Income Tax Appellate Tribunal - Delhi
Alcatel Lucent India Ltd., Gurgaon vs Acit, Circle-1(1), New Delhi on 16 August, 2021
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH 'I-1', NEW DELHI
Before Ms. Suchitra Kamble, Judicial Member
Dr. B. R. R. Kumar, Accountant Member
ITA No. 478/Del/2021: Asstt. Year: 2016-17
Alcatel Lucent India Ltd., Vs ACIT,
202-206, Tolstoy House, 15, Tolstoy Circle-1(1),
Marg, New Delhi-110001 New Delhi
(APPELLANTT (RESPONDENT)
PAN No. AACCA8667N
Assessee by : Sh. Deepak Chopra, Adv. &
Sh. Ankul Goyal, Adv.
Revenue by : Sh. Surenderpal, CIT DR
Date of Hearing: 09.08.2021 Date of Pronouncement: 16.08.2021
ORDER
Per Dr. B. R. R. Kumar, Accountant Member:
The present appeal has been filed by the assessee against the order dated 31.03.2021 passed by the AO u/s 143(3) r.w.s. 144C(3) and r.w.s 143(3A) & 143(3B) of the Income Tax Act, 1961.
2. Following grounds have been raised by the assessee:
"1. That on the facts and circumstances of the case and in law, the Ld. AO, has erred in determining the taxable income of the appellant for the subject assessment year at INR 111,30,04,560/- as against the returned income of INR 61,86,41,220/-.
1.1 That on the facts and circumstances of the case and in law, the Ld. AO has erred in making several additions based on mere conjunctures and surmises, 2 ITA No. 478/Del/2021 Alcatel Lucent India Ltd.
ignoring the factual matrix of the appellant as well as the nature of the transactions undertaken by the appellant.
1.2 That the Ld. AO failed to appreciate the submissions made/ contentions raised by the appellant and further erred in making several observations and inferences in the impugned assessment order which are factually incorrect and legally untenable.
Transfer Pricing Grounds
2. That, in framing the impugned assessment order, the reference made by the Ld. AO, under section 92CA(1) of the Act suffers from jurisdictional error, as the Ld. AO, had not recorded any reasons nor he had any material whatsoever on the basis of which he could even reach a prima-facie opinion, that it was 'necessary or expedient' to refer the matter to the learned Additional Commissioner of Income Tax, International Tax & Transfer Pricing - 1(1), New Delhi ('Ld. TPO') for computation of arm's length price ('ALP').
3. That on facts and circumstances of the case and in law, the Ld. AO/ Ld. TPO / Hon'ble Dispute Resolution Panel ('Hon'ble DRP') have erred, in making an adjustment of INR 4,41,74,915 in relation to the international transaction pertaining to purchase of capital goods from AEs without determining the ALP of the transaction in accordance with the provisions of Section 92CA(3) read with Section 92C(3) of the Act.
3.1 That on facts and circumstances of the case and in law, the Ld. TPO/ the Ld. AO have erred in making/ upholding the transfer pricing adjustment in relation to the international transaction pertaining to purchase of capital goods from AEs without issuing any show cause notice to the Appellant or granting an opportunity of being heard which violates the principle of natural justice.
3.2 That on facts and circumstances of the case and in law, the Hon'ble DRP erred in observing that the 3 ITA No. 478/Del/2021 Alcatel Lucent India Ltd.
Appellant did not provide any evidence to support the arm's length nature of the international transaction of purchase of capital goods without appreciating that no information was requested from the Appellant in relation to the transaction in question either by the office of Ld. TPO or by the Hon'ble DRP. Appellant had used combined transaction approach and used Transactional Net Margin Method ('TNMM') to determine the ALP of the transaction and no information was pending for application of such method. In case Hon'ble DRP / Ld. TPO proposed to use some other method for determining the ALP then adequate opportunity should be given to the Appellant to defend the method used in preparing the transfer pricing ('TP') documentation and provide information, if any, requested.
3.3 That on facts and circumstances of the case and in law, Hon'ble DRP erred in rejecting the use of combined transaction approach to determine the ALP of international transaction of purchase of capital goods.
3.4 That on the facts and circumstances of the case and in law, the Ld. AO/ Ld. TPO / Hon'ble DRP have erred in arbitrarily rejecting the approach used by the Appellant in determining the ALP of the international transaction pertaining to purchase of capital goods without providing any cogent reason in relation to the same.
