TaxTMI 
TaxTMI 
2014 (6) TMI 595
X X X X Extracts X X X X
X X X X Extracts X X X X
....al income of Rs. 15,95,32,740 and subsequently filed a revised return of income on 22.08.2010 declaring the total taxable income at NIL after set off of carried forward losses. The case was subjected to scrutiny by the Assessing Officer, In course of assessment proceeding, the assessee-company produced its books of account and various other details as required by the Transfer Pricing Officer and Assessing Officer from time to time. The Transfer pricing officer has passed the order u/s. 92CA(iii) of the Income tax Act, 1961 on 30th April, 2010 determining the adjustments to Arms Length price at Rs. 38,34,39,496. Subsequently, the assessment was finally completed on 30.12.2010 determining the total income at Rs. 101,45,42,242. The order was served on 04.01.2011. 3. Brief facts relating to the disallowance are as follows: As per clause 4.1.6 of the shareholders agreement, the company has paid land compensation to the land owners i.e,, Andhra Pradesh Housing Board (APHB) an amount of Rs. 2,200 per sq. yard for the land transferred by APHB to the company. The land compensation of Rs. 2,200 per sq. yard Is termed as guaranteed compensation in the said agreement. Further, the land comp....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed 500 LlG houses and handed over to the land owner as per the agreed price. Since, the 500 LIG houses were sold to the land owner, the land pertaining to the said houses need not be transferred to the Assessee and again re transfer the same to the land owner. The assessing officer has disallowed the land cost attributable to the 500 LIG houses an amount of Rs. 1,92,19,200. 3.6 As per clause 4.1.6 of Section 4 of the development and shareholders agreement, the assessee has handed over 500 LIG houses consisting of 450 sq. ft. each at a total consideration of Rs. 9 Crores. The said transaction is done by the Assessee absolutely as per the contractual agreement. The assessing officer has disallowed the cost of construction in excess of Rs .9 Crores at an amount of Rs. 18,06,75,000. 3.7 The Assessee company awarded development of township work to IJMII. On such development work, some of the work bills submitted by the IJMII were paid belatedly. On such belated payments, the assessee has paid interest to the IJMII as per the minutes of the meeting drawn between the parties. The assessing officer disallowed an amount of Rs. 2,21,95,301. 3.8 The assessing officer had added a sum ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Regarding disallowance of land transferred by APHB at Rs. 13,43,97,120, the DRP observed that it is made out of profit, taxes are to be paid u/s. 155-O of the Act and confirmed the disallowance. Regarding disallowance of incentive paid at Rs. 18,59,85,000, it was observed that it is unreasonable and confirmed the disallowance. Regarding disallowance of interest at Rs. 55,77,852 the DRP observed that the assessee had already disallowed the same in its computation of income and the Assessing Officer made further addition which resulted in double addition. Accordingly, the DRP directed the Assessing Officer to delete the same. Regarding the disallowance of delay in handing over charges at Rs. 7,74,36,597, since no proof is adduced, the disallowance is confirmed. Regarding disallowance o cost of land relating to land sold by the APHB on 500 LIG houses at Rs. 1,92,19,200 and with regard to disallowance of cost of construction of houses handed over to APHB at Rs. 18,06,75,000, it was observed by the DRP that it is a diversion of profit and confirmed the disallowance. With regard to disallowance of interest paid to IJMII at Rs. 2,21,95,301 it is observed that preferential treatment has be....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nt in the nature of "handing over charges" amounting to Rs. 7,74,36,597. On facts and in the circumstances of the case and law applicable, no addition is to be made in respect of the above payment. The addition made is to be deleted in entirety. 5. I The learned Deputy Commissioner of Income tax, Circle 3(3), Hyderabad has erred in making addition of Rs. 1,92,19,200 in respect of cost of land attributable to houses handed over to APHB. On facts and in the circumstances of the case and law applicable, the addition made by the assessing officer in respect of the above payment is to be deleted in entirety. 6.1 The learned Deputy Commissioner of Income tax, Circle 3(3), Hyderabad has erred in making addition of Rs. 18,06,75,000 in respect of cost of construction of houses handed over to APHB. On facts and in the circumstances of the case and law applicable, the addition made by the assessing officer in respect of the above payment is to be deleted in entirety. 7.1 The learned Deputy Commissioner of Income tax, Circle 3(3), Hyderabad....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nclude the amounts computed under Chapter X and therefore addition made under Chapter X is bad in law. 8.6 The Hon'ble DRP has erred in confirming the additions made by the TPO despite not agreeing to the conclusions of the learned TPO on many issues. 8.7 The Hon'ble DRP has erred in confirming the additions (i) only with a view to keep the matter alive and (ii) for the reason that the department does not have recourse to any remedy against the directions in favour of the assessee. 8.8 The learned assessing officer, TPO and the DRP has erred in making additions in respect of individual international transactions despite making adjustment at enterprise level profit margin using TNMM. 8.9 The findings and the conclusions of the learned Transfer pricing officer, DRP and the assessing officer are incorrect, bad in law and liable to be quashed. 8.10 On facts and in the circumstances of the case and law app....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ation totally amounting to Rs. 28,05,937 in computing the taxable income for the year under consideration. 3.11 The assessee filed a petition for admitting the additional ground. We are admitting the additional ground after satisfying that the reasons advanced by the assessee counsel are bona-fide and the assessee is having reasonable cause for not raising the above grounds on earlier occasion. 4. With regard to addition in respect of cost of land transferred to Andhra Pradesh Housing Board (APHB) at Rs. 13,43,96,800 (Ground Nos. 2.1 to 2.3), the AR submitted as follows: 4.1 There was an acute shortage of quality residential accommodation in the state of Andhra Pradesh. In order to alleviate this problem, the Govt. of Andhra Pradesh through its arm - Andhra Pradesh Housing Board constituted under the Andhra Pradesh Housing Board Act, 1956 (Board for short hereafter) decided to undertake housing projects in a large scale. The Board had limited financial resources, technical expertise and wherewithal to undertake the housing projects on such a large scale. The Govt. of AP therefore decided that the Board should undertake the housing projects with participation from the priva....
