Valeo Lighting Systems India Private Limited, Kancheepuram V. ACIT, CHENNAI

ITA 1042/CHNY/2017

• Counselvise Citation: [2019] 117 COUNSELVISE.COM (IT) 8168 (ITAT-CHENNAI)
• Duration Of Justice: 1 year(s) 11 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-04-2019
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: D
• Assessment Year: 2012-2013
• Appeal Filed On: 27-04-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: M SRINIVASA RAO
• Assessee Lawyers: AJITH CHORADIA
• Keywords: Transfer pricing; Residential status; Double taxation relief; International transaction; Additional evidence; TDS; Set aside
• Section: 43B; 40(a)(ia)

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL , D B ENCH, CHENNAI . . . , ., # BEFORE SHRI N.R.S.GANESAN, JUDICIAL MEMBER AND SHRI S.JAYARAMAN, ACCOUNTANT MEMBER / I.T.A. NO.1042/CHNY/2017 ' ' /ASSESSMENT YEAR : 2012-13 M/S. VALEO LIGHTING SYSTEMS INDIA PVT. LTD., 124,VALLAM A VILLAGE, SRIPERUMBUDURTALUK KANCHIPURAM-602 105. VS THE ASSISTANT COMMISSIONER OF INCOME TAX, CORPORATE CIRCLE-3(2), CHENNAI. PAN: AACCV7701J ( /APPELLANT) ( /RESPONDENT) / APPELLANT BY : MR. AJITH CHORADIA, CA /RESPONDENT BY : MR. M. SRINIVASA RAO, CIT /DATE OF HEARING : 05.02.2019 /DATE OF PRONOUNCEMENT : 05.04.2019 / O R D E R PER S.JAYARAMAN, AM: THIS APPEAL IS FILED BY THE ASSESSEE AGAINST THE OR DER PASSED BY THE ASSISTANT COMMISSIONER OF INCOME TAX , CORPORAT E CIRCLE-3(2), CHENNAI, DATED 27.02.2017 FOR ASSESSMENT YEAR 2012- 13 IN PURSUANCE OF THE DIRECTIONS ISSUED BY THE DRP IN F NO 196/DRP -2BNG/2016-17 DT 23.12.2016. 2. M/S.VALEO LIGHTING SYSTEMS INDIA PVT. LTD, THE ASSESSEE, INCORPORATED ON 18.06.2008, IS A 100% INDIRECT SU BSIDIARY OF VALEO SA, FRANCE. VALEO SA FRANCE ALONG WITH ITS SUBSID IARIES AND AFFILIATES REFERRED TO AS VALEO GROUP OR ASSOCIATED ENTER PRISES OR AES. 2 VALEO GROUP IS AN INDEPENDENT GROUP FULLY FOCUSE D ON THE DESIGN, PRODUCTION AND SALE OF COMPONENTS INTEGRATED SYSTEM S AND MODULES FOR THE AUTOMOTIVE SECTOR. THE GROUP WAS OPERATING IN 2 8 COUNTRIES WITH A TURNOVER OF 10.9 BILLION EUROS IN 2011. 2.1 THE ASSESSEE OPERATES TWO BUSINESS SEGMENT S NAMELY MANUFACTURING BUSINESS AND TOOLING BUSINESS. IN ITS MANUFACTURING BUSINESS, ASSESSEE IS ENGAGED IN THE MANUFACTURE AND SALE OF HEAD AND REAR LIGHTING FOR THE AUTOMOTIVE OEM CUSTOMERS AND NOT FOR AFTER SALES MARKET. THE MANUFACTURING PLANT IS LOCATED IN CHENNAI, COMMENCED ITS COMMERCIAL PRODUCTION OF LAMPS FROM A UG 2010 AND HENCE, THIS ASSESSMENT YEAR I.E AY 2012-13 IS THE F IRST FULL YEAR OF ITS MANUFACTURING OPERATIONS. THE PRIMARY CUSTOMER DUR ING AY 2012-13 IS NISSAN INDIA PVT.LTD. IN ITS TP STUDY , THE ASSESS EE HAS PREPARED AND SUBMITTED THE SEGMENTAL ANALYSIS OF THE TOOLING AN D MANUFACTURING SEGMENT AND HAS DEMONSTRATED THE ARMS LENGTH NATUR E OF EACH OF THESE INDEPENDENT SEGMENTS BY ADOPTING THE TRANSACTIONAL NET MARGIN METHOD (TNMM) AS THE MOST APPROPRIATE METHOD (MAM) WITH OPERATING MARGIN (OPERATING PROFIT TO SALES) AS THE PROFIT L EVEL INDICATOR(PLI). HOWEVER, THE TPO HAD REJECTED THE SEGMENTED PRO FIT AND LOSS ACCOUNT AND HAD AGGREGATED THE SEGMENTS TO DETE RMINE THE ARMS LENGTH NATURE OF THE TRANSACTIONS ON ENTITY LEVEL . ON THE DOMESTIC 3 TRANSACTIONS, THE A O, INTER ALIA, DISALLOWED TOOL DEVELOPMENT CHARGES U/S 40(A), FURTHER MADE DISALLOWANCES U/S.43B AND TRAVELLING ALLOWANCE. AGGRIEVED, THE ASSESSEE FILED ITS OBJECTIONS BE FORE THE DRP, WHICH REJECTED THOSE OBJECTIONS. ON GIVING EFFECT TO THE DIRECTIONS, THE ASSESSEE FILED THIS APPEAL . 