Mapei Construction Products (India) Private Limited, Bangalore V. Assistant Commissioner Of Income Tax,Circle-4(1)(2), Bangalore

ITA 283/BANG/2021

• Counselvise Citation: [2022] 107 COUNSELVISE.COM (IT) 1587 (ITAT-BANGALORE)
• Duration Of Justice: 11 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-05-2022
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: C
• Assessment Year: 2016-2017
• Appeal Filed On: 24-06-2021
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Depreciation; Transfer pricing; Opportunity of being heard; International transaction; Bad and doubtful debts; Capital expenditure
• Section: 37; 56; 92C; 143(3); 92; 92F; 92E; 115JB; 40(a)(ia); 205; 250; 144C; 143(2); 13; 22; 92CA; 20

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL ‘C’ BENCH : BANGALORE BEFORE SHRI. CHANDRA POOJARI, ACCOUNTANT MEMBER AND SMT. BEENA PILLAI, JUDICIAL MEMBER IT(TP)A No. 283/Bang/2021 Assessment Year : 2016-17 M/s. Mapei Construction Products (India) Pvt. Ltd., A01 and B01, Solus Jain Heights, 1 st Floor, 1 st Cross, J C Road, Bangalore – 560 002. PAN: AAHCM0464A Vs. The Assistant Commissioner of Income Tax, Circle 4 (1)(2), Bangalore. APPELLANT RESPONDENT Assessee by : Shri S. Ramasubramanyam, CA Revenue by : Shri Janardhan, Addl. CIT DR Date of Hearing : 04-03-2022 Date of Pronouncement : 01-06-2022 ORDER PER BEENA PILLAI, JUDICIAL MEMBER Present appeal is filed by the assessee against final assessment order dated 24/03/2021 passed by the Ld.ACIT, under national assessment Centre, New Delhi, under section 143(3) read with section 143(3A) and (3B) of the act, for the assessment year 2016- 17 on following grounds of appeal: “1. JURISDICTION 1.1. That the learned lower authorities erred in law and on facts in referring the case to the learned Transfer Pricing Page 2 of 22 IT(TP)A No. 283/Bang/2021 Officer (TPO) in violation of Instruction no. 3 of 2016 dated 106) March, 2016 (382 ITR (St.) 36). 1.2. That the learned lower authorities erred in law and on facts in holding that the international transaction "guarantee" falls under Transfer Pricing Risk Parameter and such finding is given without bringing any material on record. 1.3. That the order of the learned TPO is void-ab-initio as the learned assessing officer has not followed the procedure laid down in Instruction No. 3 of 2016 and has referred the case u/s. 92CA of Income Tax Act, 1961 (Act) without recording the satisfaction as per Instruction No. 3 of 2016 and without providing an opportunity of being heard to the appellant. 1.4. That the learned lower authorities erred in law and on facts in holding that the CBDT Instruction is applicable for scrutiny cases selected manually and not for cases selected under Computer Aided Selection of Scrutiny. 1.5. That the finding of the learned lower authorities that the reason for selection of case for scrutiny is "Large value of international transactions in the nature of guarantee" reported in Sl. No. 15 of Form 3CEB is perverse since Form 3CEB does not show such large value. 2. TRANSFER PRICING ADJUSTMENT OF RS. 2,93,54,528/- 2.1. That the learned lower authorities erred in law and on facts in making an adjustment of Rs.2,93,54,528/- u/s. 92CA of the Act. 2.2. That the learned lower authorities erred in law and on facts in allocating the employee cost of Rs.82,05,919/- on basis of turnover of AE and Non-AE under Trading segment and rejecting the allocation made on direct basis. 2.3. That the learned lower authorities erred in law and on facts in rejecting the allocation of employee cost made by the appellant on the ground that the allocation is made on ad-hoc basis and no cogent material is provided by the appellant and such finding is perverse and contrary to the materials available on record. 3. DISALLOWANCE U/S. 40(a)(i) OF THE ACT — RS.10,50,445/- 3.1. That the learned lower authorities erred in law and on facts in disallowing Rs.15,00,635/- u/s. 40(a)(i) of the Act being 100% against the disallowance of Rs.4,50,190/- being 30% made in the return of income. 3.2. That the learned lower authorities erred in law and on facts in disallowing Rs.15,00,635/- u/s. 40(a)(i) of the Act even though the appellant has reversed the provision Page 3 of 22 IT(TP)A No. 283/Bang/2021 immediately at the beginning of the next financial year 2016-17 relevant to assessment year 2017-18 as the appellant had no liability at all to make the payment. 3.3. That the learned lower authorities erred in law and on facts in making disallowance u/s. 40(a)(i) of the Act even though the same is revenue neutral in view of the reversal of provision in the next accounting year. 3.4. That the learned lower authorities erred in law and on facts in holding that once the provision is made and debited to Profit and Loss account, the income is said to have accrued to the payee ignoring the fact that no income chargeable to tax in India has accrued to non-resident payee.. 3.5. Without prejudice to the above grounds, the learned lower authorities ought to have given a direction that a sum of Rs. 15,00,635 should have been reduced from the income of A.Y 201718 instead of Rs. 4,50,190/- reduced in the return of income. 