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2016 (7) TMI 254 - ITAT KOLKATA

2016 (7) TMI 254 - ITAT KOLKATA - TMI - Reference to TPO - reasons to refer - Held that:- There is no requirement for furnishing the reasons to the assessee for referring the matter to the TPO. However, as per Section 92CA(2) of the Act the TPO has served the notice to the assessee before making any adjustment in the ALP. The fact for giving the opportunity of being heard is very much recorded in the order of the TPO. From a plain reading of the Section, we find that the AO for referring the mat .....

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issed.- Decided in favour of revenue - Working of the assessee for the determination of ALP with its AE in relation to the export of goods disregarded - Held that:- Transfer Pricing Officer has taken sufficient time while preparing arms length price in respect of the enterprise transaction. Since the main contention of the assessee is that the Transfer Pricing Officer has not given sufficient opportunity we are of the considered view that the matter may be set aside to the file of the AO wit .....

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f section 92C(2) does not arise. Therefore assessee, was not entitled to the concession of plus or minus 5% as prescribed in the said provision - Decided in favour of revenue - Addition u/s 41 - CIT(A) confirming the order of the AO by treating the payment of deferral sales tax loan at its Net Present Value (for short NPV) as remission of trading liability and treated the same as income under Section 41(1) - Held that:- The provisions of Section 41(1) of the Act does not attract to the asses .....

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Again it is an incentive. However, by a subsequent scheme, a provision was made for premature payment. When the assessee had the benefit of making the payment after 15 years, if he is making a premature payment, the said amount equal to the NPV of the deferred tax was determined at ₹ 4,25,79,684/- and on such payment the entire liability to pay tax/loan stood discharged. Again it is not a benefit conferred on an assessee. Therefore, Section 41(1) of the Act is not attracted to the facts o .....

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e of the assessee. But the Ld. CIT(A) has given the relief to the assessee on the basis of first appellate order of the immediately preceding assessment year i.e. 2003-04. However the same order was challenged and restored to AO for fresh adjudication.The decision of the AO as discussed aforesaid for restoring the matter has not been brought to our notice. Besides for the year under consideration, the assessee has submitted several details for writing off the bad debts are given on pages 200 to .....

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eem Ahmed, Accountant Member For The Assessee Shri K.R.Vasudevan, Advocate For The Respondent Shri G. Mallikarjuna, CIT-DR ORDER PER Waseem Ahmed, Accountant Member:- These cross-appeals by the assessee and Revenue are arising out of common order of Commissioner of Income Tax (Appeals)-XI, Kolkata dated 30.06.2009. Assessment was framed by ACIT, Range-II, Kolkata u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as the Act ) vide his order dated 29.12.2006 for assessment year 2004- .....

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ellant prays that the transfer pricing analysis conducted by the Appellant be accepted as the reference made by the AO to the Ld. TPO is invalid and bad in law. 2. Export of Finished goods in CE Division 2.1 On the facts and in the circumstances of the case, the Ld. CIT(A) erred in confirming the addition to income on account of transfer pricing adjustment for export of consumer electronics products. 2.2 On the facts and in the circumstances of the case, the Ld. CIT(A) in concluding that the app .....

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irect overheads like advertisement, selling and distribution expenses etc. 2.5 On the facts and in the circumstances of the case, the Ld. CIT(A) erred in not making the adjustment of functional differences while determining the arm s length export price. 2.6 On the facts and in the circumstances of the case, the Ld. CIT(A) failed to appreciate that the Learned TPO has overlooked the comparability criteria laid down in Rule 10B(2) and 10(B)(3) of the Rules while performing comparability analysis. .....

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n raising loan liability in books of account of the assessee in accordance with Package Scheme of Incentives, 1993 (PSI) from Government of Maharashtra and circular No.674 issued by CBDT, sales tax shall be treated as actually paid. 4.3 On the facts and in the circumstances of the case, the Ld CIT(A) erred I holding that the remission was pertaining to sales tax and not loan. 4.4 Without prejudice to the above mentioned grounds, on the fact and the circumstances of the case, the Ld. CIT(A) faile .....

