 I.T.A. No.1139/Chny/08, 1135/Chny/10 & C.O. No. 69/Chny/17, 1136/Chny/10 & 632-634/Chny/17 by the Transfer Pricing Officer or the Assessing Officer unless it can be shown that these aspects were not properly examined in the report submitted. Therefore, in the light of above decision of the Delhi Bench of the Tribunal, it is held that the Transfer Pricing Officer or the Assessing Officer should not have rejected the arm's length price determined by the appellant without showing how the pricing worked out by the appellant was incorrect or perverse. In the present case, the appellant has compared the financial statements of companies, viz., Prithvi Information Solutions, CMS Computers and D-Link India, 31 Infotech Ltd., Igate Solutions Ltd. and Larsen & Turbo Infotech Ltd. The assessee company pleaded before the TPO that the financials of Birla Soft, Sonata Info Tech, Tata Elixi and Visual Soft Tech are not comparable companies on account of low sales turnover and or extreme operative profit on sales. 6.19. The objective behind introduction of Transfer Pricing Regulations in India is to curb erosion of taxes by manipulation of prices. However, Circular No. 12 very clearly states that there is a need to ensure that the tax-payers are not put to unnecessary hardship. The appellant company has justified the prices charged by it by way of establishing comparable uncontrolled price for each product in the form of invoices / quotations from unrelated parties. In my considered view, the appellant company has sufficiently demonstrated that the exports to AE are at arm's length from Indian Transfer Pricing perspective. In view of this, it is held that there is no justification to make any adjustment. 6.20. The transfer pricing provisions, as narrated above under the Income tax Act, nowhere authorises the TPO to arbitrarily estimate the transfer price. The basis recorded by the TPO is devoid of merits. Therefore, the ALP determined at Rs. 239.54 crores is unwarranted and consequently, the adjustment of Rs. 32.63 crores on this account made by the Assessing Officer is directed to be deleted. This ground of appeal is therefore allowed.” 3.6 We have heard the ld. DR and considered his submissions that the Transactional Net Margin Method [TNMM] is the most appropriate method to work out of the ALP. However, the ld. DR could not controvert as to how the Comparable Uncontrolled Price available for all the products in the form of invoices/quotations from unrelated parties, is not an appropriate method to determine the ALP and moreover, the TPO or Assessing Officer has not given any valid reason for rejecting the ALP determined by the assessee

14 I.T.A. No.1139/Chny/08, 1135/Chny/10 & C.O. No. 69/Chny/17, 1136/Chny/10 & 632-634/Chny/17 showing how the pricing worked out by the assessee was incorrect or perverse. In this case, the assessee has compared the financial statements of companies, viz., Prithvi Information Solutions, CMS Computers and D- Link India, 31 Infotech Ltd., Igate Solutions Ltd. and Larsen & Turbo Infotech Ltd. Since there was low sales turnover and or extreme operative profit on sales as per the financials in respect of Birla Soft, Sonata Info Tech, Tata Elixi and Visual Soft Tech, which were not taken into account as comparables. Moreover, in the case of UCB India (P.) Ltd. v. ACIT [2009] 121 ITO 131, the Mumbai Benches of the Tribunal held that section 92C read with rule 10B(1)(e) of the Act deals with Transactions Net Margin Method (TNMM) and it refers to only net profit margin realised by an enterprise from an international transaction or a class of such transaction) but not operational margins of enterprises as a whole". Under the above facts and circumstances, we are of the considered opinion that while deleting the adjustment of ₹.32.63 crores, the ld. CIT(A) has rightly held that the ALP determined by the TPO at ₹.239.54 crores is unwarranted. Accordingly, the ground raised by the Revenue is dismissed.

15 I.T.A. No.1139/Chny/08, 1135/Chny/10 & C.O. No. 69/Chny/17, 1136/Chny/10 & 632-634/Chny/17 paid to Mr. Kishore Soni to ₹.5,00,000/- as against 25,00,000/- and brought to tax.

4.1 The facts are that the assessee company raised US$ 10 Million (4,875 lakhs) from institutional investors on 31.07.2002 by Issue of Global Depositary Receipts (GDR). In connection with the issue, the assessee claimed under section 35D of the Act a sum of ₹.35,28,444/- being 1/5th of 5% of capital employed of ₹. 1,76,42,217/-, whereas the actual expenditure was ₹. 2,04,37,354/-. The Assessing Officer disallowed filing fee of ₹. 25,12,500/- paid to Registrar of Companies treating the same as capital expenditure by relying on the decision of the Apex Court in the case of Brooke Bond India Ltd. v. CIT 225 ITR 798.

4.2 On appeal, the AR of the assessee vehemently contested the action of the Assessing Officer and has made submissions. After considering the submissions of the assessee and facts of the case, the ld. CIT(A) directed the Assessing Officer to allow the entire expenditure under section 35D of the Act.

