AMD Far East Limited Indian Branch, Bangalore V. JDIT, Bangalore

ITA 1282/BANG/2011

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 0416 (ITAT-BANGALORE)
• Duration Of Justice: 4 year(s) 4 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-04-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 26-04-2016
• Assessment Year: 2007-2008
• Appeal Filed On: 15-12-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Depreciation; Transfer pricing; Opportunity of being heard; International transaction; Retrospective amendment; Commercial expediency
• Section: 10B; 37; 90

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, BANGALORE BENCH B BEFORE SHRI AK GARODIA, ACCOUNTANT MEMBER & SHRI VIJAYPAL RAO, JUDICIAL MEMB ER ITA NO.1282/BANG/2011 ASSESSMENT YEAR : 2007-08 AMD FAR EAST LIMITED INDIAN BRANCH OFFICE (SINCE TAKEN OVER BY AMD INDIA PRIVATE LTD.), PODDAR HERITAGE BUILDING, 28 CUBBON ROAD, BANGALORE 560 001. PAN: AADCA 1739L VS. JOINT DIRECTOR OF INCOME TAX (INTERNATIONAL TAXATION I, BANGALORE. APPELLANT RESPONDENT APPELLANT BY : SHRI P. C. KHINCHA, C.A. RESPONDENT BY : MS NEERA MALHOTRA, CIT(DR) DATE OF HEARING : 26.04.2016 DATE OF PRONOUNCEMENT : 29.04.2016 O R D E R PER SHRI AK GARODIA, ACCOUNTANT MEMBER : THIS IS AN ASSESSEES APPEAL DIRECTED AGAINST THE ORDER OF LD. CIT (APPEALS)-V, BENGALURU DATED 19.6.2014 FOR THE ASSESSMENT YEAR 2006-07. 2. THE GROUNDS NOS. 1 TO 6 RAISED BY THE ASSESSEE ARE AS UNDER:- (1) ASSESSMENT AND REFERENCE TO TRANSFER PRICING OFFICE R ARE BAD IN LAW (A) THE FINAL ASSESSMENT ORDER8ISSUED BY THE JOINT DIRE CTOR OF INCOME-TAX (INTERNATIONAL TAXATION) I, [JDIT OR AO], IS BAD ON FACTS AND IN LAW, ITA NO.1282/B/11 2 (B) AND IS IN VIOLATION OF THE PRINCIPLES OF NATURAL JU STICE. WITHOUT PREJUDICE TO THE ABOVE, THE ORDER ISSUED BY THE AO IS BAD IN LAW INSOFAR AS THE FACT THAT THE AO DI D NOT ISSUE TO AMD FAR EAST LIMITED INDIAN BRANCH OFFIC E (THE APPELLANT OR THE COMPANY), A SHOW CAUSE NOT ICE, AS PER PROVISO TO SEC. 92C(3) OF THE INCOME-TAX ACT , 1961 [THE ACT]. (C) THE AO HAS ERRED IN LAW IN MAKING A REFERENCE TO TH E ASST. DIRECTOR OF INCOME-TAX TRANSFER PRICING IV [TPO], INTER ALIA, SINCE HE HAS NOT RECORDED AN O PINION THAT ANY OF THE CONDITIONS IN SEC. 92C(3) OF THE AC T, WERE SATISFIED IN THE INSTANT CASE. THE AO ALSO ERRED I N NOT FOLLOWING THE PROVISION CONTAINED IN SEC. 92CA (1) OF THE ACT. (2) THE FRESH COMPARABLE SEARCH UNDERTAKEN BY THE TPO I S BAD IN LAW (A) THE AO/TPO ERRED ON FACTS AND IN LAW IN CONDUCTING A FRESH BENCHMARKING ANALYSIS USING NON CONTEMPORANEO US DATA AND SUBSTITUTING THE