INFINITI WHOLESALE LTD ( FORMERLY KNWON AS WOOLWONTHS WHOLESALE (INDIA) P.LTD), MUMBAI V. ASST CIT CIR 8(3), MUMBAI

ITA 7718/MUM/2012

• Counselvise Citation: [2022] 104 COUNSELVISE.COM (IT) 0907 (ITAT-MUMBAI)
• Duration Of Justice: 9 year(s) 9 month(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-10-2022
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: K
• Next Hearing Date: 14-07-2022
• Assessment Year: 2008-2009
• Appeal Filed On: 26-12-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Capital asset; Depreciation; Transfer pricing; International transaction
• Section: 143(3); 10B; 144C; 274; 43

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL "K" BENCH, MUMBAI SHRI AMARJIT SINGH, ACCOUNTANT MEMBER SHRI RAHUL CHAUDHARY, JUDICIAL MEMBER ITA No. 7718/MUM/2012 (Assessment Year: 2008-09) M/s Infinity Retail Limited, {as successor to ̳Infinity Wholesale Limited‘ [formerly known as Woolworths Wholesale (India) Pvt. Ltd.] in terms of ̳Scheme of Amalgamation‘ between ̳Infinity Wholesale Limited‘ and ̳Infinity Retail Limited‘} 203, Akruti Center Point, MIDC, Andheri (East), Mumbai - 400059 [PAN: AAACW6273C] The Assistant Commissioner of Income Tax, Circle-8(3), Mumbai ................ Vs ................. Appellant Respondent Appearances For the Appellant/ Assessee For the Respondent/Department : : Shri Nitesh Joshi Shri Narayan Ramkrishna Michael Jerald Date of conclusion of hearing Date of pronouncement of order : : 15.07.2022 13.10.2022 O R D E R Per Rahul Chaudhary, Judicial Member: 1. The present appeal is directed against assessment order dated, 30.10.2012 passed under Section 143(3) read with Section 144C of the Income Tax Act, 1961 [hereinafter referred to as ̳the Act‘], as per directions issued by Dispute Resolution Panel-II, (hereinafter referred to as ̳the DRP‘) under Section 144C(5) of the Act pertaining to the Assessment Year 2008-09. ITA No. 7718/Mum/2012 Assessment Year: 2008-09 2 2. Appellant has raised following grounds of appeal: ―1. That on facts and circumstances of the case and in law the Ld AO erred in assessing the loss of the Appellant under the normal provisions of the Act at (Rs. 10,68.91,995) against returned loss of (Rs. 18,87,50,293) based on the directions received from Hon'ble Dispute Resolution Panel ("DRP") partially upholding the adjustment to the transfer price proposed by the learned Transfer Pricing Officer ( Ld TPO"). 2. That on facts and circumstances of the case and in law the Ld AO/ TPO erred in proposing and the Hon'ble DRP further erred in partially upholding a total adjustment of Rs 6,90,21,928 in respect of the international transactions pertaining to reimbursement of expenses to its Associated Enterprises ("AE/s"), alleging the same is not at arm's length in terms of the provisions of Sections 92C(1) and 92C(2) of the Act read with Rule 10D of the Income-tax Rules 1962 ("the Rules") 2.1 That on facts and circumstances of the case and in law the Ld AO/ TPO grossly erred in ignoring the facts while proposing the adjustment and the Hon'ble DRP further erred in upholding an adjustment of Rs. 4,90,78,826 in respect of the international transactions pertaining to reimbursement of expenses to its AE, alleging that the same pertains to earlier year and cannot be allowed in the year under consideration, there by determining the Arm's Length Price ("ALP") as Nil 2.2 That on the facts and circumstances of the case and in law the Ld AO/ TPO/ DRP grossly erred in ignoring the facts and adjusting Rs. 1,50.75,835 by determining the arm's length price of reimbursement to its AE towards purchase of fixed assets by fallaciously alleging that the fixed asset have been used by the AE before it was purchased/put to use by the appellant 2.3 That on the facts and circumstances of the case and aw the d AO/ TPO/ DRP grossly erred in ignoring the facts and materiality of third party invoices submitted to the Ld TPO and ITA No. 7718/Mum/2012 Assessment Year: 2008-09 3 in adjusting an amount of Rs. 42,40,116 towards reimbursement of out of pocket expenses to its AE. 3. That on the facts and circumstances of the case and in law the Ld AO/ TPO erred in not considering the appellant's plea of computation of double adjustment of Rs 19,94,441 on account of out of pocket expenses in a correct perspective and in disallowing without giving any cogent reasons. 4. That on the facts and circumstances of the case and in law, Ld AO/ TPO/ DRP erred in treating IT connectivity and software expenses aggregating to Rs 80,07,197 as capital in nature. 5. That on facts and circumstances of the case and in law the Ld AO has erred in computing the loss at Rs 10,68,91,995 instead of Rs. 11,65,00,631. 6. That on the facts and circumstances of the case and in law, Ld AO has erred in adding an amount of Rs. 24,885/- being contract receipts from M/s Bajaj Electricals Ltd. 7. That on the facts and circumstances of the case and in law, Ld AO has erred in disallowing professional fees of Rs 6,27,151.‖ 3. The facts as emanating from the records are that the Appellant is a company engaged in the business of wholesale trading (cash and carry) of consumer electronics and appliances. The Appellant filed its return of income on 30.09.2008 declaring loss of INR 18,27,22,789/- which was revised on 29.03.2010 declaring loss of INR 18,87,50,293/-. 