Income Tax Appellate Tribunal - Hyderabad
Ijm (India) Infrastructure Limited,, ... vs Assessee on 3 June, 2013
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCH 'A', HYDERABAD
BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER and
SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER
ITA No. 1814/Hyd/2012
Assessment year 2008-09
M/s. IJM (India) Vs. The ACIT
Infrastructure Ltd., Circle-2(1)
Hyderabad Hyderabad
PAN: AAACI7067A
Appellant Respondent
Appellant by: Sri I. Rama Rao
Respondent by: Sri M.B. Reddy
Date of hearing: 03.06.2013
Date of pronouncement: 22.08.2013
ORDER
PER CHANDRA POOJARI, AM:
This appeal by the assessee is directed against the order passed by DCIT, Circle-2(1), Hyderabad u/s. 143(3) r.w.s. 92CA(3) r.w.s. 144C(13) of the Income-tax Act, 1961 dated 15.10.2012 which was passed consequent to DRP Directions dated 27.9.2012.
2. The assessee raised the following grounds of appeal:
1. The order passed by the learned Dy.
Commissioner of Income tax, Circle 2(1), Hyderabad u/s 143(3) r.w.s. 92CA(3) r.w.s 144C(13) of the Income tax Act, 1961 to the extent it is prejudicial to the appellant is bad in law and liable to be quashed.
2. The learned Transfer pricing officer has erred in making adjustments under Chapter X in respect of transactions which were not 'international transactions' as defined in section 92B of the Act.
3. The learned Transfer pricing officer has erred in not appreciating that the provisions of Chapter X 2 ITA No. 1814/Hyd/2012 M/s. IJM (India) Infrastructure Ltd.
============================ do not apply in respect of transactions with 'resident' entities.
4. The learned Dy. Commissioner of' Income tax, Circle 2(1), Hyderabad has erred in making addition in respect of transfer pricing adjustment made by the TPO amounting to Rs.
104,95,00,000. On facts and in the circumstances of the case and law applicable, the addition on account of transfer pricing adjustment is to be deleted in entirety.
5. The learned Transfer pricing officer has erred in not appreciating that the IJM Corporation Berhad, Malaysia Delhi Project office has sub- contracted the works to the Appellant company by retaining a very small margin of 3.2% and filing income tax returns before the Delhi Income tax authorities.
6. The learned Transfer pricing officer has erred in not appreciating that the reimbursement of expenditure is purely on cost basis and do not included any profit element.
7. The learned Transfer pricing officer has erred in not appreciating that the effect of proportionate adjustment on Arm's length price should be on AE sales.
8. The learned Dy. Commissioner of Income tax, Circle 2(1), Hyderabad, learned Transfer Pricing Officer and Hon'ble Dispute Resolution Panel have erred in:
(a) passing the order without demonstrating that appellant had motive of tax evasion.
(b) not appreciating that the charging or computation provision relating to income under the head "Profits & Gains of Business or Profession" do not refer to or include the a mounts computed under Chapter X and therefore addition made under Chapter X is bad in law.
9. The Hon'ble DRP has erred in confirming the 3 ITA No. 1814/Hyd/2012 M/s. IJM (India) Infrastructure Ltd.
============================ additions made by the TPO by accepting the extreme profit margin rate comparables.
10. The learned assessing officer, TPO and the DRP has erred in making additions in respect of individual international transactions despite making adjustment at enterprise level profit margin using TNMM.
11. The findings and the conclusions of the learned Transfer pricing officer, DRP and the assessing officer are incorrect, bad in law and liable to be quashed.
12. On facts and in the circumstances of the case and law applicable, the addition on account of transfer pricing adjustment amounting to Rs. 104,95,00,000/- is to be deleted in entirety.
13. The learned Dy. Commissioner of Income Tax, Circle 2(1), Hyderabad, has erred in making the addition of Rs. 2,29,00,000 in respect of the sub- contractors.
14. The learned Dy. Commissioner of Income Tax, Circle 2(1), Hyderabad, has erred in making the addition of Rs. 10,54,21,341 in respect of the discrepancies relating to the sub-contractors amounts paid as claimed by the appellant vis-a- vis amounts received by the sub-contractors.
15. The learned Dy. Commissioner of Income Tax, Circle 2(1), Hyderabad, has erred in making the addition of Rs. 1,86,12,721 in respect of the sub-
contractors where letters were returned
unserved.
16. The learned Dy. Commissioner of Income Tax, Circle 2(1), Hyderabad, has erred in making the addition of Rs. 19,98,225 relating to Travel expenses.
17. The learned Dy. Commissioner of Income tax, Circle 2(1), Hyderabad has erred in levying interest under section 234B and 234D of the Act. On facts and in the circumstances of the case and law applicable, interest is not leviable under section 234B and 234D. The appellant 4 ITA No. 1814/Hyd/2012 M/s. IJM (India) Infrastructure Ltd.
============================ denies its liability to pay interest under section 234B and 234D.
18. In view of the above and other grounds to be adduced at the time of hearing, the appellant prays that the order passed by the learned Dy. Commissioner of Income tax, Circle 2(1), Hyderabad to the extent prejudicial to the appellant be quashed Or in the alternative
(i) addition on account of transfer pricing adjust-
ment amounting to Rs.104,95,00,000/- be deleted;
(ii) addition on account of disallowance of subcontract expenditure amounting to Rs.14,69,34,062.
(iii) Addition on account of disallowance of travelling expenses amounting to Rs.19,98,225.
(iv) Interest levied under section 234B and 234D be deleted.
3. Brief facts of the case are that the assessee is a closely held limited company promoted by IJM Corporation, Berhad. The assessee is engaged in the business of works contracts, construction and maintenance of roads, bridges, townships, residential and commercial buildings. The return of income for the assessment year 2008-09 was filed by the assessee on 29th September, 2008, declaring a total income of Rs. 10,62,00,470 and paid taxes accordingly. The case was selected for scrutiny and subsequently, a reference was given by the Assessing Officer to the Transfer Pricing Officer (TPO). During the course of assessment proceedings, the assessee Company produced books of account, documents and other relevant records as directed by the TPO and the Assessing Officer from time to time. The TPO has passed the order u/s. 92CA(3) of the Income-tax Act, 1961 on 27th October, 2011 determining the Arms Length Price at Rs. 104.95 crores. Subsequently, the Assessing Officer has completed the Draft 5 ITA No. 1814/Hyd/2012 M/s. IJM (India) Infrastructure Ltd.
============================ Assessment order on 30.12.2011, computing the total taxable income at Rs. 130,46,32,760. Finally, the draft Assessment order was served on the assessee on 30.12.2011. Details of the additions considered by the Assessing Officer are as under:
Sl.
Particulars Addition (Rs.)
No.
1) Additions u/s. 92CA 104,95,00,000
2) Disallowance of sub-contractor 2,29,00,000
payments
3) Disallowance of difference in sub- 10,54,00,000
contractor accounts
4) 5% disallowance on some of the sub- 1,86,12,721
contractors payments
5) Disallowance of power and fuel 19,98,225
expenses
3.1 Aggrieved by the draft assessment order, the assessee had
preferred to file the objections before the Dispute Resolution Panel (DRP for short). It was submitted by the AR before the DRP as follows:
i) The assessee-company IJM (India) Infrastructure Ltd., is carrying on the business of works contracts, construction and maintenance of road, bridges, townships, residential and commercial buildings. The assessee company is promoted by IJMII Mauritius, which, in turn, is a wholly owned subsidiary of IJM Corporation Berhad, Malaysia.
ii) During the financial year 2007-08, the assessee company secured sub-contracts from IJM Corporation Berhad, Malaysia Project office, situated at New Delhi, (resident PE), IJM-IJMII Joint Venture (a resident business entity) and IJM-NBCC-VRM-Joint venture (a resident business entity), apart from the contract works directly procured from various governmental and semi-governmental agencies.6 ITA No. 1814/Hyd/2012
M/s. IJM (India) Infrastructure Ltd.
