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TMI Blog2017 (7) TMI 34X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome, losses or asset of the assessee, these are international transaction. Transaction with respect to inter-company receivable from SIS Holding no interest has been charged by the assessee. Therefore, it was the contention of the assessee that in view of the cash basis of accounting no income has arisen to the assessee. We are of the view that as it is transaction of lending of borrowing money it falls into the definition of international transaction u/s 92B(1) of the Act. We dismiss ground of the appeal of the assessee holding that the transactions benchmarked by the ld TPO are "international transaction" u/s 92B of the Income Tax Act despite the method of accounting followed by the assessee and not claiming such expenditure as deduction. TPO empowered to question the commercial expediency of any alleged transaction - Held that:- Transfer Pricing Officer as well as ld DRP did not appreciate the evidence produced by the assessee for receipt of services in proper perspective. Therefore, it is imperative for the ld Transfer Pricing Officer/ Assessing Officer to verify these evidences. In view of this we set aside the grounds of the appeal of the assessee on transfer prici ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... international transactions of Technical service, Reimbursement of profession fee etc. and Hiring of equipments at Nil. The TPO also found that interest chargeable from inter-company loan was below its arm's length rate. The AO vide his draft order dated 10.3.2014 made several additions including an addition on account of transfer pricing adjustment amounting to ₹ 135.83 crore. The assessee objected to the draft order before the Dispute Resolution Panel (DRP) who, vide its Direction dated 30.12.2014, allowed certain reliefs from the additions proposed in the draft order. That is how, the final assessment order was passed computing the total income at ₹ 32,81,66,430/-. In making the additions, the AO took note of the fact that a high-powered committee, known as Shunglu Committee, was constituted by the Government of India to report on the allegations of irregularities in the conduct of CWG, 2010. The Committee reported on various aspects relating to CWG, 2010 and concluded, inter alia, that actual cost of the contract awarded to SIS Live (i.e., the assessee) was at best about ₹ 111 crore, thus, resulting in an overall combined profit of at least ₹ 135 cror ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng adjustment. When this position was confronted, the ld. AR submitted that the AO inadvertently omitted to make an addition of ₹ 36.65 crore in the computation of total income on the last page of his assessment order and the rectification proceedings have been set in to motion to make good such deficiency left in the assessment order. We are not impressed with the contention of the ld. AR about his right to argue against the transfer pricing adjustment of ₹ 36.65 crore as no such addition has been eventually made in the assessment order and consequently this issue cannot be termed as arising from the impugned order. It is only if the AO, in any subsequent proceedings, makes such addition that the assessee will acquire a right to challenge the addition as per law against the outcome of such later proceedings. Since no addition on account of the transfer pricing adjustment has been made in the final assessment order, which has been impugned before us, we desist from adjudicating on the merits of the addition. The grounds challenging this issue, therefore, fail. 3. Against the order of the coordinate bench the appellant filed an appeal u/s 260A of the Income Tax Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 92 of the Act, there being no impact on the profit and loss account, no bench marking exercise could have been initiated. 19. That the AO/ DRP grossly erred in making/ sustaining the additions which have not even been claimed by the Appellant in its return of income. 20. That in terms of section 92CA of the Act, TPO is not empowered to propose an adjustment in respect of a transaction that may be reported for some other assessment year. 21. That the AO/DRP grossly erred in law in not appreciating that the TPO was not competent or empowered to question the commercial expediency of any alleged transaction and hence was not competent to take the value of any international transaction at Nil. 22. That the TPO/DRP erred in making/sustaining an adjustment of ₹ 31,87,60,236 on account of alleged international transactions entered into by the Appellant. 