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Before: SHRI S.V. MEHROTRA & SHRI SUDHANSHU SRIVASTAVA
ORDER
PER S.V. MEHROTRA, ACCOUNTANT MEMBER:
This appeal filed by the assessee is directed against the order of ld. CIT(Appeals)-XX, New Delhi, dated 18.10.2012 passed under section 250(6) of the I.T. Act for A.Y. 2003-04.
Brief facts of the case are that, in the relevant assessment year also as in earlier years, the assessee continued to carry on the business of manufacturing and sale of aerated and non-aerated beverage products and export of traded and its manufactured products. The assessee had filed return of income declaring total loss of Rs. 135,54,53,820/- under the normal provision of the Act and loss of Rs. 143,04,28,448/- under the provisions of Section 115JB of the I.T. Act. The total income was computed as under: A. Income under the normal provisions of the Act: Income as per return (-) Rs. 135,54,53,820 Add: (i) Preliminary expenses disallowed 8,02,000 (ii) Expenditure on glow sign/neon sign 11,83,07,422 (iii) On a/c of determination of Arm’s Length Price for international Transaction 5,40,589 Rs. 11,96,50,011 Less: Depreciation claim allowed to the assessee Rs. 3,42,32,624 Total income under normal provision of the Act (-) Rs. 127,00,36,433 B. Income under section 115JB of the Act: Book profit as per return (-) Rs. 143,04,28,448 Add: (i) Provision for gratuity 3,49,10,315 (ii) Provision for leave encashment 1,79,69,702 (iii) Preliminary expenses 8,02,000 (iv) Expenditure on glow sign/neon sign 11,83,07,422 Rs. 17,19,89,439 Total income under section 115JB (-) Rs. 125,84,39,009
Ld. CIT(A) partly allowed the assessee’s appeal.
Being aggrieved with the order of ld. CIT(A), the assessee is in appeal before us and has taken following grounds of appeal: 1. “That on the facts and circumstances of the case and in law, the Commissioner of Income Tax (Appeals)-XX, New Delhi (hereinafter referred to as “the ld. CIT(A)”) has erred in upholding the ad-hoc disallowance of Rs. 1,00,00,000 made by the ld. AO (hereinafter referred to as “ld. AO”) out of total upfront fees paid to various merchant establishments amounting to Rs. 1,80,00,000 alleging that the same relates to succeeding years.
2. That on the facts and circumstances of the case and in law, the ld. CIT(A) has erred in confirming the adjustment on account of provision for gratuity amounting to Rs. 34,910,315 and provision for leave encashment amounting to Rs. 17,969,702 while computing book profits under section 115JB of the Act holding that the said provisions were unascertained liability, without appreciating the fact that such provisions have been made on the basis of actuarial valuation.
3. That on the facts and circumstances of the case and in law, the ld. CIT(A) erred in upholding the adjustment of Rs. 5,40,589 made by the Transfer Pricing Officer to the value of international transactions pertaining to export of guar gum and pet chips without appreciating the business rationale for undertaking such transactions by the Appellant. Also, since the adjustment, inter alia, consist of loss incurred by appellant on account of fluctuation in foreign exchange, no benefit can be said to be derived by the associated enterprise in this regard.
4. That on the facts and circumstances of the case and in law, the ld. CIT(A) erred in upholding and in not accepting the arm’s length price determined by the appellant, and in choosing to determine the arm’s length price by making reference to the TPO even though none of the conditions laid down u/s 92C(3) of the Act, were satisfied.
5. That on the facts and circumstances of the case and in law, the ld. CIT(A) erred in upholding/confirming the action of the ld. AO/TPO in denying the (+/-)5% benefit envisaged under proviso to Section 92C(2) of the Act. The appellant craves leave to add, alter, vary, omit, substitute or amend the above grounds of appeal, at any time before or at the time of hearing of the appeal, so as to enable your Honor to decide this appeal according to law.”
5. At the time of hearing, ld. Counsel for the assessee did not press ground no.
1. Accordingly, the same is dismissed as not pressed.
6. Brief facts apropos ground no. 2 are that during the year the assessee had created a provision for gratuity of Rs. 34,910,315/- and for leave encashment of Rs. 17,969,702/-. These provisions were added back by assessee while computing income under normal provisions of the Act. However, the same were not added while computing the book profit u/s 115JB. The assessee submitted that the provision for gratuity and leave encashment were created scientifically on the basis of actuarial valuation and, therefore, in the nature of ascertained liability. The assessee had relied on the case laws noted by the AO in the assessment order. The AO, after considering the assessee’s submissions and examining the report of actuarial valuer, concluded that the provision for gratuity and leave encashment were based on estimates and presumed figures and were uncertain as far as their quantum was concerned. He, accordingly, added back both the provisions for computing book profit u/s 115JB.