3. THE LD. AR SUBMITTED THAT WHILE DETERMINING THE ALP OF THE INTERNATIONAL TRANSACTIONS WITH THE AES, THE LD. TP O HAS AGGREGATED ALL TRANSACTIONS AND HAS ADOPTED AN ENTITY LEVEL APPROA CH BY COMPUTING THE MARGINS EARNED BY THE ASSESSEE, DISREGARDING THE T WO VARIED BUSINESS SEGMENTS. IN DOING SO, THE LD. TPO HAS NOT RESTRICT ED THE ADDITIONS TO THE INTERNATIONAL TRANSACTIONS WITH THE AES ALONE. IF THE ISSUE OF SEGMENTATION AND ITS INTERNATIONAL TRANSACTION S ALONE IS CONSIDERED IN THIS APPEAL , THE ASSESSEE WOULD GET SUBSTANTIAL JUSTICE . IN THIS REGARD, HE SUBMITTED THAT % OF TOTAL VALUE OF THE ASSESSEE S INTERNATIONAL TRANSACTIONS IN TOOLS SEGMENT WAS 86.9%, MANUFACTU RING SEGMENT WAS 1.2% AND OTHER TRANSACTIONS WERE AT 11.9%. INVITING OUR ATTENTION TO THE WRITTEN SYNOPSIS, HE SUBMITTED THE FAR ANALYSIS OF ; LIGHTING (HEAD & REAR LIGHTS) MANUFACTURING BUSINESS AND TOOLS(TRADI NG / FACILITATOR) BUSINESS AS UNDER : 4 FUNCTIONS PERFORMED BY VLS RISKS ASSUMED BYVLS ASSETS DEPLOYED BY VLS FULL-FLEDGED MANUFACTURING ACTIVITIES ,INCLUDING PRODUCTION / DELIVERY SCHEDULING, PRODUCTION, QUALITY REVIEW INVESTMENT / CAPITAL RISK, CAPACITY RISK, INVENTORY RISK FIXED ASSETS RS. 68 CR PROCUREMENT AND LOCALIZATION, QUALITY CONTROL QUALITY RISK, WARRANTY RISK AND MANPOWER RISK, FOREIGN EXCHANGE RISK RELEVANT PERSONNEL FOR QUALITY, TRAINED WORKFORCE MARKETING AND SALES TO CUSTOMERS CREDIT RISK, MARKET RISK LOCAL VENDOR & CUSTOMER RELATIONSHIPS FUNCTIONS PERFORMED BY VLS RISKS ASSUMED BYVLS ASSETS DEPLOYED BY VLS ROUTINE FACILITATOR /DISTRIBUTOR OF TOOLS, PRODUCTS AND RELATED SERVICES VERY MINIMAL FIXED ASSETS - NIL WORK-IN -PROGRESS / INVENTORY MARKETING AND SALES TO CUSTOMERS CREDIT RISK, MARKET RISK CUSTOMER RELATIONSHIPS 3.1 THE LD A R FURTHER SUBMITTED THE GIST OF THE DIFFERENCES IN TOOLING AND LIGHTING(HEAD & REAR LIGHTS) MANUFACTURING SEGM ENT AS UNDER : PRODUCTS LIGHTING ASSEMBLY TOOLS DIFFERENT PRODUCTS CUSTOMER NISSAN INDIA (98%) AE & OTHERS (2%) NISSAN INDIA (48.60%) RENAULT INDIA (30.45%) NISSAN SPAIN (20.95%) TOOLS WERE SOLD TO RENAULT INDIA, BUT LIGHTING ASSEMBLY WERE NOT SOLD TO RENAULT INDIA. THIS PROVIDES EVIDENCE THAT SALE OF TOOLS AND LIGHTING ARE NOT DIRECTLY LINKED. ASSETS FIXED ASSETS (68 CR.) CURRENT ASSETS(INVENTORY, DEBTORS ETC MANUFACTURING FACILITY EMPLOYEE INVENTORY SIGNIFICANT ASSETS INVESTED IN MANUFACTURING BUSINESS. ALMOST NO ASSETS (EXCEPT INVENTORY WORK-IN-PROGRESS) FOR TRADING ACTIVITY. FUNCTIONS MANUFACTURING TRADING FUNDAMENTALLY 5 QUALITY CONTROL, WARRANTY, PROCUREMENT, LOCALIZATION SUB-CONTRACTING DIFFERENT FAR INSIGNIFICANT FUNCTIONS IN TOOLING SEGMENT RISKS ENTREPRENEURIAL RISK INVESTMENT RISK, CAPACITY UTILIZATION RISK, QUALITY RISK, CREDIT RISK, MARKET RISK, MANPOWER RISK MINIMAL RISK NEGLIGIBLE DIFFERENT RISK PROFILE COMPLETELY OPPOSITE PROFILE AE ROLE TECHNICAL AND PROFESSIONAL SUPPORT SERVICES FULL-FLEDGED SUPPORT SUBSTANTIAL, AE TRANSACTIONS AES ROLE IS REFLECTED INQUANTUM OF TRANSACTIONS IN EACH SEGMENT. LOWER ROLE, LOWER TRANSACTIONS. CHARACTERISATION ENTREPRENEUR LOW RISK TRADING EXACTLY OPPOSITE CHARACTERIZATIONS AND PLEADED THAT GIVEN THE ABOVE SEVERAL AND SIGNIF ICANT DIFFERENCES ON VARIOUS PARAMETERS, IT IS IMPERATIVE THAT THE TWO S EGMENTS, SHOULD BE ANALYZED SEPARATELY, FROM AN INDIAN TRANSFER PRICIN G PERSPECTIVE, AND AS SUCH, THE TRANSACTIONS IN THE TWO SEGMENTS SHOULD N OT BE AGGREGATED. THE ASSESSEE MAINTAINED SEPARATE FINANCIALS RECOR DS FOR EACH OF THESE SEGMENTS VIZ COST AUDIT RULES UNDER THE COMPANIES A CT, 1956 WERE APPLICABLE TO VLSIPL, AND COST AUDIT COMPLIANCE CER TIFICATE WAS FILED WITH ROC, FOR FY 2011-12. WITHOUT PREJUDICE TO THE FACT THAT SEPARATE AUDITED SEGMENTED FINANCIALS ARE NOT REQUIRED, THE REVENUE AND COST FOR TOOLING SEGMENT WERE SEPARATELY REPORTED ON THE FAC E OF THE AUDITED FINANCIALS, AND SUBSEQUENTLY, THE ASSESSEE HAS ALSO CONDUCTED