3.5 That on facts and circumstances of the case and in law, the Ld. AO/ Ld. TPO / Hon'ble DRP have erred in making a transfer pricing addition in relation to the international transaction of purchase of capital goods without determining the ALP of the international transaction using any of the six methods prescribed under Section 92C of the Act read with Rule 10B of the Rules.
3.6 That on the facts and circumstances of the case and in law, the Ld. AO/ Ld. TPO / Hon'ble DRP have erred in following an assumption - based approach for the purpose of proposing the transfer pricing 4 ITA No. 478/Del/2021 Alcatel Lucent India Ltd.
adjustment, wherein the Ld. TPO has arbitrarily assumed that the AEs charged a markup of 8% in relation to sale of capital goods to the Appellant.
3.7 That on the facts and circumstances of the case and in law, the Ld. AO/ Ld. TPO / Hon'ble DRP have erred in making/upholding the addition of INR 4,41 74,915 made by following the approach of disallowing the alleged mark-up @ 8%, which has been charged by the AE on sale of capital goods without appreciating that even going by the Ld. TPO's approach, only the depreciation portion of such alleged markup would have been considered as deduction while computing the income chargeable to tax under the head PGBP for AY 2016-17. The remaining amount would not have been considered for the purpose of computing the income chargeable to tax.
3.8 That on the facts and circumstances of the case and in law, the Ld. AO/ Ld. TPO / Hon'ble DRP have erred in making/ upholding additional transfer pricing adjustment at the rate of 15% of INR 3,84,12,970 without appreciating that once the entire amount of INR 3,84,12,970 has been proposed to be disallowed by the Ld. TPO, any additional adjustment for depreciation would result in dual adjustment.
3.9 That on the facts and circumstances of the case and in law, the Ld. AO/ Ld. TPO / Hon'ble DRP have erred in reducing the amount of depreciation allowance without simultaneously reducing the revenue earned by the Appellant on such depreciation cost since the Appellant was remunerated on cost plus basis for provision of CSD services its AEs and the cost base for such international transaction included the amount of depreciation on purchase of capital goods.
Corporate Tax Grounds
4. That on the facts and circumstances of the case and in law, the Ld. AO has erred in disallowing the liquidated damages of INR 1,77,13,487/- incurred by the appellant pursuant to breach of its contractual 5 ITA No. 478/Del/2021 Alcatel Lucent India Ltd.
arrangements on the grounds that the same could not be verified.
4.1. That on the facts and circumstances of the case and in law, the Ld. AO has erred in summarily j/~ rejecting the appellant's contentions and not considering the binding judicial precedents which squarely applies to the facts of the appellant's case.
5. That on the facts and circumstances of the case and in law, the Ld. AO has erred in disallowing the interest on foreign term loan amounting to INR 13,57,00,000/- u/s 40(a)(i) of the Act.
5.1. Without prejudice to the above, on the facts and circumstances of the case and in law, the Ld. AO has erred in not considering the direction of the Hon'ble DRP and proceeding to disallow the entire amount of INR 13,57,00,000/- being interest liability as per books of accounts instead of INR 5,06,995/-, which has actually been charged to profit and loss account for the subject assessment year.
5.2. That on the facts and circumstances of the case and in law, the Ld. AO has erred in holding that the appellant has failed to provide any details in relation to the said ground without providing any opportunity of being heard.
6. That on the facts and circumstances of the case and in law, the Ld. AO has erred in making an addition of INR 3,33,65,030/- to the income of the appellant alleging that the said amount has not been recognized as revenue in the books of accounts.
6.1. That on the facts and circumstances of the case and in law, the Ld. AO has erred in drawing adverse inference by holding that the purported excess amount as per Form 26AS over books of accounts by itself amounts to underreporting of income.
6.2. That on the facts and circumstances of the case and in law, the Ld. AO has erred in rejecting the appellant's contention that the difference appearing in 6 ITA No. 478/Del/2021 Alcatel Lucent India Ltd.
the amount of revenue recognized as per books of accounts of the appellant and as per Form 26AS is on account of different accounting policies being followed by the payer/customer and the appellant.
7. That on the facts and circumstances of the case and in law', the Ld. AO has erred in making an addition of INR 30,74,09,825/- basis the order of the Ld. TPO dated 18 November 2020 passed pursuant to directions of the Hon'ble DRP without considering the order of the Ld. TPO passed under section 154 of the Act dated 26 March 2021 reducing the amount of TP addition to INR 4,41,74,915/-.
