TMI Blog2017 (5) TMI 477X X X X Extracts X X X X X X X X Extracts X X X X ..... rting and supplying any goods or services to AEs. The balances appearing in the Balance Sheet are mobilization advances which are to be adjusted against future supply bills and hence no adverse inference is drawn, thus no adjustment is required on the issue of mobilization advances during the impugned year also. Disallowance of sub-contract expenditure - Held that:- It is a fact that the assessee-company, had been carrying out contract works on a national level with Turn Over running into crores of rupees. It naturally, requires time for any company working at such a huge platform to retrieve all the information sought for by the department which involves great amount of time, manpower etc. When the information that' is sought for, involves a matter of huge quantum documentation of money, the company is bound to take time in complying with sanctioning or approval process from various internal departments of the company in order to maintain confidentiality norms entered with such third party. Therefore, if compliance could take naturally long time, then the AO is expected to give adequate and proper time to the assessee before he completes his assessment. Hence, the assessment co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cessary details as directed in earlier ground, AO is directed to accept the same to the extent assessee could furnish the vouchers. AO is however, directed to restrict the disallowance to 10% of the above expenditure instead of 20% made in the order. With these observations, the issue is again restored to the AO for fresh examination. - 404/Hyd/16, 450/Hyd/16, C.O. No. 21/HYD/2016 - - - Dated:- 3-5-2017 - SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER For The Revenue : Shri P. Chandra Sekhar, CIT DR For The Assessee : Shri Salil Kapoor, Shri Ananya Kapoor and Shri P. Murali Mohan Rao, ARs ORDER PER B. RAMAKOTAIAH, A.M. : These are appeals by Assessee and Revenue against the order of the Dy. Commissioner of Income Tax, Circle-16(1), Hyderabad u/s. 143(3) r.w.s. 92CA(3) and 144C(13) of the Income Tax Act [Act] and Cross-Objection by assessee. 2. Briefly stated, assessee-company M/s Lanco Infratech Limited (LITL) is engaged in the business of civil construction infrastructure development and generation of power through wind mills. It filed its return of income for AY. 2011-12 admitting net total income of ₹ 380,99,11,655/- under the normal provisions of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ced on record. TRANSFER PRICING ISSUES: 3. Ground of Appeal 8a to 8d are general in nature. 4. Grounds 9a to 9d: The grounds relate to TP adjustment of ₹ 2,39,69,300/- related to Interest on Loan. LITL had given a loan amounting to USD 59 million to its AE namely Lanco International Pte. Limited, Singapore (UPl) with first disbursement of USD 9 million on 5th March 2010 followed by further three disbursements later in the Financial Year 2010-11. The entire loan was stated to have been repaid by AE to LITL on 1st September 2010. In order to justify the receipt of interest on the foreign currency loans, LITL has applied Comparable Uncontrolled Price Method (CUP) as the most appropriate method. As the loan was provided by LITL to its AEs in foreign currency, Singapore PLR was considered to benchmark the said transaction. The average Singapore PLR was 5.38% whereas LITL has received interest at 6.37% from Lanco International Pte. Limited, Singapore, which is greater than Singapore PLR, thus confirming the arm's length nature of the transaction. 4.1. The TPO did not accept the benchmarking analysis conducted by assessee in its transfer pricing document and inste ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith a reserve and surplus position of ₹ 3,154 Crores. Thus, loan advanced to the AEs forms a very miniscule portion considering LITL's financial position. It relied on following case law: i. CIT Vs. Cotton Naturals India Pvt. Ltd., Hon'ble Delhi High Court ((2015) 276 CTR 445 (Del). ii. CIT Vs. EKL Appliances Ltd. (ITA No. 1068/2011) 4.4. Ld.DR however relied on the orders of the AO/TPO and DRP to support the adjustments so made. 5. We have considered the rival contentions and perused the details available on record. There is no dispute that assessee has advanced amounts in foreign currency. Therefore, following principles laid down by the Hon'ble Bombay High Court in the case of CIT Vs. Tata Autocomp Systems Ltd. In ITA No.1320 of 2012, the claim of assessee to adopt Singapore PLR as stated before the TPO and DRP is reasonable and deserves to be accepted. Further, it is also an established law that TPO/DRP cannot adopt the interest rate prevailing in Indian rupees for Indian loans to compare