4. ADDITION OF PROVISION FOR BAD AND DOUBTFUL DEBTS TO INCOME COMPUTED UNDER NORMAL PROVISIONS OF THE ACT AND BOOK PROFITS COMPUTED U/S. 115JB OF THE ACT — RS.36,20,870/- 4.1. That the learned lower authorities erred in law and on facts in adding provision for bad and doubtful debts of Rs.36,20,870/- to the income computed under normal provisions of the Act even though the same has been debited to profit and loss account and correspondingly reduced from the Trade Receivables in the Balance Sheet which amounts to write off. 4.2. That the learned lower authorities erred in law and on facts in adding provision for bad and doubtful debts of Rs.36,20,870/- to the book profits computed u/s. 115JB of the Act. 5. INTEREST EXPENDITURE CLAIMED U/S. 57(iii) OF THE ACT 5.1. That the learned lower authorities erred in law and on facts in disallowing interest expenditure of Rs.49,81,189/- claimed as deduction u/s. 57 of the Act even though such expenditure was incurred for earning the interest income of Rs. 60,13,880/- declared u/s. 56 of the Act under the head "Income from other sources". 5.2. Without prejudice to the above ground, that the learned lower authorities ought to have held that the above claim is in the nature of expenses incurred for the business and allowed the deduction u/s. 37 of the Act. Each of the above grounds are without prejudice to one another, the appellant seeks the leave of the Hon'ble Income Tax Appellate Tribunal to add, delete, amend or Page 4 of 22 IT(TP)A No. 283/Bang/2021 otherwise modify each or any of the grounds of appeal either before or at the time of hearing this appeal.” 2. Brief facts of the case are as under: 2.1 The assessee is a private limited company engaged in the business of manufacturing of construction chemicals and other allied products. The assessee filed its return of income on 30.11.2016 declaring nil income after setting-off the brought forward losses (The ITR — V and computation of income are enclosed at page no. 17 to 21 of paper book). The assessee's case was selected for scrutiny and notice u/s. 143(2) of Income-tax Act (Act) was issued on 08.08.2018 (The notice is enclosed at page no. 155 to 162 of paper book). During the assessment proceedings, the learned assessing officer sought for information and documents on various deductions claimed in the return of income. In response, the assessee filed submissions (The notices and replies filed are enclosed at page nos. 155 to 205 of paper book). The learned assessing officer referred the case to the Transfer Pricing Officer (TPO) to verify whether the international transactions entered into by the appellant with its associated enterprises are at Arm's Length. The learned TPO issued notices u/s.92CA of the Act and the assessee filed submissions (The notices and replies filed are enclosed at page nos. 206 to 250 of paper book). After hearing the assessee, the learned TPO passed an order u/s. 92CA(3) of the Act on 30.10.2019 making an adjustment of Rs. 2,93,54,528/- (Placed at page no. 66 to 78 of paper book). Subsequently, the learned assessing officer passed a draft assessment order u/s. 144C of the Act on 25.12.2019 determining the total income at Rs. 3,90,50,690/- after making other additions / disallowances along with the adjustment u/s. Page 5 of 22 IT(TP)A No. 283/Bang/2021 92CA(3) of the Act (The draft order is enclosed at page no. 62 to 66 of appeal memo). 2.2. The assessee challenged the above draft assessment order by filing the petition u/s. 144C of the Act before Hon'ble Dispute Resolution Panel, Bangalore (Form 35A is enclosed at page nos. 67 to 106 of appeal memo). The Hon'ble DRP issued directions u/s. 144C(5) of the Act on 22.02.2021 (The copy is enclosed at page no. 18 to 53 of appeal memo). The learned assessing officer passed a final assessment order u/s. 143(3) r.w.s 144C of the Act on 24.03.2021 after considering the directions u/s. 144C(5) of the Act (The copy is enclosed at page no. 7 to 17 of appeal memo). 3. The Ld.AR submitted that, the assessee has raised additional ground of appeal wherein following issue has been alleged before the Tribunal: “1. That the learned assessing officer erred in law and on facts in not carrying out the direction of the Hon'ble DRP in allowing depreciation on the sum of Rs.49,81,189/- 2. That the order passed on 24.03.2021 u/s. 143(3) r.w.s 144C of Income-tax Act, 1961 (Act) is barred by limitation as the reference to learned Transfer Pricing Officer is bad in law and therefore, the extended time limit u/s. 144C of the Act is not available for passing the assessment order.” 4. It has been submitted that no new facts needs to be considered in order to dispose of the additional ground raised by the assessee vide application dated 22/06/2021. It is submitted that the additional ground no.2 is a legal issue that goes to the root cause of the proceedings. The Ld.AR, thus prayed for the admission of additional ground so raised by assessee. 5. On the contrary, the Ld.CIT.DR though opposed admission of the additional ground, could not bring anything on record which would challenge such a right available to assessee under the Act. Page 6 of 22 IT(TP)A No. 283/Bang/2021 6. We have perused the submissions advanced by both sides in light of records placed before us. The Ld.DR did not object for the additional grounds being admitted. We note that one of the additional grounds is directly connected with the main issue of disallowance and no new facts needs to be investigated for adjudicating the same. Another issues alleged by the assessee is a legal issue that does not require investigation of any facts. Considering the submissions and respectfully following the decisions of Hon’ble Supreme Court in case of National Thermal Power Co. Ltd. Vs. CIT reported in (1998) 229 ITR 383 and Jute Corporation of India Ltd. Vs. CIT reported in 187 ITR 688, we are admitting the additional ground raised by the assessee. Accordingly, the additional grounds raised by assessee stands admitted. 