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TMI Blog2022 (6) TMI 1363X X X X Extracts X X X X X X X X Extracts X X X X ..... r scrutiny on non transfer pricing risk parameters only. Once it was evident that assessee's case was selected for scrutiny on the transfer pricing risk parameter, same fell under para 3.2 of circular dated 10-3-2016 which required reference to the TPO by the Assessing Officer mandatorily. There is no exception in this regard. Disallowance u/s. 40(a)(ia) - Scope of amendment inserted by Finance Act No. 2 to section 40(a)(ia) - HELD THAT:- In the present facts of the case, there is no dispute that assessee did not receive the invoice in respect of the total payment that was payable to its parent company. However, in the computation of income, assessee disallowed 30% of the provision which is in consonance with the amendment inserted by Finance Act No. 2 to section 40(a)(ia) w.e.f. 01.04.2015. We note that various benches of this Tribunal has held that this amendment is curative in nature and disallowance u/s. 40(a)(ia) of the Act is to be restricted to 30% as against 100%. The assessment years under consideration is 2016-17 and therefore the disallowance made by the assessee suo moto is in accordance with the provisions that are applicable at the relevant period of time. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Ld.ACIT, under national assessment Centre, New Delhi, under section 143(3) read with section 143(3A) and (3B) of the act, for the assessment year 2016- 17 on following grounds of appeal: 1. JURISDICTION 1.1. That the learned lower authorities erred in law and on facts in referring the case to the learned Transfer Pricing Officer (TPO) in violation of Instruction no. 3 of 2016 dated 106) March, 2016 (382 ITR (St.) 36). 1.2. That the learned lower authorities erred in law and on facts in holding that the international transaction guarantee falls under Transfer Pricing Risk Parameter and such finding is given without bringing any material on record. 1.3. That the order of the learned TPO is void-ab-initio as the learned assessing officer has not followed the procedure laid down in Instruction No. 3 of 2016 and has referred the case u/s. 92CA of Income Tax Act, 1961 (Act) without recording the satisfaction as per Instruction No. 3 of 2016 and without providing an opportunity of being heard to the appellant. 1.4. That the learned lower authorities erred in law and on facts in holding that the CBDT Instruction is applicable for scrutiny cases selected ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 15,00,635 should have been reduced from the income of A.Y 201718 instead of Rs. 4,50,190/- reduced in the return of income. 4. ADDITION OF PROVISION FOR BAD AND DOUBTFUL DEBTS TO INCOME COMPUTED UNDER NORMAL PROVISIONS OF THE ACT AND BOOK PROFITS COMPUTED U/S. 115JB OF THE ACT RS.36,20,870/- 4.1. That the learned lower authorities erred in law and on facts in adding provision for bad and doubtful debts of Rs.36,20,870/- to the income computed under normal provisions of the Act even though the same has been debited to profit and loss account and correspondingly reduced from the Trade Receivables in the Balance Sheet which amounts to write off. 4.2. That the learned lower authorities erred in law and on facts in adding provision for bad and doubtful debts of Rs.36,20,870/- to the book profits computed u/s. 115JB of the Act. 5. INTEREST EXPENDITURE CLAIMED U/S. 57(iii) OF THE ACT 5.1. That the learned lower authorities erred in law and on facts in disallowing interest expenditure of Rs.49,81,189/- claimed as deduction u/s. 57 of the Act even though such expenditure was incurred for earning the interest income of Rs. 60,13,880/- declared u/s. 56 of the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the petition u/s. 144C of the Act before Hon'ble Dispute Resolution Panel, Bangalore (Form 35A is enclosed at page nos. 67 to 106 of appeal memo). The Hon'ble DRP issued directions u/s. 144C(5) of the Act on 22.02.2021 (The copy is enclosed at page no. 18 to 53 of appeal memo). The learned assessing officer passed a final assessment order u/s. 143(3) r.w.s 144C of the Act on 24.03.2021 after considering the directions u/s. 144C(5) of the Act (The copy is enclosed at page no. 7 to 17 of appeal memo). 3. The Ld.AR submitted that, the assessee has raised additional ground of appeal wherein following issue has been alleged before the Tribunal: 1. That the learned assessing officer erred in law and on facts in not carrying out the direction of the Hon'ble DRP in allowing depreciation on the sum of Rs.49,81,189/- 2. That the order passed on 24.03.2021 u/s. 143(3) r.w.s 144C of Income-tax Act, 1961 (Act) is barred by limitation as the reference to learned Transfer Pricing Officer is bad in law and therefore, the extended time limit u/s. 144C of the Act is not available for passing the assessment order. 4. It has been submitted that no new facts needs to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Instruction would show that the case can be selected for scrutiny under transfer pricing adjustment only if the quantum of such addition exceeded Rs. 10 Crore earlier in any years. It is submitted that the petitioner's case was never subject to proceedings u/s 92 to 92F of the Act. (Transfer pricing proceedings). Therefore, it is submitted that the reference to TPO by the learned assessing officer is void-ab-initio as the parameters specified in paragraph 3.2 and 3.3 of Instruction no. 3/2016 are not fulfilled. 