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ve scheme. Shri K.R.Vasudevan, Ld. Authorized Representative appearing on behalf of assessee and Shri G.Mallikarjuna, Ld. Departmental Representative appearing on behalf of Revenue. 3. The 1st issue raised by the assessee in this appeal is that the First Appellate Authority [CIT(A) for short] erred in confirming the order of AO with regard to the Arm s Length Price (ALP for short) computed by the Transfer Pricing Officer (TPO for short) without furnishing the reason for disregarding the ALP comp .....

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t of finished goods in consumer electronics division. 2. payment for IT charges In this ground of appeal the assessee has challenged the validity of the assessment proceedings by the AO with regard to the International Transaction with Associated Enterprises (AE for short) on the ground that the reasons for disregarding the ALP worked out by the assessee were not furnished. According to assessee the reasons for referring the matter to the TPO by the AO were not furnished. Therefore the order pas .....

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to an international transaction [or specified domestic transaction] in any previous year, and the Assessing Officer considers it necessary or expedient so to do, he may, with the previous approval of the [Principal Commissioner or] Commissioner, refer the computation of the arm s length price in relation to the said international transaction [or specified domestic transaction] under section 92C to the Transfer Pricing Officer. 92CA.(2) where a reference is made under sub-section (1), the Transfe .....

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matter to the TPO. However, as per Section 92CA(2) of the Act the TPO has served the notice to the assessee before making any adjustment in the ALP. The fact for giving the opportunity of being heard is very much recorded in the order of the TPO. From a plain reading of the Section, we find that the AO for referring the matter to TPO should consider whether it is necessary or expedient so to do and after approval from the competent authority. But it is not AO s obligation to communicate to the a .....

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elation to the export of goods. 5. The assessee has exported the finished goods to its AE for a value of ₹ 2,02,32,909/- and claimed to have exported the goods to AE to utilize the excess stock and excess capacity. The assessee further claimed that the goods were exported to AE at marginal costing i.e. at a price which covers a margin on variable cost and earned contribution margin of 2.44% on sale of exports and 2.50% on cost. However the AO referred the matter to TPO for valuing the abov .....

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he TPO also observed that similar adjustment was also made on this account in the immediate previous year for the determination of the ALP. Accordingly the TPO determined the ALP by the using the gross profit margin as submitted by the assessee as detailed under: Cost of export of finished goods Rs.1,97,38,999 (CE Commercial and industrial division) The gross profit margin of this division is 16.97% on sales hence 20.43% on cost (since the ALP is being determined for the sale price) Gross profit .....

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or consideration in course of the appeal in this case for AY 2003-04 in Appeal No.51/CIT(A)-XI/Cir-11/06-07/Kol. After considering the facts and circumstances of the facts, the addition was confirmed. Unless it is shown that the AE would have made less than normal profit, had the goods been exported to it at the same price at which they were sold by the assessee locally, the mischief of transfer pricing cannot be removed that has not been done. Since the factual matrix remains the same as for AY .....

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s suitable for determination of ALP and drew our attention on page 11 of the paper book where the details of the OP in percentage terms is given. On the other hand ld. DR submitted that assessee has not done TP study. The assessee has just filed a globally based transfer pricing policy of the parent company. The smallness amount involved is cannot be a reason for not determining the ALP. The DR requested the Bench to restore the file to the AO for fresh adjudication and relied in the order of lo .....

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g arms length price in respect of the enterprise transaction. Since the main contention of the assessee is that the Transfer Pricing Officer has not given sufficient opportunity we are of the considered view that the matter may be set aside to the file of the AO with the direction to obtain fresh report from the TPO and the TPO is directed to re-compute the transfer price after giving reasonable opportunity of being heard to the assessee. Before us neither ld. AR nor ld. DR brought anything to t .....

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d under Section 92C(2) of the Act with regard to the determination of ALP of the International transaction with AE. 11. Aggrieved assessee preferred an appeal to Ld. CIT(A) who has upheld the order of the TPO by observing as under:- …. Another ground (Ground No.5) is that, while making transfer pricing adjustment, the Transfer Pricing Officer did not give the benefit of plus minus 5% range as provided in Section 92C(2) of the Income-tax Act. according to the said provision, where more tha .....

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ined was one, and not more than one in each case. Hence there was no occasion to allow 5% variation therein. Hence, this ground is rejected. Being aggrieved by this order of Ld CIT(A) assessee came in second appeal before us. 12. At the outset we observed that similar issued was also raised by the assessee in its own appeal in ITA 1075/Kol/2009 (supra) in identical ground where this Tribunal decided the issue against the assessee by observing as under:- 12. After hearing the rival submissions an .....

