M/S. M N DASTUR & COMPANY PRIVATE LIMITED,BANGALORE V. DCIT, CIRCLE-4(1)(1), BANGALORE

ITTPA 2372/BANG/2024

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The case involves MN Dastur and Company Pvt. Ltd., which appealed against the assessment order for the year 2021-22 concerning various transfer pricing adjustments and disallowances of expenses. The primary contention was the incorrect computation of transactions with Associated Enterprises (AEs) and the subsequent adjustments made by the TPO. The Tribunal found that the TPO had not properly considered the actual transactions and had applied incorrect benchmarks for determining the Arm's Length Price (ALP). Additionally, issues related to the disallowance of legal and travel expenses were also remanded back for re-examination to ensure they were assessed in the correct accounting period and were substantiated by adequate documentation.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 315678 (ITAT-BANGALORE)
• Appeal Type: Income Tax (Transfer Pricing) Appeal
• Pronouncement Date: 13-05-2025
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Assessment Year: 2021-2022
• Other Referred Cases: CIT v. Hindustan Unilever Ltd., 99 taxman.com 134 (SC), Tokai Rika Minda India Pvt. Ltd. vs DCIT, ITA No. 1513/Bang/2017, Goetze (India) Ltd. v. CIT [(2006) 284 ITR 323 (SC)]
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Matter Remanded
• Court: TRIBUNAL
• Department Lawyers: NEERA MALHOTRA
• Assessee Lawyers: K R PRADEEP; GIRIJA ADVOCATES
• Keywords: Set aside; Opportunity of being heard; Revised return; Transfer pricing; International transaction; Corroborative evidences; Principle of natural justice; TDS
• Section: 143(3); 37; 28; 37(1); 92F

Judgement Text

" IN THE INCOME TAX APPELLATE TRIBUNAL ‘C’ BENCH, BANGALORE BEFORE SHRI WASEEM AHMED, ACCOUNTANT MEMBER AND SHRI SOUNDARARAJAN K, JUDICIAL MEMBER IT(TP)A No. 2372/Bang/2024 Assessment Year: 2021-22 MN Dastur and Company Pvt. Ltd., 7th Floor, Raheja Towers, 26/27, M.G Road, Bangalore – 560 001. PAN – AABCM 2136 M Vs. The Dy. Commissioner of Income Tax, Circle – 4(1)(1), Bangalore. APPELLANT RESPONDENT Assessee by : Shri KR Pradeep and Smt. Girija - Advocates, Revenue by : Ms. Neera Malhotra, CIT (DR) Date of hearing : 05.03.2025 Date of Pronouncement : 13.05.2025 O R D E R PER WASEEM AHMED, ACCOUNTANT MEMBER: This is an appeal filed by the assessee against the assessment order dated 21/10/2024 in DIN No. ITBA/AST/S/143(3)2024- 25/10698294301(1) for the assessment year 2021-22. 2. The issues raised by the assessee at ground Nos. 1 to 6 of its appeal memo, are general in nature which do not require any separate adjudication. Accordingly, these grounds are dismissed as infructuous. 3. The 1st issue raised by the assessee at ground Nos. 7 to 9 of appeal memo is that the Ld. AO/TPO/DRP erred in considering the ITA No.21/Bang/2025 Page 2 of 18 . transactions with AEs Rs. 5,99,99,183/- whilst the actual transactions with AEs take place is of Rs. 4,80,72,168/- only and further erred making upward adjustment of Rs. 15,01,29,577 which shows application of mind. 4. The facts in brief are that the assessee is a private limited company and engaged in providing consulting engineering services and software engineering services to domestic as well as international customers. 5. The assessee in the year under consideration has entered into international transactions with its two AEs under the EDS (Engineering Design Services) segment which are as detailed under; 6. The assessee has adopted the TNMM method to benchmark said transactions and computed the PLI (OP/TC) as 4.56 for AEs and 1.51 for Non-AEs. ITA No.21/Bang/2025 Page 3 of 18 . 7. The TPO on the other hand disregarded the computation of PLI made by the assessee and recomputed the PLI of the assessee at 1.97 only. The TPO after that has made the procedure of selection of comparables companies to get the ALP by applying certain filter criteria and selected 6 comparable companies as tabulated below. 8. The TPO thus reached the conclusion that there is need to make an adjustment of Rs. 15,01,29,577/- on account of TP adjustment u/s 92CA under EDS segment. ITA No.21/Bang/2025 Page 4 of 18 . 9. The AO accordingly has made the draft assessment order by making the TP adjustment of Rs. 15,01,29,577/- under EDS segment against which assessee has filed the objection before DRP where DRP has confirmed the adjustment made by the AO on account of TP adjustment of Rs. 15,01,29,577/- only. 10. Being aggrieved by the order of the Ld. DRP, the assessee is in appeal before us. 11. The Ld. AR before us filed a paper book along-with the appeal set running from pages 1 to 820, one page summery highlighting the issue involved and submitted that the TPO has incorrectly considered the total transactions with AEs at ₹5,99,99,183/-, while the actual transactions amounted only to ₹4,80,72,168/- only. It was submitted that no opportunity was granted to reconcile the figures before the TPO, and therefore, the adjustment computed is excessive and without proper foundation. 