9911796707
TMI Blog2024 (7) TMI 829X X X X Extracts X X X X X X X X Extracts X X X X ..... payments made in respect of contracts awarded by Public Sector Companies we have to be held as expenses were incurred against public policy, and therefore, not entitled to be deducted in the light o the proviso to Sect 37 - Decided against assessee. Value of Construction Work-In-Progress adopted by the AO - AO held method of valuation followed by the Appellant in respect of construction jobs was not correct and concluded that the valuation of closing Construction Work-In- Progress as on 31/03/2004 was incorrectly reduced the Appellant - HELD THAT:- CIT(A) was right in dismissing the issue as being academic in nature since no addition was made by the Assessing Officer on account of adopting higher value of the Construction Work-In-Progress. We do not find any infirmity in the order passed by the CIT(A). Accordingly, Ground No. 2 raised by the Appellant in the present appeal is dismissed. Disallowance of provision for foreseeable loss - Appellant submitted that the provision for foreseeable losses is an allowable deduction - HELD THAT:- A claim otherwise not allowable as per the provisions of the Act cannot be allowed merely on the ground of non-materiality of the quantum involved. H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s a transaction of slump sale and not a case of itemized sale as held by the Assessing Officer. Therefore, the very basis on which the WDV and depreciation was re-computed by the Assessing Officer does not survive. Taking note of the aforesaid facts, the Tribunal had decided identical issue in favour of the Appellant and directed the Assessing Officer to accept depreciation as calculated by the Appellant and thereby deleted the addition made on account of reduction of depreciation claimed by the Assessing Officer vide common order passed in a batch of appeals including the appeal preferred by the Appellant for the Assessment Year 2001-02 and 2002-03 [ 2022 (5) TMI 104 - ITAT MUMBAI] . Disallowance of interest and other expenses made u/s 14A - as in return of income the Appellant had claimed exemption in respect of dividend and interest income from equity shares/Units of mutual funds and tax free bonds - HELD THAT:- While arriving at the enhanced amount of disallowance the CIT(A) has borrowed the computation mechanism prescribed in Rule 8D of the Rules as a reasonable basis even though the aforesaid Rule 8D did not apply to the Assessment Year 2004-05. It is admitted position that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at arm s length as per Cost Plus Method. However, in effect, the Appellant had remitted 100% of the project cost overrun expenses which can be considered as Appellant s share of project cost overrun expenses of 80% along with markup of 20%. On the other hand, TPO was also required to determine the arm s length price by following one of the method prescribed. Accordingly, we remand this issue back to the file of the TPO/Assessing Officer for determination of ALP of the transaction of reimbursement of project cost overrun expenses by the Appellant to L T Ceylinco and recompute transfer pricing adjustment, if any. In terms of the aforesaid, Ground No. 8 raised by the Appellant is allowed for statistical purposes. Contract executed prior to the introduction of transfer pricing provisions - The actual computation of income and income tax would be made as per the law prevailing on 1st April of the relevant Assessment year. In the case before us, there is no dispute as to the nature/character of the international transaction. Further, the Assessing Officer has applied the transfer pricing provisions as applicable on 01/04/2004, which only affect the computation of income. Further, we note ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt Order, dated 05/12/2006, passed under Section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as the Act ). 2. The Appellant has raised the following grounds of appeal: 1. On the facts and in the circumstances of the case and in law, the learned Commissioner of Income Tax (Appeals) [CIT(A)] erred in confirming the disallowance of Rs. 2,94,88,620/- being commission paid to certain parties during the previous year. 2. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in confirming disallowance of Rs. 54,16,82,032/- on account of increase in value of construction work-in-progress. The CIT(A) erred in not directing the Assessing Officer to grant deduction of Rs. 52,95,37,421/- [Rs. 54,16,82,032/- less Rs. 1,07,12,19,453/-] being difference between closing and opening construction work-in-progress allowable based on the stand of Assessing Officer in earlier years. 3. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in confirming disallowance on account of provision for foreseeable loss of Rs. 9,79,40,038/-. 4. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isallowance under section 14A for the purpose of computing book profit u/s 115JB of the Act. In doing so, he erred in applying Rule 8D of Income-tax Rules, 12. The appellant company craves leave to add to, to amend, to alter or modify any or all the aforesaid grounds of appeal. 2.1. The Appellant has also raised the following Additional Ground of appeal vide letter, dated 14/11/2018: 1. On the facts and in the circumstances of the case and in law, the Ld. Assessing Officer (AO) ought to have computed the deduction u/s 80HHC of the Act in determining the Book Profit u/s 115JA on the basis of profit as per the profit and loss account instead of profits of business and profession computed under the normal provisions of the Act while determining tax liability u/s 115JA of the Act. 2. On the facts and in the circumstances of the case and in law, the Ld. Assessing Officer (AO) ought to have computed the deduction u/s 80HHE of the Act in determining the Book Profit u/s 115JA on the basis of profit as per the profit and loss account instead of profits of business and profession computed under the normal provisions of the Act while determining tax liability u/s 115JA of the Act. 3. The rele ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IT(A) vide, order dated 12/08/2013, the CIT(A) partly allowed the aforesaid appeal. However, the CIT(A) did not grant any relief in relation to the additions/disallowances specified in paragraph 5 above. 