Appeal allowed deleting search-based additions, bogus purchase disallowances and TP adjustment; commercial payments and intra-group services accepted

ITAT allowed the appeal of the assessee-AOP in full. It held that cash and jewellery seized during search could not be taxed in the hands of the AOP as they were not found at premises belonging to the assessee or its members, rendering such additions illegal. Additions for alleged bogus purchases from identified suppliers were deleted as payments stood recognized in an arbitral award and were made through banking channels, and the advances/write-offs were commercially justified. Disallowance of expenses was also set aside since payments were made by cheque with TDS and duly accounted for in the AOP's financials. TP adjustment applying CUP and determining nil value for intra-group services was rejected.

---

---

1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether addition under Section 69A on account of cash and jewellery found during search could be sustained in the hands of the assessed AOP.

1.2 Whether purchases from three specified suppliers could be treated as bogus and disallowed, including (i) M/s Vijay Iron Works, (ii) M/s Armstrong Wires and Engineering Pvt. Ltd., and (iii) M/s Kirti Enterprises.

1.3 Whether a blanket disallowance of expenses debited to the profit & loss account amounting to Rs. 29,86,27,579/- was sustainable.

1.4 Whether transfer pricing adjustment by determining the arm's length price of specified international transactions at nil and making an addition of Rs. 7,46,57,884/- was justified.

1.5 Whether interest charged under Sections 234A, 234B and 234C required separate adjudication.

1.6 Whether the findings and relief granted in one appeal would apply mutatis mutandis to the connected appeal.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1 - Addition under Section 69A on cash and jewellery found during search

Legal framework (as discussed)

2.1 The Tribunal considered Section 69A, which applies where an assessee is "found to be the owner" of money, bullion, jewellery or other valuable article not recorded in the books of account and for which no satisfactory explanation is offered. The Tribunal also noted the presumption under Section 132(4A) that material found in possession or control of a person is presumed to belong to that person.

Interpretation and reasoning

2.2 It was undisputed that the assessed consortium was an AOP formed for executing Commonwealth Games contracts and that it is not a legal entity owning the various searched premises.

2.3 The seized cash and jewellery were found at several premises. On the material placed, the Tribunal noted that, except for one office premises, the addresses where cash/jewellery were found belonged to individuals or other entities (including one consortium member and other persons such as a director, family members and an associated firm), and not to the AOP itself.

2.4 The Tribunal recorded that the recovery and seizure were from premises not belonging to the AOP or its members (insofar as the impugned addition was made in the hands of the AOP), and that no specific material was shown to establish that the AOP was the owner of the seized cash and jewellery.

2.5 In this factual backdrop, the necessary pre-condition under Section 69A - that the assessee be "found to be the owner" of the seized assets - was held not to be satisfied in the case of the AOP.

Conclusions

2.6 The addition of Rs. 52,87,395/- under Section 69A in the hands of the AOP was held to be illegal and unsustainable and was set aside. The corresponding ground in the appeal was allowed.

Issue 2 - Alleged bogus purchases from Vijay Iron Works, Armstrong Wires & Engineering Pvt. Ltd., and Kirti Enterprises

Interpretation and reasoning

2.7 For purchases from M/s Vijay Iron Works and M/s Armstrong Wires & Engineering Pvt. Ltd., the Tribunal noted the undisputed position that all relevant claims had been considered in arbitral proceedings, and that actual payments were made through banking channels pursuant to the Arbitral Award.

2.8 In light of the existence of an arbitral adjudication and the fact of payments through proper banking channels, the Tribunal found the Assessing Officer's and DRP's conclusion branding the purchases as bogus to be unsustainable.

2.9 For purchases/advances relating to M/s Kirti Enterprises, the Tribunal recorded that advances to suppliers had been given in good faith in the course of business; on account of delay, such advances were written off. Treating these purchases/advances as bogus and disallowing the amount was held to be unjustified on the facts.

Conclusions

2.10 Additions on account of alleged bogus purchases from:
* M/s Vijay Iron Works (Rs. 1,16,52,984/-), and
* M/s Armstrong Wires & Engineering Pvt. Ltd. (Rs. 2,58,55,023/-),
were held to be unsustainable and were deleted.