8. That on the facts and circumstances of the case and in law, the Ld. AO, has erred in computing the tax payable by considering the assessed income at INR 170,50,50,356/- instead of assessed income of INR 111,30,04,560/-.
9. That on the facts and circumstances of the case and in law, the Ld. AO, has erred in considering returned income of INR 61,88,16,224/- as against INR 61,86,41,220/-
10. That on the facts in the circumstances of the ease and in law, the Ld. AO has erred in levying interest under section 234B of the Act.
11. That on facts in the circumstances of the case and in law, the Ld. AO has erred in initiating penalty proceedings under section 271(1)(c) of the Act mechanically and without recording any adequate satisfaction for its initiation."
3. The moot issue regarding the Transfer Pricing raised by the assessee relates to adjustment on account of capital goods purchased from AE. During the year, the assessee purchased capital goods of Rs.48,01,62,130/- from the AE. The AO held that the purchase of capital goods cannot be benchmarked under TNMM. The AO observed that AE has charged a markup of 7 ITA No. 478/Del/2021 Alcatel Lucent India Ltd.
8% on this sale. The TPO did not allow Rs.3,84,12,970/- being the 8% markup on the capital goods purchased by the assessee and also disallowed the depreciation of Rs.57,61,945/- and thus making an adjustment of total amount of Rs.4,41,74,915/-.
4. We have gone through the decision of the ld. DRP on this issue. The Panel held that the purchase of capital goods does constitute a separate international transaction in term of express statutory provisions contained in Section 92B(1) r.w. Explanation (1)(a). The ld. DRP also held that the ALP of the international transaction pertaining to purchase of capital goods from AE has been determined along with other transaction covered CSD segment of the assessee under combined transaction approach cannot be accepted.
5. The operative part of the order of the ld. DRP is reproduced for the sake of convenience:
" It has been argued on be half of the assessee that the TPO has vio late d the principle s of natural justice by not pro viding an opportunity of being he ard to the assessee and that the TPO proceede d to dete rmine the ALP of the inte rnatio nal transactio n in an ad-hoc manner without applying any of the six me thods prescribed unde r Indian T P regulations as mandate d by Sectio n 92CA(3) o f the Act and CBDT's Instructio n No .3/ 2016.
Reliance was placed on Lumax Industries Ltd. Vs ACIT in ITA No. 5252/De l/2011 and AWB India Pvt. Ltd. Vs DCI T in ITA No . 6480/De l/2012. I t is also contended that the TPO did not given any cognizance to the fact that the de preciation which was charged to profit and loss account of the assessee was included in the cost base 8 ITA No. 478/Del/2021 Alcatel Lucent India Ltd.
of the assessee which was recove red fro m the AEs alo ng with a markup o f 8%.
Accordingly, the ALP of inte rnational transaction pertaining to purchase o f capital goo ds from AEs was de termine d along with the other transactions cove red under the CSD se gment o f the assessee unde r combine d transactio n appro ach and the T PO accordingly, made two fo ld adjustme nt viz., allege d markup of 8% o n the purchase cost i.e . Rs.3,84,12,970/- and depreciation of 15% o n alle ged markup o f 8% i.e . Rs.57,61,945/- .
The pane l has carefully co nsidere d the rival conte ntions. It is noticed that the purchase of capital goo ds does constitute a separate inte rnatio nal transaction in terms of express statutory pro visions contained in Section 92B(1) read with explanatio n (1) (a) and needs to be separate ly benchmarked, especially fo r the purpo se of calculating de preciation and othe r cost re lated expenses as he ld by the De lhi Bench o f the ITAT in Honda Moto rcycle & Scooters I ndia Pvt. Ltd. Vs ACIT (2015) 56 taxmann.co m 237. The contention o f the assessee that the ALP of international transactio n pertaining to purchase o f capital goo ds from AEs has been de termined along with the other transactions cove red under the CSD segment of the assessee unde r combined transactio n approach, cannot there fore be accepte d.