7. Being aggrieved, the Appellant is now in appeal before the Tribunal on the above issues on the grounds reproduced in paragraph 2 above which are taken up hereinafter in seriatim. Ground No. 1 8. Ground No. 1 pertains to disallowance of commission expenses of INR 2,94,88,620/- paid to different parties by the Appellant. 9. During the relevant previous year, the Appellant paid commission of INR 2,94,88,620/- to various parties in respect of contracts received from Government Departments and Public Sector Undertakings. According to the Appellant, the commission was paid for various services rendered by these parties, like liaision with the customers, providing feedback on tenders, collection of cheques, C forms etc., and was, therefore, allowable deduction under Section 37 the Act being expenditure incurred wholly and exclusively for the purpose of business of the Appellant. However, the Assessing Officer was not convinced. The Assessing Officer held that adequate evidence was not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of records, we find that similar issue raised by the assessee company in its appeal in ITA No.987/Mum/1998 relating to Assessment Year 1990-91, wherein the Tribunal after deliberated upon the issue a length and following the decisions of the Tribunal in assessee's own case relating to Years 1988-89 held that The assessee company should explain without any shadow of doubt, the nature of such services. In the present case, no such explanations or details have come from the side of the assessee company. Without knowing the exact nature of the services rendered by those parties, it is not possible for us to decide whether the commission payable by the assessee company was a legitimate expenditure permitted by law, and therefore, to be allowed. If such detail: are not coming, such payments made in respect of contracts awarded by Public Sector Companies we have to be held as expenses were incurred against public policy, and therefore, not entitled to be deducted in the light o the proviso to Sect 37 of the IT Act. This position is confirmed by the order o the Tribunal in assessee's own case for the Assessment Year 1989-90. Accordingly, we reject the contention of the assessee an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,032 Provision made in valuation of opening construction work-in-progress 1,07,12,19,453 Difference between closing opening Constructions Work-in-Progress (52,95,37,421) 16. In support of the above contentions the Appellant filed before the Assessing Officer Notes on Account for Construction Contract (placed at page 78 79 of the paper-book) and Accounting Policy Regarding Construction/Project Activity (placed at page 80 to 82 of the paper-book). 17. The Assessing Officer, however, did not accept the above contentions of the Appellant holding that method of valuation followed by the Appellant in respect of construction jobs was not correct and concluded that the valuation of closing Construction Work-In- Progress as on 31/03/2004 was incorrectly reduced the Appellant by INR 54,16,82,032/-. The Assessing Officer also noted that similar increase in the value of Construction Work-In-Progress was also made by the Assessing Officer for the earlier Assessment Years and computed the difference in valuation of the adjusted closing and opening constructions Work-in-Progress of at (INR 52,95,37,421). However, the Assessing Officer ignored the above difference observing as under: 9.6 The asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eted contract method, revenue is recognized only when a substantial portion of the contract is completed. Costs and progress payments received are accumulated and carried to the accounting period in which the contract is completed and the profits/loss recognized in that year. 2.3 Under the percentage completion method, revenue is recognized pro rata to the stage of completion is reached. Against the revenue, costs incurred in reaching the given stage are matched leading to the profits for the period in question. The merit of percentage completion method is that revenue is reflected in the year in which the activity is undertaken. 2.4 A number of methods are used to measure the stage of completion of the job which is in turn the basis for determining the revenue to be recognized in the financial statements e.g., (i) proportion of costs incurred to date to the estimated total costs of the contract or (ii) proportion of value work done to the total contract value. 2.5 The employment of percentage completion method is subject to the risk of errors in making estimates. For this reason, no profit is recognized until the outcome of the contract can be reliably estimated. 2.6.1 Considering ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... revenue. (e) Retentions are accounted as Sales and shown as receivables. 2.0 Job (WIP Valuation): 2.1 Job valuation is the key element of the construction contract accounting. The difference between the work-in-progress figures as on the opening closing days of the accounting period is accounted as Sales. The aggregate value of all jobs which are in progress (as per 2.2 and 2.3 below) at the end of the accounting period constitutes the Work-in-progress. 2.2 Jobs which are less than 50% complete are valued at cost (vide valuation policy disclosed in the covering letter to the Return of Income - Para 27). 