PHILIPS ELECTRONICS INDIA LIMITED,KOLKATA vs. ADDL. CIT, CIRCLE - 11, KOLKATA, KOLKATA

आदेश /O R D E R

PER Waseem Ahmed, Accountant Member:-

&1545/Kol/2009 A.Y. 2004-05 Philips Electronics India Ltd. v. ACIT, Cir-11 Kol. Page 2 First we take up the assessee appeal ITA 1460/kol/2009 2. Assessee has raised following grounds:- “1. Reference to Transfer Pricing Officer 1.1 On the facts and in the circumstances of the case, the Ld. CIT(A) erred in confirming the action of the Assessing Office (AO) of not informing the Appellant about the reasons for disregarding the arm’s length price computed by the Appellant and referring the computation of arm’ s length price to the leaned Transfer Pricing Officer (Ld. TPO)

1.2 The Appellant prays that the transfer pricing analysis conducted by the Appellant be accepted as the reference made by the AO to the Ld. TPO is invalid and bad in law.

2.1 On the facts and in the circumstances of the case, the Ld. CIT(A) erred in confirming the addition to income on account of transfer pricing adjustment for export of consumer electronics products.

2.2 On the facts and in the circumstances of the case, the Ld. CIT(A) in concluding that the appellant did not have surplus stock as there is no material on record with the Appellant to demonstrate the excess capacity.

2.3 On the facts and in the circumstances of the case, the Ld. CIT(A) erred in comparing the export profitability with the profitability of the ‘Other’ segment of CE Division to benchmark the Appellant’s Arm’s Length Price.

2.4 On the facts and in the circumstances of the case, the Ld. CIT(A) failed to appreciate that for the said export, the appellant did not have t incur indirect overheads like advertisement, selling and distribution expenses etc.

2.5 On the facts and in the circumstances of the case, the Ld. CIT(A) erred in not making the adjustment of functional differences while determining the arm’s length export price.

2.6 On the facts and in the circumstances of the case, the Ld. CIT(A) failed to appreciate that the Learned TPO has overlooked the comparability criteria laid down in Rule 10B(2) and 10(B)(3) of the Rules while performing comparability analysis.

4.1 On the facts and in the circumstances of the case, the Ld CIT(A) erred in confirming the disallowance made by the Assessing Officer.

4.2 On the facts and in the circumstances of the case, the Ld. failed to appreciate that the on raising loan liability in books of account of the assessee in accordance with ‘Package Scheme of Incentives, 1993 (PSI) from Government of Maharashtra and circular No.674 issued by CBDT, sales tax shall be treated as actually paid.

4.3 On the facts and in the circumstances of the case, the Ld CIT(A) erred I holding that the remission was pertaining to sales tax and not loan.

4.4 Without prejudice to the above mentioned grounds, on the fact and the circumstances of the case, the Ld. CIT(A) failed to appreciate that the incentive was given for bringing about necessary infrastructure in processing/developing of the backward area and hence capital in nature.

4.5 On the facts and in the circumstances of the case, the Ld. CIT(A) erred in holding that there was notional interest by prepayment of loan at Net Present Value (NPV).

4.6 On the facts and in the circumstances of the case, the Ld. CIT(A) erred in holding the incentive as operational subsidies without giving cognizance to the incentive scheme.”

Shri K.R.Vasudevan, Ld. Authorized Representative appearing on behalf of assessee and Shri G.Mallikarjuna, Ld. Departmental Representative appearing on behalf of Revenue.

The 1st issue raised by the assessee in this appeal is that the First 3. Appellate Authority [CIT(A) for short] erred in confirming the order of AO with regard to the Arm’s Length Price (ALP for short) computed by the Transfer &1545/Kol/2009 A.Y. 2004-05 Philips Electronics India Ltd. v. ACIT, Cir-11 Kol. Page 4 Pricing Officer (TPO for short) without furnishing the reason for disregarding the ALP computed by the assessee.

3.1 The facts in brief as culled out from the records are that the assessee in the present case is a subsidiary of Royal Philips Electronics, N.V. and engaged in the business of manufacture and sale of electronic goods. The AO has made the various additions including the adjustments under Section 92CA(3) of the Act for transfer pricing by rejecting the ALP of the assessee. The adjustments for transfer pricing under Section 92CA(3) of the Act include the following : 1. Export of finished goods in consumer electronics division. 2. payment for IT charges In this ground of appeal the assessee has challenged the validity of the assessment proceedings by the AO with regard to the International Transaction with Associated Enterprises (AE for short) on the ground that the reasons for disregarding the ALP worked out by the assessee were not furnished. According to assessee the reasons for referring the matter to the TPO by the AO were not furnished. Therefore the order passed by the AO/TPO for making the adjustment in ALP was invalid and bad in law. However from the provisions of the Act, we find that there is no such requirement under the Act to furnish the reason for rejecting computation of assessee for the determination of ALP and accordingly for referring the matter to TPO. The relevant extract of the provisions of Section 92CA(1) of the Act reads as under : [Reference to Transfer Pricing Officer.]