X X X X Extracts X X X X
X X X X Extracts X X X X
....p; (iii) Circumstances leading to the formation of the Company and matters concerning the share capital and shareholding pattern; (iv) Approval of Foreign Investment Promotion Board (FIPB) for development of integrated township project; (v) Appointment of IJMII as the main contractor and project manager for the development of integrated township project, entering into sales and marketing agreement with IJMII; (vi) Entering into technical collaboration agreement with M/s IJM Properties Sdn. Bhd, Malaysia (vii) Appointment of M/s CESMA International, Singapore as the Architects of the project; (viii) Power of attorney from the Board in favour of the assessee; (ix) Commencement of site clearing and earth works; (x) Registered office of the Company, fi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sp; (b) 500 Low-income-group apartment units with the size of 450 Sft. Each @ Rs. 400/- per sft. : 90,000,000/- (c) Payments made through bank: Rs. 223,619,447/- The aforesaid guaranteed compensation of Rs. 2,200/- per square yard is inclusive of the land cost and APHB's share of anticipated profits in the development of integrated township. The Joint sector company shall pay the guaranteed profits at the rate of Rs. 800/- per square yard amounting to Rs. 13,43,97,120/- (Rupees Thirteen Crores Forty Three Lakhs Ninety Seven Thousand One Hundred Twenty Only), to APHB whether or not the Joint Sector Company realises profits from the integrated township. If the Joint Sector Company makes profits amounting to more than 15% of the Total Development Cost, APHB and IJMII shall be entitled to share such additional profits in the ratio of 49:51. For avoidance of doubts it is made clear that IJMII shall alone be entitled to receive all the profits generated by the Joint Sector Company up to 15% of the total development cost" 4.8 The Board of directors in their meeting on 2.2.2004 discussed....
X X X X Extracts X X X X
X X X X Extracts X X X X
....erved. It was held that the net profits of the company should be calculated by applying the principles of business. Accordingly the payment of royalty held allowable in computing taxable profits. 4.13 He relied on the judgement in the case of CIT v Parikh (C) & Co (India) Ltd [1966) 29 ITR 661 (SC), where the managing agents' commission was payable as a percentage of net profits, it was held that commission so paid was eligible for deduction in computing the profits chargeable to tax. The fact that the commission payable had to be computed as a percentage of net profits was held not relevant in determining whether the same is eligible for deduction. [Nizam Sugar Factory v C Ag. IT [1964) 52 ITR 939 (AP)) 4.14 According to the AR, the Income-tax is a tax on the real income, i.e., the profits arrived at on commercial principles subject to the provisions of the Income-tax Act. The real profit can be ascertained only by making the permissible deductions. There is a clear-cut distinction between deductions made for ascertaining the profits and distributions made out of profits. In a given case whether the outgoings fall in....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... The amount returned is not a part of the profits at all." 4.15 It was submitted that in the case of CIT v Travancore Sugars and Chemicals Ltd [1973] 88 ITR 1 (SC), the promoters of the respondent Company viz., the Govt. of Travancore and Sir William Wright on behalf of Parry & Co. Ltd., entered into an agreement wherein the business of three concerns were agreed to be sold by the Government of Travancore to the respondent Company which was to be floated for that purpose. Under the said agreement, in addition to the consideration for the transfer of business, the Govt. of Travancore was entitled to a certain sum calculated at a percentage of net profits of the respondent Company. On a question as to whether the sums paid to Govt. of Travancore under the agreement constitutes diversion of income by overriding title or whether the same is allowable as deduction in computing the income, the Kerala High Court ruled in favour of the respondent Company on both the questions. The Supreme Court affirmed the above decision and held as under: "On a construction of the terms of the contract in this case and the obl....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... name." 4.17 He relied on the judgement in the case of CIT v Mehsana District Co- operative Milk Producers Union Ltd [2006] 282 ITR 24 (Guj), the respondent paid additional price to member societies supplying milk on last day of the previous year pursuant to resolution of its board of directors. The assessing officer and the first appellate authority disallowed the said payment for the reason that the same amounted to distribution of profit and a case of profit adjustment with the object of evading tax. The Tribunal in its third member decision held that the payment was an additional purchase price and if it is regarded as adjustment of profit at a pre-determined level, the nature of the payment would not change and cannot be termed as distribution of profits. The High Court on appeal held that the amount in question had gone out of the coffers of the assessee and had been received by the member societies. He placed reliance on the judgement of the Supreme Court in CIT v. Ashokbhai Chimanbhai [1965] (56 ITR 42) where it was held that profits of a business do not accrue day to day or month to month and the same accrue at the year end on comparison of Assets at two stated points, ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....f the Act. (e) Payment to be made compulsorily by virtue of statue or agreement, irrespective of existence of profits, cannot be regarded as 'distribution of profits'. The said payments are deductible in computing the profits taxable under the Act. (f) A payment agreed to be made compulsorily at the inception from income which may accrue or arise subsequently, whether by virtue of statue or contract, results in diversion of income by overriding title. The income to the extent of payments agreed to be made compulsorily at the inception is not taxable by virtue of overriding title. 4.20 He submitted that in the present case, the assessee was incorporated by the Govt. of Andhra Pradesh through its arm - The Andhra Pradesh Housing Board (Board). The assessee was incorporated as a SPV with a view to alleviate the acute shortage of housing in the state of Andhra Pradesh. As per the term of the MoU dated 15.5.2002 the assessee was responsible for the construction and implementation of the housing projects as contemplated by the Board and it was bound by the policy frame....
X X X X Extracts X X X X
X X X X Extracts X X X X
....present case do not envisage payment to Board being dependent or conditional upon profits. The amount payable to Board is also not computed as a percentage of profit. The payments to Board therefore cannot be regarded as distribution of profits. The payment made to Board thus constituted expenditure allowable in computing the profits of the business under section 28. Alternatively and without prejudice, the said payments partake the character of expenditure wholly and exclusively incurred for the purpose of business and consequently allowable under section 37. 4.23 He relied on the judgement of Bombay High Court in the case of CIT v Crawford Bayley and Co. [1977]106 ITR 0884 (Bom), the aspect of diversion of income by overriding title was explained as under: "In respect of this matter the material question to be considered is, is there diversion of income by an overriding title or whether there is an application of income after it accrued to the assessee-firm. The true test in determining this question is laid down in Sitaldas Tirathdas"s case [1961} 41 ITR 367 (SC). The true test for the application of ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....red to APHB to the assessee the learned DR submitted that a reading of clause No. 4.16 of the agreement of Development and Shareholders Agreement shows that APHB was assured of profit @ Rs. 800 per square yard. There is no necessity to mention separately this rate of Rs.800 per square yard and refer to it as 'anticipated profits'. The assessee has not registered this agreement. The land is never registered and transferred to the taxpayer by the APHB. Such evidence is not produced. When specifically questioned as to why registration is not done, the AR only replied that there is no necessity to register the agreement. 5.1 According to the DR, agreements can be mutually concluded which can be of self-serving nature. Such agreements can also be concluded to avoid tax. From subsequent paras of agreement wherein incentive is also paid to the other shareholder, the matters would get further clarified. First the exact words used in the agreement are to be considered. These words clearly show that the 'anticipated profits' are being passed on. The details of rate per square yard as per Sub Registrar is not produced. Kukatpally Housing Board Colony is nearby and it is one....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Four Crores Ninety Lakhs only) shall be appropriated and converted by the Joint Sector company towards APHB's Percentage Equity interest @49%, as per Clause 2.3.1; (b) Rs. 9,00,00,000 (Rupees Nine Crores Only) shall be directly realized by APHB by allotting/selling five hundred (500) low- Income-group apartment units of the size of 450 square feet each (inclusive of apportioned common areas), at Rs.400/- per sq. feet. Provided however, APHB shall cause the allottees of the said 500 apartment units, to pay directly to the Joint Sector Company, all other costs, charges and expenses including but not limited to stamp duty, registration, water, electricity sewerage deposit, maintenance charges and deposit, parking area etc. (c) 15% of the balance Land cost amounting to Rs. 1,44,29,244 shall become due and payable by the Joint Sector Company to the APHB on the 90th day from the date of APHB making available to the Joint Sector Company, the vacant unencumbered Land mentioned in sub-clause 4.1.3; and (d) the balan....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s. 800 as anticipated profits from the business of township development. However, as far as the company point of view, the total land compensation as guaranteed to the land owner is Rs. 2,200/- per sq. yard. The said compensation has to be paid by the company whether it realizes any profits or not. Considering the terms and conditions of the contractual agreement between the shareholders, the company has paid the compensation to the land owners. Without considering the merits of the contractual agreement, the assessing officer has disallowed an amount of Rs. 13,43,96,800 being part of the land compensation as distribution of profits to APHB. The assessing officer has not mentioned the section and provision under which the distribution of profits is treated as income. 6.2 This is a contractual payment and the assessee is having no control over this and if the assessee failed to abide by the agreement entered by the APHB and IJMII it would lead to total break-down of the contract. The true test for allowability of this expenditure is where an amount is sought to be deducted, it never to be reached the assessee as its income. An amount paid, if it is an application of income it can....
