TaxTMI 
TaxTMI 
2017 (5) TMI 477
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.... scrutiny proceedings, the transactions with the AE were referred to the Transfer Pricing Officer [TPO] u/s. 92CA(1) who has proposed adjustments in respect of assessee's international transactions for the year as under: Transaction Adjustment (in Rs.) Interest received on loans 2,39,69,300 Corporate Guarantee 90,19,30,000 Interest of receivables 1,45,21,83,968 Total 2,37,80,83,268 2.1. Assessee had filed certain objections against the TP order before the AO. However, AO finalized the draft order by incorporating the adjustments proposed. Assessee then preferred objections before the DRP on 30-04-2015. DRP vide their order dt. 31-12-2015 has given directions in which only one of the objections raised by assessee with reference to bank guarantee adjustment was accepted partly. Pursuant to the directions of DRP, the AO passed a final order with total addition of Rs. 1,71,51,64,718/- summarized as below. S.No. TP Additions as proposed in the assessment order Amount (Rs) 1. Adjustment u/s. 92CA of the IT Act, 1961 171,51,64,718 a) Interest received on loans 2,39,69,300 b) Co....
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....o Systems Limited ITA No. 524/Bang/2009. 4.2. It was submitted that the loan was provided to the AE which is a Singapore based company i.e. the loan was consumed/received in Singapore and also the loan was in foreign currency and repaid in foreign currency. Hence, the ALP should be determined using Singapore PLR. It was the contention that TPO/DRP, incorrectly equated the transaction of providing loan to subsidiary situated outside India with bank rates prevailing in India without appreciating the fact that loans are made outside India and same should be compared with foreign market prime lending rates. Hence, the comparison is not in accordance with the provisions of the Act and the Rules. Assessee relied on the following case law: i. CIT Vs. Tata Autocomp Systems Ltd., Bombay High Court (ITA No.1320 of 2012) ii. Siva Industries & Holdings Ltd. Vs. ACIT (ITA No. 2148/MDS/2010) iii. Marico Ltd. Vs. ACIT [2016 70 taxmann.com 214 (Mumbai Trib.) / (ITA No. 8713 & 8858/Mum/2011) iv. CIT Vs. Cotton Naturals India Pvt. Ltd., Hon'ble Delhi High Court ((2015) 276 CTR 445 (Del) v. Everest Kanto Cylinder Ltd. Vs. ACIT [2015] 56 taxmann.com 361 (Mumbai-Trib.) / (ITA No. ....
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.... a transaction should have been entered. It is for the assessed to take commercial decisions and decide how to conduct and carryon its business. • Actual business transactions that are legitimate cannot be restructured. • The transaction of lending of money by the respondentassessee to the subsidiary, should not be seen in isolation, but also for the purpose of maximizing returns, propelling growth and expanding market presence. • This ratio and rationale, when applied to the facts of the present case, would mean that the transfer pricing determination would decide what an independent distributor and marketer, on the same contractual terms and having the same relationship, would have earned/paid as interest on the loan in question. What an independent party would have paid under the same or identical circumstances would be the arm's length price or rate of interest. What the assessed would have earned in case he would have entered into or gone ahead with a different transaction, say with a party in India, is not the criteria. What is permitted and made subject matter of the arm's length determination is the question of rate of interest....
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....company. Accordingly, the DRP directed the AO to adopt a rate of 0.53% in place of 2.00% while determining the ALP of the transaction and the same was recomputed at Rs. 23,90,11,450/- instead of Rs. 90,19,30,000/- originally proposed. 6.4. It was the submission that LITL provided guarantee to its subsidiaries to enable the acquisition of a coal mine through bank loans. LITL being successful bidder is under obligation to pay for acquisition of the coal mines. LITL did not charge any fees for providing guarantee, as the purpose of obtaining loan by the subsidiaries was to discharge LITL obligation in acquisition of coal mines which will accrue benefits to the entire group. Guarantee provided by assessee was part of the procedural compliance for availing the banking facilities i.e. loan by the subsidiaries. Corporate guarantee was given by assessee for its own commercial expediency and for the overall benefit of LITL. The corporate guarantee was provided by assessee as it is having shareholding interest in the subsidiaries. Aseessee relied on the following case law: i. Marico Ltd. Vs. ACIT (ITA No. 8713 & 8858/MUM/2011 / [2016] 70 taxmann.com 214 (Mumbai - Tribunal) ii. Micro....
