TaxTMI 
TaxTMI 
2024 (7) TMI 829
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.... Tax (Appeals) [CIT(A)] erred in confirming the disallowance of Rs. 2,94,88,620/- being commission paid to certain parties during the previous year. 2. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in confirming disallowance of Rs. 54,16,82,032/- on account of increase in value of construction work-in-progress. The CIT(A) erred in not directing the Assessing Officer to grant deduction of Rs. 52,95,37,421/- [Rs. 54,16,82,032/- less Rs. 1,07,12,19,453/-] being difference between closing and opening construction work-in-progress allowable based on the stand of Assessing Officer in earlier years. 3. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in confirming disallowance on account of provision for foreseeable loss of Rs. 9,79,40,038/-. 4. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in confirming disallowance made u/s 40A(9) for contribution to Utmal Employees Welfare Fund of Rs. 1,50,000/-. 5. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in confirming partial disallowance of depreciati....
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....ncome-tax Rules, 12. The appellant company craves leave to add to, to amend, to alter or modify any or all the aforesaid grounds of appeal." 2.1. The Appellant has also raised the following Additional Ground of appeal vide letter, dated 14/11/2018: 1. "On the facts and in the circumstances of the case and in law, the Ld. Assessing Officer (AO) ought to have computed the deduction u/s 80HHC of the Act in determining the Book Profit u/s 115JA on the basis of "profit as per the profit and loss account" instead of "profits of business and profession computed under the normal provisions of the Act while determining tax liability u/s 115JA of the Act. 2. On the facts and in the circumstances of the case and in law, the Ld. Assessing Officer (AO) ought to have computed the deduction u/s 80HHE of the Act in determining the Book Profit u/s 115JA on the basis of "profit as per the profit and loss account" instead of "profits of business and profession computed under the normal provisions of the Act" while determining tax liability u/s 115JA of the Act." 3. The relevant facts in brief are that the Appellant filed original return of income on 29/10/2004 declari....
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....appeal before the CIT(A) vide, order dated 12/08/2013, the CIT(A) partly allowed the aforesaid appeal. However, the CIT(A) did not grant any relief in relation to the additions/disallowances specified in paragraph 5 above. 7. Being aggrieved, the Appellant is now in appeal before the Tribunal on the above issues on the grounds reproduced in paragraph 2 above which are taken up hereinafter in seriatim. Ground No. 1 8. Ground No. 1 pertains to disallowance of commission expenses of INR 2,94,88,620/- paid to different parties by the Appellant. 9. During the relevant previous year, the Appellant paid commission of INR 2,94,88,620/- to various parties in respect of contracts received from Government Departments and Public Sector Undertakings. According to the Appellant, the commission was paid for various services rendered by these parties, like liaision with the customers, providing feedback on tenders, collection of cheques, 'C' forms etc., and was, therefore, allowable deduction under Section 37 the Act being expenditure incurred wholly and exclusively for the purpose of business of the Appellant. However, the Assessing Officer was not convinced. The Assessing Officer hel....
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....red towards payment of commission to certain parties. From the perusal of records, we find that similar issue raised by the assessee company in its appeal in ITA No.987/Mum/1998 relating to Assessment Year 1990-91, wherein the Tribunal after deliberated upon the issue a length and following the decisions of the Tribunal in assessee's own case relating to Years 1988-89 held that ............The assessee company should explain without any shadow of doubt, the nature of such services. In the present case, no such explanations or details have come from the side of the assessee company. Without knowing the exact nature of the services rendered by those parties, it is not possible for us to decide whether the commission payable by the assessee company was a legitimate expenditure permitted by law, and therefore, to be allowed. If such detail: are not coming, such payments made in respect of contracts awarded by Public Sector Companies we have to be held as expenses were incurred against public policy, and therefore, not entitled to be deducted in the light o the proviso to Sect 37 of the IT Act. This position is confirmed by the order o the Tribunal in assessee's own case for the....
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....Particulars Amount (INR) Provision made in valuation of closing construction work-in-progress 54,16,82,032 Provision made in valuation of opening construction work-in-progress 1,07,12,19,453 Difference between closing & opening Constructions Work-in-Progress (52,95,37,421) 16. In support of the above contentions the Appellant filed before the Assessing Officer 'Notes on Account for Construction Contract' (placed at page 78 & 79 of the paper-book) and 'Accounting Policy Regarding Construction/Project Activity' (placed at page 80 to 82 of the paper-book). 17. The Assessing Officer, however, did not accept the above contentions of the Appellant holding that method of valuation followed by the Appellant in respect of construction jobs was not correct and concluded that the valuation of closing Construction Work-In- Progress as on 31/03/2004 was incorrectly reduced the Appellant by INR 54,16,82,032/-. The Assessing Officer also noted that similar increase in the value of Construction Work-In-Progress was also made by the Assessing Officer for the earlier Assessment Years and computed the difference in valuation of the adjusted closing and opening constru....
