TMI Blog2015 (3) TMI 365X X X X Extracts X X X X X X X X Extracts X X X X ..... made for special audit under section 142(2A) - whether bad in law? - Held that:- The AO as well as the DRP have, keeping in view the complexities in the accounts and the volume came to a conclusion that this is a fit case for application of provisions of S.142(2A) of the Act. We do not find any perversity in this view of the AO as approved by the DRP. Sufficient opportunity has been granted to the assessee and it was only after considering the objections, special audit was ordered. We see no reason to interfere with these findings of the Revenue authorities.- Decided against assessee. Unaccounted credit notes issued - Held that:- As per this reconciliation, the credit notes issued by the appellant in the name of M/ s Bright Point India Pvt Ltd during the financial year 2009-10 were ₹ 125,92,827/- whereas the debit note raised by M/ s Bright Point India Pvt Ltd on the appellant company was ₹ 125,94,969. Thus there was a small excess debit by M/s Bright Point India Pvt Ltd of ₹ 2142.02. Thus, it cannot be said that credit note issued by the assessee has not been accounted for by Bright Point India Pvt Ltd. Even this difference has also been explained by the speci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of swap units/warranty reimbursement - addition made by the AO on the sole ground that the confirmations given by various parties, were on plain paper and not on letterheads - Held that:- These are all confirmations filed by foreign suppliers. The assessee had submitted arguments including purchase invoices, bill of entry, custom clearance, stock entries etc. The confirmation in question from these foreign parties are on additional documentary evidences. In our view these confirmations cannot be summarily rejected by the AO. The AO, in our view, should not have rejected these confirmations without enquiry. The AO had the address of these parties, the telephone numbers, e-mail addresses. The format in which the confirmations were given by foreign parties, is not within the control of the assessee. We further note that the assessee has submitted all evidences which included third party/government evidences in the form of bill of entry, custom-attested purchase invoices. All these purchases are from foreign suppliers and are liable for custom duty. All units received by way of import have to be declared in the bill of entry. As regards the vendors with whom there is no such arrangem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the AO that the assessee would have recovered 14% of the value of phones which are dead on arrival - Held that:- There is no iota of evidence with the AO to come to a conclusion that the assessee would have sold the accessories recovered from dead on arrival phones, out of the books. The assessee has submitted complete quantitative details during the course of assessment proceedings. As per these details the total value of such accessories was ₹ 3,66,45,443. These have been duly accounted for in the books of accounts. The total quantity of such accessories were valued and utilised by giving the same to super distributors. Confirmations were filed from the super distributors. The AO is factually incorrect in stating that the assessee has not filed a reply to the show cause notice issued by the AO as is evident from the reply on record. In fact the assessee has filed detailed explanation with supporting evidences. Even during the course of search no incriminating material was found to show that the assessee has not made sales, outside the books of accounts. - Decided in favour of assessee. Addition on account of sale of scrap - Held that:-The special auditor by extrapola ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the company and that these notings were recording entries, which were reversed in the books of accounts. The AO assumed that these reversal of entries are unaccounted income. Such a view cannot be sustained. When entries are found in the books of accounts and when the same corroborates to rough workings made by the Accounts Clerk of the assessee, to argue that these rough notings on a piece of paper are unaccounted income of the assessee is incorrect and against the facts of the case. The addition in question is purely made on the basis of conjectures and surmises, hence we delete the same.- Decided in favour of assessee. On examining page no.1 Annexure A-V. The assessee has explained that this sheet of paper consists notings on a proposal for a module factory. It is submitted that the cost of the module factory has been stated therein, including the proposed locations. Here also the addition is based on the imagination of the AO, rather than on gathering of evidences. A plain look at the document does not by any stretch of imagination leads us to a conclusion that unaccounted income/assets have been recorded therein. The Ld.DR while agreeing with the papers points out to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t there is no default on its part in deducting tax at source and has also filed details before the AO and the DRP. With the assistance of the AR, we have verified the details with the supporting evidences. As per the details on record and ejvidences in support thereof, there is no default in respect of the amount added by the AO. The assessee has submitted compelte reconciliation and the reason thereof. Further, the assessee’s contentions that tax has been deducted on an amount of ₹ 1,59,65,555/- and its contention that tax is not deductible on the balance due to various reasons, has not been contradicted by the DR. Under these circumstances we delete this addition of ₹ 3,22,39,995 and allow this ground of the assessee. - Decided in favour of assessee. Disallowance on account of bonus - invoking the provisions of the section 43B - DRP directs the AO to allow the claim of the assessee u/s 43B after proper verification - Held that:- The AO has not bothered to carry out the directions of the DRP. The claim made by the assessee is as per law. It only required verification of the facts as submitted by the assessee. This is not done by the AO. Under these circumstances we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eld that the AO was totally unjustified in adding back payments made for bank charges, LC charges and TD. The AO records that the assessee has not submitted proper reconciliation statement and documentary evidence. This is a bank account maintained officially by the assessee. This was stated as such before the AO in a letter dt. 10th September,2012. The assessee has furnished explanation of the debit and credit balances with vouchers from pages 1216 to 1234 of the paper book. The allegation of the AO that the assessee has not filed the details is factually incorrect. The transactions done through this bank account, apart from regular books of accounts of the assessee. The books have been audited not only by the auditors appointed by the assessee but also by the special auditors. Under the circumstances the addition in question is totally unjustified. The very fact that the entire debit balances have been audited by the AO demonstrates that there is total non application of mind by the assessing authority. The entire addition is arbitrary. Hence we are of the considered opinion that such additions should be deleted. - Decided in favour of assessee. G.P. addition - rejection of b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... addition otherwise cannot be sustained in view of the amendment made by the Finance Act, 2012 where a proviso has been inserted below section 201(1) to provide that the assessee shall not be treated as an assessee in default in case the deductee has furnished the return of income, included the sum in the income and paid taxes as per the return of income. In the present case, the assessee has complied with these conditions as is evident from the letter dated 8th November,2013 filed before the AO along with the certificate in the prescribed form to this effect. - Decided in favour of assessee. Addition on account of prior period expenses - assessee had explained that the prior period expenditure of ₹ 16,037/- and that a sum of ₹ 15,94,202/- relating to clearing and forwarding of M/s SSS Sai Shipping Services P.Ltd. The clearing and forwarding agent reported loss of mobile units and hence a debit note was raised on the said agent during the Previous Year 2009-10. In the current AY, after mutual consultation the debit note was reversed. As the dispute was settled in the year under consideration as is evident from the MOU, the assessee was correct in reversing the claim a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3 tier distribution net work in India, which extends across 65 super distributers, 1500 micro distributors and over 100,000 retailers. The product includes mobile phones, data cards, accessories and spares and terminals. 2.2. A search and seizure operation u/s 132 of the Act was conducted in the Micromax group of cases on 10.2.2011. The assessee M/s Micromax India Ltd., is a Member of this group. The assessee filed its return of income on 30.09.2011 declaring total income of ₹ 299,42,85,775/-. A notice u/s 143(2) of the Act was issued to the assessee on 02.03.2012. 