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....ed into by LITL with various banks. The dates on which the corporate guarantee agreements were entered in to by LITL with different banks are tabulated below: Agreement Date of agreement LITL and ICICI Bank (in relation to LRIPL, Singapore) 18th February 2011 LITL and ICICI Bank (in relation to LRAPL, Australia) 18th February 2011 LITL and Barclays Bank (in relation to LIPL, Singapore) 1st September, 2010 LITL and DBS Bank (in relation to LIPL, Singapore) 10th June 2010 LITL and Standard Chartered Bank (in relation to LIPL, Singapore) 6th May 2010 6.9. Ld.DR however submitted that corporate guarantee is an international transaction and relied on the provisions of Section 92B and the order of the Co-ordinate Benches at Hyderabad, in the case of M/s. Foursoft Ltd., in ITA No. 1903/Hyd/2011 and other cases in which corporate guarantee is considered as international transaction. With reference to the rate of corporate guarantee fee Ld. DR referred to the order of the TPO to submit that 2% is a nominal fee which should be upheld. He also referred to the Revenue grounds on this issue contesting that decision of the DRP to reduce it to 0.53....
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....is. Accordingly, Revenue grounds on this issue are rejected. Cross-Objection is in support of the DRP order which in our view, becomes academic. Accordingly, the Cross-Objection is also considered dismissed for statistical purposes. 8. Grounds 11a to 11f: regarding TP adjustment of Rs. 1,45,21,83,968/- related to Interest on Mobilization advance. It was submitted that LITL has not done any export of goods or services to its foreign AEs and hence, there are no trade receivables outstanding in its books from foreign AEs. LITL sub-contracted EPC contracts to its AE namely Lanco International Pte. Ltd (LIPL) (Formerly known as Lanco Enterprises Pte Ltd) in respect of which mobilization/ material advance was paid by LITL to Lanco International Pte. Ltd (LIPL) for the execution of the projects. As the EPC contracts for power plant are long term contracts with involvement of huge capital base, it is submitted that it is an accepted practice in industry to release advances for mobilization of resources like man, material and machinery for execution of contract which are given as non-interest bearing advances and the same will be adjusted against supplies made or work executed by contrac....
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....otech Ltd. Vs. ACIT (ITA No.497/Hyd/2015 iii. Lintas India P. Ltd. Vs. ACIT (ITA No. 2024 (Mu) of 2007) II) LITL has received advance from both AEs and non-AEs without giving any interest. Further, LITL has also given advance to both AEs and non-AEs during the year and has not charged any interest from both AE and non-AE. Hence, even if Internal CUP is applied, and the AE and non-AE transactions are compared, no adjustment can be called for. Relevant case laws : i. Indo American Jewellery Ltd. Vs. CIT, Hon'ble Bombay High Court (ITA No. 1053 of 2012) ii. Mastek Ltd. Vs. ACIT (I.T.A. No.3120) iii. Nimbus Communications Ltd. Vs ACIT (ITA No. 6597/Mum/09) iv. Sony Ericsson Mobile Communications India Pvt. Ltd. (ITA No. 16/2014) The outstanding mobilization/ material advances from AEs and Non-AEs are as below: Particulars Outstanding receivables Outstanding payables AEs 11,88,18,38,737 52,92,82,68,321 Non-AEs 4,80,92,70,245 10,85,32,67,385 Total 16,69,11,08,982 63,78,15,35,706 III) Domestic PLR of 12.25% cannot be applied and the transaction cannot be equated to investment in bank deposit, stocks, mutual funds....
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....as advanced mobilization advances to both AEs and non-AEs and no interest has been charged from either party. Not only that assessee is also not required to pay any interest on the mobilization advances received, which are in fact more than the amounts advanced by assessee. Thus, there is complete uniformity in the act of assessee in not charging interest from both AE and non-AE and also not paying interest/claiming interest for the advances received. Following the principles laid down by the Hon'ble Bombay High Court in the case of Indo American Jewellery Ltd. Vs. CIT, Hon'ble Bombay High Court (ITA No. 1053 of 2012), we are of the view that there is no need for charging any interest on the amounts advanced as receivables. Since this amount is part of contract work, in our view it does not attract any adjustment under TP provisions. Moreover, advances given as part of contract work does not require any special addition, when the TPO was already examined and held that the transaction relating to 'work contract expenses' are within the ALP during the year. Thus, when the whole work contract is considered within the ALP, we are of the opinion that the advances given in the co....
