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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 ..... meter 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 manually and not for cases selected under Computer Aided Selection of Scrutiny. 1.5. That the finding of the learned lower authorities that the reason for selection of case for scrutiny is "Large value of international transactions in the nature of guarantee" reported in Sl. No. 15 of Form 3CEB is perverse since Form 3CEB does not show such large value. 2. TRANSFER PRICING ADJUSTMENT OF RS. 2,93,54,528/- 2.1. That the learned lower authorities erred in law and on facts in making an adjustment of Rs.2,93,54,528/- u/s. 92CA of the Act. 2.2. That the learned lower authorities erred in law and on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 Act under the head "Income from other sources". 5.2. Without prejudice to the above ground, that the learned lower authorities ought to have held that the above claim is in the nature of expenses incurred for the business and allowed the deduction u/s. 37 of the Act. Each of the above grounds are without prejudice to one another, the appellant seeks the leave of the Hon'ble Income Tax Appellate Tribunal to add, delete, amend or otherwise modify each or any of the grounds of appeal either before or at the time of hearing this appeal." 2. Brief facts of the case are as under: 2.1 The assessee is a private limited company engaged in the bus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 be considered in order to dispose of the additional ground raised by the assessee vide application dated 22/06/2021. It is submitted that the additional ground no.2 is a legal issue that goes to the root cause of the proceedings. The Ld.AR, thus prayed for the admission of additional ground so raised by assessee. 5. On the contrary, the Ld.CIT.DR though opposed admission of the additional ground, could not bring anything on record which would challenge such a right available to assessee under the Act. 6. We have perused the submissions advanced by both sides in light of records placed before us. The Ld.DR did not object for the additional grounds being admitted. We note th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 decisions wherein it was held that selection of a case for scrutiny contrary to the instructions of CBDT would make the assessment bad in law." 7.2 The Government in the budget speech promised to take appropriate steps in order to reduce litigation and providing certainty in taxation and had taken various steps relating to same by proposing to amend and incorporate new provisions in the Act"). 7.3 In continuation to their promise, the Central Board of Direct tax on 10/03/2016 took steps towards reducing litigation by replacing earlier Instruction no.15/2015 with new Instruction no.3/2016 containing guidelines for transfer pricing assessment. 7.4 The Instruction no.3 is as under: "The provisions relating to transf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 a perusal of the reasons for which a particular case has been selected and the same are invariably available with the jurisdictional AO. Thus, if the reason or one of the reasons for selection of a case for scrutiny is a TP risk parameter, then the case has to be mandatorily referred to the TPO by the AO, after obtaining the approval of the jurisdictional PCIT or CIT. 3.3 Cases selected for scrutiny on non-transfer pricing risk parameters but also having international transactions or specified domestic transactions, shall be referred to TPOs only in the following circumstances: (a)where the AO comes to know that the taxpayer has entered into international transactions or specified domestic transactions or both but the taxpayer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, he should make a reference after obtaining the approval of the PCIT or CIT. 3.5 In addition to the cases to be referred as per paragraphs 3.2 and 3.3, a case involving a transfer pricing adjustment in an earlier assessment year that has been fully or partially set-aside by the ITAT, High Court or Supreme Court on the issue of the said adjustment shall invariably be referred to the TPO for determination of the ALP. 3.6 Since the provisions of Section 92CA of the Act, interalia, refer to the computation of the ALP of the international transaction or specified domestic transaction, it is imperative for the AO to ensure that all international transactions or relevant specified domestic transactions or both, as the case may be, are explicitly mentioned in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 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 adjustment of Rs. 10 Crore or more in an earlier assessment year and such adjustment has been upheld by the judicial authorities or is pending in appeal. * The Instruction further goes on to clarify three situations