THE ACIT 11(1), MUMBAI V. M/S. CREST ANIMATION STUDIOS LTD, MUMBAI

ITA 5348/MUM/2007

• Counselvise Citation: [2013] 140 COUNSELVISE.COM (IT) 71223 (ITAT-MUMBAI)
• Duration Of Justice: 6 year(s) 1 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-10-2013
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: K
• Next Hearing Date: 25-09-2013
• Assessment Year: 2003-2004
• Appeal Filed On: 09-08-2007
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: VIJAY MEHTA IZRFKHZ DH LS
• Assessee Lawyers: AJEET KUMAR JAIN; NEERAJA PRADHAN VKNSK VKNSK
• Keywords: Depreciation; Transfer pricing; International transaction; Additional evidence; Wholly owned subsidiary; Notional interest; Commercial expediency
• Section: 92C

Judgement Text

CREST ANIMATION STUDIOS LTD . . - 1 - VK;DJ VIHYH; VF/KDJ.K DS U;K;IHB EQACBZ ESAA IN THE INCOME TAX APPELLATE TRIBUNAL K BENCH, MUM BAI JH JKTSUNZ FLAG YS[KK LNL; ,OA JH FOT; IKY JKO] U;KF;D LN L; DS LE{K BEFORE SHRI RAJENDRA SINGH ACCOUNTANT MEMBER AND SH RI VIJAY PAL RAO JUDICIAL MEMBER VK;DJ VIHY LA[;K /ITA NO. 5212/MUM/2007 FU/KKZJ.K O'KZ @ ASSESSMENT YEAR: - 2003-04 CREST ANIMATION STUDIOS LTD. 250B, CREST HOUSE, HIND CYCLE MARG, WORLI, MUMBAI 400 018. VS./ CUKE ACIT 11(1) ROOM NO. 439, AAYAKAR BHAVAN M.K. MARG, MUMBAI 400 020 PAN:- AAACC6134C VIHYKFKHZ @ APPELLANT IZR;FKHZ @ RESPONDENT VK;DJ VIHY LA[;K /ITA NO. 5348/MUM/2007 FU/KKZJ.K O'KZ @ ASSESSMENT YEAR: - 2003-04 ACIT 11(1) ROOM NO. 439, AAYAKAR BHAVAN M.K. MARG, MUMBAI 400 020 VS./ CUKE CREST ANIMATION STUDIOS LTD. 250B, CREST HOUSE, HIND CYCLE MARG, WORLI, MUMBAI 400 018. PAN:- AAACC6134C VIHYKFKHZ @ APPELLANT IZR;FKHZ @ RESPONDENT VIHYKFKHZ DH VKSJ LS @ APPELLANT BY SHRI VIJAY MEHTA IZR;FKHZ DH VKSJ LS @ RESPONDENT BY SHRI AJEET KUMAR JAIN AND MS NEERAJA PRADHAN VKNS'K@ VKNS'K@ VKNS'K@ VKNS'K@ ORDER PER RAJENDRA SINGH, AM THESE CROSS APPEALS ARE DIRECTED AGAINST THE ORDER DATED 23.5.2007 OF THE CIT(A) FOR ASSESSMENT YEAR 2003-04. THESE APPEALS W HICH WERE HEARD TOGETHER LQUOKBZ DH RKJH[K @ DATE OF HEARING 25-09-2013 ?KKS'K.KK DH RKJH[K @ DATE OF PRONOUNCEMENT 04-10-2013 CREST ANIMATION STUDIOS LTD . . - 2 - AND ALSO INVOLVE COMMON ISSUES ARE BEING DISPOSED O FF BY A SINGLE CONSOLIDATED ORDER FOR THE SAKE OF CONVENIENCE. 2. WE FIRST TAKE UP THE APPEAL OF THE ASSESSEE IN ITA NO.5212/MUM2007 . THE ASSESSEE IN THIS APPEAL HAS RAISED DISPUTES ON FOUR DIFFERENT GROUNDS. 2.1 THE FIRST DISPUTE RAISED BY THE ASSESSEE IS REG ARDING DISALLOWANCE OF CLAIM OF BAD DEBT OF RS. 1,15,794/-. THE AO NOTED THAT TH E ASSESSEE HAD CLAIMED BAD DEBT OF RS. 1,15,794/- ON ACCOUNT OF TDS. IT WAS OB SERVED BY HIM THAT THE TDS WAS NOT A TRADE DEBT AND WAS ONLY TAX DEDUCTED WHIC H HAD BEEN PAID TO THE GOVERNMENT. THE AMOUNT CANNOT BE TREATED AS BAD DEB T ONLY ON THE GROUND THAT THE TDS CERTIFICATES HAVE NOT BEEN RECEIVED. AO, TH EREFORE, DISALLOWED THE CLAIM. 