DCIT, Circle-16(1), Hyd, Hyderabad V. Lanco Infratech Ltd., Hyd, Hyderabad

ITA 404/HYD/2016

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 2533 (ITAT-HYDERABAD)
• Duration Of Justice: 1 year(s) 1 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-05-2017
• Appeal Filed By: Department
• Bench Allotted: A
• Next Hearing Date: 13-10-2016
• Assessment Year: 2011-2012
• Appeal Filed On: 28-03-2016
• Court: TRIBUNAL
• Department Lawyers: P CHANDRA SEKHAR
• Assessee Lawyers: SHRI
• Keywords: Bogus purchase; Unexplained expenditure; Transfer pricing; Principle of natural justice; International transaction; Additional evidence; Difference of opinion; Corroborative evidences; Commercial expediency
• Section: 69C; 143(3); 11A; 92B; 133A; 37(1); 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES A, HYDERABAD BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER AND SHRI G. PAVAN KUMAR, JUDICIAL MEMBER ITA NO. ASST. YEAR APPELLANT RESPONDENT 404/HYD/16 2011-12 THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-16(1), HYDERABAD M/S. LANCO INFRATECH LIMITED HYDERABAD [PAN: AAACL3449H] 450/HYD/16 M/S. LANCO INFRATECH LIMITED HYDERABAD [PAN: AAACL3449H] THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-16(1), HYDERABAD C.O. NO. 21/HYD/2016 (IN ITA NO. 404/HYD/2016) ASSESSMENT YEAR: 2011-12 M/S. LANCO INFRATECH LIMITED HYDERABAD [PAN: AAACL3449H] VS THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-16(1), HYDERABAD (CROSS-OBJECTOR) (RESPONDENT) FOR REVENUE : SHRI P. CHANDRA SEKHAR, CIT DR FOR ASSESSEE : SHRI SALIL KAPOOR, SHRI ANANYA KAPOOR & SHRI P. MURALI MOHAN RAO, ARS DATE OF HEARING : 14 - 0 2 - 201 7 DATE OF PRONOUNCEMENT : 03 - 0 5 - 201 7 O R D E R PER B. RAMAKOTAIAH, A.M. : THESE ARE APPEALS BY ASSESSEE AND REVENUE AGAINST THE ORDER OF THE DY. COMMISSIONER OF INCOME TAX, CIRCLE-16(1), HYDERABAD M/S. LANCO INFRATECH LIMITED :- 2 - : U/S. 143(3) R.W.S. 92CA(3) AND 144C(13) OF THE INCOME TAX ACT [ACT] AND CROSS-OBJECTION BY ASSESSEE. 2. BRIEFLY STATED, ASSESSEE-COMPANY M/S LANCO INFRATECH LIMITED (LITL) IS ENGAGED IN THE BUSINESS OF CIVIL CONSTRUCTION INFRASTRUCTURE DEVELOPMENT AND GENERATION OF POWER THROUGH WIND MILLS. IT FILED ITS RETURN OF INCOME FOR AY. 2011-12 ADMITTING NET TOTAL INCOME OF RS. 380,99,11,655/- UNDER THE NORMAL PROVISIONS OF THE INCOME TAX ACT AND BOOK PROFITS OF RS. 417,94,04,376/- UNDER THE MAT PROVISIONS. IN THE SCRUTINY PROCEEDINGS, THE TRANSACTIONS WITH THE AE WERE REFERRED TO THE TRANSFER PRICING OFFICER [TPO] U/S. 92CA(1) WHO HAS PROPOSED ADJUSTMENTS IN RESPECT OF ASSESSEES INTERNATIONAL TRANSACTIONS FOR THE YEAR AS UNDER: TRANSACTION ADJUSTMENT (IN RS.) INTEREST RECEIVED ON LOANS 2,39,69,300 CORPORATE GUARANTEE 90,19,30,000 INTEREST OF RECEIVABLES 1,45,21,83,968 TOTAL 2,37,80,83,268 2.1. ASSESSEE HAD FILED CERTAIN OBJECTIONS AGAINST THE TP ORDER BEFORE THE AO. HOWEVER, AO FINALIZED THE DRAFT ORDER BY INCORPORATING THE ADJUSTMENTS PROPOSED. ASSESSEE THEN PREFERRED OBJECTIONS BEFORE THE DRP ON 30-04-2015. DRP VIDE THEIR ORDER DT. 31-12-2015 HAS GIVEN DIRECTIONS IN WHICH ONLY ONE OF THE OBJECTIONS RAISED BY ASSESSEE WITH REFERENCE TO BANK GUARANTEE ADJUSTMENT WAS ACCEPTED PARTLY. PURSUANT TO THE DIRECTIONS OF DRP, M/S. LANCO INFRATECH LIMITED :- 3 - : THE AO PASSED A FINAL ORDER WITH TOTAL ADDITION OF RS. 1,71,51,64,718/- SUMMARIZED AS BELOW. S.NO. TP ADDITIONS AS PROPOSED IN THE ASSESSMENT ORDER AMOUNT (RS) 1. ADJUSTMENT U/S. 92CA OF THE IT ACT, 1961 171,51,64,718 A) INTEREST RECEIVED ON LOANS 2,39,69,300 B) CORPORATE GUARANTEE FEE 23,90,11,450 C) INTEREST ON RECEIVABLES 145,21,83,968 2. DISALLOWANCE OF SUB- CONTRACT EXPENCES. 286,00,39,638 ASSESSEE IS AGGRIEVED ON THE CONSEQUENTIAL ASSESSMENT ORDER PASSED ON VARIOUS ISSUES, WHEREAS REVENUE IS AGGRIEVED ON THE REDUCTION ORDERED BY THE DRP WITH REFERENCE TO COMMISSION ON CORPORATE GUARANTEE FROM 2% ADOPTED BY THE TPO TO 0.53%. ASSESSEES CROSS-OBJECTION IS AGAINST THE CORPORATE GUARANTEE ISSUE RAISED BY THE REVENUE. THESE ISSUES ARE CONSIDERED IN DETAIL AFTER CONSIDERING THE DETAILED SUBMISSIONS OF THE LD. COUNSEL AND LD.CIT-DR AND PERUSING THE DOCUMENTS PLACED ON RECORD. TRANSFER PRICING ISSUES: 3. GROUND OF APPEAL 8A TO 8D ARE GENERAL IN NATURE. 4. GROUNDS 9A TO 9D: THE GROUNDS RELATE TO TP ADJUSTMENT OF RS. 2,39,69,300/- RELATED TO INTEREST ON LOAN. LITL HAD GIVEN A LOAN AMOUNTING TO USD 59 MILLION TO ITS AE NAMELY LANCO INTERNATIONAL PTE. LIMITED, SINGAPORE (UPL) WITH FIRST M/S. LANCO INFRATECH LIMITED :- 4 - : DISBURSEMENT OF USD 9 MILLION ON 5 TH MARCH 2010 FOLLOWED BY FURTHER THREE DISBURSEMENTS LATER IN THE FINANCIAL YEAR 2010-11. THE ENTIRE LOAN WAS STATED TO HAVE BEEN REPAID BY AE TO LITL ON 1 ST SEPTEMBER 2010. IN ORDER TO JUSTIFY THE RECEIPT OF INTEREST ON THE FOREIGN CURRENCY LOANS, LITL HAS APPLIED COMPARABLE UNCONTROLLED PRICE METHOD (CUP) AS THE MOST APPROPRIATE METHOD. AS THE LOAN WAS PROVIDED BY LITL TO ITS AES IN FOREIGN CURRENCY, SINGAPORE PLR WAS CONSIDERED TO BENCHMARK THE SAID TRANSACTION. THE AVERAGE SINGAPORE PLR WAS 5.38% WHEREAS LITL HAS RECEIVED INTEREST AT 6.37% FROM LANCO INTERNATIONAL PTE. LIMITED, SINGAPORE, WHICH IS GREATER THAN SINGAPORE PLR, THUS CONFIRMING THE ARM'S LENGTH NATURE OF THE TRANSACTION. 4.1. THE TPO DID NOT ACCEPT THE BENCHMARKING ANALYSIS CONDUCTED BY ASSESSEE IN ITS TRANSFER PRICING DOCUMENT AND INSTEAD PROCEEDED TO DETERMINE THE ARM'S LENGTH PRICE (ALP) BY ADOPTING PLR PREVALENT IN INDIA IN FY.2010-11 I.E., 12.25% AS ARM'S LENGTH INTEREST. ACCORDINGLY, TPO COMPUTED ADJUSTMENT AS RS. 2,39,69,300/-. THE DRP UPHELD THE TRANSFER PRICING ADJUSTMENT MADE BY THE TPO. DRP FURTHER OBSERVED THAT THE ASSESSEE HAD SIGNIFICANT LOANS OUTSTANDING ON WHICH IT HAS PAID INTEREST COST ACCORDINGLY, ASSESSEE HAS INCURRED POTENTIAL LOSS AS INTEREST COST TO THAT EXTENT COULD HAVE BEEN REDUCED. THE DRP RELIED ON THE DECISION OF TRIBUNAL IN CASE OF M/S. LOGIX MICRO SYSTEMS LIMITED ITA NO. 524/BANG/2009. 4.2. IT WAS SUBMITTED THAT THE LOAN WAS PROVIDED TO THE AE WHICH IS A SINGAPORE BASED COMPANY I.E. THE LOAN WAS CONSUMED/RECEIVED IN SINGAPORE AND ALSO THE LOAN WAS IN FOREIGN M/S. LANCO INFRATECH LIMITED :- 5 - : CURRENCY AND REPAID IN FOREIGN CURRENCY. HENCE, THE ALP SHOULD BE DETERMINED USING SINGAPORE PLR. IT WAS THE CONTENTION THAT TPO/DRP, INCORRECTLY EQUATED THE TRANSACTION OF PROVIDING LOAN TO SUBSIDIARY SITUATED OUTSIDE INDIA WITH BANK RATES PREVAILING IN INDIA WITHOUT APPRECIATING THE FACT THAT LOANS ARE MADE OUTSIDE INDIA AND SAME SHOULD BE COMPARED WITH FOREIGN MARKET PRIME LENDING RATES. HENCE, THE COMPARISON IS NOT IN ACCORDANCE WITH THE PROVISIONS OF THE ACT AND THE RULES. ASSESSEE RELIED ON THE FOLLOWING CASE LAW: I. CIT VS. TATA AUTOCOMP SYSTEMS LTD., BOMBAY HIGH COURT (ITA NO.1320 OF 2012) II. SIVA INDUSTRIES & HOLDINGS LTD. VS. ACIT (ITA NO. 2148/MDS/2010) III. MARICO LTD. VS. ACIT [2016 70 TAXMANN.COM 214 (MUMBAI TRIB.) / (ITA NO. 8713 & 8858/MUM/2011) IV. CIT VS. COTTON NATURALS INDIA PVT. LTD., HON'BLE DELHI HIGH COURT ((2015) 276 CTR 445 (DEL) V. EVEREST KANTO CYLINDER LTD. VS. ACIT [2015] 56 TAXMANN.COM 361 (MUMBAI-TRIB.) / (ITA NO. 1386/MUM/2014) VI. TRANSPORT CORPORATION OF INDIA VS. ACIT, ITA NO. 117/HYD/ 2016 4.3. WITH RESPECT THE DRP'S OBSERVATION THAT THE ASSESSEE COULD HAVE REPATRIATED THE FUNDS AND UTILIZED THE SAME TO REPAY OUTSTANDING LOAN, IT WAS SUBMITTED THAT UNLIKE THE CASE OF LOGIX MICROSYSTEMS LIMITED, HUGE FUNDS WERE NOT BLOCKED WITH AE. IN THE CASE OF THE ASSESSEE THE LOAN AMOUNT, ON WHICH THE ADJUSTMENT WAS MADE AMOUNTS TO USD9 MILLION(EQUIVALENT RS.40,78,80,000/-). THE DOMESTIC LOAN AVAILED ON WHICH LITL PAYS INTEREST COSTS M/S. LANCO INFRATECH LIMITED :- 6 - : AMOUNTS TO RS. 3,137 CRORES. FURTHER, THE ASSESSEE HAS A PAID UP CAPITAL OF RS. 238 CRORES WITH A RESERVE AND SURPLUS POSITION OF RS. 3,154 CRORES. THUS, LOAN ADVANCED TO THE AES FORMS A VERY MINISCULE PORTION CONSIDERING LITL'S FINANCIAL POSITION. IT RELIED ON FOLLOWING CASE LAW: I. CIT VS. COTTON NATURALS INDIA PVT. LTD., HON'BLE DELHI HIGH COURT ((2015) 276 CTR 445 (DEL). II. CIT VS. EKL APPLIANCES LTD. (ITA NO. 1068/2011) 4.4. LD.DR HOWEVER RELIED ON THE ORDERS OF THE AO/TPO AND DRP TO SUPPORT THE ADJUSTMENTS SO MADE. 5. