TaxTMI 
TaxTMI 
2023 (1) TMI 828
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....and on facts in deleting the addition of Rs.90,18,586/- made on account of delayed recovery on the transaction as per order of TPO. c) That the ld. CIT(A) erred in law and on facts in deleting the addition of Rs.4,91,063/- made u/s 35D of the I.T. Act. d) That the ld. CIT(A) erred in law and on facts in deleting the addition of Rs.15,555/- made on account of disallowance of depreciation of Office Equipment." 3. Ground Nos. (a) & (b) mentioned above, it was contended, related to transfer pricing adjustments made on two different counts to the same transaction undertaken by the assessee with its related entity, being reimbursement of expenses received by the assessee from its Associated Enterprise ("AE" for short). One adjustment being on account of profit margin on the said transaction treating it as services rendered by the assessee and the other on account of interest treating the payment made by the assessee which was stated to be reimbursed by AE as indirect funding by assessee to its AE. The arguments with respect to both the issues, it was contended was identical; and, the additions made by the Assessing Officer in respect of the same had been deleted by t....
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....ame. The TPO was not convinced with the explanation of the assessee and held that some services were certainly required by the AE and the assessee had incurred cost by extending the credit facilities; therefore, a markup was justifiable on the reimbursement by the AE to the assessee. The TPO accordingly took a markup of 11% equivalent to the operating margin of the assessee company itself and computed the margin to be earned by the assessee on the reimbursement of expenses at Rs.1,06,54,295/- proposing an upward adjustment on account of the same to the income of the assessee. 7. Further noting that the recovery against such expenses was received from the AE after substantial period of time since the assessee incurred expenses on behalf of the AE, he held that tantamounted to assessee funding the AE for the said purpose. He held that in such circumstances, in an independent scenario, any entity would have expected remuneration for the same. The assessee's contention, that there was no time gap between the expenditure incurred by the assessee and its reimbursement by the AE since already huge amount of advance had been given by the AE to the assessee, was rejected by the TPO stati....
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....as contended that no services were rendered in lieu of these expenses incurred by the assessee on behalf of the AE being payment of statutory dues etc. which involved no services to be rendered by the assessee at all. The explanation of the assessee of the various expenses made on behalf of the AE at paragraph Nos. 2.2 (a) to 2.2 (e) on page Nos. 3-6 of the order is as under:- "2.2.... The learned Assessing Officer has erred in adding of Rs.1,06,54,295/- as margin on the transaction of reimbursement of expenses of Rs.9,68,57,231/- as per Transfer Pricing Order. Details of expenses paid out of advance received is as follows:- a) Custom Duty of Rs. 3,65,20,816/-: The company has paid Rs.10,969/- for custom duty and Rs. 1,997/- for Courier Charges of Maintenance kit & connector for Elliptical waveguide, Rs. 35,788/- for custom duty of VHF cables and Rs.3,64,72,062/- as custom duty as also for clearance of Vessel Traffic and Port Management Systems (VTPMS) equipments. The amount includes custom duty as also charges of custom clearing agent. The company has purchased certain equipments including purchase of VTPMS equipments. The purchase was ....
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....e high in case of borrowings from Indian financial institute, compared to financial institute of Norway. Therefore, Kongsberg Norcontrol IT AS, company's Joint Venture partner, approached Eksportfinans, who can give term loan to assessee. But Eksportfinance require a guarantor from Norway to give loan. Therefore, Kongsberg Norcontrol IT AS has played a crucial role and convinced GIEK to give guarantee to Eksportfinans with understanding that Kongsberg (AE) will bear the premium of GIEK. Therefore, the premium which was paid by the company was reimbursed by AE. As a matter of fact, the project cost was very water tight and any cost escalation could put the project in financial crises and viability will be in doubt. Hence the company negotiated the terms with the AE and ultimately the AE after lots of deliberations decided to reimburse this amount of premium to the company. c) EMD and Tender fees of Rs.1,02,44,055/- The company has paid Earnest Money Deposit and tender fees of Rs. 81,70,420/- for Sethusamundarm & MPT Tender and Rs.20,73,635/- for Tuticorin Port Tender on behalf of AE for the project of VTMPS. The AE was to install the VTPMS system and the compan....
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....deration the company has received advance of Rs.3.00 cr to pay the amount and the company recovered the amount again to maintain sufficient amount of advance. We would like to draw your attention that the company is having advance money of Rs. 12,88,10,315 on 01/04/2010 and Rs.12,47,93,835/- as on 31/03/2011. The company has maintained the level of advance throughout the year under consideration. Further as and when expenses were paid by the company on behalf of AE; it was received back from the AE. As the company has always huge advance to meet such expenses on behalf of AE, therefore, the transactions cannot be called reimbursement of expenses and question of charging interest or mark up does not arise at all. Enclosed herewith chart showing details of expenses paid and recovery date." 11. Considering the above facts, learned CIT(A) held that there was no case of any services rendered by the assessee on account of the reimbursement of expenses made calling for no adjustment to extending of profit element embedded in the reimbursement to be made. His findings recorded in this regard from paragraph no. 2.4 to 2.4 of the order are as under:- "2.4. I have carefully consid....