X X X X Extracts X X X X
X X X X Extracts X X X X
....As the accounting year comes to an end, the assessee has to part with the same to the parent body. The Department has taken a plea before us that the provisions of the agreement are not binding on the assessee as the assessee is not the party to the agreement entered between the APHB and IJMII. As we have observed earlier, these two companies are parent companies who formed the assessee through that agreement. Then, undoubtedly, the provisions of the agreement are not to be violated by the assessee. The assessee cannot say that only the beneficial clauses in that agreement would be followed and the other part cannot be acted upon. The agreement as a whole is to be acted upon by the assessee in order to give full effect to the agreement. The obligation of the assessee under the agreement is nothing but an actionable claim in favour of the APHB. It is true that the burden of a contract cannot be assigned without the consent of the other party of the contract. But so far as this contract is concerned, a contract as a whole is to be acted upon for the functional operation of the assessee. The terms of the agreement are very clear that unless obligations cast upon the assessee are carri....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ure of incentive was recognised only to the extent of Rs. 18,59,85,000 and an amount of Rs. 33,76,53,731/- was not recognised due to absence of sufficient profits. The purpose and genuineness of the expenditure has not been doubted by the learned income tax authorities. 7.2 The learned assessing officer has disallowed the incentives paid to IJMII amounting to Rs. 18,59,85,000/- for the following reasons. (a) The payment of incentive is not reasonable and attracts the provisions of section 40A of the Income tax Act. (b) Assessee is not liable for payment of incentive as it is not a party to the shareholders agreements. (c) Payment of incentive above the contract price amounts to distribution of profits. (d) As per the details available the claim of incentive is not related to this year, as the project is not yet completed. (e) IJ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nce on the judgement of Supreme Court in the case of Upper India Publishing House (P,) Ltd. v, CIT [1979] 117 ITR 569. He submitted that reasonableness is to be decided on the basis of fair market value of the goods, services or facilities. The reasonableness of any expenditure is to be seen from the viewpoint of the businessman and not from the view point of the revenue authorities. He placed reliance on the judgement of Gujarat High Court in the case of Voltamp Transformers (P.) Ltd. v. CIT [1981] 129 ITR 1051 and on the judgement of Delhi High Court in the case of Mittal Metal vs ITO (2008) 021 SOT 0186. 7.8 He submitted that the provision of section 40A(2) is intended to prevent evasion of tax. [CBDT Circular No. 6P (LXXVI-66) of 1968] Though the object of the section is to prevent evasion of tax, the provision must be worked not from the standpoint of the Tax Collector but from that of a businessman. The Income-tax Officer must take an overall picture of the financial position of the business. He should put himself in the position of the prudent businessman or the director of the company and deal with a sympathetic and objective approach. He placed reliance on the judgement....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nnot be invoked. He placed reliance on the judgement of Karnataka High Court in the case of DCIT vs. Microtex Separators Ltd (2007) 293 ITR 0451 and CIT v. Indo Saudi Services (Travel) P. Ltd. [2009] 310 ITR 306 (Bom)] 7.10 The AR submitted that the disallowance of incentive paid has been made for the reason that the assessee is not liable for payment of incentive as it is not a party to the shareholders agreements. Having made disallowance u/s 40A(2)(a) thereby accepting that the impugned expenditure qualifies for deduction under section 37, the assessing officer cannot turn around and conclude that the assessee was not liable for payment of incentives. The assessing officer cannot blow hot and cold at the same time. Disallowance cannot be made for two opposite and contrary reasons. The disallowance is to be deleted for this reason alone. 7.11 According to AR, even otherwise, the conclusion of the assessing officer that the since assessee was not a party to the shareholders agreements, it was not liable to pay incentive is incorrect. The assessee was incorporated solely for the purpose of development of township with APHB and IJMII as its shareholders. It was imperative for ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....mitted that the assessing officer has disallowed the incentive paid to IJMII for the reason that the said payments amounts to distribution of profits. The incentive paid to IJMII constituted an expenditure incurred for the purpose of business and the same is allowable in computing the real profits and gains chargeable under section 28. Alternatively, the said payments are allowable under section 37. The fact that payment of incentive was measured or quantified as a percentage of development cost subject to availability of profits is not a relevant criteria at all. He placed reliance on the judgement of Supreme Court in the case of CIT vs. Ponni Sugars and Chemicals Ltd [2008] 306 ITR 392 (SC), wherein held that where subsidy was allowed by the Govt. for the purpose of repayment of loans and the same was allowed through a rebate on excise duty, it was held that the form or the mechanism by which the subsidy was allowed is irrelevant in determining whether the subsidy allowed is capital receipt or revenue receipt. It was also held that the source of subsidy or the point of time at which it is paid is not irrelevant. In the present case, the incentive paid to IJMII was a consideration....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... income and expenditure are recorded at the time of their accrual or incurrence. For instance, income accrued during the previous year is recorded whether it is received during the previous year or during a year preceding or following the previous year. Similarly, expenditure is recorded if it becomes due during the previous year, irrespective of the fact whether it is paid during the previous year or not. The profit calculated under the mercantile system is profit actually earned during the previous year, though not necessarily realized in cash. 7.16 He drew our attention to Accounting Standard-I, relating to disclosure of accounting policies, issued by the Central Government under section 145(2), requires the assessees to make provisions towards all known liabilities and losses, even though the amount cannot be determined with certainty. This is the principle of prudence. 7.17 He referred to the word "provision" as defined in paragraph 7(1)(a) of Part III of Schedule VI to the Companies Act to mean "any amount written off or retained by way of providing for depreciation, renewals or diminution in the value of assets or retained by way of providing for any known liability of....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nt cost and the balance, if any, more than 15% of the total development cost will be shared by APHB and IJMII in the ratio of their shareholding. During the previous year Rs.18,59,85,OOO/- has been provided towards incentive to IJMII. A reference was made in para No. 5.8 of agreement in this regard. Herein it is stated that IJMII shall alone be entitled to receive all the profits generated by the taxpayer up to 15% of the total cost. The quantification of incentive is premature according to the AO. Payment of incentive to the contractor is something peculiar. It also envisages that profit of over 15% would certainly be generated. However, the profit is normally 8 to 12% in real estate and after tax it works out to 5.6% to 8.4% only. The AO also narrated in page 6 of his order the facts as obtained from the record of M/s. IJMII that the profit disclosed is only 0.09%. If incentive is considered, it comes to 4.8% which is still on the lower side. 8.1 The DR further submitted that the taxpayer is not a party to the agreements between the shareholders. He also relied on the doctrine of Privity of Contract. Accordingly, for the following reasons the sum of Rs.18,59,85,OOO incentive p....
