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TMI Blog2022 (6) TMI 1433X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee to explain as to how these emails show that services were rendered by the AE. It is only on such analysis being provided by the assessee, can the TPO proceed to examine the rendering of services as well as benefit that the assessee might derive. In the matter of coming to the conclusion on the benefit that the assessee received, clear evidence cannot be insisted upon and the overall business scenario and type of services rendered have to be looked into. We also notice that similar payment made to the very same AE for similar services under the very same agreement, has been accepted to be at Arm s Length in AY 2017-18 2018-19. We are, therefore, of the view that it would be just and appropriate to set aside the issue with regard to determination of ALP to the AO/TPO for fresh consideration in the light of law as explained above and the other observations in this order. The AO/TPO will afford opportunity of being heard to the assessee in the set aside proceedings, before deciding the issue. Determination of ALP in respect of international transactions whereby assessee paid a sum for Brand Promotion Expenses - HELD THAT:- We find that the TPO in the impugned assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... depreciation on goodwill is not allowable based on the facts of the case of assessee. Respectfully following that decision, we hold that depreciation on goodwill is not allowable. Accordingly, these grounds are dismissed. Disallowance of expenses u/s. 14A - HELD THAT:- It is settled law that disallowance u/s. 14A cannot exceed the amount of exempt income earned by the assessee. Thus we hold that the disallowance should be restricted to the amount of exempt income earned by the assessee. We direct accordingly. Disallowance of year end provisions u/s. 40(a)(ia) - AO disallowed the said amount stating that tax ought to have been deducted as of 31.3.2012 and only for remittance the assessee has time till the date of filing of the return which the assessee failed to comply - HELD THAT:- In the present case, we notice that the assessee has furnished the details of subsequent deduction of tax from the year end provisions and the details of payment made before the due date for filing the return of the assessee s PB. Thus we remand this issue back to the AO to verify the details of payments and tax deducted and allow the expenditure where the TDS is remitted to the Government acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erred in making an adjustment of INR 6,00,00,000. 2.2 The learned AO/TPO erred in law and on facts in concluding that no specific tangible services have been rendered by the AE to the Appellant; 2.3 The learned AO/TPO further erred in law and on facts in concluding that the payment made towards Management Service Fee by the Appellant to the AE is not connected to any specific services rendered by the AE to the Appellant; 2.4 The learned AO/TPO has erred in law and on facts in making the TP adjustment on account of Management Service Fee ignoring the commercial and economic rationale and business expediency of the Appellant for receiving the Management Services from its AE; 2.5 The learned AO/TPO erred in law and on facts in making the TP adjustment on account of Management Service Fee without appreciating the fact that the Management Services have been rendered by the AE to the Appellant based on an agreement between AE and the Appellant; 2.6 The learned AO/TPO erred in law and on facts in making the TP adjustment on account of Management Service Fee ignoring the fact that the services rendered by the AE to the Appellant resulted in various tangible benefits and fur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y to the other group entities across the world. On the international level, intragroup services are quite challenging for tax authorities, as companies use these transactions (of course, also other transaction types as loans etc.) to optimize with taxes. Services are commonly used for shifting untaxed profit to a country, where lower income tax rate applies. Therefore, the intragroup transactions have caught the interest of the tax authorities and are being constantly monitored. 4. To justify the payment to HIBV as at arm s length, the assessee filed a Transfer Price [TP] study along with the report in Form 3CEB. It was submitted in its TP study by the Assessee, that there was an agreement between HIBV and the assessee dated 27.6.2012 whereby HIBV agreed to provide the following services to the assessee:- Provision of Services and know how HIBV agrees to provide Services and know how to the Company through its Personnel. Such services and know how would be rendered by HIBV to the Company from the Netherlands. Heineken has accumulated substantive information, experience and unique knowledge either by developing such know-how itself or by adapting external know-how for spec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n bottle necks being addressed instantaneously and also analysing the Causes which resulted in production loss. This concept also ensures that. no such problem are repeated in future. d. Quality Analysis A new perspective based on international model. 7. The assessee also furnished copy of emails and correspondence in connection with the services rendered. These documents are available at pages 198 to 424 of the assessee s PB. 8. The TPO, firstly, observed that there should be a commercial rationale for the arrangement and the agreement between assessee and HIBV lacked commercial rationality in the sense that a sum of Rs.6 crores was paid by the assessee as a lump sum consideration without reference to any nexus with the nature of services to be rendered. He observed that as per clause (7) of the agreement dated 23.7.2012, HIBV was not liable in any way, except for direct damage sustained as a result of gross negligence or willful misconduct in the performance of the services. According to the TPO, such clauses would not be present in the agreement between unrelated parties. Another peculiar feature noted by the TPO was clause (9) of the agreement which laid down a condi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ervices were generic in nature and no benefit was derived by the assessee and there was no material to prove rendering of any technical services. The TPO observed that because of the services, the assessee claims water consumption while manufacturing beer was reduced. However, the assessee could not file any evidence to prove the reduction of water consumption, according to him. On the aspect of brewery consumption system, the TPO observed that the assessee has filed only illustrative set of emails and this was purely a reporting system between the teams of groups which proved that this was stewardship services provided to shareholders of the group and there is no necessity to pay for shareholder activity. The TPO also observed that the assessee failed to establish the economic or commercial value