============================
iii) The TPO has rejected the TP study conducted by the assessee. The TPO has conducted an independent analysis and selected 11 companies from the data base for benchmarking analysis and determination of Arms Length Price. The assessee had objected the inclusion of 4 companies out of the 11 companies selected by TPO, the objected 4 companies are M/s. Patel Engineering Ltd., M/s. Raheja Universal Ltd., Prestige Projects Ltd., and M/s. Puravanker Projects Ltd., on the grounds of functional comparability and economic comparability and high profit margins. Without considering assessee submissions, the TPO arrived at the arithmetic mean PLI (OP/Sales) by following his own analysis.
iv) The assessee submitted before the TPO, explaining that certain transactions entered into with their related party enterprises, who were residents of India. Further explained that the said transactions were considered as international transactions as an abundant caution of complying with the law. The quantum of such transactions was submitted. Without considering assessee submissions, the TPO treated the said transactions relating to two Indian resident companies as international transactions.
v) The TPO arrived at a sum of Rs. 104.95 Crores as Arms Length Price by rejecting the submissions and TP study conducted by the assessee.
vi) During the financial year 2007-08, the assessee Company made payments to sub-contractors, M/s. Marco Enterprises and M/s. Macro Enterprises. The Assessing Officer has disallowed the payment made to 7 ITA No. 1814/Hyd/2012 M/s. IJM (India) Infrastructure Ltd.
============================ these sub-contractors an amount of Rs. 2,29,00,000 merely stating that, the letter heads were found at the registered office of the assessee during the course of survey proceedings conducted by the department on 8th February, 2011. The assessee explained to the Assessing Officer, the circumstances under which the letter heads could have been kept at the head office of the assessee. Without considering the assessee submissions, the Assessing Officer has disallowed the payments made to the sub-contractors.
vii) The Assessing Officer has collected information from the sub-contractors u/s 133(6) of the Income-tax Act, 1961. Based on the information collected from the sub- contractors, a show cause notice was issued to the assessee calling for explanation for the difference amount of Rs. 10,54,21,341. The information collected by the Assessing Officer is not reflecting the total transaction done by the sub-contractors. Hence, they are not comparable with the assessee record. The assessee explained the reasons for variation and reconciled for an amount of Rs. 9,21,54,736 in one sub-contractor account. However, without considering the reconciliation submitted by the assessee, the Assessing Officer has disallowed the said amount of Rs. 10,54,21,341 based on alleged discrepancies in the amount shown in the books of assessee vis-a-vis books of the sub-contractors.
viii) During the course of scrutiny proceedings, the Assessing Officer had written letters to various sub-contractors u/s 133 (6) of the IT Act, 1961. Some of the letters were returned un-served with various remarks. The assessee submitted a detailed reply explaining the reasons and 8 ITA No. 1814/Hyd/2012 M/s. IJM (India) Infrastructure Ltd.
============================ also substantiated the method of awarding the work to sub-contractor, work rendered by the sub-contractor and payment made to sub-contractor through account payee cheques. Without considering the assessee submissions, the Assessing Officer has disallowed 5% of the expenditure in respect of some of the sub-contractor payments and arrived the disallowance amount of Rs. 1,86,12,721.
ix) During the course of assessment proceedings, the assessee submitted the books of account along with supporting vouchers. All the expenses including power and fuel were verified by the Assessing Officer along with the books and supporting vouchers. Without considering the assessee submissions and proper verification, the Assessing Officer has quantified an amount of Rs. 19,98,225 and disallowed under the head Travelling Expenses.
3.2 Firstly, the assessee company disputed the analysis done by the TPO and also disputed the rejection of TP study conducted by the assessee. Further, the assessee disputed the disallowances made by the Assessing Officer. The DRP had brushed aside the objections filed and confirmed the order of the TPO. Aggrieved, the assessee filed the present appeal before this Tribunal.
3.3 The AR submitted that the TPO had erroneously exercised the jurisdiction under the provisions of Chapter X even though there were no transactions, which are in the nature of the 'International Transaction' as defined under Sec. 92B of Income Tax Act, 1961 inasmuch as neither of the parties to the transaction is a non-resident. On bare reading of the provisions of Sec. 92B(1) of Income Tax Act, 1961, it is crystal-clear that in 9 ITA No. 1814/Hyd/2012 M/s. IJM (India) Infrastructure Ltd.
============================ order to be characterised as international transaction, the following salient features must be present:
(i) There should be a 'transaction.' (ii) Such 'transaction' should be between two or more
AEs and either or both of whom should be non-
residents.
(iii) Such transaction should be of the nature as referred to in Sec. 92B.
3.4 According to the AR, all the above three (3) conditions must be cumulatively satisfied so as to make a transaction an 'international transaction'. If there is a transaction between two AEs and such transaction is of nature as referred to in Sec. 92B of Income Tax Act, 1961, it will not become an 'international transaction' so as to fall within the domain of Chapter X, unless such transaction is between two or more AEs and either or both of them should be non-residents. He relied on the decision of the Delhi Special Bench of the Tribunal in the case of L.G. Electronics India (P) Ltd. & Ors. vs. ACIT (Del) (SB), 152 TTJ 273 (Del).
3.5 The AR reiterated that transfer pricing provisions are not applicable to transactions between two domestic related parties. The transfer pricing regulations have been specifically been made applicable to transactions between two domestic related parties by virtue of the amendment through Finance Act, 2012. In case, the existing provisions were applicable to domestic transactions then there was no need to bring the above amendment.
3.6 Based on all the above, the AR submitted that the TPO has erred in treating the transactions between the assessee and its AEs, as international transaction and applying transfer pricing regulations. The addition being bad in law is liable to be rejected. He relied on para 28.8 of the order of the Tribunal, Hyderabad 10 ITA No. 1814/Hyd/2012 M/s. IJM (India) Infrastructure Ltd.
============================ Bench 'A' in the case of M/s. Swarandhra IJMII Integrated Township Development Company Pvt. Ltd., Hyderabad vs. DCIT, Circle-3(3), Hyderabad in ITA No. 2072/Hyd/2011, dated 31.12.2012.
3.7 The AR submitted that the assessee is a company incorporated under the provisions of the Companies Act, 1956 and it is assessed to income-tax in the status of domestic company and whereas the AEs with whom the assessee had transactions are IJM Corporation Berhad, Delhi Project Office (PE in India), has the place of business in India under the provisions of Sec. 592 of the Companies Act, 1956 w.e.f. 30th May, 2005.
3.8 He submitted that by virtue of its registration under provisions of sec. 592 of Companies Act, 1956 and its affairs are managed and controlled in India. Further, one of the Directors of the Principal Company is nominated as Attorney for the purpose of undertaking the contract awarded by the Municipal Corporation of Delhi and National Highways Authority of India and is empowered to manage and operate entire operations in India and all the decisions in respect of operations in India are taken only in India and that nominated Director had been residing in India only. In other words, control and management of branch affairs were situated in India within the meaning of Sec. 6(3) (ii) of Income-tax Act, 1961. In this connection, he relied on the judgement of Calcutta High Court in the case of CIT vs. Bank of China (In Liquidation) (154 ITR 617).
3.9 He also relied on the judgement in the case of Egyptian Hotels Ltd. v. Mitchell [1915) 6 TC 542 (HL.).
3.10 He submitted that under the provisions of DTAA with Malaysia, PE is treated as a separate legal entity, independent of its foreign principal enterprise. Further, Article 24 of the DTAA 11 ITA No. 1814/Hyd/2012 M/s. IJM (India) Infrastructure Ltd.
============================ contains a non-discrimination provision. It prohibits a Contracting State from making any discrimination in the matter of taxation between its own national and a national of the other Contracting State, who are placed in similar circumstances. In other words, a Contracting State is obliged to provide the same tax treatment to a national of the other Contracting State as it would give to its own nationals. Article 3(h) of the DTAA defines the term "national" to include both-natural persons and artificial persons, such as companies, etc. Therefore, PE should be treated as resident in India inasmuch as the business profits attributable to PE are taxable in India and all business decisions relating to PE are entered and concluded in India. In other words, the control and management of the affairs of PE are situated in India and therefore, the PE should be treated as resident in India, treating PE otherwise amounts to violation of Article 24 of DTAA with Malaysia.
3.11 He relied on the order of the Tribunal, Special Bench, Ahmedabad in the case of Rajeev Sureshbhai Gajwani v. Asstt. Commissioner of Income-tax, Circie-6, Baroda (129 ITD 145).
