TMI Blog2018 (2) TMI 1914X X X X Extracts X X X X X X X X Extracts X X X X ..... could be issued in the matter as on the date of the reference made by the AO to the TPO for determination of the arm s length price of the international transactions. Coming to the admitted facts of the case on hand, we find that return of income was filed by the assessee on 28.10.2005. Time to issue notice under section 143(2) of the Act was available till 30-9-2006. However, reference u/s 92CA(1) was made by the learned AO to the learned TPO on 11.7.2006. Notice u/s 143(2) was issued on 4.9.2006. TPO passed order on 31.10.2008 and the learned AO passed the assessment order on 29.12.2008, before the expiry of the period of 33 months allowed by Second proviso to Section 153(1) of the Act. Reject the contention advanced on behalf of the assessee by way of additional grounds that the order dated 31.10.2008 passed by the TPO or the final assessment order dated 12.12.2008 passed by the learned AO or the impugned order are bad in law and void ab initio because the reference u/s 92CA(1) preceded the date of issuance of notice u/s 143(2) of the Act, and proceed to adjudicate the matter on merits. Selection of five comparable - HELD THAT:- A reading of the TPO s order does not i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t this secured loan waiver as revenue receipt. We accordingly dismiss this ground of appeal. Provision for indirect tax - AO has lead to double disallowance, since the aforesaid amount of provision for indirect taxes has already been suo moto disallowed by the assessee while computing the taxable income for the subject matter and in view of the same, CIT(A) deleted it. We do not find any illegality or irregularity in this finding of the CIT(A) inasmuch as it is not either pleaded or established before us that the addition made by the AO does not lead to double disallowance or that the assessee suo moto did not disallow the same. It is a matter of record. We, therefore, find that the learned CIT(A) is justified in deleting this amount only to controvert the double disallowance and upheld the same. This ground of appeal is also dismissed. Amortization of spares - When there is consistency in the assessee following the straight line method of claiming amortization of spares in its accounts, we are also of the considered opinion that there is no justification for interfering in the method of calculation and the learned AO is not justified in making addition of the spares purc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 77; 26,86,64,303/- 7. Communication charges paid ₹ 3,41,97,344/- 8. Fes for technical services ₹ 74,80,327/- 9. Payment of training charges ₹ 3,05,710/- 10. Recovery of expenses ₹ 15,63,21,483/- 11. Payment of miscellaneous and other Administrative expenses ₹ 43,43,806/- 3. Learned TPO accepted the international transactions of the assessee in all segments except in manufacturing and installation segment. Assessee used Transactional Net Margin Method (TNMM) as the most appropriate method and net margin on cost was taken as profit level indicator (PLI). The margin of the assessee was 6.63%. Order of the learned TPO shows that the assessee had clubbed manufacturing and installation services into one segment and margin of this segment was calculated at -1.49% on sales. For benchmarkin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n law, the Learned AO have grossly erred in making assessment under section 143(3) read with sections 144C(4) of the Income tax Act, 1961 ( the Act ) since: (i) the reference under section 92CA(1) made by Learned AO on 11 July, 2006 (refer page 1 of the order u/s 92CA of the Act enclosed as Annexure 1) to the Learned TPO was an invalid reference as the same was made before the initiation of the assessment proceedings under section 143(2) of the Act as the notice under section 143(2) of the Act was issued to the Appellant on 4 September, 2006 (refer page 1 of assessment order enclosed as Annexure 2); and (ii) henceforth, the adjustment made by the Learned AO is not in consequence of an order passed under section 92CA(3) which ought to have been passed by the TPO on the basis of a valid reference under section 92CA(1) of the Act during the course of the assessment proceedings, and hence is invalid in law and void-ab-initio. 6. Ld. AR submitted that inasmuch as the additional ground is purely based on law and all the facts request for its adjudication are available on record, in view of the judgement of the Hon ble Supreme Court in NTPC vs. CIT (1998) 22 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... des that any income arising from an international transaction between associated enterprises shall be computed having regard to the arm's length price. Sections 92A and 92B of the Act contain provisions relating to the meaning of the expressions associated enterprise and international transaction respectively. Section 92C of the Act contains the powers of the Assessing Officer and the manner of determination of arm's length price in relation to an international transaction. Section 92CA of the Act provides that where the Assessing Officer considers it necessary or expedient to do so, he may refer to the Transfer Pricing Officer the determination of the arm's length price. Section 92CB of the Act relates to the power of the Board to make safe harbour rules. Section 92D of the Act relates to Maintenance and keeping of information and document by persons entering into an international transaction. Section 92E of the Act prescribes that the person entering into international transaction shall furnish a report from a chartered accountant in Form No.3CEB. Section 92F of the Act contains definitions of certain terms which are relevant to compute arm's length price, etc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h price in relation to an international transaction is determined either by the Assessing Officer as provided in sub-section (3) of section 92C or by the TPO u/s 92CA(3) of the Act where a reference is made to him by the Assessing Officer. In both situations, the Assessing Officer is required to compute the total income of the assessee having regard to the arm's length price of the international transaction so determined, either in terms of sub-section (4) of section 92C or subsection (4) of section 92CA. Notably, sub-section (4) of section 92C comes into play where an arm's length price