APPELLANTS ANALYSIS WITH FRESH BENCHMARKING ANALYSIS ON HIS OWN CONJECTURES AND SURMISES. THUS THE APPELLANT PRAYS THAT THE FRESH BENCHMARKING ANALYSIS CONDUCTED BY THE TPO IS LIABL E TO BE QUASHED. (B) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE TPO ERRED IN NOT DEMONSTRATING THAT THE MO TIVE OF THE APPELLANT WAS TO SHIFT PROFITS OUTSIDE OF IN DIA BY MANIPULATING THE PRICES CHARGED IN ITS INTERNATIONA L TRANSACTIONS WHICH ARE A PRE-REQUISITE CONDITION TO MAKE ANY ADJUSTMENT UNDER THE PROVISIONS OF CHAPTER X OF THE ACT. ITA NO.1282/B/11 3 (3) COMPARABILITY ANALYSIS ADOPTED BY THE TPO FOR DETERMINATION OF ARMS LENGTH PRICE (A) THE AO/TPO GROSSLY ERRED ON FACTS IN BENCHMARKING T HE TRANSACTIONS OF THE CAPTIVE MARKETING SUPPORT SERVI CES OF THE APPELLANT WITH COMPANIES OPERATING AS FULLY FLE DGED ENTREPRENEURS WITHOUT CONSIDERING THE DIFFERENCES I N THE FUNCTIONS PERFORMED, ASSETS EMPLOYED AND RISK UNDERTAKEN BY THE APPELLANT VIS-VIS COMPARABLE COMPANIES. (B) THE AO/TPO ERRED ON FACTS IN REJECTING THE COMPARAB LE COMPANIES ARRIVED AT IN THE TRANSFER PRICING STUDY WITHOUT CONSIDERING THE FUNCTIONAL AND RISK ANALYSI S OF THE APPELLANT. (C) THE AO/TPO ERRED IN LAW IN APPLYING ARBITRARY FILTE RS TO ARRIVE AT A FRESH SET OF COMPANIES AS COMPARABLE TO BE ASSESSEE, WITHOUT FUNCTIONAL COMPARABILITY. (D) THE AO/TPO ALSO ERRED ON FACTS AND IN LAW IN ARBITR ARILY REJECTING COMPANIES WITH DIFFERENT YEAR ENDING (I.E OTHER THAN 31 MARCH 2007) AND INCONSISTENTLY APPLYING SUC H FILTER. (E) THE AO/TPO GROSSLY ERRED IN LAW IN DEVIATING FROM T HE UNCONTROLLED PARTY TRANSACTION DEFINITION AS PRE TH E INCOME-TAX RULES AND ARBITRARILY APPLYING A 25% REL ATED PARTY CRITERIA IN ACCEPTING/REJECTING COMPARABLES. (F) THE AO/TPO GROSSLY ERRED ON FACTS IN ARBITRARILY REJECTING COMPANIES HAVING COMMISSION INCOME LESS T HAN 75% OF TOTAL OPERATING REVENUE. ITA NO.1282/B/11 4 (G) THE AO/TPO ERRED ON FACTS IN ARBITRARILY ACCEPTING COMPANIES HAVING TURNOVER BETWEEN RS.1 CRORE TO RS. 100 CRORES. (H) THE AO/TPO ALSO ERRED ON FACTS IN ARBITRARILY REJEC TING COMPANIES BASED ON THEIR FINANCIAL RESULTS WITHOUT CONSIDERING THE FUNCTIONAL COMPARABILITY. (I) THE AO/TPO ERRED ON FACTS AND IN LAW IN CONSIDERING A SET OF SECRET DATA, I.E DATA WHICH WAS NOT AVAILA BLE IN PUBLIC DOMAIN, IN ARRIVING AT A FRESH SET OF COMPAN IES USING HIS POWER U/S 133(6), WHICH IS GROSSLY UNJUST IFIED. (J) THE AO/TPO ALSO ERRED ON FACTS AND IN LAW IN EXCLUD ING THE FOREIGN EXCHANGE GAIN OR LOSS WHILE CALCULATING THE NET MARGINS OF THE COMPARABLE COMPANIES. (4) ERRONEOUS DATA USED BY THE AO/TPO (A) THE