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND PERUSED THE DETAILS AVAILABLE ON RECORD. THERE IS NO DISPUTE THAT ASSESSEE HAS ADVANCED AMOUNTS IN FOREIGN CURRENCY. THEREFORE, FOLLOWING PRINCIPLES LAID DOWN BY THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. TATA AUTOCOMP SYSTEMS LTD. IN ITA NO.1320 OF 2012, THE CLAIM OF ASSESSEE TO ADOPT SINGAPORE PLR AS STATED BEFORE THE TPO AND DRP IS REASONABLE AND DESERVES TO BE ACCEPTED. FURTHER, IT IS ALSO AN ESTABLISHED LAW THAT TPO/DRP CANNOT ADOPT THE INTEREST RATE PREVAILING IN INDIAN RUPEES FOR INDIAN LOANS TO COMPARE IT FOR THE LOANS ADVANCED IN FOREIGN CURRENCY. EITHER LIBOR OR EURIBOR OR IN THIS CASE, SINGAPORE PLR ARE TO BE CONSIDERED. FURTHER, THE SAID ISSUE HAS BEEN SPECIFICALLY CONSIDERED BY THE HON'BLE DELHI HIGH COURT IN THE CASE OF COTTON NATURALS INDIA PVT. LTD WITH SPECIFIC REFERENCE TO THE CASE OF LOGIX MICROSYSTEM PRIVATE LIMITED, RELIED ON BY DRP IN THEIR ORDER. THE FINDING OF HON'BLE HIGH COURT WITH RESPECT TO THE SAME IS SUMMARISED AS BELOW: M/S. LANCO INFRATECH LIMITED :- 7 - : TRANSFER PRICING DETERMINATION IS NOT PRIMARILY UNDERTAKEN TO RE-WRITE THE CHARACTER AND NATURE OF THE TRANSACTION; CHAPTER X AND TRANSFER PRICING RULES DO NOT PERMIT THE REVENUE AUTHORITIES TO STEP INTO THE SHOES OF THE ASSESSEE AND DECIDE WHETHER OR NOT A TRANSACTION SHOULD HAVE BEEN ENTERED. IT IS FOR THE ASSESSED TO TAKE COMMERCIAL DECISIONS AND DECIDE HOW TO CONDUCT AND CARRYON ITS BUSINESS. ACTUAL BUSINESS TRANSACTIONS THAT ARE LEGITIMATE CANNOT BE RESTRUCTURED. THE TRANSACTION OF LENDING OF MONEY BY THE RESPONDENT- ASSESSEE TO THE SUBSIDIARY, SHOULD NOT BE SEEN IN ISOLATION, BUT ALSO FOR THE PURPOSE OF MAXIMIZING RETURNS, PROPELLING GROWTH AND EXPANDING MARKET PRESENCE. THIS RATIO AND RATIONALE, WHEN APPLIED TO THE FACTS OF THE PRESENT CASE, WOULD MEAN THAT THE TRANSFER PRICING DETERMINATION WOULD DECIDE WHAT AN INDEPENDENT DISTRIBUTOR AND MARKETER, ON THE SAME CONTRACTUAL TERMS AND HAVING THE SAME RELATIONSHIP, WOULD HAVE EARNED/PAID AS INTEREST ON THE LOAN IN QUESTION. WHAT AN INDEPENDENT PARTY WOULD HAVE PAID UNDER THE SAME OR IDENTICAL CIRCUMSTANCES WOULD BE THE ARM'S LENGTH PRICE OR RATE OF INTEREST. WHAT THE ASSESSED WOULD HAVE EARNED IN CASE HE WOULD HAVE ENTERED INTO OR GONE AHEAD WITH A DIFFERENT TRANSACTION, SAY WITH A PARTY IN INDIA, IS NOT THE CRITERIA. WHAT IS PERMITTED AND MADE SUBJECT MATTER OF THE ARM'S LENGTH DETERMINATION IS THE QUESTION OF M/S. LANCO INFRATECH LIMITED :- 8 - : RATE OF INTEREST AND NOT RE-CLASSIFICATION OR SUBSTITUTION OF THE TRANSACTION. 5.1. RESPECTFULLY FOLLOWING THE PRINCIPLES LAID DOWN BY THE CO-ORDINATE BENCHES AS RELIED ON BY THE LD. COUNSEL AND ALSO BY VARIOUS JUDICIAL PRONOUNCEMENTS OF THE HIGH COURTS RELIED UPON, WE ARE OF THE OPINION THAT THERE IS NO NEED FOR ANY ADJUSTMENT ON THIS ACCOUNT, AS ASSESSEE HAS ALREADY RECEIVED 6.37% INTEREST WHICH IS MORE THAN THE SINGAPORE PRIME LENDING RATE OF 5.38%. IN VIEW OF THAT, WE DELETE THE ADDITION MADE BY THE AO/TPO/ DRP. ASSESSEES GROUNDS ON THIS ARE ALLOWED. 6. GROUNDS 10A TO 10H: REGARDING TP ADJUSTMENT OF RS. 23,90,11,450/- RELATED TO CORPORATE GUARANTEE. 6.1. DURING FY 2010-11, LITL BECAME THE SUCCESSFUL BIDDER FOR ACQUIRING A COAL MINE IN WESTERN AUSTRALIA OWNED BY GRIFFIN COAL MINING COMPANY PTY LTD. AND CARPENTER MINE MANAGEMENT PTY LTD. THE BID WAS TO ACQUIRE THESE COMPANIES WHICH OWN COAL MINE. A TWO LEVEL SUBSIDIARY STRUCTURE WAS CREATED TO ENABLE THE ACQUISITION THROUGH BANK LOANS. BANK LOANS WERE OBTAINED BY LANCO RESOURCES INTERNATIONAL PTE. LTD (LRIPL, SINGAPORE), LANCO RESOURCES AUSTRALIA PTY. LTD. (LRAPL, AUSTRALIA). LITL PROVIDED CORPORATE GUARANTEE, FREE OF CHARGE BASIS, FOR LOAN FACILITY AND HEDGE TO THE LENDER TO GET THE FINANCE AND DID NOT CHARGE ANY CORPORATE GUARANTEE FEE AGAINST THE SAME. M/S. LANCO INFRATECH LIMITED :- 9 - : COMPANY AMOUNT OF GUARANTEE LANCO RESOURCES INTERNATIONAL PTE. LTD (LRIPL, SINGAPORE) 6,13,93,75,000 LANCO RESOURCES AUSTRALIA PTY. LTD (LRAPL, AUSTRALIA) 34,93,86,25,000 LANCO INTERNATIONAL PTE. LTD (LIPL, SINGAPORE) 4,01,85,00,000 TOTAL 45,09,65,00,000 6.2. THE TPO CONSIDERED PROVISION OF CORPORATE GUARANTEE AS AN INTERNATIONAL TRANSACTION, FOR WHICH ARM'S LENGTH PRICE WAS DETERMINED. THE TPO APPLIED CUP AS THE MOST APPROPRIATE METHOD AND USED SBI RATES ON LOANS. THE TPO APPLIED ARM'S LENGTH GUARANTEE FEE AT 2% (ADJUSTMENT FOR UPFRONT FEE AND CREDIT RATING). ACCORDINGLY, ADJUSTMENT OF RS. 90,19,30,000/- WAS MADE. 6.3. THE DRP PRIMARILY UPHELD THE ACTION OF THE TPO THAT THE GUARANTEE TRANSACTION FALLS WITHIN THE SCOPE OF INTERNATIONAL TRANSACTION AS PER INDIAN TRANSFER PRICING PROVISIONS. HOWEVER, THE DRP DIRECTED THAT CORPORATE GUARANTEE IS NOT IN THE NATURE OF BANK GUARANTEE, THEREFORE RATE APPLICABLE TO BANK GUARANTEE PROVIDED BY BANK CANNOT BE APPLIED TO CORPORATE GUARANTEE WHICH IS PROVIDED BY A GROUP COMPANY. ACCORDINGLY, THE DRP DIRECTED THE AO TO ADOPT A RATE OF 0.53% IN PLACE OF 2.00% WHILE DETERMINING THE ALP OF THE TRANSACTION AND THE SAME WAS RECOMPUTED AT RS. 23,90,11,450/- INSTEAD OF RS. 90,19,30,000/- ORIGINALLY PROPOSED. 6.4. IT WAS THE SUBMISSION THAT LITL PROVIDED GUARANTEE TO ITS SUBSIDIARIES TO ENABLE THE ACQUISITION OF A COAL MINE THROUGH M/S. LANCO INFRATECH LIMITED :- 10 -: BANK LOANS. LITL BEING SUCCESSFUL BIDDER IS UNDER OBLIGATION TO PAY FOR ACQUISITION OF THE COAL MINES. LITL DID NOT CHARGE ANY FEES FOR PROVIDING GUARANTEE, AS THE PURPOSE OF OBTAINING LOAN BY THE SUBSIDIARIES WAS TO DISCHARGE LITL OBLIGATION IN ACQUISITION OF COAL MINES WHICH WILL ACCRUE BENEFITS TO THE ENTIRE GROUP. GUARANTEE PROVIDED BY ASSESSEE WAS PART OF THE PROCEDURAL COMPLIANCE FOR AVAILING THE BANKING FACILITIES I.E. LOAN BY THE SUBSIDIARIES. CORPORATE GUARANTEE WAS GIVEN BY ASSESSEE FOR ITS OWN COMMERCIAL EXPEDIENCY AND FOR THE OVERALL BENEFIT OF LITL. THE CORPORATE GUARANTEE WAS PROVIDED BY ASSESSEE AS IT IS HAVING SHAREHOLDING INTEREST IN THE SUBSIDIARIES. ASEESSEE RELIED ON THE FOLLOWING CASE LAW: I. MARICO LTD. VS. ACIT (ITA NO. 8713 & 8858/MUM/2011 / [2016] 70 TAXMANN.COM 214 (MUMBAI - TRIBUNAL) II. MICRO INK LTD VS. ACIT (ITA 2873/AHD/10) III. MANUGRAPH INDIA LTD. VS. DCIT (I.T.A. NO.2631/MUM/2015) IV. TEGA INDUSTRIES LTD VS. DEFT (ITA NO. 1912/KOL/2012 RELEVANT CASE LAWS: COMMERCIAL EXPEDIENCY : I. M/S KNORR BREMSE INDIA PVT LTD [ITA NO. 182/2013 II. CIT VS. CUSHMAN & WAKEFIELD (INDIA) PVT LTD, HON'BLE DELHI HIGH COURT [2014] 46 TAXMANN.COM 317 (DELHI) III. NEW DELHI TELEVISION LTD. VS ACIT (ITA NO. 2851/DEL/2013) 6.5. IT WAS FURTHER CONTENDED THAT THE CORPORATE GUARANTEE, DOES NOT FALL WITHIN THE SCOPE OF TERM 'INTERNATIONAL TRANSACTION' AS EVEN AFTER INSERTION OF EXPLANATION TO SECTION 92B BY FINANCE ACT 2012 AS IT DOES NOT HAVE ANY BEARING ON LITL'S PROFITS, INCOME, M/S. LANCO INFRATECH LIMITED :- 11 -: LOSSES OR ASSETS. IT WAS SUBMITTED THAT ASSESSEE HAS NOT INCURRED ANY COST OR EARNED ANY INCOME BY PROVIDING SUCH BANK GUARANTEE. RELEVANT CASE LAWS: I. SIRO CLINPHARM PVT. LTD. VS. DCIT (ITA. NO. 2876/MUM/2014) II. BHARTI AIRTEL LIMITED VS. ADDL. CIT [ITA NO. 5816/DEL/2012] III.REDINGTON (INDIA) LIMITED VS. JCIT, 49 TAXMANN.COM, 146 (CHENNAI- TRIBUNAL) 6.6. WITHOUT PREJUDICE, THE GUARANTEE FEE SHOULD NOT BE CALCULATED ON THE ENTIRE AMOUNT OF GUARANTEE INSTEAD IT SHOULD BE RESTRICTED TO THE EXTENT OF WITHDRAWAL OF GUARANTEED AMOUNT. THE WITHDRAWAL OF GUARANTEE AMOUNTED TO RS. 45 CRORES, WHILE THE ENTIRE AMOUNT OF GUARANTEE ON WHICH THE ADJUSTMENT HAS BEEN MADE IS RS. 4,509.65 CRORES. THUS, THE ADJUSTMENT WILL BE RS. 22.01 CRORES INSTEAD OF RS. 23.90 CRORES. (IN CRORES) COMPANY NAME EFFECTIVE VALUE GUARANTEE VALUE LANCO RESOURCES INTERNATIONAL PTE. LTD (LRIPL, SINGAPORE) 558.13 613.94 LANCO RESOURCES AUSTRALIA PTY. LTD (LRAPL, AUSTRALIA) 3192.48 3493.86 LANCO INTERNATIONAL PTE. LTD (LIPL, SINGAPORE) 401.85 401.85 TOTAL 4152.46 4509.65 ADJUSTMENT @ 0.53% 22.01 23.90 6.7. IT WAS ALTERNATELY CONTENDED THAT RATE FIXED BY DRP IS ARBITRARY AND SUBMITTED THAT CORPORATE GUARANTEE FEE HAS TO BE APPLIED AT REASONABLE PERCENTAGE. FOLLOWING CASE LAW WERE RELIED: I. ASIAN PAINTS LTD. VS. CIT (ITA NO. 7801/MUM/2010) II. RELIANCE