7. Ld. CIT(A), following the order of the Tribunal for A.Y. 2001-02 in assessee’s own case, vide 5663, 4989/Del/2004 dated December 31, 2009, upheld the AO’s action 7.1 At the time of hearing, ld. Counsel referred to page 102 to 134 of the Paper Book, wherein the Tribunal’s order dated December 22, 2015 in assessee’s own case for AY 2002-03, vide ITA No. 834/Del/2010 & 945/Del/2010 respectively is contained. He pointed out that the Tribunal has set aside the issue relating to provision for gratuity to the file of AO. However, the provision for leave encashment has been held to be ascertained liability and, therefore, not required to be added back for computing book profits u/s 115JB.
Having heard both the parties, we find that the Tribunal in the aforesaid order in para 6 to 8 has held as under:
“Vide Ground no. 2, the grievance of the assessee relates to the adjustment on account of provision for gratuity and leave encashment while computing the book profits for the purpose of Section 115JB of the Income Tax Act, 1961 (hereinafter referred to as the Act). During the course of hearing the ld. Counsel for the assessee at the very outset stated that the issue relating to disallowance on account of leave encashment has been allowed by the ITAT and the issue relating to disallowance for gratuity has been restored to the AO vide order dated 16.07.2009 in 2836 & 4988/Del/2004 in assessee’s own case for the assessment year 2000-01 and the same view was taken for the AY 2001-02 in ITA Nos. 5722, 5663 & 4989/Del/2004 vide order dt. 31.12.2009. A reference was made to page nos. 235 to 286 of the assessee’s paper book. It was also stated that the issue relating to the disallowance of gratuity has been admitted by the Hon’ble Jurisdictional High Court vide order dated 02.07.2012 in ITA No. 739/2010.
The ld. DR in his rival submissions although supported the orders of the authorities below but could not controvert the aforesaid contention of the ld. Counsel for the assessee. 8. We have considered the submissions of both the parties and carefully gone through the material available on the record. It is noticed that an identical issue having similar facts was a subject matter of the adjudication for the AY 2001-02 in assessee’s own case in ITA Nos. 5722, 5663 & 4989/Del/2004 wherein relevant findings have been given in paras 33 & 34 of the order dt. 31.12.2009 which read as under: “33. We have carefully considered the rival submissions in the light of material placed before us. It has been the contention of the assessee right from the beginning that a cumulative sum of Rs. 97,84,178/- (Rs. 68,23,350/- on a/c of gratuity and Rs. 29,60,828/- on account of leave encashment) was debited to the Profit & Loss Account. Out of the said sum assessee itself has added back the gratuity of Rs. 68,23,350/- while computing the income under the normal provisions and thus, effectively the only amount remained to be debited to the P&L account was a sum of Rs. 29,60,828/-. If the amount was not debited to P&L account during the year under consideration, then the same is not subject to adjustment made while computing book profit u/s 115JA. To that extent there could be any dispute. Therefore, it has to be held that to the extent the amount which was not debited during the year under consideration to the profit and loss account relating to schedule 10 in the balance sheet of the assessee, the addition cannot be made for computing book profit u/s 115JA. It is the case of the assessee that provision of gratuity of Rs. 68,23,350/- was though debited to the P&L account but it was again added while computing the income under the normal provisions. Copy of computation of income has been filed by the assessee at page 107 to 110 of the paper book. It is observed there from that while computing the income under the normal provisions the amount of Rs. 68,23,350/- being provision made for gratuity u/s 40A(7) is added whereas no such addition has been made while computing the book profit u/s 115JA. It has not been shown that provision for payment of gratuity is calculated on the basis of actuarial valuation. It has also not been shown that provision on account of gratuity is an ascertain liability. Therefore, the addition to that extent while computing book profit u/s 115JA was required to be made. However, so as it relates to another component i.e. a sum of Rs. 29,60,828/- the claim is made by the assessee on the basis of actuarial valuation. It has not been shown by the department that there was any defect in such valuation. It has not been shown by the department that there was any defect in such valuation made by the assessee. If it is so then this claim of the assessee has to be accepted in the light of decision of Hon’ble Supreme Court in the case of Bharat Earthmovers vs. CIT (supra) wherein it has been held that liability incurred by the assessee under the leave encashment scheme applicable to its employees proportionate to the entitlement earned by the employees subject to ceiling on accumulation not being a contingent liability, provision made thereof is deductible. Therefore, this claim of the assessee has to be accepted. The AO is directed to delete the addition made on account of provision for leave encashment amounting to Rs. 29,60,888/-. To conclude our findings on this ground are that (i) Opening balance standing to provision for staff benefits, if not debited to the P&L account of the year under consideration, could not be considered for addition while computing profit u/s 115JA. (ii) Provision for gratuity being not ascertained liability was to be added while computing book profit u/s 115JA. (iii) Liability of Rs. 29,60,828/- on account of provision for leave encashment being a liability based on actuarial valuation is to be considered ascertained liability hence deductible while computing book profit u/s 115JA. This ground is partly allowed.”
