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Facts
The assessee filed appeals against orders for Assessment Years 2017-18 and 2018-19. Several grounds were raised, including issues related to transfer pricing adjustments and disallowances of expenses. Some grounds were not pressed due to settlement through an Advance Pricing Agreement.
Held
The Tribunal held that the addition of Rs. 1,78,659/- for entrance fees and club service expenditure was made in contravention of the DRP's directions and directed its deletion. Regarding adjustments to book profit under Section 115JB, the Tribunal followed a coordinate bench's ruling, stating that only adjustments provided in Explanation 1 to Section 115JB(2) are permissible, and thus, transfer pricing adjustments cannot be added back.
Key Issues
Whether transfer pricing adjustments can be added back to book profits under Section 115JB, and whether the AO wrongly included expenses despite DRP directions.
Sections Cited
115JB
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Income Tax Appellate Tribunal, ‘C’ BENCH, BANGALORE
Before: SHRI WASEEM AHMED & SHRI KESHAV DUBEY
PER WASEEM AHMED, ACCOUNTANT MEMBER:
These are the appeals filed by the assessee against the orders passed by the ACIT, Bengaluru dated 29/04/2022 in DIN No. ITBA/AST/ S/143(3)/2022-23/1042901198(1) for the A.Y. 2017-18 and dated 25/08/2022 in DIN No. ITBA/AST/S/143(3)/2022-23/1044918835(1) for the assessment year 2018-19.
At the outset, the ld. Counsel for the assessee submitted that he has been instructed by the assessee not to press additional ground of IT(TP)A Nos.419 & 876/Bang/2022 Page 2 of 10 appeal relating to Document Identification No. (DIN), which was not mentioned in the direction issued by the dispute resolution panel. Accordingly, we dismiss the same.
The issue raised in ground No. 1 is general in nature and, therefore, the same does not require any separate adjudication. Accordingly, we dismiss the same being general in nature.
The issues raised by the assessee in ground Nos. 3 to 9 relates to transfer pricing adjustment, which has been settled in the Unilateral Advance Pricing Agreement entered between the assessee and the CBDT dated 16/06/2023 for the period from assessment years 2016-17 to assessment year 2020-21. Accordingly, these grounds were not pressed by the assessee and, therefore, we dismiss the same as not pressed.
The next issue raised by the assessee in ground Nos. 10 to 18 is that the ld. DRP is erred in making the adjustment of Rs. 30,47,64,640/- on account of selling, marketing and distribution expenses incurred by the assessee.
5.1 At the outset, the ld. Counsel for the assessee before us submitted that the identical issue was also raised in the assessment year 2016-17 in the own case of the assessee in which has been restored to the file of the AO/TPO for fresh adjudication vide order dated 25/06/2024. Accordingly, the ld. AR contended that similar direction can also be issued in the year in dispute.
IT(TP)A Nos.419 & 876/Bang/2022
Page 3 of 10 5.2 On the contrary, the ld. DR did not raise any objection, if such direction is issued by setting aside the issue to the file of the AO/TPO for fresh adjudication as per the provisions of law.
5.3 We have heard the rival contentions of both the parties and perused the materials available on record. At the outset, we note that this Tribunal in the own case of the assessee cited above has observed as under: “13. We have heard the rival submissions and perused the materials available on record. The assessee relied on the latest decision of Chennai Bench in the case of Nissan Motor India Pvt. Ltd. in IT(TP)A No.91/Chny/2018 and others dated 29.5.2024, wherein on the similar argument of the assessee is considered and observed as under: "17. We have heard the rival contentions in the light of the evidences available on records, arguments put forth as well as judicial citations relied upon. Upon careful consideration of the impugned APA signed between the assessee and the CBDT, we find that the said APA is valid for AYs 2014-15 to 2018-19 and hence all the four pending appeals would fall under the purview of said APA. It is noted that Para-3, 4, 5, & 6 clearly lay down the scheme of working which has to be followed by the assessee while reporting its business affairs. It is also be noted that the assessee has reported its financial transactions in complete fulfillment of the stipulations postulated in the said APA. Accordingly, there was no case for any adjustment to be made by the TPO and for the DRP to reiterate TPO's actions. The addition made by the AO is thus in conflict with the agreements done in the APA and consequently deserves to be quashed and set aside. Accordingly, the addition made by the AO vide his order dated 05.10.2018. In compliance to directions of DRP dated 27.09.2018 is deleted and the ground of appeal no.2 raised by the assessee is allowed." 13.1 In view of the above latest order of the Tribunal on the impugned issue, in our opinion, it is appropriate to remit the issue to the file of ld. AO/TPO as the benefit of this order was not available to the AO/TPO at the time of deciding the issue by them. Accordingly, the issue in dispute is remitted to the file of Id. AO/TPO to be decided in the light of above order of the Tribunal cited (supra).