2.3 Other jobs are valued at estimated realizable value which is calculated as follows: Value of Work Certified xxx Add: a) Cost of work done but not billed xxx b) Materials at site xxx Less: a) Allowance for Contingencies xxx xxx 2.4 a) Work certified which is the basis for computing the estimated realizable value-refers to the amount for which the progress bills of the contractor are passed or certified for payment . The job is entrusted to project staff of the customer. Invariably, in the case of large jobs, the customers engages specialist project consultants (Chartered Archite ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llowing pre-determined percentages to work certified figure depending on the type of project and the stage of completion: Job Type For 51-90% Completion For 91-99% Completion Defect Liability Period Civil/Infrastructure 3 % 1.5 % 1 % Mechanical 5 % 2 % - Electrical 5 % 2 % - Note: DLP refers to Defect liability period i.e. Warranty period. 2.6.3 No allowance for contingencies is made in respect of jobs which are less than 50% complete, since as per our accounting policy, such jobs are valued at cost and no profit is recognized on the same. Also, it is to be noted that the percentage of contingency allowance is naturally and logically lower as the job progresses and the uncertainties reduce. On completion of Defect Liability Period, no provision is retained, thereby recognizing the total profit actually earned on the job 3.0 Financial Accounting entries: 3.1 The scheme of accounting entries in financial accounts - is shown on Annexure 4.2.1. 3.2 It may be noted that there is no accounting entry for contingency allowance; it does not represent a provision in the accounting sense. 3.3 The peculiar feature of the contract accounting is that each year, Sales is recorded in P L account b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... total contract revenue is higher, the expected loss from the concerned construction-work is required to be recognized as an expense immediately in the year on which the contract is signed notwithstanding the fact whether or not such construction-work has commenced or not. The Appellant has been following this accounting policy consistently. Therefore, the provision for foreseeable loss on construction-work should be allowed as deduction from the income. However, the CIT(A) confirmed the disallowance of deduction for provision for foreseeable losses of INR 9,79,40,038/- made by the Assessing Officer holding that the provision did not crystalise during the relevant previous year. The amount has been merely set aside in anticipation of liability which may accrue on a future day on happening of an uncertain event. Given that the liability cannot ascertained with accuracy, the Appellant was not entitled to deduction for provision for foreseeable losses of INR 9,79,40,038/-. 27. Being aggrieved, the Appellant carried the issue in appeal before us. 28. During the course of hearing the Ld. Sr. Counsel appearing for the Appellant submitted that the provision for foreseeable losses is an all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accordance with the method of accounting regularly employed by the assessee : Provided that in any case where the accounts are correct and complete to the satisfaction of the Assessing Officer but the method employed is such that, in the opinion of the Assessing Officer, the income cannot properly be deduced therefrom, then the computation shall be made upon such basis and in such manner as the Assessing Officer may determine. Therefore, it is to be examined whether income is properly deducible or not. In our opinion, it cannot be disputed that from the method adopted by the assessee, assessee's income cannot be deduced properly in the year in which the loss has been anticipated. As a matter of fact this aspect is not disputed by the Assessing Officer also. He seems to have swayed more by the revenue loss than by the correct principle to be applied. The matching principle of accounting is not of much significance in the present context because if the loss has been properly estimated in the year in which the contract has been entered into then it has to be allowed in that very year and cannot be spread over the period of contract. The matching principle is of relevance where in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... though the Tribunal noted that estimation was done on technical basis, in view of the discrepancies pointed out by the First Appellant Authority for correct estimation of loss, the issue was restored to the file of Assessing Officer for examining correctness of the claim. Whereas in the case of Jacobs Engineering India Pvt. Ltd (supra) the Tribunal noted that quantification and calculation of foreseeable losses in terms of AS-7 had not been done by the Assessing Officer. 31. During the course of hearing, the Appellant was also asked to clarify the basis of quantification/computation of the foreseeable losses. In response, it was contended on behalf of the Appellant that the Assessing Officer had never doubted the basis of computation of Foreseeable Loss and therefore, the Tribunal was not required to examine this issue at all. Referring to the table at page 88 of the paper-book Working of foreseeable losses for some jobs on sample basis , the Ld. Senior Counsel submitted that the figure of Foreseeable Loss was the balancing figure. Since the Assessing Officer has accepted the actual expenditure incurred in the project and the percentage of completion, it can be inferred that the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h the relevant extract of Accounting Standard -7 ('AS-7') issued by The Institute of Chartered Accountants of India. c. In the Audited Accounts for the year under consideration, the amount of foreseeable loss is specifically referred to in Schedule O' under the head 'Sales, administration and other expenses' and 'Schedule Q' contains a note dealing with foreseeable loss. d. The Provision for foreseeable loss is claimed on the basis of and in accordance with AS-7. The Assessing Officer disallowed the loss by holding that it is merely a provision, and the Assessing officer did not dispute the basis of computation of foreseeable loss. e. In the course of the proceedings before the learned CIT(A), detailed submissions were filed on the allowability of Provision for foreseeable loss with project wise (including name of client) breakup of the Provision for foreseeable loss (submissions dated 10.04.2013 and 02.08.2013) together with sample workings explaining the quantification of Provision for foreseeable loss. f. The learned CIT(A) has while passing the order incorrectly remarked that the details was not given with reference to the parties. The CIT(A) also in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reby state that whatever is stated hereinabove is true to the best of my knowledge. 