7. We shall first consider Ground No.2 raised in the application for additional ground along with Ground No. 1 raised in the Grounds of appeal which is the legal issue and goes to the root cause of the case. Assessee has also raised certain issues in Ground No.1 challenging the jurisdiction of the Ld.AO. All these grounds are considered together as they are on same issue. Additional Ground No.2 7.1 In support of the above legal plea, the Ld.AR submitted as under: “10.2. A perusal of the above would show that a case can be referred to the learned TPO only under the circumstances specified in paragraph 3.2 and sub paragraphs (a) to (c) of paragraph 3.3. Instruction No.4 of 2016 dated 13.07.2016 (385) ITR 53 is applicable for FY Page 7 of 22 IT(TP)A No. 283/Bang/2021 2016-17. Instruction No. 5 of 2017 dated 7.7.2017 (396 ITR ST 1) are applicable for cases selected during the FY 2017-18. Instruction no. 4 of 2018 dated 20.08.2018 are applicable for the cases selected during FY 2018-19 and the notice u/s 143(2) has been issued on 09.08.2018. A perusal of this Instruction would show that the case can be selected for scrutiny under transfer pricing adjustment only if the quantum of such addition exceeded Rs. 10 Crore earlier in any years. It is submitted that the petitioner's case was never subject to proceedings u/s 92 to 92F of the Act. (Transfer pricing proceedings). Therefore, it is submitted that the reference to TPO by the learned assessing officer is void-ab-initio as the parameters specified in paragraph 3.2 and 3.3 of Instruction no. 3/2016 are not fulfilled. 10.3. It is clear that the learned assessing officer has not followed the binding instruction of CBDT and therefore, the reference to the TPO is bad in law. The learned TPO gets jurisdiction only if there is a valid reference u/s. 92CA of the Act. 10.4. The assessee relies on the decision of Hon'ble Delhi High Court in Indorama Synthetics (India) Limited Vs. Additional CIT 386 ITR 665, wherein at page 678, paragraph 22, it was held that the instruction no. 3 of 2016 is retrospective in operation and applies to all pending cases and even to a case where reference was made earlier prior to the issue of circular. The assessee relies on the following decisions wherein it was held that selection of a case for scrutiny contrary to the instructions of CBDT would make the assessment bad in law.” 7.2 The Government in the budget speech promised to take appropriate steps in order to reduce litigation and providing certainty in taxation and had taken various steps relating to same by proposing to amend and incorporate new provisions in the Act"). 7.3 In continuation to their promise, the Central Board of Direct tax on 10/03/2016 took steps towards reducing litigation by replacing earlier Instruction no.15/2015 with new Instruction Page 8 of 22 IT(TP)A No. 283/Bang/2021 no.3/2016 containing guidelines for transfer pricing assessment. 7.4 The Instruction no.3 is as under: “The provisions relating to transfer pricing are contained in Sections 92 to 92F in Chapter X of the Income-tax Act, 1961. These provisions came into force w.e.f. Assessment Year 2002-2003 and have seen a number of amendments over the years, including the insertion of Safe Harbour and Advance Pricing Agreement provisions and the extension of the applicability of transfer pricing provisions to Specified Domestic Transactions. 2. In terms of the provisions, any income arising from an international transaction or specified domestic transaction between two or more associated enterprises shall be computed having regard to the Arm's Length Price. Instruction No. 3 was issued on 20th May, 2003 to provide guidance to the Transfer Pricing Officers (TPOs) and the Assessing Officers (AOs) to operationalise the transfer pricing provisions and to have procedural uniformity. Due to a number of legislative, procedural and structural changes carried out over the last few years, Instruction No. 3 of 2003 was replaced with Instruction No. 15/2015, dated 16th October, 2015. After the issuance of Instruction No. 15/2015, the Board has received some suggestions and queries, which have been examined in detail. Accordingly, this Instruction is being issued to replace Instruction No. 15 of 2015. This Instruction is applicable for both international transactions and specified domestic transactions between associated enterprises. The guidelines on various issues are as follows: 3. Reference to Transfer Pricing Officer (TPO) 3.1 The power to determine the Arm's Length Price (ALP) in an international transaction or specified domestic transaction is contained in sub-section (3) of Section 92C. However, Section 92CA provides that where the Assessing Officer (AO) considers it necessary or expedient so to do, he may refer the computation of ALP in relation to an international transaction or specified domestic transaction to the TPO. For proper administration of the Income-tax Act, the Board has decided that the AO shall henceforth make a reference to the TPO only under the circumstances laid out in this Instruction. 