9911796707
TMI Blog2022 (6) TMI 1433X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 further erred in ignoring the submissions and evidence placed by the Appellant before learned TPO/DRP; 2.7 The learned AO/TPO erred in law and on facts in making the T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s (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 specific use within the Heineken Group. It relates to all aspects of the industry of production, marketing and selling beverages and more in particular beers, not limited to the Hei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 condition that agreement would get terminated, the moment HIBV group's shareholding in the assessee gets reduced to less than 25% of total equity shareholding. According to the TPO, this aspect of the agreem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ims 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 regard to the actual rendering of services by the AE and how they were quantified. 2. The taxpayer did not produce any primary evidence to show that the services are actually rendered by the AE except describing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 considerable expertise and international exposure in the relevant field (b) Service agreement was approved by the company board which included independent directors (c) AE has brought in several qualitative changes in the man ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y 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 appear vague and they can hardly be classified as cause and effect. We feel that the case is identical to Gemplus India (P.) Ltd.(TP0) has observed that the terms prescribed in the agreement in respect of the payments to be made by the assessee com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se 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, had such services been rendered by a unrelated party. Though the assessee is required to show the benefit that it received from the rendering of services, such benefit can be on a broad basis it need not be specific. 13. The submission of the ld. counsel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 business is entirely his prerogative and it is not for the revenue authorities to decide what is necessary for an assessee and what is not. An assessee may have any number of qualified accountants and management experts on his rolls, and yet he may decide to engage servic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... action 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 however, the arrangement between the AE and the Assessee is not a cost sharing arrangement but a payment for specific services rendered. To this extent the above observations of the Hon'ble High Court may not be relevant to the present case. 17. The following aspects ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 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 18,98,50,836 to Force India Formula One Team Limited; 2.11 The learned AO/TPO erred in law and on facts in treating payment towards Brand Promotion expenses to Force India Formula One Team Limited as international transaction under the provisions of the Act without appreciating the fact t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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% (Netherlands) It is clear from the Annexure-2 details furnished along with the report that none of the above persons holds more than 26% shares in UBL. So the relationship mentioned in S.92A(2)(b) where the same person or enterprise holds directly or indirectly, shares carrying not less than 26% o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntion 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 would like to submit that Force India Formula One Team Ltd. is not an Associated Enterprise of United Breweries Ltd. The transfer pricing provisions would be applicable only if the relationship of two enterprises qualifies as associated enterprises within the meaning of section 92A of the Income Tax Act. The relations ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tly, 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 determination of ALP are left open, without any adjudication, as the preliminary issue, if decided will render the entire exercise of determination of ALP, academic. 26. The next issue to be decided is with regard to determination of ALP in respect of specified domestic transaction in respect of sales promotion expenses for payme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 more associated enterprises enter into a mutual agreement or arrangement 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, the cost or expense allocated or apportioned to, or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ice 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 res-integra in the light of authoritative pronouncement of Hon'ble Apex Court in the matter of KOBLAPUR CANESUGAR WORKS LTD. v. UNION OF INDIA reported in AIR 2000 SC 811 whereunder Apex Court has examined the effect of repeal of a statute visa-vis deletion/addition of a provision in an enactment and its effect thereof. The import of Section 6 of Gene ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. 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 respect of specified domestic transactions mentioned in clause (i) of sec.92BA is not valid, as the said provision has been omitted. Accordingly, we direct the AO to delete the addition relating to specified domestic transactions made u/s 92CA of the Act. 33. We notice that the co-ordinate bench in the case of Textport Overseas (supra) has restored the matter to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat 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 goodwill is not allowable. Accordingly, these grounds are dismissed. 37. The next issue for adjudication is disallowance of expenses u/s. 14A of the Act on the following grounds:- Grounds relating to disallowance of expenses under section 14A: 4.1 The learned AO has erred in law and on facts in disallowing expenses of INR 70,66,372 in relation to exempt dividend income amounting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome. 