33. On perusal of the above affidavit it is not clear whether the statements given by the officer are as per personal knowledge or knowledge as per record. Be that as it may, we find that the stand taken by the Appellant is that the Appellant is not in a position to produce presently/currently the documents to substantiate the computation of the foreseeable loss. As per the paragraph e. of the above affidavit, only sample workings explaining the quantification of Provision for foreseeable loss were filed before the CIT(A). As noted herein above, the sample working pertained to 4 out of 30 projects. It has been stated in paragraph g. that the Appellant migrated to inhouse ERP System for maintaining records. The projects under consideration were completed by year 2009, the Appellant is enable to presently retrieve any electronic records with respect to the concerned Job Cost Reports (JCR) for the purpose of providing details. Even the Job Cost Reports maintained in physical form in record room situated at Tamil Nadu were damaged in flood/cyclone in the year 2015 and for the same reason the Appellant i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ounting period was accounted as sales. The valuation of Work-in Progress is based upon cost in case of jobs which were less than 50% complete whereas in the case of the balance jobs (competed 50% or more) the valuation of work-in-progress were valued at Estimated Realizable Value (ERV). While arriving at ERV the Appellant reduced the Allowance for Contingency from value of Work Certified. As per paragraph 2.6.2 of the Accounting Policy, the allowance for contingencies was quantified by applying pre-determined percentages to work certified which were dependent upon type of the project and the stage of completion. No allowance for contingencies was made for jobs less than 50% complete as the same were valued as cost. As per paragraph 3.3 of the Accounting Policy, the sales were recorded in Profit Loss Account by creating a Work-in-Progress and not by debiting customers account. Further, as per paragraph 3.2 of the Accounting Policy, no accounting entry was passed for Allowance for Contingency. Thus, the Allowance for Contingencies is taken into account while valuing the Work-in-Progress and is not debited to Profit Loss Account. On the other hand, the Provision for Foreseeable Losses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (supra) relied upon by the Appellant. However, in our view, it cannot be said that the computation/working of foreseeable business losses has been accepted by the Assessing Officer. In absence of any material on record supporting the computation/working of the foreseeable loss, we cannot direct the Assessing Officer to allow deduction for foreseeable losses in the present case. Even though in principle we may agree with the contention that deduction for foreseeable losses can be allowed in certain cases, the basis and the reasonableness of the estimate of foreseeable losses would require examination/verification of the underlying documents, at least on a test check basis. In the present case, the aforesaid documents are presently not available with the Appellant. Further, in our view, the Assessing Officer would also be required to take into consideration the impact of the Allowance for Contingencies taken into account by valuing the Work-in-Progress. On perusal of material placed before us, it is clear that in support of the claim for foreseeable loss that Appellant had filed the project wise break-up showing unforeseeable loss for 30 projects and had provided computation of 4 ou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (mentioned in the list of 30 projects) which have not been completed till date, and (b) the projects which have been completed but entire Revenue has not been offered to tax till date. In terms of the aforesaid, Ground No. 3 raised by the Appellant is partly allowed. Ground No. 4 38. Ground No. 4 pertains disallowance of INR 1,50,000/- made under Section 40A(9) of the Act. 39. During the year, the Appellant paid INR 1,50,000/- to Utmal Employees Welfare Fund to provide for recreational activities for employees at Kansbahal Works, formerly known as Utkal Machinery Limited . The aforesaid payment was made in pursuance of a settlement under Section 18 of the Industrial Disputes Act, 1947. The contention of the Appellant was that the payment falls under the exception provided under Section 40A(9) of the Act as the same was made under the law for the time being in force . However, the Assessing Officer rejected the aforesaid contention of the Appellant and made the disallowance invoking provision of Section 40A(9) of the Act. 40. In appeal, the CIT(A) confirmed the disallowance by following the decision of his predecessor in the case of the Appellant for the Assessment Year 2003-04. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has directed the Assessing Officer to allow deduction of Rs. 1,00,000/- . Similar disallowance was considered by the Tribunal in ITA No. 2200/Mum/2000 at para 12 and 13 of its order at page 5 6, wherein the Tribunal has followed its own decision in ITA No. 3943/Mum/98. Facts and circumstances being identical, respectfully following the decision of the Tribunal in the assessee‟s own case for earlier years, we direct the Assessing Officer to delete the addition of Rs. 6,32,725/-. Ground no. 4 is accordingly allowed. 5.5 Facts being identical, we follow the above decision of the Coordinate Bench and delete the disallowance of Rs. 2,82,665/- made by the AO. Thus the 4th ground of appeal is allowed. 