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.... of Shri Pavin Kumar Agarwal. Accordingly, AO categorized the payments made to six companies to an extent of Rs. 1,83,81,30,566/- as non-genuine expenditure. AO also made additions of Rs. 41,08,00,000/- and Rs. 61,11,09,082/-- towards Sub-Contract Expenditure incurred by assessee during the year under consideration on the ground that the said sub-contract expenditure is not a genuine expenditure. The break-up of total amount claimed against 9 companies is as under: Sl. No. Name of the Company Amount Rs. 1. NKG Infrastructures Limited 41,08,00,000 Total(A) 41,08,00,000 2. Makesworth Projects Pvt Ltd 33,37,97,879 3. Pioneer Prodev Pvt Ltd 30,47,68,611 4. Link Point Infra Pvt Ltd 30,79,96,487 5. Suryamukhi Projects Pvt Ltd 34,30,19,698 6. Subhsree Hirise Pvt Ltd 30,77,37,072 7. Subhadristi Complex Pvt Ltd 24,08,10,819 Total(B) 1,83,81,30,566 8. Jain Infra Projects Ltd 37,80,29,798 9. Horizon Infrastructures Ltd 23,30,79,284 Total(C) 61,11,09,082 Total(B+C) 2,44,92,39,638 10.2. A statement stated to have been recorded fro....
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....on 24-03-2015 and did not give a reasonable time for submitting the above documents during the course of assessment proceedings. These additional evidences were made available to AO as per the letter issued by the Secretary DRP in response to which the AO had submitted a report. However, the DRP stated that if the evidences would have been genuine, they could have been produced before the AO and in absence of the same, the AO was justified in treating the expenses to be nongenuine. It is submitted that the assessee could not produce the documents before AO, since the AO did not give a reasonable time for submitting the above documents during the course of assessment proceedings. 11.2. It was submitted that Lanco Babandh Power Limited (LBPL), Lanco Amarkantak Power Limited (LAPL) and Lanco Kondapalli Power Limited entered into memorandum of understanding / implementation agreements with State Governments for development of thermal power projects in the states of Odisha, Chhattisgarh and Andhra Pradesh. For execution of the above contracts, the aforesaid mentioned entities awarded Engineering, Procurement and Construction (EPC) contract to M/s. Lanco Infratech Limited (L1TL/assess....
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.... the Civil works done the assessee. For LAPL (Amarkantak) Project, assessee incurred a cost of Rs. 320.67 Crores on civil works against the receipt of Rs. 471 Crores which were taxed by the AO. Also, for LKPI (Kondapalli) Project, the assessee incurred a cost of Rs. 80.82 Crores for execution of civil works against receipt of Rs. 110.49 Crores, which was again taxed by the AO. The income against the aforesaid invoices has already been received by assessee and the same has also been taxed by the AO. It cannot be thought that such huge quantum of civil works could have been carried out without incurrence of any costs against the same. Further, VAT/Service obligations have been duly complied with by assessee and the concerned Government Authorities have accepted these transactions. Therefore, if one arm of the government has accepted the transactions, the other arm of the government must also respect the same- (Apollo Tyres Ltd Vs. CIT (2002) 255 ITR 273 and Vadilal Chemicals Vs. State of AP (2005) 6 SCC 292). 11.6. It is submitted that a perusal of the Reports generated by Independent Engineers appointed by Lender Banks clearly shows a substantial amount of work being carried out ....
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.... the expenditure is held to be bogus, then the corresponding receipts cannot also be subject to tax because without incurring of expenditure, it was not possible to carry on the Civil works and raise invoices LBPL/LAPL/LKPL. Further, it may also be noted that when the assessing officer has not disputed the receipts of the assessee (which have been duly offered to tax) and no doubts have been raised upon the corresponding completion of the project, then the corresponding expenditure incurred towards completion of the project cannot be treated as bogus in view of the fact that assessee has furnished all the details and supporting evidence. In this regard reliance is placed on the following case laws: a. Judgement of Hon'ble Bombay High Court in the case of CIT Vs. Nikunj Eximp Enterprises (P) Ltd. (2013) [372 ITR 619] (Mum) wherein it was held as under: "The Tribunal records that the Books of Accounts of the respondentassessee have not been rejected. Similarly, the sales have not been doubted and it is an admitted position that substantial amount of sales have been made to the Government Department i.e. Defence Research and Development Laboratory, Hyderabad. Further, ....
