2015 (3) TMI 365 - AT - Income Tax

Order passed by the DRP - whether directions issued by the Hon ble DRP are bad and liable to be quashed having been passed beyond the period of limitation prescribed under the statute - Held that - Entire basis on which the assessee claims that the impugned order is hit by limitation is an assumption that the DRP order dt. 29th August,2014, was handed over on the very same day to the AO. This is not a valid assumption. The Revenue claims that the DRP order in question was served on the AO on 2nd September,2014. The DRP having passed the order on 29th August, 2014 and having served the same by hand on 2nd September, 2014 will not mean that DRP has not passed the order within the time prescribed. In our view it is not correct that date of the order to be considered for limitation will be the date on which the order goes out of the hands of the DRP. Further the final assessment order passed by the AO on 21st October,2014, is within one month from the end of the month in which the AO received the DRP order and hence is within the limitation period. - Decided against assessee. Reference made for special audit under section 142(2A) - whether bad in law? - Held that - The AO as well as the DRP have, keeping in view the complexities in the accounts and the volume came to a conclusion that this is a fit case for application of provisions of S.142(2A) of the Act. We do not find any perversity in this view of the AO as approved by the DRP. Sufficient opportunity has been granted to the assessee and it was only after considering the objections, special audit was ordered. We see no reason to interfere with these findings of the Revenue authorities.- Decided against assessee. Unaccounted credit notes issued - Held that - As per this reconciliation, the credit notes issued by the appellant in the name of M/ s Bright Point India Pvt Ltd during the financial year 2009-10 were ₹ 125,92,827/- whereas the debit note raised by M/ s Bright Point India Pvt Ltd on the appellant company was ₹ 125,94,969. Thus there was a small excess debit by M/s Bright Point India Pvt Ltd of ₹ 2142.02. Thus, it cannot be said that credit note issued by the assessee has not been accounted for by Bright Point India Pvt Ltd. Even this difference has also been explained by the special auditor in its report. Similar reconciliation has been given by the special auditor for the financial year 2010-11 whereby it has been stated that the appellant company has issued credit note of ₹ 30,13,25,910 and the corresponding debit note raised by M/ s Bright Point India Pvt Ltd on the appellant company were of ₹ 30,67,54,495. Thus, the credit note issued by the appellant company were not excessive. On the contrary, claim made by Bright Point India Pvt Ltd on the assessee was more.payments received by the appellant company and the payments stated to have been made by M/s Bright Point India Pvt Ltd as per its accounts during the year are exactly the same, i.e., ₹ 161,81,58,957. All these facts are borne on record and the same were brought to the notice of the DRP by the assessee. The observations made by the DRP in this regard are in total disregard to the facts and evidences on record. Accordingly, DRP was not correct in not deleting the addition on this account. In the result this addition on account of credit notes are deleted. - Decided in favour of assessee. Addition on account of remaining super distributors of ₹ 346,57,17,107, we note that this addition has been made not on the basis of any adverse material or information collected against the assessee. The assessing officer in the draft assessment order has drawn adverse inference on the ground that the appellant company has not provided its ledger account in the books of the 65 super distributors. It is not a case where assessee has failed to provide what was available with it.- Decided in favour of assessee. Addition of ₹ 947,21,431 on account of difference as per the accounts of the distributors examining as per these copy of accounts and the reconciliation, each and every account stood reconciled including the accounts whereby difference of ₹ 947,21,431 was pointed out. The DRP ignoring all these evidences and the material have confirmed the action of the Assessing Officer. During the course of hearing with the assistance of the learned AR, we have verified these accounts. At the time of the hearing before us, the learned DR could not controvert the above facts. The conclusion of the AO as upheld by the DRP, in our view is contrary to facts on record and based purely on surmises and conjectures - Decided in favour of assessee. Addition on account of swap units/warranty reimbursement - addition made by the AO on the sole ground that the confirmations given by various parties, were on plain paper and not on letterheads - Held that - These are all confirmations filed by foreign suppliers. The assessee had submitted arguments including purchase invoices, bill of entry, custom clearance, stock entries etc. The confirmation in question from these foreign parties are on additional documentary evidences. In our view these confirmations cannot be summarily rejected by the AO. The AO, in our view, should not have rejected these confirmations without enquiry. The AO had the address of these parties, the telephone numbers, e-mail addresses. The format in which the confirmations were given by foreign parties, is not within the control of the assessee. We further note that the assessee has submitted all evidences which included third party/government evidences in the form of bill of entry, custom-attested purchase invoices. All these purchases are from foreign suppliers and are liable for custom duty. All units received by way of import have to be declared in the bill of entry. As regards the vendors with whom there is no such arrangement, we note that there is no evidence or material to even suggest that assessee would have received swap units. No material was found during search to this effect. We further note that before the DRP the assessee has also filed confirmation