9911796707
TMI Blog2024 (7) TMI 829X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 - 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 invol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment 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 CI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earned CIT(A) erred in confirming the disallowance 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 pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on under Section 80HHC and 80HHE of the Act, respectively 6. Being aggrieved, the Appellant preferred appeal before the CIT(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 busines ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his ground is directed against the disallowance of expenditure incurred towards payment of commission to certain parties. From the perusal 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. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , is taken into account, the net result of the adjustment would be as under: Particulars Amount (INR) Provision made in valuation of closing construction work-in-progress 54,16,82,032 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 differenc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iods over the duration of the contract. 2.0 Revenue recognition 2.1 Two principal methods followed for recognizing the revenue are: a) The completed contract method b) The percentage completion method 2.2 Under the completed 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 contra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... total contract value. (c) Claims made in respect of escalations are accounted only on being admitted by the customers. (d) Revenue is recognized on the basis of value of work certified by the customer. Advances / Progress payments received against "running bills" are not considered as 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stponed to that year. It can be observed from the valuation policy followed by the company that as an ongoing business, there will be many jobs just taken up for construction and other hand, many jobs will be completed. The cycle will continue every year without having any material impact on the reported profits. 2.6.2 The amount of Contingencies allowance is quantified by applying following 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fficer disallowed the deduction for provision for foreseeable losses of INR 9,79,40,038/- holding the same to be contingent in nature. 26. In appeal, it was contended on behalf of the Appellant that the provision has been created in accordance with the revised Accounting Standard - 7 on Construction Contracts issued by ICAI with effect from 01/04/2003 the aforesaid Accounting Standard provided that in cases were probability of the total cost exceeding the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ver, merely because the change in method of accounting is bona fide, it would not lead to the inference that the income is also deducible properly under the Income-tax Act. This aspect is very evident from 1st proviso to section 145 as it stood prior to amendment 1995 with effect from 1-4-1997 which reads as under:-- "Method of accounting-(1) Income chargeable under the head "Profits and gains of business or profession" or "Income from other sources" shall be computed in 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 anticip ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re, ground No.1 of A.Y. 2002-03, and Ground No.2 of A.Y. 2003-04 of the assessee are allowed." (Emphasis Supplied) 30. On perusal of above, it was clear that while in principle the Tribunal had accepted the contention of the Assessee in the above cases that deduction for foreseeable losses estimated on a reasonable basis could be allowed as deduction. However, in both the cases, the issue is remanded back to the file of Assessing Officer for computation and quantification. In the case of Mazgaon Dock Ltd. (supra) 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m currently working in the capacity of Joint General Manager, Finance & Accounts with Larsen & Toubro Limited. I do hereby solemnly Affirm that I am aware of the facts pertaining to the appeal proceedings specifically in respect of the claim for "foreseeable loss" by the Company for Assessment Year 2004-05 and on the basis of the same I state as under:- a. The Assessment proceedings for Assessment Year 2004-05 took place between the Year 2005 and 2006. b. During the course of the Assessment Proceedings vide letter dated 17th November 2006, the methodology adopted for computing the foreseeable loss was explained to the Assessing Officer along with 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 disal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is not material. Further, only, the foreseeable loss of the project is disallowed. The loss, to the extent of actual expenditure of the project has been allowed by the Assessing Officer. In doing so, the Assessing Officer has accepted the estimated cost of the project as per the job cost report. I say that the computation of foreseeable loss is also based on the same estimated cost of the project as per the job cost report which has been accepted by the Assessing Officer. j. I further say that the issue of foreseeable loss is only a timing difference as by the end of the project, only the actual profit / loss of the project is offered to tax/claimed as loss by the Company. I hereby 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 'sam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Assessing Officer or the CIT(A). In our view, the question of drawing any inference does not arise in view of the fact that the Assessing Officer rejected the claim of foreseeable losses made by the Appellant and therefore, as a matter of fact the occasion to examine the computation/working of the same did not arise. 