INDUSTRIES LTD. ACIT (ITA NO. 4475/MUM/2007) M/S. LANCO INFRATECH LIMITED :- 12 -: 6.8. WITHOUT PREJUDICE, THE GUARANTEE FEE SHOULD NOT BE CALCULATED ON THE ENTIRE YEAR UNDER CONSIDERATION INSTEAD IT SHOULD BE RESTRICTED TO THE PERIOD FROM WHICH THE CORPORATE GUARANTEE AGREEMENTS WERE ENTERED INTO BY LITL WITH VARIOUS BANKS. THE DATES ON WHICH THE CORPORATE GUARANTEE AGREEMENTS WERE ENTERED IN TO BY LITL WITH DIFFERENT BANKS ARE TABULATED BELOW: AGREEM ENT DATE OF AGREEMENT LITL AND ICICI BANK (IN RELATION TO LRIPL, SINGAPORE) 18 TH FEBRUARY 2011 LITL AND ICICI BANK (IN RELATION TO LRAPL, AUSTRALIA) 18 TH FEBRUARY 2011 LITL AND BARCLAYS BANK (IN RELATION TO LIPL, SINGAPORE) 1 ST SEPTEMBER, 2010 LITL AN D DBS BANK (IN RELATION TO LIPL, SINGAPORE) 10 TH JUNE 2010 LITL AND STANDARD CHARTERED BANK (IN RELATION TO LIPL, SINGAPORE) 6 TH MAY 2010 6.9. LD.DR HOWEVER SUBMITTED THAT CORPORATE GUARANTEE IS AN INTERNATIONAL TRANSACTION AND RELIED ON THE PROVISIONS OF SECTION 92B AND THE ORDER OF THE CO-ORDINATE BENCHES AT HYDERABAD, IN THE CASE OF M/S. FOURSOFT LTD., IN ITA NO. 1903/HYD/2011 AND OTHER CASES IN WHICH CORPORATE GUARANTEE IS CONSIDERED AS INTERNATIONAL TRANSACTION. WITH REFERENCE TO THE RATE OF CORPORATE GUARANTEE FEE LD. DR REFERRED TO THE ORDER OF THE TPO TO SUBMIT THAT 2% IS A NOMINAL FEE WHICH SHOULD BE UPHELD. HE ALSO REFERRED TO THE REVENUE GROUNDS ON THIS ISSUE CONTESTING THAT DECISION OF THE DRP TO REDUCE IT TO 0.53%. 7. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND PERUSED THE DOCUMENTS PLACED ON RECORD. THERE IS A DIFFERENCE OF OPINION AS FAR AS IN THE CORPORATE GUARANTEE FEE TO BE CONSIDERED AS M/S. LANCO INFRATECH LIMITED :- 13 -: INTERNATIONAL TRANSACTION. HOWEVER, THE HYDERABAD BENCHES OF ITAT IS CONSISTENTLY FOLLOWING THE PRINCIPLE THAT CORPORATE GUARANTEE IS TO BE CONSIDERED FOR THE PURPOSE OF TRANSFER PRICING ADJUSTMENTS AS THE TRANSACTION OF PROVIDING CORPORATE GUARANTEE IS CONSIDERED AS INTERNATIONAL TRANSACTION. TO BE CONSISTENT WITH THE OPINION ALREADY TAKEN IN EARLIER DECISIONS, LD. COUNSEL WAS GIVEN AN OPTION TO PRESS OR NOT TO PRESS THE ISSUE ON THIS. LD. COUNSEL HOWEVER, SUBMITTED THAT IF REASONABLE RATE OF 0.27%, CONFIRMED BY ASIAN PAINTS LTD. VS. CIT (ITA NO. 7801/MUM/2010) WAS ADOPTED, ASSESSEE HAS NO OBJECTION TO WITHDRAW THE ABOVE CONTENTION. CONSIDERING THAT THE CORPORATE GUARANTEE PROVIDED BY THE COMPANY WILL FALL WITHIN THE SCOPE OF THE TERM INTERNATIONAL TRANSACTION AFTER THE INSERTION OF EXPLANATION TO SECTION 92B BY FINANCE ACT, WE REJECT THE CONTENTION OF ASSESSEE ON THIS ISSUE. HOWEVER, CONSIDERING THE CO-ORDINATE BENCH DECISION GIVEN IN THE CASE OF ASIAN PAINTS LTD. VS. CIT (ITA NO. 7801/MUM/2010) (SUPRA) WE HOWEVER, DIRECT THE AO/TPO TO CONSIDER ONLY 0.27% AS THE GUARANTEE COMMISSION ON THE AMOUNT INVOLVED. THE CONTENTION THAT CORPORATE GUARANTEE FEE TO BE CONSIDERED PROPORTIONATELY WITH THE PERIOD IT AVAILED, CANNOT BE ACCEPTED AS GUARANTEE FEE IS UPFRONT AND ONE TIME FEE PAID AT THE BEGINNING AND THEREFORE, ON THE CORPORATE GUARANTEES PROVIDED DURING THE YEAR, THE RATE IS TO BE APPLIED. HOWEVER, IF ANY OF THE CORPORATE GUARANTEES ARE PROVIDED IN EARLIER YEAR, THEY MAY NOT BE SUBJECTED TO TRANSFER PRICING DURING THE YEAR UNDER CONSIDERATION. ASSESSEE HAS STATED THAT SOME OF THE GUARANTEES WERE WITHDRAWN DURING THE YEAR. IF THE GUARANTEES ARE GIVEN DURING THE YEAR AND ALSO WITHDRAWN DURING THE YEAR, AO IS DIRECTED TO CONSIDER ACCORDINGLY. SUBJECT TO QUANTIFICATION OF CORPORATE GUARANTEE PROVIDED BY ASSESSEE DURING THE YEAR, WE M/S. LANCO INFRATECH LIMITED :- 14 -: DIRECT THE AO/TPO TO FIX THE FEES AT 0.27% ON THAT AMOUNT. WITH THESE DIRECTIONS, THE GROUNDS ARE CONSIDERED PARTLY ALLOWED AS FAR AS THE APPEAL OF ASSESSEE IS CONCERNED. SINCE THE ISSUE IS CONSIDERED IN THE LIGHT OF THE CO-ORDINATE BENCH DECISIONS, WE FIND NO MERIT IN REVENUE CONTENTIONS OF ADOPTING RATE AT 2% ADOPTED BY THE TPO WHICH HAS NO BASIS. ACCORDINGLY, REVENUE GROUNDS ON THIS ISSUE ARE REJECTED. CROSS-OBJECTION IS IN SUPPORT OF THE DRP ORDER WHICH IN OUR VIEW, BECOMES ACADEMIC. ACCORDINGLY, THE CROSS-OBJECTION IS ALSO CONSIDERED DISMISSED FOR STATISTICAL PURPOSES. 8. GROUNDS 11A TO 11F: REGARDING TP ADJUSTMENT OF RS. 1,45,21,83,968/- RELATED TO INTEREST ON MOBILIZATION ADVANCE. IT WAS SUBMITTED THAT LITL HAS NOT DONE ANY EXPORT OF GOODS OR SERVICES TO ITS FOREIGN AES AND HENCE, THERE ARE NO TRADE RECEIVABLES OUTSTANDING IN ITS BOOKS FROM FOREIGN AES. LITL SUB-CONTRACTED EPC CONTRACTS TO ITS AE NAMELY LANCO INTERNATIONAL PTE. LTD (LIPL) (FORMERLY KNOWN AS LANCO ENTERPRISES PTE LTD) IN RESPECT OF WHICH MOBILIZATION/ MATERIAL ADVANCE WAS PAID BY LITL TO LANCO INTERNATIONAL PTE. LTD (LIPL) FOR THE EXECUTION OF THE PROJECTS. AS THE EPC CONTRACTS FOR POWER PLANT ARE LONG TERM CONTRACTS WITH INVOLVEMENT OF HUGE CAPITAL BASE, IT IS SUBMITTED THAT IT IS AN ACCEPTED PRACTICE IN INDUSTRY TO RELEASE ADVANCES FOR MOBILIZATION OF RESOURCES LIKE MAN, MATERIAL AND MACHINERY FOR EXECUTION OF CONTRACT WHICH ARE GIVEN AS NON-INTEREST BEARING ADVANCES AND THE SAME WILL BE ADJUSTED AGAINST SUPPLIES MADE OR WORK EXECUTED BY CONTRACTOR OVER THE PERIOD OF CONTACT. AS AN EPC CONTRACTOR, LITL HAS ALSO RECEIVED AS WELL AS GIVEN MOBILIZATION/MATERIAL ADVANCE. SINCE LITL HAD PLACED SOME OF THE CONTRACTS AMONGST AES, IT HAD M/S. LANCO INFRATECH LIMITED :- 15 -: PAID ADVANCES AS PER THE TERMS OF CONTRACT, WHICH WERE BEING ADJUSTED FROM SUPPLIES OR WORKS MADE ON REGULAR BASIS. THE OUTSTANDING MOBILIZATION ADVANCE AMOUNT RECEIVABLE FROM AES AS ON MARCH 31, 2011, WAS RS. 11,85,45,63,000/- ON WHICH THE AO HAS MADE AN ADJUSTMENT OF RS. 1,45,21,83,968/-. FURTHER, THE AMOUNT PAYABLE BY LITL TO ITS AES AS ON MARCH 31 ST 2011 WAS RS. 52,92,82,68,321/-. THE TPO CONSIDERED MOBILIZATION ADVANCES AS LOANS AND ADVANCES / RECEIVABLES AND MADE AN ADJUSTMENT @ 12.25% TREATING THEM AS INTERNATIONAL TRANSACTION. THE DRP UPHELD THE TRANSFER PRICING ADJUSTMENT MADE BY THE TPO. DRP FURTHER OBSERVED THAT THE ASSESSEE HAD SIGNIFICANT LOANS OUTSTANDING ON WHICH IT HAS PAID INTEREST COST. THE DRP RELIED ON THE RULING PROVIDED BY HON'BLE TRIBUNAL IN CASE OF M/S. LOGIX MICRO SYSTEMS LIMITED ITA NO. 524/BANG/2009. 8.1. IT WAS THE SUBMISSION THAT THE NATURE OF THE TRANSACTION IS 'MOBILIZATION ADVANCES'. THE NATURE HAS BEEN RE-CHARACTERISED TO 'LOANS & ADVANCES' INSTEAD OF TREATING IT AS 'MOBILIZATION ADVANCE' GIVEN IN DUE COURSE OF BUSINESS. LD COUNSEL RELIED ON THE DECISION OF CIT VS. EKL APPLIANCES LTD. (ITA NO. 1068/2011), HON'BLE DELHI HIGH COURT THAT TRANSACTION CAN NOT BE RE-CHARACTERISED. FURTHER SUBMISSIONS CAN BE SUMMARIZED AS UNDER: I) MOBILISATION ADVANCE HAS BEEN WRONGLY TREATED AS TRADE RECEIVABLE. MOREOVER, INTEREST ON RECEIVABLES IS NOT AN 'INTERNATIONAL TRANSACTION' AS PER THE PROVISION OF SECTION 92B OF THE ACT. M/S. LANCO INFRATECH LIMITED :- 16 -: RELEVANT CASE LAWS : I. M/S. TALLY SOLUTIONS PVT. LTD. VS ACIT (I.T.(T.P)A. NO.1364/BANG/2011) II. WIPRO LTD VS DCIT, BANGALORE ITAT [ITA NOS .624, 817 AND 1178 (BANG)/2007] III. PEGA SYSTEMS WORLDWIDE INDIA PVT LTD VS. ACIT, HYDERABAD ITAT [ITA NO. 1758/HYD/2014] IV. DET NORSKE VERITAS A/S VS. ADIT (ITA NO. 200/MUM/2014) V. EVONIK DEGUSSA P. LTD. V ACIT OSD, CIRCLE 3(1), MUMBAI (ITA NO.7653/MUML2011). VI. EXCELLENCE DATA RESEARCH VS. ACIT, ITA NO. 292/HYD/2015 VII. ESSAR STEEL ORISSA LTD. - [2016] 74 TAXMANN.COM 70 (MUMBAI - TRIB.)