Pr.Commissioner Of Income Tax vs M/S Micromax Informatics Ltd on 7 February, 2025

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Delhi High Court - Orders

Pr.Commissioner Of Income Tax vs M/S Micromax Informatics Ltd on 7 February, 2025

1. The Principal Commissioner of Income Tax impugns the order of the Income Tax Appellate Tribunal1 dated 20 February 2015 for Assessment Year2 2011-12. We had by our order of 14 December 2022 admitted this appeal on the following questions of law:-

"a) Whether in the facts and circumstances of the case; the Income tax Appellate Tribunal [' Tribunal ] was correct in accepting the interest rate of 9.25% [as applied by the assessee] as the arm's length price based on comparable uncontrolled price method without addition of any mark up?

b) Whether in the facts and circumstances of the case, the Tribunal was justified in reducing the rate charged on the standard letter of credit from 2% to 1% for considering the arm's length price based on comparable uncontrolled price method?

c) Whether in the facts and circumstances of the case the Tribunal was correct in deleting the addition amounting to Rs.

3,46,57,17,077 made against credit notes that remained, 1 Tribunal 2 AY ITA 797/2015 Page 1 of 8 This is a digitally signed order.

d) Whether in the facts and circumstances of the case the Tribunal was correct in deleting the addition amounting to Rs. 33,61,06,480/- made on account of gross profit rate?"

2. We find that question „a‟ pertains to the interest rate which was charged by the respondent/assessee in respect of the loans which had been extended. The assessee had, in that respect, charged interest at 9.25%. The Tribunal, while examining this aspect, has borne in consideration the undisputed fact that the loan was made and expressed in US Dollars. It has thus, and in our opinion correctly, come to conclude that it would be the international LIBOR rate which would govern as opposed to what may have been adopted by SBI and which would have been relevant only for domestic transactions.

3. We take note of the following conclusions which have come to be rendered for the Tribunal in this respect:-

"26.6. Our findings:

Ground no.27 is on addition as a transfer pricing adjust regarding interest on loan given to subsidiary company. The DRP has directed to apply SBI base rate plus 150 basis points. The issue is covered in favour of the assessee and against the Revenue by the following decisions.

1. Siva Industries & Holdings Ltd. v. Asstt. CIT [2011] 11 taxmann.com 404 (Chennai - ITAT),

2. M/s Four Soft Ltd, Hyderabad v. DCIT (ITA No. 1495/HYD/2010),

3. Dy. CIT v. Tech Mahindra Ltd. [2011] 46 SOT 141 (URO)/12 taxmann.com 132 (Mum.)

4. Tata Autocomp Systems Ltd. v. Asst. CIT [2012] 21 taxmann.com 6 (Mumbai - Trib.) As per these decisions for proper benchmarking, interest rate to be applied is the interest rate of the currency in which the amount has been advanced. Since in this case the loan has been given in USD, the interest rate will be LIBOR+. The international rate fixed by the LIBOR has to be considered for bench marking. The assessee has charged interest @ 9.25% which is much above the LIBOR and hence, no further adjustment on this account needs to be made.

ITA 797/2015 Page 2 of 8

This is a digitally signed order.

The authenticity of the order can be re-verified from Delhi High Court Order Portal by scanning the QR code shown above. The Order is downloaded from the DHC Server on 01/03/2025 at 00:02:49 Thus this ground of the assessee stands allowed."

4. Question „b‟ is concerned with the rate charged on a Standby Letter of Credit. The DRP had rejected the stand of the respondent/assessee, which had charged 1%, and substituted the same by 2%. However, as we view the findings which were ultimately recorded by the Tribunal, we fail to discern any underlying logic which may have weighed upon the DRP to mandate 2% in respect of the Standard Credit Limit. We bear in consideration the following passages which appear in the order rendered by the Tribunal:-

"27.5. Revenue‟s submissions:

It was submitted by the learned DR that this ground is common with ground no.1 in Revenue‟s appeal. The learned DR further submitted that there are two issues arising on this point. The first is whether the assessee is required to charge an amount from its subsidiary in respect of the Standby Letter of Credit and the second is if it has to be charged then at what rate. The first issue is not being admitted by the assessee company as the learned AR has not disputed the fact that some amount is to be charged on the Standby Letter of Credit. As regards the second contention that the amount charged at the rate of 2% is too high as compared to the cost at the rate of 1% to be incurred by the assessee company, it is submitted that the assessee has provided service to the subsidiary company by providing Standby Letter of Credit. Accordingly for the services rendered by it, it is required to add service charges on the cost it has incurred in providing the Standby Letter of Credit. He further contended that the computation done by the TPO by deducting cost of such providing such services at 2.5% and further addition of 200 basis point on such services at 2.5% and further addition of 200 basis point on such cost was justified. On this basis he supported the order of the TPO.

27.6. Our finding:-

Ground no.28 is against the Transfer Pricing adjustment as confirmed by the DRP in respect of stand by letter of credit. As the assessee has obtained stand by letter of credit @ 1%, the rate suggested by the DRP at 2% in our view is not justified. We direct that 1% of stand by letter of credit amount be taken as arm‟s length price. In the result the assessee gets part relief and this ground is partly allowed."