36. Further, in our view it cannot be said that the Assessing Officer had accepted the computation of foreseeable losses. We note that as per paragraph 2.1 L&T's Accounting Policy Re: Construction/Project Activity (for short 'Accounting Policy') dealing with Job (WIP Valuation), the difference between the work-in-progress figures as on the opening and the closing days of the accounting 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 appl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spect of our various construction jobs, we have considered the costs attributable to such jobs in accordance with the provisions of the revised AS-7. The said provision has been made by us in accordance with the mandatory requirement of the Accounting Standard issued by the ICAI and followed consistently. You will thus appreciate that the practice followed by the assessee is consistent with para 6(c) of AS-I notified u/s 145(2)." 37. We note that the Assessing Officer has not made any addition on account of difference of valuation of Work-in-Progress and therefore, it can be said that the Assessing Officer has accepted the computation of Allowance for Contingencies. This is in line with the decision of the Tribunal in the case of Mazgaon Dock Ltd. (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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e losses made by the Appellant merely resulted in timing difference as by the end of the project entire/actual profits of the project were offered to tax cannot be accepted in absence of any material on record supporting the same. Accordingly, we direct the Appellant to file relevant documents/details before the Assessing Officer to show that all the 30 projects have been completed and entire revenues from the 30 projects under consideration have been offered to tax leading to no leakage of revenue pertaining to the projects on overall basis. We direct the Assessing Officer to verify the details/documents submitted by the Assessing Officer and if satisfied, restrict the disallowance on account of unforeseeable losses pertaining to (a) the projects (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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... counsels of the assessee rely on the order of the Tribunal in its own case for the AY 1994-95 to AY 1997-98 and submit that the issue has been decided in favour of the assessee by the above decisions. On the other hand, the Ld. DR supports the order passed by the Ld. CIT(A). 5.4 We have heard the rival submissions and perused the relevant materials on record. The ITAT „J‟ Bench Mumbai in assessee‟s own case for the AY 1997-98 (ITA No. 2891/Mum/2001) held : "Ground No. 4 relates to the disallowance of Rs. 6,32,725/- on account of contribution to Marine Officers Welfare Fund. This issue has been discussed by the Assessing Officer at para 18 page 9 of this order and the same has been considered by the CIT(A) at para 13 page 5 of his order, wherein the CIT(A) 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 y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ery 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 dated 11/04/2022, passed in a batch of appeals including the appeal preferred by the Appellant for the Assessment Year 2001-02 (ITA No. 6908/Mum/2012) and 2002-03 (ITA No. 2117/Mum/2013). Respectfully following the aforesaid decision of the Tribunal, we overturn the decision of the Assessing Officer and the CIT(A) directing the Assessing Officer to accept the depreciation as computed 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntained in Rule 8D were held by the CIT(A) to be not applicable for the Assessment Year 2004-05, the CIT(A) has, in effect, applied the same for making disallowance towards interest and other expenses under Section 14A of the Act (c) In the case of the Appellant for the Assessment Year 1999-2000 [ITA No. 6257/Mum/2011, order dated 28/03/2018] this identical issue has been decided in favour of the Appellant and the disallowance made by the Assessing Officer under Section 14A of the Act has been deleted by the Tribunal by accepting the contention of the Appellant that the investments have not been made out of borrowed funds by placing reliance on the judgment of the Hon'ble Bombay High Court in the case of HDFC Bank Ltd. v. DCIT [2016] 67 taxmann.com 42 (Bom). 53. Per Contra, the Learned Departmental Representative 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 e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... disallowance of interest expenses under Section 14A of the Act was not warranted on the ground that separate accounts were not maintained by Appellant for investments and other expenditure incurred for earning tax-free income. Accordingly, we delete the addition/disallowance made by the Assessing Officer and the CIT(A). Disallowance of INR 12.24 Crores made under Section 14A of the Act is deleted. Ground No. 6 raised by the Appellant is allowed. Ground No. 7 55. Ground No. 7 raised by the Appellant is directed against the order of CIT(A) confirming the assessment order to the extent it holds that extinguishment of sales tax deferred loan liability results in a taxable revenue receipt in the hands of the Appellant. 56. During the year under reference, the Appellant assigned/repaid certain liabilities in respect 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 trea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her entity. In coming to this conclusion, the A.O relied on the decision of CIT vs. Sunderam Iyengar & Sons Ltd. (supra). wherein the assessee used to receive deposits in the course of its trading transaction on sale of Coca Cola in glass bottles of, etc. which are refundable on return of the said bottles. wherein the order of the Supreme Court has held that liability needs to be treated as income of the assessee u/s 41(1) of the Act. The ld. CIT(A) in the appellate proceeding affirmed the order of AO by holding that the said takeover of deferred sales tax liability to be paid in future is taxable u/s 28(iv) of the Act, by relying on the decision of CIT(A) Vs. Sundaram Iyangar & Sons Ltd., (supra) and also the decision of the Jurisdiction High Court in the case of Solid Container Ltd., Vs. DCIT (supra). In this case, we note that the A.