AO/TPO HAS ERRED IN LAW IN USING DATA, WHICH WA S NOT CONTEMPORANEOUS AND WHICH WAS NOT AVAILABLE IN THE PUBLIC DOMAIN AT THE TIME OF CONDUCTING THE TRANSFE R PRICING STUDY BY THE ASSESSEE. (B) THE AO/TPO ERRED IN LAW IN NOT APPLYING THE MULTIPL E- YEAR DATA WHILE COMPUTING THE MARGIN OF ALLEGED COMPARABLE COMPANIES. (5) NON-ALLOWANCE OF APPROPRIATE ADJUSTMENTS TO THE COMPARABLE COMPANIES, BY THE AO/TPO THE AO/TPO ERRED IN LAW AND ON FACTS IN NOT ALLOWIN G APPROPRIATE ADJUSTMENTS UNDER RULE 10B TO ACCOUNT F OR, INTER ALIA, DIFFERENCES IN (A) ACCOUNTING PRACTICES , (B) DEPRECIATION ADJUSTMENTS, (C) WORKING CAPITAL ADJUS TMENT AND (D) RISK PROFILE BETWEEN APPELLANT AND THE COMPARABLE COMPANIES. (6) VARIATION OF 5% FROM THE ARITHMETIC MEAN ITA NO.1282/B/11 5 THE AO/TPO ERRED IN LAW IN NOT GRANTING THE BENEFIT S OF PROVISO TO SECTION 92C(2) OF THE ACT AVAILABLE TO T HE APPELLANT. 3. IT WAS SUBMITTED BY THE LEARNED AR OF THE ASSESS EE THAT GROUND NO. 1 IS NOT PRESSED AND GROUND NO. 6 IS TO BE DECIDED AGAINST THE ASSESSEE IN VIEW OF INSERTION OF SECTION 2A IN SECTION 90 WITH RETROSPECTIVE EFFECT FROM 01.04.2002. ACCORDINGLY, GROUND NOS. 1 AND 6 A RE REJECTED. REGARDING GROUNDS NOS. 2 TO 5, HE SUBMITTED THAT TH E GRIEVANCES OF THE ASSESSEE WILL BE TAKEN CARE OF IF THREE ASPECTS OF THE MATTER ARE CONSIDERED AND DECIDED. FIRST ASPECT AS PER HIM IS EXCLUSION O F ONE COMPARABLE OUT OF FIVE COMPARABLES SELECTED BY THE TPO I.E. ICC INTER NATIONAL AGENCIES LTD. (SEG.). IN SUPPORT OF THIS CONTENTION, HE SUBMITTED THAT AS PER THE TRIBUNAL ORDER RENDERED IN THE CASE OF LOGICA (P) LTD. VS. A CIT AS REPORTED IN 36 TAXMAN.COM 374 (BANGALORE) AND AUTODESK INDIA PVT. LTD. VS. DCIT AS REPORTED IN TS-502-ITAT-2015(BANG)-TP, COPY SUBMITT ED, IT WAS HELD BY THE TRIBUNAL THAT THIS COMPANY IS FUNCTIONALLY DISS IMILAR. HE FURTHER SUBMITTED THAT THE FUNCTION OF THE PRESENT ASSESSEE AND THESE TWO COMPANIES ARE SIMILAR AND THEREFORE, FOLLOWING THES E TWO TRIBUNAL ORDERS, IN THE PRESENT CASE ALSO, THIS COMPARABLE SHOULD BE EXCLUDED. 4. SECOND ASPECT AS PER HIM IS THIS THAT OPERATING MARGIN ON COST CONSIDERED BY THE TPO IN RESPECT OF TWO COMPANIES I .E. PRIYA INTERNATIONAL ITA NO.1282/B/11 6 LTD. AT 74.71 % AND ACCESS GLOBAL SOLUTIONS LTD. AT 5.40% IS NOT CORRECT AND IT SHOULD BE 15.71% AND 3.94 % RESPECTIVELY. IN SUPPORT OF THIS CONTENTION, HE SUBMITTED THAT IN ANOTHER CASE I.E. IN THE CASE OF M/S ELECTRONICS FOR IMAGING INDIA PVT. LTD. FOR A.Y. 20 07 08, THIS CLAIM WAS MADE BEFORE THE TPO IN THAT CASE AND AS PER THE ORD ER OF TPO DATED 27.10.2010 IN THAT CASE, THE TPO HAS WORKED OUT THE MARGIN RATIO OF THESE TWO COMPANIES BEING OPERATING PROFIT TO COST AT 15. 