2.3. During the course of scrutiny proceedings the assessee filed a letter dt. 9th May,2012 and requested to review the validity and scope of assessment proceedings u/s 153A of the Act and also asked for a copy of an order passed u/s 127 of the Act, transferring the jurisdiction of the assessee company. The objections are summarised by the AO at para 3 of his draft assessment order which is extracted for ready reference. The assessee s objection is summarised below: (i) Proceedings u/s 153A cannot be initiated against a person against whom search seizure action u/s 132(1) has not bee initiated. (i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs.2,99,42,85,775/- Add: As per TPO ₹ 2,28,05,551/- (i) Sale of scrap ₹ 2,74,00,000/- (ii) Shortage of DOA mobiles ₹ 3,82,03,224/- (iii) Accessories of DOA mobiles ₹ 4,62,00,000/- (iv) Credit notes of M/s Bright Point ₹ 10,97,61,523/- (v) Other credit notes Rs.3,37,09,95,646/- (vi) Swap ₹ 33,82,50,816/- (vii) Seized documents ₹ 13,81,25,000/- (viii) (a) TDS default ₹ 3,22,40,175/- (b) TDS default ₹ 53,17,42,328/- (ix) Bonus ₹ 51,59,380/- (x) Prior period expenses ₹ 16,06,037/- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TDS default (para-15(3) ₹ 25,65,386/- (ix) Bonus (para-16) ₹ 51,59,380/- (x) Sundry creditors (para-19) ₹ 2,37,11,754/- (xi) U/s 14A (para-20) ₹ 5,21,025/- (xii) Shortage of mobiles (para-21) ₹ 1,18,63,125/- (xiii) HSBC Account (para-22) ₹ 7,44,24,668/- Addition on account of G.P. rate (para-24) ₹ 33,61,06,480/- Total income Rs.769,70,64,640/- Or Rs.769,70,64,640/- 3. Aggrieved the assessee filed this appeal before us taking 29 grounds. The Revenue has also filed an appeal taking 12 grounds. 4. We have heard Shri Ved Jain, the Ld.Counsel for the assessee and Shri Peeyush Jain, the Ld.CIT, D.R. on behalf of the Revenue at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the order on 29th August, 2014 the same would have been served on the AO on the same date as the order has been served by hand and not by post. In case the order has not been issued by the DRP on 29th August, 2014 so as to be out of its control then the direction of the DRP will be barred by limitation as the same will be beyond nine months from the end of the month in which the draft assessment order was received by the assessee. In the alternative, in case the DRP order was issued and received by the AO on 29th August, 2014, then the final assessment order passed by the AO on 21st October, 2014 will be beyond one month from the end of the month in which the directions have been issued and barred by limitation. 6.2.2. Assessee s contentions are as under. The AO passed the draft assessment order on 14.11.2013. Assessee filed objection before the DRP on 13.12.2013. The DRP passed its order giving directions to AO on 29.8.2014. This order was apparently hand delivered to the AO. AO has passed final assessment order on 21.10.2014. On page 2 of this order it has been stated that the directions of the DRP were received on 2.9.2014. Thus there is issue whether DRP has passed the o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... even delivered by hand on 2nd September, 2014 i.e. within 3 days from the date of the order cannot be said to be an abnormal delay so as to doubt the date of the directions stated by the DRP. He further contended that it is not necessary that the direction be communicated on the same day on which the direction has been passed by the DRP. The DRP has signed the order on 29th August, 2014 and has got the same served on the AO on 2nd September, 2014 and thus DRP order is within nine months from the end of the month in which the assessee filed the objection and the final assessment order is also within one month from the end of the month in which the AO received the direction. Thus the contention of the assessee that direction/ order is barred by limitation is not correct. 6.4. Our findings :- After hearing rival contentions we find that the entire basis on which the assessee claims that the impugned order is hit by limitation is an assumption that the DRP order dt. 29th August,2014, was handed over on the very same day to the AO. This is not a valid assumption. The Revenue claims that the DRP order in question was served on the AO on 2nd September,2014. The DRP having passed the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The order along with the submissions made by the appellant during the DRP proceedings revealed that during the search action a large number of documents were recovered suggesting confirmed concealment of income. The appellant was given opportunities during the search as well as the post search proceedings to throw ample light on the incriminating documents recovered in the course of search. However the appellant instead of availing of those opportunities chose to resort to cat and mouse game resulting in non-compliance with almost all the queries raised to him by the authorities. Accordingly the complexity of the accounts remained unresolved. Therefore the special audit conducted under the section 142(2A) of the Act was very much warranted in the given situation. Hence the said objection of the appellant is overruled. 7.3. Final order by AO The assessee challenged the draft assessment order being made in principle of natural justice and without giving adequate opportunity which was rejected by the Hon ble DRP in para 3 of their order. 7.4 . Assessee s submissions:- The assessee filed the return of income on 30th September, 2011. Thereafter the AO issued notice ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AO as approved by the DRP. Sufficient opportunity has been granted to the assessee and it was only after considering the objections, special audit was ordered. We see no reason to interfere with these findings of the Revenue authorities. In the result ground no.4 is dismissed as devoid of merit. 8. Ground no.5 reads as follows: On the facts and circumstances of the case, the learned AO has erred, both on facts and in law, in assessing the income of the appellant at ₹ 7,69,70,64,640/- as against the income of ₹ 2,99,42,85,775/- declared by the assessee. 8.1. Ground no.5 is general in nature which do not require our adjudication. 9. Ground no.6, 7 and 13 read as follows. 6 (i) On the facts and circumstances of the case, the learned AO has erred, both on facts and in law, in making the addition of an amount of ₹ 3,37,09,95,646/- on account of credit notes issued. (ii) On the facts and circumstances of the case, the DRP has erred in not deleting the above addition proposed by the learned AO in the draft assessment order despite the fact that each and every issue raised by the learned AO in the draft assessment order and the special audit report h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ributors. After verification, the special auditor reported that it has been able to reconcile the accounts. It was further reported that for the financial year 2009-10 the difference in the balance between the assessee company and the Bright Point India Pvt. Ltd. has been reconciled with the ledger account of the financial year 2010-11. In respect of the financial year 2010-11, the special auditor reported that in the absence of the ledger account for the next year not being available they are not in a position to reconcile the same. In respect of the other super distributors it was report by the special auditor that they have been provided with ledger account in the books of the super distributors in respect of 30 super distributors out of the total 95 super distributors and hence they are unable to comment in respect of other super distributors. The AO, thereafter, issued a show cause notice in response to which the assessee submitted the ledger account of the various super distributors in their books of accounts. Not being satisfied the AO drew adverse inference against the assessee and made the following additions:- i) ₹ 337,09,95,646/- in respect of 65 super dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f credit notes to this extent was rightly to be disallowed. In view of this, addition of ₹ 10,97,61,523/- is made to the income of the assessee. 9.4 . Assessee s submissions: i.. This issue regarding credit notes has arisen on account of the credit notes issued to Bright Point India Pvt. Ltd. during the course of the post-search investigation. ii. During the course of the post-search investigation the assessee submitted details of the discount and copy of account with respect to Bright Point India Pvt. Ltd. A reconciliation statement was also filed. iii. The AO thereafter referred this issue to the special auditor under Section 142(2A). The terms of reference (Paper Book page 4971) was that there was a difference of ₹ 10,97,61,523/- in the amount of the credit notes shown by the assessee issued to M/s Bright Point India Pvt. Ltd. This difference could not be reconciled during the assessment proceedings and the special auditor is directed to obtain copies of account of the super distributors including M/s Bright Point India Pvt. Ltd. and examine whether credit notes and debit notes issued by the assessee are properly accounted for and tally with those acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submitted the reply dated 07.11.2013 (Paper book page 1655). In this letter, confirmation of account of super distributors which special auditors have pointed out not provided in their report was submitted along with copy of account (Paper book page 1656- 2033). It may be relevant to mention that the details about these super distributors were otherwise also were available with the AO. These details were submitted vide letter dated15.03.2011 placed at paper book page 434, Para 6 with name, address, etc. Ledger account of some of these parties were submitted to the AO vide letter dated 11.01.2013 (Paper book page 460-462). xi. Further details were submitted vide letter dated 11.01.2013 (Paper book page 539) with confirmation copy of account. Vide letter dated 20.12.2013 (Paper book page 732, relevant page 734, Para 5 and 6) it was pointed out that the confirmation in respect of Bright Point India Pvt. Ltd. has already been submitted and in this letter it was also pointed out that the credit note is accounted for on the date of issue and copy of the same is sent to the party and it is up to the distributor as to when they record the credit note in its books of account. Vide this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xviii. Thus all the information has been provided and was available with the AO. Still the AO has