AUDIT OF ITS SEGMENTAL FINANCIALS AND SUBMITTED THE REPORT T O HON. DRP. APPELLATE 6 AUTHORITIES IN JUDICIAL PRONOUNCEMENTS HAVE HELD, O ECD GUIDELINES AND INDIAN REGULATIONS PROVIDE THAT, WHEREVER POSSIBLE, TRANSACTIONS SHOULD BE ANALYZED SEPARATELY. THE LD. AO HIMSELF ADMITTED THAT THE TRANSACTION-BY-TRANSACTION APPROACH WOULD HAVE BEEN PREFERRED AS AGAINST THE AGGREGATED APPROACH. RELIED UPON THE F OLLOWING JUDICIAL PRONOUNCEMENTS TO SUPPORT THE ASSESSEES CONTENTION THAT SEGMENTED APPROACH ADOPTED FOR JUSTIFYING THE INTERNATIONAL T RANSACTIONS ENTERED IN THE TOOLING SEGMENT SHOULD BE ACCEPTED: GODREJ SARA LEE LTD. VS. ACIT [58 TAXMANN.COM 109], HON. ITAT OF MUMBAI; GOLDSTAR JEWELLERY LTD. VS. JCIT [53 TAXMANN.COM 35 3], HONBLE ITAT OF MUMBAI; MELSTAR INFORMATION TECHNOLOGIES LTD. VS. ACIT [56 TAXMANN.COM 358], HONBLE ITAT OF MUMBAI; TATA COMMUNICATIONS TRANSFORMATION SERVICES LTD. [ 54 TAXMANN.COM 24], HONBLE ITAT OF MUMBAI; AND TECNIMOUNT ICB (P) LTD. [11 TAXMANN.COM 49], HON. ITAT OF MUMBAI. 3.2 ON THE MANUFACTURING SEGMENT, THE LD AR SUBMIT TED THAT THE ASSESSEE HAD ENTERED INTO INTERNATIONAL TRANSACTION WITH AES WORTH INR 5,20,27,578/-. IT WOULD BE IMPRACTICAL TO SAY THAT, THE ENTIRE LOSS IN THE MANUFACTURING SEGMENT I.E., INR 25 CRS APPROX. IS E NTIRELY ON ACCOUNT OF INTERNATIONAL TRANSACTIONS WITH AES. ACCORDINGLY, T HE ASSESSEE HAD 7 JUSTIFIED THE TRANSACTIONS IN THE MANUFACTURING SEG MENT ON TRANSACTION BY TRANSACTION BASIS. RELIED UPON THE FOLLOWING JUDICI AL PRONOUNCEMENTS: BENETTON INDIA (P) LTD. V. ITO [17 TAXMANN.COM 5) , HONBLE ITAT OF DELHI; JCB INDIA LTD. VS. DCIT [69 TAXMANN.COM 383], HON BLE ITAT OF DELHI; INDIA PISTONS LTD. [75 TAXMANN.COM 99], HONBLE I TAT OF CHENNAI; TEJ DIAM [37 SOT 341 (MUM.)], HONBLE ITAT OF MUM BAI; AXA TECHNOLOGIES SHARED SERVICES (P) LTD. [76 TAX MANN.COM 102], HONBLE ITAT OF BANGALORE; AVINEON INDIA (P) LTD. [41 TAXMANN.COM 334], HON BLE ITAT HYDERABAD; AND ANKIT DIAMONDS[43 SOT 523], HONBLE ITAT OF MUMBA I. 3.3 THE AR SUBMITTED THAT THOUGH THE ASSESSEE HA S SUBMITTED DETAILED ADDITIONAL EVIDENCES BEFORE THE HON. DRP T O DEMONSTRATE THE ARMS LENGTH NATURE OF THE ABOVE TRANSACTIONS ON TR ANSACTION-BY- TRANSACTION BASIS, THE HONBLE DRP DID NOT HAVE SUF FICIENT TIME TO ACCEPT THE ADDITIONAL EVIDENCES CONSIDERING THE LACK OF TIME (HEARING ON 8.12.2016 AND LAST DATE FOR ISSUING DIRECTIONS WAS 31.12.2016) IN SEEKING REMAND REPORT FROM THE TPO. THEREFORE, THE ADDITIONAL EVIDENCES COULD NOT BE ADMITTED BY THE HON. DRP. TH E DOCUMENTS COULD NOT BE SUBMITTED TO AO/TPO DUE TO FLOODS IN CHENNAI DURING THE MONTH OF NOVEMBER AND DECEMBER, 2015. RELIED UPON T HE FOLLOWING 8 JUDICIAL PRONOUNCEMENTS IN SUPPORT OF ITS CONTENT ION THAT IF THERE ARE SUFFICIENT CAUSE WHICH PREVENTED THE APPELLANT F ROM SUBMITTING THE DOCUMENTS FORMING PART OF ADDITIONAL EVIDENCES, TH E SAME SHOULD BE ACCEPTED. CIT VS. GAMES RENEWABLES PVT.LTD (78 TAXMANN.COM 24 )HON.HC OF MADRAS CIT VS. TEXT HUNDRED INDIA PVT.LTD. (239 CTR 263) H ON. HC OF DELHI CIT VS. VIRGIN SECURITIES & CREDITS P.LTD (332 ITR 396) HON .HC OF DELHI MINDTREE LTD VS.CIT (73 TAXMANN.COM 142) HONBLE IT AT OF BANGALORE ETC. 3.4 HENCE, THE LD AR REQUESTED THAT ADDITIONAL EVIDENCES BE ADMITTED. UNDER THESE CIRCUMSTANCES, IT PRAYED THAT THE MATTER BE REMANDED BACK TO LOWER AUTHORITIES FOR REVIEW AND V ERIFICATION OF DOCUMENTS SUBMITTED BY THE ASSESSEE. FURTHER, IT WA S PLEADED THAT IN ALL SUBSEQUENT YEARS, THE LD. TPO HAS ACCEPTED THE TRAN SACTION BY TRANSACTIONAND SEGMENTAL ANALYSIS APPROACH ADOPTED BY THE ASSESSEE IN ITS TRANSFER PRICING DOCUMENTATION AND SUBSEQUEN T SUBMISSIONS, EXCEPT DURING AY 2012-13 AND AY 2011-12. PER CONTRA , THE LD DR SUPPORTED THE ORDERS OF THE LOWER AUTHORITIES. 