2014 (6) TMI 595 - AT - Income Tax

Transfer pricing adjustment - Determination of ALP Disallowance of cost of land transferred to APHB Held that - The two companies are parent companies who formed the assessee through that agreement - the provisions of the agreement are not to be violated by the assessee - The assessee cannot say that only the beneficial clauses in that agreement would be followed and the other part cannot be acted upon - The agreement as a whole is to be acted upon by the assessee in order to give full effect to the agreement - The obligation of the assessee under the agreement is nothing but an actionable claim in favour of the APHB - the burden of a contract cannot be assigned without the consent of the other party of the contract a contract as a whole is to be acted upon for the functional operation of the assessee - The terms of the agreement are very clear that unless obligations cast upon the assessee are carried on by the assessee, the assessee cannot function and operate - The assessee is bound by the terms therein and being so it is not possible to accept on behalf of Revenue that this is a case where income has accrued to the assessee and later on it was applied by it by passing the share of profit in favour of the APHB - the right to receive this payment was vested with the APHB and the assessee has to comply with the agreement in true letter and spirit - the payment made by the assessee to the APHB in terms of the agreement is to be allowed as wholly and exclusively incurred for the purpose of business Decided in favour of assessee. Disallowance of incentive paid to IJMII Held that - The assessee was contractually liable to pay incentive to IJMII - The payment was measured as a percentage of development costs incurred for development of integrated township - the incentive payable was quantified based on the quantum of development costs incurred till 31.3.2007 - the liability to pay incentive crystallised during the year - the incentive payable is to be finalised after completion of construction based on the total cost of development does not postpone the incurrence of liability - incentive paid to IJMII is allowable irrespective of the fact that the construction of the township had not been completed at the end of the year - the fact that the execution of work was not in time is irrelevant for the purpose of allowability of expenditure - substantial completion of the project is done and only some minor works are pending which are very time consuming such as interiors, design changes by the owners etc. - incentive paid to IJMII is fully allowable in computing the business income Decided in favour of Assessee. Disallowance of incentive paid Held that - The commercial complex was not completed in time it is not clear how such incentive was paid and what is the necessity for such payment while the project was in progress - IJMII is 51% shareholder of this company - incentive as well as anticipated profits are taken away and profit is not disclosed for income tax purposes such that no dividend tax nor any tax need be paid - the profit/income disclosed by the taxpayer as well as one of the shareholders - among other justified reasons another issue to be noticed is that low incomes are only disclosed by taxpayer as well as one of the shareholders i.e., APHB - the reason can be traced to the self-serving nature of the agreement concluded after 8 months of incorporation - the applicability of Sections 2 (22), 40A(2) and unreasonableness of payment, there is no justification to allow the deduction on account of incentive paid Decided against Assessee. Disallowance of handling over charges Held that - The assessee was to handover the flats after completion of construction within 12 months from the date of agreement with the purchasers - there was inordinate delay in completing the construction and the assessee has to pay compensation to the purchasers - AO held that the impugned sum is to be treated as interest as per definition u/s 2(28A) and to the extent there was failure to do TDS and the same is held to be disallowable u/s 40a(ia) - As per clause 38 which deals with delay in completion, the contractor shall pay to the employer for every day s delay certain compensation - These sums are to be as liquidated damages for delay and not as a penalty. As per Appendix -B liquidated damages clause.38.1 the tax payer is liable to collect the damages from the contractor-cum-shareholder, i.e. IJMII - The AO has already pointed out that IJMII has not executed the work in time to term the payment as incentive for timely completion - There is no evidence placed on record to state that contractor handed over possession in time - the liability to pay liquidated damages vested in the tax payer Decided against Assessee. Payment of handing over charges Scope of term interest u/s 2(28A) of the Act Held that - The handing over charges paid were not in respect of any debt incurred or money borrowed - the assessee had merely paid compensation for delay in completion and handing over possession of flats Relying upon Delhi Development Authority v ITO 1995 (1) TMI 126 - ITAT DELHI - handing over charges cannot be equated with the word interest so as to invoke the provisions of section 40(a)(ia) of the Act and no addition is possible Decided in favour of Assessee. Addition of cost of land attributable to flats Held that - Nothing prevented the tax payer to sell directly and credit such consideration to its P&L account - The necessity to conclude this agreement after incorporation of the company and to sell the flats only through shareholder is not substantiated - The expenditure is in fact incurred for the business purpose of shareholder and not for taxpayer s business - The necessity to incur such loss is also not established - Sec. 40A(2)(a) arises in this case as APHB is a shareholder holding 49% of shares in the company - excess expenditure is incurred for the specified person - it also amounts to diversion of profit since the shareholder, APHB, can sell at a far higher than Rs.400/- and make profit whereas the taxpayer incurs loss which is the quantum of addition made by the AO as disallowance - already the incomes disclosed by taxpayer and APHB are pointed out - The tax avoidance device is once again brought to light besides the legal issues Decided against Assessee. Disallowance made u/s 10A(2) of the Act Cost of construction of houses Held that - The burden is on the AO to bring on record the proof with regard to market value of the services rendered - The expression used in this provision is incurs any expenditure in respect of which payment has been made or is to be made in person - actually payment must be made and there has to be expenditure incurred before the provision can be applicable - A trade discount is the subject matter of the claim is a discounted price of offer and not an expenditure thus, no question of invoking the provisions of section 40A(2) arises Decided in favour of Assessee. Disallowance of interest paid to IJMII Held that - There was no evasion of tax since interest paid to IJMII was offered to tax by IJMII and the taxable income of IJMII was higher than the taxable income of the assessee - The interest was paid at prevalent bank rates - even though the construction agreement did not provide for payment of interest, the same was later on agreed between the parties orally and later confirmed in writing - contractual obligation is not necessary for incurring the expenditure Relying upon CIT v. Associated Electrical Agencies 2003 (12) TMI 36 - MADRAS High Court - tax was also deducted at paid in respect of the interest paid to IJMII. Transfer pricing adjustment - Fees for Technical services Reimbursement of bank guarantee charges - Held that - The transaction taken place is with domestic enterprises and at least one among the AEs are not non-resident - Both the assessee and IJMII are the residents for the purpose of Indian Taxation as they are Indian companies - Any transaction between them will not constitute an international transaction - The primary condition for attracting transfer pricing provisions is that there should be a transaction between two or more associated enterprises. Section 92A defines the term associated enterprise - Section 92A(1) provides the broad parameters on satisfaction of which two or more enterprises constitute associated enterprises - the deeming fiction u/s 92A(2) are limited to the parameters of management, control or capital. Section 92B(2) travels beyond these parameters - the primary condition for attracting transfer pricing provisions is that there should be a transaction between two or more AEs in terms of section 92A(1) and 92A(2) of the Act - the transactions between the assessee and IJMII do not fall u/s 92B(2) of the Act.