that it derived by virtue of services rendered by HIBV. In conclusion, the TPO made the following observations and held that ALP should be treated as NIL and the entire payment of Rs.6 crores was to be added to the total income of the assessee on account of determination of ALP:- The arguments of the TPO are summarized as under: 1. The taxpayer did not produce any evidence with reg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... greed percentage basis and not linked to the extent or type of services, if any, actually rendered by the individual unit. Despite the high sounding words used, no specific tangible service is identified or its arms length price determined. The payment made by United Breweries Limited apparently looks like a tribute payable by a subsidiary to its holding company. It is not relatable to any specific tangible service rendered by the holding company to the subsidiary. In view of the above it is concluded that the ALP is nil since an independent entity in a comparable situation would not pay any amount for the service. The entire payment of management fee Rs. 6 Crores is treated as an adjustment proposed U/s 92CA. Showcause why the same should not be done. 10. The TPO s suggestion was incorporated in the draft assessment order. The assessee filed objections before the DRP, which upheld the order of the TPO with the following observations:- Panel: The assessee has further made extensive submissions regarding management service fee (Page 49-106 of the assessee's paper book) . The main points raised by the assessee are: (a) HIBV, the service provider AE has con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the payment was more in nature of a tribute from the subsidiary to its holding company and determined the ALP as Nil as no independent party would make such payment. 6.3 We have gone through the Service Agreements and other evidence adduced by the assessee, TPO's order and the elaborate submissions made by the assessee. We agree with the TPO that the service agreement is unlike those exist between unrelated parties in the sense that: It does not specify or quantify services to be rendered It does not link payment schedule to milestones achieved in service delivery It does not contain normal penal clauses to safeguard the interest of the payer It is lopsided on account of the vast scope of indemnity and limitation of liability granted to service provider at the expenses of the recipient. 6.4 The submissions made by the assessee regarding the actual services rendered and commercial benefit accrued to the assessee on account of the said services are too general. There is little evidence connecting process improvements or commercial successes claimed by the assessee to any actual interventions of AE. Both the alleged interventions and commercial successes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ribunal. 12. We have heard the rival submissions. The ld. counsel for the assessee drew our attention to the list of services that the assessee received from HIBV and also the evidence filed regarding rendering of services. We have already referred to these documents while dealing with the manner in which the TPO determined the ALP. The ld. counsel for the assessee submitted that the evidence filed by the assessee regarding services rendered has been completely brushed aside by the TPO as well as the DRP. In this regard, he drew our attention to the order of the TPO for AYs 2017-18 and 2018-19 which are placed at pages 31 to 42 of assessee s PB and submitted that for those assessment years for the very same services, the TPO has accepted that payment to AE is at arm s length. His further submission was that the law with regard to determining the ALP in a case where services are rendered by an AE is that the TPO has to invoke benchmarking analysis on the basis of services that are stated to have been rendered by the AE. The question should be as to, whether, for the services alleged to have been received, a payment equal to sum paid by the AE by the assessee, would have been paid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with its parent company pursuant to which it paid a sum of Rs. 10.55 crores as its share of the costs. The TPO, AO DRP disallowed the expenditure on the ground that the ALP was Nil as no real services had been availed by the assessee and the arrangement was not genuine. On further appeal by the Assessee, the Tribunal held as follows:- 8. We find that the basic reason of the Transfer Pricing Officer s determination of ALP of the services received under cost contribution arrangement as NIL is his perception that the assessee did not need these services at all, as the assessee had sufficient experts of his own who were competent enough to do this work. For example, the Transfer Pricing Officer had pointed out that the assessee has qualified accounting staff which could have handled the audit work and in any case the assessee has paid audit fees to external firm. Similarly, the Transfer Pricing Officer was of the view that the assessee had management experts on its rolls, and, therefore, global business oversight services were not needed. It is difficult to understand, much less approve, this line of reasoning. It is only elementary that how an assessee conducts his busine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in ITA No.475/2012 dated 23.5.2014, 367 ITR 730 (Del), rendered similar ruling as was rendered in the case of Dresser Rand (supra). In the case of Cushman Wakefield (supra), the Hon ble Delhi High Court observed that whether a third party in an uncontrolled transaction with the Taxpayer would have charged amounts lower, equal to or greater than the amounts claimed by the AEs, has to perforce be tested under the various methods prescribed under the Indian TP provisions. In the context of cost sharing arrangement, the Hon ble High Court opined that concept of base erosion is not a logical inference from the fact that the AEs have only asked for reimbursement of cost. This being a transaction between related parties, whether that cost itself is inflated or not only is a matter to be tested under a comprehensive transfer pricing analysis. The basis for the costs incurred, the activities for which they were incurred, and the benefit accruing to the Taxpayer from those activities must all be proved to determine first, whether, and how much, of such expenditure was for the purpose of benefit of the Taxpayer, and secondly, whether that amount meets ALP criterion. In the present case h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the overall business scenario and type of services rendered have to be looked into. We also notice that similar payment made to the very same AE for similar services under the very same agreement, has been accepted to be at Arm s Length in AY 2017-18 2018-19. We are, therefore, of the view that it would be just and appropriate to set aside the issue with regard to determination of ALP to the AO/TPO for fresh consideration in the light of law as explained above and the other observations in this order. The AO/TPO will afford opportunity of being heard to the assessee in the set aside proceedings, before deciding the issue. 