“92CA(1) Where any person, being the assessee, has entered into an international transaction [or specified domestic transaction] in any previous year, and the Assessing Officer considers it necessary or expedient so to do, he may, with the previous approval of the [Principal Commissioner or] Commissioner, refer the computation of the arm’s length price in relation to the said international transaction [or specified domestic transaction] under section 92C to the Transfer Pricing Officer.”

&1545/Kol/2009 A.Y. 2004-05 Philips Electronics India Ltd. v. ACIT, Cir-11 Kol. Page 5 92CA.(2) where a reference is made under sub-section (1), the Transfer Pricing Officer shall serve a notice on the assessee requiring him to produce or case to be produced on a date to be specified therein, any evidence on which the assessee may rely in support of the computation made by him of the arm’s length price in relation to the international transactions [or specified domestic transactions] referred to in sub-section (1). From a plain reading of the Section, we find that there is no requirement for furnishing the reasons to the assessee for referring the matter to the TPO. However, as per Section 92CA(2) of the Act the TPO has served the notice to the assessee before making any adjustment in the ALP. The fact for giving the opportunity of being heard is very much recorded in the order of the TPO. From a plain reading of the Section, we find that the AO for referring the matter to TPO should consider whether it is necessary or expedient so to do and after approval from the competent authority. But it is not AO’s obligation to communicate to the assessee what makes AO to make necessary or expedient to refer the matter to TPO. As such we find that there is no requirement for furnishing the reasons to the assessee for referring the matter to the TPO. In this background of the case, we uphold the order of Ld. CIT(A). Hence, this ground of appeal of the assessee is dismissed. The 2nd issue raised by assessee in this appeal is that the Ld CIT(A) 4. erred in disregarding the working of the assessee for the determination of ALP with its AE in relation to the export of goods.

5. The assessee has exported the finished goods to its AE for a value of Rs. 2,02,32,909/- and claimed to have exported the goods to AE to utilize the excess stock and excess capacity. The assessee further claimed that the goods were exported to AE at marginal costing i.e. at a price which covers a margin on variable cost and earned contribution margin of 2.44% on sale of exports and 2.50% on cost. However the AO referred the matter to TPO for valuing the above International transactions at Arm’s Length Price. Accordingly the TPO valued the ALP of Rs. 2,37,71,676/- for export of finished goods. The assessee regarding the ALP of export of finished goods submitted that the activity for the export of goods to the AE was undertaken to utilize the excess capacity. However, assessee failed to substantiate its claim that it &1545/Kol/2009 A.Y. 2004-05 Philips Electronics India Ltd. v. ACIT, Cir-11 Kol. Page 6 really had actually excess capacity. Accordingly the TPO disregarded the claim of the assessee for the ALP of the finished goods. The TPO also observed that similar adjustment was also made on this account in the immediate previous year for the determination of the ALP. Accordingly the TPO determined the ALP by the using the gross profit margin as submitted by the assessee as detailed under: “Cost of export of finished goods Rs.1,97,38,999 (CE Commercial and industrial division)

The gross profit margin of this division is 16.97% on sales hence 20.43% on cost (since the ALP is being determined for the sale price)

Gross profit margin in Rs. 4012677 The sale price for exports 23771676 Sales price recorded by the assessee in books 20232908 Total adjustment required on this transaction 35,38,769

The AO is required to take the sale proceeds of exports on these two items at Rs.23771676 thereby making an adjustment of Rs.35,38,769”

Being aggrieved by this order of Ld. CIT(A) assessee came in second appeal before us.

Before us neither ld. AR nor ld. DR brought anything to the notice of the Bench about the outcome of the assessee’s appeal in ITA No1075/Kol/2009. Therefore relying in the aforesaid decision of the Bench, we restored the file to AO for fresh adjudication as per law. Accordingly, assessee’s ground is allowed for statistical purpose.

The 3rd issue raised by assessee in this appeal is that the learned 9. CIT(A) erred in not granting the benefit of +/-5 % allowed for the computation of ALP.