3.12 He submitted that IJM-IJMII JV (Joint Venture) between the assessee and IJM Corporation Berhad, Malaysia and IJM-NBCC- VRM (Joint Venture between National Building Construction Co. Ltd., VRM and the assessee) are also residents. These Joint Ventures are formed in India by an agreement between the respective parties and assessed in the status of AOP. According to the AR, in order to determine the residential status of AOPs, one has to refer to the definition given under sub-section (2) of Section 6 of Income-tax Act, 1961, which reads as under:
"6. Residence in India. ---For the purpose of this Act. ...
(2) A Hindu undivided family, firm or other association of persons is said to be resident in India in any 12 ITA No. 1814/Hyd/2012 M/s. IJM (India) Infrastructure Ltd.
============================ previous year in every case except where during that year the control and management of its affairs is situated wholly outside India."
3.13 He also drew our attention to the provisions of Sec. 6(2) of Income-tax Act, 1961 which places "AOPs" in the same category as "Hindu Undivided Family (HUF)" and "firm" for the purpose of determining the residential status. In the case of partnership, it is settled by Supreme Court in the case of Erin Estate, Galah, Ceylon v. CIT (1958) 34 ITR 1 that the control and management of its affairs means the de facto control and not the de jure and refers to controlling and directive power often described as "head and brain".
3.14 The AR submitted that in the present case the transactions are between two resident parties only and there is no possibility of shifting of profits outside India or erosion of country's tax base. Therefore, its transactions with AEs are outside the purview of the transfer pricing regulations. This PE is assessed to income-tax in India in the status of foreign company in respect of its business profits.
3.15 He relied on the judgement of Supreme Court in the case of DIT (International Taxation) vs Morgan Stanley (292 ITR 416).
3.16 He also relied on the following judgements for the proposition that where there is no erosion of tax base in India, the provision of Transfer Pricing cannot be applied:
(a) Philips Software Centre (P) Ltd. vs. Asst. CIT [2008) (26 SOT
226) (Bangalore) and (119 TTJ 721);
(b) Dresdner BANK A.G. vs. Addl. CIT (108 ITD 375) (11 SOT
158);
(c) ITO v. Zydus Altana Healthcare (P.) Ltd. (44 SOT 132) (Mum.);13 ITA No. 1814/Hyd/2012
M/s. IJM (India) Infrastructure Ltd.
============================
(d) Cotton Naturals (I) Pvt. Ltd., New Delhi vs. DCIT, Circle 3(1), New Delhi in ITA No. 5855/Del/2012, dated 08.02.2013.
3.17 Notwithstanding the above, the assessee submitted that no TP adjustment under the provisions of Sec. 92(c) of Income-tax Act is required inasmuch as after TP adjustment, the revenue assessed in the hands of the assessee had exceeded the total revenue received by AE. This adjustment is not permissible as held by the Hon'ble Tribunal in the following cases:
(i) Li & Fung (India) (P) Ltd. v. DCIT (16 taxmann.com
192) (Del)/12 ITR(Trib.) 748 (Del)/143 TTJ 201 (Del);
(ii) Global Vangtedge (P) Ltd. v. DCIT, 1 ITR (Del)/37 SOT 1 (DELHI).
3.18 He submitted that in the present case, the assessee had the following transactions with its AEs as detailed below:-
S. Particulars Amount (Rs.) Remarks No.
1. IJM Corporation 93,67,11,155 Works contract expenses
2. IJM Corporation 1,64,87,452 Reimbursement of expenses paid to IJM Corp.
3. IJM-IJMII JV 54,45,01,543 Works contract expenses
4. IJM-NBCC-VRM JV 1,87,05,776 Works contract expenses
5. IJM-IJMII JV 39,76,26,155 Reimbursement of expenses received from JV
6. IJM-IJMII JV 41,51,82,999 Reimbursement of expenses paid to JV 3.19 In respect of S. No. l, IJM Corporation Berhad, Malaysia had secured two (2) contracts, namely (1) MCD Project from Municipal Corporation of Delhi (2) Sagar C-4 Project from National Highway Authority of India for up-gradation of existing road. These contracts were sub-contracted to the assessee company on back-
to-back basis by retaining a margin of 3% of the contract value. In respect of S. No. 3, IJM-IJMII JV was awarded two contracts from Delhi Metro Rail Corporation. The labour component of this work was sub-contracted to the assessee without retaining any margin. In respect of S. No. 4, IJM-NBCC-VRM JV was awarded contract 14 ITA No. 1814/Hyd/2012 M/s. IJM (India) Infrastructure Ltd.
============================ from Delhi Metro Rail Corporation. The labour component of the work was sub- contracted without retaining any margin. In respect of reimbursement of expenditure, it is a matter of record that no margins are involved and the exact amount of expenditure is reimbursed and, therefore, no benchmarking is required.
3.20 He drew our attention to the following tabular chart showing the scenario after TP adjustment is as follows:-
Value of TP Contract Revenue adjustment Total value S. Margin Particulars value (during offered by (proportionate after TP No. retained the year) the assessee adjustment of adjustment 104.95 Cr.)
1. IJM Corp 98,26,78,976 2,94,80,369 95,31,98,607 65,92,95,900 161,24,94,506 PO-Delhi
2. IJM-IJMII 54,55,01,543 Nil 54,55,01,543 37,72,95,250 92,27,96,793 JV
3. IJM-NBC- 1,87,05,776 Nil 1,87,05,776 1,29,08,850 3,16,14,626 VRM JV` 3.21 According to the AR, from the above, it is clear that after TP adjustment under Section 92CA the total value of the revenue recognized in the hands of assessee exceeded the total contract value received by the AE. Therefore, such excess adjustment is not permissible in the light of judicial precedents cited supra. In any event, the margin retained by the AE is only 30/0. which is less than the tolerance limit of ± 5%. Therefore, no adjustment is required under Section 92CA of Income-tax Act.
3.22 Without prejudice to the above argument the AR contended that the TPO had erroneously exercised the jurisdiction and examined the transactions between the ASE and AE under Transfer Pricing Regulations. He submitted that the TPO had erred in rejecting certain comparables selected by it and instead selecting inappropriate comparables, which are functionally and economically different. The TPO had scrutinized the alleged international transactions the assessee had with its AE by applying TNMM method taking margin at 24.76% on costs of comparables. While doing so, the TPO had selected 11 15 ITA No. 1814/Hyd/2012 M/s. IJM (India) Infrastructure Ltd.
============================ comparables out of which 4 were objected by the assessee on the grounds as follows:-
Filter under which S. Name of the company Reasons for rejections No. company should be rejected
1. Patel Engg. Ltd. Functionally The appellant submits that this different company is engaged mostly into hydro power. This company turnover and order book represents 60% hydro power related works. Whereas, the appellant who is engaged in works contract mostly into roads and buildings and civil works. The nature of the business is significantly different, this company deserves to be rejected as comparable.
2. Raheja Universal Functionally The company is into residential and Ltd. different and commercial constructions. Further, economically the company earned profit with the different. abnormal OP/cost percentage of 115.01%. The company has made an abnormally high profit and thus this company should be rejected as comparable.
3. Purvankar Functionally The company is into residential and Projects Ltd. different and commercial constructions. Further, economically the company earned profit with the different. abnormal OP/cost percentage of 58.06%. The company has made an abnormally high profit and thus this company should be rejected as comparable.
4. Prestige Estate Functionally The company is into real estate Projects Ltd. different business such as development of residential and commercial complex by acquiring lands or on development basis. Thus, this company should be rejected as comparable.
3.23 In respect of S. No. l above, he submitted that the line of business of M/s. Patel Engg. Ltd., is different from that of the assessee as M/s. Patel Engg. Ltd., is engaged in the construction of dams, powerhouse, surge chambers, intake structures, and head race tunnel etc., for hydro-power projects. It claims to be a leader in the hydro-power segment with a 22 per cent market share. Till date the company has executed 30 hydro-power projects and 75 dam related projects. Patel Engineering also 16 ITA No. 1814/Hyd/2012 M/s. IJM (India) Infrastructure Ltd.