71 % AND 3.94 % RESPECTIVELY. HE SUBMITTED A COPY OF THE TPOS ORDE R IN THAT CASE. HE ALSO SUBMITTED THAT ON PAGE 443 OF THE PAPER BOOK BEING PART OF THE TRIBUNAL ORDER RENDERED IN THE CASE OF LOGICA (P.) LTD. (SUP RA), THE TRIBUNAL HAS ALSO NOTED THE PERCENTAGE OF OPERATING PROFIT TO COST OF THESE TWO COMPANIES AT 15.71 % AND 3.94 % RESPECTIVELY. HE SUBMITTED THAT THEREFORE, IN THE PRESENT CASE ALSO, THE MARGIN PERCENTAGE OF THESE T WO COMPARABLES SHOULD BE ADOPTED AT 15.71 % AND 3.94 % RESPECTIVELY. 5. THIRD ASPECT AS PER HIM IS THIS THAT THERE SHOULD BE ADJUSTMENT IN PLI ON ACCOUNT OF DEPRECIATION. HE SUBMITTED THAT THE A SSESSEE HAS APPLIED STRAIGHT LINE METHOD (SLM) OF DEPRECIATION AND ACCO RDINGLY, THE DEPRECIATION CHARGED BY THE ASSESSEE COMPANY IS MUC H HIGHER THAN THE DEPRECIATION CHARGED BY THE COMPARABLES. HE SUBMITT ED THAT THE PERCENTAGE OF DEPRECIATION TO TOTAL ASSETS IN THE P RESENT CASE IS 28.47 % WHEREAS THE AVERAGE DEPRECIATION TO TOTAL ASSETS IN THE CASE OF THE ITA NO.1282/B/11 7 COMPARABLES IS ONLY 15.32% AND IT ALSO SHOWS THAT T HE DEPRECIATION CHARGED BY THE ASSESSEE COMPANY IS ON VERY HIGHER S IDE AND THEREFORE, SUITABLE ADJUSTMENT IS REQUIRED. IN SUPPORT OF THIS CONTENTION, HE PLACED RELIANCE ON THE FOLLOWING JUDICIAL PRONOUNCEMENTS:- A) EGAIN COMMUNICATION (P) LTD. VS. ITO, 23 SOT 385 (P UNE) PAPER BOOK PAGES 452 TO 476. B) CIT VS. RAKHRA TECHNOLOGIES (P.) LTD., 15 TAXMAN.CO M 266 (P & H) PAPER BOOK PAGES 477 TO 481. C) M/S ACI WORLDWIDE SOLUTIONS (P.) LTD. VS. DCIT IN I TA NO. 652/BANG/2012 DATED 10.04.2015, PAPER BOOK PAGES 48 9 TO 498. 6. FINALLY HE SUBMITTED THAT IF THESE THREE EFFECT S ARE GIVEN THAN THE PLI BEING ARITHMETICAL MEAN OF THE REMAINING FOUR C OMPARABLES WILL BE 14.00% BEFORE ADJUSTMENT OF DEPRECIATION AND 7.98 % AFTER ADJUSTMENT OF DEPRECIATION AS AGAINST THE MARGIN REPORTED BY THE ASSESSEE COMPANY AT 7.29% AND SINCE IT IS WITHIN 5% RANGE, NO TP ADJUST MENT IS CALLED FOR. 7. AS AGAINST THIS, LEARNED DR OF THE REVENUE S UBMITTED THAT REGARDING EXCLUSION OF ONE COMPARABLE I.E. ICC INTERNATIONAL AGENCIES LTD. (SEG.), SHE RELIES ON THE ORDER OF ASSESSING OFFICER/TPO. R EGARDING RECTIFICATION IN OPERATING MARGINS OF TWO COMPARABLES AND ADJUSTM ENT ON ACCOUNT OF DEPRECIATION, SHE SUBMITTED THAT THE MATTER MAY BE RESTORED TO ASSESSING OFFICER/TPO FOR FACTUAL VERIFICATIONS. 8. IN THE REJOINDER, IT WAS SUBMITTED BY THE LEARNE D AR OF THE ASSESSEE THAT HE HAS NO OBJECTION TO RESTORING THE MATTER BA CK TO ASSESSING ITA NO.1282/B/11 8 OFFICER/TPO FOR FACTUAL VERIFICATIONS BUT THE ISSUE S ON PRINCIPLE SHOULD BE DECIDED BY THE TRIBUNAL. 9. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. REGARD ING THE FIRST ASPECT I.E. EXCLUSION OF ONE COMPARABLE I.E. ICC IN TERNATIONAL AGENCIES LTD. (SEG.), WE FIND THAT IN THE CASE OF LOGICA (P ) LTD. VS. ACIT (SUPRA), THAT ASSESSEE COMPANY WAS ENGAGED IN THE BUSINESS O F RENDERING SOFTWARE DEVELOPMENT SERVICES AND SUPPORT SERVICES TO ITS AE . IN THE PRESENT CASE ALSO, THE ASSESSEE COMPANY IS RENDERING MARKET SUPP ORT SERVICES TO ITS AE. LEARNED DR OF THE REVENUE ALSO COULD NOT POINT OUT ANY DIFFERENCE IN FACTS IN THE PRESENT CASE AND IN THE CASE OF LOGICA (P) L TD. VS. ACIT (SUPRA). IN THIS CASE I.E. IN THE CASE OF LOGICA (P) LTD. VS. A CIT (SUPRA), IT WAS HELD BY THE TRIBUNAL THAT KEEPING IN MIND THE FUNCTIONS AND RISK ANALYSIS, IT IS NOT POSSIBLE TO COMPARE THAT ASSESSEE WITH ICC INTE RNATIONAL AGENCIES LTD. THE RELEVANT PARA OF THIS TRIBUNAL ORDER IS PA RA NO. 28 ON PAGE 445 OF THE PAPER BOOK AND THE SAME IS REPRODUCED BELOW FOR READY REFERENCE:- 28. WE HAVE GIVEN A CAREFUL CONSIDERATION TO THE RI VAL SUBMISSIONS AND ARE OF THE VIEW THAT THE PLEA PUT F ORTH BY THE ASSESSEE DESERVES TO BE ACCEPTED. AS CAN BE SE EN FROM THE FUNCTIONAL PROFILE OF ICC INTERNATIONAL AG ENCIES LTD. GIVEN BY THE ASSESSEE, WHICH IS NOT DISPUTED B Y THE TPO, THAT IT DOES TRADING AND ALSO ACTS AS COMMISSI ON AGENT FOR MACHINERIES USED TEXTILES INDUSTRY. AS A GAINST ITA NO.1282/B/11 9 THIS, THE FUNCTIONAL PROFILE OF THE ASSESSEE, AS WE HAVE ALREADY SEEN, IS ONLY GIVING SUPPORT SERVICES. KEE PING IN MIND THE FUNCTIONS AND RISK ANALYSIS, IT IS NOT POS SIBLE TO COMPARE THE ASSESSEE WITH ICC INTERNATIONAL AGENCIE S LTD. IF ICC INTERNATIONAL AGENCIES LTD. IS NOT TAK EN AS A COMPARABLE, THEN THE MARGIN OF THE ASSESSEE WOULD B E WELL WITHIN THE OP/COST PLI OF THE OTHER COMPARABLE COMPANIES CHOSEN BY THE TPO. WE ACCORDINGLY HOLD T HAT IN RESPECT OF THE INTERNATIONAL TRANSACTIONS OF REN DERING MARKETING SUPPORT SERVICES, THE PRICE RECEIVED BY T HE ASSESSEE IS AT ARMS LENGTH AND NO ADJUSTMENT IS CA LLED FOR. GROUND NO.5 RAISED BY THE ASSESSEE IS ACCORDI NGLY ALLOWED. 10. BY RESPECTFULLY FOLLOWING THIS TRIBUNAL ORDER I N THE ABSENCE OF ANY DIFFERENCE IN FACTS HAVING BEEN POINTED OUT BY THE LEARNED DR OF THE REVENUE, WE HOLD THAT THIS COMPANY I.E. ICC INTERNA TIONAL AGENCIES LTD. CANNOT BE CONSIDERED AS A COMPARABLE IN THE PRESENT CASE BECAUSE OF FUNCTIONAL DISSIMILARITY. 