on the letterhead of these vendors. In view of the facts, the findings of the DRP are incorrect and against the facts on record. Under these circumstances, we are of the considered opinion that the addition in question is bad in law as it is made without any evidence. - Decided in favour of assessee. Addition on under valuation of closing stock of DOA mobile on NO3 location - Held that - Assessee has submitted a detailed note pointing out the recovery which are made from the dead-on-arrival mobile phones in the form of charger, hands free and battery. The assessee has done the valuation of the dead-onarrival mobile phones at its N-3 location on the basis of this salvage value computed at ₹ 212. This valuation done is in accordance with the accounting standard AS-2 whereby closing stock is to be valued at lower of cost or net realisable value. The fact that these are mobile phones, which are dead on arrival and the fact that these are cannibalised and certain parts are gathered and valued is not disputed by the Revenue. The cost of a live mobile phone, cannot, in our view, be adopted as the cost of a dead on arrival mobile phone. Under these circumstances we have no other alternative but to delete this addition. When the facts stated by the assessee are not contradicted by gathering of evidence, then the addition based on presumptions cannot be made. The observations made by the DRP that such valuation of closing stock was highly under valued shows that DRP has not been able to appreciate the facts in right perspective. It has failed to distinguish between a working mobile phone and a dead-onarrival mobile phone. The dead-on-arrival mobile phone cannot be valued at cost. It has to be valued at salvage value. The valuation of ₹ 1,677 is at cost of mobile phone which is working. If the mobile phone is dead, its value has to be salvage value which has been worked out at ₹ 212. The detailed working of this has been submitted by the assessee with which has not been disputed. - Decided in favour of assessee. Addition on account of sale of DOA mobiles and accessories - addition is made on the presumption of the AO that the assessee would have recovered 14% of the value of phones which are dead on arrival - Held that - There is no iota of evidence with the AO to come to a conclusion that the assessee would have sold the accessories recovered from dead on arrival phones, out of the books. The assessee has submitted complete quantitative details during the course of assessment proceedings. As per these details the total value of such accessories was ₹ 3,66,45,443. These have been duly accounted for in the books of accounts. The total quantity of such accessories were valued and utilised by giving the same to super distributors. Confirmations were filed from the super distributors. The AO is factually incorrect in stating that the assessee has not filed a reply to the show cause notice issued by the AO as is evident from the reply on record. In fact the assessee has filed detailed explanation with supporting evidences. Even during the course of search no incriminating material was found to show that the assessee has not made sales, outside the books of accounts. - Decided in favour of assessee. Addition on account of sale of scrap - Held that -The special auditor by extrapolation of sale of the scrap under the year of consideration worked out the same at ₹ 84,25,360/-. The special auditors in its report has given a basis for computing scrap value for each year. The AO has no basis whatsoever to come to a conclusion that the sale of scrap amounted to ₹ 2.74 crores. Taking the total imports of the assessee and applying of a percentage cannot be considered as a scientific basis for arriving at the transaction. The special auditor in its report which has been quoted by the AO in the assessment order has given the basis for working out the value of the scrap. Thus, the DRP was correct in holding that the value of the scrap as computed by the special auditor be adopted which comes to ₹ 84,20,360. Nevertheless, we note that the assessee has already accounted for scrap to the tune of ₹ 37.47 lakhs as is evident from its profit and loss account. This figure has to be reduced from the figure of ₹ 84,20,360 worked out by the special auditor as value of scrap generated during the year and it is only the balance amount which can be brought to tax. - Decided partly in favour of assessee. Addition on account of notings in seized documents - Held that - Examining of document A-2, A-3 and Annexure A-3 and Revenue s contention that there is a clear mention of the word gift for Major and that the assessee has not explained the same we are of the considered opinion that the onus shifted to the assessee, to prove that this entry is not a gift given by the Mayor, which is not recorded in the books of accounts. Hence we sustain this addition. - Decided against assessee. On examining Annexure A-4. no addition can be made based on these notings on loose papers, without any corroborating evidence. The addition is made purely on surmises and conjectures. - Decided in favour of assessee. On examining page no. B9 of Annexure A-5 we are of the considered opinion that this rough calculations cannot lead to a conclusion that the assessee has earned unaccounted income. As held earlier scribbling and figures on loose papers, without any corroboratory evidence cannot lead to a conclusion that the assessee has received unaccounted money. Hence this addition is hereby deleted.- Decided in favour of assessee. On examining B-31 of Annexure A-6 The assessee explains that these are notings made by Mr.Jha, the accounts clerk of the company and that these notings were recording entries, which were reversed in the books of accounts. The AO assumed that these reversal of entries are unaccounted income. Such a view cannot be sustained. When entries are found in the books of accounts and when the same corroborates to rough workings made by the Accounts Clerk of the assessee, to argue that these rough notings on a piece of paper are unaccounted income of the assessee is incorrect and against the facts of the case. The addition in question is purely made on the basis of conjectures and surmises, hence we delete the same.