The pane l also no tices the fact that the assessee apart from me re making a bald statement that the A LP of international transaction o f capital goods is included in other transactio ns unde r CSD segment has no t file d e ither be fore the T PO or be fore this pane l. The purchase bills o f these goods in the hands off its AE and necessary evide nce as to whether the AE has so ld these goods to the assessee at the same price at which they we re purchased by the AE or with any markup value . Nor has the asse ssee taken pains to give its own 9 ITA No. 478/Del/2021 Alcatel Lucent India Ltd.
data of comparables to show any arm's length co mparison. Thus, in the absence of these purchase bills and evidence , the assessee has failed to discharge its onus in this regard and it cannot, the refo re, be stated that the international transactio n re lating to purchase o f capital goods is at arm's le ngth. The pane l is fo rtified in its decision by the ho lding off the De lhi Bench of the ITAT in DHR Ho lding I ndia Pvt. Ltd. Vs DCIT (2020) 117 taxmann.com 469, whe re on identical facts , the ITAT observed thus:
"15. We have co nside red the rival arguments made by bo th the sides, pe ruse d the orde rs of the AO/ TPO/DRP and the pape r book on behalf of the assessee. We have also conside re d the various decisions cited be fore us. We find the TPO in the instant case while rejecting the contention of the assessee that purchase of fixe d assets should be accepte d at arm's length no ted that despite ample opportunities provided to the taxpayer, the taxpayer merely pro vided copy o f sample invoices corre sponding bills of e ntry but failed to provide mark-up, if any, o n the cost of the fixed asse ts in the hands of the AE's. No contemporaneo us documentary evidence was submitted by the taxpayer for deducing the AE book value/markup charged. The primary onus was on the part of the taxpaye r to establish the cost of goods in the hands of the AE which exported it to the taxpayer. Further the taxpayer also failed to provide any suppo rting document/evidence as provide d as per rule 10 D o f the IT Rules.....
...
17. It is the submission o f the Ld. Counsel for the assessee that the TPO did not provide any comparable data and did not apply any method to bench markup the said transaction. It is also his submission that as per provisio n section 92 CA of the I T Act the T PO is require d to determine the arms length price and not decide d the allo wability o f transaction. Since the assessee in the instant case has 10 ITA No. 478/Del/2021 Alcatel Lucent India Ltd.
not file d the purchase bills o f these assets in the hands of its AE and as to whethe r the AE has so ld these assets to the assessee at the same price at which the y we re purchase d by the A E or with any mark-up value , therefore , we are o f the considere d o pinion that the contention of the assessee that the purchase of medical e quipments are at ALP canno t be accepte d."
The assessee made an argument that unde r the Indian TP regulations, the TPO was obligate d to dete rmine the ALP o f an inte rnatio nal transaction by applying the most appropriate me tho d and not by any adhoc me tho d. Re liance was placed on Lumax Industries Ltd. Vs ACIT in ITA No. 5252/De l/2011, AWB India Pvt. Ltd. Vs D CIT in ITA No. 6480/De l/2012, MC Retail Pvt. Ltd. V s ACIT in ITA No. 1777/ M/2016, ACIT Vs Koch Chemical Techno lo gy Group (India) Ltd. in ITA No. 8091/Mum/ 2011, 7236/Mum./ 2020, 7958/Mum/2011, TNS India Pvt. Ltd. Vs ACIT in ITA No. 944/H/ 07, 194 & 74/H/ 08, 793/H/ 09, 654 & 655/ H/10 & 7/H/2012 and NLC Nalco India Ltd. in ITA No . 529/Ko l/2008 in this regard. The contention of the assessee is we ll founded but this contention can ho ld good only if the re levant mate rial is made available to the TPO or be fore this pane l, which is a co ntinuation of assessment proceedings in te rms of law explained by the Hon' ble Bombay High Court in Vodafone India Services (P) Ltd. Vs Union o f India (2013) 39 taxmann.co m 201. Howe ver, e ven after the T PO unde rtoo k the benchmarking in the manne r as he did, no e vidence was made available to this pane l in the fo rm o f purchase bills of these goods in the hands off its AE and necessary evidence as to whether the A E has so ld these goo ds to the assessee at the same price at which they were purchase d by the AE or with any markup value, in orde r to facilitate de terminatio n of ALP in terms o f Section 92CA( 3) of the Act."
11 ITA No. 478/Del/2021Alcatel Lucent India Ltd.
6. From the above, the following points emerged, • The Assessing Officer made adjustment by denying the 8% markup charged by the AE on the supply of capital goods and disallowed the depreciation also to that extent. • The assessee contested that the purchase of capital goods cannot be benchmarked separately. The main argument was the depreciation do form a component of operating cost and hence cannot be given separate treatment. • It was argued that the ALP of the international transaction pertaining to purchase of capital goods from AE has been determined along with other transaction covered CSD segment of the assessee under combined transaction approach.
• The ld. DRP held that the assessee failed to produce evidences to substantiate the purchases and no evidences have been filed before the Panel or before the TPO. • The assessee at ground nos. 3.1 & 3.2 submitted that adequate opportunity has not been given before finalizing the order by the TPO.