23. That the AO/DRP grossly erred in law in making/upholding adjustment in respect of (a) reimbursement of expenses; and (b) imputed interest; for which. no adjustment was made by the TPO in his assessment order under section 92CA(3) of the Act. 5. The ld Assessing Officer vide u/s 154 of the Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee was required to maintain prescribed documents. The Assessee Officer may initiate penalty proceedings u/s 271AA for failure of keep and maintain information and documents i.r.o international transaction as also penalty proceedings u/s 271BA for failure to furnish report u/s 92B within the stipulated time and penalty proceedings u/s 271G for failure to furnish information or documents u/s 92D of the Income Tax Act, 1961. 13.4 Without prejudice to the above finding in this case, since, the Firm is following Cash System of accounting, no payment i.r.o the international Transactions w.r.t. SIS OB and Fatpipe as discussed above, shall be allowed in subsequent years also, since the Arm's Length Price of such transactions has been determined at NIL. Interest payment i.r.o the international Transactions w.r.t. SIS Ltd. shall be determined using interest rates for rupee denominated loans for the relevant period, as discussed above . Hence, as per the recommendation of the TPO-U(2)f New Delhi and in conformity to the order of Hon'ble DRP-III, the computation of International Transaction to be added in the total income of the assesses in as follows:-. -. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on arrives in negative. Hence, this contention of the assessee based on extract of the order of AAR is not acceptable. M/s SIS Live has maintained its books of accounts on cash basis. The books of accounts for the F.Y. 2010-2] of the assessee analysed during post search proceedings were, therefore, reflective of the actual payments and receipts only, and do not give the real position of the profitability of the assessee from the CWG contracts. The non-resident partnership firm M/s SIS Live is formed with the specific and exclusive purpose of executing the media broadcasting and coverage contract for CWG 2010, New Delhi. Other than the media broadcasting and coverage contract, it has not undertaken any project either in respect of CWG or otherwise. It is, therefore, seen that the activities of the assessee are not earned forward from one accounting period to the next. The books of the assessee should, therefore, be in the nature of venture account only, and the correct profitability and the truthfulness as well as tax liability of the assessee can only be arrived at by following the accrual method of accounting. The books of account of the assessee on cash basis, therefo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8. The ld AO/ ld Transfer Pricing Officer has proposed an adjustments of ₹ 318760236/- being the total sum of international transaction holding the ALP as NIL and further as such sum is given as a loan he calculated the interest thereon @ 15% on the amount of ₹ 3018760236/- calculated at ₹ 47814035/- as interest and thereby made a total addition of ₹ 366574271/-. Therefore, assessee is aggrieved by this addition on account of transfer pricing issues and hence, submitted that ground No. 16 to 23 of the appeal needs to be adjudicated. 9. The ld Authorised Representative has made submission on each of the above issues before us by way of written submission as under:- A description of each of the above transactions is provided as under: Availing of technical services from AE (INR 109,450,616): In order to render broadcasting services for CWG 2010, SIS Live required highly technical knowledge, skills and expertise. In the absence of such necessary skills and resources to manage the magnitude of work, SIS Live availed such services from its AE, SIS OB, for a consideration of INR 109,450,616. SIS Live deducted and paid withholding t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the contract of SIS Live) amounting to INR 2,366,572. Such expenses were recorded in the current account of SIS Limited. The said amount was not paid by SIS Live during the year and also not claimed as deduction in its ROI. In view of the fact that the said transaction did not have a bearing on SIS Live's tax liability for the said year, SIS Live took a position that provisions of Section 92 did not apply to the said transaction, Inter-company receivables (INR 210,029,760): As a policy of SIS group, all transactions relating to currency conversions are carried out by SIS Holdings with the bankers to the group. In October 2010, SIS Live required conversion of Indian Rupees in its bank account in UK into Great Britain Pounds ('GBP'). Accordingly, SIS Live transferred INR equivalent of GBP 12 million to SIS Holdings, out of which SIS Holdings transferred GBP 9 million into SIS Live's bank account