2.1.1 THE ASSESSEE DISPUTE THE DECISION OF AO AND S UBMITTED BEFORE CIT(A) THAT THE AMOUNT NOT RECEIVED ON ACCOUNT OF TDS HAD BEEN BOOKED AS REVENUE IN THE EARLIER YEARS AND OFFERED TO TAX. IN THE ABSENCE OF TDS CERTIFICATES, THE ASSESSEE COULD NOT CLAIM DEDUCTION OF TAX. THEREFORE, THE AM OUNT HAD BEEN WRITTEN OFF AND CLAIMED AS BAD DEBT. CIT(A) HOWEVER DID NOT ACCEPT THE CONTENTIONS RAISED AND AGREED WITH AO THAT TDS WAS NOT A TRADING TRANSACTI ON AND MERELY ON THE BASIS OF WRITE OFF THE SAME COULD NOT BE CLAIMED AS DEDUCTIO N. HE, THEREFORE, CONFIRMED THE ADDITION MADE BY AO, AGGRIEVED BY WHICH THE ASSESSE E IS IN APPEAL BEFORE TRIBUNAL. 2.1.2 BEFORE US THE LEARNED AR FOR THE ASSESSEE SUB MITTED THAT THE AMOUNT RECEIVED SHORT TO THE EXTENT OF TDS HAD BEEN DECLAR ED AS INCOME IN THE EARLIER YEAR. THE PARTY HAD NOT GIVEN THE TDS CERTIFICATE A ND, THEREFORE, IT COULD NOT BE KNOWN WHETHER THE TAX WAS ACTUALLY DEDUCTED AND PAI D TO THE CENTRAL GOVERNMENT. THE ASSESSEE HAD NOT MADE ANY CLAIM OF DEDUCTION ON ACCOUNT OF TDS EITHER IN EARLIER YEAR OR IN SUBSEQUENT YEAR. T HE CLAIM OF BAD DEBT HAD, THEREFORE, TO BE ALLOWED. LEARNED DR ON THE OTHER HAND STRONGLY SUPPORTED THE CREST ANIMATION STUDIOS LTD . . - 3 - ORDERS OF AUTHORITIES BELOW AND PLACED RELIANCE ON THE FINDINGS GIVEN IN THE RESPECTIVE ORDERS. 2.1.3 WE HAVE HEARD BOTH THE PARTIES, PERUSED THE R ECORDS AND CONSIDERED THE MATTER CAREFULLY. THE DISPUTE IS REGARDING DISALLOW ANCE OF CLAIM OF BAD DEBT ON ACCOUNT OF TDS. THE ASSESSEE HAD RECEIVED AMOUNT SH ORT TO THE EXTENT OF TDS FROM THE CLIENTS. HOWEVER THE ENTIRE AMOUNT HAD BEE N SHOWN AS INCOME IN THE EARLIER YEARS. IT HAS BEEN SUBMITTED THAT THE PARTY DID NOT SUBMIT ANY TDS CERTIFICATE. THEREFORE, IT WAS NOT KNOWN WHETHER TH E TAX WAS ACTUALLY DEDUCTED AND PAID TO THE CENTRAL GOVERNMENT. THE ASSESSEE, THERE FORE, COULD NOT CLAIM DEDUCTION ON ACCOUNT OF TDS. THE AMOUNT HAD, THEREF ORE, BEEN WRITTEN OFF AS A BAD DEBT. NO MATERIAL HAS BEEN PRODUCE BY THE REVEN UE BEFORE US TO CONTROVERT THE CLAIM OF THE ASSESSEE THAT THERE WAS NO EVIDENCE OF ANY TAX DEDUCTED AND PAID TO THE CENTRAL GOVERNMENT. THE AMOUNT CLAIMED AS BAD D EBT HAD BEEN SHOWN AS INCOME IN THE EARLIER YEAR AND IT HAS BEEN WRITTEN OFF IN THE BOOKS OF ACCOUNTS AND, THEREFORE, CONDITIONS REGARDING ALLOWABILITY OF BAD DEBT CLAIM ARE SATISFIED. THEREFORE, IN OUR VIEW, THE CLAIM OF THE ASSESSEE H AS TO BE ALLOWED ON THE FACTS OF THE CASE. WE, THEREFORE, SET ASIDE THE ORDER OF CIT (A) AND ALLOW THE CLAIM OF THE ASSESSEE. 2.2 THE SECOND DISPUTE IS REGARDING DISALLOWANCE OF LEASE RENTAL PAID BY THE ASSESSEE. THE AO NOTED THAT THE ASSESSEE IN THE P&L ACCOUNT HAD DEBITED A SUM OF RS. 10,65,247/- (CORRECT FIGURE IS RS. 6,51,169/ -) ON ACCOUNT OF LEASE RENTAL. HOWEVER IN THE COMPUTATION OF INCOME THE ASSESSEE H AD CLAIMED DEDUCTION OF RS. 18,06,840/- ON ACCOUNT OF LEASE RENTAL. THE AO, THE REFORE, ASKED THE ASSESSEE TO EXPLAIN THE DISCREPANCY. THE ASSESSEE SUBMITTED THA T IT HAD TAKEN CERTAIN ASSETS ON LEASE AND ANNUAL ACCRUAL OF FINANCE COST EMBEDDED I N THE LEASE RENT OVER THE WAS CHARGED TO THE PROFIT AND LOSS ACCOUNT. THE COMPO NENT REPRESENTING THE PRINCIPAL PORTION OF LEASE RENT IS AMORTIZED OVER THE USEFUL LIFE OF THE LEASED ASSETS AND CLAIMED AS DEDUCTION SEPARATELY WHICH RESULTED INTO HIGHER DEDUCTION. AO ASKED CREST ANIMATION STUDIOS LTD . . - 4 - THE ASSESSEE TO FIND COPIES OF THE LEASE AGREEMENT. HOWEVER AS PER THE AO THE ASSESSEE ONLY SUBMITTED THE STATEMENTS OF EMI FROM FINANCE COMPANIES AND NO SPECIFIC LEASE AGREEMENTS WERE PRODUCED. THEREFORE, THE AO IN THE ABSENCE OF AGREEMENT DID NOT ACCEPT THE GENUINENESS OF LEASE T RANSACTIONS. HE, THEREFORE DISALLOWED THE ENTIRE CLAIM. 