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Income Tax Appellate Tribunal, KOLKATA ‘C’ BENCH, KOLKATA
Before: Sri J. Sudhakar Reddy& Sri S.S. Viswanethra Ravi]
order : September 7th,2018 ORDER Per J. Sudhakar Reddy, AM :- This is an appeal filed by the assessee directed against the order of the Ld. Assessing Officer, dt. 26/07/2017, passed u/s 144C(13) of the Income Tax Act, 1961 (hereinafter the ‘Act’), relating to Assessment Year 2013-14.
Facts in brief:-
Assessment Year: 2013-14 Indian Explosives Private Ltd 2.1. The Assessing Officer passed a draft assessment order dt. 23/12/2016 u/s 143(3) r.w.s. 144C(1) fo the Act, interalia making the following additions:- i. Transfer Pricing Adjustment Rs.1,93,83,735/- ii. Provision for leave encashment Rs.28,18,656/- iii. Disallowance u/s 40A(9) Rs.11,21,347/- iv. Employees’ Contribution to PF/ESI Rs.10,21.069/- This draft assessment order was passed consequent to the order passed by the TPO u/s 192CA(3) of the Act, on 20/10/2016.
Aggrieved the assessee carried the matter in appeal before the DRP. The DRP-2, New Delhi, vide order dt. 12/06/2017, disposed of this objections raised. Thereafter the Assessing Officer passed the impugned assessment order dt. 26/07/2017
4. Further aggrieved the assessee is in appeal before us.
5. We have heard Miss Oindrila Bala & Shri Saurabh Kedia, the ld. Counsels on behalf of the assessee and Shri Sanjay Paul, Addl. CIT, DR, on behalf of the revenue. On careful consideration of the facts and circumstances of the case, perusal of the papers on record, orders of the authorities below as well as case law cited, we hold as follows:- 6. Ground No. 1 to 5, are on the issue of Transfer Pricing Adjustment. The Transfer Pricing Adjustment related to payment of royalty to A.E. while the royalty rate was 0.5% of net revenue, the ALP determined by the revenue was 1.67% of net revenue. This resulted in an adjustment of Rs.1,93,83,735/-. We find that the very same issue has been adjudicated by the ITAT for the Assessment Year 2012-13. The ITAT, in the assessee’s own case for the Assessment Year2012-13, on the very same issue in order dt. 13th July, 2018, held as follows:- “3. We keep in mind this fair stand of the parties and notice that our detailed discussion in the said two cases accepts the assessee’s grievance thereby deleting the arm’s length price adjustment in question reading as under:- 4. We have given our thoughtful consideration to the rival submissions. The short question that arises for our apt adjudication is as to whether action of the lower authorities right from the TPO, DRP to Assessing Officer holding the assessee not to have derived any tangible and commensurative benefit of paying any of the interest sales thereby culminating in the impugned adjustment of the entire payment of Rs.16,24,110/- is sustainable or not. Learned CIT D/R vehemently supports the above extracted findings under challenge that the payee’s products in question had long been established in India. He points out the fact that this is the first year of the impugned royalty outgo forming the point of dispute as international transaction under the Act. whereas the assessee had been using the very brand name/trademark in the past without Assessment Year: 2013-14 Indian Explosives Private Ltd incurring any such expenditure. He terms the lower authorities action under challenge to be strictly as per law. We see no reason to accept the same. Hon’ble Delhi High Court’s judgement in Commissioner of Income-tax v. EKL Appliances Ltd. [2012] 24 taxmann.com 199 (Delhi), as well as this Tribunal’s decision in Deputy Commissioner of Income-tax, Circle- 1(1), Kolkata v. Landis+ Gyr Ltd. [2017] 86 taxmann.com 109 (Kolkata - Trib.), Deputy Commissioner of Income-tax, Circle -1(1), Hyderabad v. Air Liquide Engineering India (P.) Ltd. [2014] 43 taxmann.com 299 (Hyderabad - Trib.), Dresser-Rand India (P.) Ltd. v. Additional Commissioner of Income- tax, Range - 6(2), Mumbai [2011] 13 taxmann.com 82 (Mumbai) interalia conclude that Chapter-X, provisions in the Act do not require the tax payer to prove any expenditure to have been incurred out of necessity or for the purpose of business or that it should actually result in profits, an ALP cannot be NIL amount where the TPO’s order nowhere records that the relevant conditions incorporated in section 92C(3) of the Act, are satisfied, the TPO would not sit in judgement on a taxpayers business expediency so as to conclude its ALP of international transactions as unreasonable thereby adopting nil ALP and that it is wholly irrelevant that these are no corresponding benefit since the real question in transfer pricing regime is as to what would be the price to be paid by an independent enterprise vis-à-vis the one shown by the concerned tax payer; respectively. The very legal position is reiterated in tribunal’s other decisions in Merck Ltd. vs. DCIT 2016 139 DTR 1 (Mum.), as well as in L.K. India Pvt. Ltd. vs Dy.Cit, Circle-1(2)in decided on 31st May, 2017. The co-ordinate bench(es), hold therein that it is an assessee’s call as to whether or not the services availed in question are commercially expedient rendering same benefits being derived from its business. 4.1 We keep in mind the said case-law to revert back to the relevant facts before us. It is clear first of all that the lower authorities have been very fair in not holding the assessee’s royalty transactions to be a sham ones. They have applied benefit and commercial expediency test in the instant case whilst computing nil ALP. We see no reason to approve the same these two tests of benefits and commercial expediency are not to be invoked as per the above legal position. The impugned action of the lower authorities under challenge is therefore held to be not sustainable.