and balance GBP 3 million was still held with SIS Holdings (as is in the normal course of balances held by SIS group entities). The said balance was reflected as inter-company receivables from SIS Holdings in Balance Sheet of SIS Live as on 31 March 2011 (at an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome, losses or assets as far as the transactions with AE is concerned during the relevant period. Reliance is placed, on CBDT Instruction No. 3 / 2016 which clarifies that before making reference to TPO, the AO must, as a jurisdictional requirement, record his satisfaction that there is an income arising and / or being affected on determination of arm's length price of an international transaction before seeking approval of Principal Commissioner of Income Tax. This view is also fortified by the Hon'ble Delhi High Court in the Sony Ericson Mobile Communications India Pvt. Ltd.(374 ITR 118) in the following words: 44. On careful analysis of sub-section (2B) to Section 92CA of the Act, the following position emerges: (a) There should be reference under sub-section (1) to Section 92CA by an Assessing Officer to the TPO in respect of an international transaction. (b) The reference should be with prior approval of the Commissioner. (c) Satisfaction of conditions (a) (b) gives jurisdiction to the TPO. (d) If during the course of the proceedings, a TPO comes to a conclusion that there was an international transaction for which the said assessed has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cifies that 'Any income arising from an international transaction shall be computed having regard to the arm's length price' implies that the potential income, if any, should arise from the impugned international transaction which is before the TPO for consideration and not out of a hypothetical international transaction which may or may not take place in the future. It is respectfully submitted that the facts in the instant case are similar to the ratio laid down by Hon'ble Pune ITAT in the case of Eaton technologies Pvt. Ltd. v DCIT, ITAT Pune, ITA No. 1621/Pn/2011, Order dated 11.01.2013. Reliance is placed on the following judgements:- 1. Bharti Airtel Ltd. v Addl. CIT, 63 SOT 113, ITAT Delhi 2. Ciena India Pvt Ltd. v ITA, ITA No. 1453/Del/2014, order dated 24,04.2015, IT AT Delhi 3. Honda Motorcycle and Scooters India Pvt Ltd. v ACIT, ITA No. 1379/Del/2011, order dated 13.04.2015, ITAT Delhi 4. Marico Ltd. v ACIT, (2016) 70 taxmann.com 214, ITAT Mumbai 5. Topsgrup Electronic Systems Ltd. v ITO, 157 ITD 1123, ITAT Mumbai 6. Shell India Markets Pvt. Ltd. v ACIT, 369 ITR 516, High Court of Bombay 7. Vodafone India Services ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... P L account, it had the necessary effect of reducing the taxable income of the assessee. This is impermissible. Hence all action of the TPO is bound to be struck down. The TPO benchmarked the transaction with Fatpipe Satcom Ltd. and SIS OB by taking the Foreign AE as the tested party and benchmarked the same at Nil value (kindly refer the internal page 5 of TPO order). As far as the transaction with SIS Holdings of Inter Company Receivables is concerned, the TPO held that the rate of interest charged is not at arm's length and determined the same by using interest rates for Rupee denomination loans for the relevant period. (Kindly refer internal page 31 of the TPO order). Though, the TPO did not draw any adverse inference in respect of international transaction with SIS Ltd., however, the Assessing Officer while passing the final Assessment Order made an addition of ₹ 23,66,572/-(Kindly refer internal Pg. 73 to 82 of Draft Assessment Order). Even otherwise, Revenue authorities failed to appreciate that in respect to transaction of intercompany receivables, the first interest payment would be due only in assessment year 2013-14 and if without prejudice, in any subseq ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as under:- Section 92B of the Income Tax Act, 1961 (1) For the purposes of this section and sections 92, 92C, 92D and 92E, international transaction means a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises. (2) A transaction entered into by an enterprise with a person other than an associated enterprise shall, for the purposes of sub-section (1), be deemed to be an international transaction entered into between two associated enterprises, if there exists a prior agreement in relation to the relevant transaction between such other person and the associated enterprise ; or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... proprietary computer software, software copyrights, automated databases, and integrated circuit masks and masters ; (e) engineering related intangible assets, such as, industrial design, product