3.2 All cases selected for scrutiny, either under the Computer Assisted Scrutiny Selection [CASS] system or under the compulsory manual selection system (in accordance with the CBDT's annual instructions in this regard for example, Instruction No. 6/2014 for selection in Page 9 of 22 IT(TP)A No. 283/Bang/2021 F.Y 2014-15 and Instruction No. 8/2015 for selection in F.Y 2015-16), on the basis of transfer pricing risk parameters [in respect of international transactions or specified domestic transactions or both] have to be referred to the TPO by the AO, after obtaining the approval of the jurisdictional Principal Commissioner of Income-tax (PCIT) or Commissioner of Income-tax (CIT). The fact that a case has been selected for scrutiny on a TP risk parameter becomes clear from a perusal of the reasons for which a particular case has been selected and the same are invariably available with the jurisdictional AO. Thus, if the reason or one of the reasons for selection of a case for scrutiny is a TP risk parameter, then the case has to be mandatorily referred to the TPO by the AO, after obtaining the approval of the jurisdictional PCIT or CIT. 3.3 Cases selected for scrutiny on non-transfer pricing risk parameters but also having international transactions or specified domestic transactions, shall be referred to TPOs only in the following circumstances: (a)where the AO comes to know that the taxpayer has entered into international transactions or specified domestic transactions or both but the taxpayer has either not filed the Accountant's report under Section 92E at all or has not disclosed the said transactions in the Accountant's report filed; (b) where there has been a transfer pricing adjustment of Rs. 10 Crore or more in an earlier assessment year and such adjustment has been upheld by the judicial authorities or is pending in appeal; and (c) where search and seizure or survey operations have been carried out under the provisions of the Income-tax Act and findings regarding transfer pricing issues in respect of international transactions or specified domestic transactions or both have been recorded by the Investigation Wing or the AO. 3.4 For cases to be referred by the AO to the TPO in accordance with paragraphs 3.2 and 3.3 above, in respect of transactions having the following situations, the AO must, as a jurisdictional requirement, record his satisfaction that there is an income or a potential of an income arising and/or being affected on determination of the ALP of an international transaction or specified domestic transaction before seeking approval of the PCIT or CIT to refer the matter to the TPO for determination of the ALP:  where the taxpayer has not filed the Accountant's report under Section 92E of the Act but the international Page 10 of 22 IT(TP)A No. 283/Bang/2021 transactions or specified domestic transactions undertaken by it come to the notice of the AO;  where the taxpayer has not declared one or more international transaction or specified domestic transaction in the Accountant's report filed under Section 92E of the Act and the said transaction or transactions come to the notice of the AO; and  where the taxpayer has declared the international transactions or specified domestic transactions in the Accountant's report filed under Section 92E of the Act but has made certain qualifying remarks to the effect that the said transactions are not international transactions or specified domestic transactions or they do not impact the income of the taxpayer. In the above three situations, the AO must provide an opportunity of being heard to the taxpayer before recording his satisfaction or otherwise. In case no objection is raised by the taxpayer to the applicability of Chapter X [Sections 92 to 92F] of the Act to these three situations, then AO should refer the international transaction or specified domestic transaction to the TPO for determining the ALP after obtaining the approval of the PCIT or CIT. However, where the applicability of Chapter X [Sections 92 to 92F] to these three situations is objected to by the taxpayer, the AO must consider the taxpayer's objections and pass a speaking order so as to comply with the principles of natural justice. If the AO decides in the said order that the transaction in question needs to be referred to the TPO, he should make a reference after obtaining the approval of the PCIT or CIT. 3.5 In addition to the cases to be referred as per paragraphs 3.2 and 3.3, a case involving a transfer pricing adjustment in an earlier assessment year that has been fully or partially set-aside by the ITAT, High Court or Supreme Court on the issue of the said adjustment shall invariably be referred to the TPO for determination of the ALP. 3.6 Since the provisions of Section 92CA of the Act, inter- alia, refer to the computation of the ALP of the international transaction or specified domestic transaction, it is imperative for the AO to ensure that all international transactions or relevant specified domestic transactions or both, as the case may be, are explicitly mentioned in the letter through which