4. WE HEARD THE RIVAL SUBMISSIONS AND GONE THROUGH RELEVANT MATERIAL. WE FIND MERIT IN THE SUBMISSIONS OF THE L D.A R, SUPRA. WE FIND THAT THE DRP DID NOT CONSIDER THE MATERIAL PLACE D BEFORE IT AND PASSED 9 ITS ORDER HOLDING, INTER-ALIA, THAT SUCH MATERIAL WERE NOT PLACED BEFORE THE TPO. THE ASSESSEE PLEADED THAT IT COULD NOT PLACE RELEVANT MATERIALS BEFORE THE AO/TPO DUE TO THE FLOODS IN CHENNAI DURING THE MONTH OF NOVEMBER AND DECEMBER, 2015. THEREFORE, WE ARE OF THE VIEW THAT THE DRP COULD NOT CONSIDER THOSE MATERIAL D UE TO PAUCITY OF TIME ETC. ON THE ABOVE FACTS AND CIRCUMSTANCES, WE DEEM IT FIT TO SET ASIDE THE ORDERS OF LOWER AUTHORITIES AND REMIT THESE ISSUES BACK TO THE FILE OF THE AO / TPO FOR DETERMINING THE ARMS LENGTH PRICE IN RESPECT OF THE INTERNATIONAL TRANSACTIONS UNDERTAKEN WITH THE ASSOCIATED ENTERPRISE, AFRESH. THE ASSESSEE SHALL PLACE RELEVANT MATERIAL S BEFORE THE A.O./TPO AND COMPLY TO THE REQUIREMENTS OF A.O./T PO IN ACCORDANCE WITH LAW. THE A.O/TPO SHALL AFTER AFFORDING EFFECTI VE OPPORTUNITY TO THE ASSESSEE SHALL DECIDE THE ISSUES IN ACCORDANCE W ITH LAW. SINCE THE ABOVE ISSUES ARE REMITTED BACK TO AO/TPO, WE DO NOT GO TO DECIDE, AS PLEADED BY THE LD.AR, THE OTHER ISSUES AS THEY HA VE BECOME ACADEMIC AT THIS STAGE. 5. WITH REGARD TO THE RESTRICTION OF ADJUSTMENT TO QUANTUM OF INTERNATIONAL TRANSACTIONS, THE LD.AR SUBMITTED TH AT WHILE DETERMINING THE ALP OF THE INTERNATIONAL TRANSACTIONS WITH THE AES, THE TPO HAS AGGREGATED ALL TRANSACTIONS AND HAS ADOPTED AN ENT ITY LEVEL APPROACH BY COMPUTING THE MARGINS EARNED BY THE ASSESSEE DISRE GARDING THE TWO 10 VARIED BUSINESS SEGMENTS. IN DOING SO, THE AO/TPO HAS NOT RESTRICTED THE ADDITIONS ONLY TO THE INTERNATIONAL TRANSACTIO NS WITH THE AES. HE RELIED ON THE FOLLOWING JUDICIAL PRECEDENTS:- MOBIS INDIA LTD. ITA NO.2112/MDS/2011., ITAT., CHEN NAI DEMAG CRANES &COMPONENTS INDIA P.LTD (2015) 59 TAX MANN.COM 184 (ITAT., PUNE BENCH) NEW HOLLAND FIAT (I) P.LTD (2017) 81 TAXMANN.COM 33 7 ITAT., MUMBAI ALSTOM PROJECTS INDIA LTD.(2017) 88 TAXMANN.COM 465 (HIGH COURT OF BOMBAY) CORNELL OVERSEAS P.LTD (2017) 78 TAXMANN.COM 76(ITA T., DELHI ) 5.1 WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. WE D O NOT HAVE ANY HESITATION IN HOLDING THAT THE TRANSFER PRICING ADJ USTMENT SHOULD BE RESTRICTED TO THE INTERNATIONAL TRANSACTIONS ONLY AND IT CANNOT BE APPLIED TO UNCONTROLLED TRANSACTIONS. WHILE DETERMINING AL P OF INTERNATIONAL TRANSACTIONS, BENCHMARKING HAS TO BE DONE ONLY ON AE TRANSACTIONS AND NOT FOR ENTIRE TURNOVER. THEREFORE, WE DIRECT THE A O/TPO TO RESTRICT THE ADJUSTMENT ON ACCOUNT OF ALP TO THE EXTENT OF THE TRANSACTION WITH AE ONLY. 6. THE NEXT ISSUE IS THE DISALLOWANCE MADE U/S 40(A ) (I) ON THE DOMESTIC TRANSACTION. 6.1 THE ASSESSEE HAS INCURRED DESIGN AND DEVELOPME NT FEE AS CHARGE FROM AES. OUT OF THE TOTAL FEES, RS. 23.3 CR ORES WAS LYING IN 11 CLOSING WORK-IN-PROGRESS. SINCE THE ASSESSE HAS N OT CLAIMED ANY DEDUCTION OF THIS EXPENSE IN ITS PROFIT AND LOSS ACCOUNT, IN COMPUTING THE DISALLOWANCE U/S 40(A)(I), THIS AMOUNT WAS EXCL UDED BY THE ASSESSE IN ITS TAX RETURN. WHILE MAKING THE ASSESSMENT , TH E AO HELD THAT SINCE THIS AMOUNT PASSED THROUGH THE PROFIT AND LOSS ACCO UNT AND ALSO SINCE THE TAX AUDITOR HAS CERTIFIED THAT TAX HAS BEEN DED UCTED BUT NOT PAID WITHIN THE DUE DATE U/S 200, HE DISALLOWED RS. 23.3 CRORES. BEFORE THE DRP, THE ASSESSEE PLEADED, INTER-ALIA, THAT THE AM OUNT DISALLOWED PERTAINS TO PAYMENTS MADE TO THE NON-RESIDENTS LOCA TED IN JAPAN AND FRANCE AND IN VIEW OF THE DTTA WITH THOSE COUNTRIE S, THE LAW THAT IS BENEFICIAL TO THE ASSESSE NEEDS TO BE APPLIED. HOW EVER, THE DRP DISMISSED THE ASSESSEES OBJECTIONS, INTER AL IA, THAT THE ASSESSE HAS NOT BROUGHT ANYTHING ON RECORD TO PROVE ITS CLA IM . 