============================ operates in the irrigation, transportation and urban infrastructure segments. It focuses on Lift Irrigation Projects as an EPC contractor, mainly in the State of Andhra Pradesh. In the transportation segment, its scope of work includes construction of roads, bridges, railways and road tunnel. However, hydro-power remains the largest segment with around 60 per cent contribution to the order book. Whereas, the assessee is engaged in the business of construction of roads, buildings and metro-rail works and even geographical locations are also different and, therefore, cannot be taken as comparables. The profit margins in two businesses will be totally different and, therefore, it cannot be taken as a comparable case. Reliance in this regard is placed on the decision of E-Gain Communication (P) Ltd., vs. ITO (118 TTJ (Pune) 354) and Vedaris Technology (P.) Ltd. v. Asst. CIT [2010] 131 TTJ (Delhi) 309. Moreover, the information about· the comparable is not available in the public domain and TPO has not furnished the information relied upon and not given opportunity to rebut the same. Therefore, this has to be rejected as a comparable.
3.24 In respect of S. Nos. 2 and 3 of the above, it is submitted that these comparables are in the business of construction of residential and commercial properties, which are totally different lines of business from the assessee. On the same reasoning as submitted in the above paragraph, based on the above judicial precedents cannot be taken as comparables. That apart, both the comparables have shown abnormal profits of 115% and 58% respectively. Therefore, such super-profit companies should be excluded as held by this Tribunal in the following cases:
a) Adobe Systems India Pvt. Ltd. v. Addl. CIT 44 SOT 49 (Delhi- URO);
b) ITO vs Saunay Jewels Pvt. Ltd. 42 SOT 4 (Mum.-URO);
c) Mentor Graphics 2007-(112)-TTJ-0408-TDEL;
d) E-Gain Communications vs ITO 118 TTJ 354 (Pune);17 ITA No. 1814/Hyd/2012
M/s. IJM (India) Infrastructure Ltd.
============================
e) SAPIENT Corporation Pvt. Ltd. vs. DCIT (2012) 15 ITR (Trib) 285 (Delhi);
f) Genisys Integrating Systems India Pvt. Ltd. (15 ITR (Trib.) 475 (Bangalore Bench);
g) Brigade Global Services Pvt. Ltd., Hyderabad vs. ITO in ITA No. 1494/Hyd/2010 dated 26.11.2012.
3.25 He submitted that the TPO had rejected the loss making comparables chosen by the assessee and thus conveniently picked up only super-profit companies in his study, which is against the ratio laid down by the Special Bench of the Tribunal in the following cases:-
i) DCIT v. Quark Systems (P.) Ltd. 38 SOT 307 (Chd.)
ii) ACIT v. Wockhardt Ltd. 6 taxmann.com 78 (Mum.; and
iii) UCB India (P) Ltd. v. ACIT 121 ITD 131 (Mum.) 3.26 In respect of S. No. 4 above, it is submitted that the comparable is in the business of Real Estate and therefore, the comparable is engaged in totally different line of business and cannot be taken as a valid comparable in view of the ratio laid down in tile cases of E-Gain Communication (P) Ltd., vs. ITO (118 TTJ (Pune) 354 and Vedaris Technology (P.) Ltd. v. ACIT 131 TTJ (Del) 309. If the above four comparables are excluded, the calculation of the ALP as per TPO is as under:
Sales Sl. OP/TC Name of the company (Rs. in No. (%) Crores)
1. JMC Projects (India) Ltd. 915.00 7.90
2. Unity Infraprojects Ltd. 849.50 13.39
3. KMC Constructions Ltd. 729.90 12.50
4. Valecha Engineering Ltd. 501.20 5.78
5. Ahluwalla Contractors 881.24 10.46
6. Somdatt Builders 597.69 1.31
7. AMR Constructions 587.25 13.49 Arithmetic mean 9.26 Whereas the profit shown by the assessee is as under:18 ITA No. 1814/Hyd/2012
M/s. IJM (India) Infrastructure Ltd.
============================
Company's
Particulars
Actuals
Net sales (Revenue) 736.88
Total operating income 736.88
Total cost incl. depreciation 704.77
Total operating expenses 704.77
Operating Profit 32.11
Net cost plus mark up (%) 4.56%
3.27 He submitted that the profit shown by the assessee with the AE is within the tolerance limit of + or 5% and, therefore, no TP adjustment under Sec. 92CA is required.
4. The learned DR submitted that during the previous year the assessee had transactions with two joint ventures who are the residents of India. The first joint venture is known as IJM-IJMII Joint venture. With this joint venture, the assessee had transactions for a sum of Rs. 94,31,27,708 (Rs. 54,55,01,543 + 39,76,26,165). In this joint venture, the assessee has a share of profit of 40% and the assessee's holding company, namely, IJM Corporation, Behard, Malaysia has a 60% profit share. The capital of this joint venture was contributed in proportion to the capital of the JV partners. The AR's contention is that this entity is not an associated enterprise, consequently, the transactions with JV are not international transactions. The AR also submitted that the effective control and management of this joint venture is in India.
He submitted that there is no merit in the submissions of the AR. The transactions of the assessee with the joint venture were reported as international transactions voluntarily in the 3CEB Report by the auditor. On the basis of the Audit report, the TPO had determined the arm's length price of the international transactions. The Joint Venture is an Associated Enterprise. The assessee's case is squarely covered by Sec. 92A(1 )(b) r.w.s. 92A(2).(L) of the IT. Act. Sec. 92A(2)(L) stipulates that where one enterprise is an association of persons and the other enterprise 19 ITA No. 1814/Hyd/2012 M/s. IJM (India) Infrastructure Ltd.
============================ holds not less than 10% of interest shall be deemed to be an associated enterprise for the purpose of Sec. 92A(1)(b) of the IT Act. Further, in the joint venture, there is a Non-resident entity, namely, IJM Corporation, Berhard, Malaysia. Thus, in the transaction of the assessee with the joint venture, there is a Non- resident. Further, the assessee's case also gets covered by 92A(1)(b) r.w.s. 92A(2)(a), (b) and (e) of the IT. Act. Therefore, the auditor has rightly reported the transactions with the joint venture as international transactions. He relied on the order of the DRP as well as assessment order.
5. We have heard both the parties and perused the material on record. The primary condition for attracting transfer pricing provisions is that there should be a transaction between two or more associated enterprises. Section 92A defines the term "associated enterprise". Section 92A(1) provides the broad parameters on satisfaction of which two or more enterprises constitute associated enterprises. These parameters are participation in the management or control or capital of the other enterprise. Sub-section (2) of section 92A enlists specific situations which make two or more enterprises associates of each other for the purposes of sub-section (1).
5.1 The term "international transaction" is defined in section 92B(1) as follows:
"92B. (1) For the purposes of this section and sections 92, 92C, 920 and 92E, "international transaction" means a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises, and shall include a mutual agreement or arrangement between two or more associated 20 ITA No. 1814/Hyd/2012 M/s. IJM (India) Infrastructure Ltd.
============================ enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to anyone or more of such enterprises."
A transaction between associated enterprises satisfying the prescribed criteria becomes an international transaction.
5.2 One of the essential limbs/constituents of an international transaction is "associated enterprise". Section 92B(2) outlines the circumstances under which a transaction between two persons would be deemed to be between associated enterprises. Such deeming fiction is in addition to the one created under section 92A(2). The deeming fiction under section 92A(2) are limited to the parameters of management, control or capital. Section 92B(2) travels beyond these parameters.
5.3 Transaction between an enterprise and a person which is not an associated enterprise under section 92A, may be deemed to be transaction between associated enterprises for the purposes of section 92B{l) if the conditions contained in section 92B(2) are attracted. Section 92B(2) provides:
"(2) A transaction entered into by an enterprise with a person other than an associated enterprise shall, for the purposes of sub-section (1), be deemed to be a transaction entered into between two associated enterprises, if there exists a prior agreement in relation to the relevant transaction between such other person and the associated enterprise, or the terms of the relevant transaction are determined in substance between such other person and the associated enterprise."
5.4 Section 92B(2) embodies a legal fiction. It deems a transaction to have been entered into between two associated enterprises. Though section 92B(2) is a part of section 92B with the heading "Definition of international transaction", it is to be read 21 ITA No. 1814/Hyd/2012 M/s. IJM (India) Infrastructure Ltd.
============================ as an extension of section 92A(2) and not as an extension of section 92B(1). This is for the following reasons:
(a) Both section 92A(2) and 92B(2) deal with situations under which two or more persons constitute associated enterprises.
(b) Section 92B(1) does not define the term "associated enterprise". It defines the term "international transaction". This definition provides that there can be an international transaction only between two or more associated enterprises and not otherwise. Therefore recourse to section 92A and section 92B(2} is required before referring to section 92B(1}.