patents, trade secrets, engineering drawing and schematics, blueprints, proprietary documentation ; (f) customer related intangible assets, such as, customer lists, customer contracts, customer relationship, open purchase orders ; (g) contract related intangible assets, such as, favourable supplier, contracts, licence agreements, franchise agreements, non-compete agreements ; (h) human capital related intangible assets, such as, trained and organised work force, employment agreements, union contracts ; (i) location related intangible assets, such as, leasehold interest, mineral exploitation rights, easements, air rights, water rights ; (j) goodwill related intangible assets, such as, institutional goodwill, professional practice goodwill, personal goodwill of professional, celebrity goodwill, general business going concern value ; (k) methods, programmes, systems, procedures, campaigns, surveys, studies, forecasts, estimates, customer lists, or tech ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is transaction is also falling into the provisions of services and it is not required that such transaction should affect the profitability of the assessee. Therefore, it is also according to us an international transaction. 16. The next transaction was availing of equipment on hire from M/s. Fatpipe Satcom Ltd of ₹ 166090515/-. This transaction is with respect to rent of certain equipment to render broadcasting services. The assessee has admittedly not claimed the deduction of this sum. However, the availment of equipment on hire falls into the category the nature of the transaction as purchase, sale or lease of tangible or intangible property. Therefore, according to us irrespective of the fact whether the transaction impact profit, income, losses or asset of the assessee, these are international transaction. 17. The last transaction was with respect to inter-company receivable from SIS Holding no interest has been charged by the assessee. Therefore, it was the contention of the assessee that in view of the cash basis of accounting no income has arisen to the assessee. We are of the view that as it is transaction of lending of borrowing money it falls into the definit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... having a bearing on the profit, income, losses or assets of enterprise. In the present case the international transaction of the assessee are falling into the lease of property or provisions of services or lending and borrowing money. Therefore, the reliance placed upon by the assessee on this decision is incorrect. The other decision relied upon by the assessee is pertaining to Toppsgrup Electronic Systems Ltd Vs. ITO 157 ITD 1123 (Mumbai). In that case, the transaction was investment in a private company, which was also falling into the category of any other transaction, which affects the profit, income, losses, or assets of the assessee. Therefore, reliance placed by the assessee on this case is also not correct. 19. In view of this, we dismiss ground Nos. 16 to 20 of the appeal of the assessee holding that the transactions benchmarked by the ld TPO are international transaction‟ u/s 92B of the Income Tax Act despite the method of accounting followed by the assessee and not claiming such expenditure as deduction. 20. On ground No. 21 to 23 of the appeal of the assessee, its pleading is that ld. TPO was not empowered or competent to question the commercial expedienc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he arms length price the ld Transfer Pricing Officer need to examine all these evidences and then determine whether the services were rendered or not and then derive at the ALP of such transaction in accordance with law. According to us, the ld Transfer Pricing Officer as well as ld DRP did not appreciate the evidence produced by the assessee for receipt of services in proper perspective. Therefore, it is imperative for the ld Transfer Pricing Officer/ Assessing Officer to verify these evidences. In view of this we set aside the grounds No. 21,22 and 23 of the appeal of the assessee on transfer pricing issues to the file of ld Transfer Pricing Officer/ ld Assessing Officer to examine the evidences produced and then determine ALP of the transactions after granting proper opportunity of hearing to the appellant, who may raise all the issues including the legal issues. In the result the ground No. 21 to 23 of the appeal of the assessee are allowed for statistical purposes accordingly. 22. In the result appeal of the assessee with respect to ground No. 16 to 23 are allowed for statistical purposes. Order pronounced in the open court on 13 /02/2017. - - TaxTMI - TMITax - Inco ..... X X X X Extracts X X X X X X X X Extracts X X X X
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