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arlier year, we dismiss this ground of appeal of the assessee. 13. The 4th issue raised by assessee in this appeal is that the ld. CIT(A) erred in confirming the order of the AO by treating the payment of deferral sales tax loan at its Net Present Value (for short NPV) as remission of trading liability and treated the same as income by an amount of ₹ 7,92,43,000/- under Section 41(1) of the Act. Before carving out the specific issue, a brief note about the background of the case is reprodu .....

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as permitted to defer its sales tax liability for the AYs 2001-02 and 2002-03 for ₹ 11,63,61,000/-. The GOM also arranged that the State Investment Corporation of Maharashtra (for short SICOM) would raise loan liability in order to enable the assessee/ other beneficiaries of the scheme to avail the benefit of deduction u/s. 43B of the Income-tax Act in respect of such unpaid amount of sales tax. Accordingly the deferred sales tax would be deemed to have been paid to the Government. Under t .....

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is arrangement, the assessee paid an amount of ₹ 3,71,20,0101/- in lieu of the dues of ₹ 11,63,61,000/-. Thus, it got benefit of ₹ 7,92,43,000/- which was recognized as income in the accounts but the same was claimed to be nontaxable in the return of income. According to the assessee the amount of deferred tax was first converted into a loan by the Government of Maharashtra and accordingly the sales tax itself was deemed to have been paid. Subsequently, instead of recovering th .....

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ion amount u/s 41(1) of the Act does not arise. 14. Now coming to the specific issue of the case, the AO during the year observed that the assessee prepaid a loan under the scheme of sales tax deferral loan at its NPV. As a result there arose a difference amount of ₹ 7,92,43,000/- which was credited in the profit & loss accounts by the assessee but it was claimed as non-taxable in the computation of income. However the AO at the time of framing the assessment omitted to give the effect .....

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sment. 15. Aggrieved assessee preferred an appeal to ld. CIT(A) where the assessee submitted that there were two transactions involved in the sales tax loan deferral scheme. The first was that of collection of sales tax by it from its customers and its deemed payment to the Government, as discussed above. The second was that of raising of loan liability in lieu of the deferral sales tax liability and pre-payment of the same at NPV. The assessee submitted that the two transactions should be treat .....

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e sales tax of the assessee and had treated the same as loan given to the assessee. In response to this query, it was submitted that no such document is available with the assessee and that the assessee had converted the deferred tax liability into loan liability in its own books of account by a unilateral action. Accordingly the ld. CIT(A) disregarded the claim of the assessee and upheld the order of the AO. Being aggrieved by this order of Ld. CIT(A) assessee came in second appeal before us. 1 .....

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y at NPV after giving the discount. The assessee claimed the discount as remission of loan liability but the lower authorities claimed the same at remission of sales tax liability and therefore as such it is liable to tax under section 41(1) of the Act. The ld. CIT(A) also observed that the loan from SICOM was not raised by the assessee but it was the arrangement to provide the relief to the beneficiaries of the scheme from the provision of section 43B of the Act. Now the question emerges before .....

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e or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee (hereinafter referred to as the first-mentioned person) and subsequently during any previous year,- (a) the first-mentioned person has obtained whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof, the amount obtained by .....

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e in the earlier years. In the instant the assessee claimed no such deduction/ allowance in the earlier years. Therefore, in our considered view the provisions of Section 41(1) of the Act does not attract to the assessee. In the instant case, as per the scheme he was allowed to retain the sales tax as determined by the competent authority and pay the same 15 years thereafter. The tax collected was deemed to have been paid and, therefore, the tax so collected cannot be construed as income in the .....

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₹ 4,25,79,684/- and on such payment the entire liability to pay tax/loan stood discharged. Again it is not a benefit conferred on an assessee. Therefore, Section 41(1) of the Act is not attracted to the facts of the present case. Relying on the judgment of Hon'ble Karnataka High Court in the case of McDowell & Co. Ltd. (supra) assessee s appeal is allowed. 17. In the result, assessee s appeal partly allowed for statistical purpose. Now coming Revenue s appeal ITA 1545/kol/2009. 18 .....