- Decided in favour of assessee. On examining page no.1 Annexure A-V. The assessee has explained that this sheet of paper consists notings on a proposal for a module factory. It is submitted that the cost of the module factory has been stated therein, including the proposed locations. Here also the addition is based on the imagination of the AO, rather than on gathering of evidences. A plain look at the document does not by any stretch of imagination leads us to a conclusion that unaccounted income/assets have been recorded therein. The Ld.DR while agreeing with the papers points out to the establishment of a factory at Haryana, Himachal Pradesh, submits that the assessee has failed to explain the transaction. In our view such addition based on surmises and conjectures, without enquiry or gathering of evidence cannot be sustained. In the result we delete this addition. - Decided in favour of assessee. On examining page 2 of Annexure A 5 assessee clarified that this sheet of paper is a continuation of paper where certain figures are mentioned while planning establishment of a module factory. The explanation given by the assessee has been ignored both by the AO as well as by the DRP. For the reasons given while deleting this amount of ₹ 10 crores in above paras, we delete this addition of ₹ 3 crores and allow this ground of the assessee. - Decided in favour of assessee. Non deduction of TDS - invoking the provisions of section 40(a)(ia)- expenses in relation to providing transportation to employees. - Held that - The DRP has restricted the addition to ₹ 54,30,030/-. The AO should have followed these directions of the DRP. The AO cannot ignore these directions of the DRP. Be it as it may, subsequent to the amendment made by the Finance Act, 2012 to S.201(1), wherein a Proviso was inserted, the assessee cannot be treated as an assessee in default, if the deductee has furnished return of income u/s 139 of the Act. The assessee has submitted the details whereby all the 3 deductees are income tax payees. However, the assesss is required to submit the certificate as prescribed in the proviso to s.201(1). The DR has submitted that it has no objection if this issue is remitted to AO to make necessary compliance by filing the prescribed certificate about the deductee having filed the return of income, paid taxes thereon and the above said amount on which TDS was liable to be deducted has been included in their income. Under these circumstances, the issue is remitted to the file of the AO to do the necessary compliance as required u/s 201(1) of the Act - Decided in favour of assessee for statistical purposes. Non deduction of TDS - invoking the provisions of section 40(a)(ia)- identification of nature of the transactions - Held that - directions given by the DRP have not been followed by the AO. The final assessment order passed by the AO cannot be in violation of the directions given by the DRP. The assessee has explained that there is no default on its part in deducting tax at source and has also filed details before the AO and the DRP. With the assistance of the AR, we have verified the details with the supporting evidences. As per the details on record and ejvidences in support thereof, there is no default in respect of the amount added by the AO. The assessee has submitted compelte reconciliation and the reason thereof. Further, the assessee s contentions that tax has been deducted on an amount of ₹ 1,59,65,555/- and its contention that tax is not deductible on the balance due to various reasons, has not been contradicted by the DR. Under these circumstances we delete this addition of ₹ 3,22,39,995 and allow this ground of the assessee. - Decided in favour of assessee. Disallowance on account of bonus - invoking the provisions of the section 43B - DRP directs the AO to allow the claim of the assessee u/s 43B after proper verification - Held that - The AO has not bothered to carry out the directions of the DRP. The claim made by the assessee is as per law. It only required verification of the facts as submitted by the assessee. This is not done by the AO. Under these circumstances we delete the addition and set aside the matter to the file of the AO. The AO will verify the claim of the assessee and whether the disallowance has to be restricted to ₹ 24,40,854/- is correct or not. - Decided in favour of assessee for statistical purposes. Addition on account of sundry creditors - Held that - This addition has been made by the AO on mere surmises without verifying the explanations and evidences filed by the assessee. Merely because there are certain variations in reconciliation on accounts with three parties, variations are treated as income. The assessee has placed a copy of a note giving reconciliations on accounts with these parties at apge 2410 of the paper book. It is also claimed that there are factual errors in the case of Cargo Planners and as per party account it is ₹ 2,28,30,232/- and not ₹ 22,83,232/- as mentioned in the assessment order. Such silly type of mistakes have been made a basis for the addition, without considering the submissions of the assessee. As the accounts stand fully reconciled, thus addition deleted. - Decided in favour of assessee. Addition on account of shortage of mobile phones - Held that - The assessee has filed a reconciliation statement, reconciling the stock physically found, during the post search proceedings, before the Dy.Director of Income Tax (Investigation) vide letter dt. 8.11.2011 and 16.5.2011. This explanation was again repeated before the AO on 1.11.2013. We have perused the detailed reply as well as the connected papers. In our view the revenue authorities have not bestowed any attention to the explanation given by the assessee. There is no evidence whatsoever found during the course of search of the assessee having sold stock outside the books of accounts. We further note that the