(c) Section 92B(2} only deems certain transaction to be 'transaction between associated enterprises' and not as 'international transaction between two enterprises'.
5.5 There is a difference between associated enterprises defined under section 92A and transaction deemed to be between associated enterprises under section 92B(2}. Under section 92A, two or more enterprises once determined to be associated enterprises remain so for the entire financial year. Their relationship will not change for different transactions between them. They will remain associated enterprises even if they do not have any transaction during the previous year. On the other hand, a transaction between an enterprise and another person can be deemed to be transaction between associated under section 92B(2} only in respect of transactions specified therein and not otherwise. This fiction is transaction specific and does not apply to all transactions between the enterprise and person, on the basis that one transaction attracts section 92B(2}.
5.6 Section 92B(2} was enacted to hit at those cases where two associated enterprises intend to have an international transaction but want to avoid transfer pricing provisions by interposing a third party as an intermediary. In such cases, the third party 22 ITA No. 1814/Hyd/2012 M/s. IJM (India) Infrastructure Ltd.
============================ intermediary will generally not be the ultimate consumer of the services or goods. The intermediary would facilitate the transfer of services or goods from one enterprise to its associate enterprise with no value addition or insignificant value addition. The intermediary is used to break a transaction into two different parts, which parts when viewed in isolation would not satisfy the requirements of section 92A. The legal form of the transaction in such circumstances is ignored. The substance of the transaction is given effect to, not by disregarding the existence of the intermediary but by deeming the transaction with the intermediary itself to be one with an associated enterprise.
5.7 The legal fiction created in respect of the specified transaction can be used only for the purpose of examining whether such transaction constitutes an 'international transaction' under section 92B(1). In case section 92B(1) is not attracted, the fiction under section 92B(2) ceases to operate. In our opinion, the impugned transaction between the assessee and IJM-IJMII JV and IJM Corporation, Berhard, Malaysia and IJM-NBCC-VRM (JV) between National Building Construction Co. Ltd., VRM and the assessee does not fall under section 92B(2) of the IT Act. This is for the following reasons.
5.8 The assessee is a company incorporated under the provisions of the Companies Act, 1956 and is assessed to income- tax in the status of domestic company and whereas the AEs with whom the assessee had transactions are IJM Corporation Berhad, Delhi Project Office (PE in India), established the place of business in India under the provisions of Sec. 592 of the Companies Act, 1956 w.e.f. 30th May, 2005.
5.9 By virtue of its registration under provisions of sec. 92 of Companies Act, 1956 and its affairs are managed and controlled in 23 ITA No. 1814/Hyd/2012 M/s. IJM (India) Infrastructure Ltd.
============================ India. Further, one of the Directors of the Principal Company is nominated as Attorney for the purpose of undertaking the contract awarded by the Municipal Corporation of Delhi and National Highways Authority of India and is empowered to manage and operate entire operations in India and all the decisions in respect of operations in India are taken only in India and that nominated Director had been residing in India only. In other words, control and management of branch affairs were situated in India within the meaning of Sec. 6(3) (ii) of Income-tax Act, 1961. In this connection, it is pertinent to extract the observation made by the Hon'ble Calcutta High Court in the case of CIT vs. Bank of China (In Liquidation) - 154 ITR 617 vide Para 8:
"Para 8: Under section 6(3) a non-Indian company is said to be resident in India in any previous year if during that year the control and management of its affairs is situated wholly in India. The determination as to what place or places the control and management of a particular company is situated is essentially a question of fact to be determined on the facts and in the circumstances of the particular case. A company can be simultaneously resident in more than one place but the question is whether the control and management is situated wholly in India during the relevant previous year. The expression 'control and management' signifies the controlling and directive power, the head and brain as it is sometimes called and 'situated' implies the functioning of such power at a particular place with some degree of permanence. The word 'wholly' as used in section 6(3) would indicate that seat of such power may be divided between two distinct and separate places. The expression 'control and management' means de facto control and management and not merely the right or power to control and manage. In order to hold that a non-Indian company is resident in India during any previous year, it must be established that such company de facto controls and manages its affairs in India. The principles are by now well settled. "
5.10 Vide paragraph 9 of the cited judgment, the Calcutta High Court has clarified that the word 'affairs' means affairs which are 24 ITA No. 1814/Hyd/2012 M/s. IJM (India) Infrastructure Ltd.
============================ relevant for the purpose of the Act and which have some relation to the income sought to be assessed. It is not the bare possession of powers by the directors, but their taking part in or controlling the affairs relating to the trading, that is of importance in determining the question of the place where the control is exercise. They must exercise their power of control in relation to business or activity wherefrom the profit is derived. (See - Egyptian Hotels Ltd. v. Mitchell [1915) 6 TC 542 (HL.). The Power of Attorney executed by the principal Company in favour of the Indian- resident Director to manage the branch operations in India clearly goes to establish beyond any pale of doubt the fact that the entire control and management in relation to operations in India is situated in India only. Therefore, the PE should undisputedly be treated as resident in India.
5.11 Moreover, under the provisions of DTAA with Malaysia, PE is treated as a separate legal entity, independent of its foreign principal enterprise. Further, Article 24 of the DTAA contains a non-discrimination provision. It prohibits a Contracting State from making any discrimination in the matter of taxation between its own national and a national of the other Contracting State, who are placed in similar circumstances. In other words, a Contracting State is obliged to provide the same tax treatment to a national of the other Contracting State as it would give to its own nationals. Article 3(h) of the DTAA defines the term "national" to include both-natural persons and artificial persons, such as companies, etc. Therefore, PE should be treated as resident in India inasmuch as the business profits attributable to PE are taxable in India and all business decisions relating to PE are entered and concluded in India. In other words, the control and management of the affairs of PE are situated in India and therefore, the PE should be treated as resident in India, treating PE otherwise amounts to violation of Article 24 of DTAA with Malaysia.
25 ITA No. 1814/Hyd/2012M/s. IJM (India) Infrastructure Ltd.
============================ 5.12 The Special Bench of Tribunal Ahmedabad in the case of Rajeev Sureshbhai Gajwani v. Asstt. Commissioner of Income-tax, Circie-6, Baroda (129 ITD 145) (Ahd.) (SB) also laid down the same proposition of law.
5.13 IJM-IJMII JV (Joint Venture between the assessee and IJM Corporation Berhad, Malaysia and IJM-NBCC-VRM (Joint Venture between National Building Construction Co. Ltd., VRM and the assessee) are also residents. These Joint Ventures are formed in India by an agreement between the respective parties and assessed in the status of AOP. In order to determine the residential status of AOPs, one has to refer to the definition given under sub-section (2) of Section 6 of Income-tax Act, 1961, which reads as under:
"6. Residence in India. ---For the purpose of this Act. ...
(2) A Hindu undivided family, firm or other association of persons is said to be resident in India in any previous year in every case except where during that year the control and management of its affairs is situated wholly outside India."
5.14 As may be seen from the above, the normal presumption is that an AOP will have to be considered as a resident unless its control and management are only situated outside India. The Revenue has not brought any evidence on record suggesting that these AOPs are controlled from Malaysia. Whereas the assessee led the conclusive evidence on record to say that the AOPs are residents in India in the form of Agreements entered into by respective parties and also the Power of Attorneys executed in favour of one of the resident Directors in India by the foreign principal office. This remains uncontroverted.
5.15 The provisions of Sec. 6(2) of Income-tax Act, 1961 place AOPs in the same category as "Hindu Undivided Family (HUF), 26 ITA No. 1814/Hyd/2012 M/s. IJM (India) Infrastructure Ltd.
============================ Firm" for the purpose of determining the residential status. In the case of partnership, it is settled by Hon'ble Supreme Court in the case of Erin Estate, Galah, Ceylon v. CIT (1958) 34 ITR 1 that the control and management of its affairs means the de facto control and not the de jure and refers to controlling and directive power often described as "head and brain".
5.16 In the present case, all the decisions relating to the affairs of the Joint Venture are taken in India and the business is executed in India through a Joint Venture Agreement in India. Indisputably, Joint Ventures are residents in India. Even otherwise, Clause 3 of Article 4 of Malaysia provides that a person which includes AOPs also shall be deemed to be residents of the State in which its place of effective management is situated. On perusal of the Joint Venture agreements, it can be seen that all the decisions relating to the Joint Venture are taken in India and, therefore, the JVs are to be treated as "residents" only.