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....uration of the contract. 2.0 Revenue recognition 2.1 Two principal methods followed for recognizing the revenue are: a) The completed contract method b) The percentage completion method 2.2 Under the completed contract method, revenue is recognized only when a substantial portion of the contract is completed. Costs and progress payments received are accumulated and carried to the accounting period in which the contract is completed and the profits/loss recognized in that year. 2.3 Under the percentage completion method, revenue is recognized pro rata to the stage of completion is reached. Against the revenue, costs incurred in reaching the given stage are matched leading to the profits for the period in question. The merit of percentage completion method is that revenue is reflected in the year in which the activity is undertaken. 2.4 A number of methods are used to measure the stage of completion of the job which is in turn the basis for determining the revenue to be recognized in the financial statements e.g., (i) proportion of costs incurred to date to the estimated total costs of the contract or (ii) proportion of v....
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....ompletion. (b) Stage of completion is measured by the proportion of the value of work certified to total contract value. (c) Claims made in respect of escalations are accounted only on being admitted by the customers. (d) Revenue is recognized on the basis of value of work certified by the customer. Advances / Progress payments received against "running bills" are not considered as revenue. (e) Retentions are accounted as Sales and shown as receivables. 2.0 Job (WIP Valuation): 2.1 Job valuation is the key element of the construction contract accounting. The difference between the work-in-progress figures as on the opening & closing days of the accounting period is accounted as Sales. The aggregate value of all jobs which are in progress (as per 2.2 and 2.3 below) at the end of the accounting period constitutes the Work-in-progress. 2.2 Jobs which are less than 50% complete are valued at cost (vide valuation policy disclosed in the covering letter to the Return of Income - Para 27). 2.3 Other jobs are valued at estimated realizable value which is calculated as follows: Value of Work Certified xxx Add: &nb....
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....re of that year. This method of job valuation differs from the job completion method wherein profits form part of Profit & Loss Account in the year of job completion as both the expenses and revenue are postponed to that year. It can be observed from the valuation policy followed by the company that as an ongoing business, there will be many jobs just taken up for construction and other hand, many jobs will be completed. The cycle will continue every year without having any material impact on the reported profits. 2.6.2 The amount of Contingencies allowance is quantified by applying following pre-determined percentages to "work certified" figure depending on the type of project and the stage of completion: Job Type For 51-90% Completion For 91-99% Completion Defect Liability Period Civil/Infrastructure 3 % 1.5 % 1 % Mechanical 5 % 2 % - Electrical 5 % 2 % - Note: DLP refers to Defect liability period i.e. Warranty period. 2.6.3 No allowance for contingencies is made in respect of jobs which are less than 50% complete, since as per our accounting policy, such jobs are valued at cost and no p....
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....titute of Chartered Accountants of India (ICAI) with effect from 01/04/2003. However, the Assessing Officer was not convinced. According to the Assessing Officer, the aforesaid provision was created for a loss which may or may not occur at a future day. Therefore, the Assessing Officer disallowed the deduction for provision for foreseeable losses of INR 9,79,40,038/- holding the same to be contingent in nature. 26. In appeal, it was contended on behalf of the Appellant that the provision has been created in accordance with the revised Accounting Standard - 7 on Construction Contracts issued by ICAI with effect from 01/04/2003 the aforesaid Accounting Standard provided that in cases were probability of the total cost exceeding the total contract revenue is higher, the expected loss from the concerned construction-work is required to be recognized as an expense immediately in the year on which the contract is signed notwithstanding the fact whether or not such construction-work has commenced or not. The Appellant has been following this accounting policy consistently. Therefore, the provision for foreseeable loss on construction-work should be allowed as deduction from the income.....