it for the loans advanced in foreign currency. Either LIBOR or EURIBOR or in this case, Singapore PLR are to be considered. Further, the said issue has been speci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2010-11, LITL became the successful bidder for acquiring a coal mine in Western Australia owned by Griffin Coal Mining Company Pty Ltd. and Carpenter Mine Management Pty Ltd. The bid was to acquire these companies which own coal mine. A two level subsidiary structure was created to enable the acquisition through bank loans. Bank loans were obtained by Lanco Resources International Pte. Ltd (LRIPL, Singapore), Lanco Resources Australia Pty. Ltd. (LRAPL, Australia). LITL provided corporate guarantee, free of charge basis, for loan facility and hedge to the lender to get the finance and did not charge any corporate guarantee fee against the same. Company Amount of guarantee Lanco Resources International Pte. Ltd (LRIPL, Singapore) 6,13,93,75,000 Lanco Resources Australia Pty. Ltd (LRAPL, Australia) 34,93,86,25,000 Lanco International Pte. Ltd (LIPL, Singapore) 4,01,85,00,000 Total 45,09,65,00,000 6.2. The TPO considered provision of corporate guarantee as an international transac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate guarantee, does not fall within the scope of term 'international transaction' as even after insertion of Explanation to Section 92B by Finance Act 2012 as it does not have any bearing on LITL's profits, income, losses or assets. It was submitted that assessee has not incurred any cost or earned any income by providing such bank guarantee. Relevant case laws: i. Siro Clinpharm Pvt. Ltd. Vs. DCIT (ITA. No. 2876/Mum/2014) ii. Bharti Airtel Limited Vs. Addl. CIT [ITA No. 5816/Del/2012] iii.Redington (India) Limited Vs. JCIT, 49 taxmann.com, 146 (Chennai- Tribunal) 6.6. Without prejudice, the guarantee fee should not be calculated on the entire amount of guarantee instead it should be restricted to the extent of withdrawal of guaranteed amount. The withdrawal of guarantee amounted to ₹ 45 Crores, while the entire amount of guarantee on which the adjustment has been made is ₹ 4,509.65 Crores. Thus, the adjustment will be ₹ 22.01 Crores instead of ₹ 23.90 Crores. (in crores) Company Name Effective value Guarantee value Lanco Resources In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reduce it to 0.53%. 7. We have considered the rival contentions and perused the documents placed on record. There is a difference of opinion as far as in the corporate guarantee fee to be considered as international transaction. However, the Hyderabad Benches of ITAT is consistently following the principle that corporate guarantee is to be considered for the purpose of Transfer Pricing adjustments as the transaction of providing corporate guarantee is considered as international transaction . To be consistent with the opinion already taken in earlier decisions, Ld. Counsel was given an option to press or not to press the issue on this. Ld. Counsel however, submitted that if reasonable rate of 0.27%, confirmed by Asian Paints Ltd. Vs. CIT (ITA No. 7801/Mum/2010) was adopted, assessee has no objection to withdraw the above contention. Considering that the corporate guarantee provided by the company will fall within the scope of the term international transaction after the insertion of Explanation to Section 92B by Finance Act, we reject the contention of assessee on this issue. However, considering the Co-ordinate Bench decision given in the case of Asian Paints Ltd. Vs. CIT (I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... k executed by contractor over the period of contact. As an EPC contractor, LITL has also received as well as given mobilization/material advance. Since LITL had placed some of the contracts amongst AEs, it had paid advances as per the terms of contract, which were being adjusted from supplies or works made on regular basis. The outstanding mobilization advance amount receivable from AEs as on March 31, 2011, was ₹ 11,85,45,63,000/- on which the AO has made an adjustment of ₹ 1,45,21,83,968/-. Further, the amount payable by LITL to its AEs as on March 31st 2011 was ₹ 52,92,82,68,321/-. The TPO considered mobilization advances as loans and advances / receivables and made an adjustment @ 12.25% treating them as international transaction. The DRP upheld the transfer pricing adjustment made by the TPO. DRP further observed that the assessee had significant loans outstanding on which it has paid interest cost. The DRP relied on the ruling provided by Hon'ble Tribunal in case of M/s. Logix Micro Systems Limited ITA No. 524/Bang/2009. 