10.3. It is clear that the learned assessing officer has not followed the binding instruction of CBDT and therefore, the reference to the TPO is bad in law. The learned TPO gets jurisdiction only if there is a valid reference u/s. 92CA of the Act. 10.4. The assessee relies on the decision of Hon'ble Delhi High Court in Indorama Synthetics (India) Limited Vs. Additional CIT 386 ITR 665, wherein at page 678, paragraph 22, it was held that the instruction no. 3 of 2016 is retrospective in operation and applies to all pending cases and even to a case where reference was made earlier prior to the issue of circular. The assessee relies on the following decisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) of Section 92C. However, Section 92CA provides that where the Assessing Officer (AO) considers it necessary or expedient so to do, he may refer the computation of ALP in relation to an international transaction or specified domestic transaction to the TPO. For proper administration of the Income-tax Act, the Board has decided that the AO shall henceforth make a reference to the TPO only under the circumstances laid out in this Instruction. 3.2 All cases selected for scrutiny, either under the Computer Assisted Scrutiny Selection [CASS] system or under the compulsory manual selection system (in accordance with the CBDT's annual instructions in this regard for example, Instruction No. 6/2014 for selection in F.Y 2014-15 and Instruction No. 8/2015 for selection in F.Y 2015-16), on the basis of transfer pricing risk parameters [in respect of international transactions or specified domestic transactions or both] have to be referred to the TPO by the AO, after obtaining the approval of the jurisdictional Principal Commissioner of Income-tax (PCIT) or Commissioner of Income-tax (CIT). The fact that a case has been selected for scrutiny on a TP risk parameter becomes clear from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... O; and where the taxpayer has declared the international transactions or specified domestic transactions in the Accountant's report filed under Section 92E of the Act but has made certain qualifying remarks to the effect that the said transactions are not international transactions or specified domestic transactions or they do not impact the income of the taxpayer. In the above three situations, the AO must provide an opportunity of being heard to the taxpayer before recording his satisfaction or otherwise. In case no objection is raised by the taxpayer to the applicability of Chapter X [Sections 92 to 92F] of the Act to these three situations, then AO should refer the international transaction or specified domestic transaction to the TPO for determining the ALP after obtaining the approval of the PCIT or CIT. However, where the applicability of Chapter X [Sections 92 to 92F] to these three situations is objected to by the taxpayer, the AO must consider the taxpayer's objections and pass a speaking order so as to comply with the principles of natural justice. If the AO decides in the said order that the transaction in question needs to be referred to the TPO, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... body of the assessment order that due to the Board's Instruction on this matter, the transfer pricing issue has not been examined at all. 7.5 The brief feature of the revised instruction are as under: 7.6 Reference of TP cases The reference by Assessing Officer to the Transfer Pricing Officer would be required in the following situations: Para 3.2 of the Instruction refers to cases which have been selected for scrutiny on the basis of Transfer Pricing Risk Parameters. Para 3.3 of the Instruction refers to following circumstances: those cases which have been selected for scrutiny on Non- Transfer Pricing Risk Parameters, but also having International Transactions or Specified Domestic Transactions. As per Para 3.3, if the AO identifies that the taxpayer has entered into international transactions or specified domestic transactions or both, but the taxpayer has either not filed the Accountant's Report under Section 92E at all or has not disclosed the said transactions in the Accountant's report, then the matter can be referred to the TPO by the AO. As per para 3.3, the AO can refer the matter to the TPO if there has been a transfer pricing ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction or not? (2) Whether, failure to supply satisfaction note to assessee before making reference to TPO was at most a mere irregularity and it could not turn the reference itself as void ab initio? (3) Whether before making a reference to the TPO, the AO is bound to deal with the objections raised by the assessee and pass a speaking order in accordance with the provisions of the Act and as per the conditions laid down under the CBDT Instruction No. 3/2016 dated by this bench 10/03/2016? 7.10 It is noted by this bench that, Hon ble Supreme Court has recently granted SLP against the decision of Hon ble Delhi High Court, in an appeal filed by revenue, in case of, ACIT vs. Indo Rama synthetics reported in (2020) 114 taxmen.com 588. The issue that is pending to be decided by the Hon ble Supreme Court is whether, the Assessing Officer was obliged to give assessee an opportunity of being heard before making reference to TPO on question of determination of ALP of alleged international transactions involving assessee and its AE. Under such it is not appropriate on behalf of this Tribunal to consider the argument raised by the Ld.AR on this issue. 