made addition arbitrarily ignoring the material and evidence on record on account of the credit notes issued to the super distributors. The addition made in the final assessment order is not tenable. xix. The assessee has submitted complete details and no inconsistency, contradictions or errors have been pointed out in the details submitted. xx. Assessee has been maintaining regular books of account and all sales and credit notes issued thereto have been duly accounted for. xxi. Payments received from the super distributors have been duly accounted for. The AO and special auditor after thorough verification have not been able to point out any single instance of any payment being received but not accounted for by the assessee company. xxii. There is not a single instance where a super distributor has refused or contradicted that it has not received the credit note. xxiii. The addition has been made merely on the basis of a doubt. xxiv. Even these doubts have also been addressedby the assessee by submitting complete copy of account of the assessee company in the books ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the appellant company to submit the ledger account of M/S Bright Point India Pvt Ltd in its books of accounts as well as in the books of M/s Bright Point India Pvt Ltd. for the financial year 2009-10 and 2010-11. After verification, the special auditor has reported the reconciliation for the financial year 2009-10 in its report at paperbook page 4980. As per this reconciliation, the credit notes issued by the appellant in the name of M/ s Bright Point India Pvt Ltd during the financial year 2009-10 were ₹ 125,92,827/- whereas the debit note raised by M/ s Bright Point India Pvt Ltd on the appellant company was ₹ 125,94,969. Thus there was a small excess debit by M/s Bright Point India Pvt Ltd of ₹ 2142.02. Thus, it cannot be said that credit note issued by the assessee has not been accounted for by Bright Point India Pvt Ltd. Even this difference has also been explained by the special auditor in its report. Similar reconciliation has been given by the special auditor for the financial year 2010-11 whereby it has been stated that the appellant company has issued credit note of ₹ 30,13,25,910 and the corresponding debit note raised by M/ s Bright Point India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pecial auditor has pointed that ledger accounts were not provided. The AO still drew adverse inference despite all the above information being available on record. As regards the addition of ₹ 947,21,431 on account of difference as per the accounts of the distributors, we have examined the copy of ledger accounts and reconciliation filed by the assessee. These accounts have been duly reconciled by the assessee and there was no reason to draw adverse inference on this account. We further note that at the time of the hearing before the DRP, the assessee collected copy of accounts in the book of the super distributor and also filed the reconciliation in respect thereof. As per these copy of accounts and the reconciliation, each and every account stood reconciled including the accounts whereby difference of ₹ 947,21,431 was pointed out. The DRP ignoring all these evidences and the material have confirmed the action of the Assessing Officer. During the course of hearing with the assistance of the learned AR, we have verified these accounts. At the time of the hearing before us, the learned DR could not controvert the above facts. The conclusion of the AO as upheld by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich it is importing from various Chinese parties. During the course of the search it was observed that there are agreements with the suppliers whereby the assessee is entitled to receive 2% extra mobile phones along with its purchased quantity from the Chinese parties. On this basis the AO raised an apprehension that the assessee is not accounting for these 2% extra mobile phones in its books of accounts. Accordingly this issue was referred to the special auditor for verification whether such swap units being received by the assessee are being accounted for or not. The assessee, before the special auditor, explained that the swap units are being issued in respect of certain suppliers. These are not being received from all the suppliers. The assessee also submitted that all the swap units have been duly accounted for. It was contended that the assessee is importing these mobile phones and during the course of the imports each and every quantity imported has to be declared in the invoices as well as in the Bill of Entry. The assessee also explained the modus operandi of accounting treatment of these swap units as under:- 4.4 Basis of recording swap units received The assessee com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to the Profit Loss account under warranty expense. Kindly refer to Annexure-4(3) for supporting documents. Procedure 2(Case Study) The assessee company sent a Purchase order (PO), order No. MIL/10/PO/00535 dated 31-08-2010 to m/s Verykool Wireless Technology Ltd. of 10,000 units of mobile phones at $75/- per mobile handset. The assessee company is eligible to receive 2 % swap units on the purchase and 200 units have been mentioned in PO at zero value. The foreign vendor sends a Porforma Invoice to the assessee company in which it mentioned that the assessee is eligible to receive 2% Free of Cost (FOC) mobile phones i.e. 200 units. Proforma Invoice Particulars Units Rate Amount 10000 units of mobile phones (Model No. X50,against PO No. MIL\10\PO\00535) 10000 $75/ $7,50,000/- FOC UNITS 200 - - TOTAL 10,200 $7,50,000 The foreign vendor has acknowledged the eli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... refer to Annexure-4(4) for supporting documents. (i) In support thereof the assessee company submitted all the documents including the purchase orders, purchase invoices, Bill of Entry, customs clearance, stock accounts, etc. (ii) The special auditor, however, asked for the confirmation from the foreign suppliers and in the absence of confirmations from the foreign suppliers they worked out the value of the swap units which assessee would have received from the vendors in respect of which assessee company has entered into agreements at ₹ 6,52,97,923/-. The special auditor also worked out the value of the swap units in respect of the tenders with whom the assessee has no agreement to receive swap units assuming that assessee would have received the same at ₹ 26,73,07,426/-. (iii) The AO thereafter issued a show cause notice. In response thereto, assessee submitted the confirmations from various suppliers/vendors. The AO, however, rejected the same on the ground that the same cannot be relied upon as these confirmations are on plain paper and not on the letterhead of the party, etc. The AO accordingly made an addition of ₹ 33,26,05,349/- as value of the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (i). The addition confirmed by the DRP is in total disregard to the explanation given by the assessee regarding the account of the swap units and evidences as well as confirmations filed in support thereof. (ii). The assessee company has submitted a detailed explanation that in respect of the swap units wherever there is an agreement, the supplier includes these as part of the quantity purchased and corresponding benefit is given by reducing the cost per piece to the extent of the swap units. This fact was supported with the relevant invoices and other documents and also noted in the special audit report at paper book pages 5133-5137. (iii). Further vide letter dated 04.01.2013 (Paper book page 401) assessee submitted all the documents in support of the above explanation which includes copy of the supplier s proforma invoices, Bill of Entry, Books of Account, Stock Register, Purchase invoices, Custom duty documents and other shipping documents. (iv). It was further stated in this letter that these documents should be sufficient enough. However, in case any further information/ explanation are required the same will be submitted. (v). The assessee vide letter dated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... above addition since the assessee has failed to file necessary evidences in support of its contention. It was submitted that the confirmation was filed by the assessee at the time of the proceeding before the AO were not reliable since these were on the plain paper and not on the letterhead of the companies. He further submitted that the assessee as an agreement with the vendors whereby it is entitled to receive swap units. The procedure adopted by the assessee for accounting these swap units is not the correct procedure and the AO was justified in rejecting the same and making the addition. It was further submitted that since these swap units have not been accounted for the AO was justified in making the addition of the gross profit which the assessee would have earned from sale of such swap units. 10.6 . Our findings: The entire addition in this case is made by the AO on the sole ground that the confirmations given by various parties, were on plain paper and not on letterheads. These are all confirmations filed by foreign suppliers. The assessee had submitted arguments including purchase invoices, bill of entry, custom clearance, stock entries etc. The confirmation in que ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 11.1. The facts relating to this ground are that during the course of the assessment proceedings it was observed that the assessee has a closing stock of dead on arrival mobile phones of 31,081 units at its two locations. The 5000 units at other than NO3 location has been valued at ₹ 1677/- and whereas 26,081 units at N03 location have been valued at ₹ 212/- Accordingly on this basis the AO valued the closing stock of 26,081 units by applying the rate of ₹ 1677/- computing the difference in the stock of ₹ 3,82,03m,224/- and issued a show cause notice to the assessee. In response thereto assessee submitted a reply dated 7th November, 2013 whereby this issue was clarified. The AO, however, not being satisfied with the reply of the assessee held that the stock has been undervalued in respect of the 26,081 dead on arrival mobile phones and made an addition of ₹ 3,82,03,224/-. 