2012 (11) TMI 111 - AT - Income Tax

Arm s length price - case referred to TPO - addition on commission income of GBP - Held that - The business strategy is that some products may be marketed by a businessman with a low profit to create a demand for other related products or related service. Those other related products are then sold with high profit. However from the side of the assessee nothing of this sort has been demonstrated & no scientific or convincing reason has been advanced in support,thus each sale is a separately contracted transaction, so need to evaluate separately to arrive at arm s length price relying on ACIT Versus UE Trade Corporation (India) (P) Ltd. 2010 (12) TMI 224 - ITAT, NEWDELHI rejection of the pleading of assessee through which it was demanded to aggregate the entire transaction with the AE for the whole year. Tax avoidance motive - Held that - The price on which a particular product is available in one country may vary from the price prevailing in other countries due to host of factors. The intent and purpose of these provisions is not to ensure that there is no diminution in the tax liability of Indian Enterprise as well as its AE on a total basis. Rather the logic is to make certain that the transactions between the AE should not be arranged in such a way that the ultimate tax payable in India is artificially reduced. Important factor is the payment of tax qua India and not qua the assessee along with its AE on a whole. Therefore, rejecting the submission of assessee as devoid of any merit that there was no force in this argument of establishing a tax avoidance motive by the Revenue Department. Reference to TPO without providing an opportunity of hearing - Held that - Decision of the AO to refer the international transaction to TPO for determination of ALP do not in any manner visit the assessee with any civil consequence. A safe-guard has already been provided in the Statute by making a compulsory provision about seeking of prior approval from the CIT by the AO. It was held that there should not be any grievance to the assessee because the TPO had given due opportunity to the assessee. We therefore hold that in the absence of any Statutory provision or a mandate of requirement of giving an opportunity before reference do not adversely affect a taxpayer because the TPO has definitely given sufficient opportunity to the assessee. One of the sources form which the factual information regarding international transaction can be gathered is Form No. 2CEB filed with the return which is in the nature of an account s report containing basic details of an international transaction. No detailed enquiries are needed at this stage and the AO should not embark upon scrutinizing the correctness or otherwise of the price of the international transaction at his stage. Specially when there was a non-disclosure on the part of the assessee in terms of the provisions of section 92C(3) the AO is fully empowered to proceed to determine an international transaction which had come to his knowledge on the basis of any material or document available with him. The assessee has an option either to file his acceptance of the variation of the assessment or file his objection to any such variation with the DRP. The DRP is also authorized to issue direction as it thinks fit for the guidance of the AO. At that stage as well the assessee has an opportunity of hearing. The AO is thereafter shall in conformity with the directions of the DRP complete the assessment proceedings. So the existence of an international transaction can be examined by the DRP at the instance of the assessee & there is nothing to limit the powers of DRP. Thus the AO within his jurisdiction and in terms of the provisions of section 92C(3) is empowered to determine the arm s length price on the basis of the material available to him and finalized the assessment accordingly. Commission payment - Held that - It is evident that the counter-claims are yet to be re-examined afresh by the AO & if the assessee is in a position to demonstrate that no commission in fact was received and on investigation the AO is satisfied, then the impugned addition/upward adjustment is required to be deleted. With these directions, we hereby hold that the upward adjustment pertaining to the Transfer Pricing transaction regarding commission received from M/s. Atul Europe Ltd. of Rs. 2,71,82,980/- is to be decided afresh by the AO. Prior period expenses - Held that - There is no evidence on record about the source of such income and what will be the impact of its taxability during the year under consideration. How it was termed as an income of earlier years if it was earned during the year under consideration. Since all such information is not available on record, therefore the natural justice demands to restore this issue back to the stage of the AO to be decided. Disallowance u/s.14A - Held that - Under Section 14A(1) it is for the Assessing Officer to determine as to whether the assessee had incurred any expenditure in relation to the earning of income which does not form part of the total income under the Act and if so to quantify the extent of the disallowance after furnishing an opportunity to the assessee - remand the proceedings back to the AO for a fresh determination the fact of the present case was that the Assessing Officer had not enquired the issue in the light of applicability of Rule 8D. Disallowance in respect of irrecoverable balance written off - Held that - The description of the equipment, the use of the equipment and the details about the advance given to the said party was not informed. Rather, it appeared that the assessee wanted to acquire a capital asset, as held by the AO, therefore the expenditure or advance being related to an acquisition of a capital asset, therefore not to be allowed in view of the provisions of section 37(1). Also the impugned amount could also not be allowed u/s. 36(1)(vii)because the said amount was not a debt but an advance to the said party. In the result, this addition is hereby confirmed - against assessee. Disallowance u/s.80IA - Held that - As decided in GUJARAT ALKALIES & CHEMICALS LTD. Versus CIT 2012 (3) TMI 267 - GUJARAT HIGH COURT only because to a certain extent the new undertaking is dependent on the existing unit, it will not deprive the new undertaking the status of a separate and distinct identity - issue of claim of deduction u/s. 80IA is now required to be decided in the light of the verdict of this case. Disallowance of depreciation - Held that - The difference between the two, i.e. the original claim of depreciation and the revised claim of depreciation was thus computed by the AO at Rs. 1,21,18,801/- - the findings of the CIT(A) and the depreciation as allowed by the AO was affirmed. Due to this reason, AR has correctly stated that the recalculation of depreciation for the year under consideration was nothing but a consequential effect of the re-computation of depreciation. Non carried forward of unabsorbed depreciation loss - Held that - AO had calculated the balance of unabsorbed depreciation available to the assessee to be carried forward, which resulted into a disallowance of differential of the claim of depreciation of Rs. 9,28,32,049/- At present, in the absence of any supporting re-calculation by the assessee, no interfere with the calculation of the carried forward depreciation as made by the AO. Initiation of levy of interest u/s.234B, 234D and withdrawal of interest u/s.244A & penalty u/s.271(1)(c) is not justified.