14. In the result, appeal of the assessee is partly allowed for statistical purposes.”
IT(TP)A Nos.419 & 876/Bang/2022 Page 4 of 10 5.4 The facts of the case on hand are identical to the facts of the case discussed above. At the time of hearing, the ld. DR has not brought anything on record contrary to the argument advanced by the ld. AR for the assessee. Similarly, nothing has been brought on record, suggesting that the finding given by the ITAT in the own case of the assessee discussed above has either been overruled or stayed by higher judicial forum. Likewise, no distinguishing feature has been pointed out in the case on hand vis-à-vis in the own case of the assessee cited above. Therefore, respectfully following the same, we set aside the issue to the file of the AO/TPO for fresh adjudication as per the provisions of law. Hence, the ground of appeal of the assessee is hereby allowed for the statistical purposes.
6. The next issue raised by the assessee in ground No. 19 and 20 is that the ld. AO/DRP erred in making the addition of Rs. 1,78,659/- representing the entrance fee and club service expenditure without following the direction of the Hon’ble DRP.
7. At the outset, the ld. Counsel for the assessee before us submitted that the Hon’ble DRP has directed the AO to delete the addition proposed in the draft assessment order on account of entrance fees and club service expense incurred by the assessee amounting to Rs. 1,78,659/- only. However, the AO did not comply with the direction of the Hon’ble DRP and sustained the impugned addition in the final assessment order dated 29/04/2022. Accordingly, the ld. AR submitted that the impugned addition is liable to be deleted.
IT(TP)A Nos.419 & 876/Bang/2022
On the other hand, the ld. DR could not controvert the argument advanced by the ld. AR for the assessee.
We have heard the rival contentions of both the parties and perused the materials available on record. At this juncture, it is pertinent to refer the relevant finding of Hon’ble DRP which is reproduced as under: “Objection No.2.2: erred in disallowing entrance fees and subscription and expenditure incurred for availing club services as a personal expenditure without appreciating the fact that the same has been incurred by the Assessee for the purpose of its business and Assessee being corporate entity expense cannot be personal in nature and hence, the expense is not personal in nature. 2.2.1 Having considered the submissions, in the tax audit report these amounts were shown as personal in nature and hence the addition was made by the AO. Based on the decision of Hon'ble Karnataka High Court in the case of Infosys Technologies Ltd & Sandur Manganese & Iron Ores Ltd, we consider it appropriate to direct the AO not to make the proposed addition. This objection is allowed in favour of the assessee.”
From the above, there remains no dispute to the fact that the AO in the final assessment order has exceeded the jurisdiction by making the addition of Rs. 1,78,659/- as discussed above, which is in contravention to the direction of the Hon’ble DRP. Accordingly, we direct the AO to delete the addition made by him. Hence, the ground of appeal of the assessee is hereby allowed.
11. The next issue raised by the assessee in ground No. 21 is that the ld. DRP is erred in making the adjustment to the book profit of Rs. 54,25,13,912/- under section 115JB of the Act.
12. The AO in the draft assessment order has added the transfer pricing adjustment and other corporate disallowance made by the AO .
IT(TP)A Nos.419 & 876/Bang/2022
Page 6 of 10 under normal computation of income to the book profit computed u/s 115JB of the Act. On being objection raised by the assessee, the ld. DRP, confirmed such adjustment made by the AO by observing as under: “Objection No. 1.1: erred in making additions / disallowances of Rs. 58,25,36,982 (including transfer pricing adjustment) to the total income of the Appellant under normal provisions of the Act and Rs. 54,25,13,912 while computing book profits under Section 115JB of the Act; 2.1.1 Having considered the submissions, it is seen that according to section 115JB (5) all other provisions of the Act shall apply to every company falling under section 115JB. As has been held by the honourable Madras High Court in the Case of Metal and Chromium Plater (P) Lt (TS -708-HC- 2016(MAD)) " while an assessment u/s 115J would be concluded exclusively on the basis of the book profits as adjusted by the items set out in the Explanation thereunder in an assessment in terms of sections 115JA or JB, the adjusted book profits would be further subjected to the effect of other provisions of the Act that are specifically brought into play by virtue of sub-sections (4) of section 115JA and (5) of section 115JB". 2.1.2 The decisions relied on by the assessee were rendered prior to the insertion of the subsection (4) to section 115JB. In the view of the above subsection (4) and also in view the decision of the Hon'ble Madras Court, we are of the view that book profit can be adjusted, over and over the items listed in the explanation to 115JB with the TP adjustments, being the special provision under of Chapter X of the Act. Therefore, we uphold the action of the AO.”
Being aggrieved by the direction of ld. DRP, the assessee is in appeal before us.