4.3 Before us, the ld. DR submitted that the impugned expenditure does not fall under the items of expenditure specified in section 35D(2) of the Act and strongly relied on the decision in the case of Brooke Bond India Ltd. v.

16 I.T.A. No.1139/Chny/08, 1135/Chny/10 & C.O. No. 69/Chny/17, 1136/Chny/10 & 632-634/Chny/17 CIT (supra) and in the case of Vareli Textile Industries v. CIT 284 ITR 238 (Guj.).

4.4 We have considered the submissions of the ld. DR. The point at issue is whether the expenditure incurred in connection with issue of GDR is an allowable under section 35D of the Act or not? By treating the expenditure incurred towards filing fee paid to ROC for the issue of GDR as capital in nature, the Assessing Officer disallowed the same and brought to tax. While directing the Assessing Officer to allow the entire expenditure under section 35D of the Act, the ld. CIT(A) observed that in the case of Brooke Bond India Ltd. (supra) the Hon'ble Supreme Court has dealt with a different question altogether and the question before the Hon'ble Court was whether expenditure incurred in connection with additional issue of shares is capital expenditure or revenue expenditure. The Hon'ble Court has not dealt with a claim for amortization under section 35D of the Act. Therefore, the ratio of that judgment is not applicable on the facts of the present case. The ld. CIT(A) further found that the GDR issue was made for raising the working capital funds and its claim under section 35D of the Act is allowable since the assessee claimed 1/5th of the total income in the assessment year under appeal and there is no justification to make any disallowance on this count. A perusal of Section 35D of the Act shows that the amortisation relief is granted in respect of certain preliminary expenses incurred by an assessee

17 I.T.A. No.1139/Chny/08, 1135/Chny/10 & C.O. No. 69/Chny/17, 1136/Chny/10 & 632-634/Chny/17 company, being an Indian company or a person other than a company resident in India, after 31st March 1970 as specified in sub section (2). The expenditure thus incurred are (i) either before the commencement of his business, or (ii) after the commencement of his business, in connection with the extension of his industrial undertaking or in connection with his setting up of a new industrial unit.

4.5 It is abundantly clear that there is no dispute on the fact that the expenses were incurred by the assessee in connection with GDR issue. GDR issue is nothing but the issue of shares by Indian company in the foreign countries. The Hon'ble Supreme Court in the case of Punjab State Industrial Development Corporation Ltd. v. CIT 225 ITR 792 and Brooke Bond India Ltd. v. CIT (supra) has categorically held that such expenditure cannot be allowed as deduction. In view of the judgments of the Hon'ble Supreme Court in the above cases, there remain no question of allowing any deduction even at the rate of 1/5th presumably under section 35D of the Act being the amortization of preliminary expenses. Further, in view of the judgment of the Hon'ble Delhi High Court in the case of CIT Vs. Hindustan Insecticides Ltd. [(2001) 250 ITR 338 (Del.)] in which it has been held that share issue expenses cannot be categorized even under section 35D(2) of the Act. There are several judgments of the Hon'ble High Courts and the orders passed by the Tribunal holding that share issue expenses cannot be

18 I.T.A. No.1139/Chny/08, 1135/Chny/10 & C.O. No. 69/Chny/17, 1136/Chny/10 & 632-634/Chny/17 allowed as deduction. The Bombay Bench of the Tribunal in ITO Vs. India Photographic Co. Ltd. [(1987) 20 ITD 89 (Bom.)] has also taken similar view. In the light of the above discussion, we are of the considered opinion that the ld. CIT(A) was not justified in overturning the assessment order on this point. We, therefore, set aside the impugned order on this issue and restore the view of the Assessing Officer. Accordingly, the ground raised by the Revenue is allowed.

5.1 In page 3 of the impugned assessment order, the Assessing Officer has noted the detailed bill for professional fees paid to the said company. After examining the bill, the ld. CIT(A) observed that various expenses incurred for which the bill was raised are intricately connected with the GDR issue. It is also seen that the Assessing Officer has not questioned the services rendered by the said company, however, he invoked provisions of section 40A(2)(b) of the Act without there being any material evidence or

19 I.T.A. No.1139/Chny/08, 1135/Chny/10 & C.O. No. 69/Chny/17, 1136/Chny/10 & 632-634/Chny/17 justification in invoking the said section. The ld. CIT(A) further observed that the Assessing Officer has not made out any case as to why the payment to the said company falls within the mischief of section 40A(2)(b) of the Act. Accordingly, since, when services rendered and the payments are not disputed and no case has been made out by the Assessing Officer to invoke the provisions of section 40A(2)(b), the ld. CIT(A) held that there is no justification to make any disallowance out of the professional fees paid to the said company and the assessee has correctly considered the same in the total expenditure towards the issue of GDR and therefore, the disallowance of ₹.20,00,000/- is unwarranted and deleted the same. We find no substance in the ground raised by the Revenue once the expenditure incurred and payment made by the assessee are not in dispute and thus, we find no infirmity in the order passed by the ld. CIT(A) on this issue. Accordingly, the ground raised by the Revenue stands dismissed.

