9911796707
TMI Blog2011 (11) TMI 465X X X X Extracts X X X X X X X X Extracts X X X X ..... ection of comparables selected by assessee by TPO - CIT(A) retaining comparables selected by assessee, deleted addition on account of ALP - Held that:- The assessee furnished a list of nine comparable cases. What to talk of the TPO giving reasons for their non-acceptance, he simply set aside all such cases by mentioning in one line that "No companies were identified as comparables". By reason of the fact that the TPO did not discharge his obligation of distinguishing the cases cited by the assessee as comparable, CIT(A) was justified in retaining all such nine cases in his list of comparables for determining the ALP - unable to accept the contention of the DR for excluding certain cases not rejected by the TPO but which in her opinion did not pass the test of comparability. DR cannot be allowed to argue that certain cases included by the assessee in the list of comparables, were in fact not comparable, when the TPO himself failed to point out as to how such cases were distinguishable. Decided against the Revenue. Exclusion of comparables - Held that:- For Tulsyan Technologies Limited and Vishal Information Technologies Limited as noticed from their annual accounts that these compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Officer that the assessee had debited an amount of Rs.17,26,280 as stamp duty and filing fee out of which Rs.15,26,500 was capital expenditure. It was also noticed that the assessee wrongly claimed this deduction despite the fact that auditors of the assessee had also classified such amount as capital expenditure in the tax audit report. As the income chargeable to tax on this issue escaped assessment, the A.O. issued notice dated 22.01.2007 u/s 148 of the Act. The assessee submitted that the return originally filed may be taken as in response to such notice. The assessee requested for the supply of copy of reasons, which the AO communicated. Thereafter, the assessee challenged the initiation of reassessment proceedings before the A.O. Relying on certain decisions, set out on page 2 of the assessment order, the Assessing Officer rejected such contention against the initiation of reassessment proceedings. 3. It was argued before the learned CIT(A) that the decision to treat stamp duty expenses as revenue was based on certain judgments including that of the Hon'ble jurisdictional High Court in CIT v. Cinecita (P.) Ltd. [1982] 137 ITR 652 (Bom.). The learned CIT(A) noticed that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... registration fee, solicitor fee and stamp duty incurred in connection with the registration of lease deed was revenue expenditure. In that case the period of lease was for twenty years and there was option for renewal of lease as well. That assessee incurred stamp duty and other charges in connection with the registration of lease deed which were held by the Assessing Officer to be capital expenditure. The Hon'ble jurisdictional High Court held such expenditure to be revenue in nature deductible u/s 37(1) of the Act. In reaching this conclusion, the Hon'ble jurisdictional High Court relied on its earlier judgment in the case of CIT v. Hoechst Pharmaceuticals Ltd. [1978] 113 ITR 877 (Bom.) in which case brokerage and stamp duty expenditure incurred for obtaining a lease of office premises for a short duration of five years was held to be deductible as revenue expenditure u/s 37(1). In Richardson Hindustan Ltd. v. CIT [1988] 169 ITR 516 (Bom.)], the Hon'ble jurisdictional High Court, relying on its earlier judgment in the case of Cinecita (P.) Ltd. (supra), held stamp duty paid on execution of lease deed as revenue expenditure in respect of premises taken on lease by that assessee fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y High Court in Hoechst Pharmaceuticals Ltd. (supra) had not been adversely commented upon by the Hon'ble Calcutta High Court in the case of Gobind Sugar Mills Ltd. (supra) and such later judgment had not been approved by the Hon'ble Supreme Court. In that case the hitherto consistent view of the Hon'ble jurisdictional High Court on the point would have prohibited the A.O. from believing that the expenditure was not deductible and there was no escapement on income. The fact that Hoechst Pharmaceuticals Ltd. (supra) was not accepted by the Calcutta High Court in Gobind Sugar Mills Ltd. (supra) and such later judgment of the Hon'ble Calcutta High Court has approved by the Hon'ble Supreme Court, did in our considered opinion, constitute good reasons with the Assessing Officer to believe that the assessee had wrongly claimed deduction and there was escapement of income. 9. It is further relevant to note that the assessee's auditor, against Column 17 "A. Expenditure of capital in nature" in tax audit report, mentioned 'Stamp duty of Rs.15,26,500'. It, therefore, shows that the assessee's auditor also held such expenditure to be capital in nature. Despite that the assesse claimed deduct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther, against the claim of deduction made by the assessee in its return of income, in our considered opinion such material was definitely more than prima facie and sufficient enough for the AO to entertain a belief about the escapement of income. As such we are not persuaded to accept this contention advanced on behalf of the assessee. 