the reference is made to the TPO. In this regard, guidelines as under may be followed: (a) If a case has been selected for scrutiny on a TP risk parameter pertaining to international transactions only, Page 11 of 22 IT(TP)A No. 283/Bang/2021 then the international transactions shall alone be referred to the TPO; (b) If a case has been selected for scrutiny on a TP risk parameter pertaining to specified domestic transactions only, then the specified domestic transactions shall alone be referred to the TPO; and (c) If a case has been selected for scrutiny on the basis of TP risk parameters pertaining to both international transactions and specified domestic transactions, then the international transactions and the specified domestic transactions shall together be referred to the TPO. Since international transactions may be benchmarked together at the entity level due to the inter-linkages amongst them, if a case has been selected for scrutiny on a TP risk parameter pertaining to one or more international transactions, then all the international transactions entered into by the taxpayer - except those about which the AO has decided not to make a reference as per paragraph 3.4 - shall be referred to the TPO. 3.7 For administering the transfer pricing regime in an efficient manner, it is clarified that though AO has the power under Section 92C to determine the ALP of international transactions or specified domestic transactions, determination of ALP should not be carried out at all by the AO in a case where reference is not made to the TPO. However, in such cases, the AO must record in the body of the assessment order that due to the Board's Instruction on this matter, the transfer pricing issue has not been examined at all.” 7.5 The brief feature of the revised instruction are as under: 7.6 Reference of TP cases The reference by Assessing Officer to the Transfer Pricing Officer would be required in the following situations: Para 3.2 of the Instruction refers to cases which have been selected for scrutiny on the basis of Transfer Pricing Risk Parameters. Para 3.3 of the Instruction refers to following circumstances:  those cases which have been selected for scrutiny on Non- Transfer Pricing Risk Parameters, but also having International Transactions or Specified Domestic Transactions. Page 12 of 22 IT(TP)A No. 283/Bang/2021  As per Para 3.3, if the AO identifies that the taxpayer has entered into international transactions or specified domestic transactions or both, but the taxpayer has either not filed the Accountant's Report under Section 92E at all or has not disclosed the said transactions in the Accountant's report, then the matter can be referred to the TPO by the AO.  As per para 3.3, the AO can refer the matter to the TPO if there has been a transfer pricing adjustment of Rs. 10 Crore or more in an earlier assessment year and such adjustment has been upheld by the judicial authorities or is pending in appeal.  The Instruction further goes on to clarify three situations in which the AO can refer the matter to the TPO. They are as under: 7.7 The Instruction further goes on to clarify three situations in which the AO can refer the matter to the TPO. They are as under:  Where the taxpayer has not filed the Accountant's report under Section 92E of the Act but the international transactions or specified domestic transactions undertaken by it come to the notice of the AO;  Where the taxpayer has not declared one or more international transaction or specified domestic transaction in the Accountant's report filed under Section 92E of the Act and the said transaction or transactions come to the notice of the AO; and  Where the taxpayer has declared the international transactions or specified domestic transactions in the Accountant's report filed under Section 92E of the Act but have made certain qualifying remarks to the effect that the said transactions are not international transactions or specified domestic transactions or they do not impact the income of the taxpayer.  However, for the above three situations, there are certain conditions which the AO must fulfill before making a reference to the TPO. 7.8 Para 7 of the Instruction specifies that the guidelines prescribed under the Instruction shall be retrospectively applied. The decisions that discussed Instruction 3/2016 which issued by the CBDT on 10/03/2016, wherein guidelines were laid down for referring a matter to the TPO by the AO. Are as under:  Decision of Hon’ble Delhi High Court in case of Indorama Synthetics (India) Ltd. vs. ACIT (2016)71 taxmann.com 349  Decision of Hon’ble Punjab & Harayana High Court in case of Shri Vishnu Eatables (India) Ltd. vs. DCIT (2016)74 taxmann.com 89  Decision of Hon’ble Gujarat High Court in case of Alpha Nipon Innovatives Ltd. vs. DCIT reported in (2016)76 taxmann.com 166 Page 13 of 22 IT(TP)A No. 283/Bang/2021 7.9 The broad issues considered by the Hon’ble Courts in the above decisions were as under: (1) Whether in terms of Section 92CA, before making reference to TPO, assessee was to be given an opportunity of being heard on the question whether transaction entered into by the assessee was an international transaction or not? (2) Whether, failure to supply satisfaction note to assessee before making reference to TPO was at most a mere irregularity and it could not turn the reference itself as void ab initio? (3) Whether before making a reference to the TPO, the AO is bound to deal with the objections raised by the assessee and pass a speaking order in accordance with the provisions of the Act and as per the conditions laid down under the CBDT Instruction No. 3/2016 dated by this bench 10/03/2016? 