7. In this regard, we find that the Co-ordinate Bench of ITAT in the case Honda Motorcycle & Scooters India Pvt. Ltd. Vs ACIT (2015) 56 taxmann.com 237 held that each international transaction can be benchmarked separately by applying 'MAM' out of the prescribed methods. It says, "A bare reading of section 92C(1) brings out that: (i) the ALP is required to be determined of 'an' international transaction; and
(ii) the ALP of such an international transaction is to be determined by applying the most appropriate method out of the 12 ITA No. 478/Del/2021 Alcatel Lucent India Ltd.
prescribed methods which, inter alia, include CUP and TNMM. The first ingredient is that the ALP should be determined in relation to an international transaction. It is discernible from the definition of international transaction given in section 92B that it refers to 'a transaction' between two or more associated enterprises. The term 'transaction' has been defined in section 92F(v) and also in rule 10A(d). The rule defines the term 'transaction' to include: 'a number of closely linked transactions. 'Thus, where the transactions are not closely linked, then their ALP should be determined separately for each international transaction and such determination of ALP for 'an' international transaction as per section 92C(1) is done as per the most appropriate method, being one of the methods given in the provision. To put it simply, each international transaction is viewed separately and independent of other international transactions for determining its ALP by using one of the given methods, which is the most appropriate method having regard to the nature of transaction or class of transaction or functions performed, etc. It is impermissible to combine all the international transactions for determining their ALP in a unified manner when such transactions are diverse in nature".
8. Since, the assessee has been denied proper opportunity, the TPO and the ld. DRP did not have the benefit of examining the purchase of capital goods, the issue of allowability or not of the markup of 8% charged by the AE has not been determined as per the approved methods, we hereby deem it fit to remand the matter to the file of the ld. DRP to determine the ALP as per the approved methods after giving an opportunity to the assessee to make their submissions. The assessee is also 13 ITA No. 478/Del/2021 Alcatel Lucent India Ltd.
hereby directed to comply with the directions of the ld. DRP in furnishing the complete details and substantiating their case.
Liquidated Damages:
9. The Assessing Officer disallowed liquidated damages incurred by the assessee pursuant to breach of contractual arrangements.
10. The ld. DRP confirmed the action of the AO on the grounds that the liquidated damages do not pertain to the year and cannot therefore be allowed. Similar issue has been adjudicated by the Co-ordinate Bench of ITAT in assessee's own case for the assessment year 2014-15 in ITA No. 4706/Del/2018 wherein it was held that the charges pertain to contractual obligation which was not complied with but the AO held it as penalty. The matter has been remanded back to the file of the AO for fresh examination in the assessment year 2014-15 as well as 2013014. We have given due consideration to the observations of the ld. DRP, the expense also do not pertain to the year in question. Hence, the AO is hereby directed to examine the issue afresh with regard to the allowability of the expenses per se and also the year to which the expenses belong to.
Interest on Foreign Term Loan:
11. The AO disallowed the interest paid on foreign term loan as no TDS was deducted by the assessee. The AO disallowed Rs.13,57,00,000/- on the grounds that the assessee failed to deduct TDS on the interest credited in the books whereas the 14 ITA No. 478/Del/2021 Alcatel Lucent India Ltd.
assessee submitted that only an amount of Rs.5,06,995/- has been accrued on the loan received.
12. The ld. DRP referred the matter to the AO for factual verification. Since, it is a matter of factual verification, we decline to interfere with the order of the ld. DRP.
Reconciliation of amounts in 26AS:
13. The revenue as per the books of accounts of the assessee was Rs.2,39,74,386/- against the revenue as per 26AS of Rs.5,73,39,416/- thus, reflecting a difference of Rs.3,33,65,030/- the sum which has been treated as income of the assessee by the Assessing Officer and the ld. DRP. The assessee is hereby directed to submit the reconciliation statement and the accounting principles used with reference to the continuity of treating the various receipts.
Effect of order u/s 154:
14. The AO failed to take into consideration the order u/s 154 passed by the TPO on 26.03.2021 reducing the TP addition. The same is hereby directed to be rectified.
15. In the result, the appeal of the assessee is partly allowed. Order Pronounced in the Open Court on 16/08/2021.
Sd/- Sd/- (Suchitra Kamble) (Dr. B. R. R. Kumar) Judicial Member Accountant Member . Dated: 16/08/2021 *Subodh Kumar, Sr. PS*