X X X X Extracts X X X X
X X X X Extracts X X X X
....se. It reads: Dividend includes - "any distribution by a company of accumulated profits, whether capitalized or not, if such distribution entails the release by the company to its shareholders of all or any part of the assets of the company". 8.4 The DR submitted that on this ground there is necessity to hold that it is only dividend that is paid to the shareholder and hence the deduction is not admissible. On the other side, it should also be noted that even before the work is executed in time and without examining the quality, an incentive is sought to be paid in crores. In fact, this is a case wherein there was .substantial delay in handing over the flats and nearly Rs. 7 crores of liquidated damages / compensation was paid for the delay in execution and handing over the flats. The commercial complex was not completed in time. It is not clear how such incentive was paid and what is the necessity for such payment while the project was in progress. It is also a fact that IJMII is 51% shareholder of this company (taxpayer). It is also to be seen that incentive as well as 'anticipated prof....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ot be considered as distribution of profit. The expenditure was incurred on account of commercial expediency and the assessee has no option to overlook the agreement entered by parent bodies. To invoke the provisions of section 40A(2), the Assessing Officer is required to bring on record comparable market value for the services rendered by the parties and the burden of proof under this section is on the Assessing Officer. If the assessee incurred expenditure to the legitimate needs of the business of the assessee and the Assessing Officer finds that it is an excessive payment, then the duty of the Assessing Officer is to bring on record the comparable cases and disallow that portion of the expenditure only. The Assessing Officer cannot disallow the entire expenditure by observing that section 40A(2) is applicable. However, it is not the case of the Department that the expenditure was either not incurred or if incurred then were incurred for other than business purposes or for acquiring any personal benefit of the assessee. For the details of the evidence produced by the assessee, the expenditure were incurred for the purpose of carrying on the business of the assessee in terms of c....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... of IJMII, the development of township was not possible. The payment therefore satisfied that legitimate needs and the benefit criteria. The fact that the assessee also paid project management fees and other similar fees to. IJMII are irrelevant in so far it pertains to disallowance u/s 40A(2)(a). These payments were made as a consideration for services separately availed from IJMII. The assessing officer has not brought any evidence on record in order to substantiate that the impugned payments were unreasonable or excessive having regard to the legitimate needs and the benefit there from. Further, as explained earlier, no. disallowance u/s 40A(2)(a) can be made unless the requirement of 'evasion of tax' is prayed. The assessing officer has failed to prove that the payment of incentive to IJMII has lead to evasion of tax. The assessee was eligible to set off brought forward losses and unabsorbed depreciation and hence there was no incentive to evade taxes. The assessee and IJMII both were domestic companies with uniform tax rate for the year under consideration. IJMII was not eligible for any tax holiday like ss. lOA, lOB, 10AA so that the incentive earned was tax exempt. I....
X X X X Extracts X X X X
X X X X Extracts X X X X
....his issue are that as per the terms of the agreement entered into with the buyers, the assessee has to complete the construction and handover the possession of the vacant flats to buyers within the agreed date. If there was any delay in completion of construction or handing over the possession of flats, the assessee agreed to pay liquidated damages at the rate of Rs. 5/- per sq. ft of built up area of the apartment. During the year, there was a delay in completion of construction by the assessee. A sum of Rs. 7,74,36,597/- was therefore paid by the assessee to various buyers as handing over charges. 10.2 The assessing officer has disallowed the above payment under section 40(a}(ia) for the reason that the impugned payments constitute 'interest' under section 2(28A) and the assessee has failed to deduct tax at source in respect of the said payments under section 194A of the Act. The Hon'ble DRP has confirmed the disallowance made by the assessing officer. 11. The AR submitted that section 4(2) provides the basis for deduction of tax at source. Section 190 provides that tax on income shall be payable by deduction of tax at source in accordance with the provisions of....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... disallowed under section 40(a)(ia). The disallowance under section 40(a)(ia) should be deleted even for this reason. 12. The learned DR submitted that the case is to be examined with respect to EPC contract on which the assessee relied upon. As per clause 38 of the agreement the assessee was to handover the flats after completion of construction within 12 months from the date of agreement with the purchasers. However, there was inordinate delay in completing the construction and the assessee has to pay compensation to the purchasers. The AO held that the impugned sum is to be treated as interest as per definition u/s 2(28A) and to the extent there was failure to do TDS and the same is held to be disallowable u/s 40a(ia). However, the case is to be examined with respect to the EPC Contract on which the assessee is relying upon. As per clause 38 which deals with delay in completion, the contractor shall pay to the employer for every day's delay certain compensation. These sums are to be as liquidated damages for delay and not as a penalty. As per Appendix:-B liquidated damages clause.38.1 the tax payer is liable to collect the damages from the contractor-cum-shareholder, i.e.....