/ I.T.A. NO. 2289/MUM/2014 RELEVANT CASE LAW - NO INTEREST ON TRADE ADVANCES : I. MASCON GLOBAL LTD VS. DCIT (ITA NO. 2205/MDS/2010 II. GSS INFOTECH LTD. VS. ACIT (ITA NO.497/HYD/2015 III. LINTAS INDIA P. LTD. VS. ACIT (ITA NO. 2024 (MU) OF 2007) II) LITL HAS RECEIVED ADVANCE FROM BOTH AES AND NON-AES WITHOUT GIVING ANY INTEREST. FURTHER, LITL HAS ALSO GIVEN ADVANCE TO BOTH AES AND NON-AES DURING THE YEAR AND HAS NOT CHARGED ANY INTEREST FROM BOTH AE AND NON-AE. HENCE, EVEN IF INTERNAL CUP IS APPLIED, AND THE AE AND NON-AE TRANSACTIONS ARE COMPARED, NO ADJUSTMENT CAN BE CALLED FOR. RELEVANT CASE LAWS : I. INDO AMERICAN JEWELLERY LTD. VS. CIT, HON'BLE BOMBAY HIGH COURT (ITA NO. 1053 OF 2012) M/S. LANCO INFRATECH LIMITED :- 17 -: II. MASTEK LTD. VS. ACIT (I.T.A. NO.3120) III. NIMBUS COMMUNICATIONS LTD. VS ACIT (ITA NO. 6597/MUM/09) IV. SONY ERICSSON MOBILE COMMUNICATIONS INDIA PVT. LTD. (ITA NO. 16/2014) THE OUTSTANDING MOBILIZATION/ MATERIAL ADVANCES FROM AES AND NON-AES ARE AS BELOW: PARTICULARS OUTSTANDING RECEIVABLES OUTSTANDING PAYABLES AES 11,88,18,38,737 52,92,82,68,321 NON - AES 4,80,92,70,245 10,85,32,67,385 TO TAL 16,69,11,08,982 63,78,15,35,706 III) DOMESTIC PLR OF 12.25% CANNOT BE APPLIED AND THE TRANSACTION CANNOT BE EQUATED TO INVESTMENT IN BANK DEPOSIT, STOCKS, MUTUAL FUNDS OR REAL ESTATE. RELEVANT CASE LAW: I. CIT VS. COTTON NATURALS INDIA PVT. LTD. (2015) 276 CTR 445 (DEL) / ITA NO. 233 OF 2014 IV) WITHOUT PREJUDICE, THE TPO/AO HAS NOT TAKEN INTO CONSIDERATION THE FACT THAT THERE ARE AMOUNTS PAYABLES TO SAME AE I.E. LANCO INTERNATIONAL PTE. LIMITED, SINGAPORE (AE) WHILE MAKING ADJUSTMENT TOWARDS ALLEGED OUTSTANDING RECEIVABLES AS ON MARCH 31 ST 2011. THE TOTAL OUTSTANDING PAYABLES IN RESPECT OF LANCO INTERNATIONAL PTE. LIMITED, SINGAPORE IS RS. 1,25,94,03,883/-. (ADDITIONAL GROUND 11G) M/S. LANCO INFRATECH LIMITED :- 18 -: RELEVANT CASE LAWS: I. SATYAM VENTURE ENGG. SERVICES PVT. LTD. VS ACIT (ITA NO. 431 & 432/HYD/2015) II. BENTLEY SYSTEMS INDIA PVT. LTD. VS ACIT (ITA NO. 6161/DEL/2013) V) WITHOUT PREJUDICE, THE ADJUSTMENT HAS BEEN MADE WRONGLY FOR FULL YEAR AND NOT ON THE BASIS OF ACTUAL NUMBER OF DAYS. (ADDITIONAL GROUND 11H). 8.2. IT WAS ALSO SUBMITTED THAT IN THE ASSESSMENT YEAR I.E. AY 2013-14, THE TPO HAS HIMSELF ACCEPTED THE CONTENTION OF ASSESSEE THAT THE ASSESSEE IS NOT EXPORTING OR SUPPLYING ANY GOODS AND IN FACT THE BALANCES APPEARING IN THE BALANCE SHEET ARE MOBILIZATION ADVANCE WHICH ARE TO BE ADJUSTED AGAINST FUTURE SUPPLY BILLS. WITHOUT PREJUDICE, THE OUTSTANDING BALANCE OF MOBILIZATION ADVANCE AS ON 31 ST MARCH 2011 AMOUNTING RS. 11,85,45,62,551/- ALSO INCLUDED AN AMOUNT OF RS. 68,37,99,719/- WHICH WAS THE OUTSTANDING BALANCE AS ON 31 ST MARCH 2010. IN THE PREVIOUS YEAR I.E., FY. 2010-11, THE TPO/AO HAS ACCEPTED THE ALP OF THE SAME. THUS, THIS AMOUNT SHOULD BE REDUCED FROM RS. 11,85,45,62,551/-. 8.3. LD.DR HOWEVER, RELIED ON THE ORDERS OF THE TPO/DRP AND SUBMITTED THAT THE DECISION TAKEN IN LATER YEAR CANNOT BE BINDING ON THIS YEAR, AS EACH YEAR IS SEPARATE AND PRINCIPLES OF RES JUDICATA DOES NOT APPLY TO IT MATTERS. M/S. LANCO INFRATECH LIMITED :- 19 -: 9. WE HAVE CONSIDERED THE RIVAL CONTENTIONS. IT IS WELL ACCEPTED PRACTICE THAT THE CONSTRUCTION INDUSTRY PAY ADVANCES AT A CERTAIN PERCENTAGE OF THE CONTRACT VALUE TO MOBILISE VARIOUS RESOURCES FOR THE EXECUTION OF CONTRACT AND THESE ADVANCES ARE GIVEN IN THE REGULAR COURSE OF BUSINESS. AS SEEN FROM THE FACTS OF ASSESSEES CASE, ASSESSEE IS UNDERTAKING AN EPC CONTRACT AND HAS RECEIVED MOBILIZATION ADVANCES AS PART OF THAT. LIKE-WISE, ASSESSEE HAS GIVEN SOME WORKS TO OTHER PARTIES ON SUB-CONTRACT BASIS AND NECESSARILY IT HAS TO PROVIDE MOBILIZATION ADVANCES TO THE PARTIES. IT IS ALSO NOTICED THAT ASSESSEE HAS ADVANCED MOBILIZATION ADVANCES TO BOTH AES AND NON-AES AND NO INTEREST HAS BEEN CHARGED FROM EITHER PARTY. NOT ONLY THAT ASSESSEE IS ALSO NOT REQUIRED TO PAY ANY INTEREST ON THE MOBILIZATION ADVANCES RECEIVED, WHICH ARE IN FACT MORE THAN THE AMOUNTS ADVANCED BY ASSESSEE. THUS, THERE IS COMPLETE UNIFORMITY IN THE ACT OF ASSESSEE IN NOT CHARGING INTEREST FROM BOTH AE AND NON-AE AND ALSO NOT PAYING INTEREST/CLAIMING INTEREST FOR THE ADVANCES RECEIVED. FOLLOWING THE PRINCIPLES LAID DOWN BY THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF INDO AMERICAN JEWELLERY LTD. VS. CIT, HON'BLE BOMBAY HIGH COURT (ITA NO. 1053 OF 2012), WE ARE OF THE VIEW THAT THERE IS NO NEED FOR CHARGING ANY INTEREST ON THE AMOUNTS ADVANCED AS RECEIVABLES. SINCE THIS AMOUNT IS PART OF CONTRACT WORK, IN OUR VIEW IT DOES NOT ATTRACT ANY ADJUSTMENT UNDER TP PROVISIONS. MOREOVER, ADVANCES GIVEN AS PART OF CONTRACT WORK DOES NOT REQUIRE ANY SPECIAL ADDITION, WHEN THE TPO WAS ALREADY EXAMINED AND HELD THAT THE TRANSACTION RELATING TO WORK CONTRACT EXPENSES ARE WITHIN THE ALP DURING THE YEAR. THUS, WHEN THE WHOLE WORK CONTRACT IS CONSIDERED WITHIN THE ALP, WE ARE OF THE OPINION THAT THE ADVANCES GIVEN IN THE COURSE OF CONTRACT DOES NOT CALL FOR SPECIAL ADJUSTMENT. M/S. LANCO INFRATECH LIMITED :- 20 -: MOREOVER, THESE BUSINESS ADVANCES CANNOT BE CATEGORISED AS LOANS AND ADVANCES SO AS TO CONSIDER THEM FOR ADJUSTMENT. RELYING ON THE VARIOUS CASE LAW RELIED UPON BY THE LD. COUNSEL, WE ARE OF THE OPINION THAT SINCE ASSESSEE-COMPANY IS NOT CHARGING ANY INTEREST FROM THE AES AND NON-AES AND ALSO NOT PAYING ANY INTEREST ON THE AMOUNTS RECEIVED BY IT FROM THE MAIN CONTRACTOR, THIS ADJUSTMENT IS NOT WARRANTED. RESPECTFULLY FOLLOWING THE PRINCIPLES LAID DOWN IN VARIOUS CASE LAW RELIED UPON BY ASSESSEE ABOVE, WE HAVE NO HESITATION IN DELETING THE ABOVE ADJUSTMENT. AS SEEN FROM THE ORDER OF THE TPO IN THE NEXT YEAR AY 2013-14, HE HAS CONSIDERED THE SAME ISSUE AND HAS NOT MADE ANY ADJUSTMENT BY STATING AS UNDER: 7.5 RECEIVABLES: WITH REGARD TO RECEIVABLES IT IS NOTICED FROM THE INFORMATION FILED THAT THE COMPANY IS NOT EXPORTING AND SUPPLYING ANY GOODS OR SERVICES TO AES. THE BALANCES APPEARING IN THE BALANCE SHEET ARE MOBILIZATION ADVANCES WHICH ARE TO BE ADJUSTED AGAINST FUTURE SUPPLY BILLS AND HENCE NO ADVERSE INFERENCE IS DRAWN. SINCE THE TPO ORDER IS IN TUNE WITH THE PROVISIONS OF THE ACT AND THE PRINCIPLES LAID DOWN ON THIS ISSUE, WE ARE OF THE OPINION THAT NO ADJUSTMENT IS REQUIRED ON THE ISSUE OF MOBILIZATION ADVANCES DURING THE IMPUGNED YEAR ALSO. ACCORDINGLY, GROUNDS RAISED BY ASSESSEE INCLUDING ADDITIONAL GROUNDS ARE ALLOWED . NON-TP MATTERS: 10. GROUND NOS. 3, 4 AND 5 - DISALLOWANCE OF SUB-CONTRACT EXPENDITURE OF RS. 41,08,00,000/- AND RS. 2,44,92,39,638/-: THE GROUNDS PERTAINING TO THIS ISSUE ARISES OUT OF THE DISALLOWANCE M/S. LANCO INFRATECH LIMITED :- 21 -: MADE TOWARDS SUB-CONTRACT EXPENSES BY ASSESSEE. CONSEQUENT TO INFORMATION RECEIVED, A SURVEY WAS CONDUCTED U/S. 133A ON 17-03- 2015 ON ASSESSEE-COMPANY AT HYDERABAD AND ALSO AT GURGAON. AO RECORDS THAT PRE-SURVEY ENQUIRIES REVEALED THAT ASSESSEE IS INFLATING EXPENDITURE BY WAY OF DEBITING NON-GENUINE SUB-CONTRACT EXPENSES. FURTHER, THE DEPARTMENT SEEMS TO HAVE ENQUIRED FROM ONE SHRI PRAVIN KUMAR AGARWAL WHO IS CATEGORIZED AS AN ENTRY OPERATION BASED AT CALCUTTA. 10.1. DURING THE SURVEY IT WAS FOUND THAT WORK ORDERS CLAIMED TO HAVE BEEN ISSUED BY ASSESSEE TO SIX COMPANIES BEING OPERATED BY SHRI PRAVIN KUMAR AGARWAL ARE UNSIGNED. AO ALSO RECORDS THAT ASSESSEE FAILED TO PROVIDE RELEVANT WORK ORDERS FOR ALL THE WORKS CLAIMED TO HAVE BEEN CARRIED OUT BY THE COMPANIES OF SHRI PAVIN KUMAR AGARWAL. ACCORDINGLY, AO CATEGORIZED THE PAYMENTS MADE TO SIX COMPANIES TO AN EXTENT OF RS. 1,83,81,30,566/- AS NON-GENUINE EXPENDITURE. AO ALSO MADE ADDITIONS OF RS. 41,08,00,000/- AND RS. 61,11,09,082/-- TOWARDS SUB-CONTRACT EXPENDITURE INCURRED BY ASSESSEE DURING THE YEAR UNDER CONSIDERATION ON THE GROUND THAT THE SAID SUB-CONTRACT EXPENDITURE IS NOT A GENUINE EXPENDITURE. THE BREAK-UP OF TOTAL AMOUNT CLAIMED AGAINST 9 COMPANIES IS AS UNDER: SL . NO. NAME OF THE COMPANY AMOUNT RS. 1. NKG INFRASTRUCTURES LIMITED 41,08,00,000 TOTAL(A) 41,08,00,000 2. MAKESWORTH PROJECTS PVT LTD 33,37,97,879 3. PIONEER PRODEV PVT LTD 30,47,68,611 4. LINK POINT INFRA PVT LTD 30,79,96,487 M/S. LANCO INFRATECH LIMITED :- 22 -: 5. SURYAMUKHI PROJ ECTS PVT LTD 34,30,19,698 6. SUBHSREE HIRISE PVT LTD 30,77,37,072 7. SUBHADRISTI COMPLEX PVT LTD 24,08,10,819 TOTAL(B) 1,83,81,30,566 8. JAIN INFRA PROJECTS LTD 37,80,29,798 9. HORIZON INFRASTRUCTURES LTD 23,30,79,284 TOTAL(C) 61,11,09,082 TO TAL(B+C) 2,44,92,39,638 10.2. A STATEMENT STATED TO HAVE BEEN RECORDED FROM SHRI PRAVIN KUMAR AGARWAL ON 12-11-2012 HAS BEEN EXTRACTED BY THE AO IN THE ASSESSMENT ORDER AND VIDE PARA 5.5 OF THE ORDER, AO RECORDS THAT SOME EMPLOYEES OF THE SAID PERSON ARE OPERATING THE COMPANIES. THE STATEMENTS OF SHRI PRAMOD RAMDIN SHARMA, SHRI VISHAL SHARMA, SHRI PULAK BAGCHI AND SHRI UMESH SINGH WERE EXTRACTED IN THE ORDER. IN ADDITION TO THAT, AO ALSO NOTICES THE FUND FLOW AND HE WAS OF THE OPINION THAT MAJORITY OF THE FUNDS WERE DIVERTED FROM THE SAID COMPANIES AND IN VIEW OF THOSE FINDINGS, THE CLAIM OF ASSESSEE WITH REFERENCE TO SUB-CONTRACT PAYMENTS CANNOT BE ACCEPTED AS GENUINE AND ACCORDINGLY, THE ENTIRE AMOUNT OF RS. 244.92 CRORES WAS DISALLOWED AS UNEXPLAINED EXPENDITURE U/S. 69C. 10.3. ASSESSEE RAISED OBJECTIONS BEFORE THE DRP NOT ONLY IN NOT GIVING ENOUGH OPPORTUNITY FOR FURNISHING NECESSARY DETAILS BUT ALSO INVOKING THE PROVISIONS OF SECTION 69C, WHEN ENTIRE EXPENDITURE WAS RECORDED IN THE BOOKS OF ACCOUNT. DRP, HOWEVER, WHILE ACCEPTING THAT PROVISIONS OF SECTION 69C ARE NOT APPLICABLE TO THE FACTS OF THE CASE, AGREED WITH THE AO THAT ASSESSEE FAILED TO JUSTIFY THE EXPENDITURE. EVEN THOUGH ASSESSEE FILED CERTAIN ADDITIONAL EVIDENCE WHICH COULD NOT BE FURNISHED BEFORE THE AO, TO M/S. LANCO INFRATECH LIMITED :- 23 -: THE DRP, DRP REJECTED THE SAME AS THEY WERE NOT FILED BEFORE THE AO AND ACCORDINGLY, CONFIRMED THE DISALLOWANCE. 