Summary

Issues Involved:
1. Adjustments to Arm's Length Price (ALP) for goods sold to Associated Enterprises (AEs) and commission received.
2. Admission of additional evidence.
3. Prior period expenses.
4. Disallowance under Section 14A of the Income Tax Act.
5. Irrecoverable balance written off.
6. Deduction under Section 80IA.
7. Depreciation disallowance.
8. Carry forward of unabsorbed depreciation loss.
9. Levy of interest under Sections 234B, 234D, and withdrawal of interest under Section 244A.
10. Penalty under Section 271(1)(c).

Detailed Analysis:

1. Adjustments to Arm's Length Price (ALP) for Goods Sold to AEs and Commission Received:
The appellant contested the addition of Rs. 4,46,52,496/- on account of adjustments to the ALP. The TPO made an upward adjustment of Rs. 1,74,69,516/- for goods sold to AEs at lower prices and Rs. 2,71,82,980/- for commission received from M/s. Atul Europe Ltd. The appellant argued for adjustments based on different applications and quantity discounts, which were rejected by the TPO. The ITAT restored the issue back to the AO for de novo consideration, emphasizing the need for a detailed examination of the adjustments claimed by the appellant.

2. Admission of Additional Evidence:
The ITAT admitted additional evidence related to the statement of account of the assessee in the books of Atul Europe Ltd. for certain financial years but did not admit evidence related to the discrepancy in the nature of sale of a product.

3. Prior Period Expenses:
The AO disallowed prior period expenses of Rs. 1,11,31,209/- on the grounds that the liability did not crystallize during the year. The ITAT restored the issue back to the AO to examine the nature of the liability and evidence of crystallization during the year under consideration.

4. Disallowance under Section 14A:
The AO disallowed Rs. 2,26,03,000/- under Section 14A by applying Rule 8D. The ITAT restored the issue back to the AO for a fresh determination, emphasizing the need to establish a nexus between investments and borrowings and to determine the expenditure incurred in relation to exempt income.

5. Irrecoverable Balance Written Off:
The AO disallowed Rs. 12,50,444/- related to an advance given for acquiring a capital asset. The ITAT confirmed the disallowance, agreeing that the amount could not be treated as a trading loss or debt under Section 36(1)(vii).

6. Deduction under Section 80IA:
The AO denied the deduction under Section 80IA for New Power Plant, Captive Power Plant, and Co-gen Plant. The ITAT restored the issue back to the AO to be decided in light of the verdict of the Gujarat High Court in the case of Gujarat Alkalies & Chemicals.

7. Depreciation Disallowance:
The AO reduced the depreciation claim by Rs. 1,21,18,801/- based on the depreciation allowed in earlier years. The ITAT confirmed the AO's action, noting that the recalculation was a consequential effect of earlier years' judgments.

8. Carry Forward of Unabsorbed Depreciation Loss:
The AO disallowed the carry forward of unabsorbed depreciation loss of Rs. 9,28,32,049/-. The ITAT found no legal fallacy in the AO's adjustment and dismissed the ground, suggesting the assessee seek rectification under Section 154 if there were any mistakes in calculation.

9. Levy of Interest under Sections 234B, 234D, and Withdrawal of Interest under Section 244A:
These issues were deemed premature and consequential in nature by the ITAT, hence not adjudicated.

10. Penalty under Section 271(1)(c):
The ITAT found the initiation of penalty proceedings to be premature and consequential, hence not adjudicated.

Conclusion:
The ITAT restored several issues back to the AO for fresh consideration, emphasizing the need for detailed examination and proper application of legal principles. Some contentions were rejected, and the appeal was partly allowed for statistical purposes.