6.2 THE LD AR INVITED TO THE BREAK-UP OF THE IMP UGNED DISALLOWANCES AS UNDER : PARTICULARS CONSUMED DURING THE YEAR LYING IN CLOSI NG WIP SUB-TOTAL TDS PAYMENT BEFORE 139(1) AFTER 139(1) BEFORE 139(1) AFTER 139(1) PART OF OPENING WIP 3,56,66,639 - 4,44,13,082 - CURRENT YEAR 6,90,05,940 2,97,78,069 17,94,39,789 87,65,050 SUB TOTAL 10,47,62,579 2,97,78,069 22,38,52,872 87,65,050 36,71,58,569 TOTAL CLOSING OF WIP 13,45,40,647 23,26,17,922 PRIOR YEARS DISALLOWANCES INCLUDING AS IN FY 2011-1 2 (AY 2012-13) TOTAL DISALLOWANCE AS PER TAX AUDIT REPORT FOR FY 2 011-12 ((AY 2012-13) 11,53,65,746 48,25,24,315 12 AND SUBMITTED THAT THE AMOUNT LYING IN WIP IS NOT C LAIMED AS AN EXPENDITURE DURING THE YEAR. A S PER SECTION 40(A)(I), THE TWO IMPORTANT CONDITIONS TO BE SATISFIED ARE (A) WHETHER DEDUCTIO N IS CLAIMED AS EXPENDITURE IN COMPUTING PROFIT AND LOSS ACCOUNT, A ND IF ANSWER TO (A) IS YES,(B) WHETHER THE APPELLANT HAS REMITTED THE TDS DEDUCTIBLE ON SUCH PAYMENTS, WITHIN THE PRESCRIBED TIME LIMIT. SINCE, THE ASSESSEE HAS NOT CLAIMED A DEDUCTION IN COMPUTING THE PROFIT & LOSS ACCOUNT TO THE EXTENT OF RS. 23.3 CRORES, THE DISALLOWANCE MADE BY AO IS NOT JUSTIFIED AND PLACED RELIANCE ON THE FOLLOWING JUDICIAL PRONOUNCE MENTS: ITO VS. P.C. DEVELOPERS PRIVATE LIMITED (ITA NO 41 67/DEL/LO) HONBLE ITAT OF NEW DELHI; DCIT VS. M/S S.P REAL ESTATE (ITA NO. 866/HYD/2010 ) HONBLE ITAT OF HYDERABAD; ADITYA HOUSING & INFRASTRUCTURE DEVELOPMENT VS. DCI T (1 366/HYD/2014), HONBLE ITAT OF HYDERABAD; DCIT VS. ADITYA HOUSING & INFRASTRUCTURE DEVELOPME NT VS. DCIT (959/HYD/2013) HONBLE ITAT OF HYDERABAD; UNIQUE ENTERPRISES VS. ITO (ITA NO 5109!MUM12008), HONBLE ITAT OF MUMBAI; ACIT VS. GODAVARI DEVELOPERS (ITA NO 918/HYD/201 1) , HONBLE ITAT OF HYDERABAD; ACIT VS. DREAMS CONSTRUCTION (ITA NO. 1013/PN/2009) HONBLE ITAT OF PUNE; EGWOOD INDUSTRIES PRIVATE LIMITED VS. DCIT (ITA NO. 1230/HYD/2013), HONBLE ITAT OF HYDERABAD. 6.3 WITHOUT PREJUDICE TO THE ABOVE, THE LD DR SUB MITTED THAT TDS WAS DEDUCTED AND PAID ON AN AMOUNT OF RS. 223,85 2,872/ ON OR BEFORE THE DUE DATE U/S 139(1), OUT OF RS. 134,540,647/- CONSUMED AND CHARGED AS EXPENDITURE DURING THE YEAR, AS IN THE A BOVE TABLE, TDS ON A 13 SUM OF RS. 104,762,579 WAS REMITTED BEFORE THE DU E DATE U/S 139(1) FOR AY 2012-13. FURTHER, IT IS SUBMITTED THAT THE D ISALLOWANCE IN THE ABOVE TABLE IS ARISING OUT OF NON-DEDUCTION OF TDS TO NON-RESIDENTS AS PROVIDED U/S 40(A)(I). AS PER SECTION 40(A)(I), AS IT STOOD PRIOR TO THE AMENDMENT BY FINANCE ACT (NO. 2) OF 2014, IN CASE, THE TDS IS NOT DEDUCTED AND REMITTED BEFORE THE DUE DATE SPECIFIE D IN SECTION 200(1) ON PAYMENTS MADE TO NON-RESIDENTS, THEN THE EXPEND ITURE IS DISALLOWED IN THAT YEAR, HOWEVER, IT WOULD BE ALLOWED AS AN E XPENDITURE IN THE YEAR IN WHICH TDS IS PAID. SECTION 40(A)(IA) CONTAINS S IMILAR PROVISION FOR THE PAYMENTS MADE TO RESIDENTS. AS THE PAYMENTS TO RES IDENTS ARE ELIGIBLE FOR DEDUCTION U/S 40(A)(IA), IF TDS IS PAID WITHIN 139(1) DUE DATE, SIMILAR PROVISIONS SHOULD APPLY TO THE PAYMENTS MADE TO N ON- RESIDENTS, WHO ARE RESIDENTS OF TREATY COUNTRY HAVING NON-DISCRIMI NATION AGREEMENTS WITH INDIA. ACCORDINGLY, IN ADDITION TO THE DEDUCT ION OF RS. 23.6 CRORES LYING IN WIP (OUT OF THIS TDS ON RS. 22.4 CRORES IS PAID WITHIN DUE DATE U/S 139(1), A SUM OF RS. 10.5 CRORES ON WHICH TDS W AS PAID BEFORE SECTION 139(1) DUE DATE, THE LD AR SUBMITTED THAT THE IMPUGNED AMOUNT SHOULD BE ALLOWED AS A DEDUCTION. THEREAFTE R, THE LD AR PLEADED THAT ALL THE PAYMENTS REFERRED TO THE IN T ABLE ABOVE, IS MADE TO NON-RESIDENTS, WHO ARE RESIDENTS OF FRANCE AND