in which the AO can refer the matter to the TPO. They are as under: 7.7 The Instruction further goes on to clarify three situations in which the AO can refer the matter to the TPO. They are as under: * Where the taxpayer has not filed the Accountant's report under Section 92E of the Act but the international transactions or specified domestic transactions undertaken by it come to the notice of the AO; * Where the taxpayer has not declared one or more international transaction or specified domestic transaction in the Accountant's report filed under Section 92E of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 reliance placed by the Ld.AR on paragraph 3.2 of the instruction No.3(supra), there is no dispute that the case was selected for scrutiny to verify the transfer pricing risk factor, and that, the assessee had recorded the international transaction in form 3 CEB, the value of which, exceeded Rs. 5 crores, the mandate under section 92 CA requires the Ld.AO to refer such transaction that exceeds Rs. 5 crore to the transfer pricing officer. A reference made by the Ld.AO needs to be analysed as per para 3.3 of the instruction number 3, only if the appeal is selected for scrutiny for non-transfer pricing risk parameter or a specified domestic transactions. 8. The DRP in the present facts of the case, categorically observed that, the case of assessee was selected for scrutiny, to verify, transfer pricing risk factor, whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 of Rs. 82,05,919/- equally between AE and non-AE under the trading segment. The assessee before the Ld.TPO submitted that, the turnover of AE segment is Rs. 27 crores, whereas the turnover from Non AE segment is 3.12 crores approximately. However the value of purchases, efforts and time spent by the purchase team towards AE and non-AE segments are more or less equal. The Ld.AR submitted that breakup of employee cost pertaining to trading segment are as under: Emp code Name of the Employee Designation CTC % Cost towards Trading segment 1004 Babu Shankar Purchase head 59,13,288 50% 29,56,644 1023 GMahesh Urs Supply Chain Executive 6,39,637 100% 6,39,637 1045 Esaivanan Stores in charge- Mumbai 4,95,980 100% 4,95,980 1016 Ravi Jagatap QC/Product manager 17,64,658 100% 17,64,658 1001 Abhijit dutt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10,50,445 which is credited to profit and loss account was offered to tax in AY 2017-18. It was offered to tax and tax was levied accordingly. If for any reason, the Hon'ble Tribunal were to hold that a sum of Rs. 10,50,445 is not to be allowed as a deduction, it is prayed that a direction may be given that the same amount should be excluded from the total income of the AY 2017-18. 11.3 On the contrary, the Ld.DR relied on the orders passed by authorities below. 11.4 We have perused the submissions advanced by both sides in the light of records placed before us. 11.5 It is noted that Hon'ble Karnataka High Court in case of Toyota Kirloskar Motor (P.) Ltd. vs. ITO reported in 434 ITR 719 has held that income cannot be said to accrue merely based on entries in books and the liability to deduct tax at source does not arise based on such book entries. Hon'ble Supreme Court in case of GE India Technology Centre P. Ltd. vs. CIT and Anr. reported in 327 ITR 456, Hon'ble Supreme Court held that the liability to deduct tax at source arises only when there is accrual of income in the hands of the payee. In the present facts of the case, there is no dispute that assessee did not recei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any of the years preceding to the year under consideration. We are of the view that the issue needs verification by the Ld.AO of the books of account and the financial statements. The Ld.AO is directed to verify the amount of provision for doubtful debts in the books of account and the book profit as be computed as per explanation 1 to section 115JB of the Act. 12.5 Needless to say that proper opportunity of being heard must be granted to assessee. Accordingly, this ground raised by assessee stands allowed. 13. Ground No. 5 - Disallowance of interest expenditure claimed u/s. 57(iii) of the Act. 13.1 It is submitted that assessee received external commission borrowing loan of Rs. 39.92 crores from its parent company for setting up a new manufacturing facility in Gujarat. The same was kept in short term fixed deposit against which interest was received by assessee amounting to Rs. 60,13,880/-. The assessee submitted that the said amount was offered to tax u/s. 56 of the Act under the head "Income from other sources". It is submitted that assessee had incurred an expenditure of Rs. 49,81,189/- towards interest paid on ECB loans which was claimed as deduction while computing inc ..... X X X X Extracts X X X X X X X X Extracts X X X X
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