TRHIRUVANANTHAPURAM ROAD DEVELOPMENT COMPANY LTD., MUMBAI V. DY CIT 14 (3)91), MUMBAI

ITA 7600/MUM/2019

• Counselvise Citation: [2022] 106 COUNSELVISE.COM (IT) 4850 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 9 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-09-2022
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: J
• Assessment Year: 2015-2016
• Appeal Filed On: 10-12-2019
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Keywords: Capital asset; Business income; Depreciation; Transfer pricing
• Section: 32; 92; 144C; 43; 13; 92CA

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL “J” BENCH, MUMBAI BEFORE SHRI PRASHANT MAHARISHI, AM AND SHRI SANDEEP SINGH KARHAIL, JM ITA No. 7600/Mum/2019 (Assessment Year 2015-16) T rhiru vananthapu ra m Road De velopm ent Com pany Ltd . T he IL & FS Finan c ial Centre Plot C022 G Bloc k BKC Bandra East, Mum bai-400 051 Vs. Dy. CIT 14(3)(1) Aaykar Bhavan, M.K. Road, Mumbai-400 020 (Appellant) (Respondent) PAN No. AACCT0547J Assessee by : Shri Bhupal Rapelli, AR Revenue by : Ms Vatsalaa Jha, CIT DR Date of hearing: 08.09.2022 Date of pronouncement : 21.09.2022 O R D E R PER PRASHANT MAHARISHI, AM: 01. This appeal is filed by Thiruvanthapuram Road development Co Ltd (assessee/appellant) against Assessment order passed by the Deputy Commissioner of income tax – 14 (3) (1), Mumbai (the learned assessing officer/AO) u/s 143 (3) read with Section 144C (13) of The Income Tax Act 1961 (The Act) on 14 October 2019 as per directions of The Dispute Resolution Panel – 2, Mumbai (The Learned DRP) dated 26/9/19 determining the total income of the assessee at ₹ 105,557,280/– against the returned loss of ₹ 85,666,301/–. Page | 2 ITA No.7600/Mum/2019 Trhiruvananthapuram Road Devleopment Company Ltd; A.Y. 15-16 02. Assessee is aggrieved on following counts as per grounds of appeal “i. Disallowance of Depreciation on Project management and supervision fees of ₹ 28,11,247/- and ii. Disallowance of depreciation claimed by the assessee on toll roads. iii. Treating the income earned of Rs. 21,16,990 on fixed deposits as taxable income Under the head income from other sources instead of income from business iv. Addition of interest income of ₹ 43,946 as income from other sources by computing the total income of the assessee wherein such interest was neither credited to the bank account nor accounted in the books of accounts of the assessee” 03. Assessee is engaged in business of development, widening, strengthening, operating, and construction and maintaining Thiruvanthapuram city Roads. It is improvement project under the annuity concession agreement. 04. It filed its return of income on 30/11/2015 declaring loss of ₹ 85,666,301/–. The return of income of the assessee was picked up for scrutiny. The assessee has entered into a specified domestic transaction [SDT] of project management fees of Rs 14966352/- and Project supervision fees of ₹ 37,75,196/- . Therefore, the SDT Page | 3 ITA No.7600/Mum/2019 Trhiruvananthapuram Road Devleopment Company Ltd; A.Y. 15-16 entered into by the assessee were referred to the learned transfer-pricing officer for determination of Arm’s length Price. The learned transfer-pricing officer found that assessee has entered into specified domestic transaction with IL & FS transportation network Ltd and above fees were paid to it; assessee debited it as Capital work in Progress. Assessee claimed depreciation on it of Rs 28,11,247/-. Assessee did not benchmarked above transactions for its Arm’s length price reason being aforementioned transactions are in the nature of capital expenditure and therefore no benchmarking is warranted. Assessee further relied on the judicial precedent of Decision of Texport overseas private limited wherein validity of Benchmarking of a specified domestic transaction in light of omission of Section 92BA (1) per finance act 2017 was adjudicated. Therefore, the claim of the assessee was that this transaction is not required to be benchmarked for determination of its arm’s-length price. 