2015 (12) TMI 1170 - AT - Income Tax

Transfer pricing adjustment - international transactions of provision of support services in respect of Clinical Study Management and Monitoring Support Services - Held that - While deciding this issue the DRP has not given detailed reasoning to arrive at its conclusion. The real issues raised by the assessee in detailed submissions filed before the DRP have not been dealt with properly. It appears that the DRP could not properly appreciate the facts of the case and issues involved therein. It has been pointed out by the Ld. Counsel that some incorrect facts have been noted by the DRP in its order. It has been mentioned by the DRP that the assessee had sole right to decide investigator whereas as per Ld. Counsel the correct facts are that the assessee company has right to only monitor the progress of the investigator. In its letter dated 14.07.2011 addressed to the DRP the assessee has made detailed submissions and also contested the comparables considered by the TPO. It is noted from the order of the DRP that no findings have been given with regard to the objections made by the assessee with respect to selection of comparables by the TPO. No proper decision has been given by the DRP on the merits of the case also. Therefore in our considered opinion this ground needs to go back to the file of the DRP to re-adjudicate the same - Decided in favour of assessee for statistical purposes. Rental income from leased properties - AO taxing as as profit and gains of business or profession instead of income from house property - Held that - As relying upon assessee s own case 2010 (6) TMI 433 - Bombay High Court held that Rental income received by the assessee-company from sub-leasing of commercial premises is to be considered as Income from house property even though the renting out of the premises amounts to commercial exploitation for business purposes by the assessee-company - Decided in favour of assessee TDS u/s 194C - disallowance u/s.40(a)(ia) - non deduction of TDS on payments made to manufactures towards purchase of finished goods - Held that - The purchases have been made by the assessee from manufacturer/suppliers on principal to principal basis. The manufacturers/suppliers had also levied excise duty or sales tax or VAT as was applicable. As per the terms of the agreement title in these goods was transferred to the assessee at the time of delivery. It is further noted that the Central Board of Director Taxes had issued Circular No.681 dated 8th March 1984 providing that a contract undertaken to supply any article or goods according to the specifications given by any person and the property in such article or thing passes to such person only after such article or thing is delivered then contract will be a contract for sale and as such outside of the proviso of section 194C. Thus in view this circular as well as amendment brought out by Finance Act 2009 in our view the impugned transactions were not liable for deduction of TDS u/s 194C.- Decided in favour of assessee Determination of Fair Market Value of Chandigarh property - reference to DVO - re computation of capital gains - Held that - As in the case of Puja Prints (2014 (1) TMI 764 - BOMBAY HIGH COURT ) as per which the AO was empowered under the law to make a reference to DVO if in his opinion the fair market value of the impugned property was more than the value as adopted by the assessee in the return of income on the basis of report of its registered valuer. The facts of the present case are clearly covered with the judgment of Hon ble Jurisdictional High court and therefore respectfully following the same we hold that reference made by the DVO was bad in law and is held to be invalid and therefore consequent to this all further proceedings made by the AO in pursuance to such reference are also illegal and therefore the addition made by the AO on the basis of illegal reference and report of DVO is also illegal and the same is hereby deleted. - Decided in favour of assessee Unexplained investment u/s 69 - Held that - As gone through the material placed before us and the submissions made by the assessee. It is noted that no specific arguments were made nor anything has been shown that this difference was duly reconciled.- Decided against assessee Interest u/s 234C levied - Held that - The facts narrated by Ld. Counsel remain undisputed. The property was sold after 15th March of the F.Y. and thus capital gain arose to assessee after time for payment of advance tax had passed. The assessee could not have apparently forecasted the amount of income accrued to it by way of aforesaid capital gains. The legislature has taken care of this situation by inserting a proviso below section 234C(1)(b).There is no dispute on the fact that the exact estimate could not be done by the assessee on the amount of capital gains. The assessee has relied upon the judgment of Hon ble Rajasthan High Court in the case of CIT vs. Smt. Premlata Jalani (2003 (7) TMI 62 - RAJASTHAN High Court ) wherein held interest is chargeable on delayed or deferred payment of advance tax it shall be payable only with effect from the date the liability to pay advance tax in respect thereof has been incurred. There cannot be any interest prior to the date in respect of such liability when there was no liability to pay advance tax under any provisions of the Act. Interest has been levied ignoring the effect of aforesaid proviso as well as judgment therefore in the interest of justice we send this issue back to the file of the AO to decide the same in terms of our directions as contained above - Decided in favour of assessee for statistical purposes. Interest income granted u/s 244A - Held that - interest income u/s 244A has been done in such a manner that it has led to double taxation as on date. We feel that the role of the income tax authorities under the law is to make fair assessment of income and determine tax payable thereon. No tax can be collected except with the authority of law as per clear mandate of our Constitution as enshrined in article 265. The law does not intend to make unjust enrichment of the Government at the cost of taxpayers. Therefore in the interest of justice and in all fairness we direct the AO to look into all these aspects and ensure that impugned interest income is taxed only once in appropriate year. For this purpose necessary rectification orders shall be passed as per law. The assessee shall extend requisite cooperation to the AO by providing required details information and documentary evidences. Thus Ground is sent back to file of the AO with our directions as contained above.