Next comes the quantification aspect of the impugned ALP. The TPO admittedly applied ‘CUP' method in his order (supra). He appears to have treated the tax payer itself as a valid comparable as it had not paid any royalty to the very payee in earlier assessment years. This made him to adopt nil price of the impugned royalty so as to make the adjustment in question. We see no reason to concur with such a course of action since the assessee itself having paid Nil amount in the past to the AE, cannot be taken as a valid comparable. This tribunal in the case of Technimont ICB India (P) Ltd. v. Addl. CIT (2012) 138 ITD 23(Mumbai TM) has concluded long back that a transaction between payee and its AE is not an uncontrolled one so as to be taken as a comparable. We accept the assessee’s instant first substantive ground both on legality as well as on quantification therefore. The impugned ALP adjustment stands deleted accordingly.”
We therefore follow judicial consistency in facts of the instant case since it has already come on record that there is no distinction in facts or law involved herein. The assessee succeeds in its former substantive ground and the impugned adjustment of Rs.1,78,49,737/- is deleted. 6.1. Though the ld. D/R, opposed the contentions of the assessee by relying on the order of TPO as well as the DRP, we are not inclined to deviate from the view taken by the co-ordinate bench of the ITAT on this issue on the very same facts in the assessee’s own case for the immediately preceding Assessment Year. Respectfully following the same, we allow these grounds of the assessee.
Ground No. 6, 7 & 8 are on the issue of provision for leave encashment.
Assessment Year: 2013-14 Indian Explosives Private Ltd This Bench of the Tribunal in the assessee’s own case for the Assessment Year2012-13, on the very same issue in order dt. 13th July, 2018, held as follows:-
5. Both the learned representatives’ next contention is that we have restored the above latter issue of leave encashment provision disallowance to Assessing Officer in the said former assessment year as follows:- “6. Both the learned representatives state qua the assessee’s next substantive grievance with regard to the leave encashment provision of Rs. 15,97,944/- made u/s 43B(f) of the Act deserves to be remitted back to the Assessing Officer for taking a fresh call after the hon’ble apex court’s decision in the Revenue’s special leave petition converted to appeal staying operation of hon’ble jurisdictional high court’s judgment in Exide Industries Ltd. vs. UOI, 292 ITR 470, deleting identical disallowance as well as holding the statutory provision itself to be unconstitutional. We accept this fair stand and direct the Assessing Officer to keep the instant issue in abeyance to be decided after the hon’ble apex court’s final verdict in the department’s appeal hereinabove. This second substantive ground is taken as allowed for statistical purposes.”
We therefore follow judicial consistency in facts of the instant issue as well since it has come on record that there is no distinction in facts or law involved herein. The assessee succeeds in its instant substantive ground for statistical purposes.”
7.1. Respectfully following the same, we restore this issue to the file of the Assessing Officer to follow the directions given by the Bench while disposing of the very same issue for the Assessment Year 2012-13. Accordingly these grounds are allowed for statistical purposes.
Ground No. 9 is on the issue of disallowance made by the Assessing Officer u/s 40A(9) of the Act, on account of subsidy paid to IEL Club, Gomia amounting to Rs.11,21,347/- 8.1. The assessee submitted that the payment in question was given to a club that has be set up by the assessee company itself for the exclusive use of its employees in view of the fact that Gomia is a remote area and lacks any recreational facilities. The said amount was incurred, as per the assessee, for running of the club so as to provide entertainment and relaxation to the employees.
Assessment Year: 2013-14 Indian Explosives Private Ltd 8.1.1. The ld. D/R relied on the order of the DRP. 8.2. We find that for the assessment years 2007-08, 2011-12 & 2012-13, the expenditure in question was allowed by either the ld. CIT(A) or by the DRP. These orders have been accepted by the revenue. It is only in this year that the expenditure has been disallowed. The Kolkata Bench of the Tribunal has in the case of TATA Tea Limited in (Cal. Trib) & the Hon’ble Jurisdictional High Court in the case of DCIT vs. Chloride Industries Ltd. (2001) 76 ITD 1 (Cal.) had laid down the proposition of law that payments made to recreational clubs does not fall under the purview of Section 40A(9) of the Act and is allowable u/s 37(1) of the Act.
8.3. In view of the above discussion, on the principle of consistency as well as applying the propositions of law laid down by the co-ordinate bench of the Tribunal in the case of TATA Tea Limited in (Cal. Trib) & the Hon’ble Jurisdictional High Court in the case of DCIT vs. Chloride Industries Ltd. (2001) 76 ITD 1 (Cal.), we delete this disallowance and allow this ground of the assessee.
Ground No. 10, is consequential in nature as it pertains to levy of interest u/s 234B of the Act, and is dismissed as such.
Ground No.11, is dismissed as premature.
In the result, appeal of the assessee is allowed in part.
Kolkata, the 7th day of September, 2018.