20. The next dispute is with regard to determination of ALP in respect of international transactions whereby assessee paid a sum of Rs.18,98,50,836 to Force India Formula One Team Ltd. [FIFOTL]. The grounds raised by the assessee with regard to this issue are projected in ground Nos.2.10 to 2.17 which read as follows:- Transfer Pricing Adjustment on account of Brand Promotion Expenses: 2.10 The learned AO/TPO erred in law and on facts in determining the ALP at NIL in respect of the payment made towards Brand Promotion expenses amounting to INR 18,98, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itrarily concluded that the ALP is NIL. 21. The first and foremost argument of the ld. counsel for the assessee on this issue is that FIFOTL is not an Associated Enterprise [AE] at all. In this regard, the submissions made by the assessee and the conclusions of the TPO are as follows:- 4.2 It is submitted that Force India Formula One Team Ltd is not an associated enterprise of United Breweries Ltd. By mistake it has been declared as an associated enterprise. In 3CEB and Transfer Pricing Study report the relationship has been described as enterprise over which the shareholders have significant influence . It is submitted that this kind of relationship is relevant for the related party disclosures required under the relevant Accounting Standards. This relationship is not one of those relationships mentioned in S.92A (2) of the Act. There is no dispute that neither United Breweries Ltd nor Force India Formula One Team Ltd holds directly or indirectly 26% of the shares having the voting powers in the other entity. It is also clear that the shareholders of Force India are the following persons. Dr. Vijaya Mallya 42.5% Sahara India Pariwar 42.5% Moll Family 15% (N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his companies and persons associated with him has the power to make crucial decisions regarding the management and running of two enterprises. This is very apparent in the case of the taxpayer. So Fl Force India Private ,Limited clearly is an associated enterprise as defined under section 92A 22. Our attention was drawn to the fact that in AY 2016-17 the AO himself accepted that FIFOTL is not an AE. Further attention was drawn to the order of the TPO dated 30.10.2019 for AY 2016-17 wherein the TPO accepted the explanation of the assessee in its letter dated 27.9.2019 that FIFOTL is not an AE. 23. The ld. DR, on the other hand, pointed out that in Form 3CEB the assessee himself has accepted that FIFOTL is a related party and therefore it is not open for the assessee to now take a contrary stand. 24. We have given careful consideration to the rival submissions. We find that in the AY 2016-17 the assessee had addressed a letter dated 27.9.2019 to the TPO submitting that FIFOTL is not an AE, in response to TPO s query dated 25.9.2019. Following was the submission made by the assessee in this regard:- FORCE INDIA - IS NOT A ASSOCIATED ENTERPRISE In this regard, we wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... son can take a decision with respect to put the capital at risk (or) take any other strategic decisions. Accordingly, no single promoter group has control/influence over decisions of the board. Based on the above facts, our tax auditors have also not considered Force India as an associated enterprise of UBL. Consequently, we request your good self not to consider Force India as an Associated Enterprise of United breweries Limited and to drop the proposal of making any adjustment under section 92CA of the Income Tax Act. 25. The above plea has been accepted by the AO/TPO and no separate bench marking was undertaken for identical transaction in AY 2016-17. We find that the TPO in the impugned assessment year i.e., AY 2013-14, on identical facts has taken a contrary view, which is to the effect that there is an element of indirect control. The DRP has not rendered any finding on this issue. We are of the view that, in the light of order of the TPO for AY 2016-17, the issue requires fresh examination by the TPO. We, therefore, set aside the order of the TPO and direct re-examination of the issue, whether FIFOTL can be considered as an AE? The other issues with regard to determ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... SECTION 92BA: MEANING OF SPECIFIED DOMESTIC TRANSACTION. For the purposes of this section and sections 92, 92C, 92D and 92E, specified domestic transaction in case of an assessee means any of the following transactions, not being an international transaction, namely: (i) any expenditure in respect of which payment has been made or is to be made to a person referred to in clause (b) of subsection (2) of section 40A. (ii) any transaction referred to in section 80A; (iii) any transfer of goods or services referred to in sub-section (8) of section 80-IA; (iv)any business transacted between the assessee and other person as referred to in sub-section (10) of section 80-IA; (v) any transaction, referred to in any other section under Chapter VI-A or section 10AA, to which provisions of subsection (8) or sub-section (10) of section 80-IA are applicable; or (vi) any other transaction as may be prescribed, and where the aggregate of such transactions entered into by the assessee in the previous year exceeds a sum of twenty crore rupees. 28. Section 92(2), as amended provided that where in an international transaction or specified domestic transaction, two or mor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red by Section 6 of the General Clauses Act or there is a pari materia provision in the statute under which the rule has been framed in that case also the pending proceeding will not be affected by omission of the rule. In the absence of any such provisions in the statute or in the rule, the pending proceeding will lapse under rule under which the notice was issued or proceeding being omitted or deleted. 31. We have carefully considered the rival submissions. The issue with regard to whether the transaction of payment of sale promotion expenses to UBEF can be said to be an SDT, we find that the decision of the ITAT in the case of Textport Overseas Pvt.Ltd. (supra) has been confirmed by the Hon ble Karnataka High Court in the very same case of Texport Overseas Pvt. Ltd. in ITA No.392/2018 order dated 12.12.2019, with the following observations:- 5. Having heard learned Advocates appearing for parties and on perusal of records in general and order passed by tribunal in particular it is clearly noticeable that Clause (i) of Section 92BA of the Act came to be omitted w.e.f. 01.04,2019 by Finance Act, 2014. As to whether omission would save the acts is an issue which is no more r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... never been passed and to be considered as a law never been existed. Hence, decision taken by the Assessing Officer under the effect of Section 92BI and reference made to the order of Transfer Pricing Officer-TOP under Section 92CA could be invalid and bad in law. 7. It is for this precise reason, Tribunal has rightly held that order passed by the TPO and. DRP is unsustainable in the eyes of law. The said finding is based on the authoritative principles enunciated by the Hon'ble Supreme Court in Kolhapur Canesugar Works Ltd referred to herein supra which has been followed by Co-ordinate Bench of this Court in the matter of M/s.GE Thermometrias India Private Ltd., stated supra. As such we are of the considered view that first substantial question of law raised in the appeal by the revenue in respective appeal memorandum could not ITA No.2936/Bang/20180 M/s. Sobha City, Bangalore arise for consideration particularly when the said issue being no more res Integra. 