05. The learned transfer-pricing officer rejected the contention of the assessee holding that assessee has neither benchmarked the transaction nor filed any details and supporting evidences to prove the correctness of arm’s- length price of the above transaction. Therefore, in absence of any documents to substantiate the assessee’s claim he considered that as assessee has capitalized total value of the assets in CWIP, which included this expenditure and claimed depreciation on it at the rate of 15% in the profit and loss account, it is disallowable. He Page | 4 ITA No.7600/Mum/2019 Trhiruvananthapuram Road Devleopment Company Ltd; A.Y. 15-16 determined ALP of Project management fees and Supervision fees at RS Nil. Accordingly adjustment to the total income was proposed at ₹ 2,811,247/–, being 15% of the total capital work in progress expenditure pertaining to this services of ₹ 18,741,648/–. The order u/s 92CA (3) of the act was passed on 8/10/2018. 06. Consequently, draft assessment order was passed on 21 December 2018 wherein the above adjustment was included. The learned assessing officer further found that the assessee has claimed depreciation of ₹ 211,502,144 on toll road. The assessee was asked why depreciation should be allowed on the same. The assessee submitted that it is ‘plant and machinery’ and therefore depreciation is allowable on the same. The learned assessing officer rejected the contentions of the assessee and disallowed depreciation on Toll Road. Main reasons of disallowances were that [1] ownership of the road has always been vested with the government and further [2] it was never transferred to the assessee company, [3] toll road assets do not form part of the specified assets covered under rule 5 and the corresponding appendix for granting of the depreciation [4] further followed the decision of the honourable Bombay High Court in case of West Gujarat Expressway Ltd wherein the depreciation on toll road Page | 5 ITA No.7600/Mum/2019 Trhiruvananthapuram Road Devleopment Company Ltd; A.Y. 15-16 was disallowed. Accordingly the depreciation of ₹ 211,502,144/– was disallowed. However, assessee was allowed amortization on toll road. The learned AO further found that an amount of ₹ 43,946/– has been given interest by Punjab National Bank to the assessee on which tax has also been deducted but assessee has denied the receipt of the said interest and therefore same was included as income of the assessee Under the head income from other sources. The AO further disallowed the credit of tax deduction at source amounting to ₹ 58,566. Accordingly the total income of the assessee was computed at ₹ 114,085,694/– . There were other transfer pricing adjustment also, but those are not in dispute before us, therefore, facts related thereto are not discussed here. 07. Assessee preferred objections before the learned dispute resolution panel. The directions were issued on 26/9/2019. On the issue of applicability of transfer pricing provisions, it rejected the contention of the assessee that the transfer pricing provisions now do not apply to the specified domestic transaction. With respect to the adjustment of ₹ 2,811,247 on disallowance of depreciation as capital work in progress treating ALP of Project Management and supervision fees as Rs Nil, as it was not benchmarked by the assessee in proper manner, the learned dispute resolution panel upheld the contentions of the learned transfer-pricing officer and confirmed the above adjustment. On disallowance of depreciation on toll road, Page | 6 ITA No.7600/Mum/2019 Trhiruvananthapuram Road Devleopment Company Ltd; A.Y. 15-16 as assessee has been allowed amortization, consequently, depreciation of ₹ 211,502,144/- is not allowable to the assessee and hence it was upheld. The adjustment/addition of ₹ 43,946/– on bank interest was also confirmed. The claim of the assessee was that the interest income of ₹ 2,116,919 on fixed deposits is taxable under the head ‘income from business and profession’, which is, taxed by the learned assessing officer under the head ‘income from other sources’, the learned dispute resolution panel rejected this ground. Accordingly, the directions were issued on 26/9/2019. 