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2015 (12) TMI 515 - ITAT DELHI

2015 (12) TMI 515 - ITAT DELHI - TMI - Transfer pricing adjustment - Held that:- We are not impressed with the contention of the ld. AR about his right to argue against the transfer pricing adjustment of ₹ 36.65 crore as no such addition has been eventually made in the assessment order and consequently this issue cannot be termed as arising from the impugned order. It is only if the AO, in any subsequent proceedings, makes such addition that the assessee will acquire a right to challenge t .....

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right to challenge that the amount of encashed bank guarantee is not deductible under the mercantile system of accounting in terms of rule 27, but such contention fails on merits because such an amount is deductible even under the mercantile system of accounting. It is, therefore, palpable that the amount of encashed performance bank guarantee calls for deduction both under cash system of accounting as well as the mercantile system of accounting because not only the liability for this expenditu .....

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ed. On reducing a sum of ₹ 7.39 crore from the total disallowance of ₹ 7.80 crore, we are left with the remaining disallowance of ₹ 41.51 lac. The AO made such total disallowance of ₹ 7.80 crore by recording that the assessee failed to furnish sufficient evidence in support of the deduction of expenses. The position remains status quo before the Tribunal as well. Under such circumstances, we uphold the disallowance of ₹ 41.51 lac. Ex consequenti, this issue is partl .....

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pital introduced by them in the firm with the help of bank pass books. Since this evidence has not passed through the AOs eyes and placed before us for the first time, we are of the considered opinion that the ends of justice would meet adequately if the impugned order on this score is set aside and the matter is restored to the file of AO. We order accordingly and direct him to decide this issue afresh in the light of the additional evidence which the assessee has filed or proposes to file in .....

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Income-tax Act, 1961 (hereinafter also called the Act ) in relation to the assessment year 2011-12. 2. Some grounds are general and the others, except touching four issues dealt hereinafter, were not pressed by the ld. AR. The same, therefore, stand dismissed. 3. The first issue argued by the ld. AR is against the transfer pricing adjustment. 4. Briefly stated, the facts of the case are that the assessee is a nonresident partnership firm based in the United Kingdom (UK). In December, 2009, the .....

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oom Communications Ltd., for ₹ 177 Crore on back-to-back basis. The assessee did not file any return of income for the year in question. In response to notice u/s 142(1), the assessee initially filed its return on 30.9.2011 declaring a loss of ₹ 6,01,46,503/-, which was revised to a loss of ₹ 45,06,99,539/- on 28.9.2012. The assessee did not report any international transaction nor filed Form No.3CEB along with these returns of income. During the course of assessment proceeding .....

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equipments at Nil. The TPO also found that interest chargeable from inter-company loan was below its arm s length rate. The AO vide his draft order dated 10.3.2014 made several additions including an addition on account of transfer pricing adjustment amounting to ₹ 135.83 crore. The assessee objected to the draft order before the Dispute Resolution Panel (DRP) who, vide its Direction dated 30.12.2014, allowed certain reliefs from the additions proposed in the draft order. That is how, the .....

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ut ₹ 111 Crore, thus, resulting in an overall combined profit of at least ₹ 135 crore (Rs.246 crore minus ₹ 111 crore) to the assessee and Zoom Communications Ltd. The report also suggested that the assessee secured the contract for ₹ 246 crore; assigned it to Zoom Communications for ₹ 177 crore; provided no service and made a neat profit of the difference between the contracted price and the assigned price, i.e., ₹ 69 crore. Keeping in view the observations o .....

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u Committee report and such closure report was accepted by the CBI Court. In the light of these arguments, it was submitted that the additions made by the AO, including the transfer pricing adjustment, were not called for. On a specific query from the Bench about the current status and fallout of the Shunglu Committee report, the ld. AR submitted that all the charges of financial irregularities leveled against the assessee have been dropped and the matter is now lying in arbitration proceedings. .....

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assessment order at ₹ 32.81 crore without making any addition towards transfer pricing adjustment. It, therefore, becomes vivid that albeit there is a discussion in the assessment order about the transfer pricing adjustment, but eventually no addition has been made by the AO on this score. In the absence of any such addition, we fail to find any cause of grievance to the assessee insofar as the discussion is contained in the final assessment order about the transfer pricing adjustment. Wh .....