42. Therefore, respectfully following the above decisions of the Coordinate Bench of the Tribunal in the case of the Appellant for the preceding assessment years, we delete the addition of INR 1,50,000/- made under Section 40A(9) of the Act. Accordingly, Ground No. 4 raised by the Appellant is allowed. Ground No. 5 43. Ground No. 5 pertains to addition made by the Assessing Officer by reducing the claim of depreciation made by the Appellant by INR 4,11,94,218/-. 44. The facts relevant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omputed by the Appellant. Thus, delete the addition of INR 4,11,94,218/- made by the Assessing Officer on account of reduction of depreciation claim made by the Appellant. Accordingly, Ground No. 5 raised by the Appellant is allowed. Ground No. 6 48. Ground No. 6 raised by the Appellant is directed against the order of CIT(A) confirming the disallowance of interest and other expenses made by the Assessing Officer under section 14A of the Act. 49. The relevant facts in brief are that in the return of income the Appellant had claimed exemption in respect of dividend and interest income from equity shares/Units of mutual funds and tax free bonds. During the assessment proceedings, the Appellant submitted that the investments from which exempt income was earned by the Appellant during the relevant previous year were made out of Appellant's own funds and not out of any borrowed funds. The Assessing officer was not convinced with the aforesaid submission and invoked provisions of Section 14A of the Act to disallow INR 3,18,00,000/- holding the same to be interest expenditure incurred by the Appellant in respect of interest bearing funds utilized by the Appellant for making investment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entative placed reliance on the order passed by the CIT(A) and submitted that this was not a case of enhancement without issuance of notice. The Appellant was clearly asked to show cause why higher disallowance should not be made. 54. We have heard the rival submission and perused the material on record. It emerges that the Appellant had claimed exemption in respect of income earned from investment in equity shares, mutual funds and tax free bonds during the relevant previous year. The Assessing Officer noticed that the Appellant had borrowed fund of INR 1,324.35 Crores out of which INR 921.27 Crores were borrowed for specific projects while INR 142.32 Crores were borrowed for general corporate purpose. Further, the Appellant had incurred interest expenditure of INR 27.60 Crores in respect of funds borrowed for general corporate purpose. The Assessing Officer was of the view that the interest bearing funds for general corporate purpose were utilized for making investment yielding exempt income during the relevant previous year. Therefore, the Assessing Officer made a disallowance of INR 3.18 Crore. The CIT(A) enhanced the disallowance to INR 12.24 Crores. While arriving at the enha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of sales tax deferred loan availed under the sales tax laws. These liabilities were payable at a future date. The difference (INR 4,25,44,104/-) between the actual liability and the net present value of the said liability on the date of transfer was accounted for and included in Schedule 'L' under the heads Gains on extinguishment of debt . The Appellant treated said gains as Capital receipt while the Assessing Officer and the CIT(A) held it to be taxable revenue receipt. Therefore, the Appellant carried the issue in appeal before the Tribunal. 57. During the course of hearing, both the sides are agreed that identical issue stand decided in the case of the Appellant in cross-appeals pertaining to Assessment Year 2000-01, 2001-02 and 2002-03. 58. We have perused the above decision of the Tribunal. The relevant extract of the common order, dated 11/04/2022, of the Coordinate Bench of the Tribunal in the case of the Appellant for the Assessment Years 2001-02 and 2002-03 [ITA No. 6908 6878/Mum/2012, 2117 2284/Mum/2013] capturing the factual background and the issue under consideration reads as under: 27. Ground 7 pertains to treatment of extinguishment of sales-tax deferred l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .O made addition u/s 41(1) of the Act, while in the appellate proceeding, ld. CIT(A) upheld the said addition u/s 28(iv) of the Act and not u/s 41(1) of the Act. The arguments of the Ld. counsel before us are that the said assignment of sales tax liability by the assessee is neither income u/s 41(1) of the Act nor benefit or perqs 28(iv) of the Act. In defense of his arguments the Ld. CIT(A) relied on the decision of Cable Corporation of India Ltd., Vs. DCIT(supra). In the present case, we find that provisions of Sec. 41(1) of the Act are not applicable as the necessary conditions as envisaged in the said section are not fulfilled namely the assessee has (i) not obtained any amount in respect of loss or expenditure; (ii) nor any benefit in respect of trading liability by way of remission or cessation. The first 36 condition of obtaining an amount is obviously not applicable as the assessee has paid an amount for discharge of a future liability while the issue as to the applicability of the second condition of obtaining a benefit‟ is now settled by the decision of the Apex Court in the case of CIT vs. Balkrishna Industries Ltd. 88 taxmann.com 273 (SC) wherein the Supreme Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ision of section 41(1) of the Act is not applicable. The sales-tax originally collected by the assessee was an expenditure which has been allowed to the assessee by treating it as a deemed loan. Once the said amount has been treated as a loan, it loses its characteristic of sale-tax liability. Such deemed loan is not a loss or expenditure or a trading liability and, hence, does not come within the ambit of section 41(1) of the Act. 38. Similarly the difference of Rs. 51.61 Crores