ITO, New Delhi V. M/s. AVH Resourses India Pvt. Ltd., New Delhi

ITA 5374/DEL/2014

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 3853 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-10-2017
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: F
• Next Hearing Date: 05-06-2017
• Assessment Year: 2010-2011
• Appeal Filed On: 01-10-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Transfer pricing; Earning of tax free income; Wholly owned subsidiary
• Section: 143(3); 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH F NEW DELHI BEFORE SHRI SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER AND SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER ITA NO. 5374/DEL/2014 AY: 20 10-11 ITO, VS AVH RE SOURSES INDIA PVT. LTD., WARD 2(2), D-139, FIRST FLOOR, EAST OF KAILASH, INTL. TAX, NEW D ELHI-110065 NEW DELHI. (PAN: AADCB2711K) (APPELLANT) (RESPONDE NT) APPELLANT BY: SHRI ATIQ AHMAD, SR. DR RESPONDENT BY : NONE ORDER PER SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER THIS APPEAL HAS BEEN PREFERRED BY THE REVENUE AGAIN ST THE ORDER DATED 11.07.2014 PASSED BY THE LD. CIT(A)-V, NEW DELHI FOR ASSESSMENT YEAR 2010-11 WHEREIN ASSESSEES APPEAL W AS ALLOWED. 2. THIS APPEAL WAS FIRST FIXED FOR HEARING ON 5.6.2 017 BUT NONE WAS PRESENT ON BEHALF OF THE ASSESSEE AND, THEREFOR E, DR WAS DIRECTED TO SERVE THE NOTICE THROUGH THE DEPARTMENT AND THE HEARING WAS FIXED FOR TODAY. TODAY ALSO, NONE IS P RESENT FOR THE ASSESSEE AND DEPARTMENT HAS PLACED ON RECORD A LETT ER CONFIRMING THAT THE NOTICE HAS BEEN SERVED ON THE ASSESSEE. T HEREFORE, WE ARE PROCEEDING TO HEAR THE DEPARTMENT EX PARTE QUA THE ASSESSEE. ITA NO. 5374/DEL/2014 AY : 2010-11 2 3. BRIEF FACTS OF THE CASE ARE THAT THE RETURN OF I NCOME WAS FILED DECLARING NIL INCOME AND THE ASSESSMENT U/S 143(3) OF THE INCOME TAX ACT, 1961 (HEREINAFTER CALLED 'THE ACT') WAS COMPLETED AFTER MAKING THE FOLLOWING DISALLOWANCES:- I) ADDITION ON ACCOUNT OF ARMS LENGTH PRICE RS. 16,441/- II) DISALLOWANCE U/S 14A OF THE INCOME TAX ACT, 1961 (HEREINAFTER CALLED 'THE ACT') RS. 40,01,541/- 3.1 THE ASSESSEES APPEAL BEFORE THE LD. COMMISSI ONER OF INCOME TAX(A) WAS ACCEPTED AND BOTH THE ADDITIONS I N THE ASSESSMENT ORDER WERE DELETED BY THE LD. COMMISSION ER OF INCOME TAX(A) AND NOW THE DEPARTMENT HAS APPROACHED THE ITAT AND HAS RAISED THE FOLLOWING GROUNDS OF APPEAL:- WHETHER THE LD. CIT (A) HAS ERRED ON FACTS AND IN L AW IN DELETING THE ADDITION OF RS. 16441/- MADE BY THE A. O. ON ACCOUNT OF ARMS LENGTH PRICE. WHETHER THE LD. CIT (A) HAS ERRED ON FACTS IN LAW DELETING THE ADDITION OF RS. 40,01,541/- MADE BY TH E A.O. ON ACCOUNT OF U/S 14A OF THE IT ACT. THE APPELLANT CRAVES LEAVE FOR RESERVING THE RIGHT TO AMEND, MODIFY, ALTER ADD OR FOREGO ANY GROUNDS OF A PPEAL AT ANY TIME BEFORE OR DURING THE HEARING OF THIS AP PEAL. 4. LD. DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT THE ASSESSEE COMPANY WAS A 100% SUBSIDIARY OF AVH NV, BELGIUM AN D AVH ITA NO. 5374/DEL/2014 AY : 2010-11 