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ventually made in the assessment order and consequently this issue cannot be termed as arising from the impugned order. It is only if the AO, in any subsequent proceedings, makes such addition that the assessee will acquire a right to challenge the addition as per law against the outcome of such later proceedings. Since no addition on account of the transfer pricing adjustment has been made in the final assessment order, which has been impugned before us, we desist from adjudicating on the merit .....

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a net amount of ₹ 109,21,68,631/- in its Income and Expenditure Account. This amount was determined by reducing the amount of performance bank guarantee encashed to the tune of ₹ 24.60 crore from the net amount received during the year from Prasar Bharathi totaling ₹ 133.81 crore. To ascertain the facts about the encashment of bank guarantee, the AO sought information u/s 133(6) of the Act from Prasar Bharathi, New Delhi. On appreciation of the details so filed, it was observe .....

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urnished a performance bank guarantee for a sum of ₹ 24.60 crore, equivalent to 10% of the contract price, with the validity upto 31.3.2011. In view of the performance related issues and deficiencies in executing the contract assigned to the assessee as per the terms of the contract, Prasar Bharathi sought advice of its Standing Counsel, who advised that: since the PBG expires on March 31, 2011, Prasar Bharathi should immediately quantify its claim and encash the guarantee. The quantificat .....

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xample, in respect of International coverage of QBR , it has been mentioned that the assessee was to cover the national leg extensively after QBR entered into the national territory. The assessee was to cover 21 countries for claiming the payment related to the coverage of international QBR, whereas only 16 countries were covered. Keeping in view these deficiencies on the part of the assessee in either not doing the work or doing the work in contravention of the mandate of the contract, Prasar B .....

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the AO, it is relevant to outline certain important factual aspects of the issue. The assessee was assigned a contract by Prasar Bharathi for a sum of ₹ 246 crore, whose India operations were sub-contracted by the assessee to Zoom Communications for a sum of ₹ 177 crore. The assessee followed cash system of accounting. It received a sum of ₹ 133.81 crore, net of service tax from Prasar Bharathi at the rate of 60% of the contract price. The assessee paid a sum of ₹ 101.41 .....

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ntile system was required to be followed. Then he made an addition u/s 69C of the Act on account of the bank guarantee encashed. The assessee raised objections before the DRP, inter alia, against the rejection of cash system of accounting consistently followed by the assessee from the preceding year which was also accepted by the AO and also the making of disallowance for a sum of ₹ 24.60 crore. The DRP concurred with the assessee on the first aspect thereby approving the cash system of ac .....

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the ld. DR assailed the correctness of the final assessment order by contending that the cash system of accounting followed by the assessee was not in order and the view of the DRP in accepting such a method was erroneous and hence be overturned. On a specific query as to whether the Revenue was in appeal against the assessment order, the ld. DR contended that notwithstanding the fact that no cross appeal or cross objection was filed, he has a right to take up this issue. He also pressed into s .....

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cash system of accounting by the DRP. Section 145 of the Act dealing with the method of accounting provides through sub-section (1) that the : Income chargeable under the head "Profits and gains of business or profession" or "Income from other sources" shall, subject to the provisions of sub-section (2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. Sub-section (2) provides that the Central Government may not .....

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not governed by the Companies Act, it has got the statutory option of computing its Business income either as per cash or mercantile system of accounting. Whereas under the mercantile system of accounting, income is computed by deducting expenses incurred, whether or not paid, from the income accrued, whether or not received, under the cash system of accounting, income is computed by deducting expenses actually paid from the income actually received. Under the later method of accounting, no cog .....

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overall scenario, it is the same amount of income which gets taxed under both the methods of accounting, albeit spread over different years. We are concerned with a situation in which the assessee, a partnership firm, has followed cash system of accounting, which was also followed and accepted by the AO in the immediately preceding year and the DRP has approved such a cash system of accounting for the extant year. It is further clear that the Revenue has neither filed any cross appeal nor any c .....

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satisfied with a draft order can approach the DRP for necessary relief. Such a relief can be allowed by giving direction under sub-section (5) of this section. Sub-section (13) of section 144C provides that the AO is obliged to pass a final assessment order in conformity with the direction given by the DRP. This shows that the direction tendered by the DRP is binding on the AO notwithstanding the AO s reservations on it. The Finance Act, 2012 inserted sub-section (2A) to section 253 w.e.f. 1.7.2 .....