8.1. It was the submission that the nature of the transaction is Mobilization advances . The nature has been re-characterised to L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l 16,69,11,08,982 63,78,15,35,706 III) Domestic PLR of 12.25% cannot be applied and the transaction cannot be equated to investment in bank deposit, stocks, mutual funds or real estate. Relevant Case law: i. CIT Vs. Cotton Naturals India Pvt. Ltd. (2015) 276 CTR 445 (Del) / ITA No. 233 of 2014 IV) Without prejudice, the TPO/AO has not taken into consideration the fact that there are amounts payables to same AE i.e. Lanco International Pte. Limited, Singapore (AE) while making adjustment towards alleged outstanding receivables as on March 31st 2011. The total outstanding payables in respect of Lanco International Pte. Limited, Singapore is ₹ 1,25,94,03,883/-. (Additional Ground 11g) Relevant Case laws: i. Satyam Venture Engg. Services Pvt. Ltd. Vs ACIT (ITA No. 431 432/Hyd/2015) ii. Bentley Systems India Pvt. Ltd. Vs ACIT (ITA No. 6161/Del/2013) V) Without prejudice, the adjustment has been made wrongly for full year and not on the basis of actual number of days. (Additional Ground 11h). 8.2. It was also submitted that in the Assessment Year i.e. AY 2013-14, the TPO has himself accepted the con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as already examined and held that the transaction relating to work contract expenses are within the ALP during the year. Thus, when the whole work contract is considered within the ALP, we are of the opinion that the advances given in the course of contract does not call for special adjustment. Moreover, these business advances cannot be categorised as loans and advances so as to consider them for adjustment. Relying on the various case law relied upon by the Ld. Counsel, we are of the opinion that since assessee-company is not charging any interest from the AEs and non-AEs and also not paying any interest on the amounts received by it from the main contractor, this adjustment is not warranted. Respectfully following the principles laid down in various case law relied upon by assessee above, we have no hesitation in deleting the above adjustment. As seen from the order of the TPO in the next year AY 2013-14, he has considered the same issue and has not made any adjustment by stating as under: 7.5 Receivables: With regard to receivables it is noticed from the information filed that the company is not exporting and supplying any goods or services to AEs. The balances appeari ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4. Link Point Infra Pvt Ltd 30,79,96,487 5. Suryamukhi Projects Pvt Ltd 34,30,19,698 6. Subhsree Hirise Pvt Ltd 30,77,37,072 7. Subhadristi Complex Pvt Ltd 24,08,10,819 Total(B) 1,83,81,30,566 8. Jain Infra Projects Ltd 37,80,29,798 9. Horizon Infrastructures Ltd 23,30,79,284 Total(C) 61,11,09,082 Total(B+C) 2,44,92,39,638 10.2. A statement stated to have been recorded from Shri Pravin Kumar Agarwal on 12-11-2012 has been extracted by the AO in the assessment order and vide para 5.5 of the order, AO records that some employees of the said person are operating the companies. The statements of Shri Pramod Ramdin Sharma, Shri Vishal Sharma, Shri Pulak Bagchi and Shri Umesh Singh were extracted in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would have been genuine, they could have been produced before the AO and in absence of the same, the AO was justified in treating the expenses to be nongenuine. It is submitted that the assessee could not produce the documents before AO, since the AO did not give a reasonable time for submitting the above documents during the course of assessment proceedings. 11.2. It was submitted that Lanco Babandh Power Limited (LBPL), Lanco Amarkantak Power Limited (LAPL) and Lanco Kondapalli Power Limited entered into memorandum of understanding / implementation agreements with State Governments for development of thermal power projects in the states of Odisha, Chhattisgarh and Andhra Pradesh. For execution of the above contracts, the aforesaid mentioned entities awarded Engineering, Procurement and Construction (EPC) contract to M/s. Lanco Infratech Limited (L1TL/assessee) on lnternational Competitive Bidding (ICB). The scope of work included civil works contract, Offshore BTG supply contract and onshore supply contract and Services contract. 