11. IT WAS SUBMITTED THAT THE ADDITION HAS BEEN MADE BY AO BASED ON MERE SUSPICIONS, SURMISES AND WITHOUT ANY COGENT REASONS. THE DRP/AO HAS ERRED IN LAW AND ON FACT IN DISALLOWING SUCH HUGE SUB-CONTRACT EXPENDITURE WITHOUT APPRECIATING THE FACT THAT PAYMENT HAS BEEN MADE TO THE SUB-CONTRACTORS FOR EXECUTION OF CONTRACT WORKS IN THE PROJECTS AND SUCH WORK HAS BEEN COMPLETED/SERVICES HAVE BEEN RENDERED. SUCH EXPENDITURE HAS BEEN WHOLLY AND EXCLUSIVELY INCURRED FOR THE PURPOSE OF THE BUSINESS OF ASSESSEE AND IS AN ALLOWABLE EXPENDITURE UNDER SECTION 37 OF THE ACT. 11.1. IT WAS SUBMITTED THAT THE AO/DRP ERRED IN MAKING SUCH HUGE ADDITIONS/DISALLOWANCES MERELY ON THE BASIS OF STATEMENTS RECORDED. FURTHER, IT WAS SUBMITTED THAT ASSESSEE HAD FILED THE ADDITIONAL EVIDENCE BEFORE THE DRP SUCH AS WORK ORDERS, RA BILLS, SERVICE ENTRY SHEETS, INVOICES/VOUCHERS, FORM 16A ETC. IN RESPECT OF THE ABOVE REFERRED SUB-CONTRACTORS IN ORDER TO PROVE THE GENUINENESS OF THE SUB-CONTRACT EXPENDITURE. IT WAS STATED THAT THE AO HAD ASKED FOR THE INFORMATION ONLY ON 24-03-2015 AND DID NOT GIVE A REASONABLE TIME FOR SUBMITTING THE ABOVE DOCUMENTS DURING THE COURSE OF ASSESSMENT PROCEEDINGS. THESE ADDITIONAL EVIDENCES WERE MADE AVAILABLE TO AO AS PER THE LETTER ISSUED BY THE SECRETARY DRP IN RESPONSE TO WHICH THE AO HAD SUBMITTED A REPORT. HOWEVER, THE DRP STATED THAT IF THE EVIDENCES WOULD HAVE BEEN GENUINE, THEY COULD HAVE BEEN PRODUCED BEFORE THE AO AND IN ABSENCE OF THE SAME, THE AO WAS JUSTIFIED IN TREATING THE EXPENSES TO BE NON- M/S. LANCO INFRATECH LIMITED :- 24 -: GENUINE. IT IS SUBMITTED THAT THE ASSESSEE COULD NOT PRODUCE THE DOCUMENTS BEFORE AO, SINCE THE AO DID NOT GIVE A REASONABLE TIME FOR SUBMITTING THE ABOVE DOCUMENTS DURING THE COURSE OF ASSESSMENT PROCEEDINGS. 11.2. IT WAS SUBMITTED THAT LANCO BABANDH POWER LIMITED (LBPL), LANCO AMARKANTAK POWER LIMITED (LAPL) AND LANCO KONDAPALLI POWER LIMITED ENTERED INTO MEMORANDUM OF UNDERSTANDING / IMPLEMENTATION AGREEMENTS WITH STATE GOVERNMENTS FOR DEVELOPMENT OF THERMAL POWER PROJECTS IN THE STATES OF ODISHA, CHHATTISGARH AND ANDHRA PRADESH. FOR EXECUTION OF THE ABOVE CONTRACTS, THE AFORESAID MENTIONED ENTITIES AWARDED ENGINEERING, PROCUREMENT AND CONSTRUCTION (EPC) CONTRACT TO M/S. LANCO INFRATECH LIMITED (L1TL/ASSESSEE) ON LNTERNATIONAL COMPETITIVE BIDDING (ICB). THE SCOPE OF WORK INCLUDED CIVIL WORKS CONTRACT, OFFSHORE BTG SUPPLY CONTRACT AND ONSHORE SUPPLY CONTRACT AND SERVICES CONTRACT. 11.3. THE EPC WORK SUB-CONTRACTED TO ASSESSEE ALONG-WITH CONSIDERATION IS SUMMED UP AS BELOW: PROJECT NAME CIVIL WORKS CONTRACT (INR CR) OFF - SHORE BTG SUPPLY CONTRACT (USD MN) ON - SHORE SUPPLY CONTRACT (INR CR) SERVICES CONTRACT (INR CR) BABANDH 1005.10 485 (USD MN) 1479.88 297.87 AMARKANTAK 1016.30 450 (USD MN) 1597.00 290.40 KONDAPALLI 250.00 1640.00 216.00 THE ABOVE REFERRED PROJECTS NAMELY BABANDH, AMARKANTAK AND KONDAPALLI ARE CARRIED OUT ON 897 ACRES, 640 ACRES AND 190 ACRES OF LAND. DUE TO THESE PROJECTS BEING CARRIED OUT ON LARGE AREA OF M/S. LANCO INFRATECH LIMITED :- 25 -: LAND, THERE ARE MANY ACTIVITIES TO BE CARRIED OUT IN LEVELLING THE LAND, CUTTING AND CLEARING THE BUSHES/TREES, EXCAVATION OF SOIL, LOADING, UNLOADING AND DUMPING OF SOIL, STRENGTHENING OF GROUND WITH MASS POURING OF CONCRETE BENEATH THE BASIC FOUNDATIONS TO ENABLE THE GROUND TO WITHHOLD THE CONSTRUCTION OF HUGE STRUCTURES LIKE BOILER, TURBINE AND GENERATOR (BTG), CHIMNEYS, COAL HANDLING PLANT, ASH HANDLING PLANT ETC IN ADDITION TO CONSTRUCTION OF VARIOUS STRUCTURES WHICH ARE VISIBLE. 11.4. FOR THE CIVIL WORKS CONTRACT, LITL USED THE SERVICES OF VARIOUS CONTRACTORS INCLUDING THE 9 SUB-CONTRACTORS NAMELY (1) LINK POINT INFRASTRUCTURE PRIVATE LIMITED, (2) MAKESWORTH PROJECTS AND DEVELOPERS PRIVATE LIMITED, (3) PIONEER PRODEV PRIVATE LIMITED, (4) SUBHDRISHTI COMPLEX PRIVATE LIMITED, (5) SUBHSHREE HIGHRISE PRIVATE LIMITED, (6) SURYAMUKHI PROJECTS PRIVATE LIMITED, (7) HORIZON INFRASTRUCTURE LIMITED, (8) JAIN INFRA PROJECTS LIMITED AND (9) NKG INFRASTRUCTURE PRIVATE LIMITED. THE AO HOWEVER HELD THE ABOVE SUBCONTRACTORS TO BE BOGUS/ NON-GENUINE. 11.5. DURING FY 2010-11, IT WAS SUBMITTED THAT THESE SUB- CONTRACTORS PERFORMED VARIOUS ACTIVITIES AND THE ABOVE NAMED 9 SUB-CONTRACTORS SUBMITTED THEIR BILLS FOR THE WORK DONE. IT WAS SUBMITTED THAT IN CASE OF LBPL PROJECT WHILE ASSESSEE INCURRED A COST OF RS. 1,96,08,03,192/- (RS. 196 CRORES APPXLY) TOWARDS CIVIL WORKS FOR WORKS DONE BY THE 9 CONTRACTORS IN LBPL PROJECT WHICH WERE ALLEGEDLY HELD TO BE BOGUS/ NON-GENUINE, ASSESSEE HAS IN TURN RAISED AN INVOICE OF RS. 3,56,03,76,357 (RS. 356 CRORES APPROXIMATELY) ON LBPL FOR THE CIVIL WORKS DONE THE ASSESSEE. FOR LAPL (AMARKANTAK) PROJECT, ASSESSEE INCURRED A COST OF RS. 320.67 M/S. LANCO INFRATECH LIMITED :- 26 -: CRORES ON CIVIL WORKS AGAINST THE RECEIPT OF RS. 471 CRORES WHICH WERE TAXED BY THE AO. ALSO, FOR LKPI (KONDAPALLI) PROJECT, THE ASSESSEE INCURRED A COST OF RS. 80.82 CRORES FOR EXECUTION OF CIVIL WORKS AGAINST RECEIPT OF RS. 110.49 CRORES, WHICH WAS AGAIN TAXED BY THE AO. THE INCOME AGAINST THE AFORESAID INVOICES HAS ALREADY BEEN RECEIVED BY ASSESSEE AND THE SAME HAS ALSO BEEN TAXED BY THE AO. IT CANNOT BE THOUGHT THAT SUCH HUGE QUANTUM OF CIVIL WORKS COULD HAVE BEEN CARRIED OUT WITHOUT INCURRENCE OF ANY COSTS AGAINST THE SAME. FURTHER, VAT/SERVICE OBLIGATIONS HAVE BEEN DULY COMPLIED WITH BY ASSESSEE AND THE CONCERNED GOVERNMENT AUTHORITIES HAVE ACCEPTED THESE TRANSACTIONS. THEREFORE, IF ONE ARM OF THE GOVERNMENT HAS ACCEPTED THE TRANSACTIONS, THE OTHER ARM OF THE GOVERNMENT MUST ALSO RESPECT THE SAME- (APOLLO TYRES LTD VS. CIT (2002) 255 ITR 273 AND VADILAL CHEMICALS VS. STATE OF AP (2005) 6 SCC 292). 11.6. IT IS SUBMITTED THAT A PERUSAL OF THE REPORTS GENERATED BY INDEPENDENT ENGINEERS APPOINTED BY LENDER BANKS CLEARLY SHOWS A SUBSTANTIAL AMOUNT OF WORK BEING CARRIED OUT BY THE ASSESSEE' SUB-CONTRACTORS ON ONGOING BASIS. THERE IS NO ALLEGATION IN THE ASSESSMENT ORDER OR THE DRP ORDER THAT NO WORK HAS BEEN CARRIED OUT. THEREFORE, IT IS ABSOLUTELY CLEAR THAT SUCH HUGE AMOUNT OF WORK (AS ALSO CERTIFIED BY LENDER BANK'S ENGINEERS AND INDEPENDENT AUDITORS) CANNOT BE CARRIED OUT WITHOUT INCURRING SUBSTANTIAL EXPENDITURE. IF THE ALLEGATION OF THE AO IS TO BE ACCEPTED THEN NO WORK WOULD HAVE BEEN CARRIED OUT THROUGH THESE SUB-CONTRACTORS AND EXPENDITURE HAS NOT BEEN INCURRED IN THE FIRST INSTANCE. IN THIS REGARD RELIANCE IS PLACED ON THE FOLLOWING CASE LAWS: M/S. LANCO INFRATECH LIMITED :- 27 -: A. JUDGEMENT OF HON'BLE GUJARAT HIGH COURT IN THE CASE OF BHOLANATH POLYFAB [355 ITR 290] (PARA 6) WHEREIN IT WAS HELD AS UNDER: 'THE TRIBUNAL COMMITTED NO ERROR. WHETHER THE PURCHASES THEMSELVES WERE BOGUS OR WHETHER THE PARTIES FROM WHOM SUCH PURCHASES WERE ALLEGEDLY MADE WERE BOGUS IS ESSENTIALLY A QUESTION OF FACT. THE TRIBUNAL HAVING EXAMINED THE EVIDENCE ON RECORD CAME TO THE CONCLUSION THAT THE ASSESSEE DID PURCHASE THE CLOTH AND SELL THE FINISHED GOODS, AS NATURAL COROLLARY, NOT THE ENTIRE AMOUNT COVERED UNDER SUCH PURCHASE, BUT THE PROFIT ELEMENT EMBEDDED THEREIN WOULD BE SUBJECT TO TAX. IN THE RESULT, TAX APPEAL IS DISMISSED.' B. JUDGEMENT OF HON'BLE GUJARAT HIGH COURT IN THE CASE OF SIMITH P SHETH [356 ITR 451] WHEREIN IT WAS HELD AS UNDER: 'IN THE PRESENT CASE, THE COMMISSIONER OF INCOME-TAX (APPEALS) BELIEVED THAT WHEN AS A TRADER IN STEEL THE ASSESSEE SOLD CERTAIN QUANTITY OF STEEL, HE WOULD HAVE PURCHASED THE SAME QUANTITY FROM SOME SOURCE. WHEN THE TOTAL SALE IS ACCEPTED BY THE ASSESSING OFFICER, HE COULD NOT HAVE QUESTIONED THE VERY BASIS OF THE PURCHASES. IN ESSENCE, THEREFORE, THE COMMISSIONER (APPEALS) BELIEVED THE ASSESSEE'S THEORY THAT THE PURCHASES WERE NOT BOGUS BUT WERE MADE FROM THE PARTIES OTHER THAN THOSE MENTIONED IN THE BOOKS OF ACCOUNT. THAT BEING THE POSITION, NOT THE ENTIRE PURCHASE PRICE BUT ONLY THE PROFIT ELEMENT EMBEDDED IN SUCH PURCHASES CAN BE ADDED TO THE INCOME OF THE ASSESSEE. SO MUCH IS CLEAR BY THE DECISION OF THIS COURT. IN PARTICULAR, THE COURT HAS ALSO TAKEN A SIMILAR VIEW IN THE CASE OF CIT VS. VIJAY M. MISTRY CONSTRUCTION LTD. (2013) [355 ITR 498] (GUJ) AND IN THE CASE OF CIT VS. BHOLANATH POLY FAB (P.) LTD. (2013) [355 1TR 290] (GUJ).' 