2.1.2 THE ASSESSEE DISPUTED THE DECISION OF AO AND SUBMITTED BEFORE CIT(A) THAT THE LEASE AGREEMENTS WERE CALLED FOR BY THE AO AT A LATE STAGE DURING THE ASSESSMENT PROCEEDINGS AND, THEREFORE, COULD NOT BE PRODUCED. THE ASSESSEE FILED COPIES OF LEASE AGREEMENTS IN RELATION TO TATA FINA NCE LTD AND BIRLA GLOBAL ASSETS FINANCE LTD AS ADDITIONAL EVIDENCE AND SUBMI TTED THAT THERE WAS NO TAX EVASION DEVICE AS THE ASSETS WERE NORMAL ASSETS LIK E LAPTOP AND CAR WHICH WERE NOT ENTITLED FOR 100% DEPRECIATION. ALTERNATIVELY IT WA S ALSO SUBMITTED THAT IF THE TRANSACTION WAS TREATED AS LOAN TRANSACTION, THE CO MPANY WOULD BE ENTITLED FOR DEPRECIATION WHICH WOULD BE MORE THAN THE LEASE PAY MENT MADE BY THE ASSESSEE. CIT(A) FORWARDED THE ADDITIONAL EVIDENCE TO THE AO FOR EXAMINATION AND REPORT. THE AO IN THE REPORT SUBMITTED TO CIT(A) MENTIONED THAT THE ASSESSEE HAD SUBMITTED THE LEASE AGREEMENT ONLY IN CASE OF TATA FINANCE LTD. CIT(A), THEREFORE, OBSERVED THAT LEASE TRANSACTION IN RELAT ION TO TATA ASSETS COULD NOT BE CONSIDERED AS NOT GENUINE. HE, THEREFORE, DELETED T HE ADDITION IN RESPECT OF TATA ASSETS AND UPHELD IN RESPECT OF BIRLA ASSETS. AGGRI EVED BY THE DECISION OF CIT(A) THE ASSESSEE IS IN APPEAL BEFORE TRIBUNAL. 2.2.2 BEFORE US, THE LEARNED AR FOR THE ASSESSEE SU BMITTED THAT IN RESPECT OF SAME ASSETS, LEASE RENT CLAIMED BY THE ASSESSEE ON THE SAME PATTERN HAS BEEN ALLOWED IN THE EARLIER YEARS AS WELL AS IN THE SUBS EQUENT YEARS AND IN THE SCRUTINY ASSESSMENT MADE BY AO AND, THEREFORE, DISALLOWANCE IN THE CURRENT YEAR WAS NOT JUSTIFIED. IT WAS POINTED OUT THAT THE TRANSACTIONS IN THIS YEAR COULD NOT BE TREATED AS NOT GENUINE WHEN THE GENUINENESS HAS BEEN ACCEPT ED IN THE EARLIER YEAR ONLY ON THE GROUND THAT THE LEASE AGREEMENTS WERE NOT PRODU CED. THE LEARNED DR ON THE CREST ANIMATION STUDIOS LTD . . - 5 - OTHER HAND SUPPORTED THE ORDERS OF AUTHORITIES BELO W AND PLACED RELIANCE ON THE FINDINGS GIVEN IN THE RESPECTIVE ORDERS. 2.2.3 WE HAVE PERUSED THE RECORDS AND CONSIDERED TH E MATTER CAREFULLY. THE DISPUTE IS REGARDING DISALLOWANCE OF LEASE RENTAL. THE ASSESSEE HAD TAKEN CERTAIN ASSETS LIKE CAR AND COMPUTERS ON LEASE FINANCED BY TATA AND BIRLA COMPANIES. THE FINANCE COST COMPONENT OF THE LEASE RENT WAS DEBITED IN THE P&L ACCOUNT BUT IN THE COMPUTATION OF INCOME THE ENTIRE COST INCLUDING THE PRINCIPLE PORTION OF LEASE RENT AMORTIZED OVER THE USEFUL LIF E OF THE LEASED ASSETS WAS ALSO CLAIMED AS DEDUCTION. THE ASSESSEE HAD FOLLOWED THE SAME METHOD OF ACCOUNTING IN RESPECT OF LEASE RENT SINCE INCEPTION AND IT HAS BEEN SUBMITTED THAT THE CLAIM HAS BEEN ALLOWED BY AO IN THE EARLIER YEARS AS WELL AS IN SUBSEQUENT YEARS AND SOME OF THE ASSESSMENT ORDERS HAVE BEEN MADE U/S 143(3). THE DISALLOWANCE HAS BEEN MADE ONLY IN