11.1 The ld. AR further submitted that the TPO to determine the ALP of international transactions with AEs, has benchmarked the entire turnover of the assessee rather only applying to transactions with AEs. The Ld. AR before us prayed to restore the issue to the file of the TPO for fresh adjudication as per the provisions of law. 12. On the other hand, the Ld DR vehemently supported the order of the authorities below but raised no objection if the matter is set aside to the file of the TPO for fresh adjudication as per the provisions of law. ITA No.21/Bang/2025 Page 5 of 18 . 13. We have considered the rival submissions of both the parties and perused the materials available on record. From the preceding discussion, we note that the TPO has incorrectly considered the total transactions with AEs at ₹5,99,99,183/-, while the actual transactions amounted only to ₹4,80,72,168/- only. Furthermore, we also find that no opportunity was granted to reconcile the figures before the TPO, and therefore, the adjustment computed is excessive and without proper foundation. 13.1 Likewise, we further note that the TPO to determine the ALP of international transactions with AEs, has benchmarked the entire turnover of the assessee rather only applying to transactions with AEs. In this regard, we find relevant to refer the decision of Hon’ble Supreme Court given in the case of CIT v. Hindustan Unilever Ltd., 99 taxman.com 134 (SC) wherein it was held that while determining the ALP of international transactions, benchmarking has to be done only on Associated Enterprises transactions and not for the entire turnover. Thus, in view of this, we find force in the argument of the ld. AR that the TP adjustment should be restricted only to international transactions entered with AEs. 13.2 Moreover, the Bangalore Bench of the Tribunal in the case of Tokai Rika Minda India Pvt. Ltd. vs DCIT reported in ITA No. 1513/Bang/2017, held that where the quantum of international transactions itself is disputed and not properly verified by the TPO, the matter should be remanded back for proper verification and fresh adjudication. Thus, regarding the quantum of international transactions or benchmarking approach without proper verification, the matter ought to be restored back to the file of the TPO for reconsideration after ITA No.21/Bang/2025 Page 6 of 18 . granting proper opportunity to the assessee. It is because, the proper verification of the actual value of international transactions is a sine qua non for correct determination of the Arm’s Length Price (ALP). Following the ratio laid down in Tokai Rika Minda India Pvt. Ltd. (supra), we deem it appropriate to restore the matter back to the file of the TPO for fresh adjudication. The TPO shall verify the correct value of international transactions with the AEs and thereafter recompute the Arm’s Length Price after granting an opportunity of being heard to the assessee and by following the principles of natural justice. Accordingly, the Ground Nos. 7 to 9 are allowed for statistical purposes. 14. The 2nd issue raised by the assessee is that the Ld. AO/TPO/DRP erred in making the upward adjustment of Rs. 81,32,280/- on account of interest on delayed receivables by applying the rate 5.186% which is LIBOR plus 450 basis points. 15. The TPO on perusal of form 3CEB noted that the assessee has not benchmarked the receivables transaction separately. The TPO was of the view that delay in payment from the AEs receivable is nothing as much as interest free loan and it is an international transaction covered u/s 92B(1) read with clause (v) of section 92F of the Act. The TPO also was of the view that each international transaction with AEs will be benchmarked separately and accordingly treating the assessee as tested party find out the SBI PLR interest rate as an appropriate ALP. It is because, the TPO also was of the view that where the invoice has been raised in Indian currency then interest will be charged by applying SBI PLR and where invoice has been raised in foreign currency then interest will be charged by applying LIBOR plus markup. ITA No.21/Bang/2025 Page 7 of 18 . 15.1 The TPO in the absence of invoice wise details and proper documentation computed the interest of Rs. 1,92,40,856/- on average net receivables by applying the SBI PLR 12.27% which are as detailed under: 15.2 The TPO thus reached the conclusion that there is need to make an adjustment of Rs. 1,92,40,856/- under TP adjustment u/s 92CA on account of interest on delayed receivables. The TPO accordingly has made the draft assessment order by making the TP adjustment of Rs.1,92,40,856/- on account of interest on delayed receivables against which assessee has filed the objection before DRP where DRP has directed to TPO to re-compute the interest on delayed receivables by applying the LIBOR with appropriate mark-up after providing credit period of 60 days. ITA No.21/Bang/2025 Page 8 of 18 . 15.3 The TPO accordingly recomputed the interest of Rs. 81,32,280/- on delayed receivables by applying the 6 months LIBOR 0.686% and add mark-up of 450 basis points which comes to Rs. 5.186%. 