2018 (11) TMI 1845 - AT - Income Tax

Non issuing draft assessment order as per procedure laid down u/s 144C(1) - issuing the notice of demand u/s 156 of the Act penalty notices u/s 271(1)(c) and 271AAB along with draft assessment order - AR submitted that the draft assessment was completed with demand notice u/s 156 and penalty notices u/s 271. By issuing such notices, the assessment order becomes final - HELD THAT - As carefully considered the submission and case laws relied. In all the case laws relied on by the assessee, the common mistake made by the AO in those assessments were that AO passed the final assessment order instead of Draft Assessment Order, the courts have held that as per section 144C(1), the AO has no right to pass final order pursuant to the recommendations made by the TPO. Accordingly, the order passed by the AO, thus, lacks jurisdiction. In the present case, the AO has passed the Draft Assessment but sent demand notice and penalty notices along with the draft assessment order. Since the facts are not identical to the facts of the case laws relied on by the assessee, moreover, the AO has to pass draft assessment order as per provision and was accordingly passed by him. The accompanying notices along with the draft assessment order are only procedural mistakes, it cannot tantamount to passing of final assessment order. Accordingly ground raised by the assessee is dismissed. ALP adjustment towards interest on advances - HELD THAT - From the above ledger extract, it is clear that the assessee has given advance to its AE on 19/06/2013, 1807/2013 and 30/09/2013 and received back on 20/11/2013, 04/12/2013 and 05/12/2013. In the result, assessee has received more than that it has advanced. In our view, the advances given by the assessee to its AE are falls within the ambit of international transaction. But, assessee has taken conscious decision to advance without charging any interest. But, since, it falls within the definition of international transaction, the provision will attract accordingly. At the same time, we notice that TPO has charged interest for the whole year by Bench marking @ 14.45%. We find it to be a bit harsh on the assessee. As per the above ledger summary, it is clear that assessee has given loan for overall period of 139 days. TPO should have calculated the interest for ALP adjustment only for the 139 days on the basis of day-wise outstanding. Whether the bench marking of interest based on SBI PLR is proper? - As the various courts and specially Hyderabad Bench of Tribunal has adjudicated in many cases that the bench marking on international transaction should be based on international bank rates relevant to the particular transaction. In the given case, the transaction is in USD, the bench marking should be on LIBOR plus only. We direct the AO/TPO to calculate the interest for the period of 139 days and on the day-wise outstanding basis commencing from 19/06/2013 to 04/12/2013 by adopting LIBOR 200 Bps. Accordingly, ground raised by the assessee is allowed for statistical purposes. Disallowance of deduction as claimed towards capital receipt - AO made the addition of the said amount on the ground that the assessee failed to substantiate its claim for exemption by way filing any documentary evidence to indicate the nature of receipt - HELD THAT - As relying on assessee's own case 2018 (4) TMI 1742 - ITAT HYDERABAD we remit this issue to the file of TPO/AO to decide the issue in line with the above directions given in AY 2013-14.The assessee made specific reference to the charging rate at Singapore @ 0.15%. We find that the assessee has a point since the Bench Marking is generally based on Bank rates when the banks are charging @ 0.15% on Bank Guarantee, the same should be adopted to Bench Mark. Therefore, the TPO is directed to collect the rates prevailing in Singapore Banks and adopt the same for bench marking. Accordingly, this ground is allowed for statistical purposes. Additional income admitted on the day of search in a statement recorded u/s 132(4) - additional income was declared in the belief that there were certain discrepancies in the books of account of the assessee company - HELD THAT - We notice that this addition by AO is not real income or additional income. Assessee withdrew the additional income declared by it during search proceedings. Since assessee has increased the turnover in order to declare the additional income and the same was withdrawn subsequently. Assessee should have modified the turnover and filed the return of income, but, assessee chose to keep the turnover intact as per P L and tried to reduce the profit by showing this additional turnover as other deduction. In our considered view, it is not additional or real income and also not a deduction in real sense. Hence, the same is deleted. Accordingly ground raised by the assessee is allowed. Addition on the basis of statement recorded at the time of search - HELD THAT - In the given case, AO has not brought on record any incriminating material or cogent material in support of the above addition. Merely relying on the declaration given by the MD is not proper, since the same was withdrawn by the assessee subsequently.Hence, the addition cannot be sustained in the absence of any cogent material on record. Therefore, ground raised by the assessee is allowed. Disallowance of interest expenses on sham transactions - HELD THAT - As decided in own case 2018 (4) TMI 1742 - ITAT HYDERABAD in our view, AO has not made any disallowance in purchases even though he satisfied himself that these are sham transactions. Further, he proceeded to disallow interest on purchases, which is not proper, even though, he proceeded to disallow the interest with improper data and improper method. Therefore, the disallowance made by the AO on interest is deleted. Disallowance of interest expenses paid - HELD THAT - As the issue is similar in this AY, following the decision in AY 2013-14 2018 (4) TMI 1742 - ITAT HYDERABAD we remit this back to the file of AO to decide the issue in line with the directions given in AY 2013-14. This ground is allowed for statistical purposes. Addition towards loss incurred on 4th quarter - HELD THAT - AO has not found any misstatement or any wrong claim by the assessee in the result submitted by the assessee for the 4th Quarter. AO noticed the loss in the 4th Quarter and asked the assessee to substantiate the loss. This loss is incurred during regular course of business and it is not the case of AO that the loss was incurred due to discrepancies in the result for which he could have applied the rule preponderance of probability . AO cannot breakdown the results of the business on quarterly basis when he accepted the annual results and he has not found any discrepancies in the annual results nor rejected the books of the assessee. AO cannot question the results of individual projects and determine the results of the assessee since the results declared by the assessee based on the overall results of all the projects carried on by the assessee. Breakdown the results based on period and projects, when the overall results declared by the assessee are acceptable and particularly no discrepancies were noted in the results declared by the assessee in terms of turnover, expenditure etc., are not proper. In the absence of any material in support of the result declared by the assessee for the 4th Quarter, merely because assessee incurred losses in the 4th quarter cannot be reason to make the addition or AO cannot infer merely based on the results declared. Therefore, the addition is accordingly deleted. Appeal of the assessee is partly allowed for statistical purposes.