in relation to the international transaction is determined by the Assessing Officer and sub-section (4) of section 92CA comes into play where the arm's length price in relation to an international transaction is determined by the TPO, on a reference by the Assessing Officer. In the case before us, the total income of the assessee has been computed having regard to the arm's length price determined by the TPO under section 92CA(3) of the Act and therefore the Assessing Officer has taken recourse to section 92CA(4) of the Act. 15. It is quite clear that the process of determ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Act. Under the provisions of section 92CA reference is in relation to the international transaction. Hence all transactions have to be explicitly mentioned in the letter of reference. Since the case will be selected for scrutiny before making reference to the TPO, the Assessing Officer may proceed to examine other aspects of the case during pendency of assessment proceedings but await the report of the TPO on the value of international transaction before making final assessment. [underlined for Emphasis by us] 17. It is emphasized on the basis of the CBDT Instruction (supra) that even as per the understanding of the CBDT, a case is to be selected for scrutiny assessment before the Assessing Officer may refer the computation of arm's length price in relation to an international transaction to the TPO u/s 92CA of the Act. Therefore, we are inclined to uphold the position sought to be canvassed by the assessee that an Assessing Officer can make reference to the TPO u/s 92CA of the Act only after selecting the case for scrutiny assessment. In-fact, the aforesaid underlined observations of the CBDT Instruction (supra) is a pointer to the legislative import that the ref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtment to make a reference to the TPO without issuing notice u/s 143(2) of the Act, but in our view, it is not supported by a schematic reading of the relevant Provisions relating to the transfer pricing assessment contained in sections 92 to 92F. The entire purpose of computation of arm's length price in relation to an international transaction is found in sub-section (1) of section 92 of the Act. Section 92(1) mandates that any income arising from an international transaction shall be computed having regard to the arm's length price. Therefore, the sole aim of computing the arm's length price in relation to any international transaction is to compute the income arising therefrom. Thus, the computation of income and the determination of arm's length price in relation to the international transaction have to go hand-in-hand and without there being an occasion to compute income arising from an international transaction, it is difficult to comprehend the process for computation of arm's length price in relation to the relevant international transaction. Therefore, it would not be open for the Department to say that the process of computing arm's length price o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... envisaged for the transfer pricing assessment in sections 92 to 92F of the Act. The provisions of sections 92 to 92F of the relate to computation of income from the international transaction having regard to the arm's length price, meaning of associated enterprises, meaning of international transaction, determination of arm's length price, keeping and maintaining of information and documents by persons entering into international transactions, furnishing of a report from an accountant by persons entering into such transaction and the definition of certain expressions occurring in such sections. The aforesaid provisions do not operate in individual spheres but the same operate with a singular purpose of computing income arising from an international transaction. The process of computation of income is necessarily a part and parcel of the assessment proceedings envisaged under the Act. Section 92CA of the Act is not an independent provision, but it is triggered only when the occasion arises for application of section 92(1) of the Act, whereby income from an international transaction is to be computed having regard to its arm's length price; and, the occasion to compute th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was not - whether any notice under section 143(2) was issued or not. It was only whether the return, in respect of which such notice can be issued, was pending or not. 13. This decision of Karnataka High Court was referred by a coordinate bench of this Tribunal in XL India Business Services P. Ltd. (supra) wherein the reference to the Transfer Pricing Officer was made after the end of the time limit available for issuance of notice u/s 143(2) and before the commencement of re-assessment proceedings. In this context the Tribunal referred to the decision of the Hon ble Karnataka High Court in SAP Labs (p) Ltd. (supra) and observed that inasmuch as no income-tax return in respect of which a notice u/s 143(2) can be issued was not pending and the time for issuance of such notice had come to an end before the point of time when a reference was made, such a reference itself was legally invalid. It was held therein that unless an income tax return, in respect of which notice under section 143(2) can be issued, was pending before the Assessing Officer, a reference to the Transfer Pricing Officer cannot be made by the AO. 14. This decision of the Tribunal in XL India Bus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the AO to the TPO. The irresistible conclusion, therefore, is that it is not the requirement of law that notice u/s 143(2) of the Act shall precede the making of reference, but what the law requires is that a return of income tax in respect of which notice u/s 143(2) of the Act could be issued, must be pending as on the date of reference to the Ld. TPO. As a matter of law, Section 92CA does not speak of necessity of any issuance of notice u/s 143(2) as on the date of making reference. Judicial pronouncements make it amply clear that it is suffice if return of income is pending and time is available to the AO to issue notice u/s 143(2). When once this the duel requirement is complied with, whether or not the notice u/s 143(2) of the Act is issued before the reference u/s 92CA(1) of the Act, is irrelevant and it does not vitiate the reference or the consequential proceedings on such a ground. 