4. The case of the Appellant was selected for scrutiny. During the assessment proceedings, the Assessing Officer noted that the Appellant has entered into international transactions with its Associated Enterprises (AEs) and therefore, a reference was made under Section 92CA(1) to the Transfer Pricing Officer (TPO) for the ITA No. 7718/Mum/2012 Assessment Year: 2008-09 4 determination of Arm‘s Length Price (ALP) of the international transactions. The TPO, vide order, dated 28.10.2011 passed under Section 92CA(3) of the Act, proposed transfer pricing adjustment aggregating to INR 9,65,96,086/- consisting of the following: Sr. No. Particulars Amount (INR) 1 Reimbursement of Expenses to AEs [For Services not requested by the Assessee: (a)INR.4,90,78,826/- pertaining to Assessment Year 2007-08 and (b)INR.2,41,30,833/- pertaining to Assessment Year 2008-09, both, booked prior to execution of Inter-Corporate Agreement, dated 07.01.2008, made effective from 01.06.2006)] 7,32,09,659/- 2 Payment for Asset [IBM Server previously owned by AE] 1,91,46,116/- 3 Out of Pocket Expenses [not supported by Bills/documents] 42,40,116 Total 9,65,96,086/- 5. In addition to the above transfer pricing adjustments which were incorporated in the Draft Assessment Order, dated 18.11.2011, the Assessing Officer also proposed addition of INR 80,07,197/- on account of software expenses and addition of INR 24,855/- on account of difference in the information contained in Annual Information Return pertaining to contract receipt from Bajaj Electrical Ltd in the Draft Assessment Order. The Appellant filed objections to the aforesaid additions proposed in the Draft Assessment Order, dated 18.11.2011, before Dispute Resolution Panel-II, Mumbai (hereinafter referred to as the ̳DRP‘). The DRP, vide order dated 30.07.2012, disposed off the aforesaid objections and confirmed the transfer pricing adjustment of ÏNR 42,40,116/- relating to Out of Pocket Expenses and the transfer pricing adjustment of INR.4,90,78,826/-being reimbursement of expenses ITA No. 7718/Mum/2012 Assessment Year: 2008-09 5 pertaining to the Assessment Year 2007-08 booked before the execution of the Inter-Corporate Agreement, dated 07.01.2008. As regards reimbursement expenses of INR 2,41,30,833/- pertaining to the Assessment Year 2008-09 booked before the execution of the Inter-Corporate Agreement, dated 07.01.2008, the DRP directed the Assessing Officer to verify the expenses and to allow legitimate expenses incurred for business purposes. Granting some relief to the Appellant in respect of the transfer pricing adjustment in relation to purchase price of the asset (i.e. IBM Server), the DRP directed the Assessing Officer to re-calculate the ALP of the asset purchased by reducing the cost of asset by the depreciation for one year (i.e. Financial Year 2006-07 relevant to Assessment Year 2007- 08) as according to DRP the asset was put to use during that year only. On the basis of the aforesaid direction issued by the DRP, the Assessing Officer passed the Final Assessment Order, dated 30.10.2012, computing the income of the Appellant as under: I Total income as per computation of income (-) 18,87,50,293 Add: Addition/disallowance as discussed above i) Addition on account of adjustment u/s 92CA(1) 9,65.96,086 Less : Relief as discussed above a) On a/c of reimbursement of expenditure for AY 2008-09 [INR 2,41,30,833 – INR 6,27,151/-] 2,35,03,682 b) On a/c of purchase price of asset 40,70,476 ii) Software expenses 80,07,197 iii) Different in AIR 24,855 7,70,53,980 (-) 11,16,96,313 Less Depreciation on software exp. Capitalized @ 60% 48,04,318 Total taxable income (-) 10,68,91,995 ITA No. 7718/Mum/2012 Assessment Year: 2008-09 6 6. Being aggrieved, the Appellant is now in appeal before us challenging the Final Assessment Order, dated 30.10.2012, on the grounds reproduced in paragraph 2 above. We have heard the rival contention and perused the material on record including the judicial precedents cited during the course of hearing. The grounds raised by the Appellant are taken up in seriatim hereinafter. Ground No. 1 & 2 7. Ground No. 1 and 2 are general in nature and therefore does not require adjudication. Ground No. 2.1 8. Ground No. 2.1 pertains to addition on account of transfer pricing adjustment of INR 4,90,78,826/- made in respect of reimbursement of expenses on the ground that the same pertained to Assessment Year 2007-08 (and not the relevant Assessment Year 2008-09), a period prior to the execution of the Inter-Corporate Agreement, dated 07.01.2008, and therefore, no deduction could be allowed in respect of the same. 9. We have considered the rival contentions and perused the material on record. On perusal of the revised computation of income for the Assessment Year 2008-09 (placed at page 274 to 276 of the paper- book) and the relevant extract of the tax audit report filed by the Appellant (placed as Annexure-2 to letter, dated 12.09.2011, placed at pages 126 to 193 of the paper book) it is clear that the Appellant had, while arriving at the aforesaid loss of INR 18,87,50,293/-, claimed deduction for only INR 2,46,19,542/- as per the provisions of Section 40(a)(i) of the Act. The aforesaid amount formed part of INR 4,90,78,827/- disallowed by the Appellant in the computation of income for the Assessment