total shortage of mobile phones is of 3125 handsets. The total quantity sold during the year by the assessee is 1,01,92,239. Further, the inventory at the time of the search was counted at 122,287 at different locations. Considering this volume of business, the number of mobile phones found short are not significant. Thus addition deleted. - Decided in favour of assessee. Addition on account of entries appearing in HSBC a/c no 05441758900 at Gurgaon - Held that - This account is an official bank account of the assessee and the details are available in the books of accounts. The DRP had held that the AO was totally unjustified in adding back payments made for bank charges, LC charges and TD. The AO records that the assessee has not submitted proper reconciliation statement and documentary evidence. This is a bank account maintained officially by the assessee. This was stated as such before the AO in a letter dt. 10th September,2012. The assessee has furnished explanation of the debit and credit balances with vouchers from pages 1216 to 1234 of the paper book. The allegation of the AO that the assessee has not filed the details is factually incorrect. The transactions done through this bank account, apart from regular books of accounts of the assessee. The books have been audited not only by the auditors appointed by the assessee but also by the special auditors. Under the circumstances the addition in question is totally unjustified. The very fact that the entire debit balances have been audited by the AO demonstrates that there is total non application of mind by the assessing authority. The entire addition is arbitrary. Hence we are of the considered opinion that such additions should be deleted. - Decided in favour of assessee. G.P. addition - rejection of books of account - Held that - The assessee has maintained regular books of accounts and these have been audited by the tax auditors as well as by the special auditors appointed by the AO. Both these auditors have certified that the assessee was maintaining proper books of accounts. The AO seems to have based his opinion on the report of KPMG India. This report was a due diligence report obtained by the prospective investors. Such due diligence reports cannot lead to formation of an opinion that proper books of accounts have not been kept by the assessee. The assessee also maintained quantitative details of inventory. On the one hand the AO seeks to rely on the books of accounts and on the other hand the AO rejects the books of accounts for estimated profits on adhoc basis. This in our view is not permissible. As we have held that the rejection of books of accounts is bad in law the question of enhancement of gross profit on estimate basis does not arise. The AO is directed to adopt the profits as declared by the assessee in its books of accounts - Decided in favour of assessee. Adjustment on the transaction of loan given to the AE - The DRP has directed to apply SBI base rate plus 150 base points - Held that - For proper bench marking, interest rate to be applied is the interest rate of the currency in which the amount has been advanced. Since in this case the loan has been given in USD, the interest rate will be LIBOR . The international rate fixed by the LIBOR has to be considered for bench marking. The assessee has charged interest @ 9.25% which is much above the LIBOR and hence, no further adjustment on this account needs to be made. - Decided in favour of assessee. Adjustment on account of provision of the facility of Standby Letter of Credit - Transfer Pricing adjustment - Held that - As the assessee has obtained stand by letter of credit @ 1%, the rate suggested by the DRP at 2% in our view is not justified. We direct that 1% of stand by letter of credit amount be taken as arm s length price. - Decided partly in favour of assessee. short deduction at TDS - Held that - Under the circumstances we uphold the finding of the DRP that s.40a(ia) cannot be invoked for short deduction of tax as held by Hon ble Calcutta High Court in the case of Commissioner of Income Tax vs. AK Tekriwal (2012 (12) TMI 873 - CALCUTTA HIGH COURT). Even otherwise, this addition otherwise cannot be sustained in view of the amendment made by the Finance Act, 2012 where a proviso has been inserted below section 201(1) to provide that the assessee shall not be treated as an assessee in default in case the deductee has furnished the return of income, included the sum in the income and paid taxes as per the return of income. In the present case, the assessee has complied with these conditions as is evident from the letter dated 8th November,2013 filed before the AO along with the certificate in the prescribed form to this effect. - Decided in favour of assessee. Addition on account of prior period expenses - assessee had explained that the prior period expenditure of ₹ 16,037/- and that a sum of ₹ 15,94,202/- relating to clearing and forwarding of M/s SSS Sai Shipping Services P.Ltd. The clearing and forwarding agent reported loss of mobile units and hence a debit note was raised on the said agent during the Previous Year 2009-10. In the current AY, after mutual consultation the debit note was reversed. As the dispute was settled in the year under consideration as is evident from the MOU, the assessee was correct in reversing the claim amde in the preceding year. On these facts and circumstances we uphold the finding of the DRP that the claim in question has crystallised during the year and the same is evidenced by way of MOU wherein the dispute of the assessee is settled with the shipping agent. - Decided against revenue. Disallowance of advertisement expenses - DRP deleted the addition - Held that - The books of accounts of the assessee are audited and no adverse comments have been given by the auditor. These books of accounts have also been provided before the AO. As the AO has not given any specific instance or valid reason for making this adhoc disallowance we sustain the finding of the DRP and dismiss this ground of the Revenue. - Decided against revenue.