7.10 It is noted by this bench that, Hon’ble Supreme Court has recently granted SLP against the decision of Hon’ble Delhi High Court, in an appeal filed by revenue, in case of, ACIT vs. Indo Rama synthetics reported in (2020) 114 taxmen.com 588. The issue that is pending to be decided by the Hon’ble Supreme Court is whether, the Assessing Officer was obliged to give assessee an opportunity of being heard before making reference to TPO on question of determination of ALP of alleged international transactions involving assessee and its AE. Under such it is not appropriate on behalf of this Tribunal to consider the argument raised by the Ld.AR on this issue. 7.11 In respect of the reliance placed by the Ld.AR on paragraph 3.2 of the instruction No.3(supra), there is no dispute that the case was selected for scrutiny to verify the transfer pricing risk factor, and that, the assessee had recorded the international transaction in form 3 CEB, the value of which, exceeded ₹5 crores, the mandate under section 92 CA requires the Ld.AO to refer such transaction that exceeds ₹ 5 crore to the transfer pricing officer. Page 14 of 22 IT(TP)A No. 283/Bang/2021 A reference made by the Ld.AO needs to be analysed as per para 3.3 of the instruction number 3, only if the appeal is selected for scrutiny for non-transfer pricing risk parameter or a specified domestic transactions. 8. The DRP in the present facts of the case, categorically observed that, the case of assessee was selected for scrutiny, to verify, transfer pricing risk factor, which is not in dispute. 9. The Ld.AR submitted that, international transaction of ‘guarantee’ between assessee and its AE, does not fall under the transfer pricing risk parameter and therefore the reference to the TPO was bad in law. In our view, the case of assessee satisfies the requirement as stipulated under both the paras of 3.2 as well as 3.3 and therefore no fault can be found with the Ld.AO in referring the case to the transfer pricing officer to determine the arm’s length margin, as observed by the DRP while adjudicating the issue in para 2.3 of the DRP direction. From the record it is evident that the assessee's case was selected for scrutiny for issues which also involve large international transaction (Form 3 CEB) which fall under the transfer pricing risk parameters. Thus, it is simply clear that the case was selected for scrutiny on transfer pricing risk parameters as well as non transfer pricing risk parameters. By no stretch of imagination, it can be said that the case was selected for scrutiny on non transfer pricing risk parameters only. Once it was evident that assessee's case was selected for scrutiny on the transfer pricing risk parameter, same fell under para 3.2 of circular dated 10-3-2016 which required reference to the TPO by the Assessing Officer mandatorily. There is no exception in this regard. Page 15 of 22 IT(TP)A No. 283/Bang/2021 We therefore do not find any merit in the Ground no. 1 in original grounds of appeal and Ground no. 2, raised in the application for admission of additional grounds. Accordingly additional ground number 2 and Ground no.1 raised by assessee along with sub grounds are dismissed. On merits: 10. Ground No.2 raised by assessee is in respect of the transfer pricing adjustment of ₹2,93,54,528/-. The Ld.AR submitted that revenue word in allocating employee cost of ₹82,05,919/- on the basis of turnover of AE and non-AE transaction under the trading segment. 10.1 Brief facts leading to this issue are as under: The assessee purchases certain finished products from its AE and 3 rd parties. The products purchased are similar and therefore internal TNI members adopted to arrive the arm’s length price. It is submitted that there is no dispute in respect of the method adopted for data mining the arm’s length price. Assessee had also allocated expenses between the 2 segments being trading and manufacturing segment. The Ld.AR submits that the TPO did not dispute the allocation of expenses in respect of international transaction under the manufacturing segment to be at arms length however, the allocation of employee cost between the AE and non-AE transaction in trading segment was disputed. 10.2 The Ld.TPO called upon assessee to furnish the details of determining the employee cost of ₹82,05,919/- equally between AE and non-AE under the trading segment. The assessee before the Ld.TPO submitted that, the turnover of AE segment is ₹ 27 crores, whereas the turnover from Non AE segment is 3.12 crores Page 16 of 22 IT(TP)A No. 283/Bang/2021 approximately. However the value of purchases, efforts and time spent by the purchase team towards AE and non-AE segments are more or less equal. The Ld.AR submitted that breakup of employee cost pertaining to trading segment are as under: Emp code Name of the employee Designation CTC % Cost towards Trading segment 1004 Babu Shankar Purchase head 59,13,288 50% 29,56,644 1023 GMahesh Urs Supply Chain Executive 6,39,637 100% 6,39,637 1045 Esaivanan Stores in charge- Mumbai 4,95,980 100% 4,95,980 1016 Ravi Jagatap QC/Product manager 17,64,658 100% 17,64,658 1001 Abhijit dutta Managing Director 1,17,45,000 20% 23,49,000 2,05,58,563 82,05,919 10.3 The Ld.TPO rejected the submissions of assessee as assessee allocated other expenses and salary proportionate to the sales. 