16. Being aggrieved by the order of the Ld. DRP/ TPO/AO, the assessee is in appeal before us. 17. The Ld. AR before us submitted that the interest on receivables is not an international transaction and therefore, the same should not be subject to TP adjustment. Without prejudice, the ld. AR submitted that the impugned adjustment has been made without giving the opportunity to the assessee, therefore, the same needs to be set-aside to the file of the TPO for fresh adjudication as per law. 18. On the contrary, the Ld. DR vehemently supported the order of the authorities below. 19. We have heard the rival contentions of both the parties and perused the materials available on record. We find merit in the submissions of the assessee. As per CBDT Instruction No. 15/2015, it has been clarified that in case of foreign currency denominated receivables, interest should be benchmarked with reference to the international LIBOR rate applicable to the currency involved plus a margin of 200 basis points, unless there are specific circumstances to deviate. 19.1 In the instant case, no specific justification has been brought on record by the TPO/DRP for adopting a mark-up of 450 basis points over LIBOR. In view of the binding CBDT Instruction and to maintain ITA No.21/Bang/2025 Page 9 of 18 . consistency, we deem it appropriate to restore this issue back to the file of the TPO with a direction to recompute the TP adjustment, if any, by applying 6-month LIBOR plus 200 basis points, after granting the standard credit period of 60 days, as directed by the DRP. The assessee shall be afforded a reasonable opportunity of being heard. Accordingly, this ground is allowed for statistical purposes. 20. The 3rd issue raised by the assessee is that the Ld. AO/DRP erred in disallowing the sum of Rs. 93,02,189/- claimed under the head of Travelling Conveyance, Motorcar upkeep expenses. 21. The assessee in the year under consideration has claimed the expenses of Rs. 2,06,00,997/- under the head Travelling, Conveyance & Motor upkeep expenses in which the sum of Rs. 93,02,189/- related to payments incurred in the year 2016 but was claimed in the year under consideration. 22. The assessee claims that such expenditures were incurred for providing the lodging, fooding, travelling to officials of one of its clients M/s Libiya Iron and Steel Company, therefore such expenses are allowable expenses u/s 37 of the Act. The assessee in support of its claim furnished the copy of invoices during the assessment proceedings. 23. The AO however was of the view that the expenditure of Rs. 93,02,189/- was incurred in the year 2016 therefore such expenditure would have been claimed in that year and again allowance of such expenses will lead to double allowance. ITA No.21/Bang/2025 Page 10 of 18 . 24. The AO accordingly disallowed the sum of Rs. 93,02,189/- out of total expenditure of Rs. 2,06,00,997/- claimed under the head Travelling, Conveyance & Motor upkeep expenses and added to the total income of the assessee. 25. The assessee carried the matter before the Ld. DRP but not get any relief. 26. Being aggrieved by the order of the Ld. DRP/AO the assessee is in appeal before us. 27. The Ld. AR before us submitted that the impugned expenses were incurred exclusively for the business purposes as evident from the details placed on pages 261 to 749 of the paper book. 28. On the contrary, the Ld. DR vehemently supported the order of the authorities below. 29. We have heard the rival submissions of both the parties and carefully perused the materials on record. It is observed that the lower authorities have not properly verified whether the expenditure claimed in the year under consideration has already been claimed or allowed in the earlier year, or whether the claim is permissible under the applicable provisions of the Income Tax Act, 1961. 29.1 The issue requires examination in the context of the relevant provisions of the Act, particularly considering the principles of accrual accounting, crystallization of liability, and whether the claim is allowable in the year under consideration. ITA No.21/Bang/2025 Page 11 of 18 . 29.2 In view of the above, we deem it fit and proper to set aside the impugned order on this issue and restore the matter to the file of the Assessing Officer with the following directions: • The AO shall re-examine the allowability of the expenditure in light of the provisions of the Income Tax Act, 1961, including but not limited to sections 28 to 37. • The AO shall verify whether the expenditure has already been claimed or allowed in any preceding year. • The AO shall determine whether the liability in respect of such expenditure crystallized during the current year. 29.3 The assessee shall be afforded a reasonable opportunity of being heard and to file supporting evidences, if any, in support of its claim. Accordingly, this ground of appeal is allowed for statistical purposes. 