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. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... liability for the reason that the assignment of the liability is to a third party whereas qua the Sales-Tax Department the assessee continues to be liable to pay the said amount and thus as for as the Sales-Tax Department is concerned, there is no remission or cessation of a liability. The case of the assessee finds support from the decision of the Apex Court in CIT vs. S.I. Group India Ltd., (Supra) wherein the Apex Court held that when the Sales-tax Department has not accepted the pre-payment, it cannot be a case of cessation or remission of a liability. In the present case also, the assignment has not been accepted by the Sales-tax Department and, therefore, there is no question of cessation or remission of the liability. Besides the 38 deemed loan from the Sales-tax Department is not a loss or expenditure or a trading liability and, therefore, the provision 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 exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the Profit & Loss Account as no longer payable to the said customers. On these facts, the Apex Court held that the amount was received by the assessee in the course of trading transaction and the same is chargeable to tax as trading receipts when the said amount becomes the assessee‟s own money. The Apex Court further held that because of the trading transaction, the assessee has become richer to the extent of the amount transferred to Profit & Loss Account and, hence, the amount so transferred is to be treated as income of the assessee. In the present facts are distinguishable and, therefore, the decision of the Apex Court is not applicable as the Supreme Court was neither concerned with section 28(iv) or section 41(1) of the Act, but with the issue of whether the amount received by an assessee in the course of a trading transaction, should be treated as income of the assessee or not. 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tising Pvt. Ltd.(supra) are altogether different vis a vis the facts in the present case as in the case before the High Court, there was actual write off credit balance (trading liabilities) and, accordingly, the High Court held that the assessee therein had received a benefit in respect of a trading liability which came within the ambit of section 41(1) of the Act whereas in the present case, there is no question of any benefit being received by the Appellant as the appellant has discharged the net present value of a future liability not can the present case be said to be of remission or cession of the liability. Therefore, this decision is clearly inapplicable to the facts of the present case. In the case of CIT vs. ICC India Pvt. Ltd. (supra), the Hon‟ble High Court has held that share application amount was a capital receipt and was never received towards trading purpose and, therefore, the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 8 raised by the Appellant is directed against the order of CIT(A) confirming the transfer pricing adjustment of INR 4,11,67,000/-. 61. During the assessment proceedings a reference was made to the Transfer Pricing Officer (TPO) under Section 92CA(1) of the Act for the computation of arm's length price in relation to international transactions entered by the Appellant with its Associated Enterprises (AEs). 62. The TPO noted that during the relevant previous year the Appellant has reported a international transaction being payment of INR 20,58,35,000/- by the Appellant to its AE in Sri Lanka [i.e., Larsen & Toubro Ceylinco (Pvt) Ltd.] which was claimed by the Appellant to be reimbursement of costs. The TPO noted that the Appellant held 80% equity Larsen & Toubro Ceylinco (Pvt) Ltd. [for short 'L&T Ceylinco'] while the balance 20% equity shares were held by Ceylinco Insurance Co Ltd. Sri Lanka. 63. In response to query raised 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 po ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted resources, the company had to reimburse the expenditure amounting to Rs 2,058.35 lacs during the year under reference It is worthwhile here to note that the said reimbursement was subject to the decision of working group committee (comprising of EXIM Bank RBI ECGC SCGB Credit Lyonnacs and the company as its members) and the final approval of the Reserve Bank of India. The copies of all the relevant correspondence in this regard, including the minutes of the working group meeting, approval of RBI statement showing comparison of estimated and actual cost of project and the audited statement of cost overrun incurred on the project are enclosed as part of our documentation submitted to your goodself‟s office earlier. The AE was formed with the main objective to undertake the business of cement. As mentioned earlier. AE is a subsidiary the company with only minority equity stake of a local Srilankan Company, namely Ceylinco Insurance Co Ltd. The contract for 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 w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er pricing adjustment of INR 4,11,67,000/- (i.e., INR 20,58,35,000 less INR 16,46,68,000) vide order dated 30/11/2006, passed under Section 92CA(3) of the Act. The aforesaid transfer pricing adjustment was incorporated by the Assessing Officer in the Assessment Order, dated 05/12/2006, passed under Section 143(3) of the Act. 66. Being aggrieved, the