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 earning the tax-exempt income. 6.2.3 Further, the assessee could not produce any credible evidence in the form of books of account along with fund flow / cash flow statement indicating that there is no expenditure incurred by the assessee for the purpose of investments made resulting in tax exempt income. It is also pertinent to note that the assessee has debited a sum of Rs. 7725 lakhs towards ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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) ½ % 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 disallowance made by the AO on the ground that the assessee has not maintained separate accounts for investments and that some establishment expenses / administrative expenses ought to have been incurred warranting disallowance. With regard to the claim of the assessee that the investments are made for commercial expediency, the DRP held that the purpose of investment does not matter for applicability of section 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,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 14A of the I.T.Act more than the dividend income earned and the Tribunal confirmed the disallowance made u/s 14A of the I.T.Act. However, the Hon'ble Madras High Court held that the disallowance u/s 14A of the I.T.Act cannot exceed the exempt income earned during the relevant assessment year. The relevant finding of the Hon'ble Madras High Court reads as follow:- "20. Before parting, we may also note with reference to the Table o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her, 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 directed to restrict the disallowance u/s 14A of the I.T.Act to Rs.27,37,47,187. 3.8 In the result, ground No.II raised by the assessee is allowed." 43. The assessee in this case has earned a dividend income of Rs.8,57,655 and respectfully following the decision of the coordinate Bench of the Tribunal,(supra), we hold that the disallowance should be restricted to the amount of exempt income earned by the assessee. We direct accordingly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 deposited before the due date for filing the return of income. The assessee therefore submitted that no disallowance is warranted u/s. 40(a)(ia) as amended w.e.f. 2010. The assessee also submitted the break-up of expenses on which tax is deducted and remitted before the due date for filing the return of income which amounted to Rs.11,00,00,002. 47. The AO disallowed the said amount stating that tax ought to have been deducted as of 31.3.2012 and only for rem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 resources embodying economic benefits will be required to settle the obligation; and (c) a reliable estimate can be made of the amount of the obligation." Hence, while finalising the accounts as at the year end, it is a usual accounting practice to ascertain the obligations that have arisen as a result of past events, which may involve probable cash outflow. All those obligations are recognised as expenses and provided for. Making a provision will be an easy task, if t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sferred 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 and Loss account" of the year in which the said provision is made will absorb the relevant expenses to the extent so provided for, i.e., those expenses will not get shifted to the next year when the payment is actually made. The profit and loss account of succeeding year will not be affected by the amount of provision made, if the actual payment made is equal to or in excess of the provision amount. However, if there is no requirement of making any payment or if the payment mad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, Explanation (iv) to Sec. 194H and Explanation 1 to sec. 195, which states that even if the sums referred to under these provisions are credited to any account, whether called 'Suspense Account' or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit of such account to the account of the payee and the provisions of TDS shall apply accordingly. For the sake of convenience, we extract below provisions of sec.194C(2):- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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." 7.3 We notice that the Delhi bench of Tribunal has also considered the question of applicability of TDS provisions on yearend provisions in the case of Interglobe Aviation Ltd vs. ACIT (ITA No.5347/Del/2012 dated 07-01-2020), wherein it was held as under:- "19. We have carefully considered the rival contentions and perused the orders of the lower authorities. Assessee has made provision for Airport expenses of Rs 32314535!-, Airport Handling expenses Rs. 14115000!-, Crew Accommodatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sions 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 placed his reliance on the decision rendered by co-ordinate bench in the case of Robert Bosch Engineering and Business Solutions P Ltd (ITA Nos.1689 & 1690/Bang/2017 dated 31.1.2022). 8.1 We notice that the very same contention was urged before Cochin bench of Tribunal in the case of Agreenco Fibre Foam (P) Ltd vs. The ITO (TDS)(ITA No.165/Coch/2012 dated 16th August 2013) and it was rejected with the following observations:- "5.2 The liability to deduct tax at source on the interest payme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... c. 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 examined similar argument raised before it in the case of IBM India Private Ltd (ITA Nos.749 to 752/Bang/2012 dated 14.05.2015) and it was rejected with the following observations:- "27. We have carefully considered rival submissions. Provisions of Sec.40 of the Act start with a non-obstante clause and provides that, "Notwithstanding anything to the contrary in sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head "Profits and gains of busin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hall 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 assessee is deemed to be an assessee in default, the above said relief given under the proviso to sec.40(a)(i)/40(a)(ia) shall apply. Thus the proviso given under sec.40(a)(i)/40(a)(ia) itself makes it very clear that liability u/s 201 is independent of the above said disallowances. 