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....ot disputed that the department in earlier years has allowed the loss on estimated basis having regard to the expenditure actually incurred in various years. Therefore, in principle, it is not disputed that the estimated loss under the present and circumstances is an allowable deduction. However, merely because the change in method of accounting is bona fide, it would not lead to the inference that the income is also deducible properly under the Income-tax Act. This aspect is very evident from 1st proviso to section 145 as it stood prior to amendment 1995 with effect from 1-4-1997 which reads as under:- "Method of accounting-(1) Income chargeable under the head "Profits and gains of business or profession" or "Income from other sources" shall be computed in accordance with the method of accounting regularly employed by the assessee : Provided that in any case where the accounts are correct and complete to the satisfaction of the Assessing Officer but the method employed is such that, in the opinion of the Assessing Officer, the income cannot properly be deduced therefrom, then the computation shall be made upon such basis and in such manner as the Assessing Office....
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....e similar ground has been raised by the assessee for the A.Y. 2003-04, vide ground No.2. As the issue is identical expect the assessment year and the amount of foreseeable losses at Rs. 5,83,038/-, the findings given in respect of A.Y. 2002-03 is also applicable for the A.Y. 2003-04. Therefore, ground No.1 of A.Y. 2002-03, and Ground No.2 of A.Y. 2003-04 of the assessee are allowed." (Emphasis Supplied) 30. On perusal of above, it was clear that while in principle the Tribunal had accepted the contention of the Assessee in the above cases that deduction for foreseeable losses estimated on a reasonable basis could be allowed as deduction. However, in both the cases, the issue is remanded back to the file of Assessing Officer for computation and quantification. In the case of Mazgaon Dock Ltd. (supra) though the Tribunal noted that estimation was done on technical basis, in view of the discrepancies pointed out by the First Appellant Authority for correct estimation of loss, the issue was restored to the file of Assessing Officer for examining correctness of the claim. Whereas in the case of Jacobs Engineering India Pvt. Ltd (supra) the Tribunal noted that quantification and calcu....
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....ence to JCR (short for Job Cost Report). Therefore, the Appellant was asked to file documents in support of the computation above. In the aforesaid background an affidavit came to be filed by the Appellant the relevant extract of which reads as under: " I ................................. do hereby state that I am currently working in the capacity of Joint General Manager, Finance & Accounts with Larsen & Toubro Limited. I do hereby solemnly Affirm that I am aware of the facts pertaining to the appeal proceedings specifically in respect of the claim for "foreseeable loss" by the Company for Assessment Year 2004-05 and on the basis of the same I state as under:- a. The Assessment proceedings for Assessment Year 2004-05 took place between the Year 2005 and 2006. b. During the course of the Assessment Proceedings vide letter dated 17th November 2006, the methodology adopted for computing the foreseeable loss was explained to the Assessing Officer along with the relevant extract of Accounting Standard -7 ('AS-7') issued by The Institute of Chartered Accountants of India. c. In the Audited Accounts for the year under consideration, the a....
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.... consideration. The Company is continuing its efforts to retrieve and extract the relevant information, nevertheless. i. The Company had undertaken 690 projects (approx.) during the Assessment Year 2004-05. Of this, the Company has provided for loss in about 30 projects. The foreseeable loss claimed is insignificant vis a vis the overall cost of the operating projects and is not material. Further, only, the foreseeable loss of the project is disallowed. The loss, to the extent of actual expenditure of the project has been allowed by the Assessing Officer. In doing so, the Assessing Officer has accepted the estimated cost of the project as per the job cost report. I say that the computation of foreseeable loss is also based on the same estimated cost of the project as per the job cost report which has been accepted by the Assessing Officer. j. I further say that the issue of foreseeable loss is only a timing difference as by the end of the project, only the actual profit / loss of the project is offered to tax/claimed as loss by the Company. I hereby state that whatever is stated hereinabove is true to the best of my knowledge." 33. On perusal of ....
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....he Assessing Officer has accepted estimated cost of the project as per the Job Cost Reports and therefore, by necessary implication the Assessing Officer has also accepted the computation of foreseeable losses as the same are based upon estimated cost of the project as per the Job Cost Reports. We do not find any merit in the aforesaid assertions. Admittedly, the Job Cost Reports were never filed before the Assessing Officer or the CIT(A). In our view, the question of drawing any inference does not arise in view of the fact that the Assessing Officer rejected the claim of foreseeable losses made by the Appellant and therefore, as a matter of fact the occasion to examine the computation/working of the same did not arise. 36. Further, in our view it cannot be said that the Assessing Officer had accepted the computation of foreseeable losses. We note that as per paragraph 2.1 L&T's Accounting Policy Re: Construction/Project Activity (for short 'Accounting Policy') dealing with Job (WIP Valuation), the difference between the work-in-progress figures as on the opening and the closing days of the accounting period was accounted as sales. The valuation of Work-in Progress is based upon....