Appellant carried the issue in appeal before the CIT(A). Before the CIT(A), the Appellant made detailed submissions which have been summarized in paragraph 15.3 of the order passed by CIT(A) which read as under: "15.3 The submission of the appellant are summarized as under: Appellant submitted that during the financial year 2003-04, the appellant company held 80% of the equity shares of Larsen & Toubro Ceylinco (Pvt.) Ltd. Srilanka ["AE"], a subsidiary of the appellant company. Balance 20% of the equity shares in AE was held by Ceylinco Insurance Company Limited, Srilanka. Appellant contended that during the assessment year under 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ]. The said reimbursement was subject to the decision of Working Group Committee (comprising of EXIM Bank, RBI, ECGC, 8CGB, Credit Lyonnacs and the appellant Company as its members) and the final approval of the Reserve Bank of India. The copies of the relevant correspondence in this regard viz. statement showing comparison of estimated and actual cost of project, the minutes of the Working Group Meeting, approval of RBI and the bank advice for remittance were enclosed as Annexure 6.3. In view of the above, it was requested to direct the assessing officer to delete the adjustment made to the reimbursement of cost overrun to the AE. With respect to the excess adjustment of Rs. 66 lacs by the Assessing Officer, it was submitted that the said adjustment was already rectified vide order u/s 154 dt. 04.04.2007. Copy of the rectification order is enclosed as Annexure 6.4. Further it was submitted that they erroneously mentioned Transfer Pricing Adjustment amount as Rs. 2058.35 Lacs in Annexure 1 to letter no. TAX/5094/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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ractual obligation to make the aforesaid remittances to L&T Ceylinco. 70. We have perused the Guarantee and Coordination Agreement, dated 15/06/2000. Even if we accept the contention that the Appellant was responsible for the execution of power project as a whole, it cannot be said that the Appellant was under obligation to bear 100% of the project cost overrun expenses. It is the contention of the Appellant that the decision to pick up 100% of the project overrun cost was taken by the Appellant on account of commercial expediency. In our view, though it can be said that the Appellant was required to provide funds to L&T Ceylinco to meet the project cost overrun expenses, the decision to opt for not providing funds by way of loan or capital but to directly reimburse the project cost overrun expenses was an option exercised by the Appellant. We agree with the contention of the Appellant that, as held by the Hon'ble Bombay High Court in the case of CIT-LTU Vs. SI Group India Ltd. : [2019] 265 Taxmann 204 (Bombay), the TPO cannot replace the Appellant in the decision making process and question the business decision made by the Appellant. However, at the same time, the Appellant cann ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... P and the RBI are for different purposes, like for promotion of industries, management of foreign exchange etc. and it varies in accordance with the business practices prevalent at different times which are clear from the RBI approvals themselves. Going by the relevant TP provisions as enshrined under the Act and relevant Rules, it is mandatory that the appellant has to independently benchmark its international transaction with independent comparables so as to arrive at arm's length price, which has not been made in this case. The comparability analysis is the substratum of determining the ALP, which has not been done by assessee at any stage. At the very same time we found that the revenue authorities have not properly appreciated the relevant clauses of the trademark licence agreement, precisely the clauses which were highlighted by ld. AR during the course of hearing before us. Therefore, in the interest of justice and fair play, this case should be restored back to the file of AO, ho shall require the assessee to bench mark its international transaction of 'royalty' with independent comparables following suitable methods prescribed under the Act and on its complianc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 00 series). The aforesaid clause IV of the Press Note 9 (2000 series) allows payment of Royalty upto 8% on export sales by wholly owned subsidiaries to its offshore parent companies. 10. On the last occasion that is on 23 September 2015 Mr. xxx, learned Counsel for the Revenue sought time to take instructions on whether Clause IV as reproduced hereinabove is applicable in the case of respondent-assessee. Today Mr. xxx, on instructions, states that the respondent-assessee is covered by clause IV of the Press Note 9 (2000 series) dated 8 September 2000. Therefore, the bench marking of the Royalty paid at 3% by the respondent to arrive at the ALP is much below the Royalty for trade mark / brand name which is allowed to be paid by wholly owned subsidiary to its offshore parent company. 11. In view of the above, the grievance of the Revenue that the Tribunal ought to have lowered the bench marking on application of Clause III of the Press Note 9 (2000 series) dated 8 September 2000 does not survive. Accordingly, question as proposed does not give rise to any substantial question of law. Thus not entertained. 12. The appeal is dismissed. No order as to costs." 75. It would be perti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 004-05 were inserted by the Finance Act, 2001 with effect from 01/04/2002, whereas the relevant being (a) The Installation, Erection and Commissioning Contract entered into between the Client, and L&T Ceylinco, (b) Supply Contract between the Client and Larsen and Toubro Limited and (c) Guarantee and Coordination Agreement between the Client, Larsen and Toubro Limited and L&T Ceylinco, were executed on 15/06/2000 (i.e. prior to 01/04/2002). In support reliance was placed upon the decision of Visakhapatnam Bench of the Tribunal in the case of M. Siva Parvathi & Ors. Vs. Income Tax Officer: [2011] 7 ITR(T) 468 (Visakhapatnam). 