X X X X Extracts X X X X
X X X X Extracts X X X X
....G. C. Sharma and not rebutted by the learned Departmental Representative} and not denoting an interest earning event. The transaction further does not qualify for categorization under the other terms appearing in section 2{28A} viz., "service fee" or "other charge" and not does it fall for consideration under the terms "claim or other similar right to obligation". According to us the definition of interest in section 2(28A} is not wide enough to encompass all types of transactions much less the one under consideration. The provisions of section 194A would be attracted only if the case falls under section 2(28A} irrespective of the fact that a particular receipt may represent income in the hands of the recipient. (b) CIT v HP Housing Board [2012] 340 ITR 388 (HP) "That, in case the houses were ready within the stipulated period the assessee would not be liable to pay interest. When construction of a house was delayed there could be escalation in the cost of construction. The allottee does not get the right to use the house and was deprived of the rent....
X X X X Extracts X X X X
X X X X Extracts X X X X
....mental work in respect of the land contributed by the Board. Thus, there is no merit in the contention of the assessing officer that land to the extent of 13,728 sq. yards has not been offered for development by the Board. The assessee paid compensation at the rate of Rs. 2200/- per square yard for the entire land including the above portion of 13,728 sq. yards. Merely because a portion of the above compensation was realised by the Board directly by selling 500 flats, it cannot be concluded that there was no contribution of land by the Board. The direct selling of flats by the Board was possible only after completion of construction of these flats by the assessee and the said construction could not have been made by the assessee without the contribution of land by the Board. Further, (i) sale of 500 flats by the assessee and payment of same as compensation to Board or (ii) direct realisation by the Board by sale of flats, lead to the same result. The two way traffic of first selling the houses by the assessee and then paying the same amount to Board as compensation was avoided. The compensation of Rs. 2,200/- per sq. yard paid to the Board was partly realised in the form of direct ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed before the assessing officer that the cost of construction of 500 LlG houses is only Rs. 635/- per sq. ft. Further, the assessee has also recovered Rs. 35,000/- for each apartment separately in respect of water charges and electricity charges. Thus, the actual discount at which these houses are transferred is only Rs. 107/- per sq. ft as computed below: Sale price for houses Rs. 450/- per sq. ft Add: Amount recovered separately (Rs. 35,000/450 sq.ft.) Rs. 78/- per sq. ft Rs. 528/- per sq. ft Less: Cost of construction of houses Rs. 635/- per sq. ft Discount Rs. 107/- per sq. ft 16.3 The transfer of 500 LlG houses at a discount was mandatory for the assessee in terms of the development and shareholders agreement dated 4.11.2003. The APHB was obliged to provide residential accommodation to low income group people by virtue of the governmental instructions and policy framework. The transfer of 500 houses at a price of Rs. 450/- per sq.ft was therefore made as a condition pre-requisite for entering into developers and shareholders agreement dated 4.11.2003. The assessee had no choice but to accept to the terms of the said agreemen....
X X X X Extracts X X X X
X X X X Extracts X X X X
....IT and the Madras High Court in CIT v Subbaraya Chetty and Sons [1980] 123 ITR 592 wherein held that discount allowed is not an expenditure and hence the same cannot be disallowed u/s 40A(2)(a). The transaction of transfer of 500 LIG houses to APHB resulted in a loss to the assessee Loss is different from expenditure. He also placed reliance on the judgement of Supreme Court in the case of Dr. T. A. Quereshi v. CIT [2006] 287 ITR 547 (SC)]. Loss is something which comes ab extra. There is no spending or cash outflow in case of loss. S. 40A(2)(a) therefore has no application in the present case as it applies only to an expenditure and not sale proceeds less received. 16.7 The assessing officer has added a sum of Rs. 18,06,75,000/- for the reason that the assessee should not have transferred the houses for a lesser sum. The addition made represents a sum which the assessee never received or earned. In other words, the assessing officer has imputed income in making additions. The revenue cannot question the rates at which an assessee provides services, sells goods or leases property. The following reasons are in support of the above position of law.  ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... this proposition. f) Assessees are entitled to arrange their affairs in a manner most beneficial to them. Just because some transactions, which are legal and enforceable, incidentally lead to reduction of taxes, they cannot be treated as sham transactions. As long as the transactions are genuine, the revenue authorities cannot interfere with the income or loss resulting from such transactions. The following observations of the hon'ble Supreme Court in the case of Union of India v. Azadi Bachao Andolan, [2003} 263 ITR 707 (Se) are pertinent in this context: "We are unable to agree with the submission that an act which is otherwise valid in law can be treated as non est merely on the basis of some underlying motive supposedly resulting in some economic detriment or prejudice to the national interests, as perceived by the respondents." g) The Supreme Court in S.A Builders Ltd. v. CIT (A), [2007] 288 ITR 1 (SCj, has defined the expression "commercial expedi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ion. This loss/expenditure/cost incurred should be for the purposes of its business. In case, there is certain portion unrealized because of stipulations of agreement, the same is to be examined. First of all, the assessee is to prove that it recovered only Rs. 400/- per sq. ft. towards sale or transfer of these 500 LIG houses. The onus is on the tax payer to prove that APHB also sold this property at Rs. 4OO per sq. ft. only. It cannot be ignored that APHB is one of the shareholders and hence, the profit cannot be diverted to the shareholder. The shareholder cannot be allowed to sell the flats at a higher price and appropriate the profits. Secondly, had the taxpayer sold the flats at a higher price and paid Rs.9 crores as per the agreement, the situation would be different as no loss would have arisen to the taxpayer. It is also to be noted that had the taxpayer-sold it directly at Rs. 4OO/- and credited the sales account, the loss or the expenditure may have to be allowed. But, herein the expenditure is incurred for a specified person as per Sec.40A(2}(a)/(b) as per mutual consent and agreement concluded between the shareholders which is not binding on the taxpayer as it was not ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... to land attributable to flats handed over to APHB. We have heard both the parties and perused the material on record. We find no merit in the argument of the learned counsel for the assessee. The land was not registered in favour of the assessee by APHB. The APHB is always the owner of the impugned land. There is no question of retransferring of the said land to APHB when the land itself is not registered in favour of the assessee and the cost of the land attributable to the flats handed over to APHB cannot be claimed as deduction in the hands of the assessee. This ground is rejected. 18.1 Ground No. 6 is with regard to disallowance of Rs. 18,06,75,000 towards cost of construction of houses handed over to APHB. On this issue also the Assessing Officer invoked the provisions of section 40A(2) of the Act. According to the Assessing Officer, the assessee has transferred the houses at lesser price. As held in the earlier paras with regard to disallowance incentive, the Assessing Officer is required to bring on record comparable cases having regard to the fair market value of the service rendered. The burden is on the Assessing Officer to bring on record the proof with regard to mar....