10.4 On raising objections before the DRP the DRP held that allocation of employee cost equally is ad hoc and without any cogent basis. The DRP thus upheld the proposed adjustment by the Ld.TPO. 10.5 On receipt of the DRP direction the Ld.AR disallowed the allocation of ₹82,05,919/-from the trading segment. Against the addition made, the assessee has raised this ground before this Tribunal. 11. Ground No. 3 – Disallowance u/s. 40(a)(ia) of the Act. 11.1 It is submitted that the assessee created provision of Rs.15,00,635/- was payable to the parent company on which no tax was deducted at source as assessee had not received any invoice. Assessee disallowed Rs. 4,50,190/- u/s. 40(a)(i) in the return of income being 30% of the above expenditure. Page 17 of 22 IT(TP)A No. 283/Bang/2021 11.2 During the assessment proceedings, the Ld.AO called upon assessee to furnish details in respect of the provision and the suomoto disallowance made by the assessee. In response, the assessee submitted that provision was reversed in the subsequent year and sum of Rs. 4,50,190/- was reduced in arriving at the total income for the subsequent assessment year 2017-18. The Ld.AO did not accept the submissions of the assessee and disallowed the balance Rs. 10,54,445/-. On an appeal before the DRP, the disallowance made by the Ld.AO was upheld and did not pass any direction on this issue. The Ld.AO thus made the disallowance in the final assessment order amounting to Rs.10,50,445/-. On an appeal before this Tribunal, the Ld.AR submitted that the provision of Rs. 15,00,635 made during the FY 2015-16 was reversed in the accounting year i.e FY 2016-17. This is for the reason that the provision was made in the FY 2015-16 merely on an estimated basis to satisfy the relevant accounting standard. Since the liability did not exist in the next year, it was reversed in the FY 2016-17. It may be stated that in the computation of total income for AY 2017-18, the appellant had only claimed that a sum of Rs. 4,50,190 being the 30% of the provision disallowed in the AY 2016-17 should not be taken as income because of the disallowance in the earlier year. In other words, the balance sum of Rs. 10,50,445 which is credited to profit and loss account was offered to tax in AY 2017-18. It was offered to tax and tax was levied accordingly. If for any reason, the Hon'ble Tribunal were to hold that a sum of Rs. 10,50,445 is not to be allowed as a deduction, it is prayed that a direction may be Page 18 of 22 IT(TP)A No. 283/Bang/2021 given that the same amount should be excluded from the total income of the AY 2017-18. 11.3 On the contrary, the Ld.DR relied on the orders passed by authorities below. 11.4 We have perused the submissions advanced by both sides in the light of records placed before us. 11.5 It is noted that Hon’ble Karnataka High Court in case of Toyota Kirloskar Motor (P.) Ltd. vs. ITO reported in 434 ITR 719 has held that income cannot be said to accrue merely based on entries in books and the liability to deduct tax at source does not arise based on such book entries. Hon’ble Supreme Court in case of GE India Technology Centre P. Ltd. vs. CIT and Anr. reported in 327 ITR 456, Hon’ble Supreme Court held that the liability to deduct tax at source arises only when there is accrual of income in the hands of the payee. In the present facts of the case, there is no dispute that assessee did not receive the invoice in respect of the total payment that was payable to its parent company. However, in the computation of income, assessee disallowed 30% of the provision which is in consonance with the amendment inserted by Finance Act No. 2 to section 40(a)(ia) w.e.f. 01.04.2015. We note that various benches of this Tribunal has held that this amendment is curative in nature and disallowance u/s. 40(a)(ia) of the Act is to be restricted to 30% as against 100%. The assessment years under consideration is 2016-17 and therefore the disallowance made by the assessee suo moto is in accordance with the provisions that are applicable at the relevant period of time. We are therefore of the opinion that no further disallowance is Page 19 of 22 IT(TP)A No. 283/Bang/2021 warranted in respect of the payments that has been provided for by the assessee as payable to the parent company. Accordingly, this ground raised by assessee stands allowed. 12. Ground no. 4 is in respect of addition of provision for bad and doubtful debts to the income computed under normal provisions of the Act and the book profits computed u/s. 115JB of the Act amounting to Rs.36,20,870/-. 