&1545/Kol/2009 A.Y. 2004-05 Philips Electronics India Ltd. v. ACIT, Cir-11 Kol. Page 8 10. The TPO has not granted the benefit of +/-5% range as provided under Section 92C(2) of the Act with regard to the determination of ALP of the International transaction with AE.

Being aggrieved by this order of Ld CIT(A) assessee came in second appeal before us.

Taking a consistent view in assessee’s own case in earlier year, we dismiss this ground of appeal of the assessee. &1545/Kol/2009 A.Y. 2004-05 Philips Electronics India Ltd. v. ACIT, Cir-11 Kol. Page

9. The 4th issue raised by assessee in this appeal is that the ld. CIT(A) 13. erred in confirming the order of the AO by treating the payment of deferral sales tax loan at its Net Present Value (for short NPV) as remission of trading liability and treated the same as income by an amount of Rs. 7,92,43,000/- under Section 41(1) of the Act.

Before carving out the specific issue, a brief note about the background of the case is reproduced below.

The assessee during the year has credited its profit & loss account by an amount of Rs.7,92,43,000/- as income which arose on account of difference between the amount of actual loan and discount availed for the prepayment of sales tax deferred loan. This amount was claimed as non-taxable and was deducted in the computation of income. The assessee, as per the 'Package Scheme of Incentives, 1993' (for short PSI), announced by Government of Maharashtra (for short GOM), was permitted to defer its sales tax liability for the AYs 2001-02 and 2002-03 for Rs.11,63,61,000/-. The GOM also arranged that the State Investment Corporation of Maharashtra (for short SICOM) would raise loan liability in order to enable the assessee/ other beneficiaries of the scheme to avail the benefit of deduction u/s. 43B of the Income-tax Act in respect of such unpaid amount of sales tax. Accordingly the deferred sales tax would be deemed to have been paid to the Government. Under this arrangement, the assessee availed deduction u/s.43B of the Income-tax Act in respect of the deferred sales tax for an aggregate amount of Rs.11,63,61,000/- for A.Ys. 2001-02 and 2002-03. Further the State Government offered to the assessee (as also to the other beneficiaries of the scheme) to prepay the deferred tax at a discounted value, referred to as the Net Present Value (NPV) and as a result the entire amount of the deferred tax liability would be deemed to have been paid. Under this arrangement, the assessee paid an amount of Rs.3,71,20,0101/- in lieu of the dues of Rs.11,63,61,000/-. Thus, it got benefit of Rs.7,92,43,000/- which was &1545/Kol/2009 A.Y. 2004-05 Philips Electronics India Ltd. v. ACIT, Cir-11 Kol. Page 10 recognized as income in the accounts but the same was claimed to be non- taxable in the return of income. According to the assessee the amount of deferred tax was first converted into a loan by the Government of Maharashtra and accordingly the sales tax itself was deemed to have been paid. Subsequently, instead of recovering the loan at the future date, the Government allowed it to prepay the same at the discounted value. Thus, according to the assessee, the remission that it got was in the loan liability and not in the tax liability. As the deferred loan liability was not allowed as deduction in the first place, the remission therein was not taxable u/s. 41 of the Income-tax Act. In fact the GOM allowed the remission of the loan liability raised by the assessee from SICOM, therefore the question for taxing the remission amount u/s 41(1) of the Act does not arise.

However the ld. CIT(A) observed that in fact no loan was actually granted by SICOM to the assessee as claimed by it. In course of the appeal, the assessee was asked specifically to submit documentary evidence to substantiate the contention that SICOM had actually raised a loan liability against the sales tax of the assessee and had treated the same as loan given to the assessee. In response to this query, it was submitted that no such document is available with the assessee and that the assessee had converted the deferred tax liability into loan liability in its own books of account by a unilateral action. Accordingly the ld. CIT(A) disregarded the claim of the assessee and upheld the order of the AO.

Being aggrieved by this order of Ld. CIT(A) assessee came in second appeal before us.

16.1 We have heard the rival parties and perused the materials available on record. From the facts of the case we find that the assessee claimed that the sales tax liability first was converted into loan from SICOM and thereafter it was allowed to repay at NPV after giving the discount. The assessee claimed the discount as remission of loan liability but the lower authorities claimed the &1545/Kol/2009 A.Y. 2004-05 Philips Electronics India Ltd. v. ACIT, Cir-11 Kol. Page 12 same at remission of sales tax liability and therefore as such it is liable to tax under section 41(1) of the Act. The ld. CIT(A) also observed that the loan from SICOM was not raised by the assessee but it was the arrangement to provide the relief to the beneficiaries of the scheme from the provision of section 43B of the Act. Now the question emerges before us are as under :

1. 1. Whether sales tax liability was converted into loan from SICOM.