X X X X Extracts X X X X
X X X X Extracts X X X X
....hence the same is allowable under section 37 of the Act. According to the AR disallowance of interest paid amounting to Rs. 2,21,95,301/- should be deleted in entirety. 20. With regard to disallowance of interest (Ground No. 7.1) paid to IJMII, the learned DR submitted that a perusal of the specific clauses of the agreement show that such a clause is not incorporated therein. In fact, the taxpayer ought to have charged liquidated damages on delay in construction. It is also seen that on the mobilization advance given to the contractor-cum- shareholder, no interest is charged. The preferential treatment given to the contractor-cum-shareholder is not justified. Moreover, payments such as project management, incentive, etc., are also made to the contractor. There are four contracts concluded such as Construction Agreement, Project Management Agreement, Sales and Marketing Agreement & Technical Service Agreement and substantial amounts paid to shareholder M/s. IJMII. Hence, this ground of objection is also should be rejected. 20.1 The DR placed reliance is placed on the decision of the Tribunal Bench 'D' Mumbai (Special Bench) in ITA. No. 5792/Mum/2009 in the case of M/s ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e of Rs. 2,32,72,451/- for services rendered by its AE. The assessee reimbursed bank guarantee charges of Rs. 1,15,67,035/- and other expenses of Rs. 62,125 to its AE. 23.3 With respect to fess for technical services, the assessee adopted Transactional Net Margin Method (hereinafter referred as "TNMM" for short) to justify the price charged in the international transactions. After carrying out a methodical search process on Prowess and Capitaline database, the assessee selected 18 companies as comparables. Adopting operating profits to sales as the Profit Level Indicator (PLI), the arithmetic mean of comparables was computed at 8%. The budgeted PLI of the assessee was computed at 20%. Since the assessee's budgeted operating margin on sales was more than the arithmetic mean of comparables, the assessee concluded that its international transactions are at arm's length. 23.4 As the reimbursements reimbursement of bank guarantee charges and other expenses were made at cost, the assessee concluded that the same are at arm's length. &n....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 38,34,39,486 24. About the deemed international transactions, the learned AR submitted as follows; 24.1 The assessee is involved in the development of "Raintree Park" - an integrated township. IJMII is the EPC contractor for the project. For executing the Project, the assessee entered into transactions with IJMII, a company incorporated under the provisions of the Companies Act, 1956. IJMII rendered services like project management and project execution services to assist the assessee in the development of Raintree Park. 24.2 As already submitted the assessee is a joint venture company of APHB and IJMII. IJMII holds 51% of the share capital of the assessee. IJMII is a subsidiary of IJM Group. During the year, the assessee entered in to transactions with IJMII. The TPO has held that though the transactions are entered into by the assessee with IJMII, the terms of such transactions are determined in substance between the assessee and its associated enterprise (IJM Group). The TPO was of the view that though the associated enterprise (IJM Group) is not a party to the transaction, yet it has determined its essential terms. The TPO has held that as the terms of trans....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e any application. 24.7 According to the AR, the nature, manner or extent of influence to be exercised to attract section 92B(2) is defined. It can take two forms. Firstly, it can be in the form of a prior agreement in relation to the transaction in question (between the associated enterprise and the unrelated person). Secondly, the terms of the transaction have to be in substance determined by the associate enterprise and the unrelated party. 24.8 He submitted that prior agreement means one which is independent of and prior in time in comparison to the transaction in question. The term "agreement" generally connotes a consensus ad idem, i.e., a meeting of minds to achieve a particular result. In the context of section 92B(2), the result sought to be achieved by the prior agreement must be avoidance of taxes or shifting of incomes. Otherwise, Chapter X becomes inapplicable. Such prior agreement would consequently be in the nature of an arrangement or an understanding or an action in concert between the unrelated party and the associate enterprise, not meant to be in public domain and in most cases unwritten. Unless tainted with an object of avoiding taxes or shifting of incom....
X X X X Extracts X X X X
X X X X Extracts X X X X
....plaining the scope of section 928(2) considers an illustration. The illustration deals with an Indian company exporting goods to an unrelated person abroad. A separate arrangement between the unrelated person and the AE influences the prices at which the assessee in India exports goods. In such circumstances the Circular contends that the transaction between the assessee in India and the unrelated entity abroad would be governed by transfer pricing provisions. The "unrelated entity" in the illustration is stated to be abroad obviously for the reason that it has to be a non-resident. Only then, the basic premise of the transaction being subject to transfer pricing provisions would suffice. In the assessee's case, IJMII is not situated abroad. Going by the rationale of the Circular, the transactions between the assessee and IJMII cannot be deemed to be an international transaction. 24.16 The above can also be understood through the diagrammatic illustration below: Facts matrix in the illustration provided in the CBDT Circular 24.17 To summarize, whether an international transaction emerges under various permutations and combinations of transactions between resi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e object behind enactment of transfer pricing regulations is to prevent shifting of profits outside India". The explanatory circular No.14 to the Finance Act 2001 has stated that the basic intention of the transfer pricing regulations is to prevent shifting profits out of India by manipulating prices charged or paid in international transactions, thereby eroding the country's tax base. The relevant extracts of the said circular are as below: "The new provision is intended to ensure that profits taxable in India are not understated (or losses are not overstated) by declaring lower receipts or higher outgoings than those which would have been declared by persons entering into similar transactions with unrelated parties in the same or similar circumstances. The basic intention underlying the new transfer pricing regulations is to prevent shifting out of profits by manipulating prices charged or paid in international transactions, hereby eroding the country's tax base. The new section 92 is, therefore, not intended to be applied in cases where the adoption of the arm's length price determined under ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....above filters, the learned TPO selected 25 companies as comparables. The arithmetic mean of the margins of the comparables was determined at 20.35% on cost. 24.28 The AR submitted that the following comparables selected by the TPO deserves be rejected: Sl. No. Name of the company Filter under which company should be rejected Reasons for rejection 1. Radhe Developers Ltd. Functionally different The assessee submits that this company is engaged in the development activity (on behalf of others) based on contract for each of the projects as against the assessee which is engaged in development as well as sale of residential and commercial units. Thus this company deserves to be rejected as a comparable. 2. IndeGraniti- Inds. Ltd. No segmental results available. As per the Prowess database, during the year under consideration the total sales of this company is Rs. 3.56 crores. Out of this revenue from sale of flats was Rs. 1.27 crores. Segmental details of construction and sale of flats is not available and thus this company should be rejected as comparable. 