13. The learned Counsel for the assessee assailed the initiation of reassessment proceedings from one more angle by contending that the AO relied on the auditor's report and certain decisions for initiating the reassessment, which were already there on record. It was put forth that in the absence of any fresh or new material coming in the possession of the AO casting doubt over the deductibility of registration charges from the stage of assessment u/s 143(1), he could not have validly started the exercise of reassessment. It was argued that having completed the assessment u/s. 143(1), the AO missed the bus to reconsider the deductibility of stamp duty charges. It was also stated that if the AO is allowed to reconsider the same material time and again within the extended period provided for the reassessment, then the time limit for making regular ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tertained a prima facie belief that the income chargeable to tax has escaped assessment. We are unable to read the coming of a 'new material' into existence after the filing of return as a pre-condition for assessment or reassessment u/s 147 in the context of Explanation 2(b).The only requirement for assuming jurisdiction in the light of Expl. 2(b) is that : 'it is noticed by the Assessing Officer that the assessee has understated the income' etc. Such noticing may be from the material already on record or some new material coming in his knowledge. The requirement is of noticing understatement of income. So long as noticing of understatement of income is there, the source of such noticing as emanating from some 'new material' or an existing material is wholly irrelevant in the context of Expl. 2(b). 16. We find that the contention of the ld. AR about the coming in existence of 'new material' as a condition precedent for reassessment is not totally alien to reassessment. It is settled legal position that the reassessment is not permissible on a mere change of opinion by the AO. In simple words, if the AO, after examining the relevant factual and legal position forms a belief that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sment or reassessment under this section, the Assessing Officer may assess or reassess the income in respect of any issue, which has escaped assessment, and such issue comes to his notice subsequently in the course of the proceedings under this section………..'. It, therefore, clearly transpires that where the assessment was originally made and the AO wants to make reassessment under section 147, he cannot do so in the absence of 'new material' coming in his possession after the making of the original assessment. If he ventures to do so, it will amount to change of opinion constraining him to proceed. But where no assessment was earlier made and the AO wants to make assessment u/s 147 for the first time, there is no requirement of a new material. The only requirement is the existence of some material on the basis of which the AO forms belief that some income has escaped assessment. Further as there was no assessment at all in the first instance, the yardstick for judging the new or old material with reference to the starting point for defining a material as new or old, will never be available. As we are confronted with a case in which no assessment was originally ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his clause shall be served on the assessee on or after the 1st day of June, 2003 ; (ii) notwithstanding anything contained in clause (i), if he considers it necessary or expedient to ensure that the assessee has not under stated the income or has not computed excessive loss or has not under paid the tax in any manner, serve on the assessee a notice requiring him, on a date to be specified therein, either to attend his office or to produce, or cause to be produced there, any evidence on which the assessee may rely in support of the return : (Emphasis supplied by us) 23. At the same time it will be in order to note the foundation for action u/s 147, the relevant part of which is as under : - 147. Income escaping assessment.--If the Assessing Officer, has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of sections 148 to 153, assess or reassess such income ……..' (Emphasis supplied by us) 24. When we read the above extracted portions of section 143(3) in juxtaposition to section 147, it can be easily observed that there is great difference in scope for taking action under these secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rent jurisdiction. If however, the time limit for completion of regular assessment has expired and later on the Assessing Officer entertains reasons to believe that any income chargeable to tax has escaped assessment, he is very much within his power to issue notice u/s 148. It is noticed that the instant case falls in the latter category and hence we cannot countenance the contention of the ld. AR in this regard. 26. In view of the foregoing reasons, we reject ground no.1 raised by the assessee in its cross objection. 27. Now we take up ground no. 2 of the Revenue's appeal which is partly related to the above discussed ground no. 1 of the assessee's cross objection. Through this ground the Department has assailed the action of the ld. CIT(A) in deleting the addition made by the AO on account of stamp duty charges. We have noted above that the assessee paid stamp duty charges on registration of lease deed amounting to Rs.15,26,500 which were claimed as revenue expenditure by relying inter alia on the judgment of the Hon'ble Bombay High Court in the case of Cinecita (P) Ltd. (supra). The Assessing Officer, relying on the judgment of the Hon'ble Supreme Court in the case of Gobind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h Price (hereinafter called "ALP"). Briefly stated the facts of this ground are that the assessee is a captive service provider rendering back office support services to its Associated Enterprises (hereinafter called "AEs"). The activities undertaken by the assessee are essentially IT enabled services such as data entry, transcription and data of shipping documents such as bill of leading etc. For the year ending on 31.03.2005 the assessee earned an adjusted Net Cost plus Margin (hereinafter called "NCP") of 7.90% as under:- Table A Particulars Time and material/activity based model Cost Plus model Combined (in Rs.) Total operating