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....ed as an expense immediately, i.e. in the period in which the contract is signed or a legal or constructive obligation has been assumed. Further, the amount of such loss is determined irrespective of whether or not work has commenced on the contract; the stage of completion of contract; or amount of profits expected to arise on other contracts. In determining the said loss of Rs. 9,79,40,038/- in respect of our various construction jobs, we have considered the costs attributable to such jobs in accordance with the provisions of the revised AS-7. The said provision has been made by us in accordance with the mandatory requirement of the Accounting Standard issued by the ICAI and followed consistently. You will thus appreciate that the practice followed by the assessee is consistent with para 6(c) of AS-I notified u/s 145(2)." 37. We note that the Assessing Officer has not made any addition on account of difference of valuation of Work-in-Progress and therefore, it can be said that the Assessing Officer has accepted the computation of Allowance for Contingencies. This is in line with the decision of the Tribunal in the case of Mazgaon Dock Ltd. (supra) relied upon by the A....
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....oresaid, we find some merit in the alternative contention of the Appellant. It was submitted that since the Appellant is following project completion method and the projects have been completed, the entire Revenue from the project would have been offered to tax and therefore, in absence of any impact on revenue the settled position should not be disturbed. However, even this contention that claim of foreseeable losses made by the Appellant merely resulted in timing difference as by the end of the project entire/actual profits of the project were offered to tax cannot be accepted in absence of any material on record supporting the same. Accordingly, we direct the Appellant to file relevant documents/details before the Assessing Officer to show that all the 30 projects have been completed and entire revenues from the 30 projects under consideration have been offered to tax leading to no leakage of revenue pertaining to the projects on overall basis. We direct the Assessing Officer to verify the details/documents submitted by the Assessing Officer and if satisfied, restrict the disallowance on account of unforeseeable losses pertaining to (a) the projects (mentioned in the list of 30 ....
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....on 40A(9) of the Act. 5.2 In appeal, the Ld. CIT(A) following the order of his predecessor-in office for the AY 1997-98 held that the said contributions cannot be said to have been made to any statutory fund nor covered u/s 36(1)(iv)/(v). Moreover, the assessee has itself admitted the disallowance in terms of section 40A(9). On the above reasons, the Ld. CIT(A) upheld the addition of Rs. 2,82,665/- made by the AO. 5.3 Before us, the Ld. counsels of the assessee rely on the order of the Tribunal in its own case for the AY 1994-95 to AY 1997-98 and submit that the issue has been decided in favour of the assessee by the above decisions. On the other hand, the Ld. DR supports the order passed by the Ld. CIT(A). 5.4 We have heard the rival submissions and perused the relevant materials on record. The ITAT „J‟ Bench Mumbai in assessee‟s own case for the AY 1997-98 (ITA No. 2891/Mum/2001) held : "Ground No. 4 relates to the disallowance of Rs. 6,32,725/- on account of contribution to Marine Officers Welfare Fund. This issue has been discussed by the Assessing Officer at para 18 page 9 of this order and the same has been consid....
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....al for the Assessment Year 1998-99 and 2003-04. 46. Being aggrieved, the Appellant is now in appeal before us on this issue. 47. During the course of hearing, both the sides agreed that vide common order, dated 27/07/2016, passed in the cross-appeals for the Assessment Year 1998-99 (ITA No. 442/Mum/2010 and 4599/Mum/2013), the Tribunal has held that the sale of the Undertaking was a transaction of slump sale and not a case of itemized sale as held by the Assessing Officer. Therefore, the very basis on which the WDV and depreciation was re-computed by the Assessing Officer does not survive. Taking note of the aforesaid facts, the Tribunal had decided identical issue in favour of the Appellant and directed the Assessing Officer to accept depreciation as calculated by the Appellant and thereby deleted the addition made on account of reduction of depreciation claimed by the Assessing Officer vide common order dated 11/04/2022, passed in a batch of appeals including the appeal preferred by the Appellant for the Assessment Year 2001-02 (ITA No. 6908/Mum/2012) and 2002-03 (ITA No. 2117/Mum/2013). Respectfully following the aforesaid decision of the Tribunal, we overturn the decision....