11.2 . DRP findings: The assessee filed objection to the draft assessment order in form no.35A on 13.12.2013 and the DRP vide its directions dated 29.08.2014 has dismissed the objection which reads as under:- The above submission of the appellant was considered. The DRP is o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arger, hand free and battery. The valuation of the N-3 location has accordingly been done on the basis of the salvage value of the dead on arrival mobile phones computed at ₹ 212. Thus there was no reason for the AO to ignore this valuation and value the dead on arrival mobile phones at acquisition cost of a perfect live mobile phone. The AO has ignored the fact that these are not live mobile phones but are dead mobile phones having only scrap value. iv. The AO has totally ignored the detailed reply dated 07.11.2013 (Paper book pages 1637-1638) whereby this issue was clarified. v. The cost of the live mobile phone is ₹ 1677 and the scrap value of such mobile phone is ₹ 212. vi. The AO has not disputed the fact that these phones are dead on arrival and the only dispute is regarding the value. vii. The AO has also not disputed that the salvage value is ₹ 212. The only issue which he has raised is why the same has not been valued at ₹ 1677 being the rate adopted at other location. For this the AO has ignored the fact that salvage value is taken only when it is confirmed that it is a dead phone. This process of confirmation of dead on arrival m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion based on presumptions cannot be made. The observations made by the DRP that such valuation of closing stock was highly under valued shows that DRP has not been able to appreciate the facts in right perspective. It has failed to distinguish between a working mobile phone and a dead-onarrival mobile phone. The dead-on-arrival mobile phone cannot be valued at cost. It has to be valued at salvage value. The valuation of ₹ 1,677 is at cost of mobile phone which is working. If the mobile phone is dead, its value has to be salvage value which has been worked out at ₹ 212. The detailed working of this has been submitted by the assessee with which has not been disputed. In the result the addition in question is deleted and this ground of the assessee is allowed. 12. Ground No.12 reads as follows. 12 (i) On the facts and circumstances of the case, the learned AO has erred, both on facts and in law, in making an addition of ₹ 4,62,00,000/- on account of sale of DOA mobiles and accessories. (ii) On the facts and circumstances of the case, the DRP has erred in arbitrarily ignoring the explanation and evidences submitted by the appellant company. 12.1. The facts r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7; 3,66,45,443 and the same have been utilized and given to the super distributors. The details of the same have also been filed (Paper book page 2369- 2370) along with confirmations from the super distributors (PB Pg. 2371 to 2409) were also filed. Thus the allegation of the AO that the assessee has not submitted reply in response to the show cause notice is factually incorrect. The assessee in response to show cause notice issued by the AO submitted reply vide reply dated 7.11.2013 where it was pointed out that it has submitted detailed explanation along with supporting documents. Copies of the same were again submitted to the AO. It was also pointed out that in case there is any sort of disagreement with the submission made by the assessee the specific disagreement may kindly be known to the assessee so that further explanation may be filed. iii. The assessee is maintaining complete books of accounts with quantitative details and each and every piece is duly accounted for. iv This is a case of search and during the course of search not a single piece unaccounted was found. There was no evidence that assessee has made any sale outside the books of account. v. No incrimin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with supporting evidences. Even during the course of search no incriminating material was found to show that the assessee has not made sales, outside the books of accounts. The conclusion of the AO has upheld by the DRP, in our view is based purely on surmises and conjectures. Such conjectures, presumptions and surmises cannot be the basis of addition. In the result we delete this addition on the ground that it is devoid of merit. In the result this ground of the assessee is allowed. 13. Ground no.14 reads as follows: 14(i) On the facts and circumstances of the case, the learned AO has erred, both on facts and in law, in making addition of an amount of ₹ 84,20,360/- on account of sale of scrap. (ii) On the facts and circumstances of the case, the DRP has erred in ignoring the contention of the appellant company that income on account of sale of scrap found during the search having been included in the profit and loss account filed by the assessee no further adjustment on account of income on sale of scrap is required to be made. (iii) On the facts and circumstances of the case, the DRP has erred in arbitrarily ignoring the explanation and evidences submitted by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the scrap value computed by him. 13.2. DRP findings The DRP, however, reduced the same and restricted the addition to ₹ 84,20,360/- being the value worked out by the special auditor. The findings of the DRP read as under: The DRP having considered the entire facts of the case- is of the view that the learned AO did not provide any scientific basis for computing the figures o concealed sales of scrap to the tune of ₹ 2.74 crores. The figure of concealed sales of ₹ 84,20,360/ is considered to be rational and logical being based or the working of accounting experts. Accordingly the objection of the appellant i sustained partially. In the alternative and without prejudice to the above, the AC was not justified in substituting the figure of ₹ 84,20,360 /- worked out by the special auditor with that of ₹ 2.74Crore. The addition made on this account needs to deleted. 13.3. Final order by AO: The assessee filed objection to the draft assessment order in form no. 35A on 13.12.2013 and the DRP vide its directions dated 29.08.2014 directed to substitute the figure of ₹ 84,20,360/- worked out by the Special Auditor is that of propo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has worked out a formula as percentage of the purchases made by the assessee in each of the year and has rightly computed the value of the scrap at ₹ 2.74 Crores on total import of mobile phones of ₹ 1750 Crores. Accordingly he supported the order of the AO. 13.6 . Our findings: The special auditor by extrapolation of sale of the scrap under the year of consideration worked out the same at ₹ 84,25,360/-. The special auditors in its report has given a basis for computing scrap value for each year. The AO has no basis whatsoever to come to a conclusion that the sale of scrap amounted to ₹ 2.74 crores. Taking the total imports of the assessee and applying of a percentage cannot be considered as a scientific basis for arriving at the transaction. The special auditor in its report which has been quoted by the AO in the assessment order has given the basis for working out the value of the scrap. Thus, the DRP was correct in holding that the value of the scrap as computed by the special auditor be adopted which comes to ₹ 84,20,360. Nevertheless, we note that the assessee has already accounted for scrap to the tune of ₹ 37.47 lakhs as is evident ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reinabove is of the firm view that the jottings and dotting as interpreted by the AO were not in the nature of dumb entries. They of course contained meanings and such meanings could be deciphered only by the authors of the loose papers. Upon examination of the authors and the cross verification of their statements with the realities on the ground the inferences were drawn. Therefore the objection of the appellant is over-ruled . 14.3. Final order by AO: Hence, total addition of ₹ 13,81,25,000/- was proposed to the asessee s total income vide draft order u/s 144C of the Act r.w.s 143(3) of the Act as forwarded on 16.11.2013 to the assessee in relating to the assessment order proposed to be passed by the A.O. u/s 144C/143(3) of the Act. The assessee filed objection to the draft assessment order in form no. 35A on 13.12.2013 and the DRP vide its directions dated 29.08.2014 has over-ruled the objection of the assessee. 