18. Next contention of the Ld. AR is that even if we assume for a while that no assessment proceedings are required to be pending by the date of reference under section 92CA (1) of the Act, however, for the purpose of limitation for completion of assessment under section 153 (1) of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ars , the words thirty-three months had been substituted.] [emphasis supplied by us] 20. In the preceding paragraphs we held that a reference under section 92CA (1) could validly be made by the Ld. AO to the Ld. TPO if the income tax return in respect of which notice u/s 143(2) of the Act could be issued, is pending before the Ld. AO as on the date of such reference. We are of the considered opinion that making reference under section 92 CA (1) and issuing notice under section 143(2) are integral part of the exercise to assess the total income of the assessee. That being so, we find it difficult to assume that making reference under section 92CA(1) of the Act earlier to the issuance of notice under section 143(2) of the Act would make any difference in the nature of process of assessment of total income of the assessee. When law permits a reference for determination of ALP to the Ld TPO before actual issuance of notice under section 143(2) of the Act, it does it with all the necessary consequences. Otherwise, it will render such a power vested in the Ld. AO to make a reference, a spent force and the entire exercise would remain an empty formality. 21 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Power Plant/Battery, EPBT, EPBAX, Smart cards, call charge indicators, Caller ID and ID phones and other office products. It is, therefore, clear that functional similarity of the assessee with all comparables selected is not in dispute. 26. Out of these five companies, learned TPO accepted Shyam Telecoms as a good comparable and rejected four others. As recorded by the Learned TPO, the main reason as to why the four companies should not be compared as comparables is that these companies are incurring continuous losses for facing decline revenues for the last three years. In respect of ITI Ltd. and Himachal Futuristic Communications Ltd., the learned TPO recorded that these two companies are facing continuous losses for the last three years whereas Punjab Communications Ltd. is suffering declining revenues for the last three years. In respect of HTL Ltd., it is stated that the company was referred to BIFR to declare it as a sick company. Out of these four companies rejected by the learned TPO, assessee is challenging the exclusion of ITA Ltd., Punjab Communications and Himachal Futuristic Communications Ltd. and is not pressing for inclusion of HTL Ltd. 27. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d DR placed reliance Yum Restaurants, TS 253-ITAT-2011 (DEL) TP); Navisite India (TS-408-ITAT-2014(DEL) TP); and Aithent Technologies Ltd. (TS-760-ITAT-29\016 (Del) TP) in support of her contentions. 29. A reading of the financials of these companies with reference to the annual reports corroborates the statement of learned AR that either loss making or the decline in revenues is the trend in the industry. In Chryscapitals Investments Advisors (I) P.LLtd. (supra) vide para 44, the Hon ble jurisdictional High Court held that,- 44. In light of the above findings, this Court concludes as follows: a. The mere fact that an entity makes high/extremely high profits/losses does not, ipso facto, lead to its exclusion from the list of comparables for the purposes of determination of ALP. In such circumstances, an enquiry under Rule 10B(3) ought to be carried out, to determine as to whether the material differences between the assessee and the said entity can be eliminated. Unless such differences cannot be eliminated, the entity should be included as a comparable. b. xxx xxx xxx c. xxx xxx xxx d. xxx xxx xxx 30. A reading ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the learned CIT(A) relied upon the decision of the Mumbai Bench in the case of Sulzer India Ltd. vs JCIT (2010), 134 TTJ 385 to reach the conclusion that the waiver of secured loan being capital or non trading in nature, cannot be considered as remission of trading liability to tax u/s 41(1)(a) of the Act. He submitted that this decision in the case of Sulzer India Ltd. (supra) was upheld by the Hon ble High Court in the decision reported in CIT vs. Sulzer India Ltd., 369 ITR 717. His further submission is that this issue was considered by the Tribunal in favour of the assessee for the Asstt. Years 2004-05 and 2007-08. 34. As could be seen from the order of the leaned CIT(A) vide para 3.4, learned CIT(A) while placing reliance on Sulzer India Ltd., the facts of which are similar to the case on hand, held that the subsequent waiver of the secured loan being capital or non trading in nature cannot be considered as remission of trading liability to tax u/s 41(1)(a) and on that premise, he deleted the same. Further, in assessee s own case in the asstt.2004-05 decided on 30.6.2017, this aspect is considered by this Tribunal and vide para 8, this Tribunal while placing relia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... between the working of the allowable deduction between the AO and the assessee. He further observed that as a matter of fact, the learned AO does not object to the amortization of the spare parts. On verification of record, the learned CIT(A) found that the assessee has consistently been following the straight line method of claiming amortization of spares in its accounts, as such, there is no justification in interfering in the method of calculation followed by the assessee. On this premise, the learned CIT(A) directed the learned AO to allow amortization of spares on straight line basis i.e. amortization of spares purchased during the year in three years in equal proportions which means 1/3rd in each year. 38. The observation of the learned CIT(A) could not be shown to be wrong. When there is consistency in the assessee following the straight line method of claiming amortization of spares in its accounts, we are also of the considered opinion that there is no justification for interfering in the method of calculation and the learned AO is not justified in making addition of the spares purchased during the current year to the opening balance of the spares of the earlier ..... 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