Year 2007-08 for failure to ITA No. 7718/Mum/2012 Assessment Year: 2008-09 7 deduct/deposit tax at source. Since the Appellant had deducted/deposited tax at source before the due date of filing return for the Assessment Year 2008-09 (i.e., on 04.09.2008) in respect of the aforesaid amount of INR 2,46,19,542/, deduction for the same was claimed during the Assessment Year 2008-09. The TPO had, in paragraph 4 of the order dated 28.10.2011, noted that the Appellant had disclosed amount of INR 7,87,13,678/- incurred during the Financial Year 2006-07 (relevant to Assessment Year 2007-08) separately in ̳Notes‘ 2 to Annexure III Form 3CEB for the Assessment Year 2008-09. As per Clause 5 of Schedule-17 of Notes to Accounts forming part of the financial statements for the Financial Year 2007-08 relevant to Assessment Year 2008-09 (placed at page 61 of the paper-book) dealing with related parties disclosures, the reimbursement made to the related parties for the Assessment Year 2008-09 was INR 3,98,09,317/- as opposed to INR 7,87,13,678/- for the Assessment Year 2007-08. Thus, it clear that the aforesaid amount of INR 7,87,13,678/- was not debited to the Profit & Loss Account for the Assessment Year 2008-09. Since the deduction for the aforesaid amount was not claimed by the Appellant while computing taxable income for the Assessment Year 2008-09, the question of making the disallowance or addition of the same during the relevant previous year does not arise. Accordingly, Ground No. 2.1 raised by the Appellant is allowed and addition of INR 4,90,78,826/- is deleted. Ground No. 2.2 10. Ground No. 2.2 pertains to addition on account of transfer pricing adjustment of INR 1,50,75,835/- made in the Final Assessment Order, dated 30.10.2012, on account of upward adjustment of ALP of transaction of purchase of asset. ITA No. 7718/Mum/2012 Assessment Year: 2008-09 8 11. The facts relevant for adjudication of the issue before us, in brief, are that According to the TPO the Appellant had purchased IBM Server (hereinafter referred to as ̳the Asset‘) for INR 2,51,26,392/- from its AE on 24.06.2007 which had in turn purchase it from a third party [i.e., Redington (India) Ltd.] for the same price on 29.11.2005. The TPO was of the view that the Asset purchased by the Appellant was an old asset purchased by the AE of the Appellant during the financial year 2005-06 and sold to the Appellant during the financial year 2007-08. Accordingly, the TPO reduced the purchase price of the Asset by charging depreciation for the proportionate period for financial years 2005-06 (for half year), 2006-07 (for full year) and 2007-08 (for April to June 2007) for to arrive at Written Down Value (WDV) of the Asset at INR 59,80,081/- and thus, proposed upward transfer pricing adjustment of INR 1,91,46,311/- being excess purchase price paid by the Appellant to its AE for the purchase of the Asset which was incorporated in the draft assessment order, dated 18.11.2011, by the Assessing Officer. In the objections filed by the Appellant on this issue, the DRP granted relief to the Appellant and directed the TPO to re-calculate the ALP by reducing the purchase price of the Asset by the depreciation for financial year 2006-07 only. As per the directions of the DRP the WDV of the Asset was re-calculated at INR 1,00,50,557/-. Accordingly, in the Final Assessment Order, dated 30.10.2012, the addition was reduced to INR 1,50,75,835/- as against INR 1,91,46,311/- proposed in the Draft Assessment Order. Being aggrieved, the Appellant has carried the issue in appeal before us challenging the aforesaid addition of INR 1,50,75,835/-. 12. The Ld. Authorised Representative for the Appellant appearing before us submitted that the Asset was purchased by the AE of the Appellant in 29.11.2005 as the Appellant company was not in ITA No. 7718/Mum/2012 Assessment Year: 2008-09 9 existence at that time. However, as stated in the original invoice, the Asset was to be delivered to the Appellant in India directly. As per Appellant‘s fixed asset register, the Asset was capitalized in the books of accounts and put to use in October, 2006. Thereafter, on 29.03.2007, the Appellant entered into Annual Maintenance Contract with IBM India for the maintenance of the Asset. The Asset was used for the first time by the Appellant in India. Further, the Ld. Authorised Representative for the Appellant submitted that in the case of ACIT, Circle-I, Hosur Vs. Interpump Hydraulics India (P.) Ltd: [2016] 50 ITR(T) 43 (Chennai - Trib.) and ACIT, Central Circle-22(1), New Delhi Vs. Sarens Heavy Lift (I) (P) Ltd. [2018] 93 taxmann.com 431 (Delhi-Trib.) the Tribunal has held that the WDV of asset cannot be the determining factor to decide ALP under Comparable Uncontrolled Price (CUP) Method. Per contra, the Ld. Departmental Representative relied upon the orders passed by the TPO and DRP. 13. We have heard the rival submissions and perused the material on record. As per invoice, dated 24.06.2007, raised by Redington (India) Ltd. on Woolworths Ltd., Australia, the place of delivery is stated to be Mumbai, Maharashtra. Vide letter, dated 16.11.2011, (placed at page 279 to 297 of the paper-book at page 285/286), the Appellant had explained to the Assessing Officer that at the time of purchase of the Asset the company was not incorporated and