3 NV, THE HOLDING COMPANY INTENDED TO UTILISE THE SER VICE OF ITS SUBSIDIARY I.E. THE ASSESSEE FOR THE PURPOSE OF GAT HERING SECTOR INFORMATION, INVESTMENT ADVICE AND MARKETING SERVIC ES. IT WAS SUBMITTED THAT DURING THE YEAR, THE ASSESSEE COMPAN Y HAD RECEIVED DIVIDEND OF RS. 55,44,885/- ON INVESTMENT IN M/S SAGAR CEMENTS LTD. IT WAS FURTHER SUBMITTED THAT THE ASS ESSEE HAD MADE FURTHER INVESTMENTS AMOUNTING TO RS. 62,26,360 /- IN ADDITION TO ALREADY EXISTING INVESTMENT OF RS. 79,7 1,73,523/- IN THE SAME COMPANY. IT WAS SUBMITTED THAT, THEREFORE , THE ASSESSING OFFICER PROCEEDED TO INVOKE THE PROVISION S OF SECTION 14A(2) R/W SECTION 14A(3) OF THE ACT AND PROCEEDED TO COMPUTE THE DISALLOWANCE @ % OF THE AVERAGE INVESTMENT WHI CH WORKED OUT TO RS. 40,01,541/- AND THEREFORE ON THE FACTS A ND CIRCUMSTANCES OF THE CASE, THE DISALLOWANCE WAS RIG HTLY MADE. 4.1 ON THE SECOND ISSUE, IT WAS SUBMITTED THAT IN TERMS OF THE SERVICE AGREEMENT ENTERED INTO WITH THE HOLDING COM PANY, THE ASSESSEE COMPANY WAS ENTITLED TO CHARGE A MARK UP O F 22.5% TO THE DIRECT AS WELL AS INDIRECT COST ATTRIBUTABLE TO SAID SERVICES. THE LD. AR POINTED OUT THAT WHILE CALCULATING THE A RMS LENGTH PRICE, THE ASSESSEE HAD NOT INCLUDED AUDITORS REMU NERATION AMOUNTING TO RS. 66,798/-, RATES AND TAXES AMOUNTIN G TO RS. ITA NO. 5374/DEL/2014 AY : 2010-11 4 4275/- AND BANK CHARGES AMOUNTING TO RS. 1997/- FOR THE PURPOSE OF CHARGING THE HOLDING COMPANY AND THEREFO RE, THERE WAS UNDER-REPORTING OF THE ARMS LENGTH PRICE. IT WAS SUBMITTED THAT THIS ADDITION BY THE ASSESSING OFFICER WAS ALS O IN ORDER. IT WAS SUBMITTED THAT THE ORDER OF THE LD. COMMISSIONE R OF INCOME TAX(A) BE SET ASIDE AND THE ADDITIONS BE RESTORED. 5. WE HAVE HEARD THE LD. DEPARTMENTAL REPRESENTAT IVE AND HAVE ALSO PERUSED THE IMPUGNED ORDER AS WELL AS THE ASSESSMENT ORDER. AS FAR AS ISSUE OF DISALLOWANCE U/S 14A OF T HE ACT IS CONCERNED, THE LD. COMMISSIONER OF INCOME TAX(A) HA S DISCUSSED THE ISSUE IN GREAT DETAIL IN PARA 4 OF THE IMPUGNED ORDER. THE LD. COMMISSIONER OF INCOME TAX(A) WHILE DELETING THE DI SALLOWANCE HAS NOTED THAT THE ASSESSING OFFICER HAS NOT DISPUT ED THE EXPENDITURE OF RS. 46,74,147/- DEBITED TO THE ACCOU NTS AND THAT ALL THE EXPENSES HAVE BEEN ACCEPTED AS GENUINE BY T HE ASSESSING OFFICER. 5.1 LD. COMMISSIONER OF INCOME TAX(A) HAS ALSO NOT ED THAT BEYOND MAKING THE INVESTMENT, THERE WAS NOTHING FUR THER THAT THE ASSESSEE HAD TO DO FOR EARNING THE DIVIDEND INC OME. THE LD. COMMISSIONER OF INCOME TAX(A) HAS ALSO NOTED THAT I NVESTMENT IN THE SHARES HAVE NOT BEEN SHOWN TO HAVE COME OUT OF BORROWED ITA NO. 5374/DEL/2014 AY : 2010-11 5 FUNDS AND, THEREFORE, NO FINANCE CHARGES CAN BE SAI D TO HAVE BEEN INCURRED IN RELATION TO THE DIVIDEND INCOME. IT IS ALSO NOTED BY THE LD. COMMISSIONER OF INCOME TAX(A) THAT THE E ARNING OF DIVIDEND WAS INCIDENTAL TO THE HOLDING OF SHARES AN D SINCE THE ASSESSEES INVESTMENTS CONSISTED ONLY OF SHARES OF ONE COMPANY M/S SAGAR CEMENTS LTD., THERE WAS NO REASON TO