11.3. The EPC work sub-contracted to assessee along-with consideration is summed up as below: Project Name Civ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (Amarkantak) Project, assessee incurred a cost of ₹ 320.67 Crores on civil works against the receipt of ₹ 471 Crores which were taxed by the AO. Also, for LKPI (Kondapalli) Project, the assessee incurred a cost of ₹ 80.82 Crores for execution of civil works against receipt of ₹ 110.49 Crores, which was again taxed by the AO. The income against the aforesaid invoices has already been received by assessee and the same has also been taxed by the AO. It cannot be thought that such huge quantum of civil works could have been carried out without incurrence of any costs against the same. Further, VAT/Service obligations have been duly complied with by assessee and the concerned Government Authorities have accepted these transactions. Therefore, if one arm of the government has accepted the transactions, the other arm of the government must also respect the same- (Apollo Tyres Ltd Vs. CIT (2002) 255 ITR 273 and Vadilal Chemicals Vs. State of AP (2005) 6 SCC 292). 11.6. It is submitted that a perusal of the Reports generated by Independent Engineers appointed by Lender Banks clearly shows a substantial amount of work being carried out by the assessee' sub-con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us, then the corresponding receipts cannot also be subject to tax because without incurring of expenditure, it was not possible to carry on the Civil works and raise invoices LBPL/LAPL/LKPL. Further, it may also be noted that when the assessing officer has not disputed the receipts of the assessee (which have been duly offered to tax) and no doubts have been raised upon the corresponding completion of the project, then the corresponding expenditure incurred towards completion of the project cannot be treated as bogus in view of the fact that assessee has furnished all the details and supporting evidence. In this regard reliance is placed on the following case laws: a. Judgement of Hon'ble Bombay High Court in the case of CIT Vs. Nikunj Eximp Enterprises (P) Ltd. (2013) [372 ITR 619] (Mum) wherein it was held as under: The Tribunal records that the Books of Accounts of the respondentassessee have not been rejected. Similarly, the sales have not been doubted and it is an admitted position that substantial amount of sales have been made to the Government Department i.e. Defence Research and Development Laboratory, Hyderabad. Further, there were confirmation letters filed b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (1) of the Act is itself incorrect, while disallowing the said expenditure as the expenditure is neither personal nor capital in nature. 11.9. It was submitted that AO disallowed the expenditure incurred in execution of these projects, although corresponding income was offered to tax in the return of income. It is a settled legal position that the entire amount cannot be subjected to tax and only the profit embedded therein can be subjected to tax. It was further contended that the sub-contractors to whom the payments were made are assessed to tax as this contract receipts are taxable in their hands. Thus, they have filed their ROI's and admitted the receipts. The gross receipts have already suffered tax in sub-contractors hands. The basic commercial principles are that one person's income is other person's expenditure. It may be noted that the payment had also been made through banking channels. In this regard, reliance is placed on the decision of ITAT, Mumbai in the case of ITO Vs. Growel Energy Co. Ltd (2014) 47 taxmann.com 371 (Mumbai - Trib). The AO relied on extraneous and irrelevant factors for making the disallowances such as low profit margins of sub-contra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t prejudice, the AO has erred in law and in facts in making the addition of ₹ 2,44,92,39,638/- u/s. 69C, whereas the DRP has clearly held that the provisions of Section 69C are not applicable in respect of these additions. Hence, the addition made is bad in law and without jurisdiction. 12. Disallowance of service tax as part of disallowance of sub-contract expenditure: Ground No. 16 (Additional Ground) - That without prejudice, in view of facts and circumstances of case, the AO had erred in disallowing the amount of sub-contract expenditure given to certain parties including the amount of service tax which was never claimed as expenditure. Ground No. 17 (Additional Ground) - That without prejudice, in view of facts and circumstances of the case, the AO has wrongly made the disallowance of entire service tax amount of ₹ 11,31,32,746/- in context of said sub-contractors, without appreciating the fact that service tax amount is not claimed as deduction. 