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divulges that the AO was without any remedy to challenge the unacceptable adverse direction given by the DRP, given effect to in his own order, in respect of any objections filed before this cut-off date of 1.7.2012. Now with this amendment, the Revenue has been given a liberty to file appeal before the tribunal if the CIT objects to any direction issued by the Dispute Resolution Panel, that has been incorporated in the final assessment order. The point to be underscored is that such a power of .....

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is the position about filing a Cross objection by the Department, which is covered under sub-section (4) of section 253. As per this provision amended by the Finance Act, 2012, : The Assessing Officer …., on receipt of notice that an appeal against the order of …. the Assessing Officer in pursuance of the directions of the Dispute Resolution Panel has been preferred under sub-section (1) …, may, notwithstanding that he may not have appealed against such order or any part th .....

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pass a case of the AO filing cross objection against that part of the assessment order which has not been disturbed by the DRP. 13. In a nutshell, the position is that after the insertion/amendment by the Finance Act, 2012 of/to sub-sections (2A) and (4) of section 253, the Department has acquired a right to file appeal or cross objection against the assessment order passed in pursuance of the direction of the DRP to the extent it is aggrieved against such direction. It has no right to file appe .....

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tant case, we find that though the Revenue had a right to file appeal or cross objection against the direction of the DRP in accepting the cash system of accounting followed by the assessee, but it chose not to do so. Thus the doors of this route are foreclosed. 14. Now we take up the next contention of the ld. DR in invoking rule 27 of the Income-tax Appellate Rules, 1963 for bringing home the point that he can validly challenge the action of the DRP in overturning the draft assessment rejectin .....

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the impugned order on any of the grounds decided against him. Two essential elements of the rule 27 come to the fore on its bare reading. First is the condition precedent for invoking this rule and the second is scope of interference. Insofar as the first element is concerned, we find that this Rule has been enshrined with a view to dispense justice to a respondent who is otherwise entitled to assail the correctness of the impugned order by filing appeal or cross objection, whether or not actual .....

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course to Rule 27. We have found out supra that, in the given facts, the Revenue has a right to file cross appeal or cross objection against the adverse direction given by the DRP as contained in the final assessment order. Thus, the first element, namely, the condition precedent for invoking rule 27, stands satisfied. 16. The next element is the scope of interference by the respondent. This is contained in the later part of the rule, which provides that the respondent may support the order appe .....

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expenses. The CIT(A) upholds the initiation of reassessment but deletes the disallowance of expenses on merits. In an appeal by the Revenue before the tribunal against the deletion of disallowance of expenses, the assessee under rule 27 can argue that the initiation of reassessment be also declared as invalid. This is a situation in which the assesseerespondent is supporting the impugned order (that is, the deletion of disallowance of expenses) under rule 27 on the ground decided against it (tha .....

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ticular independent issue has been decided against the respondent in the order appealed by the appellant on another independent issue decided against him, then the respondent under rule 27 has no power to challenge the correctness of such independent issue decided against him before the tribunal, while arguing for upholding the order on the issue decided against the appellant. Coming to the facts of the instant case, we find that the ld. DR has invoked rule 27 by challenging the correctness of d .....

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cided against the Revenue (on the question of cash system of accounting). 17. We find that the assessee filed objections before the DRP after 1.7.2012. As such, the Revenue could have legally approached the Tribunal in terms of section 253(2A) or 253(4) against the direction of the DRP in approving cash system of accounting. However, no cross appeal or cross objection has been filed against the final assessment order containing the direction of the DRP in approving cash system of accounting. In .....

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sh system of accounting by the DRP in dealing with its ground about the confirmation of disallowance on account of encashment of bank guarantee, is devoid of merits and consequently rejected. 18. Now let us examine the merits of the disallowance. The AO has applied section 69C of the Act for making the disallowance of ₹ 24.60 crore. This section provides that : Where in any financial year an assessee has incurred any expenditure and he offers no explanation about the source of such expendi .....

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the accounts. 19. Next thing to examine is the deductibility or otherwise of the amount of ₹ 24.60 crore under Chapter IV-D of the Act. There is no specific section under this Chapter governing deduction of the instant amount. Section 37(1) of the Act is a general provision granting deduction of any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wh .....