76.1. Per contra, the Ld. Departmental Representative submitted that no such contention had been raised by the Appellant before the Assessing Officer or the CIT(A) and therefore, the Appellant cannot be permitted to raise the same for the first time during the course of hearing. Further, the Appellant had reported the reimbursement of project cost overrun expenses as international transaction undertaken during the relevant previous year and therefore, the Appellant cannot now be heard to contend that the transfer pricing provisions were not applicable to the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... & Ors. (supra) cited on behalf of the Appellant, we have also perused the same and are of the view that it does not advance the case of the Appellant. In that case the issue before the Tribunal was regarding the applicability of provisions of Section 50C of the Act inserted by the Finance Act, 2002 with effect from 01/04/2003. In that case, the Tribunal noted that the parties had entered into the agreement for sale of property and discharge their corresponding obligations prior to the introduction of the Section 50C of the Act. Only the registration of the sale deed took place after the insertion of Section 50C of the Act. The assessee in that case was able to justify the delay in registration of the sale deed by establishing that the delay was caused on account of dispute between the parties. Keeping in view, the objection of introduction Section 50C of the Act - which was to prevent under valuation of the real value of the property in sale deeds to avoid payment of tax/duty which was to be paid to the Government, the Tribunal concluded that the amended provisions contained in Section 50C of the Act were not applicable to the transaction of sale of property. The relevant extract ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deed was registered after the introduction of Section 50C of the Act. Reliance was placed on behalf of the Appellant on paragraph 8.1 of the aforesaid order (reproduced herein below) to contend that law that existed at the time of entering into transaction were prevail over this amendment subsequently made. "8.1 The next legal issue that was pressed into service by the learned Authorised Representative was that if there is a change of law between the dates when the transaction was entered into and the transaction was actually completed, then the subsequent amendment will not change the character of the transaction and consequently the law that existed at the time of entering into the transaction will prevail over the amendments subsequently made. The case law relied upon by learned Authorised Representative are discussed in brief. (a) CIT v. Nirmal Textiles (supra). In this case the assessee was following Samvat year as his accounting year, which ends on the Diwali day of every year. During the period between 26th Dec, 1973 and 25th March, 1974, he sold certain plots and the said transaction was assessable in the asst. yr. 1975-76. On the date of transfer, the IT Act provided ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... determination of arm's length price in case of International Transaction between Associated Enterprises with respect to arrangement for allocation or apportionment of cost or expenses. In view of the aforesaid, we reject the contention of the Appellant that the transfer pricing provision would not apply to the International Transaction reported by the Appellant during the relevant previous year for the reason the same arise out of a contract executed prior to the introduction of transfer pricing provisions. Ground No. 9 & 10 77. Ground No. 9 & 10 pertains to computation of deduction under section 80HHC & 80HHE of the Act, respectively. The Assessing Officer recomputed the quantum of deduction allowable under Section 80HHC/80HHE of the Act, inter alia, by (a) Reducing 90% of gross interest (as against net interest) from the profits of business, (b) Reducing 90% of the Miscellaneous Income of from the profits of business, and (c) by reducing the profits in respect of projects eligible for deduction under Section 80HHB while computing the profits of business. In appeal preferred by the Appellant on the aforesaid three issues, the CIT(A) upheld the order passed by the Assessing Offi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct for the purpose of computing book profit under Section 115JB of the Act. 81. While computing the book profit under Section 115JB of the Act, the Assessing Officer made an addition of INR 3,18,00,000/-, being the interest calculated notionally and attributed to the earning of exempt income by invoking the provisions of Section 14A of the Act. The CIT(A) confirmed the order passed by the Assessing Officer. Therefore, the Appellant carried the issue in appeal before us. While deciding Ground No. 6 above, we have deleted the addition made under Section 14A of the Act for the purpose of computing income under the normal provisions of the Act. Therefore, the addition made while computing books profits under Section 115JB of the Act does not survive. Accordingly, addition of INR 2,00,201/- made by the Assessing Officer while computing the 'Book Profits' under Section 115JB of the Act is deleted. Assessing Officer directed to compute the amount of disallowance under Section 14A of the Act to be added to the Book Profits in terms of Section 115JB of the Act read with Explanation 1(f) thereto as per the decision of the Special Bench of the Tribunal in the case of Assistant Commissioner o ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