20 I.T.A. No.1139/Chny/08, 1135/Chny/10 & C.O. No. 69/Chny/17, 1136/Chny/10 & 632-634/Chny/17 6.1 On appeal, the ld. CIT(A) deleted the disallowance by holding that the Assessing Officer made the above disallowance towards penalty.

6.2 We find force in the ground raised by the Revenue that the ld. CIT(A) ought to have noted that even during remand proceedings, no evidence in regard to the impugned payment was produced before the Assessing Officer. In the appellate order, the ld. CIT(A) by overlooking the remand report, wherein, it was stated that if at all the payment was made towards US State Unemployment Insurance, the assessee would have received a receipt or acknowledgement for the same, which was not produced by the assessee, the ld. CIT(A) deleted the disallowance by holding that the payment is not penalty. Thus, we are of the considered opinion that the ld. CIT(A) was not justified in overturning the remand report on this point. We, therefore, set aside the impugned order on this issue and restore the disallowance made by the Assessing Officer. Accordingly, the ground raised by the Revenue is allowed.

21 I.T.A. No.1139/Chny/08, 1135/Chny/10 & C.O. No. 69/Chny/17, 1136/Chny/10 & 632-634/Chny/17 40(a)(ii) of the Act any sum paid on account of any rate or tax levied is not an allowable expenditure. The Assessing Officer further observed that the expenditure incurred by the assessee is not for earning its income, but, interest due was on delayed filing of return or interest due on delayed remittances of withholding tax which cannot be considered as an allowable expenditure. Accordingly, the Assessing Officer disallowed Rs. 2,37,50,000/- and brought to tax.

7.1 On appeal, by considering the submissions of the assessee, the ld. CIT(A) deleted the disallowance by holding that the interest on delayed payment is allowable under section 37 of the Act.

7.2 Aggrieved, the Revenue is in appeal before the Tribunal. By relying on the decision in the case of Bharat Commerce & Industries Ltd. v. CIT 230 ITR 733, the ld. DR has submitted that interest levied for delay in filing of return before the US Government cannot be allowed as deduction under section 37 of the Act.

7.3 We have considered the submissions of the ld. DR. In this case, the assessee paid interest and penalty on late payment of withholding tax in the USA as per assessee's submission of communication from the IRS, USA. The Assessing Officer observed that the communication clearly states that the payment of interest and penalty are due to default on part of the

22 I.T.A. No.1139/Chny/08, 1135/Chny/10 & C.O. No. 69/Chny/17, 1136/Chny/10 & 632-634/Chny/17 assessee and are penal in nature. Thus, the Assessing Officer invoked the provisions of section 40(a)(ii) of the Act and disallowed the claim of deduction made under section 37 of the Act. By examining the Title 26 section F 7 Chapter 67, sub-chapter A 6601 of the US Code, the ld. CIT(A) observed that tax and interest under that code are different and the assessee paid interest by way of compensation for the period of delay in payment of tax and held that such interest is not penal in nature. Accordingly, the ld. CIT(A) held that the interest of ₹.2,37,50,000/- on delayed payment is allowable under section 37 of the Act.

7.4 It is an admitted fact that the assessee has paid interest and penalty on late payment of withholding tax in the USA as per the communication from the IRS, USA furnished by the assessee, which clearly shows that the assessee was in default towards payment of interest and penalty. Under these facts and circumstances, we are of the considered opinion that when the interest was paid for committing a default in respect of late payment of withholding tax and the expenditure incurred in that connection is in no way connected with preserving or promoting the business of the assessee. Thus, the expenditure incurred cannot be taken into account before the profits of the business are calculated. Under the Income Tax Act, the payment of such interest is inextricably connected with the assessee’s tax liability. If income tax itself is not a permissible deduction under section 37 of the Act, any

23 I.T.A. No.1139/Chny/08, 1135/Chny/10 & C.O. No. 69/Chny/17, 1136/Chny/10 & 632-634/Chny/17 interest payable for default committed by the assessee in discharging his statutory obligation under the Act, which is calculated with reference to the tax on income, cannot be allowed as deduction. Thus, we are of the considered opinion that the expenditure in the form of interest which was paid was not an expenditure wholly and exclusively incurred for the purpose of earning income. Our views are duly fortified by various decisions of various Courts including the Hon’ble Supreme Court in the case Bharat Commerce & Industries Ltd. (supra). Accordingly, we set aside the order of the ld. CIT(A) and restore that of the Assessing Officer. Thus, the ground raised by the Revenue is allowed.