32. Since the decision rendered by the Hon'ble High Court of Karnataka is binding on this bench of Tribunal sitting in Bengaluru, we follow the same. Accordingly, we hold that the reference to the TPO in respec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in law and on facts by not appreciating the fact that Goodwill is an intangible asset thus entitled for depreciation under the provisions of the Act; 35. The assessee in the return of income has claimed a sum of Rs.2,30,41,441 as depreciation on goodwill @ 25% as per the provisions of the Act on the opening WDV of Rs.14,95,54,349. Before the AO, the assessee has submitted that it has acquired the brewery from Karnataka Breweries Distilleries Ltd. through a process of demerger and acquisition and the difference between the cost of acquisition and the fair value of the assets is recognized as goodwill in the books of the assessee and claimed depreciation on the goodwill. The assessee relied on the decision of the Hon ble Supreme Court in the case of Smiffs Securities, 348 ITR 307 (SC). The AO disallowed the depreciation stating that the claim was not allowed in the earlier assessment year also. 36. We have heard both the parties. The coordinate Bench of this Tribunal in the assessee s own case for AY 2007-08 has held that depreciation on goodwill is not allowable based on the facts of the case of assessee. Respectfully following that decision, we hold that depreciation on go ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t u/s. 14A as under:- 6.2.1 The assessee has disclosed dividend income of Rs. 8,57,655/-, as per Note 25 of the Financial Statements from various mutual funds / companies. Further, the assessee has claimed exemption u/s 10(34) in respect of the dividend income. On the other hand, the assessee had made huge amount of investment in shares and mutual funds with an intention to earn exempt income. As on 31.3.2013 relevant to AY 2013-14, the value of the total investment made by the assessee in shares, mutual funds, bonds etc. is Rs. 2547 lakhs. It is also noticed that most of the investments have been made in various group Companies in the form of loans, advances, investment in shares etc. but without receiving commensurate income. 6.2.2 During the course of assessment proceedings, the AR was asked to furnish the details of expenditure incurred in earning the tax-exempt income. In response thereto, the AR stated that the assessee has not incurred any expenses towards earning the taxexempt income. However, going by the huge quantum of investment made by the assessee and the nature of income earned thereon, I am not satisfied that the assessee has not incurred arty expense in earn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome by invoking provisions of section 14A r.w.r 8D. The additions/disallowances made in earlier assessment years are before various appellate authorities for final decision on the issue. In view of this, I am constrained to invoke provisions of section 14A r.w.r. 8D to determine the disallowance u/s 14A. A detailed working in respect of disallowance of expenditure as envisaged under Rule 8D is given as under:- As per clause (i): Nil as there is no direct expenditure incurred towards earning tax exempt income. As per clause (ii) (A) Amount of interest expenditure Rs. 79,89,00,000/ - (B) Average value of investment (Rs. 25,47,00,000 + 25,47,00,000) / 2 = 25,47,00,000 Average value of total assets (Rs. 32865200000+37386606000)/2=35125900000 (C) Proportionate interest expenditure = (A) x (B) / (C) =57,92,872/ - As per clause (ii) % of average value of investment = 12,73,500/- Total expenditure to be disallowed u/s 14A = (i) + (ii) + (iii) = 70,66,372/-. 39. With regard to disallowance being more than the exempt income, the AO placed reliance on the decision of ITAT, Delhi in the case of Cheminvest Ltd. v. ITO [12 ITD 318]. The DRP upheld the d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... M Ltd. v. DCIT (ITA No.4567/Del/2012) held that the disallowance u/s 14A of the Act cannot exceed the exempt income. 3.5 In view of the above settled position, the amount of disallowance u/s 14A of the I.T.Act needs to be restricted to the extent of exempted income earned during the relevant assessment year. As would be evident that in the facts and circumstances of the present case the amount of exempted income of Rs.27,37,47,187 was earned on investment and consequently the amount of disallowance, if at all, to be made is to be restricted to Rs.27,37,47,187. 3.6 However, in this case, the assessee had made disallowance of Rs.145,02,09,668 voluntarily while filing the return of income. In this context, it is important to refer to the judgment of the Hon ble Madras High Court in the case of M/s.Marg Limited v. CIT in Tax Case Appeal Nos.41 to 43 220 of 2017 (judgment dated 30.09.2020). The Hon ble Madras High Court followed the judgment of the Hon ble Karnataka High Court in the case of Pargathi Krishna Gramin Bank v. JCIT[(2018) 95 taxman.com 41 (Kar.)]. In the case considered by the Hon ble Madras High Court, the assessee therein had made voluntarily disallowance u/s 14 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reasons conveyed to Assessee and after giving opportunity of hearing to the Assessee in this regard. 22. We, therefore, dispose of the present appeal by answering question of law in favour of the Assessee and against the Revenue and by holding that the disallowance under Rule 8D of the IT Rules read with Section 14A of the Act can never exceed the exempted income earned by the Assesee during the particular assessment year and further, without recording the satisfaction by the Assessing Authority that the apportionment of such disallowable expenditure made by the Assessee with respect to the exempted income is not acceptable for reasons to be assigned the Assessing Authority, he cannot resort to the computation method under Rule 8D of the Income Tax Rules, 1962. (underlining supplied) 3.7 In view of the above judgment of the Hon ble Madras High Court in the case of M/s.Marg Limited v. CIT (supra), it is clear that the disallowance u/s 14A of the I.T.Act cannot exceed the exempt income earned during the relevant assessment year irrespective whether larger amount was disallowed by the assessee u/s 14A of the I.T.Act while filing the return of income. Therefore, the AO is di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ovisions of section 40(a)(i) and Ist proviso to section 40(a)(ia); and 5.8 That the learned AO has erred in law and on facts in making disallowance of Non-Resident payments u/s 40(a)(i) without appreciating that TDS on such payments have been deducted and deposited within the due date of filing of return of income for AY 2013-14. 