- Decided in favour of assessee for statistical purposes. Addition under section 145A to the closing stock on account of unutilized modvat credit - Held that - as the fairness demands and as per law the value of closing stock of a particular year should be the opening stock of the next year. There can be no doubt or debate on this proposition. If this principal is not followed it may give rise to absurd results leading to excessive and unfair assessment of income in the hands of the assessee. Therefore we direct the AO to adopt the value of closing stock of A.Y. 2006-07 as value of opening stock of assessment year 2007-08 in case the addition made by the AO in the closing stock of A.Y.2006-07 has attained finality. Accordingly this ground is sent back to the file of the AO with the directions as given above - Decided in favour of assessee for statistical purposes. Deduction u/s 35DD - assessee has sought direction to be issued for granting 1/5th of the expenses amounting to 13, 06, 200/- related to merger of Pharmacia Healthcare Limited with Pfizer Limited as per the provisions of section 35DD - Held that - As per law deduction has to be allowed equivalent to the amount of 1/5th of the total expenditure u/s 35DD as has already been allowed to the assessee in A.Y. 2004-05. We direct the AO to maintain consistency and follow the order for A.Y. 2004-05. - Decided in favour of assessee Adjustment to Arms Length Price on account of interest on outstanding receivable - Held that - This issue has been thrashed out by the Hon ble Pune Bench in the case of iGATE Computer System Ltd. (supra) wherein it has been held that once the transaction between the assessee and its AEs was in foreign currency then the same partakes the nature of international transaction and the said transaction has to be looked upon by applying the commercial principles with regard to an international transaction. If that is so then the domestic lending rates cannot be applied in order to benchmark the transaction of the assessee with its AEs and the international rates fixed by LIBOR would come into place. As no serious objections have been raised by the Ld. CIT-DR for adoption of international rates fixed by LIBOR keeping in view the fact that amount was to be received back in US currency only. Thus we hold that Indian prime lending rates cannot be applied and the international rate fixed by the LIBOR would come into play. In our considered view as per as per the suggestions received from both the sides the rate of interest should be LIBOR plus 150 basis points. Period up to which adjustment on account of interest can be made to the income to the current year - Held that - This issue has been very well explained by the Mumbai Bench of ITAT in case of Tecnimont ICB House (2015 (7) TMI 602 - ITAT MUMBAI) wherein it has been held that interest should be charged only up till the end of the F.Y. Thus it is held that interest should be calculated from the due date till the date of realisation if the outstanding amount has been received during the year. In case the outstanding amount has been received back after 31st March 2008 then interest will be calculated from the due date till the last date of this F.Y. i.e. 31st March 2008. We direct the AO to give effect to our directions accordingly. Thus Ground no.2 is partly allowed as in terms of our directions as stated above. Disallowance u/s 40(a)(ia) - non deduction of TDS on payment towards clinical trial expenditure - Held that - As per the order passed by Ld. CIT(A) it has been held in principle that out of clinical trial expenses amounting to 3.56 crores TDS was not required to be deducted. Keeping in view nature of these expenses and for the purposes of requisite verification of facts as was claimed by the assessee the matter was sent back to the file of AO. Thereafter the AO passed an order giving effect dated 31st December 2014. We therefore send this ground back to the file of the AO to examine these facts that out of total disallowance of 3.56 crores how much amount has been deleted by the AO in the order dated 31.12.2014. The disallowance shall be deleted equivalent to this amount and balance amount of disallowance shall be sustained. Thus assessee gets part relief - Decided in favour of assessee for statistical purposes. Profit on sale of right to use the trademark/license pertaining to consumer health brands - short term capital gains OR long term capital gains - Held that - real substance of the transactions is that the assessee company was rightful and legal owner of these assets since 1st December 2001 and has been holding these assets in the capacity of defacto as well as dejure owner. These are clearly long term assets under the income tax law having been held for more than 36 months by the assessee. Therefore in view of these facts and circumstances of the case it is held that the capital gain arising on the transfer of these assets is long term capital gain. Thus the AO is directed to recompute the income of the assessee - Decided in favour of assessee Addition made by the AO on account of mismatch of individual transaction statement transactions with insurance companies - Held that - The primary onus is upon shoulders of the AO to show that the transactions reported in AIR belong to the assessee. It is only thereafter the onus of the assessee shall start to show that these transactions have been duly recorded in the books of account of the assessee failing which the addition may be liable to be made. With these directions this issue is sent back to the file of the AO with further directions to grant adequate opportunity of hearing to the assessee. The assessee shall also extend requisite cooperation to the AO. - Decided in favour of assessee for statistical purposes. Addition on account of some differences on the basis of AIR information and on account of mismatch with From 26 - Held that - Our prima facie view is that the addition has been made and sustained by the lower authorities by following a casual and irresponsible approach. The assesse has submitted complete information showing proper reconciliation. These have been either ignored or not properly appreciated by the lower authorities. Both of these grounds are sent back to the file of the AO with our directions as have been given while disposing Ground no. 7 above. - Decided in favour of assessee for statistical purposes. Credit of tax deducted at source - Held that - It is noted that DRP has already given direction to the AO to verify the claim and accordingly grant credit of tax debited at source by HSBC. We reinforce direction given by the DRP and direct the AO to grant credit for TDS after making requisite verification as per law. - Decided in favour of assessee for statistical purposes.