14.4 . Assessee s submissions: i. The addition made by the AO and as confirmed by the DRP is in total disregard to the documents found which are self-speaking and the explanation given by the assessee company in respect of each document which h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1.11.2013 at PB Pg. 2119-2122, relevant para 5 on page 2121 it was clarified that this document is related to company s policy regarding incentive to its distributors who meet the sales target. On going through this paper it may be noticed that there is no financial transaction whatsoever recorded but still the Assessing Officer has drawn adverse inference and has made arbitrary addition. The assessee company has submitted a detailed reply vide letter dated 11.01.2013 relevant observations at page 2121. vi. This page no. B-9 of annexure A-5 of which the Assessing Officer gas made an addition of ₹ 16,25,000. This page is placed at paper book page 819. The explanation for the same was submitted vide letter dated 11.1.2013 placed at paper book page 2119-2122, relevant para 6 on page 2122. In this explanation it was clearly stated that Mr. Vikas Jain, Director who was incharge of the business has made rough calculation of the proposed tender for which company wish to apply. As per this proposal company will have to supply 8 Lakh units in two years for total 16 Lakh units in two years and shall have to do approximately ₹ 8 Crore of turnover per annum and while hiring 17+5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . On going through this page it is very crystal clear that this is proposal whereby cost of Module factory has been stated. This document clearly shows that provided sale is available , it also shows where to be established , it also gives option Himachal Pradesh - Kala Amb, second option Haryana - Bahadurgarh. Thus the income added by the Assessing Officer by assuming it is something outside the books of accounts shows the need of application of the mind. ix. This page 2 of annexure A-5 is in continuation of the above page 1 of which the Assessing Officer has made an addition of ₹ 3 Crore. This document is placed at paper book page 821. In the draft assessment order at page 53 of the draft assessment order the AO has stated that the assessee has failed to explain these transactions. This is factually incorrect. The AO has ignored the reply dated 11.11.2013 PB Pg. 2119-2122 relevant para 1 on page 2119 where it has been clarified that this is related to planning mentioned on earlier page regarding establishment of module factory. This page is the continuation of above stated page whereby the cost of module factory has been estimated and in this page the source of invest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt clearly shows the expenditure incurred by the assessee in respect of the factory to be established in Haryana and Himachal. The assessee has failed to explain these transactions and identify the source and outcome of these investments. The addition has been rightly made by the AO. (viii) In respect of document A-5/Pg.2, it was argued by the learned DR that a total investment of ₹ 3 Lac has been made by the assessee and assessee has failed to explain the source of these investments. On the basis of the above submissions the learned DR submitted that the addition has been rightly made by the AO and confirmed by the DRP. 14.6. Our findings: This ground is based on the seized documents. Hence we examine each of these seized documents. (i) First we shall take up document A-2 at page 6 of the assessee s paper book. A perusal of this document demonstrates that there is no mention of any sum of ₹ 25 lakhs. Hence the addition based on this basis that an advance has been made for the purchase of land is purely on surmises. As there is no entry or writing in the document in question as alleged by the AO, we delete the addition in question. (ii) Document A-3 co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e no. B9 of Annexure A-5. This document is at page 819 of the assessee s paper book. The assessee explained that this paper consists of rough calculations made by Mr.Vikas Jain, the Director In-Charge, for the proposed tender. It was submitted that the tender was for the supply of 8 lakh units per year for two years. The value was approximately put at ₹ 18 crores and it is stated that the hiring would be of 22 sales staff. On perusal of the documents and considering the submissions of the Ld.DR, we are of the considered opinion that this rough calculations cannot lead to a conclusion that the assessee has earned unaccounted income. As held earlier scribbling and figures on loose papers, without any corroboratory evidence cannot lead to a conclusion that the assessee has received unaccounted money. Hence this addition is hereby deleted. (vi) The next piece of paper based on which the addition of ₹ 25 lakhs is made, page no.B-31 of Annexure A-6. The assessee explains that these are notings made by Mr.Jha, the accounts clerk of the company and that these notings were recording entries, which were reversed in the books of accounts. The AO assumed that these reversal o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the DRP direction to restrict the addition to the extent of amount due and payable i.e. ₹ 5,41,301/- only. (i) On the facts and circumstances of the case, the above said addition is not otherwise tenable in the eye of the law in view of the subsequent amendment made to the provisions of section 40(a)(ia) which have been held to be retrospective in nature. 15.1. Facts relating to this ground are that: Ground no.16 is regarding addition of ₹ 25,65,386/- made by the AO on the ground that assessee has failed to deduct tax at source in respect of the payments made to the following three parties:- i) M/s Cyber Green Rent Car Pvt. Ltd. Rs.23,49,036/- ii) M/s Good Times Tours Travel Rs.1,45,330/- iii) M/s Chauhan Tours Travels ₹ 71,000/- Total Rs.25,65,386/- 11.1 A show cause notice was issued by the AO on account of the failure to deduct tax at source in respect of above payments. It was contended by the assessee company that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 377; 47,000/-(PB Pg. 2051) Total Rs.5,41,301/- As per copy of account of each of these three parties the amount due and payable as on 31st March, 2011 was ₹ 5,41,301 only and hence the observation of the AO is contrary to facts on record. ii. The entire addition of ₹ 25,65,386/- is otherwise untenable in view of the amendment made by the Finance Act, 2012 by inserting a proviso below Section 201(1) that an assessee shall not be treated in default for failure to deduct tax in case the deductee has furnished the return of income under Section 139 and has taken into account such some for computing income in its return of income and paid the taxes thereon. In the case of the appellant company all the three deductees are tax payer as is evident from the details submitted before the AO during the course of the assessment proceedings vide letter dated 08.11.2013 (Paper book pages 2037-2038) along with details (Paper book pages 2039-2075). This amendment has been held to be retrospective and it has been further held that where additions have been made under section 40(a)(ia), an opportunity has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of Vector Shipping Pvt. Ltd. is not justified. (ii) As regards the alternative contention of the assessee company that all the three deductees are being assessed to tax and in view of the proviso added to Section 201(1) the assessee company cannot be considered to be an assessee in default in case if he submits the prescribed certificate as required by this proviso to Section 201(1) he has no objection if the matter is remitted to the AO for making necessary compliance as required by the proviso to section 201(1) and thereafter the addition gets deleted. 15.6 . Our findings: The disallowance in question is made u/s 40a(ia) on the ground that the assessee has failed to deduct tax at source from three parties. The DRP has restricted the addition to ₹ 54,30,030/-. The AO should have followed these directions of the DRP. The AO cannot ignore these directions of the DRP. Be it as it may, subsequent to the amendment made by the Finance Act, 2012 to S.201(1), wherein a Proviso was inserted, the assessee cannot be treated as an assessee in default, if the deductee has furnished return of income u/s 139 of the Act. The assessee has submitted the details whereby all the 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bove payments tax has not been deducted on the above stated amount of ₹ 3,22,40,175/-.. Since the assessee company failed to submit satisfactory explanation the AO disallowed the above by invoking the provisions of Section 40(a)(ia). 16.2 . DRP findings The DRP took note of the above facts. Having regard to the evidence on record the AO is directed to identify the nature of the transactions as given in the chart after verifying that the chart is based on seized materials and the special auditor s report. Items which do not attract 40(a)(Ia) shall be excluded upon the verification. Subject to the above condition, the objection is sustained. 16.3. Final order by AO: The assessee filed objection to the draft assessment order in form no. 35A on 13.12.2013 and the DRP vide its directions dated 29.08.2014 has sustained the objection of the assessee on this issue observing that, having regard to the evidence on record the A.O. is directed to identify the nature of the transactions as given in the chart after verifying that the chart is based on seized materials and the special auditor s report. Items which do not attract 40(a)(ia) shall be excluded upon the verific ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s contrary to the direction of the DRP. (v). Secondly there is no default in deduction of tax at source on these amounts totaling ₹ 3,22,39,995/-. The assessee has submitted complete details with evidences in support thereof before the AO as well as DRP. (vi) The AO has not been able to bring any material to contradict the explanation and the evidences on record. There are evidences on record that out of the above amount of ₹ 3,22,39,935/- tax has been deducted on ₹ 1m59,65,555/- for which necessary TDS certificates and challans are also on record and TDS is not required to be deducted on the remaining amount as the same represents reversal of entries, debit notes, etc. Thus the entire addition on this account has been made arbitrarily ignoring the above facts and evidences. The detailed reply submitted before DRP (PB Pg. 6492) on the basis of which DRP has given direction to AO, has been totally ignored by the AO while framing final assessment order at page 61. 