arising out of assignment of sales tax liability of Rs.71.34 Crores to be paid in future date at its present value of Rs. 19.73 Crores has not resulted in any benefit or perquisites and thus not covered by the provisions of section 28(iv) of the Act as section 28(iv) proposes to tax benefit‟ or perquisite‟ arising from business of the assessee. In the present case the pre-payment of a deferred sales-tax loan liability at the net present value, does not result in any benefit‟ to the assessee. Besides the case of the assessee is squarely covered by the decision of the coordinate bench in Cable Corporation of India Ltd. 39 vs. Deputy Commissioner of Incometax(supra) wherein on identical fact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. In the present case, the 41 allegation of the Assessing Officer and the Commissioner of Incometax (Appeals) is that the provision of section 41(1) or section 28(iv) of the Act is applicable which issue is not there before the Hon‟ble Supreme Court. Further, the Supreme Court has held that the amount is treated as income of the assessee as the assessee had become richer by the amount which is transferred to the Profit Loss Account. In the present case, the assessee has discharged its complete obligation by paying the net present value of the obligation and, therefore, there is no question of the assessee either becoming richer or poorer on such transaction. The Apex Court in the cases of Balkrishna Industries Ltd. (supra) and Mahindra Mahindra Ltd. (supra) has specifically dealt with the provisions of section 41(1) and section 28(iv) of the Act and, therefore, the said decisions are applicable to the case of the Appellant. So far as the decision in Solid Containers Ltd. v DCIT (supra) is concerned, the counsel of the assessee submitted that the finding in this decision by the Bombay High Court is contrary to the decision of the Apex Court in Mahindra Mahindra Ltd. (supra) a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... question of applicability of section 41(1) does not arise. The High Court has, therefore, dismissed the appeal of the Revenue. Although the High Court has noted that if the loan was received for trading purposes, the provision of section 41(1) of the Act may be applicable; however, as the fact in the present case was not a case of receipt of loan towards 44 the trading purposes, the High Court has not considered whether other conditions of section 41(1) are fulfilled or not. In the case of Indian Seamless Steels Alloys Ltd. vs. ITO (supra). The Tribunal in paragraph 16 of the order has noted that the assessee therein has transferred its deferral sales-tax loan to third party for a consideration which is higher than the amount payable to the Sales-tax Deptt. The Tribunal has further noted that the assessee therein has sold its sales-tax incentive‟ and what it has received is not sales-tax benefit but sale consideration on transfer of its entitlement and such sale consideration is a benefit directly arising from business and is, therefore, revenue receipt. In the present case of the Appellant, the Appellant has, in fact, paid a consideration to the other Company for taking over ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed by the TPO regarding the payment of INR 20,58,35,000/- by the Appellant to L T Ceylinco, the Appellant explained that the aforesaid reimbursements were the amounts incurred by L T Ceylinco by way of cost overrun expenses pertaining to the execution of power project in Sri Lanka. Since the Appellant held 80% of the equity share capital but reimbursed 100% of the aforesaid overrun expenses, the TPO was of the view that the cost sharing arrangement was not equitable. Accordingly, the Appellant was required to explain the following vide office letter dated 27/11/2006: Sub Information to be furnished in connection with the proceedings under Section 92CA) of the IT Act, 1961-reg.-A.Y.2004-05. All details be provided as per serial number of this letter. 1. Specify the percentage of equity walling you have in your Srilanka AE in the FY 2003-04. 2. Specify the percentage of holding of others in this entity 3. Specify the quantum of loss borne by you for this entity 4. What is the basis of bearing these losses? 5. Since in a third party situation you would bear the profits and losses in proportion to your equity holding losses as have occurred should also have been borne in this ratio In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or procurement and construction of mega power project in Srilanka was actually intended to be awarded by AEs Kelantissa to the company on lumpsum turnkey basis However, for certain reasons an understanding was reached with the client to Split the total contract into two parts viz Supply Contract and service contract. As aforesaid supply portion was executed by the company and for the service portion to he performed onshore, comprising of installation erection and commissioning, it was decided by the company to be subsidiary company (AE) in Srilanka to execute the said job. in view of the above arrangement, an Umbrella Agreement was entered into by the client with the company and its AE whereby the singular liability for the satisfactory completion of the entire contract including the ervice component was fixed on the company as on overall EPC contractor. It is worthwhile here to note that the minority shareholder in the AE was not interested in diversifying into construction and accordingly in the execution of the power project in Srilanka. An agreement was therefore reached with Ms Ceylinco Insurance Co Ltd that the execution of the AESK power project would be the sole responsibil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consideration, the appellant company has reimbursed expenditure amounting to Rs.2058.35 lacs incurred by the AE, being cost overrun on execution of power project in Srilanka. While passing the assessment order u/s 92CA(3), the Transfer Pricing Officer has disallowed 20% of the cost overrun i.e. Rs. 411.67 Lacs and restricted the