THIS YEAR. WE FIND THE STAND OF THE AS SESSEE REASONABLE. HAVING ACCEPTED THE METHOD OF ACCOUNTING IN THE EARLIER YE AR AND IN THE SUBSEQUENT YEAR REVENUE IS NOT JUSTIFIED IN REJECTING THE SAME IN O NE OF THE MID YEARS. THE REVENUE HAS TO ADOPT A CONSISTENT APPROACH. HAD THE CLAIM O F THE ASSESSEE BEEN REJECTED IN THE EARLIER YEAR THE ASSESSEE WOULD HAVE MADE ALTER NATE CLAIM OF THE DEPRECIATION WHICH HAD TO BE EXAMINED AS PER RULES. THE CLAIM AC CEPTED IN THE EARLIER YEARS HAS BECOME FINAL. THEREFORE, IN OUR VIEW, IT WILL NOT B E APPROPRIATE TO DISTURB THE METHOD FOLLOWED BY ASSESSEE. HOWEVER, IT IS REQUIRE D TO BE VERIFIED WHETHER THE CLAIM THIS YEAR IS IN RESPECT OF THE SAME ASSETS. I N CASE THE AO ON VERIFICATION FINDS THAT THE CLAIM IS IN RESPECT OF THE SAME ASSE TS ALLOWED EITHER IN THE EARLIER YEARS OR IN THE SUBSEQUENT YEAR, THE CLAIM WILL BE ALLOWED BY HIM. THE MATTER, THEREFORE, IS RESTORED TO THE AO FOR FRESH ORDER AF TER NECESSARY VERIFICATION AND AFTER HEARING THE ASSESSEE. 2.. THE THIRD DISPUTE IS REGARDING DISALLOWANCE OF CLAIM OF DEPRECIATION IN RELATION TO ADDITIONAL CUSTOM DUTY. THE AO NOTED TH AT CUSTOM DUTY PAYABLE OF RS. 2,09,22,914/- HAD BEEN TREATED BY THE ASSESSEE AS C APITAL EXPENDITURE ON WHICH CREST ANIMATION STUDIOS LTD . . - 6 - DEPRECIATION OF RS. 53,30,728/- HAD BEEN CLAIMED. A O ASKED THE ASSESSEE TO EXPLAIN AS TO WHY THE DEPRECIATION ON ACCOUNT OF CU STOM DUTY BE NOT DISALLOWED AS THE CUSTOM DUTY WAS DISPUTED. THE ASSESSEE SUBMITTE D THAT IT HAD OBTAINED EPCG LICENSE ISSUED BY DGFT AT THE CONCESSIONAL RATE OF CUSTOM DUTY OF 15% AND WITH EXPORT OBLIGATION WORTH USD 1,03,43,621/- I.E. FOUR TIMES THE CIF VALUE OF THE IMPORTED GOODS TO BE UTILISED WITHTIN FIVE YEARS FR OM THE DATE OF ISSUE OF LICENSE. THE ASSESSEE HOWEVER COULD NOT COMPLETE THE EXPORT OBLIGATION AND ACCORDINGLY DRI VIDE LETTER DATED 10.11.2000 ASKED THE ASSESSEE TO PAY DIFFERENTIAL DUTY, WHICH WAS PAID BY THE COMPANY. THE ASSESSEE DISPUTE D THE ADDITIONAL LIABILITY BY WAY OF WRIT PETITION BEFORE THE BOMBAY HIGH COURT B UT THE SAME HAS BEEN DISMISSED. THE ASSESSEE ALSO PRODUCED EVIDENCE IN S UPPORT OF THE PAYMENT OF CUSTOM DUTY ALONG WITH INTEREST DURING MARCH 2005. AO HOWEVER OBSERVED THAT THE ASSESSEE HAVING DENIED THE LIABILITY WAS NOT JU STIFIED IN INCREASING THE COST OF MACHINERY BY THE AMOUNT OF CUSTOM DUTY PAID. IT WAS ALSO OBSERVED BY HIM THAT THE ADDITIONAL DUTY PAID FOR NON FULFILLMENT OF EXP ORT COMMITMENTS WAS PENAL IN NATURE AND, THEREFORE, COULD NOT BE ALLOWED. AO, TH EREFORE, DISALLOWED THE ADDITIONAL CLAIM OF THE DEPRECIATION. 2.3.1 IN APPEAL CIT(A) AGREED WITH AO THAT THERE WA S PENAL ELEMENT BUILT INTO THE ADDITIONAL CUSTOM DUTY LIABILITY. MOREOVER THE ASSESSEE HAD DISPUTED THE LIABILITY ALL ALONG AND, THEREFORE, THE SAME COULD NOT BE ADDED TO THE COST. HE, THEREFORE, CONFIRMED THE ORDER OF AO DISALLOWING TH E ADDITIONAL CLAIM. AGGRIEVED BY THE DECISION OF CIT(A) THE ASSESSEE IS IN APPEAL BEFORE TRIBUNAL. 