30. The 4th issue raised by the assessee is that the Ld. AO/DRP erred in disallowing the sum of Rs. 2,00,00,000/- claimed under the head Legal Expenses. 31. The assessee in the year under consideration has claimed the sum of Rs. 214.60 lacs under the head legal expenses in which Rs. 2,00,00,000/- was paid to an advocate, Mr. K R Pradeep for rendering the services as discussion, advice, consultation, appearance, and representation before various income tax authorities with respect to income tax proceedings of various assessment years starting from 1995- 96 to 2020-21. The assessee in support of its claim furnished the ledger and TDS certificate of the advocate, Mr. K R Pradeep. ITA No.21/Bang/2025 Page 12 of 18 . 31.1 The AO on the other hand noted that the assessee in support of claim of legal expenses of Rs. 2,00,00,000/- under the head legal expenses don’t furnish the details of litigation, date & time of appearance before the income tax authorities, copy of invoices/bills. 31.2 The AO was of the view that litigation starting from the year 1995-96 to 2020-21 is not possible to still carryon and the claim of the assessee that it incurred huge expenses towards the payment of legal fees in a single year cannot be possible. 31.3 The AO also noted that the assessee in the immediately preceding year has claim the sum of Rs. 14.60 lacs under the head legal expenses which is very low as compared to the expenses of Rs. 214 lacs claimed under the head legal expenses in the year under consideration. 31.4 The AO thus in view of the above disallowed the claim of Rs. 2,00,00,000/- out of total claim of Rs. 2,14,60,884/- under the head legal expenses and added to the total income of the assessee. 31.5 The assessee carried the matter before the Ld. DRP where the Ld. DRP also in the absence of proper explanation and supporting documents rejected the claim of the assessee. 32. Being aggrieved by the order of the Ld. DRP/AO the assessee is in appeal before us. ITA No.21/Bang/2025 Page 13 of 18 . 33. The Ld. AR before us drew our attention on pages 256 to 260 of the paper book, containing the details of legal expenses so as to justify that such expenditures were incurred for the purpose of the business. 34. The Ld. DR, on the other hand, vehemently supported the order of the authorities below. 35. We have considered the rival submissions and materials available on record. It is observed that the lower authorities have not properly examined whether the legal services, though rendered in respect of issues pertaining to earlier assessment years, crystallized into an obligation to pay during the year under consideration and whether such claim is allowable under the provisions of the Income Tax Act, 1961. 35.1 It is a settled principle that an expenditure, even if relatable to earlier proceedings, may be allowable in the year in which the liability to pay crystallizes, subject to satisfaction of the conditions laid down under sections 28 to 37 of the Act. 35.2 Therefore, in the interest of justice, we deem it fit and proper to set aside the impugned order on this issue and restore the matter to the file of the Assessing Officer with the following directions: • The Assessing Officer shall verify whether the liability to pay the legal expenses actually crystallized during the year under consideration. • The Assessing Officer shall further examine whether the services rendered were wholly and exclusively for the purposes of the business of the assessee. ITA No.21/Bang/2025 Page 14 of 18 . 35.3 The claim shall be adjudicated afresh in accordance with the provisions of the Income Tax Act, 1961, after granting adequate opportunity to the assessee to furnish supporting evidence. Accordingly, this ground of appeal is allowed for statistical purposes. 36. The 5th issue raised by the assessee is that the Ld. AO/DRP erred in again disallowing the claim of Rs. 46,04,24,257/- which is already disallowed in the computation of total income. 37. The assessee in the year under consideration has claimed the expenses being the provision for diminishing in the value of investment amounting to Rs. 46,04,24,157/- under the head exceptional items in profit & loss account. The assessee during the assessment proceedings claims that the disallowance of provision of Rs. 46,04,24,257/- could not be made in computing the income from business because of technical error however, submits the revised commutation of income after disallowing the provision of Rs. 46,04,24,157/- which reduces the loss shown in the original return of income. However, the AO after considering the reply of the assessee has made the disallowance of provision of Rs. 46,04,24,257/- only and added to the total income of the assessee. 38. The assessee carried the matter before the Ld. DRP where Ld. DRP confirms the disallowance made by the AO by observing that assessee is required to submit the revised return of income for any fresh claim and also has not furnished the documents to substantiate the claim of expenses being the diminishing value of investment. ITA No.21/Bang/2025 Page 15 of 18 . 