5.17 Further in the present case the transactions are between two resident parties as outlined at paras 3.18 and 3.19 of this order. There is no possibility of shifting of profits outside India or erosion of country's tax base. Therefore, its transactions with AEs are outside the purview of the transfer pricing regulations. This PE is assessed to income-tax in India in the status of foreign company in respect of its business profits. No shifting of profits outside India or erosion of taxes in India is involved, that is, there is no motive to shift the profits or evade the taxes in India inasmuch as its business profits are taxable as separate entity in India.
5.18 In the case of DIT (International Taxation) vs Morgan Stanley (292 ITR 416), the Hon'ble Supreme Court observed that "The object behind enactment of transfer pricing regulations is to prevent shifting of profits outside India". The explanatory Circular 27 ITA No. 1814/Hyd/2012 M/s. IJM (India) Infrastructure Ltd.
============================ No. 14 to the Finance Act 2001 has stated that the basic intention of the transfer pricing regulations is to prevent shifting profits out of India by manipulating prices charged or paid in international transactions, thereby eroding the country's tax base. The relevant extract of the said circular is as below:
"The new provision is intended to ensure that profits taxable in India are not understated (or losses are not overstated) by declaring lower receipts or higher outgoings than those which would have been declared by persons entering into similar transactions with unrelated parties in the same or similar circumstances. The basic intention underlying the new transfer pricing regulations is to prevent shifting out of profits by manipulating prices charged or paid in international transactions, thereby eroding the country's tax base. The new section 92 is, therefore, not intended to be applied in cases where the adoption of the arm's length price determined under the regulations would result in a decrease in the overall tax incidence in India in respect of the parties involved in the international transaction."
Even as per the CBDT Circular (Circular No. 12/2001, dated 23.08.2001), the intention underlying the provision is to prevent avoidance of tax by shifting taxable income to a jurisdiction outside the India by an associate enterprise controlling the prices charged in intra-group transactions. Hence, erosion of Indian tax base is one of the prime objectives behind insertion of new TP provisions. In the present case, as discussed above, there is no erosion of tax base in India."
5.19 The Tribunal in the under-mentioned cases had held that where there is no erosion of tax base in India, the provision of Transfer Pricing cannot be applied:
(a) Philips Software Centre (P) Ltd. vs. Asst. CIT [2008) (26 SOT
226) (Bangalore) and (119 TTJ 721);
(b) Dresdner BANK A.G. vs. Addl. CIT (108 ITD 375) (11 SOT
158);
(c) ITO v. Zydus Altana Healthcare (P.) Ltd. (44 SOT 132) (Mum.);28 ITA No. 1814/Hyd/2012
M/s. IJM (India) Infrastructure Ltd.
============================
(d) Cotton Naturals (I) Pvt. Ltd., New Delhi vs. DCIT, Circle 3(1), New Delhi in ITA No. 5855/Del/2012, dated 08.02.2013.
5.20 The primary condition for attracting transfer pricing provisions is that there should be a transaction between two or more AEs in terms of section 92A(1) and 92A(2) of the Act. After considering the entire facts and circumstances of the present case and the findings of the DRP, we are of the opinion that the transactions taken place are with domestic enterprises and at least one among the AEs are not non-resident. Both the assessee and other parties which whom the assessee entered into transactions are the residents for the purpose of Indian Taxation. Any transaction between them will not constitute an international transaction. The transactions between the assessee and IJMII do not fall under section 92B(2) of the Act and same is the position in case of other entities with whom assessee carried on the impugned transactions. In our opinion, the argument of the Department is devoid of merit. Accordingly, we agree with the contention of the assessee's counsel on legal issue and allow the legal ground raised by the assessee.
5.21 Since, we have decided on the legal issue in favour of the assessee, on applicability of transfer pricing on the assessee, we refrain from going into the other grounds raised by the assessee on the issue of transfer pricing and these grounds are dismissed as infructuous.
6. In respect of other Non-TP adjustments, the Assessing Officer had disallowed the following items of expenditure made to sub-contractors:
(a) Payments to the sub-contractors an amount of - Rs.
2,29,00,000/ - ;
(b) Disallowance of payments made to the sub-contractor, M/s. Maytas Infra Limited - Rs. 10,54,21,341/-;
29 ITA No. 1814/Hyd/2012M/s. IJM (India) Infrastructure Ltd.
============================
(c) Disallowance of payments made to various sub-contractors
- Rs. 1,86,12,721/-;
(d) Disallowance on account of power and fuel an amount of Rs. 19,98,225/-.
6.1 The learned AR submitted that the entire sub-contract payments were subjected to TDS provisions of the Act. Tax has been deducted at source and remitted to the Government within the due date. The Tribunal in the case of ECI Engineering & Construction Co., Ltd., in ITA No. 1279/Hyd/2010 vide order dated 21.04.2011 has held vide paragraph 18 of the order that "where the payments are covered by TDS, the genuineness of the expenditure cannot be doubted." Therefore, the entire expenditure should be allowed as a deduction.
6.2 In respect of disallowance of power and fuel expenses, it is submitted by the learned AR that the Assessing Officer had not brought any evidence on record suggesting that the expenditure had not been incurred by the assessee nor any incriminating evidence suggesting inflation of expenditure was found as a result of survey operations under Section 133A of the Income-tax Act, 1961. The mere fact that the assessee could not produce the vouchers at the time of assessment does not lead to inference that the expenditure is "bogus" and, therefore, no addition is called for as laid by the Hon'ble Bombay High Court in the case of R.B. Bansilal Abirchand Spg. & Wvg. Mills v. CIT [1970) 75 ITR 260 and High Court of Gauhati in the case of Aluminium Industries (P.) Ltd. v. Commissioner of Income-tax (1995) 80 Taxman 184 followed by this Tribunal in the case of R. Maheswara Naidu in ITA 302/Hyd/2011, dated 30.03.2012. In the light of the aforesaid submissions, it is submitted that this Tribunal may be pleased to pass such order or orders as may be deemed fit and proper in the interest of all canons of fair play and justice.
30 ITA No. 1814/Hyd/2012M/s. IJM (India) Infrastructure Ltd.
============================ 6.3 Regarding the disallowance of payments made to sub- contractors for a sum of Rs. 10,54,21,341/-, it was submitted by learned DR that the assessee had paid a sum of Rs. 328.53 crores to various sub-contractors. The assessee was asked to furnish the names and addresses of the sub-contractors to whom the work of the assessee was entrusted to. The assessee furnished the names and addresses of 998 sub-contractors. The Assessing Officer had sent letters u/s 133(6) of the IT Act to about 750 sub-contractors requesting them to furnish the confirmation of balances in their books of account of the assessee with the supporting evidences, if any, for the previous year. In response, replies were received from 115 sub-contractors and in 31 cases, the transactions of the sub- contractors in their books of account did not tally with the books of account of the assessee. The total amount reflected in the books of account of the assessee in respect of 31 parties was a sum of Rs. 42,34,21,336/- whereas, the sub-contractors had reflected a sum of Rs. 31,79,99,995/- in their books of account. Thus, there was a difference of Rs. 10,54,21,341/- between the books of account of the assessee and the books of account of the sub- contractors. The assessee was requested to explain the difference by the AO. The assessee submitted that out of Rs. 10.54 crores, a sum of Rs. 9,21,54,736/- was attributable to MAYTAS Infra Limited. The assessee further submitted the difference arose on account of advances which were considered as payments by the assessee. The Assessing Officer did not accept the explanation of the assessee. The Assessing Officer was of the view that total contract awarded to MAYTAS Infra Pvt. Ltd was for a sum of Rs. 55,55,29,469/- and during the previous year, the sub-contracts were executed by MAYTAS was for a sum of Rs. 16,50,40,621/-. The sub-contract work given to MAYTAS was for laying of the roads in the State of Madhya Pradesh whereas, the assessee submitted before the Assessing Officer that MAYTAS had carried 31 ITA No. 1814/Hyd/2012 M/s. IJM (India) Infrastructure Ltd.
============================ out two works situated in Sagar and Trichi. The Assessing Officer observed that there was no evidence to accept the difference of Rs. 9.21 was on account of incomplete information furnished by MAYTAS Infra Pvt. Ltd. Despite giving adequate time, the assessee did not reconcile the difference in MAYTAS account and the TPO disallowed a sum of Rs. 10,54,21,341/- as unproved sub- contractors payments .