Summary

Issues Involved:
1. Limitation of DRP and AO orders.
2. Validity of Special Audit under Section 142(2A).
3. Additions on account of credit notes.
4. Additions on account of swap units/warranty reimbursement.
5. Addition on account of under-valuation of closing stock of DOA mobiles.
6. Addition on account of sale of DOA mobiles and accessories.
7. Addition on account of sale of scrap.
8. Additions based on seized documents.
9. Disallowance under Section 40(a)(ia) for non-deduction of TDS.
10. Disallowance under Section 40(a)(ia) for short deduction of TDS.
11. Disallowance under Section 43B for unpaid bonus.
12. Addition on account of sundry creditors.
13. Disallowance under Section 14A.
14. Addition on account of shortage of mobile phones.
15. Addition on account of HSBC account entries.
16. Rejection of books of accounts and enhancement of gross profit.
17. Transfer Pricing adjustments on loan to AE and SBLC.

Detailed Analysis:

1. Limitation of DRP and AO Orders:
The assessee argued that the DRP's directions dated 29th August 2014 and the AO's final assessment order dated 21st October 2014 were barred by limitation. The tribunal found that the DRP's order was served on the AO on 2nd September 2014, and the final assessment order was within the limitation period. Thus, the ground was dismissed.

2. Validity of Special Audit under Section 142(2A):
The assessee contended that the special audit was ordered without proper justification. The tribunal upheld the AO's decision, noting the complexity and volume of the accounts, and dismissed the ground.