16.5 . Revenue s submissions: Ld.DR that considering the explanation given by the assessee before the DRP as well as before the ITAT this aspect looks to be a factual issue and in view of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y deduction in respect of the bonus is to be allowed only on payment basis and in case the amount remains outstanding, further deduction can be allowed if such bonus is paid before the due date of filing the return. 17.2 . DRP findings The DRP has considered the above submission of the assessee. The DRP directs the AO to allow the claim of the assessee u/s 43B after proper verification. 17.3. Final order by AO The assessee filed objection to the draft assessment order in form no.35A on 13.12.2013 and the DRP vide its directions dated 29.08.2014 has directed to allow the claim of the assessee u/s 43B of the Act after proper verification. In view of this, addition of ₹ 51,59,380 is made to the income of the assessee after verification from assessment record. 17.4 . Assessee s submissions i. The AO without carrying out any verification as directed by the DRP and without looking at the explanation of the assessee has confirmed the entire addition of ₹ 51,59,380. ii. The above addition of the entire amount of ₹ 51,59,380 is not correct. Before the DRP following explanation was given:- iii. As per provisions of section 43B payment in r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ame and allow the deduction. 17.6 . Our findings: The AO has not bothered to carry out the directions of the DRP. The claim made by the assessee is as per law. It only required verification of the facts as submitted by the assessee. This is not done by the AO. Under these circumstances we delete the addition and set aside the matter to the file of the AO. The AO will verify the claim of the assessee and whether the disallowance has to be restricted to ₹ 24,40,854/- is correct or not. In the result this ground is allowed for statistical purposes. 18. Ground no.19 reads as follows. 19(i) On the facts and circumstances of the case, the learned AO has erred, both on facts and in law, in making an addition of ₹ 2,37,11,754/- on account of sundry creditors. (ii) On the facts and circumstances of the case, the learned AO has erred in ignoring the direction of the DRP that there appears to be a merit on the facts in the claim pressed by the appellant company and the AO was directed to carry out necessary verification and reconciliation on the lines suggested by the appellant company. (iii) That in any case the addition made by the learned AO without giving a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stands allowed for statistical purposes. 18.3 . Final order by AO The assessee filed objection to the draft assessment order in form no. 35A on 13.12.2013 and the DRP vide its directions dated 29.08.2014 has allowed the objection of the assessee on this issue for statistical purposes observing that, the DRP is of the considered view that the issue of discrepancy in the three accounts mentioned above need to be given a relook by the A.O. by carrying out the necessary verification and reconciliation on the lines suggested hereinabove by the appellant. The objections of assessee filed before the DRP were duly considered and was found that total disallowance was rightly proposed vide the draft assessment order. In view of this, addition of ₹ 237,11,754 is made to the income of the assessee. 18.4. Assessee s submissions: i. The AO has totally ignored the facts and the evidences. No reasoning has been given by the AO for rejection the explanation. The DRP has categorically directed the AO for carrying out a reconciliation and verification. ii. The assessee has submitted the explanation before the AO vide letter dated 8.11.2013 placed at paper book page ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the same despite DRP direction and hence the addition made by the AO on this account is untenable. v. In the case of the third party, M/s Shyam Telecom Ltd. there is no difference in the balance in the ledger a/c. The ld. AO has wrongly taken the balance as per the books of assessee as ₹ 67,57,681/- as against the correct balance of ₹ 19,93,845/-. Copy of confirmed ledger a/c of the assessee in the books of party is at PB Pg. No.2412- 2414. Thus, the account with the creditor stands fully reconciled and the AO was not justified in ignoring the same despite DRP direction and hence the addition made by the AO on this account is untenable. vi. The AO has totally ignored the explanation given before the DRP at PB Pg. 6420-6422. 18.5. Revenue s submissions: It was contended by the learned DR that during the course of the assessment, the AO has issued notice under Section 133(6) and he has noticed the difference in the balances as per the books of account of the assessee and the balances as per the account of these creditors. The assessee during assessment has claimed to have explained these differences and that is why an addition was made in the draft asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was no activity during the year and these investments are mainly in the subsidiary company. The AO, however, was not satisfied with the above explanation and made a disallowance of ₹ 5,31,225/- by invoking Rule 8D. 15.1 Aggrieved by the order of the AO assessee filed objection in the DRP whereby it was contended that firstly the calculation done by the AO of average investment is not correct as it has included taxable investment also. Further it was submitted that no disallowance is called for in view of the fact that no expenditure has been incurred in relation to such investment which by and large are in the subsidiary company. The DRP, however, did not agree with the contention of the assessee company that no expenditure has been incurred in relation to such investments. However, DRP agreed to the contention of the assessee company regarding error in the average investment and consequently directed the AO to rectify the calculation error. 20.1 . DRP findings The DRP considered the claim of the assess :e in the light of the provisions u/s 14A of the Act. Upon meritorious consideration the DRP is of the firm view that the AO needs to rectify the calculation error ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... physical inventory of the mobile sets was prepared. As per this physical inventory prepared, the total number of handsets found was 122287. As per the books of account the stock of inventory was found to be 125412. Thus there was a shortage of 3125 mobile handsets. The assessee was asked to reconcile the difference. The AO not being satisfied with the explanation given by the assessee has held that the assessee has sold out these mobile phones outside the books of accounts. The AO estimated that the cost of such mobile phones at ₹ 3,000/- and worked out the total cost of 3125 mobile phones at ₹ 93,75,000/-. The AO applying gross profit rate of 26.54% on this amount further estimated profit of ₹ 24,88,125/- on the sale of such mobile phones and accordingly made addition of ₹ 1,18,63,125/-. 21.2 . DRP findings: The above contentions of the appellant were considered vis-a-vis those of the AO. Tie DRP is of the considered view that the failure of the appellant to reconcile he difference during search and post search proceedings amounted to concealment of facts. It is too late to take such a plea. The reconciliation can only be regarded as an after-thoug ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2216.57 Crores giving an average sale consideration of ₹ 1997/-. This figure has also been endorsed by the special auditor in its report whereby he has given the quantitative details of the mobile phones sold during the year at 1,10,92,239 (paper book page 4931). x. The addition is otherwise untenable on account of the shortage of physical stock. It is not the case of excess stock found during the course of the search. The shortage of 3125 mobile handsets (0.028%) in a business where the quantity sold during the year is 1,10,92,239 is not very much. The total inventory computed was also 1,22,287 at different locations. xi. Further there can always be an error in taking physical inventory spread over at various locations at the time of the search. There can also be a shortage during the physical moment of the stocks. xii. Such shortage is normal in such a huge business. xiii. It cannot be assumed without there being any material or evidence that assessee has sold these mobile handsets outside the books of account particularly keeping in view the fact that a search has been carried out and during the course of the search and not a single piece of paper or evidence w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ory at the time of the search was counted at 122,287 at different locations. Considering this volume of business, the number of mobile phones found short are not significant. Further this shortage in our view is normal in such volumes for various reasons such as error in taking physical inventory, movement of stocks, etc. Under these circumstances we delete this addition of ₹ 1,18,63,125 and allow this ground of the assessee. 22. Ground no.22 reads as follows. 