I.T.A. No. 1136/Chny/2010[AY 2005-06]

24 I.T.A. No.1139/Chny/08, 1135/Chny/10 & C.O. No. 69/Chny/17, 1136/Chny/10 & 632-634/Chny/17 this issue and restore that of the Assessing Officer. Thus, the ground raised by the Revenue is allowed.

25 I.T.A. No.1139/Chny/08, 1135/Chny/10 & C.O. No. 69/Chny/17, 1136/Chny/10 & 632-634/Chny/17 indicating starting of commercial production. On verification of the details of expenditure, the ld. CIT(A) observed that the expenditure incurred by the assessee are salaries, professional charges, travel expenses, bonus and superannuation, etc., which are clearly of the nature of admissible business expenditure. The ld. CIT(A) further observed that the assessee treated the expenses as deferred revenue expenditure and there being no provision for deferral of revenue expenditure under the Act, the claim of the expenses of the assessee, which are of revenue in nature as expenditure of this year, does not merit disallowances. Further, by following binding precedent on the decision of the Hon’ble Jurisdictional High Court in the case of CIT v. Rane (Madras) Ltd. 293 ITR 459, the ld. CIT(A) directed the Assessing Officer to allow the expenditure. To say that the Bio Informatics Division is a new unit, the Assessing Officer has not stated any valid material on record. In this case, the income and expenditure of the assessee are not in dispute. Before the ld. CIT(A), it was the submission of the assessee that the Bio Informatics Division, though called a project is neither a separate nor new business but is a part of its existing business activity of development of computer software. It was also submitted that the assessee has commenced sale of the product and has admitted receipts of ₹.11.36 lakhs during the year. Thus, the net expenditure of ₹.58.21 lakhs [total expenditure ₹.69.57 lakhs – receipts ₹.11.36 lakhs] was claimed in computing business income of the assessee. We have also perused the case relied on in the case of CIT v.

26 I.T.A. No.1139/Chny/08, 1135/Chny/10 & C.O. No. 69/Chny/17, 1136/Chny/10 & 632-634/Chny/17 Rane (Madras) Ltd. (supra), wherein, it was held that the new unit same as of existing units, new unit is extension of existing units the expenditure incurred in new unit is allowable as revenue expenditure, we find no infirmity in the order passed by the ld. CIT(A) on this issue and accordingly, the ground raised by the Revenue is dismissed.

27 I.T.A. No.1139/Chny/08, 1135/Chny/10 & C.O. No. 69/Chny/17, 1136/Chny/10 & 632-634/Chny/17 finding in the assessment order as to whether the assessee has acquired any plant and machinery outside India thereby attracting the provisions of section 43A of the Act and subsequent expenditures incurred could be held under capital field. Moreover, in the case of CIT v. Woodward Governor India (P) Ltd. (supra), the Hon’ble Supreme Court has held that the loss suffered by the assessee on account of fluctuation in the rate of foreign exchange as on the date of the balance sheet is an item of expenditure under section 37(1) of the Act, which was followed by the ld. CIT(A), we find no infirmity in the order of the ld. CIT(A) on this issue and accordingly, the ground raised by the Revenue stands dismissed.

28 I.T.A. No.1139/Chny/08, 1135/Chny/10 & C.O. No. 69/Chny/17, 1136/Chny/10 & 632-634/Chny/17 income be computed as per the provisions of the Act and not be adopt the profits as per the consolidated accounts and sustained the objections of the assessee. By following the above observations of the ld. DRP, the ld. CIT(A) decided the issue in favour of the assessee and thus, we find no infirmity in the order passed by the ld. CIT(A) on this issue. Accordingly, the ground raised by the Revenue for all the above assessment years is dismissed.

29 I.T.A. No.1139/Chny/08, 1135/Chny/10 & C.O. No. 69/Chny/17, 1136/Chny/10 & 632-634/Chny/17

Order pronounced on the 22nd June, 2018 at Chennai.

Sd/- Sd/- (A. MOHAN ALANKAMONY) (DUVVURU RL REDDY) ACCOUNTANT MEMBER JUDICIAL MEMBER Chennai, Dated, the 22.06.2018 Vm/- आदेश क� ��त�ल�प अ�े�षत/Copy to: 1. अपीलाथ�/Appellant, 2.��यथ�/ Respondent, 3. आयकर आयु�त (अपील)/CIT(A), 4. आयकर आयु�त/CIT, 5. �वभागीय ��त�न�ध/DR & 6. गाड� फाईल/GF.