JAP AN. THE INDIA-JAPAN AND INDIA-FRANCE DOUBLE TAXATION AVOIDANCE AGREEMEN T (DTAA) PROVIDES NEUTRALITY AND PROTECTION AGAINST NON-DISC RIMINATION BETWEEN 14 RESIDENTS AND NON- RESIDENTS. IT HAS BEEN HELD TH AT THE DISCRIMINATION U/S 40(A)(I) AND U/S.40(A)(IA) WILL QUALIFY FOR REL IEF UNDER THE RELEVANT NON- DISCRIMINATION CLAUSE OF THE DTAA. RELIED ON THE HO N. HIGH COURT OF DELHI DECISION IN THE CASE OF HERBALIFE [ITA 7/ 20 07] & HON. ITAT OF DELHI DECISION IN CASE OF LNCENT TOURS PVT. LTD. 12 5 TAXMANN.COM 222 (DELHI) HAS HELD THE VALIDITY AND APPLICATION OF NO N-DISCRIMINATION CLAUSE IN THE CONTEXT OF SECTION 40(A)(I) DISALLOWANCE UND ER INDIA USA AND INDIA-FRANCE DTAA RESPECTIVELY, AND HON. ITAT OF DE LHI DECISION IN CASE OF MITSUBISHI CORPORATION INDIA PVT. LTD. [41 TAXMANN.COM 162 (DELHI - TRIB.)J IN CONTEXT OF INDIA-JAPAN DTAA, TH E DECISION OF HONBLE ITAT OF CHENNAI IN THE CASE OF COOPER STANDARD AUTO MOTIVE INDIA PVT. LTD. [84 TAXMANN.COM 200 (CHENNAI - TRIB)]ETC. THUS , THE LD. AR SUBMITTED THAT THE DRP FAILED TO PROVIDE THE BENE FIT OF NON- DISCRIMINATION UNDER ARTICLE 26 OF INDIA FRANCE DTAA AND ARTICLE 24 OF INDIA JAPAN DTAA. PLEADED THAT IN ACCORDANC E WITH THE RESPECTIVE NON -DISCRIMINATION ARTICLES, THE DISBU RSEMENTS OF AN INDIAN ASSESSEE TO A RESIDENT OF(FRANCE/JAPAN) SHALL, FOR THE PURPOSE OF DETERMINING THE TAXABLE PROFITS OF SUCH INDIAN ASSE SSEE, BE DEDUCTIBLE UNDER THE SAME CONDITIONS, AS IF THEY HAD BEEN PAID TO A RESIDENT OF INDIA. 6.4 FURTHER, THE LD AR SUBMITTED THAT THERE IS MIST AKE APPARENT ON RECORD IN COMPUTING THE DISALLOWANCE FOR THE CURREN T YEAR (FY 2011-12). 15 THE ASSESSEE HAS DISALLOWED A SUM OF INR 11,53, 65,746/-, PERTAINING TO PRIOR YEARS. THE LD. AO HAD DISALLOWED AN AMOUNT OF INR 19,86,01,478/- U/S 40(A)(IA) ON ACCOUNT OF NON-DED UCTION OF TDS AND THIS INCLUDES AN AMOUNT OF INR 11,53,65,746/- DISAL LOWED BY THE APPELLANT IN AY 2012-13. THIS HAS RESULTED IN DUAL DISALLOWANCE. THEREFORE, PRAYED THAT DIRECTIONS MAY BE ISSUED TO THE LD. AO THAT THE SUM OF INR 11.53 CR, WHICH IS A MISTAKE APPARENT ON RECORD, DETAILS OF WHICH ARE SEPARATELY PROVIDED IN THE PAPER BOOK ETC , SHOULD BE RECTIFIED IN THE COMPUTATION OF INCOME. THE HONBLE DRP HA S HELD THAT, IT CANNOT ENTERTAIN ANY CLAIM MADE BY THE APPELLANT DU RING ASSESSMENT PROCEEDINGS WHICH WAS NOT CLAIMED INITIALLY WHILE F LING THE RETURN OF INCOME. HOWEVER, SINCE THE HONBLE ITAT IS VESTED WITH WIDER POWERS AND CAN ENTERTAIN FRESH CLAIMS DURING THE APPELLATE PROCEEDINGS EVEN THOUGH THE SAME WAS NOT CLAIMED IN THE RETURN OF IN COME AS PER THE JURISDICTIONAL HIGH COURT DECISION IN THE CASE OF ABHINITA FOUNDATIONS [83 TAXMANN.COM 100] , THE LD AR PLEADED TO ALLOW THE CLAIM. 6.5 LASTLY, THE LD AR SUBMITTED THAT NON-APPLIC ABILITY OF DISALLOWANCE UNDER SECTION 40(A)(I) IN ITS CASE AS UNDER : IT WAS SUBMITTED THAT CLAUSE 7 OF THE PROTOCOL T O THE INDIA - FRANCE DTAA STATES THAT IF A LOWER RATE OF TAX OR A RESTRICTED SCOPE IS PROVIDED FOR IN ANY OTHER TREATY THAT INDIA ENTERS INTO WITH ANY OTHER 16 OECD MEMBER COUNTRY, THEN THAT LOWER - FRANCE DTAA RATE OR RESTRICTED SCOPE WILL BE APPLICABLE FOR THE PURPOSES OF THE IN DIA (MOST FAVORED NATION CLAUSE I MFN CLAUSE). THE INDIA UK DTAA E XPRESSLY PROVIDES THAT FOR A SERVICE TO QUALIFY AS FTS, THE SERVICE PROVIDER MUST MAKE AVAILABLE TECHNICAL KNOWLEDGE, EXPERIENCE, S KILL, KNOW-HOW OR PROCESSES TO THE PERSONS TO WHOM THE SERVICE IS REN DERED. ACCORDINGLY, THE RESTRICTIVE PROVISIONS OF INDIA UK DTAA SHOUL D BE IMPORTED INTO THE INDIA- FRANCE DTAA. RELIED ON THE DECISION OF T HE HONBLE HIGH COURT OF DELHI, IN THE CASE OF STERIA (INDIA) LTD. VS. CIT [W.P.