11. REGARDING THE REMAINING TWO ASPECTS I.E. CORREC T MARGIN OF TWO COMPANIES I.E. PRIYA INTERNATIONAL LTD. AND ACCESS GLOBAL SOLUTIONS LTD. AND ADJUSTMENT ON ACCOUNT OF DEPRECIATION, WE HOLD THAT IN PRINCIPLE, THESE ADJUSTMENTS ARE APPROVED BECAUSE THE MARGIN OF THE COMPARABLE HAS TO BE CORRECTLY ADOPTED AND ADJUSTMENT ON ACCOUNT OF DEPR ECIATION IS ALSO JUSTIFIED IF EXCESS/LESSER DEPRECIATION IS CHARGED BY THE ASSESSEE BECAUSE ITA NO.1282/B/11 10 OF ADOPTING A DIFFERENT METHOD OF CHARGING DEPRECIA TION AS COMPARED TO METHOD OF CHARGING DEPRECIATION BY THE COMPARABLES. BUT FOR FACTUAL VERIFICATION OF THE CORRECT MARGIN OF TWO COMPANIES I.E. PRIYA INTERNATIONAL LTD. AND ACCESS GLOBAL SOLUTIONS LTD. AND ADJUSTMEN T REQUIRED ON ACCOUNT OF DEPRECIATION, THE MATTER IS RESTORED BACK TO ASS ESSING OFFICER/TPO. NEEDLESS TO SAY, BEFORE PASSING THE ORDER, ADEQUATE OPPORTUNITY OF BEING HEARD SHOULD BE PROVIDED TO THE ASSESSEE. GROUNDS N OS. 2 TO 5 ARE ALLOWED FOR STATISTICAL PURPOSES. 12. GROUND NO. 7 IS AS UNDER:- (7) DISALLOWANCE OF EXPATRIATE COST (A) ON THE FACTS AND IN THE CIRCUMSTANCES OF T HE CASE, THE AO ERRED IN MAKING DISALLOWANCE OF RS.13,512,070/- INCURRED TOWARDS EXPATRIATE COSTS, WITHOUT APPRECIA TING THE FACT THAT THE SAID EXPATRIATE COSTS ARE INCURRE D IN RELATION TO THE SERVICES RENDERED BY EXPATRIATE EMP LOYEES. (B) WITHOUT PREJUDICE TO THE ABOVE, ON THE FACTS A ND IN THE CIRCUMSTANCES OF THE CASE, THE AO HAS ERRED IN NOT EXCLUDING THE AFORESAID EXPATRIATE COST FROM THE CO ST BASE OF THE APPELLANT, WHICH WAS CONSIDERED BY THE TPO F OR DETERMINING THE ARMS LENGTH MARGIN. 13. IT WAS SUBMITTED BY THE LEARNED AR OF THE A SSESSEE THAT THE OBJECTIONS ON THIS ISSUE RAISED BY THE ASSESSEE BEF ORE DRP ARE ON PAGE 333 OF THE PAPER BOOK. MAIN OBJECTIONS ARE THAT THESE E XPATRIATE EMPLOYEES OF ITA NO.1282/B/11 11 THE HO WERE MONITORING THE MARKETING ACTIVITIES OF THE BRANCH I.E. THE PRESENT ASSESSEE AND THEREFORE, THESE EXPENSES SHOU LD BE ALLOWED. THE NEXT OBJECTION IS THIS THAT THIS COST WAS INCLUDED IN THE COST BASE OF THE BRANCH ON WHICH MARK UP HAS BEEN EARNED BY THE BRAN CH & OFFERED FOR TAX AND TPO HAS NOT EXCLUDED THIS EXPENSES FROM THE COS T BASE AND THEREFORE, THE DISALLOWANCE IS NOT JUSTIFIED. 14. HE ALSO SUBMITTED THAT AS PER PARA 4 & 5 OF THE DRAFT ASSESSMENT ORDER, THIS WAS THE OBJECTION OF THE A.O. THAT THIS EXPENSES IS NOT ALLOWABLE UNDER ANY SECTION OF THE INCOME T. ACT AN D LEARNED AR OF THE ASSESSEE ALSO COULD NOT POINT OUT THE RELEVANT SECT ION OF THE INCOME T. ACT UNDER WHICH THIS EXPENSES IS ALLOWABLE BUT IN THE R EMAND REPORT AVAILABLE ON PAGE 417 OF THE PAPER BOOK HAVING BEEN REPRODUCE D BY DRP, IT