There is no disparity on facts. The contents of the ld. Counsel for the assessee is that actuarial report is on the record, therefore, the provisions should not be treated as unascertained liability. This report has not been relied upon by the revenue authorities below. There are specific defect in the report. Taking into consideration the findings of the ITAT in AY 2000-01, defects in the report and the claim of assessee that in assessment year 2000-01, a miscellaneous application has already been filed. We deem it appropriate to set aside this issue to the file of the AO for re-adjudication. Assessee will submit the actuarial report afresh to the AO. AO shall consider the order of the ITAT in AY 2000-01 also. This ground of appeal
is partly allowed.”
9. Ld. Counsel further referred to page 171 and 172 of the Paper Book, wherein the Hon’ble High Court has admitted the following substantial questions of law for adjudication: 1. “Whether the Income Tax Appellate Tribunal was justified in law in holding that an amount of Rs. 68,23,350/- representing the liability towards gratuity and payable to employees and duly debited in the Profit & Loss account represented an unascertained liability so as to enhance the book profit in terms of provisions of Clause (c ) of Explanation to Section 115JA(1) of the Income Tax Act, 1961?
2. Whether the Income Tax Appellate Tribunal was justified in law in not directing, that the amount of Rs. 29,60,828/- being the liability towards leave encashment due to the employees could not be deducted from the income computed under the provisions of the Income Tax Act, 1961, inspite of judgment of Apex Court in the case of Bharat Earthmovers v. CIT, reported in 245-ITR-428-SC? 3. Whether in the circumstances of the case was not the Income Tax Appellate Tribunal right in not deducting an addition made of Rs. 2,83,70,822/- despite the fact that no such deduction was either claimed in the computation of income or was debited in the Profit & Loss Account? Mrs. Prem Lata Bansal, ld. Counsel for the Revenue accepts notice. In view of the aforesaid, no further notice need to be issued.”
Respectfully following the aforesaid order of Tribunal, the issue relating to provision for gratuity is restored back to the file of the AO to be adjudicated in the same manner as has been directed, vide order dt. 22/12/2015 for AY 2002-03. However, the provision for leave encashment is to be considered ascertained liability and, therefore, not required to be added back for computing book profits u/s 115JB.
In the result, this ground is partly allowed for statistical purposes.
Brief facts apropos ground nos. 3 & 4 are that the TPO vide his order dated 10/02/2006 determined arm’s length price in respect of service provided by the assessee to Pepsico Trading USA at Rs. 5,40,589/-. Since the assessee had not shown this transaction in Form 3CEB, therefore, the AO made an addition of Rs. 5,40,589/- to the assessee’s income.
Ld. CIT(A) has considered this issue in para 8 of his order and has upheld the addition.
Ld. Counsel for the assessee submitted that this issue is also covered by the decision of Tribunal in assessee’s own case for AY 2002-03, wherein the Tribunal considered this issue from para 11 to 21 of its order and finally concluded that the loss incurred by the assessee was only on account of foreign exchange fluctuation and the structure of the transaction was such for the assessee that it could not make any profit or incur any loss as the transactions were not being under taken for the sake of any profit. He submitted that the issue is squarely covered by the decision of Tribunal in assessee’s own case.