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ifferent heads, namely, Issues relating to International coverage of Queen s Baton Relay; Hiring of lighting consultant; Supply of power cables; and Equipment deviations/shortfall. Prasar Bharathi noticed the lapse on the part of the assessee on various scores inasmuch as: no work was done or the work done was in contravention to the mandate of contract for CWG 2010. This reveals that the bank guarantee was encashed by Prasar Bharathi for non-performance of the contract or its performance in con .....

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ome credited to the Income & Expenditure account. When we consider this factual matrix in a holistic manner, what turns out is that the encashment of bank guarantee was simply on account of non/inadequate performance of contract for which the gross amount received was credited by the assessee to its Income and Expenditure account. Encashment of the performance guarantee by Prasar Bharathi has a direct and immediate link with the income received on account of performance of the contract. We f .....

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st given and then a part of it is recovered by encashment of bank guarantee and the second, in which only net amount is given to the assessee. Under both the circumstances, it is the net amount of receipt which is chargeable to tax as the assessee s real income. By no standard, the encashment of performance bank guarantee can be viewed as independent of the income from production and telecasting of the CWG 2010, which is the sole source of the assessee s business income. Thus it transpires that .....

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bank guarantee, being an expenditure in the nature of section 37(1) of the Act, was discharged during the instant year itself, we see no reason in treating either the net amount of receipt from Prasar Bharathi as income or gross amount of receipt as income and the amount of bank guarantee encashed as revenue expenditure paid, thereby allowing deduction for such an amount. 22. As regards the contention of the ld. DR in invoking Rule 27 of the ITAT Rules and pressing for the adoption of mercantile .....

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olly and exclusively for the purpose of business and other necessary conditions of the provision are also satisfied. As the assessee incurred liability during the year under consideration on account of lapses in the performance of the contract and the amount of encashed performance bank guarantee is quid pro quo for such irregularities, in our considered opinion, the same qualifies for deduction. 23. To sum up, we hold that although the ld. DR has the right to challenge that the amount of encash .....

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/collected during the year resulting in the outgo of the amount from the coffers of the assessee. This issue is, therefore, decided in favour of the assessee. 24. The next issue raised in this appeal is against the disallowance of expenses amounting to ₹ 7,80,76,387/-. During the course of assessment proceedings, the assessee was asked to furnish documentary evidence to prove the genuineness of expenses claimed. The assessee furnished copies of certain documents, the details of which have .....

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e on account of encashment of bank guarantee, the AO held that the rest of the amount of ₹ 7.80 crore (Rs.133.81 crore minus ₹ 101.41 crore minus ₹ 24.60 crore) was not deductible as expenses for want of necessary evidence/support. The assessee argued before the DRP that it had voluntarily disallowed a sum of ₹ 7.39 crore in its computation of income u/s 40(a)(i)&(ii) of the Act out of its total expenses and, hence, to that extent it amounted to double disallowance. U .....

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Operating expenses of ₹ 159.41 crore and Finance expenses of ₹ 96 lac. Computation of the assessee s total income is available at page 1 of the paper book, from which it can be seen that after taking the Net loss as per Profit & Loss Account amounting to ₹ 50.57 crore, it has suo motu made disallowance u/s 40(a)(i)&(ii) for a sum of ₹ 7.39 crore towards Finance charges, Interest charges, Technician and freelancers cost and Legal and professional fees. The AO, apar .....

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ssessee after making the afore referred disallowances u/s 40(a)(i) & (ii) of the Act. By starting computation of total income with the loss as computed by the assessee in its return of income and thereafter making disallowance for the gross amount of expenses including the amounts already disallowed by the assessee, has resulted in double disallowance to that extent. Once the assessee had suo motu made disallowance of ₹ 7.39 crore, there could have been no reason to make a further disa .....

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circumstances, we uphold the disallowance of ₹ 41.51 lac. Ex consequenti, this issue is partly allowed. 26. The last issue taken up before us is against the addition of ₹ 46,19,89,585/- towards unexplained contribution made by the partners of the assessee firm. The AO noticed that both the partners had introduced fresh capital during the year. In the absence of the assessee furnishing confirmations from the partners and the source of their capital contributions, the AO proposed disa .....

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