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....taking 0.5% of average value of investment as a reasonable basis of determining the quantum of disallowance to be made under Section 14A of the Act. 51. Being aggrieved by the above order passed by the CIT(A), the Appellant is now in appeal before us. 52. The contentions advanced on behalf of the Appellant can be summarized as under: (a) The CIT(A) has enhanced the disallowance under Section 14A of the Act without issuing enhancement notice under Section 251 of the Act. (b) While the provisions contained in Rule 8D were held by the CIT(A) to be not applicable for the Assessment Year 2004-05, the CIT(A) has, in effect, applied the same for making disallowance towards interest and other expenses under Section 14A of the Act (c) In the case of the Appellant for the Assessment Year 1999-2000 [ITA No. 6257/Mum/2011, order dated 28/03/2018] this identical issue has been decided in favour of the Appellant and the disallowance made by the Assessing Officer under Section 14A of the Act has been deleted by the Tribunal by accepting the contention of the Appellant that the investments have not been made out of borrowed funds by placing reliance on the judgment....
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....owance cannot be regarded as reasonable. Further, while making the disallowance the Assessing Officer has observed that the burden was on the Appellant to show that the investment were made from own funds. The reasoning given by the CIT(A) is contrary to the judgment of the Hon'ble Supreme Court in the case of South Indian Bank Ltd. Vs Commissioner of Income Tax: [2021] 438 ITR 1 (SC) given the facts of the present case noted hereinabove, it would be presumed that investments were made out of own funds and therefore, proportionate disallowance of interest expenses under Section 14A of the Act was not warranted on the ground that separate accounts were not maintained by Appellant for investments and other expenditure incurred for earning tax-free income. Accordingly, we delete the addition/disallowance made by the Assessing Officer and the CIT(A). Disallowance of INR 12.24 Crores made under Section 14A of the Act is deleted. Ground No. 6 raised by the Appellant is allowed. Ground No. 7 55. Ground No. 7 raised by the Appellant is directed against the order of CIT(A) confirming the assessment order to the extent it holds that extinguishment of sales tax deferred loan liability r....
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....ther words, the assessee has paid an amount of Rs. 19.73 crores in assignment in consideration for taking over the said obligation for repaying for Rs. 71.34 crores on future date to another company. The differential amount of Rs.51.61 Crores was credited to the P&L account, however while computing the income the assessee, the same was reduced in the computation of income by treating the same as capital receipt not chargeable to tax. According to the A.O., the said liability has ceased to exist in the books of the assessee as the same was taken over by another entity. In coming to this conclusion, the A.O relied on the decision of CIT vs. Sunderam Iyengar & Sons Ltd. (supra). wherein the assessee used to receive deposits in the course of its trading transaction on sale of Coca Cola in glass bottles of, etc. which are refundable on return of the said bottles. wherein the order of the Supreme Court has held that liability needs to be treated as income of the assessee u/s 41(1) of the Act. The ld. CIT(A) in the appellate proceeding affirmed the order of AO by holding that the said takeover of deferred sales tax liability to be paid in future is taxable u/s 28(iv) of the Act, by relyin....
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....37 the liability. The remission or cessation of liability contemplates a discharge or partial discharge of a liability coupled with no obligation to discharge the balance liability and thus, it would not cover the facts of the present case, where the Appellant has assigned its obligation, although at the present value. The liability has been discharged by the Appellant by making an immediate payment at the present value and therefore it cannot be said that there is a remission or cessation of the liability. Further there is no remission or cessation of the liability for the reason that the assignment of the liability is to a third party whereas qua the Sales-Tax Department the assessee continues to be liable to pay the said amount and thus as for as the Sales-Tax Department is concerned, there is no remission or cessation of a liability. The case of the assessee finds support from the decision of the Apex Court in CIT vs. S.I. Group India Ltd., (Supra) wherein the Apex Court held that when the Sales-tax Department has not accepted the pre-payment, it cannot be a case of cessation or remission of a liability. In the present case also, the assignment has not been accepted by the Sale....
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....erused the decision relied upon by the revenue to support the orders of the authorities below but find that the same are distinguishable on facts or reversed or not a good law 40 in view of the subsequent decisions. In the case of CIT vs. Sunderam Iyengar & Sons Ltd. (supra), the assessee used to receive deposits in the course of its trading transaction on sale of Coca Cola in glass bottles of, etc. which are refundable on return of the said bottles. During the relevant year, such deposits outstanding for a number of years were transferred by the assessee to the Profit & Loss Account as no longer payable to the said customers. On these facts, the Apex Court held that the amount was received by the assessee in the course of trading transaction and the same is chargeable to tax as trading receipts when the said amount becomes the assessee‟s own money. The Apex Court further held that because of the trading transaction, the assessee has become richer to the extent of the amount transferred to Profit & Loss Account and, hence, the amount so transferred is to be treated as income of the assessee. In the present facts are distinguishable and, therefore, the decision of the Apex Cou....