2.3.2 BEFORE US, THE LEARNED AR FOR THE ASSESSEE SU BMITTED THAT THE ADDITIONAL CUSTOM DUTY PAID BY THE ASSESSEE WAS NOT PENAL IN N ATURE. THE ASSESSEE HAD BEEN ALLOWED TO PAY THE CONCESSIONAL RATE OF DUTY IN LIE U OF CERTAIN EXPORT OBLIGATIONS WHICH THE ASSESSEE COULD NOT FULFILL AND, THEREFORE , THE ASSESSEE HAD TO PAY THE DIFFERENTIAL DUTY WHICH WAS NOT PENALTY AND DUTY SO PAID WOULD ADD TO THE COST OF ASSET FOR THE PURPOSE OF DEPRECIATION. IT WAS, THER EFORE, REQUESTED THAT THE ORDER OF CREST ANIMATION STUDIOS LTD . . - 7 - CIT(A) BE SET ASIDE. THE ASSESSEE PLACED RELIANCE ON THE DECISION OF DELHI BENCH OF TRIBUNAL IN CASE OF MARUTI UDYOG LTD. VS. DCIT ( 92 ITD 119) LD. DR ON THE OTHER HAND SUPPORTED THE ORDERS OF AUTHORITIES BELO W AND PLACED RELIANCE ON THE FINDINGS GIVEN IN THE RESPECTIVE ORDERS. 2.3.4 WE HAVE PERUSED THE RECORDS AND CONSIDERED TH E MATTER CAREFULLY. THE DISPUTE IS REGARDING ALLOWABILITY OF DEPRECIATION O N THE ADDITIONAL CUSTOM DUTY PAID BY THE ASSESSEE IN RELATION TO IMPORT OF MACHI NERY. THE ASSESSEE AS PER THE SCHEME OF THE GOVERNMENT HAD BEEN ALLOWED TO PAY CO NCESSIONAL CUSTOM DUTY ON IMPORT OF MACHINERY SUBJECT TO FULFILLMENT OF CERTA IN EXPORT OBLIGATIONS. THE ASSESSEE HOWEVER COULD NOT FULFILL THE EXPORT OBLIG ATIONS AND ACCORDINGLY IT HAD BEEN ASKED TO PAY DIFFERENTIAL CUSTOM DUTY. THOUGH THE ASSESSEE DISPUTED THE MATTER BUT WAS NOT SUCCESSFUL AND ULTIMATELY PAID T HE CUSTOM DUTY. THE ISSUE IS WHETHER SUCH ADDITIONAL DUTY WILL ADD TO THE COST O F ASSET AND WILL BE ENTITLED FOR DEPRECIATION. IN OUR VIEW THE ADDITIONAL DUTY PAID BY THE ASSESSEE WILL ADDE TO COST OF ASSET EVEN IF THE PAYMENT HAD BEEN MADE LATER AN D THE ASSESSEE WILL BE ENTITLED FOR DEPRECIATION IN RESPECT OF SUCH ADDITIONAL DUTY . WE DO NOT AGREE WITH THE FINDINGS OF AUTHORITIES BELOW THAT THERE IS SOME PE NAL ELEMENT INVOLVED. THE CUSTOM DUTY PAID BY THE ASSESSEE IS NORMAL DUTY PAY ABLE FOR IMPORT OF MACHINERY WHICH HAD NOT BEEN PAID EARLIER AS THE ASSESSEE HAD AVAILED THE INCENTIVE SCHEME BUT IT HAD TO PAY LATER DUE TO NON FULFILLMENT OF C ONDITIONS OF INCENTIVE SCHEME. THIS IN OUR VIEW IS NOT A PENALTY AND HAS TO BE ADD ED TO THE COST OF ASSETS. THE CASE OF THE ASSESSEE IS SUPPORTED BY THE DECISION O F TRIBUNAL IN CASE OF MARUTI UDYOG LTD (SUPRA). THE ORDER OF CIT(A) CANNOT BE UP HELD . WE, THEREFORE, SET ASIDE THE ORDER OF CIT(A) AND DIRECT THE AO TO ALLO W THE DEPRECIATION IN RELATION TO ADDITIONAL CUSTOM DUTY. 2.4 THE FOURTH DISPUTE IS REGARDING ADDITION OF RS. 2,47,324,/- AS NOTIONAL INTEREST ON LOAN TO M/S RICH CREST ANIMATION INC. U SA. THE AO DURING THE CREST ANIMATION STUDIOS LTD . . - 8 - ASSESSMENT PROCEEDINGS NOTED THAT THE ASSESSEE HAD ADVANCED RS. 30,79,050/- TO ITS SUBSIDIARY NAMELY MS. RICH CREST ANIMATION INC. USA ON WHICH NO INTEREST HAD BEEN CHARGED. THOUGH THE ASSESSEE HAD CHARGED I NTEREST AT THE RATE OF 8% ON ADVANCES MADE TO OTHER SUBSIDIARY COMPANIES. AO ASK ED THE ASSESSEE TO EXPLAIN AS TO WHY INTEREST AT THE RATE OF 8% SHOULD NOT BE CHARGED IN RESPECT OF RICH CREST ANIMATION INC. USA. THE ASSESSEE SUBMITTED THAT THE SAID ADVANCES HAD BEEN GRANTED FOR THE PURPOSE OF BUSINESS AND, THEREFORE, NO INTEREST WAS CHARGED. IT WAS POINTED OUT THAT RICH CREST ANIMATION INC. USA WAS A 