2. If yes, whether the prepayment to SICOM and availing discount on the same is subject to tax under section 41(1) of the Act. If no, whether the prepayment sales tax deferral loan and availing discount on the same is subject to tax under section 41(1) of the Act.

In this factual background, it would be important to read the provisions of section 41(1) of the Act which is reproduced below: (1) where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee (hereinafter referred to as the first-mentioned person) and subsequently during any previous year,-

(a) the first-mentioned person has obtained whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof, the amount obtained by such person or the value of benefit accruing to him shall be deemed to be profits and gains of business or profession and accordingly chargeable to income- tax as the income of that previous year, whether the business or profession in respect of which the allowance or deduction has been made is in existence in that year or not; From the provisions of Section, we find that the provisions of Section 41 apply with regard to the trading liability where the assessee has claimed the deduction/ allowance in the earlier years. In the instant the assessee claimed no such deduction/ allowance in the earlier years. Therefore, in our considered view the provisions of Section 41(1) of the Act does not attract to the assessee. In the instant case, as per the scheme he was allowed to retain the sales tax as determined by the competent authority and pay the same 15 years thereafter. The tax collected was deemed to have been paid and, &1545/Kol/2009 A.Y. 2004-05 Philips Electronics India Ltd. v. ACIT, Cir-11 Kol. Page 13 therefore, the tax so collected cannot be construed as income in the hands of the assessee. The tax so retained by the s is in the nature of a loan given by the Government as an incentive for setting up the industrial unit in a rural area. The said loan had to be repaid after 15 years. Again it is an incentive. However, by a subsequent scheme, a provision was made for premature payment. When the assessee had the benefit of making the payment after 15 years, if he is making a premature payment, the said amount equal to the NPV of the deferred tax was determined at Rs.4,25,79,684/- and on such payment the entire liability to pay tax/loan stood discharged. Again it is not a benefit conferred on an assessee. Therefore, Section 41(1) of the Act is not attracted to the facts of the present case. Relying on the judgment of Hon'ble Karnataka High Court in the case of McDowell & Co. Ltd. (supra) assessee’s appeal is allowed.

Now coming Revenue’s appeal ITA 1545/kol/2009. 18. Grounds raised by Revenue are reproduced as under:-

1. On the facts and in the circumstances of the case, Ld. CIT(A) erred in deleting the addition of payment of IT services whereas the Transfer Pricing Officer had suggested adjustment after adopting third party quotation as to Arm‘s Length Price and by applying third party quotes for benchmark the payment given by the assessee himself.

2. On the facts and in the circumstances of the case, Le. CIT(A) has erred in deleting the addition of Rs.50 lakhs towards deduction as lease rental on cars whereas it was correctly concluded by the AO on verification of agreement that the assessee became the actual owner and the expenditure was capital one instead of revenue as claimed by the assessee.

3. On the facts and circumstances of the case, the learned CIT(A) has erred in deleting the addition of Rs.2,80,00,000/- being the bad debt of which no details were filed by the assessee during the assessment or appeal proceedings as was done during assessment year 2003-04.”

&1545/Kol/2009 A.Y. 2004-05 Philips Electronics India Ltd. v. ACIT, Cir-11 Kol. Page 14 19. First issue raised by Revenue in this appeal is that learned CIT(A) erred in deleting the addition made by the AO for Rs.2,29,09,327/- on account of IT services in accordance with the order of the TPO.

20.1 The assessee for the year under consideration has incurred a sum of Rs.6,11,98,127/- as IT charges for all its product divisions by using the Comparable Uncontrolled Price (CUP for short) method to determine the ALP of the IT charges with its AE. For the use of CUP method it was submitted that the assessee obtained quote from the companies providing the IT services and that quote was considered as bench mark for the payment made to AE to determine the ALP for aforesaid IT services. Accordingly the assessee has worked out the cost of IT charges per person per month as euro 98.00 based on the quote of the company and worked out the actual cost of IT charges per person of euro at 25.00 only based on the payment to AE. Accordingly the assessee submitted that payment made to the AE is quite less in comparison to the quote of the company. The assessee submitted the cost per person was worked out on the basis of all employees of the company irrespective of the fact whether IT services are being used by these employees or not. However the AO found that in the previous year the ALP was determined on basis of actual users rather than the total number of employees. If the actual users are less then why the assessee needs to pay the IT charges to its AE on the basis of the total number of employees. It is a fact that assessee would not have &1545/Kol/2009 A.Y. 2004-05 Philips Electronics India Ltd. v. ACIT, Cir-11 Kol. Page 15 paid to the third parties on the basis of actual number of employees. The AO further observed that similar adjustment was made in the last previous year as well on the similar reasons. The last year IT charges were worked out as under : S/W Comp unit price user total price WIN 2K Client 1275 1572 2004300 MS Office professional 12000 1572 18864000 Notes Client 5000 1328 6640000 VISIO Profit 16416 150 24622400 MS Project 19625 300 5887500 MCA fee Anti Virus 1250 1572 1965000 MS Front Page 4656 100 465600 Total in INR 3,88,28,800 Accordingly the AO worked out the ALP for IT charges to be paid to AE on the basis of actual users which is coming Rs. 3,88,28,800/- but in the instant case the assessee has paid Rs. 6,11,98127/-. Accordingly the TPO made the adjustment for Rs.2,29,09,327/- and added to the total income of the assessee.