Summary

Issues Involved:
1. Adjustment of Rs. 1,88,83,489/- in relation to international transactions of provision of support services.
2. Denial of 5% range benefit under Section 92C(2) of the Act.
3. Classification of rental income from leased properties.
4. Disallowance under Section 40(a)(ia) for payments to manufacturers.
5. Reference to DVO for determination of Fair Market Value of Chandigarh property.
6. Addition of Rs. 26,779/- towards unexplained investment.
7. Levy of interest under Section 234C.
8. Double taxation of interest income granted under Section 244A.
9. Adjustment to Arms Length Price on account of interest on outstanding receivables.
10. Classification of profit on sale of right to use the trademark/license.
11. Addition on account of mismatch of transactions with insurance companies.
12. Addition on account of mismatch with Form 26AS.
13. Credit of tax deducted at source.

Issue-wise Detailed Analysis:

1. Adjustment of Rs. 1,88,83,489/- in relation to international transactions of provision of support services:
The assessee challenged the DRP's decision confirming the AO's adjustment related to support services for clinical study management. The assessee contended it should be compared with support service providers rather than high-end clinical research companies. The DRP did not provide detailed reasoning, leading to the Tribunal remanding the issue back to the DRP for re-adjudication after affording the assessee adequate opportunity to present its case.

2. Denial of 5% range benefit under Section 92C(2) of the Act:
This issue was consequential to the first ground and was also remanded back to the DRP to be decided along with the primary issue.

3. Classification of rental income from leased properties:
The assessee argued that rental income should be classified as 'Income from House Property' based on a precedent set by the Bombay High Court. The Tribunal agreed, stating that the DRP's refusal to follow the High Court's judgment was incorrect. The Tribunal directed the AO to classify the rental income under 'Income from House Property.'

4. Disallowance under Section 40(a)(ia) for payments to manufacturers:
The AO disallowed payments made to manufacturers, considering them as 'works contracts' requiring TDS under Section 194C. The Tribunal found that the transactions were for the purchase of goods and not liable for TDS. The Tribunal directed the AO to delete the disallowance.

5. Reference to DVO for determination of Fair Market Value of Chandigarh property:
The AO referred the valuation of Chandigarh land to the DVO, which the assessee contested. The Tribunal found the reference to the DVO invalid, as the AO did not have the power to make such a reference when the value claimed by the assessee was higher than the FMV. The Tribunal deleted the addition made by the AO based on the DVO's report.

6. Addition of Rs. 26,779/- towards unexplained investment:
The assessee could not reconcile a small amount of Rs. 26,779/- out of transactions with a pharmaceutical company. The Tribunal upheld the AO's addition due to the lack of specific arguments or evidence from the assessee.

7. Levy of interest under Section 234C:
The assessee argued that interest under Section 234C should not be levied as the capital gains arose after the due date for advance tax payment. The Tribunal directed the AO to reconsider the interest calculation, taking into account the timing of the capital gains.

8. Double taxation of interest income granted under Section 244A:
The assessee faced double taxation of interest income granted under Section 244A for different assessment years. The Tribunal directed the AO to ensure the interest income is taxed only once, in the appropriate year, and to pass necessary rectification orders.

9. Adjustment to Arms Length Price on account of interest on outstanding receivables:
The TPO made an adjustment for interest on outstanding receivables at 16% per annum, which the DRP reduced to 13.25%. The Tribunal held that interest should be calculated only up to the end of the financial year and at the LIBOR rate plus 150 basis points.

10. Classification of profit on sale of right to use the trademark/license:
The AO treated the profit on the sale of trademarks/licenses as short-term capital gains, while the assessee claimed it as long-term capital gains. The Tribunal found that the trademarks/licenses were not part of the block of assets and no depreciation was claimed or allowed on them. The Tribunal directed the AO to treat the profit as long-term capital gains.

11. Addition on account of mismatch of transactions with insurance companies:
The AO made an addition based on an AIR statement without providing detailed information to the assessee. The Tribunal remanded the issue back to the AO to provide complete information and allow the assessee to reconcile the transactions.

12. Addition on account of mismatch with Form 26AS:
Similar to the previous issue, the Tribunal directed the AO to provide detailed information and allow the assessee to reconcile the transactions.

13. Credit of tax deducted at source:
The Tribunal reinforced the DRP's direction to the AO to verify the claim and grant credit for TDS after making requisite verification.

Conclusion:
The Tribunal's judgment addressed various issues related to international transactions, classification of income, disallowances, and procedural aspects, providing detailed directions for re-adjudication and verification by the lower authorities.