08. Based on above directions, learned assessing officer passed a final assessment order u/s 143 (3) read with Section 144C (13) of the act on 14 October 2019 in accordance with the direction issued by the learned dispute resolution panel. Accordingly the transfer pricing adjustment of ₹ 2,811,247/–, disallowance of depreciation on toll road disallowance of ₹ 211,502,144/–, addition on account of interest from Punjab National Bank not shown by the assessee of ₹ 43,946/– were made. Further the bank interest of ₹ 2,116,919/– was also taxed by the assessing officer as income from other sources against the contention of the assessee that it is a business income. 09. Aggrieved by assessment order, assessee is in appeal before us. The learned authorised representative submitted a chart of issues as well as a paper book containing 112 pages wherein the judicial precedents as Page | 7 ITA No.7600/Mum/2019 Trhiruvananthapuram Road Devleopment Company Ltd; A.Y. 15-16 well as the communication with the assessing officer are placed. 010. With respect to the first issue of transfer pricing adjustment of ₹ 2,811,247/– on account of specified domestic transaction, he submitted that the issue is squarely covered in favour of the assessee by the decision of the honourable Karnataka High Court in case of Principal Commissioner Of Income Tax Versus Export Overseas Ltd, wherein it has been held that due to omission of the clause (i) of Section 92 BA of The Act related to the specified domestic transaction, it never existed in the statute as there is no saving clause, therefore, transfer pricing adjustment on account of specified domestic transaction cannot be made. He even otherwise stated that it is not the ‘expenditure’, which is claimed by the assessee and therefore even otherwise, no adjustment could have been made. Therefore, this issue is covered in favour of assessee. 011. On the issue of disallowance of depreciation on toll roads, he submitted that the identical issue arose in the case of the assessee in earlier years wherein the claim of the depreciation was allowed to the assessee. He referred to the decisions of the coordinate bench in assessee’s own case for assessment year 2008 – 09, 2010 – 11, and 2011 – 12. He submitted that on identical basis the disallowance was made in earlier years of depreciation but is allowed by the coordinate benches. Therefore, this issue is covered in favour of assessee. Page | 8 ITA No.7600/Mum/2019 Trhiruvananthapuram Road Devleopment Company Ltd; A.Y. 15-16 012. On the third issue of treatment of interest of ₹ 2,116,919/– on FDR placed Under the debt service obligation passed by the lenders treated as income from other sources instead of business and profession, it was stated that identical issue in the assessee’s own case has been decided by the coordinate bench for assessment year 2010 – 11 and 11 – 12 holding such interest income as business income. Therefore, this issue is also squarely covered in favour of the assessee. 013. With respect to ground number 4 on account of addition of interest income of ₹ 43,946 from Punjab National Bank, it was stated that assessee not want to press it. 014. On the issue of short grant of tax deduction at source credit amounting to ₹ 68,566, it was stated that the grievance of the assessee would be addressed if a suitable directions were given to the learned assessing officer. 015. The learned departmental representative vehemently supported the orders of the lower authorities on all these issues. 016. We have carefully considered the rival contentions and perused the orders of the lower authorities. We have also carefully considered judicial precedents cited before us by the learned authorised representative in assessee’s own case for earlier years as well as of Honourable Karnataka High court. 