WAS STATED THAT THIS WAS DISALLOWED U/S 37 OF THE INCOM E T. ACT. HE FURTHER SUBMITTED THAT LEGALLY, THE HO AND BRANCH ARE NOT D ISTINCT AND THEREFORE, EVEN IF IT IS AN EXPENSE OF THE HO, IT SHOULD BE AL LOWED. HE ALSO SUBMITTED THAT AS PER COMMERCIAL EXPEDIENCY ALSO, THIS SHOULD BE ALLOWED AND IN SUPPORT OF THIS CONTENTION, HE PLACED RELIANCE ON A JUDGMENT OF HONBLE APEX COURT RENDERED IN THE CASE OF S. A. BUILDERS A S REPORTED IN 288 ITR 1. 15. AS AGAINST THIS, LEARNED DR OF THE REVENUE S UPPORTED THE ORDER OF A.O./TPO/DRP. SHE ALSO SUBMITTED THAT REGARDING THI S CONTENTION THAT IF THIS EXPENSES IS DISALLOWED, THE SAME SHOULD BE EXC LUDED FROM EXPENSES OF THE ASSESSEE COMPANY TO WORK OUT OPERATING PROFI T OF THE ASSESSEE COMPANY FOR TP ADJUSTMENT, SHE SUBMITTED THAT ON TH IS ASPECT,, THE DECISION OF DRP IS THIS ON PAGE 419 OF THE PAPER BO OK THAT SINCE THIS COST WAS INCLUDED FOR MARK UP EARNING, IT CANNOT BE EXCL UDED FROM COST FOR TP STUDY. SHE SUPPORTED THIS FINDING OF DRP. ITA NO.1282/B/11 12 16. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND WE FIND THAT A CLEAR FINDING IS GIVEN BY DRP THAT THE LIABILITY HAS BEEN IMPOSED BY THE HO AND THE ASSESSEE COMPANY HAS AGREED TO DISCHARGE THIS L IABILITY BECAUSE OF NON BUSINESS CONSIDERATION AND LEARNED AR OF THE ASSE SSEE COULD NOT CONTROVERT THIS CATEGORICAL FINDING OF DRP. REGARDI NG THE ARGUMENT OF COMMERCIAL EXPEDIENCY, WE FIND THAT ALTHOUGH THIS C ONTENTION WAS RAISED BUT THE AR OF THE ASSESSEE COULD NOT ESTABLISH THE COMMERCIAL EXPEDIENCY FOR DISCHARGING THIS LIABILITY OF THE HO AND HENCE, THIS CONTENTION AND RELIANCE ON THE JUDGMENT OF HONBLE APEX COURT REND ERED IN THE CASE OF S. A. BUILDERS (SUPRA) ARE WITHOUT ANY MERIT SINCE COM MERCIAL EXPEDIENCY IS NOT ESTABLISHED. REGARDING THE ALTERNATIVE PLEA OF EXCLUSION FROM COST FOR TP STUDY ALSO, WE FIND NO INFIRMITY IN THE ORDER OF DRP. ACCORDINGLY, THIS GROUND IS ALSO REJECTED. 17. GROUND NO. 8 IS AS UNDER:- (8) DISALLOWANCE OF CREDITORS OUTSTANDING BALANCE (A) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE, THE AO HAS ERRED IN MAKING DISALLOWANCE OF RS.749,172/- BE ING PART OF THE TOTAL OUTSTANDING BALANCE IN RESPECT OF ONE OF THE APPELLANTS CREDITOR, NAMELY VISUALNET INDIA PVT. L TD., CONSIDERING THE SAME AS DISCREPANCY. (B) WITHOUT PREJUDICE TO THE ABOVE, ON THE FACTS AN D IN THE CIRCUMSTANCES OF THE CASE, EVEN IF THE AO IS JUSTI FIED IN MAKING DISALLOWANCE FOR MISMATCH IN THE OUTSTANDING BALANCE OF VISUALNET INDIA PVT. LTD., THE MISMATCH AMOUNT SHOULD BE RS.127,603/- INSTEAD OF RS.749,172/-. (C) WITHOUT PREJUDICE TO THE ABOVE, ON THE FACTS AN D IN THE CIRCUMSTANCES OF THE CASE, THE AO HAS ERRED IN NOT EXCLUDING THE AFORESAID CREDITORS BALANCE FROM THE COT BASE OF THE ITA NO.1282/B/11 13 BRANCH, WHICH WAS CONSIDERED BY THE TPO FOR DETERMI NING THE ARMS LENGTH MARGIN. 