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TMI Blog2019 (8) TMI 799X X X X Extracts X X X X X X X X Extracts X X X X ..... d Global Trading Model (GTM) of the Fujitsu group. The assessee had adopted Transactional Net Margin Method (TNMM) in order to justify the arms length price of its international transactions. 2.1 The return of income was filed declaring income of Rs. 74,37,01,710/-. Subsequently, the return of income was revised to an income of Rs. 75,04,24,590/-. The case of the assessee was selected for scrutiny and during the course of assessment proceedings it was noticed that the assessee had issued credit notes to the value of Rs. 39 crores to its associated enterprises. 2.2 As per the assessee, during the year under consideration, the assessee had raised invoices on its associated enterprises in terms of the intercompany agreements and the GTM of the group. Based on the turnover of the preceding financial years i.e. is Rs. 259 crores for financial year 2010-11, Rs. 356 crores for financial year 2011-12 and Rs. 423 crores for financial year 2012-13, the assessee company had determined its estimated cost for the year under consideration i.e. financial year 2013-14 (assessment year 2014-15) and at such cost applied the mark-up provided in the Global Trading Model. As per the assessee, due to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to a customer as long as the resulting price charged was at arms' length. 2.4 However, the assessing officer reached the conclusion that the real purpose of issuance of the said credit notes was to maintain a minimum level of operating profit which was acceptable to the Indian tax authorities and repatriate the balance to its associated enterprises. The amount of Rs. 39 crores was ascertained by the assessing officer to be the profits accrued to the assessee under section 5 (1) (b) of the Act which had been diverted with a view to evade taxes in India. Accordingly, the AO made an upward adjustment on account of credit notes issued to the group companies considering them as undisclosed income and completed the income tax assessment at an income of Rs. 1,14,04,24,590/-. 2.5 Aggrieved with the order of assessment, the assessee filed appeal before the Ld. first appellate authority. However, the Ld. CIT (Appeals) dismissed the assessee's appeal. 2.6 Now the assessee is before this Tribunal (ITAT) and has raised the following grounds of appeal: "On the facts and circumstances of the case and in law, Ld. Commissioner of Income Tax (Appeal) ("CIT(A)" vide Impugned order dated 31.10.2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate international transaction. 8. Ld. AO/ Ld.CIT(A) has failed to appreciate the fact that even after the credit notes the profit margin being earned by the Appellant is more than the arm's length margin of comparable companies and the inter-company transaction meets the arm's length test. 9. Without prejudice to above, Ld. AO and Ld. CIT(A) erred in failing to appreciate that such adjustment of tentative consideration for services on the basis of actual costs is permissible in law and Ld. AO's addition to returned income based on incorrect presumptions is impermissible and unlawful. 10. Ld. CIT (A) has erred in passing an order without considering the detailed objections and evidences placed on record by the Appellant. 11. Ld. AO has grossly erred both in facts and in law in proposing to charge interest under section 234A and 234B of the Act. 12. Ld. AO has erred, in facts and in law, by initiating penalty proceedings under section 271 (1)(c) of Act without recording any adequate reasons for such initiation. The Appellant craves leave to add, amend, vary, omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of the appea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , it was very much evident that the case had transfer pricing implications and since no reference had been made to the TPO, the assessment itself was bad in law and deserved to be quashed. 3.3 The Ld. authorised representative further submitted that these pleadings were duly made before the assessing officer as well as the Ld. CIT (Appeals) but the Ld. first appellate authority had passed the appellate order in a routine manner without considering the detailed objections and evidences placed on record by the assessee. He drew our attention to the grounds of appeal raised before the Ld. first appellate authority and also to Para 6.5 of the impugned order and submitted that in this order the Ld. first appellate authority had proceeded on incorrect factual presumption that there was no mention of credit notes in the financial statements. It was further submitted that the order of the Ld. first appellate authority not only ignored to deal with the issue as to how the amount involved in credit notes was taxable under section 5 (1) (b) of the Act but also cited no reasons on how the adjustment of tentative billing for actual expenditure, which was in consonance with terms of the agreeme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... beyond the jurisdiction of the assessing officer to assume that the issuance of such credit notes was with intent to evade taxes in India. Reliance was placed on Para 1.64 of the OECD guidelines wherein it has been provided that it is desirable for the income tax authorities to recognise and appreciate the actual transactions undertaken by a taxpayer and the same should not be disregarded barring exceptional circumstances. It was submitted that this position has also been accepted by several courts of law wherein it has been held that it is necessary for the income tax authorities to accept and recognise a transaction as such and not to dictate or determine the terms thereof. 3.9 The Ld. authorised representative referred extensively to the paper book wherein the detailed submissions before the assessing officer and the Ld. CIT (Appeals) had been incorporated. It was prayed that since the lower authorities and not considered these arguments and submissions, the appeal of the assessee deserved to be allowed. 4.0 In response, the Ld. CIT Departmental Representative (DR) placed extensive reliance on the observations and findings of the assessing officer. The Ld. CIT DR submitted th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the assessment order and submitted that this entire exercise of issuance of credit notes was an attempt to manipulate the accounts to adjust the taxable profits down words.. The Ld. CIT DR also submitted that this was an extraordinary transaction which affected the taxable profit of the assessee in India but the same was not disclosed in Form 3CEB by the assessee. 4.3 It was also submitted that the credit notes were issued at the end of the year i.e. on 31st March and not during the course of the assessment year and, therefore, it was apparent that the credit notes were issued after the assessee realised that it had earned profits over and above expected margins. 4.4 The Ld. CIT DR also made reference to the email exchange to which the assessing officer had made a reference to in Para 4.7 of the assessment order from which it was apparent that this adjustment was done to maintain only the minimum level of operating profit which was acceptable to the income tax authorities. 4.5 The Ld. CIT DR submitted that it was beyond conclusion that the impugned transactions were pure transfer of taxable profits out of India with the view to evade taxes. It was submitted that these adjustme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ground No. 5 of the assessee's appeal that the credit notes issued were in line with the global trading model of the group which was consistent with the transfer pricing regulations in India and abroad, it was observed by the Ld. CIT (Appeals) that this contention is not accepted in view of the reasons given by the assessing officer in paragraph 6 of the assessment order. It is further seen that ground No. 6 of the assessee's appeal also was dismissed wherein the assessee had contended that the assessing officer had erred in not accepting that the credit notes were issued on account of difference between budgeted and actual cost and foreign exchange fluctuations. The reason for dismissal of this ground is also that the assessing officer's observation that the impugned transaction was not an international transaction has been accepted by the Ld. CIT (Appeals). Further ground No. 7 pertaining to the assessee's contention that the assessing officer had erred in concluding that the credit notes were part of software development services transactions and not international transactions and ground No. 8 pertaining to the contention of the assessee that the assessing officer had erred in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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