2017 (1) TMI 674 - AT - Income Tax

Transfer pricing adjustment - ALP adjustment - Held that - As clarified in the Memorandum explaining the provisions of the Finance Bill 2002 which, while inserting the words For the purpose of sub section (1) of section 92A in Section 92A(2), had observed that It is proposed to amend sub-section (2) of the said section to clarify that the mere fact of participation by one enterprise in the management or control or capital of the other enterprise, or the participation of one or more persons in the management or control or capital of both the enterprises shall not make them associated enterprises, unless the criteria specified in sub-section (2) are fulfilled . In our considered view, therefore, the assessee and Blue Gems BVBA cannot be said to be associated enterprises. As these enterprises are not associated enterprises, the ALP adjustments in respect of the transactions between these enterprises were wholly unwarranted. For this short reason, and without going any further into the matter, we approve the impugned deletion of ALP adjustment. The plea of the assesse, in cross objection, is upheld and, for that reason, grievance of the Assessing Officer, in appeal, is dismissed as infructuous. Section 68 addition as well as interest expenditure incurred there upon - Held that - Assessing Officer as well as DDIT (Inv) were first of all of the opinion that although six out of seven entities were based at Mumbai whereas their business were in Surat, they were able to trace all these creditors later on and get statement of their authorised persons recorded in the corresponding proceedings. It is thus not a case of identity dispute. Coming to the capacity aspect of the creditors, the assessee has already proved that its transactions have been routed through banking channel including repayment. We accordingly find no reason to interfere with CIT(A) s observation hereinabove deleting the impugned section 68 addition as well as interest expenditure incurred there upon. This Revenue s substantive ground on both these aspects is accordingly declined. - Decided in favour of assessee Disallowance of provision of forward contract payable - whether the entry passed in the books of account in respect of difference in exchange rate cannot be said to be in the nature of notional/unascertained liability - Held that - The assessee has admittedly made the impugned provision in view of difference in exchange rate as on the date of booking of its forward contract vis-a-vis exchange rate prevailing as on 31.03.2008. It has fortified its claim in view of ABN Amro Bank s MTM certificate forming basis of the impugned provision. The Revenue fails to dispute that the assessee has followed mercantile system of accounting instead of cash system and it is accordingly supposed to account for all expenses/gains in the P&L account on the said basis. It thus emerges that assessee had sufficient reason to treat the impugned liability arising on account of foreign exchange rate difference so as to make the impugned provision as per the relevant accounting standard issued by the Institute of Chartered Accountants of India. We thus find no reason to restore the impugned disallowance.

Issues Involved:
1. Arm’s Length Price Adjustment
2. Determination of Associated Enterprise
3. Unexplained Cash Credits under Section 68
4. Disallowance of Interest Expenses
5. Provision for Forward Contract Payable

Issue-wise Detailed Analysis:

1. Arm’s Length Price Adjustment:
The grounds of appeal numbers 1 to 4 in the assessee’s appeal relate to an arm’s length price (ALP) adjustment. The Assessing Officer (AO) challenged the correctness of the order dated 28.03.2012, passed by the CIT(A)-V, Surat, under section 143(3) of the Income Tax Act, 1961, for the assessment year 2008-09. The AO argued that the CIT(A) erred in deleting the addition of ?5,22,64,779 under section 92CA(3), as the Transfer Pricing Officer (TPO) had initially relied on the mean margin ratio of six entities including exchange difference income but later proposed the addition based on only two entities excluding exchange difference income. The CIT(A) ought to have confirmed the addition as these issues had been considered and discussed by the TPO. The CIT(A) admitted and decided the appeal in contravention of section 144C of the IT Act, as no objection was filed by the assessee before the AO after receipt of the draft assessment order.

2. Determination of Associated Enterprise:
In the cross objection, the assessee contended that M/s Blue Gems BVBA is not an associated enterprise under section 92A(2)(j) of the Act, and thus, the AO wrongly made a reference to the TPO for determining the ALP in respect of transactions with M/s Blue Gems BVBA. The CIT(A) did not give any findings on this contention, considering it academic since the addition was deleted on merits. The Tribunal held that it is essential to first adjudicate whether the assessee and Blue Gems BVBA are associated enterprises, as this is foundational for invoking transfer pricing provisions. The Tribunal found that the assessee firm, being a partnership concern, cannot be said to be controlled by "an individual" as required under section 92A(2)(j). The additional references to clauses (k) and (m) were also found inapplicable. Therefore, the assessee and Blue Gems BVBA cannot be said to be associated enterprises, making the ALP adjustments unwarranted.

3. Unexplained Cash Credits under Section 68:
The Revenue sought to restore the addition of ?8,50,00,000 under section 68 as unexplained cash credits and the disallowance of interest expenses of ?66,94,929. The assessee had filed confirmations, PAN details, and other relevant documents for the loans obtained from various entities. The AO issued notices and summons, and the DDIT (Inv.), Mumbai, reported that the entities did not maintain proper records. The CIT(A) deleted the additions, noting that the assessee had discharged its burden under section 68 by providing necessary details and that the loans had been repaid within the financial year. The Tribunal upheld the CIT(A)'s decision, finding no reason to interfere as the assessee had proved the identity, genuineness, and creditworthiness of the loan transactions.

4. Disallowance of Interest Expenses:
The disallowance of interest expenses of ?66,94,929 was linked to the unexplained cash credits. Since the Tribunal upheld the deletion of the cash credit addition, the disallowance of interest expenses was also found unsustainable and deleted.

5. Provision for Forward Contract Payable:
The Revenue challenged the deletion of disallowance of a provision for forward contract payable of ?34,35,000. The assessee had made the provision based on the difference in exchange rate as per the MTM certificate for the assessment year 2008-09, which was reversed in the succeeding year. The AO disallowed it as an unascertained liability. The CIT(A) accepted the assessee's argument that the provision was made as per the actual exchange rate prevailing at the end of the year and was in line with the accrual system of accounting. The Tribunal upheld the CIT(A)'s decision, noting that the provision was made following the relevant accounting standards and the mercantile system of accounting.

Conclusion:
The Tribunal dismissed the Revenue’s appeal and allowed the assessee’s cross objection, upholding the deletion of the ALP adjustment, the addition under section 68, the disallowance of interest expenses, and the provision for forward contract payable.

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