6.4 According to the DR, the contention of the assessee that MAYTAS Infra Pvt Ltd had executed work situated at 'Sagar' and Trichi but had furnished a part of the information only and such a part of the information had led to a discrepancy of Rs. 9,21,54,736/-. The assessee has information in its possession relating to the works executed and bills submitted by MAYTAS Infra Pvt. Ltd. The assessee could have reconciled the difference by furnishing the bills and other evidences in its possession to explain the discrepancy in the transactions. The assessee did not produce any evidence and merely made a submission without producing evidence before the Assessing Officer. Accordingly, he submitted that in the absence of evidence, the submissions of the assessee cannot be accepted and the disallowance made by the Assessing Officer is to be upheld.
6.5 Regarding the disallowance of payments made to sub- contractors for a sum of Rs. 1,86,12,721/-, the DR submitted that the Assessing Officer had sent 750 letters u/s 133(6) to various sub-contractors and the postal authorities had returned back 221 letters and no replies were received from 414 sub- contractors. In respect of letters returned unserved, in 221 cases, the assessee had made payments to sub-contractors for a sum of Rs. 37,22,54,421/- and claimed the same as business expenditure. The assessee was directed to explain the transactions in respect of letters unserved. The assessee submitted that various works were 32 ITA No. 1814/Hyd/2012 M/s. IJM (India) Infrastructure Ltd.
============================ executed and the addresses furnished by the assessee were temporary in nature and requested the Assessing Officer to address letters to permanent addresses of the payees from the PAN data base of the Department. The Assessing Officer held that the basic burden is on the assessee and such a burden is not discharged. The Assessing Officer observed that a portion of the expenditure out of the letters which were returned un-served was not genuine expenditure. The Assessing Officer disallowed 5% of the sub-contract payments attributable to 221 letters amounting to Rs. 1,86,12,721/- and the same is to be confirmed.
6.6 Regarding disallowance of a sum of Rs. 19,98,225/- out of the power and fuel expenses, the DR submitted that on verification of the books of account, it was noticed by the Assessing Officer that the expenditure incurred in respect of power and fuel was not supported with proper vouchers and he disallowed the same. The Assessing Officer made the addition because the assessee failed in producing the evidence and the same is to be sustained.
6.7 The DR further submitted that during the survey, blank letter heads standing in the names of Marco Enterprises,. New Delhi and Macro Enterprises, New Delhi were found in the office of
-the assessee. The assessee had paid a sum of Rs. 2.29 crores to these entities towards sub-contract charges. Letters were addressed by the Assessing Officer to these concerns and such letters were returned back by the postal authorities. Thereafter, the Assessing Officer has rightly directed the assessee to furnish the confirmation letters from the sub-contractors to prove the genuineness of the expenses. The burden is on the assessee to prove the genuineness of the expenditure incurred by it. The assessee did not discharge the onus cast upon it and the AO has rightly disallowed the payment to sub-contracts as not genuine. The action of the Assessing Officer is to be upheld.
33 ITA No. 1814/Hyd/2012M/s. IJM (India) Infrastructure Ltd.
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7. We have heard both the parties and perused the material on record on the issue relating to disallowance of expenditure. There is disallowance of payment made to sub-contractors (i) Rs. 2,29,00,000, (ii) Rs. 10,54,21,341 - payment to MAYTAS Infra Ltd. and (iii) Other subcontract payments - Rs. 1,86,12,721.
7.1 Primarily, the first payment of Rs. 2.29 crores was made to Marco Enterprises, New Delhi. These disallowances were made by the lower authorities on the reason that the assessee not proved genuineness of the payments. The letter addressed to this party was returned back by the postal authorities. The contention of the assessee's counsel is that this amount was subjected to TDS. Being so, it cannot be disallowed. However, the assessee not fully discharged the burden cast upon it. Being so, considering the facts of the case, as the assessee failed to discharge the burden that the expenditure has been laid out and expended wholly and exclusively for the purpose of business and mere payment by itself would not entitle the assessee to deduction of such expenditure unless the same was proved to be paid for commercial considerations. It is for the assessee to adduce necessary evidence in this regard. Mere fact that on earlier occasion the Tribunal has allowed similar claims in case of other assessees, that cannot be a ground to allow the claim in full without satisfying the necessary conditions existent to allow the claim in the present case.
7.2 In the present case, the assessee has incurred expenditure and claimed as deduction. The claim was not allowed by the Assessing Officer or by appellate authority on the reason that this payment is not verifiable and they doubted the genuineness of the payments.
7.3 With regard to the proposition that it is for the assessee to discharge whether any expenditure should be incurred in the 34 ITA No. 1814/Hyd/2012 M/s. IJM (India) Infrastructure Ltd.
============================ course of his business or trade and such expenditure may be incurred voluntarily and without any necessity and such expenditure is incurred, even voluntarily for promoting the business interest and to earn profit, the assessee is entitled to claim deduction under sub section (1) of 37, though there is no compelling necessity to incur such expenditure. It is also observed that payment itself not established and, secondly it is not the case of the assessee before the assessing authority that the particulars of the persons to whom the amounts were paid could be furnished without detriment to the business of the assessee. According to the DR the payment is based on "no evidence", but is based on irrelevant considerations. Allowance or disallowance of a claim under section 37(1) should depend upon existence or otherwise of the four conditions as follows:
1. The expenditure in question should not be of the nature described under the specific provisions ss 30 to 36 and 80VV of the Act( section 80VV was omitted w.e.f. from 1st April 1986)
2. The expenditure should not be of nature of capital expenditure
3. It should not be a personal expenditure
4. The expenditure have been laid out for expended wholly and exclusively for the purposes business or profession.
7.4 Now, we will examine, whether in this case the assessee has fulfilled the requirement as envisaged by the provisions of the Act. We have carefully gone through the provisions of sections 30 to
36. Section 30 relates to the allowability of payment like rent, rates, taxes, repairs and insurance for the premises used for the purpose of business or profession. In the instant case, the claim of the assessee does not relate to the kind of expenditure specified in S.30 and hence that section is not applicable. Section 31 relates to allowability of repairs and insurance in respect of machinery, 35 ITA No. 1814/Hyd/2012 M/s. IJM (India) Infrastructure Ltd.
============================ plant and furniture used for the purpose of business. Similarly, section 32 is related to allowability of depreciation on assets used in business. In the same way, while Section 32A is relating to investment allowance, section 32AB is relating to investment deposit account. Section 33 deals with development rebate, while Section 33A deals with development allowance. Similarly, Section 33AB deals with tea development account, coffee development, rubber development account, as against Section 33ABA relating to site restoration fund. Similarly, Section 33AC deals with reserves for shipping business. Section 33B relates to rehabilitation allowance and Section 34 deals with conditions for depreciation allowance and development rebate. Section 34A deals with restriction on unabsorbed depreciation and unabsorbed investment allowance for limited period in case of certain domestic companies. Section 35 deals with expenditure on scientific research. Section 35A deals with expenditure on acquisition of patent right or copy right. Section 35AB deals with expenditure on know-how. Section 35ABB deals with expenditure for obtaining licence to operate telecommunication services. Section 35AC deals with expenditure on eligible project or scheme. Section 35AD deals with deduction in respect of expenditure on specified business. Section 35B deals with export market development allowance. Section 35C deals with agricultural development allowance. Section 35CC deals with rural development allowance. Section 35CCA deals with expenditure by way of payment to association and institutions for carrying out rural development programmes. Section 35CCB deals with expenditure by way of payment to associations and institutions for carrying out programmes of conservation of natural resources. Section 35D deals with amortization of certain preliminary expenses and 35DD deals with amortization of expenditure in case of amalgamation or de-merger. Section 35DDA deals with amortization of expenditure 36 ITA No. 1814/Hyd/2012 M/s. IJM (India) Infrastructure Ltd.
============================ incurred under voluntary retirement scheme. Section 35E deals with deduction for expenditure on prospecting etc. for certain minerals. Section 36 deals with other deduction in respect of premium paid, interest, etc. 7.5 The claim of payment of subcontract by the present assessee is not disqualified for deduction under the Act. Now, coming to next question as to whether the expenditure is capital expenditure or not, we are of the opinion that the expenditure is not a capital expenditure since the assessee did not acquire any capital asset.