could not operate its bank account and/or make payments to the third party vendor. Therefore, the purchase of the Asset was made by the Appellant‘s AE on behalf of the Appellant. The Asset was delivered in completely knockdown condition in India and was put to use for the first time in India in 2006. In support of the aforesaid facts the Appellant had placed reliance on Annexure - 4 to Form 3CD for the Assessment Year 2007-08. However, the TPO/DRP failed to appreciate the aforesaid facts and took a view that the Asset was ITA No. 7718/Mum/2012 Assessment Year: 2008-09 10 used by the AE of the Appellant. The TPO relied upon an internal invoice, dated 24.06.2007, to arrive at the aforesaid conclusion. Whereas the DRP, despite accepting that the Asset was put to use in October, 2006 in India (which was before the aforesaid invoice date of 24.06.2007), concluded that the Asset was previously used by the AE of the Appellant. Given the fact that DRP has returned the finding that Asset was put to use in October 2006, the date of 24.06.2007 stated in the invoice cannot be the sole basis to conclude that the Asset was used outside India. As per invoice, dated 29.11.2005, raised by Redington (India) Ltd., the Asset was to be delivered in at Mumbai, in Maharashtra, India. Further, the Appellant has also placed on record (at page 227 to 231 of the paper-book) email correspondences, dated 11.10.2011, with the employees of Redington (India) Ltd. wherein it has been confirmed that the Asset was delivered in Mumbai. In view of the aforesaid, we find merit in the contention advanced on behalf of the Appellant in this regard and conclude that the Asset was a new asset that was used for the first time by the Appellant in India. Further, we note that the TPO has arrived at ALP by using CUP method by merely taking WDV of the Asset without considering any other factor. In the case of ACIT, Circle-I, Hosur Vs. Interpump Hydraulics India (P.) Ltd (supra), while examining identical issue, the Tribunal has held as under: “3. On the contrary, Shri R.E. Balasubramanyam, ld. Representative for the assessee submitted that under the CUP method, the price paid for the property transferred shall be compared with uncontrolled transactions which are identified. Such compared price with uncontrolled transaction shall be adjusted to account for the difference between the international transaction of the assessee and the comparable uncontrolled transaction identified. The price so arrived at has to be taken as ALP in respect of the property transferred. In fact, the Assessing Officer has taken the written down value without identifying any comparable case in the uncontrolled ITA No. 7718/Mum/2012 Assessment Year: 2008-09 11 transaction. The ld. Representative further submitted that the written down value may not always reflect the market value of the property. The Assessing Officer without identifying any transaction, has simply taken the written down value of the machinery. No doubt, every machinery used for manufacturing activity would naturally depreciate its value on passage of time. Even though a statutory deduction was provided under the Income-tax Act and the Companies Act, the price of the machinery has to be compared with comparable machinery in the uncontrolled market. Such an exercise was not done by the TPO and the Assessing Officer. Therefore, the DRP found that adopting written down value as ALP under the CUP method is not justified. Therefore, the downward adjustment made by the TPO to the extent of Rs. 2,53,43,940/- was rightly found to be not warranted by the DRP. 4. We have considered the rival submissions on either side and also perused the material available on record. We have carefully gone through the provisions of Rule 10B of the Income-tax Rules, 1962. Rule 10B(1) provides method for determination of Arm's Length Price in Comparable Uncontrolled Price method. For the purpose of convenience, we reproduce below Rule 10B(1): "10B(1) For the purpose of sub-section (2) of section 92C, the arm's length price in relation to an international transaction [or a specified domestic transaction] shall be determined by any of the following methods, being the most appropriate method, in the following manner namely:— (a) Comparable uncontrolled price method, by which- (i) The price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions, is identified. ( i i ) (ii) Such price is adjusted to account for differences, if any, between the international transaction [or the specified domestic transaction] and the comparable uncontrolled transactions or between the enterprises entering into such transactions, which could materially affect the price in the open market. ITA No. 7718/Mum/2012 Assessment Year: 2008-09 12 ( i i i ) (iii) The adjusted price arrived at under sub-clause (ii) is taken to be an arm's length price in respect of the property transferred or services provided in the international transaction..... As rightly submitted the by the ld. Representative for the assessee, when the transaction was compared by taking CUP method as the most appropriate method, the price charged or paid by the assessee for the property transferred needs to be compared in a comparable uncontrolled transaction or a number of such transactions, as identified. Therefore, it is obligatory