11.7. IT WAS FURTHER SUBMITTED THAT IN THE EVENT THE EXPENDITURE IS HELD TO BE BOGUS, THEN THE CORRESPONDING RECEIPTS CANNOT ALSO BE SUBJECT TO TAX BECAUSE WITHOUT INCURRING OF EXPENDITURE, IT WAS NOT POSSIBLE TO CARRY ON THE CIVIL WORKS AND RAISE INVOICES LBPL/LAPL/LKPL. FURTHER, IT MAY ALSO BE NOTED THAT WHEN THE ASSESSING OFFICER HAS NOT DISPUTED THE RECEIPTS OF THE ASSESSEE (WHICH HAVE BEEN DULY OFFERED TO TAX) AND NO DOUBTS HAVE M/S. LANCO INFRATECH LIMITED :- 28 -: BEEN RAISED UPON THE CORRESPONDING COMPLETION OF THE PROJECT, THEN THE CORRESPONDING EXPENDITURE INCURRED TOWARDS COMPLETION OF THE PROJECT CANNOT BE TREATED AS BOGUS IN VIEW OF THE FACT THAT ASSESSEE HAS FURNISHED ALL THE DETAILS AND SUPPORTING EVIDENCE. IN THIS REGARD RELIANCE IS PLACED ON THE FOLLOWING CASE LAWS: A. JUDGEMENT OF HON'BLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. NIKUNJ EXIMP ENTERPRISES (P) LTD. (2013) [372 ITR 619] (MUM) WHEREIN IT WAS HELD AS UNDER: 'THE TRIBUNAL RECORDS THAT THE BOOKS OF ACCOUNTS OF THE RESPONDENT- ASSESSEE HAVE NOT BEEN REJECTED. SIMILARLY, THE SALES HAVE NOT BEEN DOUBTED AND IT IS AN ADMITTED POSITION THAT SUBSTANTIAL AMOUNT OF SALES HAVE BEEN MADE TO THE GOVERNMENT DEPARTMENT I.E. DEFENCE RESEARCH AND DEVELOPMENT LABORATORY, HYDERABAD. FURTHER, THERE WERE CONFIRMATION LETTERS FILED BY THE SUPPLIERS, COPIES OF INVOICES FOR PURCHASES AS WELL AS COPIES OF BANK STATEMENT ALL OF WHICH WOULD INDICATE THAT THE PURCHASES WERE INFACT MADE. IN OUR VIEW, MERELY BECAUSE THE SUPPLIERS HAVE NOT APPEARED BEFORE THE ASSESSING OFFICER OR THE CIT(A), ONE CANNOT CONCLUDE THAT THE PURCHASES WERE NOT MADE BY THE RESPONDENT-ASSESSEE. THE ASSESSING OFFICER AS WELL AS CIT(A) HAVE DISALLOWED THE DEDUCTION OF RS.1.33 CRORES ON ACCOUNT OF PURCHASES MERELY ON THE BASIS OF SUSPICION BECAUSE THE SELLERS AND THE CANVASSING AGENTS HAVE NOT BEEN PRODUCED BEFORE THEM. WE FIND THAT THE ORDER OF THE TRIBUNAL IS WELL A REASONED ORDER TAKING INTO ACCOUNT ALL THE FACTS BEFORE CONCLUDING THAT THE PURCHASES OF RS. 1.33 CRORES WAS NOT BOGUS.' B. DECISION OF ITAT, MUMBAI IN THE CASE OF CANNON INDUSTRIES (P) LTD. VS. DCIT (2015) (59 TAXMANN.COM 65). 'IT IS PERTINENT TO NOTE THAT THE STATEMENT RECORDED UNDER S. 133A WITHOUT CORROBORATIVE EVIDENCE HAS NO EVIDENTIARY VALUE AS HELD BY THE HON'BLE MADRAS HIGH COURT IN THE CASE OF S. KHADER KHAN SON (SUPRA), WHICH HAS BEEN CONFIRMED BY THE HON'BLE SUPREME COURT IN S. KHADER KHAN SON'S CASE (SUPRA). FURTHER, WE NOTE THAT THE AO HAS NOT DISPUTED THE SALES OF THE ASSESSEE AND OUT OF THE TOTAL SALE, EXPORT SALE CONSTITUTES 92 PER CENT. APART FROM THE SALES, THE AO HAS ALSO NOT DISPUTED THE QUANTITATIVE FIGURES REGARDING OPENING STOCK, PURCHASES AND CLOSING STOCK AS WELL AS SALES. THEREFORE, WHEN THERE WAS NO DISPUTE OR DISCREPANCY IN THE QUANTITATIVE M/S. LANCO INFRATECH LIMITED :- 29 -: FIGURES OF PURCHASE, STOCK, SALES INCLUDING CLOSING STOCK THEN THE PURCHASES CANNOT BE TREATED AS BOGUS .... .. .. IN VIEW OF THE FACTS AND CIRCUMSTANCES OF THE CASE, WE ARE OF THE OPINION THAT THE ADDITION IN QUESTION ON ACCOUNT OF BOGUS PURCHASES IS NOT SUSTAINABLE AND ACCORDINGLY THE SAME IS DELETED.' IT WAS SUBMITTED THAT THE SUB-CONTRACT EXPENDITURE WAS INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE BUSINESS AND IT CANNOT BE HELD AS NON-GENUINE: 11.8. IT WAS FURTHER CONTENDED THAT DRP/AO HAS ALSO ERRED BY IGNORING THE EVIDENCES WHICH WERE PLACED ON RECORD SUCH AS BILLS, INVOICES, WORK ORDERS AND SERVICE ENTRY SHEETS. THE AO OUGHT TO HAVE APPRECIATED THE FACT THAT THESE DOCUMENTS ARE STANDARD DOCUMENTS FOR PROVING THE GENUINENESS OF THE TRANSACTIONS AND THEY ARE VERY MUCH AVAILABLE ON RECORD. FURTHER, INVOKING THE PROVISIONS OF SECTION 37(1) OF THE ACT IS ITSELF INCORRECT, WHILE DISALLOWING THE SAID EXPENDITURE AS THE EXPENDITURE IS NEITHER PERSONAL NOR CAPITAL IN NATURE. 11.9. IT WAS SUBMITTED THAT AO DISALLOWED THE EXPENDITURE INCURRED IN EXECUTION OF THESE PROJECTS, ALTHOUGH CORRESPONDING INCOME WAS OFFERED TO TAX IN THE RETURN OF INCOME. IT IS A SETTLED LEGAL POSITION THAT THE ENTIRE AMOUNT CANNOT BE SUBJECTED TO TAX AND ONLY THE PROFIT EMBEDDED THEREIN CAN BE SUBJECTED TO TAX. IT WAS FURTHER CONTENDED THAT THE SUB-CONTRACTORS TO WHOM THE PAYMENTS WERE MADE ARE ASSESSED TO TAX AS THIS CONTRACT RECEIPTS ARE TAXABLE IN THEIR HANDS. THUS, THEY HAVE FILED THEIR ROI'S AND ADMITTED THE RECEIPTS. THE GROSS RECEIPTS HAVE ALREADY SUFFERED TAX IN SUB-CONTRACTORS HANDS. THE BASIC COMMERCIAL PRINCIPLES ARE THAT M/S. LANCO INFRATECH LIMITED :- 30 -: ONE PERSON'S INCOME IS OTHER PERSON'S EXPENDITURE. IT MAY BE NOTED THAT THE PAYMENT HAD ALSO BEEN MADE THROUGH BANKING CHANNELS. IN THIS REGARD, RELIANCE IS PLACED ON THE DECISION OF ITAT, MUMBAI IN THE CASE OF ITO VS. GROWEL ENERGY CO. LTD (2014) 47 TAXMANN.COM 371 (MUMBAI - TRIB). THE AO RELIED ON EXTRANEOUS AND IRRELEVANT FACTORS FOR MAKING THE DISALLOWANCES SUCH AS LOW PROFIT MARGINS OF SUB-CONTRACTORS, HAVING COMMON AUDITOR, COMMON ADDRESSES ETC. WITHOUT APPRECIATING THE PRODUCTION OF DOCUMENTARY EVIDENCE IN SUPPORT OF THE WORK THAT HAS ACTUALLY BEEN EXECUTED. THE AO ERRED IN RELYING ON THE STATEMENTS OF EXTERNAL PARTIES WHO ARE NOT CONCERNED WITH THE ASSESSEE: 11.10. IT WAS STATED THAT THE BASIS OF THE DISALLOWANCE ARE THE STATEMENTS OF CERTAIN PERSONS WHICH WERE NOT EVEN RECORDED BY THE AO HIMSELF. SUCH STATEMENTS HAVE NO EVIDENTIAL VALUE. THE AO, FOR MAKING THE DISALLOWANCE, HAS RELIED ON THE STATEMENT OF SRI PRAVEEN AGARWAL WHO IS NOT CONNECTED TO THE ASSESSEE AND WHOSE STATEMENT HAS NOT BEEN RECORDED BY THE AO HIMSELF. FURTHER, IT IS SUBMITTED THAT STATEMENTS OF SRI PRAVEEN KUMAR AGARWAL AND OTHERS, WITHOUT BRINGING IN RECORD ANY CLINCHING CORROBORATIVE EVIDENCE IN SUPPORT OF SUCH PERSON'S STATEMENT, CANNOT BE TAKEN AS THE BASIS FOR THE DISALLOWANCE MADE. 11.11. IT WAS SUBMITTED THAT THE AO CALLED FOR CERTAIN SUPPORTING INFORMATION FROM THE ASSESSEE COMPANY LIKE COPY OF WORK ORDER/ RA BILLS/FORM 16A ETC. AGAINST THE WORK EXECUTED BY NKG INFRASTRUCTURE P LTD VIDE A SHOW CAUSE NOTICE ISSUED ONLY ON 24-03-2015. HOWEVER, THE AO HAD COMPLETED HIS ASSESSMENT AND PASSED THE DRAFT ASSESSMENT ORDER AS ON 31-03-2015 WHICH IS LESS M/S. LANCO INFRATECH LIMITED :- 31 -: THAN A PERIOD OF 7 DAYS FROM THE DATE OF SUCH ISSUANCE OF NOTICE. IT IS A FACT THAT THE ASSESSEE-COMPANY, HAD BEEN CARRYING OUT CONTRACT WORKS ON A NATIONAL LEVEL WITH TURN OVER RUNNING INTO CRORES OF RUPEES. IT NATURALLY, REQUIRES TIME FOR ANY COMPANY WORKING AT SUCH A HUGE PLATFORM TO RETRIEVE ALL THE INFORMATION SOUGHT FOR BY THE DEPARTMENT WHICH INVOLVES GREAT AMOUNT OF TIME, MANPOWER ETC. WHEN THE INFORMATION THAT' IS SOUGHT FOR, INVOLVES A MATTER OF HUGE QUANTUM DOCUMENTATION OF MONEY, THE COMPANY IS BOUND TO TAKE TIME IN COMPLYING WITH SANCTIONING OR APPROVAL PROCESS FROM VARIOUS INTERNAL DEPARTMENTS OF THE COMPANY IN ORDER TO MAINTAIN CONFIDENTIALITY NORMS ENTERED WITH SUCH THIRD PARTY. THEREFORE, IF COMPLIANCE COULD TAKE NATURALLY LONG TIME, THEN THE AO IS EXPECTED TO GIVE ADEQUATE AND PROPER TIME TO THE ASSESSEE BEFORE HE COMPLETES HIS ASSESSMENT. HENCE, THE ASSESSMENT COMPLETED BY THE AO ON 31-03-2015, WITHOUT PROVIDING SUFFICIENT AND REASONABLE TIME TO THE ASSESSEE TO FURNISH THE REQUIRED INFORMATION, IS AGAINST THE PRINCIPLES OF NATURAL JUSTICE. 