MAIN TAIN ANY INVESTMENT PORTFOLIO DIVISION. THE LD. COMMISSIONE R OF INCOME TAX(A) HAS ALSO NOTED THAT A VERY SMALL AND NEGLIGI BLE AMOUNT OF TIME, EFFORT AND EXPENDITURE WAS REQUIRED TO EARN T HE DIVIDEND INCOME AND THEREFORE, THE DISALLOWANCE TO THE TUNE OF RS. 40,01,541/- WAS UNJUSTIFIED. THE LD. COMMISSIONER OF INCOME TAX(A) HAS ALSO NOTED THAT THE ASSESSING OFFICER HA D NOT POINTED OUT ANY EXPENDITURE AS HAVING PROXIMATE NEXUS WITH THE EARNING OF EXEMPT INCOME AND, THEREFORE, THE PROVISIONS OF RULE 8D OF THE INCOME TAX RULES, 1962 COULD NOT BE APPLIED AUTOMAT ICALLY AND IN A MECHANICAL MANNER. THE LD. COMMISSIONER OF IN COME TAX(A) WHILE DELETING THE DISALLOWANCE HAS ALSO NOTED THAT A SIMILAR ADDITION IN ASSESSEES APPEAL FOR ASSESSMENT YEAR 2 009-10 WAS DELETED BY HIS PREDECESSOR ON IDENTICAL FACTS. 5.2 DURING THE COURSE OF PROCEEDINGS BEFORE US, TH E LD. DEPARTMENTAL REPRESENTATIVE COULD NOT POINT OUT ANY FACTUAL OR ITA NO. 5374/DEL/2014 AY : 2010-11 6 LEGAL ERROR IN THE FINDINGS ARRIVED AT BY THE LD. C OMMISSIONER OF INCOME TAX(A). THE HONBLE APEX COURT HAS HELD IN COMMISSIONER OF INCOME TAX(A) VS WALFORT SHARE AND STOCK BROKERS PVT. LTD. REPORTED IN (2010) 326 ITR 1(SC) THAT WHILE ATTRACTING THE PROVISIONS OF SECTION 14A, THERE SH OULD BE A PROXIMATE CAUSE FOR DISALLOWANCE WHICH HAS A RELATI ONSHIP WITH A TAX EXEMPT INCOME. SUCH A PROXIMATE CAUSE HAS NOT BEEN BROUGHT OUT BY THE DEPARTMENT NEITHER IN THE ASSESS MENT ORDER NOR DURING THE COURSE OF PROCEEDINGS BEFORE US. TH EREFORE, WE FIND NO REASON TO INTERFERE WITH THE FINDINGS OF TH E LD. COMMISSIONER OF INCOME TAX(A) ON THIS ISSUE AND DIS MISS GROUND NO. 2 OF THE DEPARTMENTS APPEAL. 5.3 AS FAR AS GROUND NO. 2 RELATING TO DELETION O F ADDITION ON ACCOUNT OF ARMS LENGTH PRICE IS CONCERNED, THE ISS UE HAS BEEN DISCUSSED IN PARA 5 OF THE IMPUGNED ORDER. THE LD. COMMISSIONER OF INCOME TAX(A) HAS NOTED THAT HE HAS EXAMINED THE SERVICE AGREEMENT WITH THE HOLDING COMPANY AND AS PER THE TERMS OF THE SERVICE AGREEMENT, THE ASSESSEE COULD NOT HAVE CHARGED MARK UP OF AUDITORS REMUNERATION, RATES AN D TAXES AND BANK CHARGES. THIS FACTUAL FINDING OF THE LD. COMM ISSIONER OF INCOME TAX(A) ALSO COULD NOT BE NEGATED BY THE LD. SR. DR DURING ITA NO. 5374/DEL/2014 AY : 2010-11 7 THE COURSE OF PROCEEDINGS BEFORE US. THEREFORE, KE EPING IN VIEW THE FACTUAL CIRCUMSTANCES AND THE FACT THAT THE DEP ARTMENT COULD NOT LEAD ANY EVIDENCE TO THE CONTRARY AGAINST THE F INDINGS OF THE LD. COMMISSIONER OF INCOME TAX(A), WE FIND NO REASO N TO INTERFERE WITH THIS ADJUDICATION BY THE LD. COMMISSIONER OF I NCOME TAX(A). ACCORDINGLY, GROUND NO. 2 OF THE DEPARTMENTS APPEA L ALSO STANDS DISMISSED. 6. IN THE RESULT, THE DEPARTMENTS APPEAL IS DISMIS SED. ORDER PRONOUNCED IN THE OPEN COURT ON 25 TH OCTOBER, 2017. SD/- SD/- (PRASHANT MAHARISHI) (S UDHANSHU SRIVASTAVA) ACCOUNTANT MEMBER JUDICIAL MEMBER DT. 25 TH OCTOBER, 2017 GS COPY FORWARDED TO:- 1. APPELLANT 2. RESPONDENT 3. CIT(A) 4. CIT 5. DR BY ORDER ASSTT. REGISTRAR