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7; 50 lakhs towards deduction as lease rental on cars whereas it was correctly concluded by the AO on verification of agreement that the assessee became the actual owner and the expenditure was capital one instead of revenue as claimed by the assessee. 3. On the facts and circumstances of the case, the learned CIT(A) has erred in deleting the addition of ₹ 2,80,00,000/- being the bad debt of which no details were filed by the assessee during the assessment or appeal proceedings as was done .....

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ently on the basis of actual cost plus 5%. The assessee has many product divisions and profitability for each division is separately bench marked and that too at arm s length. So accordingly the IT charges for each division to determine the ALP need to be worked out separately. 20.1 The assessee for the year under consideration has incurred a sum of ₹ 6,11,98,127/- as IT charges for all its product divisions by using the Comparable Uncontrolled Price (CUP for short) method to determine the .....

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ayment to AE. Accordingly the assessee submitted that payment made to the AE is quite less in comparison to the quote of the company. The assessee submitted the cost per person was worked out on the basis of all employees of the company irrespective of the fact whether IT services are being used by these employees or not. However the AO found that in the previous year the ALP was determined on basis of actual users rather than the total number of employees. If the actual users are less then why .....

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t 5000 1328 6640000 VISIO Profit 16416 150 24622400 MS Project 19625 300 5887500 MCA fee Anti Virus 1250 1572 1965000 MS Front Page 4656 100 465600 Total in INR 3,88,28,800 Accordingly the AO worked out the ALP for IT charges to be paid to AE on the basis of actual users which is coming ₹ 3,88,28,800/- but in the instant case the assessee has paid ₹ 6,11,98127/-. Accordingly the TPO made the adjustment for ₹ 2,29,09,327/- and added to the total income of the assessee. 21. Aggri .....

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the mark up of 5% was reasonable in the light of various studies on the average mark up earned by unrelated entities elsewhere in Europe. In view of this, the transfer pricing adjustment was found to be unreasonable and the addition was deleted. Since the facts are the same, the same reasoning is followed and the addition is deleted. Being aggrieved by this order of Ld CIT(A) Revenue is in appeal before us. 22. At the outset, we observed that similar issued was also raised by the assessee in it .....

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tical purpose. 23. The 2nd issue raised by Revenue in this appeal is that Ld CIT(A) erred in deleting the addition made by AO for ₹ 50 lacs on account of treating the lease rental as capital in nature. 23.1 The assessee during the year has claimed the deduction of lease rentals expenses incurred for the purchase of motor cars. The AO during assessment proceedings observed that in the immediate preceding year it was established that lease rentals were nothing but the installments paid for t .....

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e deduction should be allowed and the addition was deleted. Since the factual matrix of the issue is the same, the same reasoning is followed and the addition is deleted. Being aggrieved by this order of Ld CIT(A) Revenue is in appeal before us. 25. At the outset we observed that similar issue for the AY 2003-04 was allowed in favour of revenue by this Hon ble Bench of Kolkata in assessee s own case in ITA No.1075/Kol/2009. The relevant extract of the order is reproduced below:- 16.5 On the basi .....

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we are of the view that the action of the Assessing Officer is quire justifiable in the facts and circumstances of the case when compared to that of ld. CIT. therefore, we set aside order of ld. CIT(A) on this issue and restore that of AO. Considering the totality of the circumstances we are of the opinion to incline to reverse the order of the Ld. CIT(A). Hence this ground or Revenue s appeal is allowed. 26. The third and last issue raised by Revenue in this appeal is that Ld CIT(A) erred in d .....

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observing as under : This issue arose for consideration in course of the appeal for AY 2003- 04. After elaborate discussion of the facts and circumstances of the case, it was held that, in the facts of the case, deduction for bad debts written off should be allowed to the assessee. Since the factual matrix of the issue is the same, the same reasoning is followed and the addition is deleted. Being aggrieved by this order of learned CIT(A) Revenue is in appeal before us. 28. Before us Ld. DR subm .....

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s were placed. The Ld. AR also further drew our attention on pages 200 to 231 where the details of the write- off applications were placed with regard to the parties and their Invoice details. 28.1 From the aforesaid discussion, we find that the AO disallowed the bad debts on the ground that the assessee failed to provide the details when such bad debts were taken in the income of the assessee. But the Ld. CIT(A) has given the relief to the assessee on the basis of first appellate order of the i .....

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