11.12. GROUND NO. 5I (ADDITIONAL GROUND) - THAT WITHOUT PREJUDICE, THE AO HAS ERRED IN LAW AND IN FACTS IN MAKING THE ADDITION OF RS. 2,44,92,39,638/- U/S. 69C, WHEREAS THE DRP HAS CLEARLY HELD THAT THE PROVISIONS OF SECTION 69C ARE NOT APPLICABLE IN RESPECT OF THESE ADDITIONS. HENCE, THE ADDITION MADE IS BAD IN LAW AND WITHOUT JURISDICTION. M/S. LANCO INFRATECH LIMITED :- 32 -: 12. DISALLOWANCE OF SERVICE TAX AS PART OF DISALLOWANCE OF SUB-CONTRACT EXPENDITURE: GROUND NO. 16 (ADDITIONAL GROUND) - THAT WITHOUT PREJUDICE, IN VIEW OF FACTS AND CIRCUMSTANCES OF CASE, THE AO HAD ERRED IN DISALLOWING THE AMOUNT OF SUB-CONTRACT EXPENDITURE GIVEN TO CERTAIN PARTIES INCLUDING THE AMOUNT OF SERVICE TAX WHICH WAS NEVER CLAIMED AS EXPENDITURE. GROUND NO. 17 (ADDITIONAL GROUND) - THAT WITHOUT PREJUDICE, IN VIEW OF FACTS AND CIRCUMSTANCES OF THE CASE, THE AO HAS WRONGLY MADE THE DISALLOWANCE OF ENTIRE SERVICE TAX AMOUNT OF RS. 11,31,32,746/- IN CONTEXT OF SAID SUB-CONTRACTORS, WITHOUT APPRECIATING THE FACT THAT SERVICE TAX AMOUNT IS NOT CLAIMED AS DEDUCTION. 12.1. IT IS SUBMITTED THAT AO WHILE PASSING THE FINAL ASSESSMENT ORDER HAS ERRED IN DISALLOWING THE AMOUNT INCURRED AS SERVICE TAX AS PART OF THE TOTAL AMOUNT PAID TO-AFORESAID SUB- CONTRACTORS WITHOUT APPRECIATING THAT THE ASSESSEE HAS NOT CLAIMED SERVICE LAX AS EXPENDITURE IN THE PROFIT AND LOSS A/C OF THE SUBJECT YEAR. FURTHER, AS PER THE ACCOUNTING METHOD FOLLOWED BY ASSESSEE IT MAY BE MENTIONED THAT SUCH SERVICE TAX IS ROUTED THROUGH BALANCE SHEET AND NO DEDUCTION IN RESPECT OF THE SAME IS BEING CLAIMED IN THE PROFIT AND LOSS A/C. IN VIEW OF THE ABOVE, IT WAS REQUESTED TO VACATE THE ADDITION IN RESPECT OF SERVICE TAX AMOUNTING TO RS 11,31,31,746/-, SINCE THE SAME IS BAD IN LAW AND ON FACTS. M/S. LANCO INFRATECH LIMITED :- 33 -: 13. LD.DR, HOWEVER, SUPPORTED THE ORDERS OF THE AO AND TPO. IT WAS HIS SUBMISSION THAT THOSE COMPANIES ARE PAPER COMPANIES AS IDENTIFIED BY THE INVESTIGATION UNIT AT CALCUTTA AND SURVEY WAS ALSO CONDUCTED IN THE PREMISES OF ASSESSEE ON 17-03- 2015. IT WAS ESTABLISHED THAT MR. PRAVIN KUMAR AGARWAL WAS ONLY AN ENTRY OPERATOR AND WAS OPERATING THESE COMPANIES SO AS TO HELP OTHER PERSONS, LIKE ASSESSEE, TO INFLATE THE EXPENDITURE. IT WAS A FAADE CREATED AND SO CORPORATE VEIL HAS TO BE PIERCED SO AS TO REALIZE THE ACTUAL TRANSACTION. IT WAS SUBMITTED THAT ASSESSEE HAS ONLY UNSIGNED WORK ORDERS AND ENTRIES MADE IN THE BOOKS OF ACCOUNT. ASSESSEE INSPITE OF GIVING OPPORTUNITY HAS NOT FURNISHED THE PROPER WORK ORDERS OR THE DETAILS. WITH REFERENCE TO FUND FLOW ALSO, IT WAS SUBMITTED THAT AO HAS CLEARLY ESTABLISHED THAT THE FUNDS FLOWS INDICATE THAT THE PAYMENTS ARE LAYERED SO THAT THE ACTUAL BENEFICIARY IS NOT IMMEDIATELY KNOWN. WITH REFERENCE TO NOT GIVING ENOUGH OPPORTUNITY, HE REFERRED TO THE NOTICES ISSUED GIVING OPPORTUNITY TO ASSESSEE [PG. 134 OF THE PAPER BOOK] AND SUBMITTED THAT WITHOUT THE SURVEY OPERATIONS AND SURVEY OPERATIONS AT CALCUTTA, THE NATURE OF INFLATED EXPENDITURE WOULD NOT HAVE COME TO THE KNOWLEDGE. IT WAS SUBMITTED THAT ASSESSEE HAS NOT FURNISHED ANY EVIDENCE THAT IT HAS REALLY EXECUTED THE JOB AND NECESSARY EVIDENCE WAS NOT FURNISHED TO THE AO. RELYING ON THE JUDGMENT OF THE HON'BLE SUPREME COURT IN THE CASE OF PREMIER BREWERIES LTD., VS. CIT [372 ITR 180] (SC), IT WAS SUBMITTED THAT THE EXPENDITURE HAS TO BE DISALLOWED AS NON-GENUINE EXPENDITURE. 13.1. IT WAS FURTHER SUBMITTED THAT SHRI PRAVIN KUMAR AGARWAL HAS GIVEN STATEMENT THAT ALL THE COMPANIES ARE PAPER COMPANIES AND ALSO ADMITTED ADDITIONAL INCOME AND AS ASSESSEE IS M/S. LANCO INFRATECH LIMITED :- 34 -: RELYING MERELY ON THE DOCUMENTATION, WHICH ARE MADE BELIEF AGREEMENTS. THE PROVISIONS OF SECTION 37(1) CAN BE INVOKED AND RELIED ON THE DECISION OF THE CIT VS. DALMIA CEMENT (BHARAT) LTD., [254 ITR 377]. IT WAS SUBMITTED THAT THE TRANSACTIONS ARE COLLUSIVE AND COLOURABLE AND ASSESSEE HAS NOT PROVED THE GENUINENESS OF THE EXPENDITURE. IT WAS FURTHER SUBMITTED THAT ASSESSEE WAS GIVEN NINE MONTHS TIME BEFORE THE DRP. IT WAS SUBMITTED THAT IN THE ABSENCE OF ANY EVIDENCE, THERE IS NO OPTION THAN TO UPHOLD THE DISALLOWANCE MADE BY THE AO. WHILE ACCEPTING THAT IN THE CONSEQUENTIAL ORDER/FINAL ORDER AO HAS WRONGLY STATED THE DISALLOWANCE U/S. 69C, IT WAS SUBMITTED THAT THE DISALLOWANCE MADE WAS U/S. 37(1). HE SUPPORTED THE ORDERS OF THE AO AND DRP. 14. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND PERUSED THE DOCUMENTS PLACED ON RECORD. IT IS A FACT THAT THE SO CALLED STATEMENT RECORDED BY THE INVESTIGATION UNIT IN CALCUTTA HAS NOT BEEN FURNISHED TO ASSESSEE IN THE COURSE OF ASSESSMENT PROCEEDINGS. THE COPIES FILED BEFORE US ARE ALSO ARE NOT FULLY LEGIBLE AND THE CIT-DR HAS FILED ANOTHER COPY AS LEGIBLE COPY, BUT STILL IT IS ALSO NOT FULLY READABLE, AS SOME OF THE PARTS OF THE STATEMENT WERE MISSING IN THE PHOTO COPIES FURNISHED ON RECORD. PRIMA-FACIE AS SEEN FROM THE STATEMENT, THOSE STATEMENTS ARE RECORDED, NOT IN THE CASE OF ASSESSEE BUT IN PROCEEDINGS PERTAINING TO L&T AND PACL AND IN EITHER CASE, IT SEEMS NO ACTION HAS BEEN TAKEN AS SUBMITTED BY ASSESSEE. REVENUE ALSO HAS NOT PLACED ANYTHING ON RECORD TO SHOW THAT NECESSARY DISALLOWANCES HAVE BEEN MADE IN THE CASE OF L&T AND PACL IN WHOSE CASES MAINLY, THE ENQUIRIES WERE CONDUCTED. EVEN AS SEEN FROM THE SO CALLED FUNDS FLOW STATEMENT, IT IS OBVIOUS THAT AO COULD ONLY ALLEGE ABOUT SMALL AMOUNT OF M/S. LANCO INFRATECH LIMITED :- 35 -: MONEY THAT THESE WERE DIVERTED. FOR EXAMPLE IN THE CASE OF MAKESWORTH PROJECTS AND DEVELOPERS PRIVATE LIMITED, AO ACKNOWLEDGES THAT ASSESSEE-COMPANY HAS PAID AN AMOUNT OF RS. 55,75,91,650/- AND OUT OF THIS, AO NOTICES THAT AN AMOUNT OF RS. 2,10,70,764/- WAS PAID ON 25-04-2011 OUT OF WHICH AN AMOUNT OF RS. 1,78,00,000/- WAS IN TURN PASSED ON TO M/S. ALISHAN ESTATES PVT. LTD., AND THE BALANCE AMOUNT (OUT OF THE ABOVE AMOUNT) TO M/S. SUBHDRISHTI COMPLEX PVT. LTD., ON THE SAME DATE. THUS, AO WAS ONLY TALKING ABOUT AN AMOUNT OF RS. 2.10 CRORES OUT OF 55.75 CRORES PAID BY ASSESSEE-COMPANY AS SUB-CONTRACT EXPENSES, THAT TOO AN AMOUNT PAID IN A LATER ASSESSMENT YEAR (ON 25-04-2017). LIKE-WISE, IN M/S. PIONEER PRODEV PVT. LTD., ASSESSEE STATED TO HAVE BEEN PAID AN AMOUNT OF RS. 50,87,86,807/- OUT OF WHICH AGAIN AO IDENTIFIES AN AMOUNT OF RS. 2,10,70,764/- STATED TO HAVE BEEN PAID ON 08-12-2010 OUT OF WHICH AGAIN AN AMOUNT OF RS. 2,10,00,000/- WAS STATED TO HAVE BEEN PAID TO M/S. MANGALMAYEE HIRISE PVT. LTD., STATED TO BE A PAPER COMPANY OPERATED BY SHRI PRAVIN KUMAR AGARWAL. HERE ALSO AO RECORDS THE TRANSACTIONS PERTAINING TO AY. 2012-13. WITH REFERENCE TO LINK POINT INFRASTRUCTURE PVT. LTD., AO DISCUSSED THE THREE PAYMENTS MADE IN AY. 2011-12, 2012-13 AND 2013-14 TOTALLING TO ALMOST ABOUT RS. 60 CRORES. AO NOTICES THAT ASSESSEE PAID AN AMOUNT OF RS. 6,32,12,293/- ON 06-10-2010 OUT OF WHICH AN AMOUNT OF RS. 1,15,00,000/- WAS PAID TO M/S. ALISHAN ESTATES PVT. LTD., RS. 2 CRORES TO M/S. SURYAMUKHI PROJECTS PVT. LTD., AND RS. 1 CRORE TO M/S. MANGALMAYEE HIRISE PVT. LTD., AND RS. 55 LAKHS AND 57 LAKHS TO TWO MORE COMPANIES. THUS, OUT OF RS. 60 CRORES, AO EXAMINED ONLY AN AMOUNT OF RS. 6.32 CRORES IN THIS COMPANY CASE. LIKE-WISE, IN ALL OTHER CASES RELIED ON BY THE AO, THE AMOUNT WHICH AO EXAMINES FOR FUND FLOW ANALYSIS IT WAS M/S. LANCO INFRATECH LIMITED :- 36 -: HARDLY 10% OF THE AMOUNT STATED TO HAVE BEEN PAID BY ASSESSEE, THAT TOO PAYMENTS MADE IN LATER YEAR. THUS THE SO CALLED STATEMENTS AND ANALYSIS OF FUND FLOW DOES NOT ESTABLISH THAT THE SUB CONTRACT PAYMENTS ARE NOT GENUINE. 14.1. IT WAS THE CONTENTION OF ASSESSEE THESE CONTRACTS ARE GIVEN AS PART OF EPC SUB-CONTRACTS AND THESE WORKS ARE ANALYSED NOT ONLY BY THE MAIN CONTRACTOR BUT ALSO BY VARIOUS BANKS WHILE RELEASING FUNDS. IT WAS SUBMITTED THAT ASSESSEE HAS BILLED THESE AMOUNTS TO THE MAIN CONTRACTOR ON THE BASIS OF THE SUB-CONTRACTS EXECUTED BY VARIOUS COMPANIES AND THERE ARE VARIOUS DOCUMENTARY EVIDENCES WHICH ARE FURNISHED BEFORE THE DRP, BUT UNFORTUNATELY NOT ACCEPTED. THE PROJECT RECEIPTS WERE OFFERED AS INCOME AND SO THE SUB CONTRACT EXPENDITURE CAN NOT BE BOGUS. IT WAS HOWEVER SUBMITTED THAT VARIOUS TRIBUNAL DECISIONS HAVE ESTIMATED ONLY THE PROFIT IN THOSE CONTRACTS, BUT NO DISALLOWANCE OF THE ENTIRE AMOUNT. 