18. IT WAS SUBMITTED BY THE LEARNED AR OF THE AS SESSEE THAT AS PER THE REPLY DATED 13.12.2010 SUBMITTED TO THE A.O. AS AVA ILABLE ON PAGE 244 OF THE PAPER BOOK, THE ACTUAL DIFFERENCE IS ONLY RS. 1 27,603/- BEING BALANCE IN ASSESSEES BOOKS OF RS. 30,59,733/-. HE FURTHER SUBMITTED THAT IT IS NOT KNOWN AS TO FROM WHERE, THE A.O. HAS TAKEN THE FIGU RE OF DIFFERENCE AT RS. 749,172/-. HE SUBMITTED THAT THE MATTER MAY BE REST ORED TO THE A.O. TO ARRIVE AT CORRECT DIFFERENCE FIRST AND THEN EXAMINE AND DECIDE THE EXPLANATION OF THE ASSESSEE ABOUT THE DIFFERENCE AS EXPLAINED ON PAGES 262 TO 265 OF THE PAPER BOOK. AS AGAINST THIS, LEARNED DR OF THE REVENUE SUPPORTED THE ORDERS OF THE LOWER AUTHORITIES. 19. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. R EGARDING THIS OBJECTION OF THE LEARNED AR OF THE ASSESSEE THAT CORRECT FIGU RE OF DIFFERENCE IS ONLY RS. 127,603/- AND IT IS KNOWN AS TO FROM WHERE, THE A.O. HAS TAKEN THE FIGURE OF DIFFERENCE AT RS. 749,172/-, WE FIND THAT ON PAGE 244 OF THE PAPER BOOK ITSELF, THE ASSESSEE HAS NOTED TWO DIFFERENCES IN ACCOUNTS OF THIS PARTY. ONE DIFFERENCE IS OF RS. 876,775/- AND THE S ECOND DIFFERENCE IS OF RS. 127,603/- AND WE FIND THAT THE FIGURE OF RS. 74 9,172/- NOTED BY THE A.O. IS AFTER REDUCING THE AMOUNT OF RS. 127,603/- FROM RS. 876,775/-. HENCE, THE BASIS OF THE FIGURE OF RS. 749,172/- NOT ED BY THE A.O. IS AVAILABLE AND FOR THIS REASON, IT IS NOT REQUIRED T O RESTORE THE MATTER TO THE A.O. HOWEVER, WE FIND THAT THE MATTER SHOULD BE RES TORED TO THE FILE OF THE A.O. TO CONSIDER AND DECIDE ABOUT VARIOUS EXPLANATI ONS GIVEN BY THE ASSESSEE IN RESPECT OF THESE DIFFERENCES. WE, THERE FORE, RESTORE THIS MATTER TO THE A.O. TO DECIDE THE ISSUE AFRESH AFTER GIVING A FINDING ABOUT VARIOUS EXPLANATIONS OF THE ASSESSEE AFTER AFFORDING REASON ABLE OPPORTUNITY OF ITA NO.1282/B/11 14 BEING HEARD TO THE ASSESSEE. THIS GROUND IS ALLOWED FOR STATISTICAL PURPOSES. 20. IN THE RESULT, THE APPEAL OF THE ASSESSEE STA NDS PARTLY ALLOWED FOR STATISTICAL PURPOSES. PRONOUNCED IN THE OPEN COURT ON THE DATE MENTIO NED AT CAPTION PAGE. SD/- SD/- (VIJAYPAL RAO) (AK GARODIA) JUDICIAL MEMBER ACCOUNTANT MEMB ER VMS. BANGALORE DATED : 29/04/2016 COPY TO : 1. THE ASSESSEE 2. THE REVENUE 3.THE CIT CONCERNED. 4.THE CIT(A) CONCERNED. 5.DR 6.GF BY ORDER ASST. REGISTRAR, IT AT, BANGALORE.