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....s discharged the full liability at net present value which cannot be said to be a case of either waiver or cessation of the liability, which was the fact before the High Court. The decision in the case of CIT vs. Ramaniyam Homes Pvt. Ltd.,(supra) relied upon by the ld DR has been reversed by the Apex Court by the common judgment dated 24th April 2018 in Mahindra & Mahindra Ltd.(supra).Therefore, the reliance on the decision of the Madras High Court by the Revenue is wholly misplaced and completely 43 unjustified. The facts in the case of CIT vs. Aries Advertising Pvt. Ltd.(supra) are altogether different vis a vis the facts in the present case as in the case before the High Court, there was actual write off credit balance (trading liabilities) and, accordingly, the High Court held that the assessee therein had received a benefit in respect of a trading liability which came within the ambit of section 41(1) of the Act whereas in the present case, there is no question of any benefit being received by the Appellant as the appellant has discharged the net present value of a future liability not can the present case be said to be of remission or cession of the liability. Therefore, this....
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....he ground of the assessee is allowed." 29. The facts and circumstances are stated to be identical. Therefore, consistent with the earlier orders of the co-ordinate bench of this Tribunal, we allow the ground raised by the assessee." 59. Respectfully following the above decision of the Tribunal in the case of the Appellant, we delete the addition of INR 4,25,44,104/- made by the Assessing Officer on account of extinguishment of debt being sales tax deferred loan liability. Thus, Ground No. 7 raised by the Appellant is allowed. Ground No. 8 60. Ground No. 8 raised by the Appellant is directed against the order of CIT(A) confirming the transfer pricing adjustment of INR 4,11,67,000/-. 61. During the assessment proceedings a reference was made to the Transfer Pricing Officer (TPO) under Section 92CA(1) of the Act for the computation of arm's length price in relation to international transactions entered by the Appellant with its Associated Enterprises (AEs). 62. The TPO noted that during the relevant previous year the Appellant has reported a international transaction being payment of INR 20,58,35,000/- by the Appellant to its AE in Sri Lanka [i.e., Larsen &....
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....on and commissioning of the plant was awarded to AE A separate Umbrella Agreement (Guarantee and Co-ordination Agreement) dated 15.6.2000 was further entered into between the client (AEs Kelantissa P Ltd, Srilanka), the company and its AE wherein the overall responsibility for the total execution/performance of the contract awarded by the client was fixed on the company Reference in this connection is invited to para 1.1-1.4 of the Umbrella enclosed at pages 34 to 26 forming part of the Documentation. Since the AE faced a cost overrun on the onshore work of the project and was unable to meet the milestones within the budgeted resources, the company had to reimburse the expenditure amounting to Rs 2,058.35 lacs during the year under reference It is worthwhile here to note that the said reimbursement was subject to the decision of working group committee (comprising of EXIM Bank RBI ECGC SCGB Credit Lyonnacs and the company as its members) and the final approval of the Reserve Bank of India. The copies of all the relevant correspondence in this regard, including the minutes of the working group meeting, approval of RBI statement showing comparison of estimated and a....
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....could not be regarded as an approval for transfer pricing purposes. No unrelated party would have agreed to bear 100% of the project cost overrun expenses. Since the Appellant was holding 80% equity shares in L&T Ceylinco, the Appellant should have shared the project cost overrun to the extent of its equity holding only. This would have been in conformity with the CUP Method prescribed as per the provisions of the Act. Accordingly, the TPO determined the ALP of the transaction between the Appellant and L&T Ceylinco at 80% of the total cost overrun expenses remitted by the Appellant [i.e., INR 16,46,68,000 being 80% of INR 20,58,35,000/-]. Thus, the TPO proposed transfer pricing adjustment of INR 4,11,67,000/- (i.e., INR 20,58,35,000 less INR 16,46,68,000) vide order dated 30/11/2006, passed under Section 92CA(3) of the Act. The aforesaid transfer pricing adjustment was incorporated by the Assessing Officer in the Assessment Order, dated 05/12/2006, passed under Section 143(3) of the Act. 66. Being aggrieved, the Appellant carried the issue in appeal before the CIT(A). Before the CIT(A), the Appellant made detailed submissions which have been summarized in paragraph 15.3 of the o....