8.4 Our view that each of the consequences is independent of each other is also supported by the Explanation given under Sec. 191, which reads as under:- Explanation. - For the removal of doubts, it is hereby declared that if ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 been well explained by Mumbai bench of Tribunal in the case of Industrial Development Bank of India vs. ITO (2007)(107 ITD 45), which are going to discuss infra. 8.6 In view of the foregoing discussions on legal provisions, following the decisions rendered by the co-ordinate benches of Tribunal in the case of IBM India Pvt Ltd (supra) and Agreenco Fibre foam P Ltd (supra), we hold that the disallowance made u/s 40(a)(i)/40(a)(ia) will not absolve the assessee from the liability u/s 201 of the Act, when an assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty 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 (2015)(154 ITD 827)(Chennai Trib), the Chennai bench of Tribunal held that when the tax deductor cannot ascertain the payee who is the beneficiary of credit of tax deduction at source, the mechanism of Chapter XVII-B cannot be put into service. It was further held that if the payee is identifiable and the amount payable to him is ascertainable, then the assessee would be required to deduct tax at source in respect of such provision. We shall discuss some more decisions:- (a) The first decision is that of Honourable Delhi Hig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st 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 adjudication, can be summarized as follows: (a) The assessee is liable to pay interest @ 16 per cent annually in respect of regular return bondholders. (b) The interest is payable on 9th June of each calendar year, except in the year of maturity, when interest is payable on maturity. (c) The interest, except at the time of maturity, is paid to the person whose name is registered in the records of the assessee-company as on 15th May of each calendar year. (d) The bonds are transferable by endorsement and delivery, and the assessee doe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue 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 directly. This provision thus shows that TDS liability is a vicarious liability and the principal liability is of the person who is taxable in respect of such income. Section 199 makes it even more clear by laying down that the credit for taxes deducted at source can only be given to the person from whose income the taxes are so deducted. Therefore, when tax deductor cannot ascertain beneficiaries of a credit, the tax deduction mechanism cannot be put into service. Section 202 lays down that TDS provisions are without any prejud ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt, 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 visualize that Explanation to Section. 193, which was introduced w.e.f. 1st June, 1989, was apparently to take care of a situation in which instead of crediting the account of the payee, some other proxy account was credited, to avoid the TDS liability being invoked. For example, if at the end of the accounting year, the assessee is to make a provision for interest of Rs. 10,000 payable to Mr. X, but he creates the provision by way of credit to 'interest payable account'. In such a situation 'interest payable accoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 that the assessee did not have any liability to deduct tax at source, in respect of provision for 'interest accrued but not due', in respect of regular return bonds made on 31st March, 1994. When there was no obligation of deduct tax at source, there cannot be any question of levy of penalty or interest. The appellant, therefore, must succeed." It can be noticed that the decision, in all these cases has been rendered on the peculiar facts of the case. 9.3 We also notice that in all these decisions, the assessee therei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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 payment made is less 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 "actual payment" made. For example, the provision made as on 31.3.2012 was Rs.1000/- and the actual payment made was Rs.800 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all 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 provisions of sec.195 to the above said payment. Hence we restore this issue also to the file of the AO for examining it afresh in accordance with law and in the light of discussions made supra. 11. In view of the foregoing discussions, the order passed by Ld CIT(A) would stand modified." 50. 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 income at pages 528 to 537 of the assessee's PB. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esulting 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 India Pvt Ltd; 7.2 That the learned AO has erred in law and on facts by taxing the alleged notional profit of INR 4,82,21,348 without appreciating the fact that income can be taxed only under a specific provision of the Act; 7.3 That the learned AO has erred in law and on facts in bringing to tax the alleged notional profit of INR 4,82,21,348 without appreciating the fact that the same is in the nature of capital receipt and thus it is not taxable under the provisions of the Act; and 7.4 That the learned AO has erred in law and on facts in taxing the alleged ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 well as first appellate order. The documents referred and relied upon has been taken cognizance in terms of Rule 18(6) of the Income Tax(Appellate Tribunal) Rules, 1963. 