7.11 In respect of the relianc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... und no.1 raised by assessee along with sub grounds are dismissed. On merits: 10. Ground No.2 raised by assessee is in respect of the transfer pricing adjustment of ₹ 2,93,54,528/-. The Ld.AR submitted that revenue word in allocating employee cost of ₹ 82,05,919/- on the basis of turnover of AE and non-AE transaction under the trading segment. 10.1 Brief facts leading to this issue are as under: The assessee purchases certain finished products from its AE and 3rd parties. The products purchased are similar and therefore internal TNI members adopted to arrive the arm s length price. It is submitted that there is no dispute in respect of the method adopted for data mining the arm s length price. Assessee had also allocated expenses between the 2 segments being trading and manufacturing segment. The Ld.AR submits that the TPO did not dispute the allocation of expenses in respect of international transaction under the manufacturing segment to be at arms length however, the allocation of employee cost between the AE and non-AE transaction in trading segment was disputed. 10.2 The Ld.TPO called upon assessee to furnish the details of determining the employee cost o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lowed Rs. 4,50,190/- u/s. 40(a)(i) in the return of income being 30% of the above expenditure. 11.2 During the assessment proceedings, the Ld.AO called upon assessee to furnish details in respect of the provision and the suomoto disallowance made by the assessee. In response, the assessee submitted that provision was reversed in the subsequent year and sum of Rs. 4,50,190/- was reduced in arriving at the total income for the subsequent assessment year 2017-18. The Ld.AO did not accept the submissions of the assessee and disallowed the balance Rs. 10,54,445/-. On an appeal before the DRP, the disallowance made by the Ld.AO was upheld and did not pass any direction on this issue. The Ld.AO thus made the disallowance in the final assessment order amounting to Rs.10,50,445/-. On an appeal before this Tribunal, the Ld.AR submitted that the provision of Rs. 15,00,635 made during the FY 2015-16 was reversed in the accounting year i.e FY 2016-17. This is for the reason that the provision was made in the FY 2015-16 merely on an estimated basis to satisfy the relevant accounting standard. Since the liability did not exist in the next year, it was reversed in the FY 2016-17. It may be stat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lowed. 12. Ground no. 4 is in respect of addition of provision for bad and doubtful debts to the income computed under normal provisions of the Act and the book profits computed u/s. 115JB of the Act amounting to Rs.36,20,870/-. 12.1 It was submitted that assessee created provision of Rs.36,20,870/- towards bad and doubtful debts that was identified party-wise as on 31.03.2016. Assessee reduced the said amount from the trade receivables in the balance sheet but did not add back to the computation of income either under the normal provisions of the Act or under the book profits computed u/s. 115JB. 12.2 The Ld.AO during the assessment proceedings disallowed the entire provision. On an appeal before this Tribunal, it is submitted that once the provision for doubtful debts is debited to the profit and loss account, and correspondingly reduced from the trade receivables it amounts to write off . The Ld.AR placed reliance on the decision of Hon ble Supreme Court in case of Vijaya Bank vs. CIT Anr. reported in 323 ITR 166 and decision of Hon ble Bangalore Tribunal in case of Canara Bank vs. JCIT reported in 60 ITR (Trib) 1. 12.3 We have perused the submissions advanced ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rned on a fixed deposit and interest paid. Hon ble Court after considering various arguments and decisions relied by both sides observed and held as under: Thus, from perusal of aforesaid provision, it is evident that the purpose of expenditure is relevant in determining the applicability of Section 57(iii) and the purpose must be making or earning of income. The assessee in order to cover the cost of interest payable to the creditors for the unpaid period, invested the surplus in fixed deposits and earned interest. The amount earned by way of interest was paid to the lenders and creditors. Thus, there is a nexus between the interest paid to the creditors on the unpaid balance and interest earned on the deposits. The interest expenditure was incurred wholly and exclusively for the purpose of earning the interest income and therefore, the assessee is entitled to deduction of the interest income under Section 57(iii) of the Act. 13.5 Adverting to the facts of the present case, the ECB that was kept as fixed deposit against which interest was earned by assessee was set off against the interest paid by assessee on the ECB loan. Admittedly, it is not the case of the revenue t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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