on the part of the TPO to identify the comparable transaction in the uncontrolled transaction for the purpose of determining the ALP. In this case, the TPO has not taken any pain to identify the comparable transaction so as to compare the price paid by the assessee for purchasing the machinery from its holding company. When the price was determined by comparing the uncontrolled transaction, the difference between the price paid by the assessee and the price so determined in a comparable uncontrolled transaction has to be worked out and the difference between the two shall be taken as the ALP. Unfortunately, the TPO has not taken any pain either to identify the comparable transaction or to identify the price paid by the third party company in the uncontrolled transaction. The TPO has simply compared the written down value of the machinery. 5. As rightly submitted by the ld. Representative for the assessee, depreciation is provided for all machineries used for production of an article or thing and other capital asset under the Income-tax Act. A machinery would automatically depreciate when it was put to use in the manufacturing activity. When the machinery was sold, the buyer of the machinery would naturally look for the efficiency and life of the machinery after the purchase. Therefore, the written down value may be one of the factor to be taken into consideration for determining the value of the machinery. However, in view of the specific provision in Rule 10B(1)(a) of the Income-tax Rules, written down value cannot be a determining factor to decide the ALP. The value of the machinery has to be compared with identified transaction in the uncontrolled market. Since such an exercise was not done by the ITA No. 7718/Mum/2012 Assessment Year: 2008-09 13 TPO, this Tribunal is of the considered opinion that the DRP has rightly found that the sale price between the two parties cannot be merely on the basis of the written down value. Therefore, the DRP has rightly found that adopting written down value as ALP under the CUP method is not justified. Hence, this Tribunal do not find any reason to interfere with the order of the lower authority. Accordingly, the same is confirmed.‖ (Emphasis Supplied) 14. Similarly, in the case of ACIT, Central Circle-22(1), New Delhi Vs. Sarens Heavy Lift (I) (P) Ltd. (supra) the Tribunal decline to interfere with the order passed by the DRP wherein the DRP had accepted the contention of the assessee that the WDV of the machinery in the books of accounts of an associated enterprises cannot be considered as ALP for transaction of purchase of such machinery by such assessee from the associated enterprises. The Tribunal held that the Transfer Pricing Officer was not justified in making transfer pricing addition merely by taking Written Down Value of machinery as the ALP. The relevant extract of the aforesaid decision of the Tribunal read as under: ―19. However, the Assessing Officer ignored this material available on record and proceeded to determine the ALP basing on the written down value of the cranes as recorded in the books of the seller by applying the CUP method. Ld.DRP accepted the contention of the assessee that the written down value of cranes in the books of the associated enterprise of the assessee cannot be considered as ALP and is not derived from the transaction between enterprises other than associated enterprises. Further ld. DRP observed that it is nobody's case that an old asset cannot be sold at a price exceeding net book value. Having considered the decisions relied upon by the assessee in support of their contention that either the valuation done by the chartered engineer, or the value accepted by the custom authorities, or the value derived by DCF method could be considered for a determination of the ALP. Ld. DRP considered the details furnished by the assessee as per these 3 valuations namely, as valued by the chartered engineer, are as valued by the customs ITA No. 7718/Mum/2012 Assessment Year: 2008-09 14 authorities, or as valued by following the DCF method and having done all this exercise DRP reach the conclusion that the method adopted by the Assessing Officer is not an acceptable one. 20. We have gone through the decisions relied upon by the assessee. As a matter of fact DRP extracted the relevant portions of the decision reported in Tecumseh (supra) in support of their reasoning and conclusion. In the circumstances, we are in agreement with the DRP that the assessee justified the price paid by them with the valuation done by the independent chartered engineers, or the customs authorities or determined under DCF method. The reasoning given by the DRP to reach the conclusion that the additions cannot be sustained is impeccable and we find it difficult to take a different view in view of the said legal position. 21. We, therefore, are of the opinion that the impugned directions given by the ld. DRP do not suffer an illegal infirmity so as to invite the interference of this tribunal in this appeal. With this view of the matter we find the grounds of appeal are devoid of merits and the appeal is liable to be dismissed. Consequently while upholding the directions given by the ld. DRP, we dismiss the appeal of the Revenue. In view of the dismissal of the appeal, cross objection preferred by the assessee becomes in fructuous and therefore, the Cross Objection is also dismissed.