The facts as noted by the ld. CIT(A) in his order are as under: The assessee is a subsidiary of Pepsico Inc., USA and is mainly involved in the production of aerated and non-aerated soft drink beverages and snack food. It also exports guar gums, pet chips, rice, peanut butter and chilly paste etc. to overseas markets. During the year under consideration, the assessee exported gua gums and pet chips to its Associated Enterprise, PWT. The assessee undertook the export of guar gums and pet chips to its AE in order to meet its exports turnover obligations to help assessee in achieving Star Export House Status. AE-PWT further sold the same guar gum to unrelated enterprises outside India. The PWT was selected as tested party for the economic analysis of this transaction. TNMM was adopted for TP analysis with OP/Sales as relevant PLI. The assessee claimed that the results from the economic analysis conducted by the assessee provided evidence that both the pricing basis itself of the international transactions that impacted the profitability of the Company and the outcome of that pricing, i.e., the profitability were at arm’s length and hence satisfied the arm’s length standard prescribed under the Indian Regulations. However, the ld. TPO characterized assessee as a service provider and held that the assessee had provided service to its AEs and, therefore, assessee should have recovered not only cost incurred in procuring the goods but also a mark –up on for providing the services. The assessee’s main plea was that the price charged by assessee to PWT was the same as has been charged by the local vendors from the assessee. The exports by assessee were for the limited purpose of meeting export status obligations and these products did not constitute the main line business of the assessee. Further PWT had not earned any profit from the sale of commodities imported from assessee. On the contrary, the assessee-PWT had incurred loss to the extent of selling, general and administrative expenses incurred by it to process these purchases and sale transactions.
Ld. CIT(A), however, after considering the assessee’s details submissions upheld the TPO’s action observing in para 8.6 as under: 8.6 “I have gone through the order of the TPO as well as the submission made by the appellant in this regard. This issue was the same as in the earlier year. My ld. Predecessor has elaborately discussed this issue and has held that the appellant is providing a valuable service to its associated enterprise. I am in full agreement with the decision of my predecessor. Therefore, the appellant deserves mark-up on such services. Secondly, the nature of the agreement between the AE and the appellant is such that the appellant will never be able to make profit from such transactions. Therefore, the TPO was right in holding that the foreign exchange loss should be recovered from its related party. Therefore, I uphold the order of the TPO/AO. These grounds of the appellant are dismissed.”
We have considered the submissions of both the parties. We find that the Tribunal for AY 2002-03 has observed in para 21 as under: “21. We have considered the submissions of both the parties and carefully gone through the material available on the record. In the present case, it is an admitted fact that the loss incurred by the asessee was only on account of foreign exchange fluctuation as the commodities were sold to the AE at the same rate at which these were purchased from the locak market. On a similar issue the ITAT Delhi Bench in the case of DCIT vs. Global Vantedge P. Ltd. in & 2321/Del/2009 and 116/Del/2011 (supra), held that adjustment on account of arm’s length price of international transactions cannot exceed the amount received by the Associated Enterprises from the customer and the actual value of international transactions i.e. amount received by the assessee in respect of international transactions. The said decision of the ITAT Delhi Bench has been affiremed by the Hon’ble Jurisdictional High Court vide order dated 14.03.2013 in ITA Nos. 1828 & 1829/2010 and 1254/2011 against the said order of the Hon’ble High Court. The Special Leave Petition (SLP) of the Revenue had been dismissed by the Hon’ble Surpeme Court vide order dated 02.01.2014 in CC No. 22166 of 2013. The ITAT Delhi Bench, ‘I-2’, New Delhi in the case of HCL Technologies BPO Services Ltd. vs. ACIT, CC-2, New Delhi (supra) by following the aforesaid decision of the ITAT in the case of DCIT vs. Global Vantedge Pvt. Ltd. has dismissed the appeal of the Revenue. In the present case also the assessee had not gained, the AE had not paid anything and the commodities were sold to the AE at the same price at which those were purchased from the local market, just to retain assessee was only on account of foreign exchange fluctuation. The structure of the transaction was such for the assessee that it could not make any profit or incur any loss as the transactions were not being undertaken for the sake of any profit. We, therefore, are of the view that the addition made by the AO and sustained by the ld. CIT(A) on account of arm’s length price was not justified because the adjustment on account of arm’s length price of international transactions. In the present case, the assessee did not make any profit and sold the goods to the PWT at the same price at which it was purchased from the local market and the PWT in turn sold the commodities to the customers at the same price at which these were bought from the assessee. Therefore, the international transactions with PWT met the arm’s length standard. Therefore, by keeping in view the totality of the facts as discussed herein above the addition sustained by the ld. CIT(A) is deleted.”
Respectfully following the decision of Tribunal this addition is deleted.
In the result, both the grounds are allowed.