cost overrun to 80% considering appellant's shareholding in AE. In this regard, we wish to submit as follows: Appellant further contended M/s. AES Kelantissa (Pvt.) Ltd. ( the client ] was a company incorporated under the laws of Srilanka. The contract for procurement and construction of mega power project in Srilanka was actually intended to be awarded by the client to the appellant company on lumpsum turnkey basis. However, at the time of entering into contract, the total contract was split into two parts viz. Supply Contract and Service contract. The supply portion was given to the appellant company and for the service portion to be performed onshore comprising of installation, erection and commissioning, the contract was given to the AE in Srilanka. Appellant submitted that as per the Guarantee and co-ordination Agreement dated 15.6.2000 entered int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 094/L T/2005-CIT(A) dt. 02.12.2009 instead of correct disallowance amount of Rs. 411.67 Lacs. The copies of contract with client and the relevant Schedule 2 indicating the contract value were submitted. 67. However, the above submissions did not find favour with the CIT(A) who agreed with TPO/Assessing Officer and vide order, dated 12/08/2013, inter alia, held that as per CUP method the Appellant should have shared the project cost overrun expenses to the extent of equity shared in the L T Ceylinco. The CIT(A) also rejected the contention of the Appellant that the reimbursement of the project cost overrun expenses was a business decision taken on account of commercial expediency and therefore, the reimbursement of 100% of project cost overrun expenses should be accepted as being on arm s length. 68. Being aggrieved, the Appellant has preferred appeal before the Tribunal seeking deletion of transfer pricing adjustment of INR 4,11,67,000/-. 69. We have heard the rival submissions and perused the material on record. The admitted factual position is that the Appellant held 80% equity shares in L T Ceylinco, a Sri Lankan Company while the balance 20% of the equity share were held by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... annot replace the Appellant in the decision making process and question the business decision made by the Appellant. However, at the same time, the Appellant cannot avoid applicability of transfer pricing provisions triggered on account of the aforesaid business decision by simply pleading that the aforesaid business decision was taken on account of commercial expediency. 71. As regards the contention of the Appellant that the remittances were made to L T Ceylinco after obtaining necessary approvals from RBI and therefore, the remittances should be considered as being on arm s length is concerned, we find that the Mumbai Bench of the Tribunal has, in the case of Sara Lee TTK Ltd. Vs. DCIT Range - 10(2), Mumbai, [ITA No. 376/Mum/2012, dated 24/08/2016] cited by the Ld. Departmental Representative, held as under: 12. We have considered the rival submissions and perused the relevant finding given in the impugned orders. We had also deliberated on the judicial pronouncements referred by lower authorities in their respective orders as well as cited by ld. AR and DR during the course of hearing before us, in the context of factual matrix of the case. From the record we found that the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ernational transaction of 'royalty' with independent comparables following suitable methods prescribed under the Act and on its compliance, the AO after giving adequate opportunity to the assessee shall decide this issue in accordance with the TP regulations. 72. To the same effect is the decision of Delhi Bench of the Tribunal in the case of Assistant Commissioner of Income Tax Circle 4(1) Vs. Johnson Matthey India Pvt. Ltd.: [2013] 36 taxmann.com 356 (Delhi- Trib.) where identical contention of the assessee to accept the rate of royalty specified for remittances under automatic route by RBI as being arms length rate of royalty was rejected by the Tribunal. 73. We concur with the above decisions of the Tribunal, wherein it has been explained that the approvals given by RBI emanate from other legislation or policy and are not in relation to determination of Arm's Length Price. 74. As regards, the judgment of Hon ble Bombay High Court in the case of CIT-10 Vs. SGS India Pvt. Ltd. Income Tax Appeal No. 1807 of 2013, dated 18/11/2015, on which reliance was placed on behalf of the Appellant, is concerned, we find that the same had no application in the facts and circumstanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to any substantial question of law. Thus not entertained. 12. The appeal is dismissed. No order as to costs. 75. It would be pertinent to note that in the above case as per the transfer pricing study conducted by the Assessee the arm s length rate of royalty determined by the assessee was 10% whereas the assessee had paid royalty @ 3% which was much lower than the prescribed rate specified in Clause IV of Press Note 9 (2000 Series) as well as the aforesaid rate of 10%. There is no such general threshold rate prescribed by RBI for project cost overrun expenses. In our view, the reliance placed by the Appellant on the aforesaid judgment of Hon ble Bombay High Court is misplaced in view of the fact that the approval granted by the RBI and other authority to the Appellant for making the remittance of project cost overrun expenses was not based upon a threshold rate accepted or determined by RBI/such authority which could have been regarded as an independently determined price for benchmarking the remittances. In any case going by the relevant transfer provisions contained in the Act and rules made thereunder, the Appellant is required to independently benchmark its international trans ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r and therefore, the Appellant cannot now be heard to contend that the transfer pricing provisions were not applicable to the aforesaid transaction. Further, even as per the provisions contained in Section 92 of the Act, as applicable on 15/06/2000, the Assessing Officer could have made identical transfer pricing adjustment. 