45. The assessee following mercantile system of creating monthly provisions for expenses in the books of accounts and reverse these provisions in the subsequent month. In the same manner, the assessee created provision for various expenses as of 31st March, 2013. The auditors in the tax audit report against clause 27(b)(i) have recorded the fact that the assessee has not deducted tax at source in respect of provisions created for the expenses as on 31st March, 2013. The AO, during the course of assessment, took note of the same and called upon the assessee to show cause as to why disallowance u/s. 40(a)(ia) of the Act should not be made towards such provisions created. 46. The assessee submitted that the provisions are adjusted against the bills/invoices received during the month of April/May and that tax deducted on such bills/invoices are deposi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cantile system of accounting . Under mercantile system of accounting, revenue cost matching principle is followed, i.e., all the expenses incurred to earn the corresponding revenue should be accounted for. The accounting principle of Prudence also requires for accounting for all known expenses and losses at the time of finalising accounts at the yearend. Accordingly, the assessee s, who are following mercantile system of accounting are required to account for all known expenses and losses, even if the bills/invoices have not been received. This is done by making provision for various expenses at the year end. It will ensure that the financial statements reflect true profits of the fiscal period. Accounting Standard 29 issued by the Institute of Chartered Accountants of India (ICAI) titled as Provisions, Contingent Liabilities and Contingent Assets deals with this aspect. As per AS-29, A Provision is a liability which can be measured only by using a substantial degree of estimation . It further states as under:- A Provision should be recognised when:- (a) an enterprise has a present obligation as a result of past event. (b) it is probable that an outflow of resour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t on the Profit and Loss account of the succeeding year by way of increase in expenses by Rs.200/-. (c) Situation III:- In the subsequent year, the assessee receives bill for Rs.750/- only, meaning thereby, the provision created was in excess by Rs.250/-. When the payment is made, the Provision for expenses account shall be debited with Rs.750/-, which will leave a credit balance of Rs.250/- in the Provision for Expenses account. This remaining credit balance will be transferred to the Profit and Loss account. Accordingly, the Provision for expenses account will show NIL balance and there will be an impact on the Profit and Loss account of the succeeding year by way of income of Rs.250/-. (d) Situation IV:- The assessee finds that it is not liable to pay the provision amount. Accordingly, the entire amount of Rs.1000/- outstanding to the credit of Provision for expenses account shall be transferred to the Profit and Loss account. Accordingly, the Provision for expenses a/c will show NIL balance and there will be an impact on the Profit and Loss account of the succeeding year by way of income of Rs.1000/-. Thus, the effect of making provision in a year is that the Profit a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ision for expenses as at the beginning of succeeding year is followed. We have also seen that the effect/impact on the Net profit/loss of the preceding year in which provision was initially created or the effect/impact on net profit/loss of succeeding year would remain the same under book rule method of accounting practice and modern days accounting practice. The net result of making provision for expenses is that the expenses pertaining to a particular year shall be claimed in that year only even in the absence of bills/invoices received from the vendors/service providers. 7. We shall now advert to the Income tax Act. Chapter VII of the Act deals with provisions relating to tax deduction at source. The contention of the assessee is that the yearend provisions are made on estimated basis and further it is credited to Provision for expenses account and not to the credit of vendors/service providers account. Accordingly, it was contended that the TDS provisions will not apply to yearend provisions. 7.1 We noticed earlier that the Ld CIT(A) has referred to the provisions of Sub-sec. (2) of sec. 194C, Explanation (ii) to sec. 194I, Explanation (c) to Sec. 194J, Explanatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct, tax has to be deducted at source by the person responsible for making any payment in the nature of interest on securities at the time of payment. The liability to deduct tax at source was being postponed by making a provision for such payment. In order to prevent the postponement of liability to deduct tax and payment to the credit of the Central Government, the Finance Act has provided that tax will be deducted at source either at the time of credit to the account of the payee or at the time of payment thereof, whichever is earlier. For this purpose, credit to any suspense account or any other account, by whatever name called, shall be deemed to be a credit of such income to the account of the payee. 30. It is thus clear from the statutory provisions that the liability to tax at source exists when the amount in question is credited to a suspense Account or any other account by whatever name called, which will also include Provision created in the books of accounts. Therefore it is not possible for the Assessee to argue that there was no accrual of expenditure in accordance with the mercantile system of account and therefore the TDS obligations do not get triggered. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the tax is required to be deducted on the year-end provisions made by the assessee which are ascertained liabilities. No doubt, the learned CIT(A) has given the benefit of the assessee if tax is deducted by the assessee subsequently. Therefore we do not find any infirmity in the order of the learned CIT(A) in holding that assessee has failed to deducted tax at source on year-end provisions. Thus the order of the learned CIT(A) is upheld to that extent. 7.4 Following the above said decisions of the co-ordinate benches, we hold that the TDS provisions are triggered for the amount credited to Provision for expenses account also, in view of specific provisions (extracted above) available in all TDS sections. Accordingly, the assessee is liable to deduct tax at source from the yearend provision for expenses. 