22 (i) On the facts and circumstances of the case, the learned AO has erred, both on facts and in law, in making addition of an amount of ₹ 7,44,24,668/- on account of entries appearing in HSBC a/c no 05441758900 at Gurgaon. (ii) That the above addition has been made ignoring the fact that the said bank account is properly disclosed in the books of the assessee and as such each every entry of this bank account having been taken into account. (iii) On the facts and circumstances of the case, the DRP has erred in not deleting the above addition proposed by the learned AO in the draft assessment order despite the fact that each and every issue raised by the learned AO in the draft assessment order and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uments were submitted. In this regard it is submitted that vide questionnaire dated 2.3.2012, Para VIII (Paper book page 89) the AO has asked for the bank accounts maintained and operated by the company. The reply to the same was submitted vide letter dated 10th September, 2012, (Para 5, Page 93 of the paper book) whereby list of all bank accounts maintained and operated with reconciliation was submitted. The name of HSBC Bank is appearing on page 96 and reconciliation and the bank statement at paper book page 98-99. iv. Thereafter vide letter dated 30.10.2013 (Paper book page 1190-1192, relevant page 1192, Para 3) copy of bank statement of HSBC along with copy of ledger account was again submitted. v. Complete copy of bank account is available in the paper book pages 1193-1214. The explanation for the debit and credit of each entry is available at PB Pg. 1215 along with vouchers explaining the transaction and the nature thereof are available from paper book pages1216-1234. vi. Then again vide letter dated 7.11.2013 (Paper book page 1632) it was brought to the notice of the AO, that details in respect of transactions of HSBC account may kindly be verified from earlier stat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... planation for debit and credit alongwith vouchers was filed before the AO, the learned DR submitted that this is a factual aspect. He further submitted that though this bank account forming part of the account which been audited and no adverse observations have been made by the special auditor but still the AO was justified in drawing adverse inference on not getting the satisfactory reply as asked for by him from the assessee company during the assessment proceedings. 22.6. Our findings In this case the AO has added the entire debit balances in the HSBC account of the assessee. This account is an official bank account of the assessee and the details are available in the books of accounts. The DRP had held that the AO was totally unjustified in adding back payments made for bank charges, LC charges and TD. The AO records that the assessee has not submitted proper reconciliation statement and documentary evidence. This is a bank account maintained officially by the assessee. This was stated as such before the AO in a letter dt. 10th September,2012. The assessee has furnished explanation of the debit and credit balances with vouchers from pages 1216 to 1234 of the paper book ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... these allegations the AO held that he is not satisfied about the correctness and completeness of the books of account and rejected the same. 18.1 After rejection of the books of account the AO has taken into consideration the gross profit rate of the year under consideration i.e. 26.54% and the gross profit rate of the preceding year at 31.21% worked out the average of the same at 28.87%. On this basis he increased the gross profit rate to 28% as against 26.54% declared by the assessee and made addition of ₹ 33,61,06,480/-. 23.2. DRP findings: Considering the surrounding facts and circumstances of the case the contention of the appellant is not considered to approximate to the facts. There was abundant incriminating material present against the appellant suggesting suppression of income by manipulating with the records and thereby not accounting for such income. Accordingly the addition on account of GP@ 28% was not arbitrary. Hence, this objection is dismissed 23.3. Final order by AO: The assessee filed objection to the draft assessment order in form no. 35A on 13.12.2013 and the DRP vide its directions dated 29.08.2014 has dismissed the objection of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is not suited for any purpose other than to assist in valuation of the target. Further this KPMG India report nowhere leads to any doubt about the books of account being unreliable. All observations are made for prospective investor which is normal in a due diligence report. It is important to note that Asst. Director of Income Tax (Inv.) in the post-search investigation has issued a notice under Section 131(1A) to KPMG India Pvt. Ltd. seeking clarification on the report issued by them and in its reply dated 1.4.2011 it was clarified by the KPMG India that they did not issue any letter, certificate and information don Micromax regarding any financial or any other transaction and their role was limited to due diligence for TA Associates Advertiser Inc. vii. It is also important to note that post-KPMG India report the Revenue has carried out a special audit under Section 142(2A) wherein the special auditor has, as stated hereinabove, categorically certified that appellant company has maintained proper books of accounts. viii. In view of the above facts there was no reason for the AO to draw adverse inference on the basis of the KPMG India report. ix. The second issue stated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ence to the assessee s account. Even if rejection of books of account, the AO is not entitled to make a pure guess and ignore the evidences or material in the assessment year under consideration. xiv. The books of accounts having been audited not only by the company auditor but also by the special auditor and a certificate being issued by the special auditor that proper books of accounts have been maintained the AO and DRP have gone wrong in rejecting the books of account ignoring the detailed submissions at PB Pg. 6399-6420. Enhancement of Gross Profit i. The AO in the draft assessment order at page 72-73 has enhanced the gross profit rate to 28.% as against 26.54% declared by the assessee. The reasoning given by the AO is that the GP rate in the preceding year was 31.21% and in the current year it is 26.54%. Thus the average of two years has been worked out and 28% rate has been applied which has resulted into addition of ₹ 33,61,06,480. ii. DRP has confirmed the above addition. iii. The addition on this account is untenable. The assessee is maintaining regular books of account. These books of accounts have been audited by the company auditor under Section 227 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d having given explanation there was no reason for AO and the DRP to ignore the same and accordingly the addition made by enhancing the gross profit are unjustified. 23.5 . Revenue s submissions: The learned DR on the issue of rejection of the books of account and the addition on account of the gross profit rate has submitted that he relies upon the order of the AO and the order of the DRP. 23.6. Our findings On consideration of rival contentions we are of the considered view that the rejection of books of accounts is bad in law for the following reasons: The assessee has maintained regular books of accounts and these have been audited by the tax auditors as well as by the special auditors appointed by the AO. Both these auditors have certified that the assessee was maintaining proper books of accounts. The AO seems to have based his opinion on the report of KPMG India. This report was a due diligence report obtained by the prospective investors. Such due diligence reports cannot lead to formation of an opinion that proper books of accounts have not been kept by the assessee. The assessee also maintained quantitative details of inventory. Similarly on the issue of swa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and revert the order of the AO as upheld by the DRP. Accordingly, this ground of appeal of the assessee is allowed. As we have held that the rejection of books of accounts is bad in law the question of enhancement of gross profit on estimate basis does not arise. The AO is directed to adopt the profits as declared by the assessee in its books of accounts. In view of the above, we delete this addition and this ground of appeal of the assessee is allowed. 24. Ground no.25 reads as follows. 25. In the alternative and without prejudice to above, the various additions made by the AO after estimating the gross profit rate is untenable in the eye of the law. 24.1. Facts relating to this ground are that: In ground no.25 the assessee has taken an alternative ground that the AO was not justified in making individual additions on account of the trading items once he has applied the gross profit rate to the entire sales. This ground is arising on account of the following:- S.No. Particulars Amount (in Rs.) 1. Sale of scrap 84,20,360 2. Sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3,07,426 7. G P on swap units 7,09,43,390 8. Sundry creditors 2,37,11,754 9. Shortage of mobiles 1,18,63,125 Total 404,21,28,178 In support thereof reliance is placed on the following judgments: i) CIT Vs. Banwari Lal Banshidhar (1997) (All)(Hc) ii) Indwell Construction vs. CIT (1998) (AP) iii) CIT vs. Aggarwal Engg. Co. (2006) (P H) iv) CIT vs. Smt. Santosh Jain (2006) (P H) v) CIT vs. Gain Chand Labour Contractor (2007) (P H) vi) Amrit Sugar Co. vs. ITO (2010) (HP) 24.3. Revenue s submissions: The learned DR submitted that the AO has made various additions on the basis of the findings given for each of the additions and accordingly it cannot be contended that once gross profit rate has been applied these additions cannot be made. 24.4 . Our findings: In view of our decision in ground no.24 reversing the rejection of books of accounts by the AO, the plea of the assessee that additions and disallowances ought not to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e charged should be the SBI base rate plus 150 basis points. The AO in the final assessment order restricted the addition to ₹ 7,71,349/-. 26.2 . DRP findings: Keeping in view the Safe Harbour Rule, the DRP directs the AO/TPO that the interest should be computed on the basis of SBI base rate as on 30th June of the relevant previous year plus 150 basis points. 