13.1 The ld. AR before us submitted that there are specified adjustment, which can be made while computing the book profit u/s 115JB of the Act. According to the ld. AR, any adjustment made other than the adjustments specified u/s 115JB of the Act is not sustainable.
On the other hand, the ld. DR vehemently supported the order of the authorities below.
IT(TP)A Nos.419 & 876/Bang/2022
We have heard the rival contentions of both the parties and perused the materials available on record. From preceding discussion, we note that the limited question before us for adjudication is whether the amount of disallowances and TP adjustment made to ALP can be added back to the computation of book profit as envisaged under the provisions of section 115JB of the Act. In this regard, we find that the impugned question has been answered in favour of the assessee by the coordinate bench of Kolkata tribunal in the case of Normunra Research Institute Financial Technologies India Pvt Ltd vs. ACIT reported in 152 taxmann.com 352. The relevant finding of the Tribunal is extracted as under: "18. The Ground No. 26 raised by the assessee is with regard to the action of the ld. AO in adding back the disallowance conceived by the ld. TPO in the sum of Rs. 1,42,89,924/- towards adjustment to ALP in the computation of book profits u/s 115JB of the Act. This issue is now settled in favour of the assessee by the decision of the co-ordinate bench of Delhi Tribunal in the case of M/s. Cash Edge India (Pvt.) Ltd. v. ITO in for Asst Year 2010- 11 dated 23-9-2015 wherein it was held that :- "36. We have considered the rival submissions and perused the material on record. It is settled law that except for adjustments provided in Explanation 1Section115JB(2) of the Act, no other adjustment can be made to bookprofitsundersection115JB of the Act. We find that that transfer pricing adjustment is not one of the adjustments contemplated under Explanation 1Section115JB(2) of the Act and, therefore, could not have been added back to the bookprofitsundersection115JB.
The case-law relied upon by the Ld. Sr. DR i.e. decision of the Special Bench in the case of the Tribunal in Rain Commodities (supra) does not also advance the case of the Revenue. In that case the Special Bench was considering whether the AO can alter the net profits declared by an assessee. The Special Bench has, following the decision the apex Court in Apollo Tyres and HCL Comnet (supra), inter alia, held that the AO cannot travel beyond the net profits declared by the assessee unless (a) it is discovered that profit and loss account is not drawn up in accordance with Part II and Part III of Schedule VI of the Companies Act, or (b) the incorrect accounting policies, accounting standards have been adopted for preparing such accounts and the method/rate of depreciation has been incorrectly adopted for preparation of profit and loss account.
IT(TP)A Nos.419 & 876/Bang/2022
In the present case there is no allegation is the assessment order much less any finding that either that profit and loss account has not been drawn up in accordance with Part II and Part III of Schedule VI of the Companies Act, or that any incorrect accounting policies, accounting standards has been adopted for preparing such accounts or that the method/rate of depreciation has been incorrectly adopted for preparation of profit and loss account.
In view of aforesaid, we hold that the AO erred in adding back the transferpricingadjustment of the bookprofitsundersection115JB of the Act. Accordingly, this ground of the appeal raised by the assessee is allowed and the AO is directed to exclude the transferpricingadjustment, if such adjustment survives, from the bookprofitscomputedundersection115JB of the Act." Respectfully following the said decision, we hold that the sum of Rs. 1,42,89,924/- being the adjustment made to ALP of international transaction cannot be added back in the computation of book profits u/s 115JB of the Act. Accordingly, the Ground No. 26 raised by the assessee is allowed."
15.1 In view of the above, we hold that the adjustment made under transfer pricing provision in upward direction cannot be added to the book profit to be determined under section 115JB of the Act. Accordingly, we set aside the finding of the ld. CIT-A and direct the AO to delete the addition made by him. Hence, the ground of appeal of the assessee is hereby allowed.
16. The issues raised by the assessee in ground Nos. 22 to 24 are consequential in nature and, therefore, no separate adjudication is required. Accordingly, we dismiss the same as infructuous.
17. The issue raised by the assessee in ground No. 25 relates to the initiation of penalty proceedings u/s 270A of the Act, which is premature to decide at this stage and, therefore, we dismiss the same as infructuous.
IT(TP)A Nos.419 & 876/Bang/2022 Page 9 of 10
In the result, the appeal of the assessee is hereby partly allowed for statistical purposes.
Now coming to IT(TP)A No. 876/Bang/2022 for the assessment year 2018-19
The facts of the case on hand are identical to the facts of the case discussed above in the assessment year 2017-18, therefore, respectfully following the same, we partly allow the appeal of the assessee for statistical purposes.
The additional ground raised by the assessee is premature to decide, hence it is dismissed as infructuous.
In the result, the appeal of the assessee is partly allowed for statistical purposes.
In the combined result, both the appeals of the assessee are partly allowed for statistical purposes.