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.... Srilanka. An understanding was therefore reached with M/s. Ceylinco Insurance Co. Ltd. that the execution of the AESK power project would be the sole responsibility of the appellant company and any contractual obligation liabilities arising out of the contract will be made good by the appellant company. Copy of communication in this regard vide letter dated 17th February, 2003 is enclosed at Annexure 6.2. Appellant submitted that during the execution of project, the AE faced cost overrun on the onshore work of the project and was unable to meet the milestones within the budgeted resources. Accordingly, the appellant company has reimbursed the cost overrun of Rs. 2,058.35 lacs [USD 4.5 Mn.]. The said reimbursement was subject to the decision of Working Group Committee (comprising of EXIM Bank, RBI, ECGC, 8CGB, Credit Lyonnacs and the appellant Company as its members) and the final approval of the Reserve Bank of India. The copies of the relevant correspondence in this regard viz. statement showing comparison of estimated and actual cost of project, the minutes of the Working Group Meeting, approval of RBI and the bank advice for remittance were enclosed as Annexure 6.3. ....
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....mongst the client, L&T Ceylinco (i.e. AEs) and the Appellant the overall responsibility for execution/performance was fixed on the Appellant. It is the contention of the Appellant that as per the understanding between M/s Ceylinco Insurance Company Ltd. (the minority shareholder holding 20% share in L&T Ceylinco), and the Appellant, execution of the power project was the sole responsibility of the Appellant. During the execution of the project, L&T Ceylinco was enabled to meet the milestone within the budgeted resources incurring project cost overrun expenses of INR 2,058.35 Lacs. It was the aforesaid project cost overrun expenses which were reimbursed by the Appellant. The case of the Appellant is that the Appellant was under contractual obligation to make the aforesaid remittances to L&T Ceylinco. 70. We have perused the Guarantee and Coordination Agreement, dated 15/06/2000. Even if we accept the contention that the Appellant was responsible for the execution of power project as a whole, it cannot be said that the Appellant was under obligation to bear 100% of the project cost overrun expenses. It is the contention of the Appellant that the decision to pick up 100% of the pro....
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....taken at arm's length. Royalty is a separate international transaction, for this purpose, reliance can be placed on the decision of Punjab & Haryana High Court in the case of Knorr-Bremse India (P) Ltd., ITA No.182 of 2013. The RBI approval/FIPB approval is not determinative of ALP cannot be considered to be a valid CUP. Automatic route under which FIPB approvals or RBI approvals are granted have been devised for the "ease of doing business". These approvals emanate from other legislation or policy and are not in relation to determination of Arm's Length Price. The purpose of the RBI approval/FIPB approval is entirely different and cannot be equated with the arm's length principle. The approvals of rates given by the DIPP and the RBI are for different purposes, like for promotion of industries, management of foreign exchange etc. and it varies in accordance with the business practices prevalent at different times which are clear from the RBI approvals themselves. Going by the relevant TP provisions as enshrined under the Act and relevant Rules, it is mandatory that the appellant has to independently benchmark its international transaction with independent comparables so....
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....the Revenue that the royalty rate should be less than 3% by placing reliance on Clause III of Press Note 9 (2000 Series), dated 08/09/2000. However, subsequently, the Revenue agreed that the assessee in that case was covered by Clause IV of Press Note 9 (2000 Series), dated 08/09/2000. Therefore, while dismissing the appeal preferred by the Revenue the Hon'ble Bombay High Court held as under: "9. It is an undisputed position before us that the respondent assessee is a wholly owned subsidiary of its parent company which is registered in Switzerland. The respondent pays to its parent company Royalty for use of its Trademark/brand name. Therefore, admittedly the present case is covered by Clause IV and not Clause III of the Press Note 9(2000 series). The aforesaid clause IV of the Press Note 9 (2000 series) allows payment of Royalty upto 8% on export sales by wholly owned subsidiaries to its offshore parent companies. 10. On the last occasion that is on 23 September 2015 Mr. xxx, learned Counsel for the Revenue sought time to take instructions on whether Clause IV as reproduced hereinabove is applicable in the case of respondent-assessee. Today Mr. xxx, on instructio....