7.6 As for the third condition as to whether the payment is in the nature of personal expenditure or not, again, in our opinion, this is not the payment relating to personal benefit of any employees or directors of assessee-company. Being so, it is not personal expenditure.
7.7 Now, we have to see whether the expenditure is incurred wholly and exclusively for the purpose of business. In the case of Sassoon J. David & Co. Ltd. Vs. CIT (118 ITR 261 (SC) wherein held that the expression 'wholly and exclusively' used in s. 10(2)(xv) does not mean 'necessarily'. Ordinarily, it is for the assessee to decide whether any expenditure should be incurred in the course of his or its business. Such expenditure may be incurred voluntarily without any necessity and it is incurred for promoting the business and to earn profits, the assessee can claim deduction even though there was no compelling necessity to incur such expenditure. The fact somebody other than the assessee is also benefited by the expenditure should not come in the way of an expenditure being allowed by way of deduction under section 10(2)(xv), if it satisfies otherwise the tests laid down by the law.
7.8 Considering the above proposition, we find that the said entire payment of subcontract cannot be disallowed as there is no 37 ITA No. 1814/Hyd/2012 M/s. IJM (India) Infrastructure Ltd.
============================ evidence for such payment. Now, the issue before us is whether the assessee has established the payment of subcontract by producing the necessary evidence. The reason for disallowance is the letter addressed to the subcontractors by the Assessing Officer were returned back by the postal authorities. In the present case the work was carried on by the assessee in the financial year 2007-08. The Assessing Officer started enquiry in the last quarter of the year 2012, i.e., after 3 to 4 years. At that time the sub- contractors might have changed their place of business and non- delivery of letters by postal authorities cannot be a reason to find fault with the assessee and to disallow the expenditure incurred by the assessee.
7.9 In CIT v. Sigma Paints Ltd. (1991) 188 ITR 06 (Bom), their Lordships of the Hon'ble Bombay High Court held and observed at pages 7 & 8 of the Reports as under:
" ..... Shri Patel, learned counsel for the respondent- assessee, has invited our attention to the fact that the assessee had appeared as an intervener before the Special Bench of the Tribunal when it was considering the appeals relating to French Dyes and Chemicals (I.) (P.) Ltd. He has further invited our attention to paragraphs 24 to 28 of the judgment in that case to show that the assessee had produced various details and the records maintained by the company relating to the secret commission payments. Vouchers for the amounts received by the sales officer or other responsible persons for the payment of secret commission were available. The details of sales transactions entered into with various mill-companies, in respect of which secret commission had to be paid, were available. There was a complete tally between the commission paid and the Extent of business done by the mill-company. Details were also available of the exact transactions in respect of which the assessee had to pay the secret commission The assessee had given a complete list showing the turnover and the amount of secret commission paid from year to year. The percentage of secret commission was minimal. The full details of payment on the above basis in respect of several parties were available. They were correlated to the transactions which the assessee had with those persons and the period during which the transactions were entered into. The only missing item was stated to be the names of the particular parties to whom the payments were made.38 ITA No. 1814/Hyd/2012
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============================ This, the Tribunal held, could not be supplied without detriment to the business of the assessee in the very nature of things. Shri Patel then pointed out that, in paragraph 29 of the judgment, the Special Bench of the Tribunal noted that the position was the same in the case of Indochem Ltd. and that of the assessee.
On the above stated facts, our judgment in the case of CIT v. Goodlass Nerolac Paints Ltd. [1991] 188 ITR 1 (Income-tax Reference No. 606 of 1976) dated August 21, 1990, squarely applies. Accordingly, we agree with the Tribunal that its conclusion is based on a finding of fact arrived at on the basis of good and cogent material"
7.10 In the instant case of the assessee-company too, the facts are identical with those considered by the Hon'ble Bombay High Court in the case of Sigma Paints (188 ITR 6). The payment vouchers giving the relevant details, including the names of the payees, and also bearing the signatures of the payees as recipients, had been produced by the assessee-company before the Assessing Officer. The payment vouchers contained full details of the nature of transaction. In other words, the details of all transactions in respect of which the subcontract payment had been paid by the assessee-company are duly recorded in the payment vouchers and other evidence. The only missing link was the address of the payees, which it was all along submitted and, however, the letters written by the Assessing Officer to those parties were returned by the postal authorities and these things cannot jeopardise the claim of the assessee-company.
7.11 The AR submitted that vouchers clearly mentioned the nature of works carried on by the subcontractors. In view of the above facts, we are unable to accept the contention of the learned Departmental Representative that the genuineness of the payment was not established by the assessee. In our opinion, genuineness of the payments was established by the assessee.
39 ITA No. 1814/Hyd/2012M/s. IJM (India) Infrastructure Ltd.
============================ 7.12 We may note at the cost repetition that the decision of the Hon'ble Bombay High Court in CIT vs. Sigma Paints Ltd. (1991) 188 ITR 6 (Born), clearly supports the case of the Assessee Company. In that case there was payment of secret commission. The assessee company, in that case, had produced various details and records maintained by it relating to commission payments. The details of sales transactions entered into with various mill companies, in respect of which secret commission had been paid, were produced before the assessing officer along with payment vouchers. There was a complete reconciliation and tally between the commission paid and the extent of business done by the mill company. The payments were correlated to the transactions which the assessee had with those persons. The only missing link was stated to be the names of the particular parties to whom the payments were made. This, the Tribunal held, could not be supplied without detriment to the business interests of that assessee, considering the very nature of things.
7.13 The initial onus and burden of proof was on the assessee. In the instant case, such initial onus and burden of proof has been duly discharged by the Assessee Company by producing its audited books of accounts, payment vouchers-and other documents giving full details as to the nature of transactions, which necessitated the payment of such subcontract works and that this was an accepted norm and established in this line of business and that without such payment, it was not possible to survive in this line of business, as well as the prevalent trade practice in the line of business carried on by the Assessee Company all along. However, in this case the inflating of expenditure by the assessee cannot be ruled out. Considering the entire facts and circumstance of the case and chances of inflating the expenses by the assessee, to meet the ends of justice, we are inclined to disallow 15% of this payment.
40 ITA No. 1814/Hyd/2012M/s. IJM (India) Infrastructure Ltd.
============================ 7.14 Regarding payment to MAYTAS Infra Ltd. of Rs. 10,54,21,341, the assessee failed to reconcile the difference by furnishing the bills and other evidences in its possession to explain the discrepancy in the transactions. Being so, as discussed in earlier paras 7 to 7.13, we are inclined to disallow 15% of this payment.
7.15 Regarding the disallowance of Rs. 1,86,12,721 to other subcontract payments, the Assessing Officer sent 750 letters to the sub contractors, out of this 221 letters were returned back and no reply from 414 sub contractors. The payment in respect of returned back letters consists payment of Rs. 37,22,54,421. The assessee was not able to prove the genuineness of the payment. Considering this, the Assessing Officer disallowed only 5% of Rs. 37,22,54,421 which is very reasonable. Being so, this disallowance is confirmed.
7.16 Regarding the disallowance of Rs. 19,98,225 towards power and fuel expenses, which was not supported by proper vouchers and bills. Being so, as discussed in paras 7 to 7.13 above, we direct the Assessing Officer to disallow 15% of this expenditure.
8. Levy of interest u/s. 234B and 234D is consequential and mandatory in nature which is to be computed by the Assessing Officer accordingly while passing giving effect order to this order.
9. In the result, appeal of the assessee is partly allowed.
Order pronounced in the open court on 22nd August, 2013.
Sd/- Sd/-
(ASHA VIJAYARAGHAVAN) (CHANDRA POOJARI)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Hyderabad, dated the 22nd August, 2013
41 ITA No. 1814/Hyd/2012
M/s. IJM (India) Infrastructure Ltd.
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Copy forwarded to:
1. M/s. IJM (India) Infrastructure Ltd., 1-89/1, Plot Nos. 42 & 43, Kavuri Hills, Phase-1, Madhapur, Hyderabad-81.
2. The ACIT, Circle-2(1), Hyderabad.
3. The DRP, Hyderabad.
4. The Director of Income-tax (International Taxation), Hyderabad.
5. The DR - A Bench, ITAT, Hyderabad.
Tprao