26.3. Final order by AO The above was adjudicated by DRP eferred to TPO for computation. The TPO vide their order no.328 dated 24.9.2014 has been received in this office by diary no.616 dated 30.09.2014. The TPO has arrived at the following conclusion after considering the DRP directions. Recomputation for adjustment in interest on loan advanced to AE Amount of adjustment in original order Rs.1,05,66,451 Less: Amount of adjustment as per DRP order ₹ 7,71,349 Net relief Rs.97,95,102 Recomputation for adjustment in stand by letter of credit/bank guarantee Amount of adjustment in original order Rs.1,22,39,100 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d LIBOR rate could not be considered as the loan was given from India and the prime lending rate in India was to be considered. Consequently, the Assessing Officer had determined the rate at 11.75 per cent and the difference to the extent of ₹ 45,23,817.53 was added to the assessee s income. The assessee submitted that the prime lending rate was a domestic rate and the transaction done by the assessee was an international transaction for which the LIBOR rate was to be applied. It further submitted that the RBI had also given directions wherein it was specifically mentioned that the LIBOR rate was to be applied. Therefore, it prayed for the deletion of addition to the total income as made by the AO. The Tribunal held that the assessee had given the loan to the associated enterprises in US dollars, and assessee was also receiving interest from the associated enterprises in Indian rupees. Once the transaction between the assessee and the associated enterprises was in foreign currency and the transaction was an international transaction, then the transaction would have to be looked upon by applying the commercial principles in regard to international transaction. If that was so, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation and adopt the interest rate 4.42% if the claim of the assessee is found correct. The ground raised by the assessee on this issue is partly allowed for statistical purpose. (vi). The Mumbai Bench in case of Dy. CIT v. Tech Mahindra Ltd. [2011] 46 SOT 141 (URO)/12 taxmann.com 132 (Mum.) for Assessment Year (AY) 2004-05, held that the arm's length price in case of interest on extended credit period allowed to an Associated Enterprise (AE) based in USA shall be determined on the basis of USD London Inter Bank Offer Rate (LIBOR) instead of applying the rate of interest pertaining to EURO denominated loan charged to AE based in Germany since the AE was based in USA. The facts of the case were that the Assessee in that case was a joint venture between Mahindra Mahindra Limited (Indian company) and British Telecommunications (UK Company), was engaged in rendering of software services relating to telecommunication, internet technology and engineering etc. During the previous year, the taxpayer had extended credit beyond the stipulated credit period to its AE based in USA without charging any interest on such extended credit period. During the assessment proceedings, the TPO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as the RBI's approval does not put a seal of approval on the true character of the transaction from the perspective of transfer pricing regulation as the substance of the transaction has to be judged as to whether the transaction is at arm s length or not. Further, CUP is the most appropriate method for determining ALP in the present case. In this case the Tribunal held as below: In the present case the AE is a German company. Eurobior rates are based on the average interest rates at which a panel of more than 50 European banks borrow funds from one another. There are different maturities, ranging from one week to one year. These rates are considered to be the most important rate in the European money market. The interest rates do provide the basis for the price and interest rates of all kinds of financial products like interest rate swaps, interest rate futures, saving account and mortgages. We find that the RBI in respect of export credit to exporters at internationally competitive rates under the scheme of pre-shipment credit in foreign currency (PCFC) and Rediscounting of Export Bills abroad (EBR), has permitted banks to fix the rates of interest with reference to rulin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is point. He further argued that the contention of the assessee that the rate should be computed with reference to the LIBOR applied by the ITAT in the various judgments has not been accepted by the department as the same is subject matter of further appeal before the High Court. 26.6 . Our findings: Ground no.27 is on addition as a transfer pricing adjustment regarding interest on loan given to subsidiary company. The DRP has directed to apply SBI base rate plus 150 base points. The issue is covered in favour of the assessee and against the Revenue by the following decisions: 1. Siva Industries Holdings Ltd. Vs. Asst.CIT(2011) 11 taxmann.com 404 (Chennai-ITAT) 2. M/s Four Soft Ltd., Hyderabad vs. DCIT (ITA no.1495/Hyd/2010) 3. Dy.CIT vs. Tech Mahindra Ltd. (2011) 46 SOT 141 (URO)/12 taxmann.com 132 (Mum) 4. Tata Autocomp Systems Ltd. Vs ACIT (2012) 21 taxmann.com 6 (Mumbai - Trib.) As per these decisions for proper bench marking, interest rate to be applied is the interest rate of the currency in which the amount has been advanced. Since in this case the loan has been given in USD, the interest rate will be LIBOR+. The international rate fixed by the LIBOR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Amount of adjustment in original order Rs.1,05,66,451 Less: Amount of adjustment as per DRP order ₹ 7,71,349 Net relief Rs.97,95,102 Recomputation for adjustment in stand by letter of credit/bank guarantee Amount of adjustment in original order Rs.1,22,39,100 Less: Amount of adjustment as per DRP order ₹ 54,39,600 (2% of stand by letter of credit given of ₹ 27,19,80,000) Net relief Rs.67,99,500 Addition on account of interest ₹ 7,71,349 Addition on account of SBLC ₹ 54,39,600 Total addition ₹ 62,10,949 The Transfer Pricing Adjustment in the case of the assessee stands at ₹ 62,10,949/- from ₹ 2,28,05,551/- in the original order. 27.4. Assessee s submissions: The assessee has obtained Standby Letter of Credit by paying 1% cost. Hence the DRP was not correct in applying the rate of 2% ignoring the fact that the assessee company has obtained the Standby Letter of Cre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 29. We now consider the Revenue s appeal ITA no.5829/Del/2014. 30. Ground no.1 reads as follows. l. The Hon ble DRP has erred in law and on facts as well in directing the A.O. and the TPO that the arm's length price for providing SBLC should be computed at the rate of 2 per cent per annum on USD 6000000 in respect of addition of ₹ 2,28,05,551 /- - on account of Transfer Pricing issue without examining and adjudicating upon on merits of the case. 30.1. We have dealt with this issue while adjudicating ground no.28 in the assessee s appeal. Consistent with the view taken therein we dismiss this ground of the Revenue. 31. Ground nos. 2 and 3 read as follows. 2. The Hon'ble DRP has erred in law and on facts as well in directing substitute the figure of ₹ 84,20,360/- - worked out by the Special Auditor A.O. instead of proposed addition of ₹ 2.74 cr on account of extrapolation of scrap sales without examining and adjudicating upon on merits of the case. 3. The Hon ble DRP has erred in law and on facts as well in directing the A.O. to re-verify the claim of the appellant without examining and adjudicating upon on merits of the case. Our finding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , included the sum in the income and paid taxes as per the return of income. In the present case, the assessee has complied with these conditions as is evident from the letter dated 8th November,2013 filed before the AO along with the certificate in the prescribed form to this effect. In the result this ground of the Revenue stands dismissed. 34. Ground no.5 reads as follows. 5. The Hon'ble DRP has erred in law and on facts as well in directing the A.O to allow the claim of the assessee u/s 43B of the Act after proper verification in respect of addition of ₹ 51,59,3801- on account of disallowance of bonus u/s 43B without examining and adjudicating upon on merits of the case. Our finding:- The directions of the DRP to the AO to allow the claim of the assessee u/s 43B of the Act after proper verification is disputed by the Revenue. We find no infirmity in the directions of the DRP. We have dealt with this issue while disposing of ground no.18 of assessee s appeal. Consistent with the view taken therein we dismiss this ground of appeal. 35. Ground no.6 reads as follows. 5. The Hon ble DRP has erred in law and on facts as well in observing that the expenses of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Hon'ble DRP has erred in law and on facts as well in directing the A.O. to relook the issue by carrying out the necessary verification and reconciliation by the appellant in respect of addition on account of Sundry creditors amounting to ₹ 2,37,11,754/- without examining and adjudicating upon on merits of the case. 37.1. Our findings:- This ground is directed against the directions of the DRP, wherein verification of outstanding amount of sundry creditors was directed. We have dealt with this issue while disposing of ground no.19 of the assessee s appeal. Consistent with the finding given therein, we dismiss this ground of the Revenue. 38. Ground no.9 reads as under. The Hon ble DRP has erred in law and on facts as well in directing the A.O. to delete the addition to the extent of ₹ 4.27 crore subject to proper verification by the A. O. in respect of addition on account of HSBC account amounting to ₹ 7,44,24,668/ - without examining and adjudicating upon on merits of the case. 38.1. Our findings: This ground is against direction of the DRP for verifying an amount of ₹ 4.27 crores on transactions amounting to ₹ 4.27 crores in HSBC acco ..... X X X X Extracts X X X X X X X X Extracts X X X X
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