2.11 The addition of Rs. 63,42,250/- in respect of M/s Kirti Enterprises, treated as bogus purchases/advance write-off, was also set aside. The corresponding grounds were allowed.

Issue 3 - Disallowance of Rs. 29,86,27,579/- being expenses debited to the profit & loss account

Interpretation and reasoning

2.12 The Tribunal noted that the impugned disallowance was a blanket disallowance of expenses, notwithstanding that:

* Payments were made through account-payee cheques; and
* Tax was deducted at source (TDS), as evidenced inter alia at page 392 of the paper book (Volume II).

2.13 It was further observed that the AOP's financial statements and return of income reflected the total contract receipts from Commonwealth Games and all related expenses incurred on behalf of the AOP, including expenses incurred through its members.

2.14 The Tribunal reiterated that, for contract work executed through the AOP, receipts and corresponding expenditure are to be assessed in the hands of the AOP, and that one of the consortium members (Deepali Designs and Exhibits Pvt. Ltd.) continued to be part of the AOP. On these facts, a blanket/arbitrary disallowance of properly vouched, TDS-compliant expenses was held to be unjustified.

Conclusions

2.15 The disallowance of Rs. 29,86,27,579/- was held to be arbitrary and illegal and was deleted. The corresponding ground was allowed.

Issue 4 - Transfer pricing adjustment: determination of ALP at nil and addition of Rs. 7,46,57,884/-

Legal framework (as discussed)

2.16 The Tribunal examined the treatment of international transactions under Chapter X, noting that the Transfer Pricing Officer had effectively determined the arm's length price at nil and the Assessing Officer and DRP had adopted that view, rejecting the assessee's transfer pricing documentation based on the Transactional Net Margin Method (TNMM) and adopting the CUP method.

Interpretation and reasoning

2.17 In the second round of proceedings, the original assessment had already been set aside, and all issues were left open for fresh adjudication, as clarified in a Miscellaneous Application order dated 11.01.2021. Despite this, the TPO and Assessing Officer largely reiterated their earlier reasoning and failed to freshly examine the international transactions.

2.18 The Tribunal noted that the DRP had accepted TNMM as the appropriate method in its directions, whereas the Assessing Officer applied the CUP method and determined the value of intra-group services at nil.

2.19 It was an undisputed factual position on record that services were actually rendered by PICO Hong Kong and that detailed TP documentation and supporting evidence had been filed, including the TP study report (pages 2272-2323) and event management documentation (page 2080 of the paper book). The TPO, however, held that no details were filed and applied the CUP method without any reliable comparable data.

2.20 The Tribunal found this approach contrary to the earlier remand directions and inconsistent with the record. The rejection of TNMM without cogent reasons and adoption of CUP with no proper comparables, coupled with an ALP determination of nil despite actual services, was held to be untenable.

Conclusions

2.21 The determination of the value of international transactions at nil and consequential transfer pricing addition of Rs. 7,46,57,884/- were set aside. The corresponding ground was allowed.

Issue 5 - Interest under Sections 234A, 234B and 234C

Interpretation and reasoning

2.22 The Tribunal held that the ground relating to interest was consequential in nature, dependent upon the outcome of the substantive additions and disallowances.

Conclusions

2.23 No separate adjudication was undertaken on interest; it was left to be recomputed, if necessary, in consequence of the Tribunal's substantive findings.

Issue 6 - Application of findings in one appeal to the connected appeal

Interpretation and reasoning

2.24 The Tribunal noted that the connected appeals involved common issues arising from the same assessment proceedings and transaction structure, including the status and membership of the AOP and the same additions/disallowances.

2.25 It was specifically recorded that the findings on grounds 1 to 8 in one appeal (relating to Section 69A, alleged bogus purchases, disallowance of expenses and transfer pricing adjustment) equally governed the corresponding grounds in the other appeal.

Conclusions

2.26 The Tribunal directed that its findings in ITA No. 412/Del/2022 apply mutatis mutandis to ITA No. 518/Del/2022. Both appeals were allowed on this basis.

---