Summary

Issues Involved:
1. Issuance of Draft Assessment Order
2. ALP Adjustment for Interest on Advances
3. ALP Adjustment for Corporate Guarantee
4. Addition of ?60 Crores Based on Books
5. Addition of ?60 Crores Based on Statement During Search
6. Disallowance of Interest Expenses on Sham Transactions
7. Disallowance of Interest Expenses Paid to Silver Point Infratech Ltd.
8. Addition of ?13.23 Crores Towards Loss Incurred in the 4th Quarter

Detailed Analysis:

1. Issuance of Draft Assessment Order:
The assessee argued that the AO erred by not issuing a draft assessment order as required under section 144C(1) of the Income Tax Act, which effectively made the assessment order final. The Tribunal found that the AO had issued a draft assessment order but had also sent a demand notice and penalty notices along with it, which was a procedural mistake. This did not amount to passing a final assessment order, and thus, the ground raised by the assessee was dismissed.

2. ALP Adjustment for Interest on Advances:
The TPO calculated interest on advances given to the AE without considering the dates of the advances and repayments. The assessee argued that the advances were for commercial expediency and that no interest was charged on similar transactions with non-AEs. The Tribunal held that the TPO should calculate interest only for the period the advances were outstanding, using LIBOR + 200 Bps instead of SBI PLR. The issue was remitted back to the AO/TPO for recalculating the interest accordingly.

3. ALP Adjustment for Corporate Guarantee:
The TPO made an adjustment for corporate guarantee provided to the AE by applying a rate of 1.30% based on SBI rates. The assessee contended that the corporate guarantee was for commercial expediency and should not attract any fee. The Tribunal referred to its earlier decision in the assessee’s own case for AY 2013-14, where it was held that corporate guarantee falls within the definition of international transactions and a rate of 0.53% was appropriate. The issue was remitted back to the TPO/AO to determine the actual exposure and apply the rate of 0.53%.

4. Addition of ?60 Crores Based on Books:
The assessee had initially declared an additional income of ?60 crores during the search, which was later withdrawn. The AO added this amount back, stating the assessee failed to substantiate the claim. The Tribunal held that the additional income was not real and was withdrawn, thus, it should not be added back. The ground raised by the assessee was allowed.

5. Addition of ?60 Crores Based on Statement During Search:
The AO made an addition based on the MD’s statement during the search, without any corroborative evidence. The Tribunal referred to the CBDT Circular and various judicial precedents, holding that retracted statements without supporting evidence cannot form the basis for addition. The ground raised by the assessee was allowed.

6. Disallowance of Interest Expenses on Sham Transactions:
The AO disallowed interest expenses proportionate to purchases from related concerns, considering them sham transactions. The Tribunal, following its earlier decision in the assessee’s own case for AY 2013-14, held that since the AO accepted the purchases and sales, he cannot disallow the associated financial cost. The ground raised by the assessee was allowed.

7. Disallowance of Interest Expenses Paid to Silver Point Infratech Ltd.:
The AO disallowed interest expenses paid to Silver Point Infratech Ltd., considering the transactions non-genuine. The Tribunal remitted the issue back to the AO to verify the claim of back-to-back payments and delete the addition if the payments were found genuine. The ground was allowed for statistical purposes.

8. Addition of ?13.23 Crores Towards Loss Incurred in the 4th Quarter:
The AO added ?13.23 crores, suspecting the loss incurred in the 4th quarter. The Tribunal held that the AO cannot make an addition merely based on suspicion without finding discrepancies in the annual results. The addition was deleted, and the ground raised by the assessee was allowed.

Conclusion:
The appeal of the assessee was partly allowed for statistical purposes, with directions for recalculating interest on advances and verifying transactions with Silver Point Infratech Ltd. The additions based on the statement during the search and the loss incurred in the 4th quarter were deleted.