3. Marg Constructions Ltd. Related party transactions more t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....see. The AR submitted that such a rejection is bad in law for the reasons stated below:- Sl. No. Name of the company Reason for rejection by TPO Arguments of the assessee 1. Ansal Buildwell Ltd. No segmental results. As per data available no Capitaline database, this company has only one segment i.e., Real Estate and construction business. 2. Ansal Properties and Infrastructure Ltd. No segmental results As per data available in Capitaline database this company has only one segment i.e., Real Estate Development 3. Ashiana Housing & Finance (India) Ltd. No segmental results and foreign exchange revenue is zero In the facts of the case, Foreign exchange revenue filter is not applicable. Even TPO has not applied forex revenue filter in his TP analysis. As per data available in Prowess database, 97% of the revenue of the company is from construction and sale of residential buildings. 4. Conart Engineers Ltd. No segmental results and foreign exchange revenue is zero In the facts of the case, Foreign exchange revenue filter is not applicable. Even TPO has not applied forex revenue filter in his TP analysis. As per data available ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ns Ltd. 25.42 19 K. Raheja Pvt Ltd. 29.30 20 TirupatiSarjan 4.62 21 Luxmi Township 8.55 22 SAB Industries (Seg) 16.10 23 CHD Developers (Seg) 27.20 24 Alpine Housing 20.27 25 Prince Found 30.75 26 Aristo Realty Developers 38.53 27 Vijay Shanthi Builders Ltd. 14.44 28 Ansal Housing 33.67 29 Parshvnath Land 20.18 30 Parshvanath Landmark Developers Ltd. 24.00 31 HDIL 33.91 Arithmetic Mean 15.27 24.34 The learned TPO has determined the TP adjustment at Rs. 34,86,00,000. While determining the TP adjustment, the learned TPO has considered an operating cost at Rs. 1,86,35,01,499/-. The operating revenue has been considered at Rs. 1,90,20,00,000/-. 24.35 In the order passed u/s 92CA, the TPO has determined the arm's length price of the following transactions as NIL. SL No. Nature of Payment disallowed Amt (Rs.) 1 Fee for Technical Services 2,32,72,451 2 Reimbursement of Bank Guarantee Charges 1,15,67,035 Total 3,48,39,486 24.36 Further, during the course of proceedings under ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....o by the assessee in the revised return, they are required to be excluded from the operating cost and the calculation of the assessee should have been accepted that its profit margin should have been taken according to the income computed in the revise return for which the assessee has also paid the due taxes. In this manner, finding force in the contentions of Id. AR, we are of the opinion that ground No. 2 of the assessee is to be allowed and accordingly allowed. Ground No. 3 is the alternative argument and as the main argument of the assessee is accepted we need not required to go in the alternative claim made by the assessee." 24.39 Based on the above, the AR submitted that the above amounts should be excluded from the operating cost of the assessee. The revised operating cost of the assessee would be as follows :- Particulars Amount in INR Operating Cost as considered by the TPO 186,35,01,499 Less: Payments disallowed by the TPO 3,48,39,486 Less: Payments disallowed by the AO 62,54,85,750 Revised Operating Cost 120,31,76,263 24.40 The revised Operating Margins of the assessee after considering the above Operating Cost would be as under: P....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tted that a similar conclusion was arrived at by the Mumbai Tribunal in case of IL Jin Electronics (L) Pvt Ltd V ACIT 2010-TIOL-151-ITAT- MUM. In this case, the assessee was engaged in the manufacture of printed circuit boards. Out of the total purchase, 45.51% was from associated enterprises. On these facts, the Tribunal held that adjustment can be made only to the extent of 45.51% of the turnover. The relevant observation of the Tribunal in para 15 of the judgment is as follows: "After considering the facts of the case, we do not find any difficulty in accepting this contention of the assessee that at best only 45.51% of the operating profit can be attributed to imported raw material acquired from assessee's associate concerns." 24.46 He also submitted that a similar conclusion has been reached by the Mumbai Tribunal in the case of ACIT v T Two International Private Limited 2010-TOIL-166-ITAT-MUM. In this case, assessee had controlled sales of Rs. 25.02 crores and uncontrolled sales of Rs. 64.49 crores. The TPO made adjustment for all the transactions. The CIT(A) upheld the assessee's contention that adjus....
X X X X Extracts X X X X
X X X X Extracts X X X X
....AE rendered technical services to the assessee. These services were rendered based on Technical Services Agreement between the assessee and its AE. The assessee's AE rendered Project Management Services and Design and Technical Services to the assessee. The assessee paid technical services fee of Rs. 2,32,72,451/- for services rendered by its AE. 25.2 The assessee adopted TNMM to justify the price charged in the international transactions. After carrying out a methodical search process on Prowess and Capitaline database, the assessee selected 18 companies as comparables. Adopting operating profits to sales as the Profit Level Indicator (PLI), the arithmetic mean of comparables was computed at 8%. The Budgeted PLI of the assessee was computed at 20%. Since the assessee's operating margin on sales was more that the arithmetic mean of comparables, the assessee concluded that its international transactions are at arm's length. 25.3 The TPO proposed to perform a separate transfer pricing analysis in relation to fees for technical services paid by the assessee to its associated enterprises. The TPO adopted the CUP method as most appropriate method instead of TNMM. The l....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e AR submitted that the above is also supported by the decision of the Tribunal, Delhi Bench in the case of McCann Erikson India Pvt Ltd vs. ACIT - ITA No.5871/Del/2011. 25.8 In this case the assessee company was engaged in the business of advertising and allied services. During the year, the assessee had several international transactions including payment of management fees (Rs.36,293,148) and coordination cost (3,958,838) to its AE. The assessee applied the Transactional Net Margin Method ('TNMM') to confirm the arm's length pricing of all its international transactions. However the TPO held that the assessee has not demonstrated that it has derived any economic benefit from payment of management fees and coordination cost. Accordingly ALP of these payments were computed as 'NIL' by adopting CUP method. The assessee filed objections before DRP who allowed partial relief to the assessee. On appeal to the Tribunal, the issue was decided in the favour of the assessee. The relevant observations of the Tribunal extracted below:- "9. We have heard both sides and have also gone through the orde....
X X X X Extracts X X X X
X X X X Extracts X X X X
....w any economic benefit received by it. Further, the learned TPO has stated that there is no evidence to show that the assessee has actually received any technical services during the year. Therefore he has determined the arm's length price of technical services fee paid by the assessee at NIL. 25.12 The AR submitted that the TPO's contention that it has not received any technical services is without basis. The assessee submits that it has entered in to Technical Services Agreement with its AE for receipt of technical services which will assist the assessee in development of Rain Tree Park. As per the Agreement the AE has to provide the following technical services to the assessee: a) Engineering and construction technology services in respect of drawings, designs, maps, sketches, and for all civil/construction related methods practices and matters. b) To render all the required technical and engineering assistance and advice in the execution of the project according to the standards specifications and technology in accordance with existing building by laws and an....