100% SUBSIDIARY OF THE ASSESSEE COMPANY WHICH WAS IN SIMILAR BUSINESS AS T HAT OF THE ASSESSEE AND HAD BROUGHT BUSINESS TO THE ASSESSEE FROM A COUNTRY LIK E USA. IT WAS ALSO SUBMITTED THAT THE SUBSIDIARY DID THE PRE PRODUCTION WORK FOR THE PROJECTS BROUGHT IN BY THEM. THE ADVANCES HAD, THEREFORE, BEEN GIVEN FOR FURTHERANCE OF ITS OWN BUSINESS. IT WAS ALSO SUBMITTED THAT THE ADVANCES H AD BEEN GIVEN OUT OF OWN FUNDS AND, THEREFORE, NO NOTIONAL INTEREST COULD BE TAXED IN THE HANDS OF THE ASSESSEE, AS THERE WAS NO REAL INCOME. THE AO, HOWEVER, DID NOT ACCEPT THE EXPLANATION GIVEN. HE REFERRED TO ANNEXURE 3 OF FORM NO. 3CEB AS PER W HICH INTEREST AT THE RATE OF 8% HAD BEEN CHARGED FROM OTHER SUBSIDIARY BUT NO IN TEREST HAD BEEN CHARGED ON THE ADVANCES GIVEN TO M/S RICH CREST ANIMATION INC. USA. FURTHER ANNEXURE 1 TO FORM 3CEB GAVE THE NATURE OF RELATIONSHIP WITH ALL THE THREE AES AND THE DESCRIPTION OF THEIR BUSINESSES WERE SIMILAR TO THA T OF THE ASSESSEE. THE ASSESSEE HAD NOT EXPLAINED AS TO WHY NO INTEREST HAD BEEN C HARGED FROM M/S RICH CREST ANIMATION INC, WHEN IT HAD BEEN CHARGING INTEREST F ROM ALL OTHER AES PROVIDING SIMILAR SERVICES. NO COMPARABLE CASE HAD BEEN GIVEN NOR THE PROVISIONS OF SECTION 92C OF THE ACT HAD BEEN APPLIED. AO, THEREFORE, APP LIED THE CUP METHOD AND CHARGED THE INTEREST AT THE RATE OF 8%, WHICH RESUL TED INTO ADDITION OF RS. 2,46,324/- TO THE TOTAL INCOME. 2.4.1 IN APPEAL, THE ASSESSEE REITERATED THE SUBMIS SIONS EARLIER MADE THAT THERE WAS NO REAL INCOME AND, THEREFORE, NO ADDITION COUL D BE MADE. RELIANCE WAS PLACED ON THE JUDGMENT OF HONBLE SUPREME COURT IN CASE OF S.A BUILDERS VS. CREST ANIMATION STUDIOS LTD . . - 9 - CIT (288 ITR 1). CIT(A) HOWEVER OBSERVED THAT THE C ASE WAS DISTINGUISHABLE. IT WAS ALSO OBSERVED BY HIM THAT THERE WAS NO REASON F OR NOT TO PAY INTEREST. HE, THEREFORE, CONFIRMED THE ADDITION MADE BY AO, AGGRI EVED BY WHICH THE ASSESSEE IS IN APPEAL BEFORE TRIBUNAL. 2.4.2 BEFORE US, THE LEARNED AR FOR THE ASSESSEE SU BMITTED THAT THE AO WAS NOT CORRECT IN STATING THAT OTHER AES WERE ALSO PROVID ING SIMILAR SERVICES. IT WAS POINTED OUT THAT OTHER AES HAD NOT PROVIDING ANY S ERVICES AND THE ASSESSEE HAD NOT DONE ANY BUSINESS WITH THEM. THE LEARNED AR REF ERRED TO THE RELEVANT PORTION OF THE ANNUAL REPORT OF THE YEAR PLACED AT PAGE 65 OF THE PAPERBOOK AS PER WHICH THE ASSESSEE HAD RECEIVED A SUM OF RS. 4.55 CRORE O N ACCOUNT OF TECHNICAL SERVICES PROVIDED TO RICH CREST ANIMATION INC, AND THE AMOUN T RECEIVED IN THE IMMEDIATE PRECEDING YEAR WAS RS. 2.61 CRORE. IT WAS ALSO POIN TED OUT BY HIM THAT THE ASSESSEE HAD EARNED TOTAL REVENUE OF RS. 12.06 CRORE OUT OF WHICH RS. 4.55 CRORE HAD BEEN RECEIVED FROM THE SAID AE AND SIMILAR INCOME HAD BE EN RECEIVED IN THE SUBSEQUENT YEARS ALSO. THE INTEREST FREE ADVANCES H AD, THEREFORE, BEEN GIVEN TO THE SUBSIDIARY ON COMMERCIAL EXPEDIENCY. HE PLACED RELI ANCE ON THE DECISION OF BANGALORE BENCH OF TRIBUNAL IN CASE OF WIPRO LTD. I N ITA 972/BANG/2011 AND ALSO ON THE DECISION OF AHMEDABAD BENCH OF TRIBUNAL IN ITA NO. 1668 IN CASE OF MICRO INDIA LTD. IT WAS ALSO POINTED OUT THAT ADVAN CES