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....voking the provisions of section 37(1) of the Act is itself incorrect, while disallowing the said expenditure as the expenditure is neither personal nor capital in nature. 11.9. It was submitted that AO disallowed the expenditure incurred in execution of these projects, although corresponding income was offered to tax in the return of income. It is a settled legal position that the entire amount cannot be subjected to tax and only the profit embedded therein can be subjected to tax. It was further contended that the sub-contractors to whom the payments were made are assessed to tax as this contract receipts are taxable in their hands. Thus, they have filed their ROI's and admitted the receipts. The gross receipts have already suffered tax in sub-contractors hands. The basic commercial principles are that one person's income is other person's expenditure. It may be noted that the payment had also been made through banking channels. In this regard, reliance is placed on the decision of ITAT, Mumbai in the case of ITO Vs. Growel Energy Co. Ltd (2014) 47 taxmann.com 371 (Mumbai - Trib). The AO relied on extraneous and irrelevant factors for making the disallowances such ....
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....i (Additional Ground) - That without prejudice, the AO has erred in law and in facts in making the addition of Rs. 2,44,92,39,638/- u/s. 69C, whereas the DRP has clearly held that the provisions of Section 69C are not applicable in respect of these additions. Hence, the addition made is bad in law and without jurisdiction. 12. Disallowance of service tax as part of disallowance of sub-contract expenditure: Ground No. 16 (Additional Ground) - That without prejudice, in view of facts and circumstances of case, the AO had erred in disallowing the amount of sub-contract expenditure given to certain parties including the amount of service tax which was never claimed as expenditure. Ground No. 17 (Additional Ground) - That without prejudice, in view of facts and circumstances of the case, the AO has wrongly made the disallowance of entire service tax amount of Rs. 11,31,32,746/- in context of said sub-contractors, without appreciating the fact that service tax amount is not claimed as deduction. 12.1. It is submitted that AO while passing the final assessment order has erred in disallowing the amount incurred as service tax as part of the total amount paid to-aforesaid subcon....
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....Section 37(1) can be invoked and relied on the decision of the CIT Vs. Dalmia Cement (Bharat) Ltd., [254 ITR 377]. It was submitted that the transactions are collusive and colourable and assessee has not proved the genuineness of the expenditure. It was further submitted that assessee was given nine months time before the DRP. It was submitted that in the absence of any evidence, there is no option than to uphold the disallowance made by the AO. While accepting that in the consequential order/final order AO has wrongly stated the disallowance u/s. 69C, it was submitted that the disallowance made was u/s. 37(1). He supported the orders of the AO and DRP. 14. We have considered the rival contentions and perused the documents placed on record. It is a fact that the so called statement recorded by the Investigation Unit in Calcutta has not been furnished to assessee in the course of assessment proceedings. The copies filed before us are also are not fully legible and the CIT-DR has filed another copy as legible copy, but still it is also not fully readable, as some of the parts of the statement were missing in the Photo copies furnished on record. Prima-facie as seen from the statem....
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....oo payments made in later year. Thus the so called statements and analysis of fund flow does not establish that the sub contract payments are not genuine. 14.1. It was the contention of assessee these contracts are given as part of EPC sub-contracts and these works are analysed not only by the main contractor but also by various banks while releasing funds. It was submitted that assessee has billed these amounts to the main contractor on the basis of the sub-contracts executed by various companies and there are various documentary evidences which are furnished before the DRP, but unfortunately not accepted. The project receipts were offered as income and so the sub contract expenditure can not be bogus. It was however submitted that various tribunal decisions have estimated only the profit in those contracts, but no disallowance of the entire amount. 14.2. As seen from the submissions and the orders of the authorities, it is noticed that assessee was given no opportunity to justify the expenditure. A survey was conducted on 17-03-2015 at two places whereas assessee's projects were spread all over India. Draft assessment order has been passed on 31-03-2015. In the short period....
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....e adequate time to furnish evidence and DRP also refused to examine the evidence furnished justifying the sub contracts. Therefore, we are of the opinion that AO can examine this aspect afresh after giving due opportunity to assessee. There is also justification in assessee's claim that AO erred in disallowing the amount of sub-contract expenditure, including service tax which was never claimed as expenditure to an extent of Rs. 11,31,32,746/. This contention is also required to be examined. Question of disallowance of an amount which was not claimed should not arise. Consequently, without relying on the so called statements which has no evidentiary value considering that no action was taken either in those companies or in the companies in whose cases the said enquiries were conducted( L& T, PACL), we direct the AO to independently examine the claim of sub contract expenditure. In case assessee billed and offered the said contract receipts, AO is directed to accept the sub contract payments, as assessee received the corresponding amounts from main contractor and offered the same for taxation. In case there is any failure or the nexus was not fully established, Assessee agrees that ....