3. Additions on Account of Credit Notes:
The AO made several additions based on discrepancies in credit notes issued to super distributors and Bright Point India Pvt. Ltd. The tribunal found that the assessee had provided necessary reconciliations and confirmations, which were ignored by the AO. The tribunal deleted the additions, noting that the AO's conclusions were based on surmises and conjectures.

4. Additions on Account of Swap Units/Warranty Reimbursement:
The AO added amounts for unaccounted swap units and their gross profit. The tribunal found that the assessee had accounted for swap units properly, supported by customs documents and confirmations from suppliers. The additions were deleted as they were based on incorrect assumptions.

5. Addition on Account of Under-Valuation of Closing Stock of DOA Mobiles:
The AO added amounts for alleged under-valuation of DOA mobiles. The tribunal found that the assessee had valued the DOA mobiles at their salvage value, which was correct. The addition was deleted.

6. Addition on Account of Sale of DOA Mobiles and Accessories:
The AO added amounts for alleged unaccounted sale of accessories from DOA mobiles. The tribunal found that the assessee had provided quantitative details and confirmations from super distributors. The addition was deleted.

7. Addition on Account of Sale of Scrap:
The AO extrapolated scrap sales from a 70-day period to the entire year. The tribunal upheld the DRP's direction to adopt the special auditor's figure of Rs. 84,20,360, noting that the AO's estimation was unscientific.

8. Additions Based on Seized Documents:
The AO made several additions based on notings in seized documents. The tribunal examined each document and found that most additions were based on incorrect assumptions and surmises. Except for one addition related to a "gift for Mayor," all other additions were deleted.

9. Disallowance under Section 40(a)(ia) for Non-Deduction of TDS:
The AO disallowed amounts for non-deduction of TDS on payments to three parties. The tribunal noted that the DRP had directed the AO to verify the amounts outstanding as of the year-end. The tribunal remitted the issue to the AO for compliance with the proviso to Section 201(1).

10. Disallowance under Section 40(a)(ia) for Short Deduction of TDS:
The AO disallowed amounts for short deduction of TDS. The tribunal upheld the DRP's finding that Section 40(a)(ia) cannot be invoked for short deduction, relying on the Calcutta High Court's decision in Commissioner of Income Tax vs. AK Tekriwal.

11. Disallowance under Section 43B for Unpaid Bonus:
The AO disallowed amounts for unpaid bonus. The tribunal noted that the DRP had directed verification of the amounts paid before the due date of filing the return. The tribunal remitted the issue to the AO for verification.

12. Addition on Account of Sundry Creditors:
The AO added amounts for discrepancies in balances with three creditors. The tribunal found that the assessee had provided reconciliations and confirmations, which were ignored by the AO. The addition was deleted.

13. Disallowance under Section 14A:
The AO disallowed amounts under Section 14A. The tribunal noted that the assessee did not press this ground, considering the small amount involved, and dismissed it with liberty to keep the issue open in other years.

14. Addition on Account of Shortage of Mobile Phones:
The AO added amounts for alleged unaccounted sale of mobile phones based on a shortage found during the search. The tribunal found that the shortage was insignificant given the volume of business and could be due to normal errors. The addition was deleted.

15. Addition on Account of HSBC Account Entries:
The AO added the entire debit balance in an HSBC account. The tribunal found that the account was properly disclosed and reconciled in the books. The addition was deleted, with the AO directed to verify the reconciliation.

16. Rejection of Books of Accounts and Enhancement of Gross Profit:
The AO rejected the books of accounts and estimated a higher gross profit rate. The tribunal found that the books were properly maintained and audited, and there was no justification for rejection. The addition was deleted, and the profits as declared by the assessee were directed to be adopted.

17. Transfer Pricing Adjustments on Loan to AE and SBLC:
The AO made adjustments for interest on a loan to an AE and a Standby Letter of Credit (SBLC). The tribunal held that the interest rate should be based on LIBOR, and the rate for SBLC should be 1%, not 2%. The adjustments were accordingly modified.

Conclusion:
The tribunal allowed the assessee's appeal partly, deleting most of the additions and disallowances made by the AO. The Revenue's appeal was dismissed. The tribunal emphasized the importance of proper verification and reliance on evidence rather than assumptions and surmises.