‖ 15. In the case before us, the TPO has determined ALP by computing WDV of the Asset without making any effort to identify a comparable transaction or the price paid by third party. Further, while doing so the TPO has taken depreciation rate of 60% as per the provisions of the Act without considering any other factor(s). Therefore, respectfully following the above decision of the Tribunal, we delete the transfer pricing addition of INR 1,50,75,835/-. Ground No. 2.2 raised by the Appellant is allowed. Ground No. 2.3 16. Ground No. 2.3 pertains to addition on account of transfer pricing adjustment of INR 42,40,116/- made in the Final Assessment Order, ITA No. 7718/Mum/2012 Assessment Year: 2008-09 15 dated 30.10.2012, on account of reimbursement of out of pocket expenses by the Appellant to its AE. 17. The relevant facts for the adjudication of the issue, in brief, are that the Appellant had claimed deduction for payments of INR 1,95,10,810/- made by the Appellant to its AEs contending the same to be reimbursement of out of pocket expenses incurred by the AEs on behalf of the Appellant. Since, the Appellant could only furnished bills for INR 1,52,70,694/-, the TPO determined ALP of the balance out of pocket expenses of INR 42,40,116/- to be ̳Nil‘ and proposed transfer pricing adjustment of INR 42,40,116/-, which was incorporated in the Draft Assessment Order. The Appellant filed objections before the DRP. However, the DRP declined to grant any relief to the Appellant holding that the Appellant was not able to justify the claim of expenditure by furnishing supporting bills/documents before the TPO. Since, the Appellant had failed to discharge the burden cast upon it, the aforesaid disallowance/adjustment of INR 42,40,116/- was unjustified. Accordingly, Assessing Officer made disallowance of the same in the Final Assessment Order, dated 30.10.2012. Being aggrieved, the Appellant has carried the issue in appeal before us. The Ld. Authorised Representative for the Appellant submitted that the relevant documents supporting out of pocket expenses were filed before lower authorities on sample basis. Out of total out of pocket expenses of INR 1,95,10,810/- claimed by the Appellant, bills for expenses of INR 1,52,70,694/- were furnished by the Appellant and the same were accepted by the TPO. No defect or discrepancy was been pointed out by the TPO in the bills/documents furnished by the Appellants and therefore, the Appellant has materially complied with the directions issued by the TPO by furnishing of the supporting bills/documents in for around 80% of the out of pocket ITA No. 7718/Mum/2012 Assessment Year: 2008-09 16 expenses. He submitted that the Assessing Officer was not justified in insisting upon the Appellant to furnish 100% of the bills/supporting documents in support of claim for direction of out of pocket expenses. In view of the aforesaid, he prayed that the addition of INR 42,40,116/- to be deleted. Per contra, the Ld. Departmental Representative submitted that the TPO had asked for the bills/supporting vouchers in relation to the expenses which the Appellant has, admittedly failed to furnish and therefore, the Assessing Officer was justified in making the addition of INR 42,40,116/-. 18. We have heard the rival submissions and perused the material on record. While we are not inclined to accept the contention advanced on behalf of the Appellant that an assessee cannot be directed to produce bills/supporting documents pertaining to entire amount of expenses claimed as deduction, we are also alive to the possible burden an assessee would be subjected to during the assessment proceedings in case such a direction is issued to the assessee. However, in cases where the bills and/or supporting documents called for during the assessment proceedings are not furnished, or have been furnished but the same are not found to be sufficient or satisfactory by the assessing officer, the assessing officer would, in our view, be justified in calling for any/all details and/or bills & supporting documents as the Assessing Officer may deem fit. We note that the Appellant is under obligation to maintain proper books of accounts including voucher and documents to support the claim of expenditure. The Appellant has been subjected to statutory as well as tax audit for the relevant assessment year, and no qualifications regarding accounting systems followed by the Appellant or the books of accounts maintained by the Appellant have been made by the Auditors in the audit report and has ITA No. 7718/Mum/2012 Assessment Year: 2008-09 17 certified the financial statements to be true and correct after carrying out verification on test check basis. Further, the TPO/Assessing Officer has not pointed out any defect/discrepancy in the bills/supporting documents furnished by the Appellant which constitute 78% of the out of pocket expenses reimbursed by the Appellant to its AE. The Appellant has not furnished bills/supporting documents for INR 42,40,116/- which constitute balance 22% out of pocket expenses reimbursed and only 3.5% [(42,40,116/11,85,22,998) x 100] of the total expenses reimbursed by the Appellant to its AEs for the relevant assessment year. In view of the aforesaid facts, we