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....E. The Contract's Standard Conditions for Sale and Installation, Point No. 2 of Annexure E of Kongsberg Norcontrol IT AS states, "Custom Duty, Installation/Commissioning and Training are included in the Contract Price". 2.5. The appellant has further submitted that AE has given the amount in advance to pay the expenses on its behalf hence it cannot be called reimbursement of expenses. In respect of all the payment, AO has added a mark up of 11% which is equivalent to profit earned by the Assessee Company in operational activities as per the Assessing Officer. Question of mark up does not arise for the reasons that these transactions cannot be called reimbursement of expenses and the Company have not rendered any services to the AE which generally rendered in operational activities though it is mentioned by the AO that "it is clear from the details of reimbursement recovered from AE that you have provided services to AE". The reimbursement or recoveries is not for services rendered by the Company. Operational activities are separate which are for specific services like VTS services rendered to ship owners, whereas no such services are rendered to the AE. Therefore, the ....
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....ot clearly established the facts that what services have been rendered by the appellant company in this facts and situation. The TPO has a/so not specified as to which method is proposed to be applied and what is comparable transaction functionally similar to that with the AE. The A.O. has simply added the amount as suggested in TPO report without appreciating the facts involved in this case. In view of the above facts and on the basis on the above discussion, the adjustment u/s 92C of the Act appears to be out of context and is not required. In nutshell, the adjustment u/s 92C of the Act made by the A.O. is deleted. The ground of the appeal is allowed." 12. Similarly, on the basis of all these facts, the learned CIT(A) held that since the assessee had made these expenses out of advances received from the AE, it could neither be termed as reimbursement of expenses nor could it be said that there was, by virtue of meeting expenses on behalf of the AE, any loan advanced by the assessee to the AE. Accordingly, he deleted the adjustment made on account of interest charged on the alleged advance made by the assessee on account of reimbursement of expenses. The findings recorded in th....
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....ghout the year, which was sent by AE to pay on its behalf for various expenses as has been agreed in the agreement entered by the appellant and the AE. TPO in his order at para 6.2.1 on page 11 has mentioned the table of advance kept by the AE with the appellant company and has not been observed anything contrary by the AO. The appellant has shown that throughout the year it had the sufficient advance maintained to meet the expenses on behalf of the AE as per the terms and condition of the Agreement. The appellant has further submitted that AE has given the amount in advance to pay the expenses on its behalf hence it cannot be called reimbursement of expenses. In respect of all the payment, AO has added a mark up of 11% which is equivalent to profit earned by the Assessee Company in operational activities. The TPO has not clearly established the facts that what services have been rendered by the appellant company in this facts and situation. The TPO has also not specified as to which method is proposed to be applied and what is comparable transaction functionally similar to that with the AE. The A.O. has simply added the amount as suggested in TPO report without appreciating the fa....
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....e to the AE while meeting the expenses of the AE and further on account of the fact that all these expenses were made out of advances given by the AE to the assessee, there was no reason to make any adjustment to the ALP of the international transactions of reimbursement of expenses either on account of profit element or the interest element. In view of above, the grounds of appeal Nos. (a) and (b) raised by the Revenue are dismissed. 16. Ground No. (c) relates claim of preliminary expenses written off as per the provisions of Section 35D of the Act which the assessee had claimed to the extent of Rs.4,91,063/- and which was disallowed in entirety by the Assessing Officer while the learned CIT(A) had restricted the disallowance to Rs.25,000/-. 17. The facts of the case being that the assessee had claimed deduction of Rs.4,91,063/- being preliminary expenses written off to the extent of 1/5th as per Section 35D of the Act comprising of Rs.4,66,063/- being claimed as per previous years relating to expenses incurred on incorporation of the company and Rs.25,000/- being 1/5th of the expenditure incurred during the impugned year of Rs.1,25,000/- on increase in share capital of the ....
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.... the Act. The fact is that deduction u/s 35D includes Rs. 4,66,063/- being 1/5th of expenses claimed as per last year. The expenditure claimed pertains to the expenditure of company incorporation and other expenses of preliminary in nature. The company has started writing off preliminary expenses after commencement of business. Hence, question of disallowance does not arise on Rs.4,66,063/-. The company has further incurred expense of Rs.1,25,000/- in the year under consideration for increase in share capital and claimed 1/5thof the same i.e.Rs.25,000/- under section 35D. The appellant has further submitted that if above contention of the company is not agreeable, then it is requested to allow Rs.4,66,063/- and disallow Rs.25,000/- only being 1/5thof Rs.1,25,000/- which is incurred during the year under consideration. 5.4. After going through the facts of the case, it is seen that deduction u/s35D includes Rs.4,66,063/- being 1/5thof expenses claimed as per last year. The expenditure claimed pertains to the expenditure of company incorporation and other expenses of preliminary in nature. The company has started writing off preliminary expenses after commencement of busines....
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....of depreciation is EPBAX equipment, vacuum cleaner, water dispenser etc. The learned CIT(A), after considering the nature of assets, held that they qualify as plant and machinery entitled for depreciation @ 15%. The findings recorded by him in this regard at paragraph No. 6.3 and 6.4 of his order are as under:- "6.3. I have carefully considered the assessment order and submission filed by appellant. The Assessing Officer has observed that appellant has claimed depreciation @ 15% on office equipment as against prescribed rate of @10%. It was observed that appellant is not entitled to claim depreciation @15% on office equipment being, Vacuum Cleaner, Water Dispenser, EPBAX Installation, etc hence he disallowed excess depreciation claimed for Rs 15,555/-. The appellant has also referred to provisions of section 32A of the Act which relates to investment allowance on new plant & machineries wherein it is stated in statute that office equipment are not entitled to such deduction which means that such assets are covered within expression "Machinery and Plant". 6.4. On careful consideration of the above facts, it is pertinent to note that provisions of section 32A relati....