12.1. It is submitted that AO while passing the final assessment order has erred in disallowing the amount incurred as service tax as part of the total amount paid to-aforesaid subcontractors without appreciati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd relied on the decision of the CIT Vs. Dalmia Cement (Bharat) Ltd., [254 ITR 377]. It was submitted that the transactions are collusive and colourable and assessee has not proved the genuineness of the expenditure. It was further submitted that assessee was given nine months time before the DRP. It was submitted that in the absence of any evidence, there is no option than to uphold the disallowance made by the AO. While accepting that in the consequential order/final order AO has wrongly stated the disallowance u/s. 69C, it was submitted that the disallowance made was u/s. 37(1). He supported the orders of the AO and DRP. 14. We have considered the rival contentions and perused the documents placed on record. It is a fact that the so called statement recorded by the Investigation Unit in Calcutta has not been furnished to assessee in the course of assessment proceedings. The copies filed before us are also are not fully legible and the CIT-DR has filed another copy as legible copy, but still it is also not fully readable, as some of the parts of the statement were missing in the Photo copies furnished on record. Prima-facie as seen from the statement, those statements are reco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been paid by assessee, that too payments made in later year. Thus the so called statements and analysis of fund flow does not establish that the sub contract payments are not genuine. 14.1. It was the contention of assessee these contracts are given as part of EPC sub-contracts and these works are analysed not only by the main contractor but also by various banks while releasing funds. It was submitted that assessee has billed these amounts to the main contractor on the basis of the sub-contracts executed by various companies and there are various documentary evidences which are furnished before the DRP, but unfortunately not accepted. The project receipts were offered as income and so the sub contract expenditure can not be bogus. It was however submitted that various tribunal decisions have estimated only the profit in those contracts, but no disallowance of the entire amount. 14.2. As seen from the submissions and the orders of the authorities, it is noticed that assessee was given no opportunity to justify the expenditure. A survey was conducted on 17-03-2015 at two places whereas assessee s projects were spread all over India. Draft assessment order has been passed on 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amined by AO as he did not give adequate time to furnish evidence and DRP also refused to examine the evidence furnished justifying the sub contracts. Therefore, we are of the opinion that AO can examine this aspect afresh after giving due opportunity to assessee. There is also justification in assessee s claim that AO erred in disallowing the amount of sub-contract expenditure, including service tax which was never claimed as expenditure to an extent of ₹ 11,31,32,746/. This contention is also required to be examined. Question of disallowance of an amount which was not claimed should not arise. Consequently, without relying on the so called statements which has no evidentiary value considering that no action was taken either in those companies or in the companies in whose cases the said enquiries were conducted( L T, PACL), we direct the AO to independently examine the claim of sub contract expenditure. In case assessee billed and offered the said contract receipts, AO is directed to accept the sub contract payments, as assessee received the corresponding amounts from main contractor and offered the same for taxation. In case there is any failure or the nexus was not fully ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... basis, which is arbitrary and bad in law. 18. As seen from the order, AO quantified the expenditure as un-vouched expenditure at ₹ 27,58,572/-, the quantification of which was not furnished to assessee. However, in this case, he has quantified the amount for disallowance at 20% of the above amount. As seen from the earlier ground, AO disallowed 100% of the amount un-vouchered and in this case, AO disallowed 20% of the amount un-vouched, Thus, there is no consistency in the AO s approach. We are of the opinion that in case AO furnishes the details of un-vouchered expenditure quantified and assessee could furnish the necessary details as directed in earlier ground, AO is directed to accept the same to the extent assessee could furnish the vouchers. AO is however, directed to restrict the disallowance to 10% of the above expenditure instead of 20% made in the order. With these observations, the issue is again restored to the AO for fresh examination. 19. In the result, appeal of assessee is allowed for statistical purposes and appeal of Revenue and Cross-Objection of assessee are dismissed. Order pronounced in the open court on 03rd May, 2017 - - TaxTMI - TMITax - ..... X X X X Extracts X X X X X X X X Extracts X X X X
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