are inclined to accept the submission advanced by the Ld. Authorised Representative for the Appellant that the Appellant has substantially complied with the directions given by the Assessing Officer and therefore, in our view, the TPO/Assessing Officer was not justified in making additions of INR 42,40,116/-. Further, in our view, the TPO has also failed to determine the ALP of the transaction and has, in effect, made disallowance holding that the Appellant had failed to substantiate the claim. Accordingly, in view of the aforesaid, we delete the addition of INR 42,40,116/-. Ground No. 2.3 raised by the Appellant is allowed. Ground No. 3 19. In Ground No. 3, the Appellant has contended that the double adjustment to the extent of INR 19,94,441/- has been made in the Final Assessment Order leading to double addition. The Ld. Authorised Representative for the Appellant, referring to the calculation of the double adjustment of INR 19,94,441/- (at page 288 of the paper book), submitted that this issue can be remanded back to the file of Assessing Officer for verification. We note that the amount of INR 19,94,441/- has been computed taking into ITA No. 7718/Mum/2012 Assessment Year: 2008-09 18 account the adjustment/disallowance made in respect of expenses pertaining to Assessment Year 2007-08 and 2008-09 for the period preceding the date of execution of Inter-Corporate Agreement, dated 07.01.2008 and reimbursement of out of pocket expenses. While disposing off Ground No. 2.2 and 2.3 hereinabove, we have deleted the additions made in respect of the aforesaid expenses. Accordingly, we remand this issue back to the file of Assessing Officer for verification/re-computation, keeping in view our findings in relation to Ground No. 2.2 & 2.3 above, as well as the contentions of the Appellant. In view of the aforesaid, Ground No. 3 is allowed for statistical purposes. Ground No. 4 &5 20. Ground No. 4 pertains to disallowance of IT Connectivity Charges and Software Expenses aggregating to INR 80,07,197/-. The Ld. Authorised Representative for the Appellant appearing before us submitted that the aforesaid expenses were disallowed on the ground that the same were capital in nature and depreciation @ 60% was allowed in respect of the same. The appellant does not wish to press this Ground of appeal. Accordingly, Ground No. 4 of the appeal is dismissed as not pressed. 21. Ground No. 5 pertains to computation of loss at INR 10,68,91,995/- instead of INR 11,65,00,631/-. The Ld. Authorised Representative for the Appellant submitted that while computing the total loss the Assessing Officer has committed computation error. The Assessing Officer has disallowed IT Connectivity Charges and Software Expenses aggregating to INR 80,07,197/- and thereby, correctly reduced the loss claimed by the Appellant. However, while granting corresponding deprecation of INR 48,04,318/- [INR 80,07,197 @ 60%], the Assessing Officer has not increased the amount of loss ITA No. 7718/Mum/2012 Assessment Year: 2008-09 19 claimed by the corresponding depreciation amount and committed the computational error by reducing the loss claimed by the depreciation amount. We have perused the record and find merit in the submissions advanced by the Ld. Authorised Representative for the Appellant. We note that the Assessing Officer has after adding the additions/disallowance to the loss of INR 18,87,50,293/- declared by the Appellant arrived at reduced loss of INR 11,16,96,313/-. Though, in the computation table, the Assessing Officer has correctly stated that as under: (-) 11,16,96,313/- Less depreciation on software @ 60% 48,04,318/- The Assessing Officer has incorrectly added the depreciation amount of INR 48,04,318/- to arrive at incorrect figure of loss of INR 10,68,91,995/- instead of correct figure of INR 11,65,00,631/-. In view of the aforesaid, the Assessing Officer is directed to increase the amount of loss by the amount of by the depreciation amount of INR 48,04,318/-. Ground No. 5 raised by the Appellant is allowed. Ground No. 6 22. The Ld. Authorised Representative for the Appellant appearing before us submitted that the amount in dispute is only INR 24,855/-. Therefore, on account of the smallness of the amount in dispute, the Appellant does not wish to press this ground. Accordingly, Ground No. 6 is disposed off as not pressed. Ground No. 7 23. Ground No. 7 pertains to disallowance of INR 6,27,151/- made by the Assessing Officer after carrying out verification of total expenses of INR 2,41,30,833/- incurred by the Appellant during the relevant previous year but prior to execution of the Inter-Corporate ITA No. 7718/Mum/2012 Assessment Year: 2008-09 20 Agreement dated 07.01.2008. The relevant extract of the Final Assessment Order read as under: ―Further, vide para 10 of the directions the Hon‘ble DRP directed to the Assessing Officer to verify expenditure incurred of Rs. 2,41,30,833/- prior to signing of agreement. Following the direction of Hon‘ble DRP, the assessee was given an opportunity to make his submission in this regard required for verification of expenditure. In response to same the assessee made submission vide letter dated 09.10.2012. The submission made by the assessee was carefully perused and considered. This exercise revealed that out of expenses of Rs. 2,41,30,833/- the