2016 (6) TMI 208 - AT - Income Tax

Tribunal dismisses Revenue's appeal, upholds deduction under section 80IA(5), disallows disallowance under section 14A

The Tribunal dismissed the Revenue's appeals and partly allowed the assessee's appeal. The assessment order dated 30.12.2011 was held to be invalid and ... Deduction under section 80IA(5) - initial assessment year under section 80IA - deemed associated enterprise under section 92A(2)(i) - reference to Transfer Pricing Officer (TPO) and extension of assessment time limit - assessment barred by limitation - CBDT Circular No.1/2016 - interpretation of initial assessment yearDeduction under section 80IA(5) - initial assessment year under section 80IA - CBDT Circular No.1/2016 - interpretation of initial assessment year - Allowability of deduction under section 80IA(5) in light of the assessee's option to choose an initial assessment year - HELD THAT: - The Tribunal upheld the Commissioner (Appeals) and followed the Pune Bench precedent and CBDT Circular No.1/2016 that an assessee has the option to elect an initial assessment year for claiming deduction under section 80IA and the term 'initial assessment year' means the first year so chosen. Once the initial assessment year is validly elected, only losses beginning from that initial assessment year are to be carried forward against the eligible business and losses of earlier years already set off against other income cannot be notionally brought forward to deny the section 80IA(5) deduction. Applying that principle to the facts, the Revenue's grounds attacking the allowance of the 80IA(5) deduction were dismissed. [Paras 6, 8, 9, 10, 11]Revenue's appeals against allowance of deduction under section 80IA(5) dismissed; assessee entitled to claim deduction after adopting the elected initial assessment year.Deemed associated enterprise under section 92A(2)(i) - reference to Transfer Pricing Officer (TPO) and extension of assessment time limit - assessment barred by limitation - Validity of reference to the TPO (and consequent extension of assessment time limit) by treating the purchaser as a deemed associated enterprise under section 92A - HELD THAT: - The Tribunal examined the definition of 'associated enterprise' in section 92A and the illustrative deeming clauses. It held that the foundational test is participation in management, control or capital; mere commercial contractual terms do not ipso facto create that participation. On the facts the assessee was a closely held Indian company with no participation by Cummins in its management, control or capital; the supply agreement's clauses (including a 30 day response to competitive offers) reflect commercial obligations and negotiation mechanisms and do not establish price control or de facto participation by Cummins in management or control. Exports to Cummins were about 18-19% of turnover and the TPO made no transfer pricing adjustment. Consequently, the precondition for invoking Chapter X was absent, the reference to the TPO (and prior approval) was not justified, and the assessment remained a normal assessment with limitation up to 31.12.2010. The assessment order dated 30.12.2011 was therefore barred by limitation and invalid. [Paras 21, 23, 24, 25, 26]Reference to the TPO was unjustified as Cummins was not an associated enterprise; the assessment (completed on 30.12.2011) was time barred and is invalid.Assessment barred by limitation - Validity of adhoc apportionment of administrative expenses to the EOU unit in light of the limitation finding - HELD THAT: - The Tribunal held that since the assessment itself was barred by limitation and therefore invalid, consequential adjustments made in that assessment (including the adhoc apportionment of administrative expenses to the EOU) do not survive for adjudication. [Paras 26]Grounds challenging the adhoc apportionment do not survive; those grounds are allowed as a consequence of the assessment being time barred.Final Conclusion: The appeals filed by the Revenue are dismissed; the assessee's appeal is partly allowed - deduction under section 80IA(5) sustained in accordance with the elected initial assessment year and the assessment orders (including for the EOU apportionment) for the years in dispute are held to be time barred and invalid where reference to the TPO was unjustified. Issues Involved:1. Validity of the assessment order dated 30.12.2011.2. Validity of the reference to the Transfer Pricing Officer (TPO).3. Deduction under section 80IA(5) of the Income-tax Act, 1961.4. Apportionment of administrative expenses to the EOU unit.5. Disallowance under section 14A read with Rule 8D.Issue-wise Detailed Analysis:1. Validity of the Assessment Order Dated 30.12.2011:The assessee argued that the assessment order dated 30.12.2011 was barred by limitation. The CIT(A) held that the reference to the TPO was valid, and thus, the time limit for completion of the assessment was extended to 31.12.2011. The Tribunal found that the assessment should have been completed by 31.12.2010 since the assessee did not have an Associated Enterprise (AE) and no international transactions were carried out. Consequently, the assessment order dated 30.12.2011 was held to be invalid and barred by limitation.2. Validity of the Reference to the Transfer Pricing Officer (TPO):The CIT(A) justified the reference to the TPO based on the agreement between the assessee and Cummins Turbo Technologies, USA, considering Cummins as a deemed AE under section 92A(2)(i) of the Act. However, the Tribunal found that the assessee and Cummins did not fulfill the conditions laid down in section 92A(1) of the Act to be considered as associate enterprises. Therefore, the reference to the TPO was not justified, and the assessment should have been completed by 31.12.2010.3. Deduction Under Section 80IA(5) of the Income-tax Act, 1961:The Revenue's appeals challenged the deduction claimed under section 80IA(5) by the assessee for profits from windmill operations. The Tribunal upheld the CIT(A)'s decision that the assessee had the option to pick the initial assessment year and only the losses from the initial assessment year were to be carried forward, not the losses of earlier years. The Tribunal dismissed the Revenue's appeals, citing the CBDT Circular No.1/2016 and the precedent set by the Pune Bench of the Tribunal.4. Apportionment of Administrative Expenses to the EOU Unit:The assessee challenged the apportionment of Rs. 3 lakhs out of administrative expenses to the EOU unit. However, this issue did not survive as the Tribunal held the assessment order to be beyond limitation.5. Disallowance Under Section 14A Read with Rule 8D:The assessee's appeal included a challenge to the disallowance of Rs. 1,07,837/- under section 14A read with Rule 8D. However, this ground was not pressed by the assessee and was dismissed as not pressed.Conclusion:The Tribunal dismissed the Revenue's appeals and partly allowed the assessee's appeal. The assessment order dated 30.12.2011 was held to be invalid and barred by limitation. The reference to the TPO was not justified as there was no AE involved. The deduction under section 80IA(5) was upheld in favor of the assessee, and the apportionment of administrative expenses issue did not survive. The disallowance under section 14A was dismissed as not pressed.