14.2. AS SEEN FROM THE SUBMISSIONS AND THE ORDERS OF THE AUTHORITIES, IT IS NOTICED THAT ASSESSEE WAS GIVEN NO OPPORTUNITY TO JUSTIFY THE EXPENDITURE. A SURVEY WAS CONDUCTED ON 17-03-2015 AT TWO PLACES WHEREAS ASSESSEES PROJECTS WERE SPREAD ALL OVER INDIA. DRAFT ASSESSMENT ORDER HAS BEEN PASSED ON 31-03-2015. IN THE SHORT PERIOD AVAILABLE, ASSESSEES MD PLACED ON RECORD THAT OBTAINING THE INFORMATION PERTAINING TO EARLIER YEARS, THAT TO FROM VARIOUS PROJECT SITES WILL TAKE LOT OF TIME. IT IS ALSO SUBMITTED THAT NO CROSS-EXAMINATION WAS PROVIDED AND PRINCIPLES OF NATURAL JUSTICE HAVE BEEN VIOLATED. WHEN ASSESSEE HAS FURNISHED ADDITIONAL EVIDENCE BEFORE THE DRP SUCH AS WORK ORDERS, RA BILLS, SERVICE ENTRY SHEETS, INVOICES/VOUCHERS, FORM 16A ETC. IN RESPECT OF M/S. LANCO INFRATECH LIMITED :- 37 -: THE ABOVE REFERRED SUB-CONTRACTORS IN ORDER TO PROVE THE GENUINENESS OF THE SUB-CONTRACT EXPENDITURE, IT IS NOTICED THAT THE DRP INSTEAD OF REMITTING THE MATTER TO THE AO FOR FRESH EXAMINATION HAS REFUSED TO ENTERTAIN THE SAID ADDITIONAL EVIDENCE ON THE REASON THAT THEY ARE NOT FURNISHED BEFORE THE AO. IT WAS NOT EXPLAINED HOW ASSESSEE COULD FURNISH VOLUMINOUS INFORMATION IN A SHORT PERIOD FROM 17-03-2015 TO 31-03-2015, FOR AN EXPENDITURE PERTAINING TO FOUR YEARS EARLIER, THAT TOO THE DETAILS AVAILABLE AT VARIOUS PROJECT SITES. WE ARE OF THE OPINION THAT THE PRINCIPLES OF NATURAL JUSTICE HAVE BEEN VIOLATED BY BOTH THE AUTHORITIES AND THERE IS LOGIC IN ASSESSEES CONTENTION THAT (A) STATEMENT OF SHRI PRAVIN KUMAR AGARWAL IS NOT PERTAINING TO ASSESSEES TRANSACTIONS; (B) THAT SHRI PRAVIN KUMAR AGARWAL IS NO WAY CONNECTED TO THE COMPANIES IN WHICH THERE ARE VARIOUS OTHER DIRECTORS AS NOTED BY THE AO HIMSELF AND (C) THERE ARE VARIOUS PAYMENT MADE IN THE COURSE OF REGULAR BUSINESS TRANSACTIONS AND NO ADVERSE INFERENCE HAS BEEN DRAWN EITHER IN THE CASE OF L&T OR IN THE CASE OF PACL OR EVEN IN THE CASE OF THE SO CALLED EIGHT PAPER COMPANIES. 14.3. IT WAS FURTHER NOTICED THAT THE SO CALLED DIVERSION OF FUNDS WAS ONLY TO THE EXTENT OF 10% OF THE AMOUNTS OF THE TOTAL CONTRACT VALUE, WHICH COULD BE THE PROFIT OF THE OTHER COMPANY OR MAY BE FUNDS OF THE OTHER COMPANY, WHICH HAS NO BEARING ON ASSESSEE. THERE IS NO EVIDENCE THAT THE AMOUNTS SO PAID HAVE BEEN M/S. LANCO INFRATECH LIMITED :- 38 -: RECEIVED BACK BY ASSESSEE. CONSIDERING THAT ASSESSEE HAS BILLED THE CONTRACT WORKS TO THE MAIN CONTRACTOR, IT CANNOT BE STATED THAT THE SUB-CONTRACT EXPENSES ARE NOT GENUINE. THEREFORE, THE ACTION OF THE AO AND DRP IN TREATING THE EXPENDITURE AS BOGUS CANNOT BE JUSTIFIED ON THE FACTS OF THE CASE. 14.4. THE CONTENTION THAT THE ASSESSEE BILLED THE MAIN CONTRACTOR AND SUB CONTRACT EXPENDITURE WAS INCURRED BY THOSE PERSONS/COMPANIES HAS NOT BEEN EXAMINED BY AO AS HE DID NOT GIVE ADEQUATE TIME TO FURNISH EVIDENCE AND DRP ALSO REFUSED TO EXAMINE THE EVIDENCE FURNISHED JUSTIFYING THE SUB CONTRACTS. THEREFORE, WE ARE OF THE OPINION THAT AO CAN EXAMINE THIS ASPECT AFRESH AFTER GIVING DUE OPPORTUNITY TO ASSESSEE. THERE IS ALSO JUSTIFICATION IN ASSESSEES CLAIM THAT AO ERRED IN DISALLOWING THE AMOUNT OF SUB-CONTRACT EXPENDITURE, INCLUDING SERVICE TAX WHICH WAS NEVER CLAIMED AS EXPENDITURE TO AN EXTENT OF RS. 11,31,32,746/. THIS CONTENTION IS ALSO REQUIRED TO BE EXAMINED. QUESTION OF DISALLOWANCE OF AN AMOUNT WHICH WAS NOT CLAIMED SHOULD NOT ARISE. CONSEQUENTLY, WITHOUT RELYING ON THE SO CALLED STATEMENTS WHICH HAS NO EVIDENTIARY VALUE CONSIDERING THAT NO ACTION WAS TAKEN EITHER IN THOSE COMPANIES OR IN THE COMPANIES IN WHOSE CASES THE SAID ENQUIRIES WERE CONDUCTED( L& T, PACL), WE DIRECT THE AO TO INDEPENDENTLY EXAMINE THE CLAIM OF SUB CONTRACT EXPENDITURE. IN CASE ASSESSEE BILLED AND OFFERED THE SAID CONTRACT RECEIPTS, AO IS DIRECTED TO ACCEPT THE SUB CONTRACT PAYMENTS, AS ASSESSEE RECEIVED THE CORRESPONDING AMOUNTS FROM MAIN CONTRACTOR AND OFFERED THE SAME FOR TAXATION. IN CASE THERE IS ANY FAILURE OR THE NEXUS WAS NOT FULLY ESTABLISHED, ASSESSEE AGREES THAT BEING A SUB- CONTRACTOR A SMALL PERCENTAGE OF THE EXPENDITURE CAN BE ESTIMATED M/S. LANCO INFRATECH LIMITED :- 39 -: FOR DISALLOWANCE, FOLLOWING THE PRINCIPLES LAID DOWN BY THE CO- ORDINATE BENCHES AS RELIED UPON ABOVE. IN THAT EVENT, AO IS DIRECTED TO DISALLOW ONLY A CERTAIN PERCENTAGE OF THE ABOVE AMOUNT, IF NECESSARY . THE ADDITION MADE IS ACCORDINGLY DELETED AND THE ISSUE OF EXAMINATION OF IMPUGNED SUB CONTRACT PAYMENTS IS RESTORED TO AO TO CONSIDER AFRESH AS DIRECTED . GROUNDS ARE CONSIDERED ALLOWED FOR STATISTICAL PURPOSES. 15. GROUND NO. 6 - DISALLOWANCE OF RS. 24,99,777/- ON ACCOUNT OF LICENSE MEMBERSHIP, SUBSCRIPTIONS & ACCESS FEE . IT WAS SUBMITTED THAT THE DRP/AO ERRED IN MAKING A DISALLOWANCE OF RS. 24,99,777/- WITHOUT APPRECIATING THE FACT THAT SUCH EXPENSES HAVE BEEN INCURRED FOR THE PURPOSE OF THE BUSINESS OF ASSESSEE AND ASSESSEE HAD PLACED SUFFICIENT EVIDENCE ON RECORD FOR SUBSTANTIATING ITS CLAIM OF EXPENDITURE. HENCE THE SAME SHOULD BE ALLOWED U/S 37(1) OF THE ACT. 16. AFTER CONSIDERING THE RIVAL CONTENTIONS, WE ARE OF THE OPINION THAT THE QUANTIFICATION OF THE AMOUNT AT RS. 24,99,777/- HAS NOT BEEN FURNISHED BY THE AO. ASSESSEE IS NOT IN A POSITION TO EXAMINE WHICH EXPENDITURES WERE DISALLOWED. SINCE THE AO DISALLOWED SPECIFIC EXPENDITURE, WE DIRECT HIM TO PROVIDE THE QUANTIFICATION OF THE SAID EXPENDITURE AND TO WHAT NATURE OF EXPENDITURE THE SUPPORTING BILLS OR VOUCHERS ARE NOT PROVIDED BY ASSESSEE. AFTER FURNISHING THE DETAILS OF THE DISALLOWANCE OF RS. 24,99,777/- TO ASSESSEE, ASSESSEE IS DIRECTED TO FURNISH THE SUPPORTING BILLS OR VOUCHERS. AO IS ACCORDINGLY DIRECTED TO EXAMINE THIS ISSUE AGAIN. IN CASE ASSESSEE FAILS TO FURNISH THE RELEVANT VOUCHERS/JUSTIFY THE EXPENDITURE, DISALLOWANCE TO THAT EXPENDITURE M/S. LANCO INFRATECH LIMITED :- 40 -: CAN BE MADE. WITH THESE OBSERVATIONS, THE ISSUE IN THIS GROUND IS SET ASIDE TO THE FILE OF AO TO EXAMINE THE SAME AFRESH BY GIVING DUE OPPORTUNITY TO ASSESSEE, AFTER PROVIDING THE DETAILS OF THE AMOUNT SO QUANTIFIED SO THAT ASSESSEE WILL BE AN OPPORTUNITY TO EXPLAIN. 17. GROUND NO. 7 - DISALLOWANCE OF RS. 5,51,715/- ON ACCOUNT OF MISCELLANEOUS AND ENTERTAINMENT EXPENSES. IT WAS SUBMITTED THAT THE DRP/AO ERRED IN MAKING A DISALLOWANCE OF RS. 5,51,715/- ON ACCOUNT OF MISCELLANEOUS AND ENTERTAINMENT EXPENSES INCURRED FOR THE PURPOSE OF THE BUSINESS OF THE ASSESSEE. FURTHER, THE DISALLOWANCE IS PURELY ON AD-HOC BASIS, WHICH IS ARBITRARY AND BAD IN LAW. 18. AS SEEN FROM THE ORDER, AO QUANTIFIED THE EXPENDITURE AS UN-VOUCHED EXPENDITURE AT RS. 27,58,572/-, THE QUANTIFICATION OF WHICH WAS NOT FURNISHED TO ASSESSEE. HOWEVER, IN THIS CASE, HE HAS QUANTIFIED THE AMOUNT FOR DISALLOWANCE AT 20% OF THE ABOVE AMOUNT. AS SEEN FROM THE EARLIER GROUND, AO DISALLOWED 100% OF THE AMOUNT UN-VOUCHERED AND IN THIS CASE, AO DISALLOWED 20% OF THE AMOUNT UN-VOUCHED, THUS, THERE IS NO CONSISTENCY IN THE AOS APPROACH. WE ARE OF THE OPINION THAT IN CASE AO FURNISHES THE DETAILS OF UN-VOUCHERED EXPENDITURE QUANTIFIED AND ASSESSEE COULD FURNISH THE NECESSARY DETAILS AS DIRECTED IN EARLIER GROUND, AO IS DIRECTED TO ACCEPT THE SAME TO THE EXTENT ASSESSEE COULD FURNISH THE VOUCHERS. AO IS HOWEVER, DIRECTED TO RESTRICT THE DISALLOWANCE TO 10% OF THE ABOVE EXPENDITURE INSTEAD OF 20% MADE IN THE ORDER. WITH THESE OBSERVATIONS, THE ISSUE IS AGAIN RESTORED TO THE AO FOR FRESH EXAMINATION. M/S. LANCO INFRATECH LIMITED :- 41 -: 19. IN THE RESULT, APPEAL OF ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES AND APPEAL OF REVENUE AND CROSS-OBJECTION OF ASSESSEE ARE DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 03 RD MAY, 2017 SD/- SD/- (G. PAVAN KUMAR) (B. RAMAKOTAIAH) JUDICIAL MEMBER ACCOUNTANT MEMBER HYDERABAD, DATED 03 RD MAY, 2017 TNMM COPY TO : 1. THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE- 16(1), HYDERABAD. 2. M/S. LANCO INFRATECH LTD., LANCO HOUSE, PLOT NO. 4, SOFTWARE UNITS LAYOUT, HITECH CITY, MADHAPUR, HYDERABAD. 3. DISPUTE RESOLUTION PANEL (DRP), BENGALURU. 4. DIRECTOR OF INCOME TAX (IT & TP), HYDERABAD. 5. ADDL. COMMISSIONER OF INCOME TAX (TRANSFER PRICING), HYDERABAD. 6. D.R. ITAT, HYDERABAD.