assessee made a payment of Rs. 6,27,151/- to M/s KPMG. On enquiry it has been noticed that this expenditure was mainly incurred by way of payment of professional fees to KPMG for rendition of services to expats. This act of the assessee tantamount of bearing the expenses of employees i.e. third party which cannot be considered for allowance especially in the light of the fact that the assessee at no point of time produced any evidence to show that this amount has been included in the hands of expats employees as perquisites as required by the provisions of 17(2)(iv) of the Income Tax Act, 1961. Therefore, the disallowance to the extent of Rs. 6,27,151/- is sustained. As a result, the addition to the extent of difference Rs. 2,35,03,682/- (2,41,30,833 – 6,27,151) stands deleted as the expenditure has been incurred wholly and exclusively for the purpose of business.‖ 24. The Ld. Authorised Representative for the Appellant submitted that all the necessary documents supporting the fact that the aforesaid expenses were incurred wholly and exclusively for the purpose of business of the Appellant were placed before the Assessing Officer. In this regard, he referred to the details of third party invoices given at page 231 of the paper-book, as well as letter dated 23.10.2012, filed before the Assessing Officer. He submitted that the aforesaid payments were incidental to the business of the Appellant. The services provided by expats helped the Appellant to establish efficient business structure. The aforesaid payments were to facilitate the business of the Appellant and were not in the nature of personal services rendered by the third party service provider to ITA No. 7718/Mum/2012 Assessment Year: 2008-09 21 the employees of the Appellant. Per contra, the Ld. Departmental Representative referred to invoices (placed at page 75 to 81 of the paper-book) and submitted that the services were essentially for the benefit of the employees of the Appellant and not the Appellant. The Assessing Officer has returned a finding that during the assessment proceedings, the Appellant had failed to produce any evidence to show that this amount has been included in the hands of expats employees as perquisites as required by the provisions of 17(2)(iv) of the Act. Therefore, the Assessing Officer was justified in making the addition of INR.6,27,151/-. 25. We have considered the rival submissions and perused the material on record. The finding returned by the Assessing Officer that the amount of INR 6,27,151/- has not been included in the hands of the employees as prerequisites has been sought to be controverted by the Ld. Authorised Representative for the Appellant by contending that the aforesaid expenses were incurred wholly and exclusively for the purpose of business. We note that vide letter dated 23.10.2012 (placed at page 301 to 303 of the paper-book) the Assessing Officer had given the following break-up of expenses paid to KPMG. Sr. No. Particulars Amount (INR) 1 Assistance on tax to be withheld made by Woolworth Limited 73,559 2. Arrival/Departure tax briefing for employee and tax returns for employees 5,53,039 3. Visa Application 1,42,343 4. Tax equalization reconciliation 57,546 5. Advice in respect of the changes to the taxation of stock options in India 55,568 Total 8,82,055 26. Out of the aforesaid expenses aggregating to INR 8,82,055/-, the Assessing Officer has disallowed INR 6,27,151/-. Having perused the ITA No. 7718/Mum/2012 Assessment Year: 2008-09 22 material on record including invoices, we concur with the Assessing Officer to the extent of disallowance of INR 5,53,039/- being payments made by the Appellant for arrival/departure tax briefing for employees and tax returns for employees only. In our view, the aforesaid amount was not incurred wholly and exclusively for the benefit of the Appellant and was for the personal benefit of employees. The aforesaid amount has also not been taxed as prerequisite in the hands of the employees. Accordingly, disallowance of INR 5,53,039/- is confirmed while balance disallowance of INR 74,112/- is deleted. In view of the aforesaid, Ground No. 7 is partly allowed. Additional Grounds 27. The Appellant had, vide letter dated 17.04.2014, raised an additional ground(s) pertaining to claiming deduction for INR 71,93,907/- pertaining to payment made to non-resident in the financial year relevant to Assessment Year 2008-09 on which tax was deducted/deposited on 26.06.2009. In view of the statement made by the Ld. Authorised Representative for the Appellant under instructions, the additional ground(s) are disposed off as being not pressed. 28. In the result, appeal filed by the Appellant is partly allowed. Order pronounced on 13.10.2022. Sd/- Sd/- (Amarjit Singh) Accountant Member (Rahul Chaudhary) Judicial Member म ुंबई Mumbai; दिन ुंक Dated : 13.10.2022 Alindra, PS ITA No. 7718/Mum/2012 Assessment Year: 2008-09 23 आदेश की प्रतितिति अग्रेतिि/Copy of the Order forwarded to : 1. अपील र्थी / The Appellant 2. प्रत्यर्थी / The Respondent. 3. आयकर आय क्त(अपील) / The CIT(A)- 4. आयकर आय क्त / CIT 5. दिभ गीय प्रदिदनदि, आयकर अपीलीय अदिकरण, म ुंबई / DR, ITAT, Mumbai 6. ग र्ड फ ईल / Guard file. आिेश न स र/ BY ORDER, सत्य दपि प्रदि //True Copy// उप/सह यक पुंजीक र /(Dy./Asstt. Registrar) आयकर अपीलीय अदिकरण, म ुंबई / ITAT, Mumbai