017. First ground of appeal is general in nature, no arguments were advanced, and therefore, it is dismissed. Page | 9 ITA No.7600/Mum/2019 Trhiruvananthapuram Road Devleopment Company Ltd; A.Y. 15-16 018. Ground number 2 of the appeal is against the arm’s-length price of specified domestic transaction of project management and supervision which has resulted into adjustment of ₹ 2,811,247/– being disallowance of depreciation. Brief facts of the case show that assessee is a special purpose vehicle [SPV] jointly formed by IL & FS transportation network Ltd and Punj Loyd Ltd. The assessee has entered into a specified domestic transaction wherein project management fees of ₹ 14,966,352/– and Project supervision fees of ₹ 3,775,196/– is paid to IL & FS. This amount has been debited by the assessee in capital work in progress. Assessee did not claim the above amount as expenditure. However, assessee claimed depreciation at the rate of 15% on the above sum, which amounts to ₹ 2,811,247/-. During the course of assessment proceedings, learned AO asked assessee about the benchmarking of the above-specified domestic transaction. The reply of the assessee is that this transaction is of SDT is not at all a specified domestics transaction to which provision of section 92 BA applies. Further, it is a capital expenditure and therefore no benchmarking is required. Assessee also stated that all the expenditure incurred in connection with the project is treated in the books of account as part of capital work progress, which will translate into fixed assets whenever the project is completed. On the capital expenditure the provisions of Section 40A (2) (b) are not applicable and therefore benchmarking is not required under Section 92BA of the act. It was further stated that clause (i) of Page | 10 ITA No.7600/Mum/2019 Trhiruvananthapuram Road Devleopment Company Ltd; A.Y. 15-16 Section 92 BA of the income tax act has been omitted by The Finance Act, 2017 therefore; the courts have held that such Section was never there in the statute book. Assessee also relied on the decision of coordinate bench, which has been confirmed by the honourable Karnataka High Court. Despite this the learned assessing officer, as assessee has not benchmarked transaction, did not file the details of supporting evidences, correctness of the arm’s- length price, the corresponding arm’s-length price of the above sum considered at Rs Nil. Consequently, assessee has claimed depreciation on the rate of 15% on the above sum amounting to 28,11,247/–, was disallowed. The action of the learned assessing officer was confirmed by the learned dispute resolution panel. We find that honourable Karnataka High Court in case of PCIT V Texport Overseas Limited [2020] 114 taxmann.com 568 (Karnataka)/ [2020] 271 Taxman 170 has held that Clause (i) of section 92BA having been omitted by Finance Act, 2017 with effect from 1-4-2017 from statute, resultant effect is that it had never been passed and, hence, decision taken by AO under effect of section 92BA and reference made to Transfer Pricing Officer under section 92CA was invalid and bad in law. Thus, naturally benchmarking of Specified domestic Transaction covered u/s 40 (2) (b) was never to be benchmarked. We carefully find that that provision of section 40A (2) applies only with respect to the ‘expenditure’ incurred by the assessee, which are otherwise allowable to the assessee. Here it is not the ‘expenditure’ but depreciation ‘allowance’ claimed Page | 11 ITA No.7600/Mum/2019 Trhiruvananthapuram Road Devleopment Company Ltd; A.Y. 15-16 by the assessee , therefore, it is not hit by provisions of Section 40A (2) of the act. We have also enquired whether the learned assessing officer has any power to substitute ‘Actual cost’ of an assets by the arm’s-length price of purchase or acquisition of a capital asset u/s 32 Vis a Vis of Section 43(1) of the act in similar situation. On careful perusal of provisions of section 32 as well as the ‘actual cost’ u/s 43 (1) for the purpose of claiming of the depreciation, we could not find any provision by which the ‘actual cost’ incurred by the assessee, if acquired from or created from the associated enterprises can be substituted by the Arm’s length price of purchase of such assets. In view of this, we hold that the learned assessing officer is incorrect in determining the arm’s-length price of specified domestic transaction after omission of clause (i) of Section 92BA of the act. Hence, the action of the learned transfer- pricing officer in determining the arm’s-length price of project management and supervision fees at Rs Nil and consequent disallowance of depreciation there on is not correct. Accordingly, ground number 2 of the appeal of the assessee is allowed. 