8. One more contention raised by Ld A.R is that the assessee has voluntarily disallowed the amount of yearend provision u/s 40(a)(i)/40(a)(ia) of the Act and hence there is no requirement to raise any demand u/s 201(1)/201(1A) of the Act, i.e., disallowance made u/s 40(a)(i)/40(a)(ia) would exonerate the assessee from the liability u/s 201 of the Act. In this regard, he p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unt so paid. Accordingly, even if the payer has disallowed the expenditure u/s 40(a)(ia) of the Act or did not claim the same as expenditure at all, he shall still be liable to deduct tax at source u/s 194A of the Act on the interest amount so paid, if the said payment is liable for tax deduction at source. We notice that the Mumbai bench of Tribunal, in the case of Pfizer Ltd (supra) did not consider the express provisions contained in sec. 194A of the Act. Further we notice that the provisions of sec. 40(a)(ia) does not override the provisions of sec. 201 of the Act. We notice that provisions of sec. 40(a)(ia) do not provide for absolute disallowance as in the case of say, sec. 40A(3) of the Act. The amount disallowed u/s 40(a)(ia) in one year can be claimed as deduction in the year in which the TDS provisions are complied with. Thus, in our view, the provisions of sec. 40(a)(ia) provide only for deferment of the allowance and it does not provide for absolute disallowance. The objective of sec. 40(a)(ia) appears to be to compel the assessee to deduct tax at source in order to claim the relevant expenditure as deduction. 8.2 The co-ordinate Bangalore bench of Tribunal has also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the view that the disallowance u/s 40(a)(i) and 40(a)(ia) and the demand raised u/s 201 are two different consequences. In this connection, we may advert to various provisions of the Act. We may notice that the Income tax Act provides for different types of consequences for the failure to deduct tax at source or failure to remit the tax so deducted either in full or in part. The consequences provided under the Act are (a) disallowance of expenses should be made u/s 40(a)(i)/40(a)(ia); (b) assessee shall be deemed to be an assessee in default and hence the demand u/s 201(1)/201(1A) could be raised upon the assessee. (b) penalty can be levied u/s 271C/271CA and (c) prosecution can be launched /s 276B of the Act. It is pertinent to note that each of the consequences mentioned above are independent of each other. However, in case of disallowance of expenses to be made u/s 40(a)(ia) (w.e.f AY 2013-14) and u/s 40(a)(i) (w.e.f 2020-21), the proviso inserted in those sections gives a relief, i.e., if the assessee is not deemed to be an assessee in default u/s 201 , then there is no requirement of making any disallowance u/s 40(a)(ia)/40(a)(i). The corollary is that if the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Government on behalf of the vendor. For example, if an assessee is liable to pay interest amount of Rs.10,000/- to a person named Mr. A and the said payment is liable for tax deduction at source @ 10%, then the assessee shall pay Rs.9000/- to Mr.A and deposit Rs.1000/- to the credit of Government as TDS on behalf of Mr.A. Thus the TDS amount is actually a form of recovery of tax from the payee Mr.A and it belongs to him only. Hence Mr.A is entitled to claim set off of the TDS amount of Rs.1000/- against the tax payable by him. If there is failure on the part of an assessee to deduct tax at source, the provisions of sec.191 introduces a deeming fiction as per which the said assessee is deemed to be an assessee in default. Accordingly, the TDS amount could be recovered from the assessee, even if he has not yet paid the amount or fully paid the amount to the payee, i.e., the assessee is made liable for the tax belonging to the payee. In the above said example, the assessee would be liable to pay Rs.1000/- as per the provisions of sec.201(1) over and above the amount of Rs.10000/-payable/paid to Mr.A. Hence it is called vicarious liability. The concept of vicarious liability has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n a correct view of its profit at year end was not based on any arbitrary or whimsical estimate. It is clear from the provisioned expenses that the estimate has followed from pre-existing contracts with known parties for identified services and, hence, the accounting of amounts liable to be paid to these parties for services availed as per known terms of transaction is a specific exercise which carries with it the statutory responsibility for deducting tax at source also. The appellant cannot wriggle out of this responsibility by holding that the provisions were made without any basis towards unidentified parties for unascertained liabilities. From the nature of expenses listed above, the view expressed by Ld CIT(A) appears to be quite reasonable. In our view, it is the responsibility of the assessee to satisfy the assessing officer by preparing a list of expenses, for which payees could not be identified at the time of making provision and the reasons for the same. 9.2 We notice that there are certain judicial rulings holding that there will not be TDS liability, if the payee is not identifiable. We shall discuss about the same. In the case of Dishnet Wireless Ltd vs. DCIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome alone is liable for deduction of tax at source u/s 194A of the Act. (c) The Mumbai bench of Tribunal, in the case of Industrial Development Bank of India vs. ITO (2007)(107 ITD 45) has examined the aspect of liability to deduct tax at source, when the payees could not be identified. The question before Mumbai bench of Tribunal was whether or not Section. 193 of the Act requires tax deducted at source in respect of the provision for interest accrued but not due made by an assessee where the ultimate recipient of such interest accrued but not due cannot be ascertained at the point of time when the provision is made. In this case, the assessee issued 'Regular Return Bond-Series II , which carried interest rate of 16 per cent p.a. payable annually. The interest was payable on 9th of June every year. However, the assessee closed its accounting year on 31st March. Accordingly, it made provision of interest accrued upto 31st March, which however has not become due. This issue was adjudicated in a detailed manner. The discussions made by the Tribunal in lucid manner are extracted below:- 9. The above terms and conditions, so far as material for the purposes of our adjudicatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chapter providing for collection and recovery mechanism and set out under a separate chapter 'Determination of tax in certain special cases -Special provision relating to tax on distributed profits of domestic companies'. A plain reading of Section. 190 and Section. 