HAD BEEN GIVEN FOR PERIOD OF SEX MONTHS DURING HE YEAR, AO HAD COMPUTED NOTIO NAL INTEREST FOR THE WHOLE YEAR. THE LEARNED DR ON THE OTHER HAND SUPPORTED TH E ORDERS OF AUTHORITIES BELOW AND ARGUED THAT IT WAS A CASE OF TRANSFER PRICING A DJUSTMENT IN RELATION TO INTERNATIONAL TRANSACTION WHICH DOES NOT DEPEND UPO N THE BUSINESS DONE WITH THE AE. THE ADJUSTMENT WAS REQUIRED TO BE MADE ON THE B ASIS OF PRESCRIBED METHOD FOR MAKING TP ADJUSTMENT. IT WAS ALSO SUBMITTED THA T IT WAS NOT CLEAR FROM THE ANNUAL REPORT AS TO WHETHER THE SUM OF RS. 4.55 CRO RE WAS RECEIVED ONLY FROM M/S RICH CREST ANIMATION INC. THE LEARNED DR FURTHER PO INTED OUT THAT THE DECISIONS OF TRIBUNAL RELIED UPON BY THE LEARNED AR WERE DIST INGUISHABLE. IT WAS ACCORDINGLY URGED THAT THE ADDITION MADE SHOULD BE UPHELD. CREST ANIMATION STUDIOS LTD . . - 10 - 2.4.3 IN REPLY THE LEARNED AR FOR THE ASSESSEE SUBM ITTED THAT FORM 3CED HAD BEEN SUBMITTED BEFORE THE AO WHICH HAD BEEN DULY RE FERRED BY HIM IN THE ASSESSMENT ORDER. THE ANNEXURE 2 OF THE SAID FORM C LEARLY SHOWED THAT THE ENTIRE INCOME OF RS. 4.55 HAD BEEN RECEIVED FROM M/S RICH CREST ANIMATION INC. THE VERY FACT THAT THE AO HAD REFERRED TO THE FORM 3CED SHOWED THAT THE ENTIRE MATERIAL WAS BEFORE HIM. 2.4.4 WE HAVE PERUSED THE RECORDS AND CONSIDERED TH E MATTER CAREFULLY. THE DISPUTE IS REGARDING TRANSFER PRICING ADJUSTMENT MA DE BY AO ON ACCOUNT OF NOTIONAL INTEREST ON INTEREST FREE ADVANCES GIVEN B Y THE ASSESSEE TO THE ASSOCIATE ENTERPRISE NAMELY M/S RICH CREST ANIMATION INC. USA . THE TOTAL AMOUNT ADVANCED WAS RS. 30,79,050/- ON WHICH THE AO HAS MA DE ADJUSTMENT AT THE RATE OF 8% RESULTING INTO ADDITION OF RS. 2,47,324/-. THE L EANED AR FOR THE ASSESSEE HAS POINTED OUT THAT THE ADVANCES GIVEN DURING THE YEAR WERE ONLY FOR THE PERIOD OF SIX MONTHS BUT THE AO HAS MADE ADJUSTMENT FOR THE WHOLE YEAR, WHICH WAS NOT CORRECT. HE HAS REFERRED TO NECESSARY PAPERS IN SUP PORT OF THE PLEA. THEREFORE, THE ACTUAL ADJUSTMENT ON ACCOUNT OF INTEREST MADE BY A O WOULD COME TO ONLY AROUND RS. 1,24,000/-. THE CASE OF THE ASSESSEE IS THAT NO ADDITION ON ACCOUNT OF NOTIONAL INTEREST IS CALLED FOR AS THE ASSESSEE HAD BEEN GET TING THE REGULAR BUSINESS FROM THE AE AND, THEREFORE, THE INTEREST FREE ADVANCES WERE ON COMMERCIAL EXPEDIENCY. THE CASE OF THE DEPARTMENT IS THAT COMMERCIAL EXPED IENCY IS NOT RELEVANT IN DECIDING THE TP ADJUSTMENT WHICH HAS TO BE MADE IN RESPECT OF ANY INTERNATIONAL TRANSACTION ENTERED INTO BY THE ASSESSEE WITH AE. S INCE, THE ASSESSEE HAD CHARGED INTEREST @8% FROM OTHER AES, THE ADJUSTMENT HAS BE EN MADE AT THE RATE OF 8% THE LEARNED CIT (DR) ALSO POINTED OUT THAT IT WAS N OT CLEAR WHETHER THE ENTIRE REVENUE OF RS. 4.55 CRORE HAD BEEN RECEIVED BY THE ASSESSEE ONLY FROM M/S RICH CREST ANIMATION INC. USA AND NOT FROM OTHER AES. T HE POSITION HAS HOWEVER BEEN CLARIFIED BY THE LEANED AR, WHO POINTED OUT TH AT ANNEXURE 2 OF FORM 3CED WHICH HAD BEEN FILED BEFORE AO CLEARLY SHOWED THAT THE ENTIRE INCOME OF RS. 4.55 CREST ANIMATION STUDIOS LTD . . - 11 - CRORE WAS RECEIVED FROM M/S RICH CREST ANIMATION IN C. USA. WE HAVE PERUSED THE SAID