019. Ground number 3 of the appeal is with respect to disallowance of depreciation on toll road. The assessee has claimed the depreciation on the road at ₹ 211,502,144. This issue has been dealt with in the case of the assessee in ITA NO. 622/Mum/2015, ITA NO. 636/Mum/2015, ITA NO. 4346/Mum/2015, C.O. No. 25/Mum/2017 (Arising out of ITA NO. 622/Mum/2015) for assessment year 2010 – 11 and 2011 – 12 by order dated 23 rd may 2018. As per Page | 12 ITA No.7600/Mum/2019 Trhiruvananthapuram Road Devleopment Company Ltd; A.Y. 15-16 paragraph number 2 of that order there was an additional ground raised by the assessee with respect to the depreciation treating the toll collection on road as ‘intangible asset’. As per para number 2 .1, coordinate bench relied upon the decision of the coordinate bench in case of Andhra Pradesh Expressway Ltd and later on per paragraph number 7, it held that the claim of the assessee for depreciation on license to collect toll being an ‘intangible asset’ is falling within the scope of Section 32 (1) (ii) of the act. Assessee was allowed depreciation on road constructed by it under built operates and transfer basis [BOT] was considered as an ‘intangible asset’. The coordinate bench also allowed the depreciation to the assessee at the rate of 25% thereon. Therefore, respectfully following the decision of the coordinate bench in assessee’s own case, the learned assessing officer is directed to delete the disallowance of depreciation of ₹ 211,502,144/– on toll roads. Ground number 3 is allowed. 020. Ground number 4 is with respect correct head of income of interest on fixed deposits placed under the debt service obligation created by the lenders amounting to ₹ 2,116,919/–. Assessee offered it as income from business; the learned assessing officer and learned DRP charged it under the head income from other sources. The learned authorised representative has categorically submitted that this issue is also covered in favour of the assessee by the decision of the coordinate bench in assessee’s own case for assessment year 2010 – 11 and 2011 – 12. As per paragraph number 4 at page number 30 Page | 13 ITA No.7600/Mum/2019 Trhiruvananthapuram Road Devleopment Company Ltd; A.Y. 15-16 of the decision of the coordinate bench, following the decision of the honourable Bombay High Court in CIT versus lok Holdings 308 ITR 356 , it upheld the order of the learned CIT – A holding it to be interest income chargeable Under the head business income. Therefore respectfully following the decision of the coordinate bench in assessee’s own case, in absence of any change in the facts and circumstances of the case, we also direct the learned assessing officer to consider interest income on fixed deposit of ₹ 2,116,919/– as business income. Ground number 4 is allowed. 021. Ground number 5 is with respect to taxability of interest income of ₹ 43,946 received from Punjab National Bank which has not been accounted by the assessee in its books of account and consequently not offered for taxation but appearing in form number 26AS so added by the learned assessing officer and confirmed by the learned dispute resolution panel is not pressed, hence, dismissed. 022. Ground number 6 is with respect to short grant of tax credit of ₹ 68,566/–. We direct the assessee to submit the proof before the learned assessing officer about such credit available to the assessee and whether corresponding income has been recorded in the books of account of the assessee for the respective year or not, thereafter, the learned AO may examine the same and decide the issue in accordance with the law. Accordingly, ground number 6 is allowed. Page | 14 ITA No.7600/Mum/2019 Trhiruvananthapuram Road Devleopment Company Ltd; A.Y. 15-16 023. In the result, appeal filed by the assessee is partly allowed. Order pronounced in the open court on 21.09.2022. Sd/- Sd/- (SANDEEP SINGH KARHAIL) (PRASHANT MAHARISHI) (JUDICIAL MEMBER) (ACCOUNTANT MEMBER) Mumbai, Dated: 21. 09.2022 Sudip Sarkar, Sr.PS/Dragon Page | 15 ITA No.7600/Mum/2019 Trhiruvananthapuram Road Devleopment Company Ltd; A.Y. 15-16 Copy of the Order forwarded to : 1. The Appellant 2. The Respondent. 3. The CIT(A) 4. CIT 5. DR, ITAT, Mumbai 6. Guard file. BY ORDER, True Copy// Sr. Private Secretary/ Asst. Registrar Income Tax Appellate Tribunal, Mumbai