ITA 797/2015 Page 3 of 8

This is a digitally signed order.

The authenticity of the order can be re-verified from Delhi High Court Order Portal by scanning the QR code shown above. The Order is downloaded from the DHC Server on 01/03/2025 at 00:02:50

5. Question „c‟ was in respect of deletion of additions which were claimed by the respondent and flowed from various credit notes which had been placed for the consideration of the Assessing Officer. Quite apart from the fact that the accounts had been duly audited as also scrutinized by a Special Auditor, the Tribunal has held as follows:-

"9.6. Our findings:-

After considering the rival submissions and the details of the discounts and copy of accounts submitted by the assessee to the revenue authorities, which is filed before us by way of paper book, we observe that the entire addition is based on the fact that the assessee has failed to submit the copy of accounts in the books of super distributors and in some cases it has failed to reconcile the differences in the accounts during the assessment proceedings. Before us the assessee has demonstrated that it has submitted the necessary information and each and every account has been reconciled. This is a pure case of reconciliation of accounts and we do not understand how an element of income can be inferred and an addition made. The AO has referred this issue to the special auditor as he was not satisfied about the reconciliation of account of Bright Point India Pvt Ltd. The special auditor thereafter examined this issue and has asked the appellant company to submit the ledger account of M/S Bright Point India Pvt Ltd in its books of accounts as well as in the books of M/s Bright Point India Pvt Ltd. for the financial year 2009-10 and 2010-11. After verification, the special auditor has reported the reconciliation for the financial year 2009-10 in its report at paperbook page 4980. As per this reconciliation, the credit notes issued by the appellant in the name of M/s Bright Point India Pvt Ltd during the financial year 2009-10 were Rs. 125,92,827 whereas the debit note raised by M/s Bright Point India Pvt Ltd on the appellant company was Rs. 125,94,969. Thus there was a small excess debit by M/s Bright Point India Pvt Ltd of Rs. 2142.02. Thus, it cannot be said that credit not issued by the assessee has not been accounted for by Bright Point India Pvt Ltd. Even this difference has also been explained by the special auditor in its report. Similar reconciliation has been given by the special auditor for the financial year 2010-11 whereby it has been stated that the appellant company has issued credit note of Rs. 30,13,25,910 and the corresponding debit note raised by M/s Bright Point India Pvt Ltd on the appellant company were of Rs. 30,67,54,495.Thus, the credit note issued by the appellant company were not excessive. On the contrary, claim made by Bright Point India Pvt Ltd on the assessee was more. We further note from paperbook page 4982 that the payments received by the appellant ITA 797/2015 Page 4 of 8 This is a digitally signed order.

The authenticity of the order can be re-verified from Delhi High Court Order Portal by scanning the QR code shown above. The Order is downloaded from the DHC Server on 01/03/2025 at 00:02:50 company and the payments stated to have been made by M/s Bright point India Pvt Ltd as per its accounts during the year are exactly the same, i.e., Rs. 161,81,58,957. All these facts are borne on record and the same were brought to the notice of the DRP by the assessee. The observations made by the DRP in this regard are in total disregard to the facts and evidences on record. Accordingly, DRP was not correct in not deleting the addition on this account. Under these circumstances, we are of the considered opinion that the additions in question are bad in law and without any adverse evidence against the assessee. In the result this addition on account of credit notes are deleted.

As regards the addition on account of remaining super distributors of Rs. 346,57,17,107, we note that this addition has been made not on the basis of any adverse material or information collected against the assessee. The assessing officer in the draft assessment order has drawn adverse inference on the ground that the appellant company has not provided its ledger account in the books of the 65 super distributors. It is not a case where assessee has failed to provide what was available with it.

As per the facts on record, the appellant company has provided its ledger account in respect of all the 95 distributors. In response to the letter received from the special auditor, the appellant company vide letter dated 29th August, 2013 provided the Rebate & Discount Ledger. It provided the contact details of the 65 distributors for the financial year 2010-11 whose ledger account in their books of account were not provided. The appellant company also provided balance confirmations of the super distributors. The observation of the special auditor was limited to the point that in the absence of ledger account in the books of super distributors, they are unable to comment. The Assessing Officer thereafter sought clarification by way of show cause notice and in response thereto the appellant company submitted the confirmation from each of the super distributor in whose case the special auditor has pointed that ledger accounts were not provided. The AO still drew adverse inference despite all the above information being available on record.

As regards the addition of Rs. 947,21,431 on account of difference as per the accounts of the distributors, we have examined the copy of ledger accounts and reconciliation filed by the assessee. These accounts have been duly reconciled by the assessee and there was no reason to draw adverse inference on this account. We further note that at the time of the hearing before the DRP, the assessee collected copy of accounts in the book of the super distributor and also filed the reconciliation in respect thereof. As per these copy of accounts and the reconciliation, each and every account stood reconciled including the accounts whereby difference of Rs. 947,21,431 was pointed out. The DRP ignoring all these evidences ITA 797/2015 Page 5 of 8 This is a digitally signed order.