income (A) 491,454,573 77,121,000 568,575,573 Total operating cost (B) 460,018,079 6,936,766 526,954,845 Operating profit (C = A - B) 31,436,494 10,184,234 41,620,728 NCP margin (C/B x 100) 6.83 15.21 7.90 30. The assessee in its transfer pricing study considered transactional net margin method (hereinafter called "TNMM") as the most appropriate method with NCP margin as the profit level indicator to benchmark its international transactions with AEs. The assessee conducted analysis for determining the ALP of international transa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ded any scientific basis for capital, risk adjustments etc., no deduction could be given on this score. In the final analysis, the TPO determined operating profit margin of the assessee at 7.89%. Applying the arithmetic mean of 27.80% of twelve comparables chosen by him, the TPO proposed adjustment in the ALP to the tune of Rs.10.49 crores. The A.O. made addition for such amount while computing the total income of the assessee. In the first appeal, the learned CIT(A) ordered for the deletion of addition on this issue. The Revenue is aggrieved against such deletion. 32. We have heard the rival submissions and perused the relevant material on record. It is noted that the TPO suo motu found out twelve comparables listed above to determine the ALP of the assessee's international transactions after recording that the assessee did not identify any comparables. This finding of the TPO about the assessee not identifying any comparables, at the very outset, is erroneous. From the Transfer pricing study conducted by the assessee, a copy of which is available on record, it is ostensible that the assessee identified nine comparable cases as under:- Table C Sr. No. Company name Weighted Av ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Registry Limited 15.16 Appellant 14 Transworks Information Services Ltd. 2.08 TPO Arithmetic mean 12.71 34. From the above Table D it can be seen that the ld. CIT(A) in his final list of comparables included nine cases as chosen by the assessee and six out of twelve chosen by TPO. Since one case of Nucleus Netsoft & GIS India Ltd. is common in both the lists of the assessee as well as that of the TPO, it has made the total of fourteen. 35. The ld. DR objected to the inclusion of nine cases chosen by the assessee as per Table C, in the final list of comparables drawn by the ld. CIT(A). We have gone through transfer pricing study conducted by the assessee for the year in question, a copy of which is available on pages 92 to 145 of the paper book. The TPO has not at all considered any of such cases and simply brushed them aside by mentioning that no companies were identified by the assessee as comparable. On the contrary the fact is that list of these nine cases is very much there in assessee's transfer pricing study, which was provided to TPO as well. No reasons worth the name have been assigned by the TPO while blackouting such list of comparable cases cited by the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re comparable. It is only when the TPO gives reason for non-acceptance of any case as not comparable, the duty is cast on the appellate authorities to examine the reasons given by the TPO with a view to determine as to whether or not such cases were rightly excluded. But where the TPO fails to give any reason for the exclusion of the comparables given by the assessee, then going by the presumption of acceptability of such cases, the first appellate authorities cannot be said to have any duty to check the work done by the AO/TPO with a view to ensure whether or not it was properly done. 37. As per section 92CA(4), at the material time :'On receipt of the order under sub-section (3), the Assessing Officer shall proceed to compute the total income of the assessee under sub-section (4) of section 92C having regard to the arm's length price determined under sub-section (3) by the Transfer Pricing Officer'. It means that the assessment is to be made by the AO having regard to the ALP determined by the TPO, which is not binding on him. In such a situation the order of the TPO u/s 92CA(3) constitutes not more than a mere input to the AO. The AO is competent to make suitable adjustments to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the realm of his powers and not duties. The duty of the CIT(A) is to dispose of the appeal on the grounds raised before him and not to do redo assessment. Thus we do not find any logic in accepting the contention of the ld DR that the CIT(A) was duty bound and hence should have examined the comparables given by the assessee to find out whether or not these were, in fact, comparable. 39. Adverting to the facts of the instant case it is seen that the assessee furnished a list of nine comparable cases. What to talk of the TPO giving reasons for their non-acceptance, he simply set aside all such cases by mentioning in one line that "No companies were identified as comparables". By reason of the fact that the TPO did not discharge his obligation of distinguishing the cases cited by the assessee as comparable, in our considered opinion, the learned CIT(A) was justified in retaining all such nine cases in his list of comparables for determining the ALP. 40. Having exhausted the argument that the ld. CIT(A) should have examined the cases cited by the assessee as comparable, the ld. DR then took upon herself the task of distinguishing some of such cases. Referring to the material on recor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ficer while arguing the appeal filed by the Revenue. He is fully competent and free to support the reasoning of the Assessing Officer from any other angle so as to put forward a strong case of the Revenue. There is a marked distinction between supporting order of the AO/TPO by the Departmental Representative on one hand and finding flaws in the order of