10.1 In the case in hand, the short question that arises in essence is whether the shares received by the amalgamating company in consideration of vesting of its assets, liabilities and undertaking in the amalgamated company pursuant to scheme of amalgamation is hit by the deeming provisions of Section 56(2)(viib) of the Act in the facts of the present case? 10.2 The AO has made impugned additions towards excess consideration solely under S. 56(2)(viib) in terms of approval granted by the Addl. CIT on reference made under S. 144A of the Act. Hence, no other point such as cursory allegation of violation of AS-14 of ICAI etc. needs our indulgence in isolation for adjudication of controversy. To address the issue, it may be pertinent to reproduce the provision of section 56(2)(viib) for an easy reference: "(viib) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 verification that the intrinsic value of share of amalgamated co. issued at face value of Rs. 10 stands at Rs. 6.81 per shares only. The AO accordingly noted that the share of amalgamated co. so issued carries worth Rs. 10.22 crores only (1,50,00,000 *6.81= 10,21,50,000) as against the net assets acquired Rs. 54.21 crore. The AO after making reference to Addl. CIT under S. 144A has brought the difference of Rs. 43.99 crore within the ambit of taxable income with the aid of deeming provision of S. 56(2)(viib) of the Act and increased the assessed income to that extent. 10.4 In the backdrop of facts capsuled above, it is the contention of the assessee that impugned transaction of vesting of assets of amalgamated co. in exchange of issue of shares of assessee co. at face value neither matches the essential ingredients of S. 56(viib) of the Act nor is the transaction carried out pursuant to approved scheme, in conformity of the objects and purposes of insertion of section 56(viib) of the Act. It is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 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 chargeable to income tax under the head "Income from other sources. However, this provision shall not apply where the consideration for issue of shares is received by a venture capital undertaking from a venture capital company or a venture capital fund. Further, it is also proposed to provide the company an opportunity to substantiate its claim regarding the fair market value. Accordingly, it is proposed that the fair market value of the shares shall be the higher of the value- (i) as may be determined in accordance with the method as may be prescribed; or (ii) as may be substantiated by the company to the satisfaction of the Assessing Officer, based on the value of its assets, including intangible assets, being goodwill, know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature. 10.7 The budget speech of the Hon'ble Finance Minister Mr. Pranab Mukherjee on 16/03/2012 in para 155 concerning section 56(2)(viib) may also be qu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iably 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 to them. It also seems that subscription to the shares issued by a company at a substantial premium (not necessarily backed by a valuation justifying the premium) was supposedly resorted to convert unaccounted money. The extant framework of law were not found sufficient by the legislature to curb such practices. Earlier attempts to tax such excessive receipts in the garb of share premium by private cos. did not arguably fructify. The provision was inserted to change the landscape for charging premium to tax of capital nature. 10.10 Section 56(2)(viib) creates a deeming fiction to imagine and fictionally convert a capital receipt into revenue income. It is well entrenched by the body of case laws that while giving effect to such legal fictions, all facts and circumstances thereto and inevitable corollaries thereof have to be assumed. In CIT v. Mother India Refrigeration (P.) Ltd. [1985] 23 Taxman 8/155 ITR 711, the Hon'ble Supreme Court has held that the legal fictions are only for a definite pur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rrangement between (i) amalgamated co. (ii) amalgamating co. (iii) the shareholders of amalgamating co.. Such tripartite arrangements in amalgamation cases are not contemplated in the deeming clause in question. 11.3 There is yet another perspective to dwell upon. As per the proviso to the clause, it does not apply 'to the consideration for issue of shares by a venture capital undertaking(VCU) from a venture capital company(VCC) or a venture capital fund(VCF)'. The proviso implies that there should issue of shares directly by the company to the subscriber, obviously, for a consideration. In other words, it contemplates a bilateral transaction. Further, it also contemplates a transaction in the nature of issue of shares at the instance of the company on its own and it does not contemplate a transaction in the nature of issue of shares for discharging the consideration or issue of shares obligated pursuant amalgamation etc. If a view is adopted that the transaction can also apply to amalgamation etc. then, in that case, if there is amalgamation by and between venture capital undertakings, the provision would possibly apply inconsistent with the intent of the legislature to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y 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 infructuous." 63. A similar view s held by the Kolkata Tribunal in the case of ITO v. Kyal Developers in ITA No.627/Kol/2012 dated 19.12.2013. 64. Respectfully following the above decisions of the Tribunal, we hold that there is no income arising in the hands of the assessee for the notional profit computed by the AO. Hence the addition is deleted. 65. The grounds of the assessee regard MAT credit and TDS credit are as follows:- 8.1. That the learned AO has erred in law and on facts in not allowing MAT credit as per provisions of section 115JAA of the Act. 8.2. That the learned AO has erred in law and on facts in granting TDS credit of INR 12,67,57,080 instead of INR 12,71,75,047. 66. We direct the AO to verify and allow the credits for MAT and TDS while recomputing the income of the assessee in accordance with the directions given in this order. 67. Ground No.8.3 with regard to interest u/s. 234B of the Act is consequential in nature. 68. Ground No.8.4 reads as follows:- 8.4. The learned AO / TPO and ..... X X X X Extracts X X X X X X X X Extracts X X X X
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