191, which are first two sections under the Chapter XVII, and of Sections 199, 202 and 203(1) would show this underlying feature of the TDS mechanism Section 190 makes it clear that the scheme of TDS is one of the methods of recovering the tax due from a person and it is notwithstanding the fact that the tax liability may only arise in a later assessment year. The tax liability is obviously in the hands of the person who earns the income and TDS mechanism provides for method to recover tax under such liability. Therefore, this TDS liability is, as we begun by taking note of, a sort of substitutionary liability. Section 191 further makes this position clear when it lays down that in a situation TDS mechanism is not provided for a particular type of income or when the taxes have not been deducted at source in accordance with the provisions of Chapter XVII, income-tax shall be payable by the assessee direc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... visions of this Section shall apply accordingly, but the fact that the credit to any account is to be deemed to be credit to the payee's account also presupposes that payee can be ascertained. Therefore, this deeming fiction can only be activated when the identity of the payee can be ascertained. To illustrate, in the example that we had taken in para 4 above as long as assessee knows the identity of lenders, whether the assessee credits the interest accrued but not due in the account of the assessee or in some other account, tax would continue to be deductible under Section 193 by the virtue of deeming fiction set out in the Explanation to Section. 193. The liability to pay in such a case would crystallise later, i.e., on due date of 31st December, and the corresponding credit to the lender's account will also be given on 31st December, but the assessee will still have tax deduction liability in respect of interest accrued but not due as on 31st March. However, on the facts of the present case, this Explanation cannot be put into practice because the payee is not known at the stage of provision for 'interest accrued but not due' being made. It is not difficult to v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e endorsement and delivery and the relevant registration date being a date subsequent to the closure of books of account, the assessee could not have ascertained the payees at the point of time when the provision for interest accrued but not due was made. Accordingly, no tax was required to be deducted at source in respect of the provision for interest payable made by the assessee which reflected provision for 'interest accrued but not due' in a situation where the ultimate recipient of such 'interest accrued but not due' could not have been ascertained at the point of time when the provision is made. In the present case, interest to such bondholders is to be paid as are registered with the assessee-company as on 15th May, 1994 but there could not have been any method of ascertaining, as at the time of making the provision for 'interest accrued but not due', i.e., on 31st March, 1994, as to who will be registered bondholders as on 15th May, 1994. It is also important to bear in mind that taxes were duly deducted at source at the time of payment, i.e., on 9th June, 1994 and that there is no loss of revenue as such. In the light of these discussions, we hold t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) and (b) above, if the assessee has deducted tax at source at the time of making payment, then the provisions of sec.201(1) will not be attracted as held by us in the preceding paragraphs. However, since there was delay in deduction and payment of TDS amount, the assessee would be liable to pay interest u/s 201(1A) of the Act. We shall discuss the same in the ensuring paragraphs. 10.1 The first scenario is that the actual payment made is more than the amount of provision made. The TDS was deducted at the time of credit or at the time of making actual payment. Since yearend provision was made on 31.3.2012 in this case, the date on which TDS was deductible shall be 31.3.2012. The assessee shall be liable to pay interest from that date to the date of actual deduction/payment as per the provisions of sec.201(1A) of the Act on the amount of Provision created as on 31.3.2012. For example, the provision made as on 31.3.2012 was Rs.1000/- and the actual payment made was Rs.1200/-. The interest shall be payable on the provision amount of Rs.1000/-, since the provision amount alone was claimed as deduction during the year ending 31.3.2012. 10.2 The second scenario is that the actual ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was acknowledged. TDS was also not deducted in the succeeding year. In this scenario, the assessee would be liable to pay demand u/s 201(1) of the Act equivalent to the TDS amount deductible on the entire amount of provision. The assessee shall also be liable to pay interest u/s 201(1A) of the Act till the date of deduction/payment, which may cross the succeeding year. 10.6 We noticed earlier that the assessee has claimed to have deducted tax at source at the time of accounting of invoices/payments. Accordingly, the yearend provisions may fall under anyone of the categories discussed above. Accordingly, we restore this issue to the file of AO in order to enable him to recompute the liability, if any, u/s 201(1) and interest u/s 201(1A) of the Act. 10.7 We noticed earlier that the yearend provisions made by the assessee included Commission payable to non-residents , which is liable for deduction of tax at source u/s 195 of the Act. The provisions of sec.195 are triggered only if that payment is chargeable under the provisions of Income tax Act. We notice that the assessee has not furnished any detail to the AO/CIT(A) with regard to the applicability or otherwise of provision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eard both the parties. We notice that the AO while arriving at the difference between the amount mentioned in the tax audit report (as not paid before the due date for filing the return of income) and the amount already disallowed by the assessee i.e., the difference between Rs.17,86,33,977 and Rs.14,71,03,012 had arrived at an amount of Rs.3,50,30,965 which is wrong, whereas the correct amount is Rs.3,15,30,965. Further the assessee has already disallowed Rs.1,90,33,176 as penalty on service tax (pg. 243 of PB) which fact has not been considered by the AO resulting in double disallowance to that extent. We, therefore, direct the AO to recompute the disallowance taking into consideration the above two disallowances already considered by the assessee in the computation and also correct the transposition error while arriving at the disallowance. It is ordered accordingly. 55. The next issue that arises for consideration is relating to taxing capital receipt. The grounds raised in this regard are as follows:- 7.1 That the learned AO has erred in law and on facts by taxing the alleged notional profit of INR 4,82,21,348 which arose out of amalgamation with Scottish Newcastle Ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t on amalgamation with SNIPL, the assessee has earned a profit of 4,82,21,348/- which is not offered to tax and hence the same was added. 59. Against the objections raised by the assessee, the DRP confirmed the addition. 