FORM NO. 3CED AND FOUND THE CONTENTION OF THE LEARNED AR CORRECT. THE AO HAS ALSO REFERRED TO THE SAID FORM IN THE ORDER WHICH MEANS THAT THE FORM WAS BEFORE HIM AND HE HAS NOT MADE ANY ADVERSE COMMENTS ON THE CONTENTS OF ANNEXURE -2. FURTHER, BOTH IN EARLIER YEARS AND ALS O IN SUBSEQUENT YEARS, THE ASSESSEE HAD RECEIVED SUBSTANTIAL REVENUE FROM THE SAID AE. THEREFORE, IT IS CLEAR THAT THE ASSESSEE HAD NO BUSINESSES WITH OTHER AES TO WHOM INTEREST HAD BEEN CHARGED. HOWEVER, WE AGREE WITH THE SUBMISSIONS MAD E ON BEHALF OF THE REVENUE THAT COMMERCIAL EXPEDIENCY IS NOT RELEVANT IN MAKIN G TRANSFER PRICING ADJUSTMENT. IN CASE OF ANY INTERNATIONAL TRANSACTION, THE ARMS LENGTH PRICE OF THE TRANSACTION AS PER PRESCRIBED METHOD HAS TO BE DETERMINED AND SUIT ABLE ADJUSTMENT IS REQUIRED TO BE MADE AS PER THE METHOD PRESCRIBED. HOWEVER IN SE LECTING THE COMPARABLES IT HAS TO BE ENSURED THAT THE COMPARABLE PARTIES ENTER ING INTO UNCONTROLLED TRANSACTIONS ARE ALSO HAVING SIMILAR BUSINESS RELAT IONSHIP SO AS TO MAKE THEM FULLY COMPARABLE. FURTHER THE COMPARABLE DATA HAS TO BE C ONTEMPORANEOUS. COMING TO THE PRESENT CASE , THE AO HAD USED THE CUP METHOD AND MADE COMPARISON WITH THE INTEREST CHARGED BY THE ASSESSEE TO OTHER AES. THE TRANSACTION WITH THE AES WAS ALSO CONTROLLED TRANSACTION AND, THEREFORE, THI S COULD NOT BE CONSIDERED AS COMPARABLE. THE AO HAS NOT BROUGHT ON RECORD ANY IN DEPENDENT UNCONTROLLED TRANSACTION FOR THE PURPOSE OF MAKING ANY ADJUSTMEN T. CIT (A) HAS NOT APPLIED MIND AT ALL TO THE TRANSFER PRICING ADJUSTMENT PROV ISIONS AND HAS NOT PLACED ANY INDEPENDENT COMPARABLE ON RECORD NOR ANY COMPARABLE HAS BEEN PLACED BEFORE US AT THE TRIBUNAL STAGE. THEREFORE, THE ADJUSTMENT MA DE BY AO WHICH IS NOT AS PER THE METHOD PRESCRIBED, CANNOT BE UPHELD. WE ARE ALS O UNABLE TO ACCEDE TO THE REQUEST OF LEARNED CIT(DR) TO SENT BACK THE MATTER TO AO CONSIDERING THAT THE MATTER IS VERY OLD INVOLVING ASSESSMENT YEAR 2003-0 4 AND NO COMPARABLE HAS BEEN PLACED ON RECORD EVEN AT THIS STAGE. WE, THEREFORE, CONSIDERING THE FACTS AND CIRCUMSTANCES OF THE CASE, SET ASIDE THE ORDER OF C IT(A) AND DELETE THE ADDITION MADE BY AO. CREST ANIMATION STUDIOS LTD . . - 12 - 3. THE APPEAL OF THE DEPARTMENT IN ITA NO. 5348/MUM 2007. THE ONLY DISPUTE RAISED BY THE REVENUE IN THIS APPEAL IS REGARDING D ELETION OF ADDITION ON ACCOUNT OF LEASE RENT BY CIT(A) IN RESPECT OF TATA COMPANY ASS ETS. 3.1 WE HAVE ALREADY DEALT WITH THIS ISSUE WHILE DEA LING WITH THE APPEAL OF THE ASSESSEE AND IN VIEW OF THE DECISION TAKEN VIDE PAR A NO 2.2.3 OF THIS ORDER, NO ADDITION IS REQUIRED TO BE MADE. THE GROUND RAISED BY THE REVENUE IS, THEREFORE, DISMISSED. 4. IN THE RESULT APPEAL OF THE ASSESSEE IS ALLOWED WHEREAS THAT BY THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN OPEN COURT ON 04-10-2013 SD/- SD/- (VIJAY PAL RAO) (RAJENDRA SINGH) JUDICIAL MEMBER ACCOUNTANT MEMBER SKS SR. P.S, MUMBAI DATED 4-10-2013 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CONCERNED CIT(A) 4. THE CONCERNED CIT 5. THE DR, K BENCH, ITAT, MUMBAI BY ORDER ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCHES, MUMBAI