The authenticity of the order can be re-verified from Delhi High Court Order Portal by scanning the QR code shown above. The Order is downloaded from the DHC Server on 01/03/2025 at 00:02:50 and the material have confirmed the action of the Assessing Officer. During the course of hearing with the assistance of the learned AR, we have verified these accounts. At the time of the hearing before us, the learned DR could not controvert the above facts. The conclusion of the AO as upheld by the DRP, in our view is contrary to facts on record and based purely on surmises and conjectures. Such conjectures presumptions and surmises cannot be the basis of addition. The finding as recorded by the DRP and stated hereinabove on these issues of credit notes is incorrect and contrary to facts on record. Under these circumstances, we are of the considered opinion that the additions in question are bad in law and without any adverse evidence against the assessee. In the result we delete these additions being devoid of merit and these grounds nos 6, 7 and 13 of the assessee are allowed."

6. As is manifest from the aforesaid recital, which appears in the order impugned before us, the Tribunal has painstakingly gone through the material on record and had independently examined the ledger accounts and undertaken a reconciliation exercise. Bearing in mind the aforesaid, we find no justification to differ from the conclusions returned by the Tribunal and which is the ultimate fact- finding authority.

7. That only leaves us to examine the issue arising out of the adoption of the gross profit rate. That addition itself was firstly based on the rejection of the books of account of the respondent/assessee. The Tribunal has, in this respect, found that there was clearly no justification to reject the books of account since the assessee had been found to be maintaining proper books coupled with the special audit to which it had been subjected to. This becomes apparent from a reading of para 23.6 and which is extracted herein below:-

"23.6. Our findings:

On consideration of rival contentions we are of the considered view that the rejection of books of accounts is bad in law for the following reasons:

The assessee has maintained regular books of accounts and these ITA 797/2015 Page 6 of 8 This is a digitally signed order.

The authenticity of the order can be re-verified from Delhi High Court Order Portal by scanning the QR code shown above. The Order is downloaded from the DHC Server on 01/03/2025 at 00:02:50 have been audited by the tax auditors as well as by the special auditors appointed by the AO. Both these auditors have certified that the assessee was maintaining proper books of accounts. The AO seems to have based his opinion on the report of KPMG India. This report was a due diligence report obtained by the prospective investors. Such due diligence reports cannot lead to formation of an opinion that proper books of accounts have not been kept by the assessee. The assessee also maintained quantitative details of inventory. Similarly on the issue of swap units while disposing of ground nos. 8, 9 and 10, we have dealt with the issue and from our observations it is clear that this cannot be a basis for rejection of books of accounts. Addition on account of difference in credit notes cannot also form a ground for rejection of books of accounts for the reason that we have come to a conclusion that the addition itself is arbitrary and deleted the same. In fact the AO relied on these very books of accounts and to make huge additions during the course of assessment. On the one hand the AO seeks to rely on the books of accounts and on the other hand the AO rejects the books of accounts for estimated profits on adhoc basis. This in our view is not permissible.

The rejection of the books of accounts cannot be done in a light hearted manner. Section 44AA of the Income Tax Act mandates that every person carrying on business or profession shall keep and maintain such books of accounts are maintained in such a manner which makes it difficult for the Assessing Officer to compute its total income then only the books of accounts can be rejected. This is not the case here. Even if, there are certain discrepancies or errors which are not so crucial so as to disable the Assessing Officer to compute the total income of the appellant, then the books of account cannot be rejected but such discrepancies can be taken into consideration while computing the total income. Further, the rejection of books of accounts is not justified when mistakes in the books of accounts are of general or technical nature. The remarks given by the Assessing Officer in the appellant‟s case are neither sufficient for rejecting the duly audited books of accounts not the Assessing Officer has shown that how these remarks would have a bearing in giving a finding that true income cannot be computed on the basis of books of accounts maintained by the appellant on day to day basis in regular course of business.

As we have held that the rejection of books of accounts is bad in law the question of enhancement of gross profit on estimate basis does not arise. The AO is directed to adopt the profits as declared by the assessee in its books of accounts. In view of the above, we delete this addition and this ground of appeal of the assessee is allowed."

8. The Tribunal thus found that not only had the assessee ITA 797/2015 Page 7 of 8 This is a digitally signed order.

The authenticity of the order can be re-verified from Delhi High Court Order Portal by scanning the QR code shown above. The Order is downloaded from the DHC Server on 01/03/2025 at 00:02:50 maintained the books of account in terms as mandated, the same had also been subjected to independent audit. Of greater import is the finding of the Tribunal that the AO itself had relied upon those accounts for making various additions. The view thus taken clearly merits no interference.

9. Consequently and for all the aforesaid reasons, we find no merit in the appeal. The same shall stand dismissed. The questions of law are answered in the negative and against the appellant/Revenue.

YASHWANT VARMA, J.

HARISH VAIDYANATHAN SHANKAR, J.

FEBRUARY 07, 2025/nd ITA 797/2015 Page 8 of 8 This is a digitally signed order.

The authenticity of the order can be re-verified from Delhi High Court Order Portal by scanning the QR code shown above. The Order is downloaded from the DHC Server on 01/03/2025 at 00:02:50

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