(C) 4793/2014 & CM APPI. 9551/2014] THEREFORE, IT WAS PLEADED THAT THE PAYMENTS MADE BY THE ASSESSEE TOWARDS TOOL DEVELOPM ENT CHARGES, IN WHICH NO KNOW-HOW OR TECHNICAL IS MADE AVAILABLE BY VALEO VISION TO THE ASSESSEE, WERE NOT SUMS CHARGEABLE UNDER THE ACT AN D THEREFORE WERE NOT LIABLE TO DEDUCTION OF TAXES AS WELL. ACCORDING LY, THE DISALLOWANCE UNDER SECTION 40(A)(I) IS ITSELF NOT ATTRACTED IN T HE FIRST PLACE. 6.6 WE HEARD THE RIVAL SUBMISSIONS AND GONE T HROUGH RELEVANT MATERIAL. THE ASSESSEE HAS CLEARLY MADE OUT ITS CASE, SUPRA, THAT SECTION 40(A) (IA) IS NOT APPLICABLE IN ITS CASE, AS IT HAS NOT CLAIMED A DEDUCTION IN COMPUTING THE PROFIT & LOSS ACCOUNT TO THE EXTENT OF RS.23.3 CRORES, THEREFORE, THE DISALLOWANCE MADE BY AO IS NOT JUSTIFIED. THEREFORE, WE DIRECT TO DELETE THE DISAL LOWANCE. WE FIND FROM 17 THE ORDERS OF LOWER AUTHORITIES THAT THEY HAVE NO T APPRECIATED THE FACTS AND CIRCUMSTANCES ON THE OTHER ISSUES RAISED BY THE ASSESSEE. THEREFORE, WE DEEM IT FIT TO REMIT THOSE ISSUES BAC K TO THE AO /TPO FOR REEXAMINATION / VERIFICATION ON THE BASIS OF MATERI ALS TO BE FURNISHED BY THE ASSESSEE. THE ASSESSEE HAS ALSO PLEADED THAT T HERE IS A MISTAKE APPARENT ON RECORD IN COMPUTING THE DISALLOWANCE FO R THE CURRENT YEAR (FY 2011-12), SUBMITTING THAT IT HAS DISALLOWED INR 11,53,65,746/-, PERTAINING TO PRIOR YEARS. HOWEVER, THE AO HAD DISA LLOWED INR 19,86,01,478/- U/S 40(A)(IA) ON ACCOUNT OF NON-DED UCTION OF TDS WHICH INCLUDED INR 11,53,65,746/- DISALLOWED BY THE APPEL LANT IN AY 2012-13. THIS HAS RESULTED IN DUAL DISALLOWANCE. THEREFORE, IT PRAYED THAT DIRECTIONS MAY BE ISSUED TO THE AO TO CORRECT THE MISTAKE APPARENT ON RECORD, DETAILS OF WHICH ARE SEPARATELY PROVIDED IN THE PAPER BOOK. THEREFORE, WE REMIT THIS ISSUE ALSO BACK TO T HE FILE OF THE AO / TPO FOR RE-EXAMINATION/ VERIFICATION AND DUE DECISION IN ACCORDANCE WITH LAW. THE ASSESSEE SHALL PLACE ALL RELEVANT MA TERIALS BEFORE THE A.O./TPO, ON ALL THE ABOVE ISSUES AND COMPLY TO TH E REQUIREMENTS OF A.O./TPO IN ACCORDANCE WITH LAW. THE A.O/TPO SHALL AFTER AFFORDING EFFECTIVE OPPORTUNITY TO THE ASSESSEE SHALL DECIDE THEM IN ACCORDANCE WITH LAW. 18 7. THE NEXT ISSUE IS THE DISALLOWANCE OF SERVICE TA X, SALES TAX & VAT U/S. 43 B: IN THIS REGARD, THE LD. AR SUBMITTED THAT SERVICE T AX AT RS. 28,13,873/- AND SALES TAX & VAT AT RS. 92,88,085/- (TOTALLING T O RS. 1,21,01,958) WERE ARE NOT DEBITED TO PROFIT & LOSS ACCOUNT AND ACCORDINGLY NO EXPENDITURE IS CLAIMED WITH RESPECT TO SUCH TAXES. THESE PAYMENTS AS AND WHEN COLLECTED ARE RETAINED IN SERVICE TAX PAYA BLE AND SALES TAX / VAT PAYABLE ACCOUNT IN TRADE PAYABLE LEDGER, WITHOU T CLAIMING AS EXPENDITURE IN THE PROFIT AND LOSS ACCOUNT. HOWEVER , THE AO INVOKING THE PROVISIONS OF S 43B DISALLOWED IT AND THE DRP ERRED IN SUSTAINING THE DISALLOWANCE. 7.1 WE HEARD THE RIVAL SUBMISSIONS AND GONE THROUGH RELEVANT MATERIAL. THOUGH THE DRP UPHELD THE DISALLOWANCE B ASED ON THE DECISION OF THE HONBLE HIGH COURT OF CALCUTTA IN THE CASE OF COMMISSIONER OF INCOME-TAX VS. ASSOCIATED FIGMENTS LID. [1993] 71 TAXMAN 244 (CAL) READ WITH SECTION 145, THE LD AR R ELIED UPON VARIOUS JUDICIAL PRECEDENTS IN SUPPORT OF HIS CONT ENTION VIZ EVEREST LITHO PRESS (285 ITR 297 (MAD)) , NOBLE & HEWITT (I) P.LT D (ITA 839 OF 2007) DEL. HC) INDIA CARBON LTD. (262 ITR 327 (2003) GA UHATI HC), SINCE THIS AMOUNT IS NOT CLAIMED AS EXPENDITURE IN THE FIRST P LACE. WE HAVE GONE THROUGH THE DECISION OF THE JURISDICTIONAL HIGH C OURT IN THE CASE OF 19 EVEREST LITHO PRESS (285 ITR 297 (MAD). THE HIGH CO URT AFTER CONSIDERING THE DECISIONS OF SUPREME COURT IN THE C ASES OF CHOWRINGHEE SALES BUREAU P.LTD., VS. CIT (1973 87 ITR 542) AND JONNALLA NARASHIMARAO & CO., VS. CIT (200 ITR 588 ) AND SINCLAIR