39. Being aggrieved by the order of the Ld. DRP/AO, the assessee is in appeal before us. 40. The Ld. AR before us submitted that the assessee has already made the disallowance of deduction claimed in the revised computation of income. Therefore, the same cannot be disallowed again. 41. The Ld. DR, on the other hand, vehemently supported the order of the authorities below. 42. We have carefully considered the submissions of both sides and perused the records. It is a well-settled position in law that while an assessee is required to file a correct return under section 139, if during the course of assessment proceedings, the assessee identifies any mistake in computation, the same can be rectified by filing a revised computation, subject to the condition that such revised claim is properly substantiated and verified. In this regard, it is pertinent to refer to the decision of the Hon'ble Supreme Court in the case of Goetze (India) Ltd. v. CIT [(2006) 284 ITR 323 (SC)] where it was held that although the Assessing Officer cannot entertain a claim for deduction otherwise than by way of a revised return, the appellate authorities, including the Tribunal, can consider such claims if the facts are available on record. 42.1 Further, it is important to appreciate that the return of income and the assessment proceedings are governed by the principles laid down under sections 139, 143, and 144C of the Act. Section 143(3) empowers the Assessing Officer to make an assessment based on total income after considering such evidence as the assessee may produce ITA No.21/Bang/2025 Page 16 of 18 . during the assessment proceedings. Therefore, a revised computation filed during the assessment proceedings, particularly one which rectifies an apparent error and results in a lower claim of loss, should not be disregarded merely on technical grounds, without examining the same on merits. In the present case, the assessee has voluntarily disallowed the provision for diminution in the value of investments. It is pertinent to note that the provision for diminution in the value of investments is generally not allowable under the Act, as per the principles laid down under section 37(1) and various judicial precedents, unless the loss is ascertained and real. Therefore, the disallowance proposed by the assessee in its revised computation appears prima facie justified. Moreover, the procedural requirement of filing a revised return cannot defeat the substantive right of the assessee to correct an inadvertent mistake and offer correct income for taxation. Courts have repeatedly emphasized that substance should prevail over form and that technicalities should not come in the way of determining the correct taxable income. 42.2 In view of the above legal position and facts of the case, we are of the considered opinion that the matter requires fresh examination. The Assessing Officer shall verify the revised computation filed by the assessee during the assessment proceedings, examine whether the disallowance of ₹46,04,24,257/- is justified in terms of accounting and tax principles, and thereafter decide the matter in accordance with law. The Assessing Officer shall also grant a reasonable opportunity of hearing to the assessee and allow it to substantiate its claim with necessary documentary evidence regarding the nature of the provision. Accordingly, we set aside the orders of the lower authorities on this ITA No.21/Bang/2025 Page 17 of 18 . issue and restore the matter back to the file of the Assessing Officer for deciding the issue afresh, in accordance with law and in the light of the observations made hereinabove. This ground of appeal is allowed for statistical purposes. 43. The issue raised by the assessee in ground No. 14 relates to the TDS credit amounting to ₹ 27,54,412.00 which has not been provided to the assessee by the AO without assigning any reason thereon. Accordingly, in the interest of justice and fair play, we deem it fit to restore the issue to the file of the AO for fresh adjudication as per the provisions of law. Hence, the ground of appeal of the assessee is hereby allowed for statistical purposes. 44. The issue raised by the assessee in ground No. 15 relates to the levy of interest of ₹ 20,39,184.00 which has been charged by the AO without assigning any reason or the relevant section of the Act. Therefore, we deem it fit to restore the same to the file of the AO for fresh adjudication as per the provisions of law after affording the reasonable opportunity to the assessee. Hence, the ground of appeal of the assessee is hereby allowed for statistical purposes. 45. In the result, the appeal filed by the assessee is allowed for statistical purposes. Order pronounced in court on 13th day of May, 2025 Sd/- Sd/- (SOUNDARARAJAN K) (WASEEM AHMED) Judicial Member Accountant Member Bangalore Dated, 13th May, 2025 / vms / ITA No.21/Bang/2025 Page 18 of 18 . Copy to: 1. The Applicant 2. The Respondent 3. The CIT 4. The CIT(A) 5. The DR, ITAT, Bangalore. 6. Guard file By order Asst. Registrar, ITAT, Bangalore "