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....ed. Accordingly, we remand this issue back to the file of the TPO/Assessing Officer for determination of ALP of the transaction of reimbursement of project cost overrun expenses by the Appellant to L&T Ceylinco and recompute transfer pricing adjustment, if any. In terms of the aforesaid, Ground No. 8 raised by the Appellant is allowed for statistical purposes. 76. Before parting with this issue we would also deal with another contention raised on behalf of the Appellant. During the course of hearing, it was contended on behalf of the Appellant that the transfer pricing provisions contained in the Act were not applicable to the international transaction under consideration for the reason that the transfer pricing provisions as applicable for the Assessment Year 2004-05 were inserted by the Finance Act, 2001 with effect from 01/04/2002, whereas the relevant being (a) The Installation, Erection and Commissioning Contract entered into between the Client, and L&T Ceylinco, (b) Supply Contract between the Client and Larsen and Toubro Limited and (c) Guarantee and Coordination Agreement between the Client, Larsen and Toubro Limited and L&T Ceylinco, were executed on 15/06/2000 (i.e. pr....
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....as accepted the transaction of reimbursement of project cost overrun expenses as an international transaction and had contended that the submitted that the same was undertaken at arm' s length price as per the Cost Plus Method adopted by the Appellant. The contention that the transfer pricing provisions are not applicable to the transaction of reimbursement of cost overrun expenses has been raised for the first time before the Tribunal. On perusal of the record we find that no application for admission of additional ground/claim has been preferred by the Appellant. Be that as it may, we proceed to adjudicate the contention raised by the Appellant by treating the same as submission supporting the Ground No. 8. The decision of the Tribunal in the case of M. Siva Parvathi & Ors. (supra) cited on behalf of the Appellant, we have also perused the same and are of the view that it does not advance the case of the Appellant. In that case the issue before the Tribunal was regarding the applicability of provisions of Section 50C of the Act inserted by the Finance Act, 2002 with effect from 01/04/2003. In that case, the Tribunal noted that the parties had entered into the agreement for sale o....
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....fail in the facts and circumstances of the case. In our opinion, the final argument of the learned Authorised Representative that the FMV cannot be substituted in the absence of charging section is not relevant under the peculiar facts and circumstances of the case." 76.3. From the above, it is clear that the Tribunal was of the view that there was no suppression of the actual consideration and the final registration of the sale was only culmination of contractual obligation of a transaction already fulfilled by the parties as per the agreement already executed. In the above context, the Tribunal had concluded that the provisions of Section 50C of the Act introduced after the transaction was undertaken by the assessee in that case would not be applicable even though the sale deed was registered after the introduction of Section 50C of the Act. Reliance was placed on behalf of the Appellant on paragraph 8.1 of the aforesaid order (reproduced herein below) to contend that law that existed at the time of entering into transaction were prevail over this amendment subsequently made. "8.1 The next legal issue that was pressed into service by the learned Authorised Representat....
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....own by the Tribunal. Further, in paragraph 8.10 the Tribunal has concluded that character of the transaction for the provisions of the Act should be determined on the basis of law prevailing on the date on which the transaction was initially entered into. However, the actual computation of income and income tax would be made as per the law prevailing on 1st April of the relevant Assessment year. In the case before us, there is no dispute as to the nature/character of the international transaction. Further, the Assessing Officer has applied the transfer pricing provisions as applicable on 01/04/2004, which only affect the computation of income. Further, we note that even the provisions contained in Section 92 of the Act as on the date of the execution of the agreements under consideration provided for determination of arm's length price in case of International Transaction between Associated Enterprises with respect to arrangement for allocation or apportionment of cost or expenses. In view of the aforesaid, we reject the contention of the Appellant that the transfer pricing provision would not apply to the International Transaction reported by the Appellant during the relevant prev....
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....s of the business for the purpose of computing deduction under Section 80HHC/80HHE of the Act. Whereas, issues raised in Ground No. 9(b) & 10(b) [relating to reduction of profit of business by 90% of the Miscellaneous income]; and 9(c) & 10(c) [relating to exclusion of profits of projects eligible for deduction under Section 80HHB of the Act from the profits of the business] are concerned, we remit the aforesaid issues back to the file of the Assessing Officer for fresh adjudication in terms of the order passed by the Tribunal in the above said preceding assessment years. Accordingly, Ground No. 9(b), 9(c), 10(b) and 10(c) are allowed for statistical purposes. Ground No. 11 80. Ground No. 11 raised by the Appellant is directed against the order of the CIT(A) confirming the disallowance under Section 14A of the Act for the purpose of computing book profit under Section 115JB of the Act. 81. While computing the book profit under Section 115JB of the Act, the Assessing Officer made an addition of INR 3,18,00,000/-, being the interest calculated notionally and attributed to the earning of exempt income by invoking the provisions of Section 14A of the Act. The CIT(A) confirmed ....