60. Before us, the ld. AR submitted that the AO has brough to tax a notional profit without even mentioning under what provisions of the Act and under what head the amount is taxed. Even if this notional amount is taxable in the first place, then the amount is in the nature of capital receipt and not taxable. At any rate, the provisions of section 56(2)(viib) is not applicable. 61. The ld. DR supported the orders of lower authorities. 62. We have heard the rival submissions and perused the material on record. The AO has taken the market price of the shares of the assessee company which were allotted as a gain in the hands of the assessee. He has not mentioned any specific provision under the addition is made. On a similar issue, the Ahmedabad Tribunal in the case of DCIT v. Ozone Ltd. in ITA No.103/Ahd/2018 by order dated 13.4.2021 has held as follows:- 10. We have dispassionately considered the rival submissions and perused the assessment order as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion] to clause (23FB) of section 10;] 10.3 In the instant case, pursuant to amalgamation, all assets, liabilities, undertaking of the amalgamating company (KEPL) are agreed to be vested in the amalgamated company( the Assessee) as a going concern. The amalgamated company has issued 300 equity shares of its company at face value for each shares of amalgamating company in consideration of such vesting of assets, liabilities etc. as per the scheme of amalgamation duly approved by the Jurisdictional High Court. As a result, shares worth Rs. 15 crore of the amalgamated co. (assessee co.) were issued against the vesting of assets etc. The assessing officer observed that the value of net assets (assets less liabilities) vested in the amalgamated company under the scheme stands at Rs. 54,21,16,156 against which shares worth Rs. 15 crore were issued by it for such acquisition. The difference between the value of assets and corresponding shares issued amounting to Rs. 39,21,16,156/- credited by the assessee co.(amalgamated co.) to its capital reserve without any payment of taxes triggered the cause of action for the AO. In the course of assessment, the AO further found on a incisive veri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o be determined as per sub-clause (a) appended thereto. The Assessee in the present case, is not found to have issued shares at value more than face value at the first instance as repeatedly exhorted on behalf of the assessee. 10.6 To decipher the true purport of iteration of law in the context and object for insertion of the provision, it may be useful to refer to the explanations given at the time of enactment of the provision. Explanatory Memorandum to Finance Bill, 2012 Share premium in excess of the fair market value to be treated as income Section 56(2) provides for the specific category of incomes that shall be chargeable to Income Tax under the head Income from other sources . It is proposed to insert a new clause in section 56(2). The new clause will apply where a company, not being a company in which the public are substantially interested, receives, in any previous year, from any person being a resident, any consideration for issue of shares. In such a case if the consideration received for issue of shares exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares shall be cha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tal fund. (i) It has now been further provided that such excess share premium is included in the definition of income under sub-clause (xvi) of clause (24) of section 2. (ii) Considering that the proposed amendment may cause avoidable difficulty to investors who invest in start-ups where the fair market value may not be determined accurately, it is proposed to provide an exemption to any other class of investors as may be notified by the Central Government. These amendments will take effect from 1st April, 2013 and will, accordingly, apply in relation to the assessment year 2013-14 and subsequent assessment years. 10.9 When the clause in section 56(2)(viib) of the Act is read in tandem with elucidations provided in CBDT Circular; Finance Ministers' speech in Parliament disclosing his intentions behind such insertion and also Memorandum explaining Finance Bill, it appears that whole thrust for such insertion is to bring measures to tax hefty or excessive share premium received unjustifiably by private companies on issue of shares without carrying underlying value to support such uncalled for premium and thereby enriching itself without paying taxes legitimately due ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sure. 11.2 In contrast, the applicability of the clause in the case of amalgamation may be equally looked from a little different perspective as well. In amalgamation, the issue of shares is made by inviting subscription from the persons to whom offer is made. The issue of shares is to give effect to the amalgamation, as per mutual agreement and the Court order. In other words, it may be argued that the issue of shares does not trigger any consideration and in converse, the obligation to give consideration, triggers issue of shares. Secondly, the clause contemplates 'receipt' of the consideration for the shares from a resident person. In other words, it contemplates a transaction between a resident person and the company issuing shares. In the case of an amalgamation, the consideration, which would be undertaking along with all its assets and liabilities is in the form of vesting by the amalgamating company, whereas the shares are issued to its shareholders. Thus, it is, in effect, a tripartite arrangement between (i) amalgamated co. (ii) amalgamating co. (iii) the shareholders of amalgamating co.. Such tripartite arrangements in amalgamation cases are not contemplated i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isaged by section 56(2)(viib) is not found compatible with scheme enacted, when seen from the perspective of revenue. 12. To summarise, in our view, the issue of shares at 'face value' by the amalgamated company (assessee) to the shareholders of amalgamating company in pursuance of scheme of amalgamation legally recognized in the Court of Law neither falls with scope ambit of clause (viib) to S. 56(2), when tested on the touchstone of objects and purpose of such insertion i.e. to deem unjustified premiums charged on issue of shares as taxable income; nor does it fall in its sweep when such deeming clause is subjected to interpretative process having regard to the scheme of the Act. 13. In the wake of above delineation, we see no error in the conclusion drawn by the CIT(A) in this regard. The CIT(A) in our view, has rightly found inapplicability of S. 56(viib) in the facts of the present case. We thus decline to interfere with the conclusion so drawn by the CIT(A) whose order is under challenge by the revenue. Similarly, the cross objection filed by the Assessee which merely seeks to support the action of CIT(A) also does not call for separate adjudication and is inf ..... X X X X Extracts X X X X X X X X Extracts X X X X
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