X X X X Extracts X X X X
X X X X Extracts X X X X
....igned and drafted by the AE is an evidence to the fact that the AE has provided services to the assessee. Reference is made to page no.43 to 112 of paper book volume 'A' wherein sample documents designed and drafted by the AE is attached. 25.14 Based on the above, the AR submitted that it has received the services and has derived adequate benefit from it. 25.15 The AR submitted that the TPO cannot ignore the Agreement entered by it and cannot question its commercial decision. The AR invited our attention to the decision of Tribunal, Mumbai Bench in the case of Dresser- Rand India Pvt. Ltd v ACIT ITA No.8753/Mum/2010, wherein the Tribunal was concerned with payment of Rs. 10.055 crores to the associated enterprise towards cost contribution agreement. The assessee had received various services like legal services, treasury services, technical support services etc. The TPO computed the ALP for these services at NIL on the ground that no real services were received by the assessee and it had not received any benefit under the cost contribution arrangement. On appeal, the Tribunal deleted the above addition made by TPO. The relevant observations of the Tribunal in this ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....on which is to be determined in such cases is whether the price of this service is what an independent enterprise would have paid for the same. Similarly, whether the AE gave the same services to the assessee in the preceding years without any consideration or not is also irrelevant. The AE may have given the same service on gratuitous basis in the earlier period, but that does not mean that arm's length price of these services is 'nil'. The authorities below have been swayed by the considerations which are not at all relevant in the context of determining the arm's length price of the costs incurred by the assessee in cost contribution arrangement." 25.16 The Tribunal, after going through the documents filed by the assessee, concluded that the assessee has received the services and deleted the addition. In the assessee's case also, it has demonstrated that it has received services and therefore the addition made by the TPO is to be deleted. 25.17 The AR also invited our attention to Tribunal Decision in the case of DVIT v Ekla Appliances ITA No. 3895, 421 & 4333/DEL/2010. In this case, the learned TPO assessed the arm's length price of royalty payment....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he continued losses suffered by the assessee in his business, he could have feared better had he not incurred such expenditure. These are irrelevant considerations for the purpose of Rule 10B. Whether or not to enter into the transaction is for the assessee to decide. The quantum of expenditure can no doubt be examined by the TPO as per law but in judging the allowability thereof as business expenditure, he has no authority to disallow the entire expenditure or a part thereof on the ground that the assessee has suffered continuous losses. The financial health of assessee can never be a criterion to judge allowability of an expense; there is certainly no authority for that. What the TPO has done in the present case is to hold that the assessee ought not to have entered into the agreement to pay royalty/ brand fee, because it has been suffering losses continuously. So long as the expenditure or payment has been demonstrated to have been incurred or laid out for the purposes of business, it is no concern for the TPO to disallow the same on any extraneous reasoning. As provided in the OECD guidelines, he is expected to examine the international transaction as he actually finds the same....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ical services paid by the assessee is sought to be disallowed on the basis of the CUP method. Why and how the CUP method was chosen as the most appropriate method has not been demonstrated. Even otherwise, the conclusion has been arrived at by the TPO without considering any comparable. The law of transfer pricing is based on the rest of comparability. Under the CUP method, comparable uncontrolled transactions are identified. The results of the international transaction are bench marked against such comparable uncontrolled transaction and appropriate conclusions drawn. If no comparables are identified, it cannot be concluded that the transaction is not at arms length. In the absence of any comparable transactions, the entire exercise of the TPO is, not in accordance with the law and hence liable to be ignored. 25.22 The AR invited our attention to Rule 10B(1)(a) which provides for computation of arm's length price under the CUP Method. The methodology is extracted as below: (a)comparable uncontrolled price method, by which,- i. the price charged or ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rned TPO has determined the arm's length price of reimbursement of bank guarantee charges at Nil on the ground that the assessee has not furnished any documents/agreements, the AE has furnished to the bank to justify the payment of bank guarantee charges. Accordingly, the TPO has determined the ALP as NIL and made an adjustment of Rs. 1,15,67,035/- 26.3 With respect to above, the AR submitted that the debit notes raised by the AE with respect to the charges paid to the bank by them and the 'bank guarantee charges' invoice issued by the AE's bankers justify the payment of bank guarantee charges. Reference may be made to page No. 113 to 144 of paper book volume 'A' wherein the above documents are attached. Accordingly, the assessee submits that the payment of bank guarantee charges are at cost and are to be treated as at arm's length. 26.4 In the global business environment, often group companies incur expenses on behalf of other companies in the group. These amounts are recovered by the expending entities from the entity on behalf of whom such expenses ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ment on the transfer pricing. After considering the entire facts and circumstances of the case and the findings of the DRP, we are of the opinion that the transaction taken place is with domestic enterprises and at least one among the AEs are not non-resident. Both the assessee and IJMII are the residents for the purpose of Indian Taxation as they are Indian companies. Any transaction between them will not constitute an international transaction. The primary condition for attracting transfer pricing provisions is that there should be a transaction between two or more associated enterprises. Section 92A defines the term "associated enterprise". Section 92A(1) provides the broad parameters on satisfaction of which two or more enterprises constitute associated enterprises. These parameters are participation in the management or control or capital of the other enterprise. Sub-section (2) of section 92A enlists specific situations which make two or more enterprises associates of each other for the purposes of sub-section (1). 28.1 The term "international transaction" is defined in section 92B(1) as follows: "92B. (1) For the purpose....
X X X X Extracts X X X X
X X X X Extracts X X X X
....h section 92B(2) is a part of section 92B with the heading "Definition of international transaction", it is to be read as an extension of section 92A(2) and not as an extension of section 92B(1). This is for the following reasons: (a) Both section 92A(2) and 92B(2) deal with situations under which two or more persons constitute associated enterprises. (b) Section 92B(1) does not define the term "associated enterprise". It defines the term "international transaction". This definition provides that there can be an international transaction only between two or more associated enterprises and not otherwise. Therefore recourse to section 92A and section 92B(2} is required before referring to section 92B(1}. (c) Section 92B(2} only deems certain transaction to be 'transaction between associated enterprises' and not as 'international transaction between two enterprises'. 28.5 There is a difference between associated enterprises defined under section 92A and transaction deemed to be between associate....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ne of whom is a non-resident. As both the parties are residents, the transaction between the assessee and IJMII do not constitute an international transaction. Thus the basic premise for invoking the deeming fiction under section 92B(2) does not arise. (b) The transaction in question did not involve transfer of goods or services from the assessee to IJM Group or to any other non-resident enterprise, either directly or indirectly, or by using IJMII as an intermediary. The transaction in question involved direct rendering of services by IJMII to the assessee. (c) The APHB came into existence under the A.P. Housing Board Act, 1956. It performs governmental functions. Its policies are directly controlled by the Andhra Pradesh Government. In view of the active participation of the Government of AP in the functioning of the assessee, it cannot be said that IJM Group would influence the assessee either in entering into contract with IJMII or in determining the terms and conditions thereto. a. The transactions between the assessee and IJMII fall under item 4 above. Consequently, the transaction between....