Being aggrieved by this order of Ld CIT(A) Revenue is in appeal before us. &1545/Kol/2009 A.Y. 2004-05 Philips Electronics India Ltd. v. ACIT, Cir-11 Kol. Page 16 22. At the outset, we observed that similar issued was also raised by the assessee in its appeal in ITA 1075/Kol/2009 for the assessment year 2003-04 dated 11.10.2011 where this Tribunal restored the file to AO with a direction to adjudicate the matter afresh as per law. Before us neither ld. AR nor ld. DR brought anything to the notice of the Bench about the outcome of the assessee’s appeal in ITA 1075/Kol/2009. Therefore relying in the aforesaid decision of the Bench, we restored the file to AO for fresh adjudication as per law. Accordingly, Revenue’s ground is allowed for statistical purpose.

The 2nd issue raised by Revenue in this appeal is that Ld CIT(A) erred in 23. deleting the addition made by AO for Rs. 50 lacs on account of treating the lease rental as capital in nature.

23.1 The assessee during the year has claimed the deduction of lease rentals expenses incurred for the purchase of motor cars. The AO during assessment proceedings observed that in the immediate preceding year it was established that lease rentals were nothing but the installments paid for the purchase of motor cars which are capital asset. Accordingly the lease rentals were not treated as revenue expenditure. Therefore the AO disallowed the deduction and made the addition to the total income of the assessee.

Being aggrieved by this order of Ld CIT(A) Revenue is in appeal before us.

17. After hearing the rival submissions and on perusal of the page numbers of the paper book referred by assessee as well as AO we are of the view that the action of the Assessing Officer is quire justifiable in the facts and circumstances of the case when compared to that of ld. CIT. therefore, we set aside order of ld. CIT(A) on this issue and restore that of AO.”

Considering the totality of the circumstances we are of the opinion to incline to reverse the order of the Ld. CIT(A). Hence this ground or Revenue’s appeal is allowed.

26.1 The assessee claimed bad debts for Rs. 2.80 crores in the computation of income but failed to furnish the details of the same and the year in which the amount was included in the total income. Accordingly the AO has disallowed the claim and made the addition to the total income of the assessee.

Being aggrieved by this order of learned CIT(A) Revenue is in appeal before us.

28.1 From the aforesaid discussion, we find that the AO disallowed the bad debts on the ground that the assessee failed to provide the details when such bad debts were taken in the income of the assessee. But the Ld. CIT(A) has given the relief to the assessee on the basis of first appellate order of the immediately preceding assessment year i.e. 2003-04. However the same order was challenged and restored to AO for fresh adjudication. The relevant extract of the order in dated 11.10.2011 of this Tribunal is reproduced as under:- “28. After hearing the rival submissions and keeping in view of the arguments made by the ld. counsel on behalf of assessee, we are of the view that these submissions require fresh verification. Therefore, in the interest of justice we consider it fit to restore this issue to the file of AO for fresh verification and decide the same as per law after giving a reasonable opportunity of being heard to assessee. The assessee is also at liberty to file the additional evidences in support of his submissions.” &1545/Kol/2009 A.Y. 2004-05 Philips Electronics India Ltd. v. ACIT, Cir-11 Kol. Page 19 The decision of the AO as discussed aforesaid for restoring the matter has not been brought to our notice. Besides for the year under consideration, the assessee has submitted several details for writing off the bad debts are given on pages 200 to 231. However we find in many cases the details for treating the bad debts as income in the earlier years were not given. Therefore in view of above we are inclined to restore the matter to the file AO for fresh adjudication as per law and assessee is also at liberty to file the additional evidences in support of its submissions accordingly. This ground or Revenue’s appeal is allowed for statistical purpose.

उप/सहायक पंजीकार आयकर अपील�य अ�धकरण, कोलकाता ।