Summary

Issues Involved:

1. Disallowance of Cost of Land Transferred to APHB
2. Disallowance of Incentive Paid to IJMII
3. Disallowance of Handing Over Charges
4. Disallowance of Land Cost Relating to 500 LIG Houses
5. Disallowance of Cost of Construction of Houses Handed Over to APHB
6. Disallowance of Interest Paid to IJMII
7. Transfer Pricing Adjustments
8. Levy of Interest under Sections 234B and 234D
9. Set-off of Brought Forward Business Loss and Unabsorbed Depreciation

Detailed Analysis:

1. Disallowance of Cost of Land Transferred to APHB:

The assessee paid land compensation to Andhra Pradesh Housing Board (APHB) at Rs. 2,200 per sq. yard, which included Rs. 1,400 as land cost and Rs. 800 as anticipated profits. The Assessing Officer disallowed Rs. 13,43,96,800, treating it as a distribution of profits. The Tribunal held that the payment was a contractual obligation and necessary for the business. The payment was considered as diversion of income by overriding title, thus allowable as a business expenditure.

2. Disallowance of Incentive Paid to IJMII:

The assessee paid Rs. 18,59,85,000 as an incentive to IJMII. The Assessing Officer disallowed it under Section 40A(2), considering it unreasonable. The Tribunal found that the payment was made under a contractual obligation and was necessary for business operations. The Assessing Officer failed to provide comparable market value to prove excessiveness. The disallowance was deleted.

3. Disallowance of Handing Over Charges:

The assessee paid Rs. 7,74,36,597 as handing over charges to buyers for delayed possession of flats. The Assessing Officer treated it as interest under Section 2(28A) and disallowed it for non-deduction of TDS under Section 194A. The Tribunal held that the payment was not in respect of any money borrowed or debt incurred, thus not interest. The disallowance was deleted.

4. Disallowance of Land Cost Relating to 500 LIG Houses:

The Assessing Officer disallowed Rs. 1,92,19,200, attributing it to the land cost for 500 LIG houses handed over to APHB. The Tribunal upheld the disallowance, noting that the land was not registered in favor of the assessee and remained with APHB.

5. Disallowance of Cost of Construction of Houses Handed Over to APHB:

The Assessing Officer disallowed Rs. 18,06,75,000, considering the transfer of houses at a discounted price. The Tribunal held that the discount allowed could not be considered under Section 40A(2) as it was not an expenditure but a loss. The disallowance was deleted.

6. Disallowance of Interest Paid to IJMII:

The Assessing Officer disallowed Rs. 2,21,95,301 paid as interest to IJMII, stating it was not provided in the agreement and was unreasonable under Section 40A(2). The Tribunal found the payment was necessary for business and not proven excessive. The disallowance was deleted.

7. Transfer Pricing Adjustments:

The Transfer Pricing Officer (TPO) made adjustments totaling Rs. 38,34,39,486, including Rs. 34,86,00,000 for deemed international transactions with IJMII. The Tribunal held that transactions between two resident companies do not constitute international transactions under Section 92B. The adjustments were deleted.

8. Levy of Interest under Sections 234B and 234D:

The Tribunal directed the Assessing Officer to recompute interest under Sections 234B and 234D while passing the giving effect order, as it is consequential in nature.

9. Set-off of Brought Forward Business Loss and Unabsorbed Depreciation:

The Tribunal remitted the issue to the Assessing Officer to verify if the losses were quantified in the returns filed in time and allowed as per Section 72 of the Act.

Conclusion:

The appeal was partly allowed for statistical purposes, with several disallowances deleted and issues remitted to the Assessing Officer for verification and recomputation.