2024 (1) TMI 23 - AT - Income Tax

Addition on account of suppression of sales - DRP held that on the issue of credits notes it is seen that the credit note and debit note are been inserted by the assessee for account reconciliation which is not backed by actual transaction - allegation of the revenue that the credit note was afterthought is baseless as the credit note was duly accounted in the sales for the purpose of benchmarking, the corresponding adjustment was made by the AE, and furthermore benchmarking was duly accepted by the AO - HELD THAT - Once the transaction has been benchmarked at the arm length and no adverse finding was there, then no further addition can be done, and no further attribution can be made. The AO and subsequently ld. DRP both erred in not appreciating the judgment of Morgan Stanley 2007 (7) TMI 201 - SUPREME COURT - We find that the assessee has consistently benchmarked its international transaction with the cost plus @ 15% markup and it has been consistently accepted by the department during the assessment procedure and has passed the assessment order u/s 143(3). The AO erred in not appreciating that issuance of credit note / debit note was a regular year end feature of the assessee to achieve such benchmarking of mark -up. Once such transaction is held to be at ALP, no further addition /attribution can be made to the assessee income. Hence, we hold that the AO cannot treat the amount of Rs. 94,00,610/- as an unaccounted sales Disallowance of Expenses - The argument of the assessee that the Ld. DRP has erred in not appreciating that the all the inward and outward entry in the SEZ Area must passed through the checking of another wing of Ministry of Revenue i.e., custom department and the SEZ authority cannot be accepted. Invoices pertaining to Modi Graphic, Bharat Safety House, Om Jyoti Engineering Enterprises, Inox Air Products Ltd. and Vikram Paints Sanitary Store have not been stamped proving their entry into the premises. Hence, the same cannot be considered as proven correctly. The disallowance on account of these expenses is hereby upheld. For other expenses, we find that they are very minor expenses, the AO erred in appreciating that nonreply of Section 133(6) notices cannot necessarily lead to disallowance of petty expenses ranging from Rs. 9,000/- to Rs. 1,00,000/- in the absence of any other proof of non-incurring of expenses. Assessee has provided primary and direct evidences along with the PAN address and hence, no disallowance can be made merely on the reason of noncompliance of the parties to the notices issued u/s 133(6) of the Act.

Issues Involved:
1. Compliance with Section 144C of the Income Tax Act.
2. Limitation period under Section 153(1).
3. Validity of assessment order.
4. Benchmarking of international transactions.
5. Real income theory.
6. Discrepancy between GST returns and income tax provisions.
7. Verification of transactions in SEZ areas.
8. Issuance of notices under Section 133(6).
9. Disallowance of purchase transactions.
10. Disallowance of advertisement and publicity expenses.

Summary:

1. Compliance with Section 144C of the Income Tax Act:
The assessee argued that the assessment proceedings were nullity as they did not comply with Section 144C. The provision mandates that the draft assessment order should be issued to the "eligible assessee," defined under Section 144C(15). The assessee contended that there was no order from the Transfer Pricing Officer (TPO) as required, making the proceedings invalid.

2. Limitation period under Section 153(1):
The assessee claimed that the assessment order was time-barred and beyond the limitation as per Section 153(1), which mandates that the assessment order under Section 143 should be passed within 18 months from the end of the assessment year. Since the matter was not referred to the TPO, the extension of 12 months was not available, making the draft assessment order dated 30.06.2022 invalid.

3. Validity of assessment order:
The assessee argued that the assessment order was perverse as the AO and DRP did not appreciate the evidence of the transaction of the credit note issued by the assessee and corresponding adjustment made by the AE. The allegation that the credit note was an afterthought was baseless as it was duly accounted for in the sales for benchmarking purposes.

4. Benchmarking of international transactions:
The assessee contended that once the transaction had been benchmarked at arm's length and no adverse finding was there, no further addition could be made. The AO and DRP erred in not appreciating the Supreme Court judgment in DIT (International Taxation) Vs. Morgan Stanley, which supports this view.

5. Real income theory:
The assessee argued that the AO attempted to tax hypothetical income which never accrued to the assessee. The AO and DRP did not appreciate that the assessee's arrangement with the AE under cost plus 15% benchmarking was not disputed.

6. Discrepancy between GST returns and income tax provisions:
The assessee argued that the credit note adjustment was for benchmarking purposes under Income Tax laws and had nothing to do with GST. The AO erred in relying on GST return figures without appreciating the different basis of reporting under different laws.

7. Verification of transactions in SEZ areas:
The assessee contended that all inward and outward entries in the SEZ area must pass through customs and SEZ authority checks. The AO did not issue notices to these authorities to verify the entry of materials rather relied on small vendors unfamiliar with income tax proceedings.

8. Issuance of notices under Section 133(6):
The assessee argued that the AO erred in not issuing Section 133(6) notices to customs and SEZ authorities and instead issued them to small vendors. Non-reply from these vendors should not lead to disallowance of expenses.

9. Disallowance of purchase transactions:
The AO alleged that purchases amounting to Rs. 4,38,039/- were bogus. The assessee provided invoices stamped by customs and SEZ authorities, PAN, and address details to justify the purchases. The DRP upheld the disallowance due to lack of proper documentation and non-existent suppliers.

10. Disallowance of advertisement and publicity expenses:
The AO disallowed expenses amounting to Rs. 1,38,893/- as they were supported only by self-made vouchers. The assessee argued that these were business promotion expenses supported by evidence.

Judgment:
The Tribunal held that the AO's allegation that the credit note was an afterthought was baseless. Once the transaction was benchmarked at arm's length, no further addition could be made. The appeal on the grounds of unaccounted sales was allowed. However, the disallowance of expenses for certain vendors without SEZ stamping was upheld. Minor expenses were allowed as they were supported by primary and direct evidence. The appeal on expenditure grounds was partly allowed.

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