the AO/TPO in an attempt to show that the AO/TPO failed to do what was required to be done by him. In our considered opinion if the Departmental Representative is allowed to fill in the gaps left by the AO/TPO it would amount to conferring the jurisdiction of the CIT u/s 263 to the Departmental Representative, which is not permitted by the statute. Let us take another situation. Suppose a particular deduction is permissible on the cumulative satisfaction of three conditions. The AO examines the case and finds the very first condition as lacking. Without examining the fulfillment or otherwise of the other two conditions, he rejects the claim. In that case if such first requirement is subsequently found to be fulfilled in the appellate proceedings, the Departmental Representative can very well point out to the tribunal that the other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for earlier year's expenses from the total expenses debited in the Profit and loss account. When he expressly granted such deduction, the ld. DR cannot argue that the TPO was wrong in allowing deduction for such expenses. 46. Reverting to the final list of comparable cases drawn by the ld. CIT(A) as per Table D above to compute the ALP, we hold that he was fully justified in including nine comparable cases chosen by the assessee as per Table C. 47. Now we turn to the list of twelve comparable cases drawn by the TPO as per Table B. It is found that the case of Nucleus Netsoft & GIS India Ltd. finds place in the list of assessee's comparables also. As such no infirmity can be found in the impugned order in including this case in the final list of comparables. Out of the remaining eleven cases, the learned CIT(A) has included five cases, thereby excluding the following cases:- Part of Table B Sr. No. Name of the company 1. Tulsyan Technologies Ltd. (Cosmic Global) 2. WIPRO BPO Solutions Ltd. 3. Vishal Information Technologies Ltd. 4. Asian Cerc Information Technology Ltd. (Seg) 5. Airline Financial Support Services (I) Ltd. 6 Cepha Imaging Pvt. Ltd. 48. Insofar as t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not allowed, then ground nos. 2 to 9 of the assessee's cross objection should be treated as not pressed. In view of our decision in not accepting the ground of the Revenue on this issue, these grounds of the assessee's cross objection fail. 52. The only other ground which survives in the appeal of the Revenue is against the allowing of prior period EDP and communication expenses. The factual matrix of this ground is that the Assessing Officer noted that the assessee claimed had expenses amounting to Rs.8,28,00,380 pertaining to the period January to March 2004. On being called upon to explain as to why the expenses of earlier year were included in the current year's expenditure and claimed as deduction, the assessee stated that the details of such expenses were received only after the year ending 31st March, 2004 and such amount was not allowed as deduction in the immediately preceding assessment year i.e. 2004-2005. The Assessing Officer disallowed such amount as prior period expenses. 53. When the matter came up before the learned CIT(A), he ordered for the deletion of addition by observing that the assessee received invoice dated 18th March, 2005 from A.P.Moller - Maersk A/s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of crystallization of liability at such later event. But where there is no dispute as to the liability to pay, the deduction becomes permissible on the accrual of such liability irrespective of the fact whether the bill is raised and the payment is made simultaneously or later on. Thus the crucial test for grant of deduction under the mercantile system of accounting is the crystallization of liability and not its quantification. 56. Adverting to the facts of the instant case it is seen that APMM is an associated enterprise of the assessee which raised a bill on it towards IT cost for the calendar year 2004 on 18th March, 2005. The proportionate expenses for the period 1st January to 31st March, 2004 relate to previous year relevant to assessment year 2004-2005. When the assessee availed the benefit of such services in the preceding year, the deduction to that extent was also allowable in the earlier year notwithstanding the fact that service provider did not raise invoice in the earlier year. Further it is not a case of the assessee that some dispute was going on about the liability to pay such amount, which was subsequently settled and only thereafter the invoice was received. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ear of incurring such expenditure. If however such tax is paid after the time prescribed, the assessee shall be entitled to claim deduction for such expenditure in the year of payment. It can be seen that section 40(a) has partly modified the concept of deduction of liability on its accrual under the mercantile system of accounting. Resultantly, the mercantile system of accounting as understood in common connotation needs to be harmoniously adjusted in the light of section 40(a), to the extent of the items of expenses covered under it. 59. Adverting to the facts of the instant case it is noticed that the assessee deducted and deposited tax on EDP charges for the period 1.1.2004 to 31.3.2004 on 31.3.2005. This date falls within the previous year relevant to the assessment year under consideration. As the payment of tax has been made after the date prescribed u/s 200(1) and in the previous year relevant to the assessment year 2005-2006, the deduction was not allowable in respect of such expenses in assessment year 2004-2005. The same, in our considered opinion, has been rightly allowed by the learned CIT(A) in the current year when the assessee paid tax deducted on the amount on the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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