MURRAY & CO.P.LTD VS. CIT (97 ITR 615) HELD, INTER- ALIA, AS UNDER:- IN THE CASE ON HAND, THE AMOUNT COLLECTED AS SALE S TAX WAS NEVER CLAIMED AS DEDUCTION BY THE ASSESSEE . SECTION 43 B OF THE ACT IS NOT ATTRACTED AT ALL WHEN THE ASSESSEE HAS NOT CLAIME D ANY DEDUCTION OF THE AMOUNT COLLECTED BY IT. THE GAUHATI HIGH COURT I N THE CASE OF INDIA CARBON LTD. VS. IAC (200 ITR 759) CONSIDERED A SIM ILAR ISSUE AND HELD AS FOLLOWS:- . THE AMOUNT OF SALES TAX APPEARED ON THE LIA BILITIES SIDE OF THE BALANCE SHEET OF THE PETITIONER COMPANY. THE PETIT IONER DID NOT CLAIM THE ADDED AMOUNT AS DEDUCTION NOR DID HE CHARGE IT TO THE PROFIT AND LOSS ACCOUNT. THE AMOUNT OF SALES TAX COULD NOT BE ADDE D BACK TO THE INCOME OF THE ASSESSEE U/S.43B. IN THE PRESENT CASE, THE QUESTION WAS WHETHER SECTION 43B APPLIED AND NOT WHETHER SALES TAX COL LECTED FORMED PART OF THE TRADING RECEIPTS. IN THE INSTANT CASE, THE AMOUNT HAD BEEN ADDED BY T HE AO U/S.43B OF THE ACT. ALL THE AUTHORITIES BELOW HAD GIVEN A FACTUAL FIND ING THAT THE ASSESSEE NEVER CLAIMED DEDUCTION U/S.43B OF THE ACT AND THEREFORE SECTION 43B OF THE ACT IS NOT APPLICABLE. 7.2 SINCE THE DISALLOWED SUMS WERE NOT CLAIMED AS AN EXPENDITURE, THE ASSESSEE PLEADED THAT IN ACCORDANCE WITH THE J URISDICTIONAL HIGH COURT DECISION, THE AO CANNOT MAKE THE DISALLOWANCE . IN ORDER TO APPRECIATE THE ISSUE, WE HAVE GONE THROUGH THE ASSE SSMENT ORDER. THE RELEVANT PORTION IS EXTRACTED AS UNDER:- 6.DISALLOWANCE U/S.43B: ON PERUSAL OF THE COMPUTATION OF TAXABLE INCOME AND TAX AUDIT REPORT IT WAS OBSERVED THAT SERVICE TAX AMOUNTING T O RS.28,13,873/- AND SALES TAX & VAT AMOUNTING TO RS.92,88,085/- WERE N OT PAID HOWEVER THE 20 SAME AMOUNT WAS NOT DISALLOWED BY THE ASSESSEE COMPANY WHILE COMPUTING THE TAXABLE INCOME. AS PER THE PROVISION OF SECTION 43B OF INCOME TAX ACT, 1961, STATUTORY DUE IS ALLOWED ON ACTUAL PAYMENT BASIS. IN VIEW OF THE ABOVE LEGAL FACT THE AMOUNT OF ST ATUTORY DUE OF RS.1,21,01,958/- ARE DISALLOWED AND ADDED BACK TO T HE INCOME OF THE ASSESSEE COMPANY. 7.3 SINCE THE FACTS ARE NOT CLEAR FROM THE ABOVE P ORTION, WE DEEM IT FIT TO REMIT THIS ISSUE BACK TO THE AO/TPO FOR VERIFICA TION. IN CASE, THE IMPUGNED AMOUNTS WERE NOT CLAIMED AS AN EXPENDITURE IN THE PROFIT & LOSS ACCOUNT, THE AO/TPO SHALL APPLY THE LAW LAID BY THE JURISDICTIONAL HIGH COURT IN THE ABOVE DECISION. 8. THE NEXT ISSUE IS AD-HOC DISALLOWANCE OF TRA VELLING EXPENDITURE: THE LD AR SUBMITTED THAT DURING THE ASSESSMENT PROC EEDINGS, THE APPELLANT ON 31 ST MARCH, 2016 HAS SUBMITTED THE REQUESTED INFORMAT ION VIDE SUBMISSION DATED 8TH MARCH, 2016 (PAGE NO. DT 35 OF THE PAPER BOOK) TO SUBSTANTIATE THE CLAIM. THE LD. AO HAS MADE AN AD-HOC DISALLOWANCE OF INR 500,000 TOWARDS TRAVELLING EXPE NDITURE. SINCE THE ASSESSEE HAS FILED THE RELEVANT PARTICULARS, AD-H OC DISALLOWANCE MAY BE DELETED. 8.1 WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. SIN CE THE SUBSTANTIAL ISSUES ARE REMITTED BACK TO THE AO/TPO, SUPRA, WE DEEM IT FIT TO REMIT THIS ISSUE ALSO TO THE FILE OF THE AO/TPO FOR A FRE SH EXAMINATION AND 21 DECISION. THE ASSESSEE SHALL PLACE ALL RELEVAN T MATERIALS BEFORE THE A.O./TPO AND COMPLY TO THE REQUIREMENTS OF A.O./T PO IN ACCORDANCE WITH LAW. THE A.O/TPO SHALL AFTER AFFORDING EFFE CTIVE OPPORTUNITY TO THE ASSESSEE SHALL DECIDE THE ISSUES IN ACCORDANCE W ITH LAW. 9. IN THE RESULT, THE ASSESSEES APPEAL IS TREATED AS ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED ON 05 TH APRIL, 2019 SD/- SD/- ( . . . ) ( . ) (N.R.S.GANESAN) (S.JAYARAMAN) ( ! / JUDICIAL MEMBER) ( ! / ACCOUNTANT MEMBER) /CHENNAI, $ /DATED 05 TH APRIL, 2019 SOMU () *) /COPY TO: 1. APPELLANT 2. RESPONDENT 3. + () /CIT(A) 4. + /CIT 5. ) / /DR 6. 2 /GF