76.2. On perusal of the provisions contained in Chapter X Special Provisions relating to Avoidance of Tax we find that no exception has been carved out in relation to International Transactions pertaining to or arising out of contracts/agreements/arrangements which were executed/existing prior to 01/04/2002. Further, on a combined reading of the provisions contained in Section 92 to 92F of the Act, as applicable at the relevant time, we are of the considered view that the expression International Transactions as defined in Section 92B of the Act cannot be restricted to the transaction of executing the contract/agreement between the Associated Enterprises and must be understood to mean/include transactions undertaken by the Associated Enterprises in discharge of their corresponding obligations under such contract/agreement during the relevant previous year. On p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntained in Section 50C of the Act were not applicable to the transaction of sale of property. The relevant extract of the decision of the Tribunal reads as under: 8.10 The periods of the impugned transaction have fallen in the transition phase of law, i.e., the sale agreement was entered before the introduction of s. 50C and the registration was completed after the introduction of said section. As pointed out by Hon'ble apex Court in the case of A (supra), the assesses have only fulfilled the contractual obligation imposed upon them by virtue of the sale agreement. The ratio of the decisions in the cases of Nirmal Textiles (supra) and Laxman Singh (supra) is that the character of the transaction vis-a-vis IT Act should be determined on the basis of the law that prevailed on the date the transaction was initially entered into. However actual computation of income and income-tax would be made as per the law existing on the 1st April of the relevant assessment year. If we look at the impugned transactions from the point of view of this legal proposition, we notice that the provisions of s. 50C cannot be applied to the sale agreement as the said section was not available in the sta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e said transaction was assessable in the asst. yr. 1975-76. On the date of transfer, the IT Act provided for treatment of immovable property, which was held for less than 24 months, as short-term capital asset. Subsequently, consequent to an amendment made the Finance Act, 1973 w.e.f. 1st April, 1974, the period of holding upto which the capital asset would remain as short-term capital asset was extended to 60 months instead of 24 months. The plots were held by the assessee therein for more than 24 months but less than 60 months. While the assessee claimed the gain on sale of plots as long-term, the AO treated the same as short-term. The Hon'ble Gujarat High Court held that the question whether the said transfer is of long-term capital asset or short-term capital asset will have to be determined as on the date of taxable event i.e., the date of transfer as per the law existing on the date. (b) CIT v. Laxman Singh (supra). In this case the assessee sold certain jewellery between 29th March, 1972 to 31st March, 1972. On those dates, the definition of 'capital asset', for the purpose of assessing the capital gain, did not include jewellery. However, w.e.f. 1st April, 1973 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llant on the aforesaid three issues, the CIT(A) upheld the order passed by the Assessing Officer. Being aggrieved, the Appellant has carried the issues in appeal before the Tribunal. 78. During the Course of hearing both the sides agreed that the above issues are recurring in nature and stand decided by the Tribunal in the case of the Appellant for the preceding assessment years. 79. On perusal of the common order, dated 29/10/2020, passed by the Tribunal disposing off the cross appeals (ITA No. 3076/Mum/2012 3573/Mum/2012) filed in the case of the Appellant for the Assessment Year 2000-2001, the Tribunal has allowed the overturned the decision of the Assessing Officer and CIT(A) and held that net profits were to be reduced while computing profits of the business for the computation of deduction under Section 80HHC of the Act. Whereas, the other two issues were remanded back to the file of the Assessing Officer for adjudication as per directions in the earlier years. The aforesaid decision of the Tribunal was again followed by the Tribunal in the case of the Appellant for the Assessment Year 2000-2001 (ITA No. 6908/Mum/2012) and 2001-02 (ITA No. 2117/Mum/2013) decided by common ord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of the Special Bench of the Tribunal in the case of Assistant Commissioner of Income Tax, Circle 17(1), Delhi vs. Vireet Investments Ltd.: [2017] 58 ITR(T) 313 (Delhi-Trib.) (SB) on the basis of audited financial statements of the Appellant. In terms of the aforesaid, Ground No. 11 raised by the Appellant are allowed for statistical purposes. Additional Ground 1 2 82. By way of the Additional Grounds No.1 and 2 raised by the Appellant vide letter, dated 14/11/2018, the Appellant has claimed that while determining book profits under Section 115JB of the Act the Assessing Officer should have reduced deduction under Section 80HHC and 80HHE of the Act as computed on the basis of profits as per Profit Loss Account as against profits of business and profession computed under the normal provisions of the Act. Both the sides agreed that identical additional ground raised by the Appellant in appeal pertaining to preceding assessment years were admitted by the Tribunal. On perusal of the additional ground we find that the additional ground raised by the Appellant is a legal ground which can be adjudicated after taking into consideration material on record without inquiring into new facts. ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