12.1 It was submitted that assessee created provision of Rs.36,20,870/- towards bad and doubtful debts that was identified party-wise as on 31.03.2016. Assessee reduced the said amount from the trade receivables in the balance sheet but did not add back to the computation of income either under the normal provisions of the Act or under the book profits computed u/s. 115JB. 12.2 The Ld.AO during the assessment proceedings disallowed the entire provision. On an appeal before this Tribunal, it is submitted that once the provision for doubtful debts is debited to the profit and loss account, and correspondingly reduced from the trade receivables it amounts to write off . The Ld.AR placed reliance on the decision of Hon’ble Supreme Court in case of Vijaya Bank vs. CIT & Anr. reported in 323 ITR 166 and decision of Hon’ble Bangalore Tribunal in case of Canara Bank vs. JCIT reported in 60 ITR (Trib) 1. 12.3 We have perused the submissions advanced by both sides in the light of records placed before us. 12.4 It is a claim of the assessee that the effect of bad debts written off has been taken into consideration in the books of account whereas revenue contends that assessee did not credit the Page 20 of 22 IT(TP)A No. 283/Bang/2021 amount in relation to bad debts in the profit and loss account in any of the years preceding to the year under consideration. We are of the view that the issue needs verification by the Ld.AO of the books of account and the financial statements. The Ld.AO is directed to verify the amount of provision for doubtful debts in the books of account and the book profit as be computed as per explanation 1 to section 115JB of the Act. 12.5 Needless to say that proper opportunity of being heard must be granted to assessee. Accordingly, this ground raised by assessee stands allowed. 13. Ground No. 5 – Disallowance of interest expenditure claimed u/s. 57(iii) of the Act. 13.1 It is submitted that assessee received external commission borrowing loan of Rs. 39.92 crores from its parent company for setting up a new manufacturing facility in Gujarat. The same was kept in short term fixed deposit against which interest was received by assessee amounting to Rs. 60,13,880/-. The assessee submitted that the said amount was offered to tax u/s. 56 of the Act under the head “Income from other sources”. It is submitted that assessee had incurred an expenditure of Rs. 49,81,189/- towards interest paid on ECB loans which was claimed as deduction while computing income u/s. 57. The Ld.AO during the assessment proceedings disallowed the said expenses by holding that the said amount was disclosed as capital expenditure in form 3CED. The DRP upheld such disallowance made by the Ld.AO. Before this Tribunal, the Ld.AR submitted that the said expenses is allowable as there is a direct nexus between the loan borrowed which was placed at fixed deposit. He relied on the decision of Page 21 of 22 IT(TP)A No. 283/Bang/2021 Hon’ble Karnataka High Court in case of Best Trading and Agencies Ltd. vs. DCIT reported in 428 ITR 52. 13.2 On the contrary, the Ld.DR relied on the orders passed by the authorities below. 13.3 We have perused the submissions advanced by both sides in the light of records placed before us. 13.4 We note that in the decision relied by the Ld.AR, the issue for consideration before the Hon’ble Court was in respect of nexus between the interest earned on a fixed deposit and interest paid. Hon’ble Court after considering various arguments and decisions relied by both sides observed and held as under: “Thus, from perusal of aforesaid provision, it is evident that the purpose of expenditure is relevant in determining the applicability of Section 57(iii) and the purpose must be making or earning of income. The assessee in order to cover the cost of interest payable to the creditors for the unpaid period, invested the surplus in fixed deposits and earned interest. The amount earned by way of interest was paid to the lenders and creditors. Thus, there is a nexus between the interest paid to the creditors on the unpaid balance and interest earned on the deposits. The interest expenditure was incurred wholly and exclusively for the purpose of earning the interest income and therefore, the assessee is entitled to deduction of the interest income under Section 57(iii) of the Act.” 13.5 Adverting to the facts of the present case, the ECB that was kept as fixed deposit against which interest was earned by assessee was set off against the interest paid by assessee on the ECB loan. Admittedly, it is not the case of the revenue that the ECB loan obtained by the assessee was not for the purpose of business. In fact, the loan was taken by assessee for setting up a new manufacturing facility in Gujarat. Thus the nexus in respect of the interest earned and interest paid stands automatically established with the business of the assessee. Page 22 of 22 IT(TP)A No. 283/Bang/2021 13.6 We note that assessee has raised an alternate plea in ground no. 5.2 wherein a prayer is made to consider the interest expenditure u/s. 37 of the Act. We are of the considered opinion that as the interest paid by the assessee is directly connected with the business activity, assessee succeeds on this ground. We therefore allow this claim of assessee as an allowable deduction u/s. 37 of the Act. Accordingly, this ground raised by assessee stands partly allowed. In the result, the appeal filed by the assessee stands partly allowed. Order pronounced in open court on 01 st June, 2022. Sd/- Sd/- (CHANDRA POOJARI) (BEENA PILLAI) Accountant Member Judicial Member Bangalore, Dated, the 01 st June, 2022. /MS / Copy to: 1. Appellant 4. CIT(A) 2. Respondent 5. DR, ITAT, Bangalore 3. CIT 6. Guard file By order Assistant Registrar, ITAT, Bangalore