IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH : `E' NEW DELHI
BEFORE SHRI K.G. BANSAL, ACCOUNTANT MEMBER AND
SHRI C.M. GARG, JUDICIAL MEMBER
I.T.A No. 5466/Del/11
Asstt. Year 2007-08
Headstrong Services India Pvt. Vs. ACIT,
Ltd.,
Circle-12(1)
103, Ashoka Estate,
New Delhi.
Barakhamba Road,
New Delhi 110 001
AABCT7650D
(Appellant) (Respondent)
Appellant by: Shri G.C. Srivastava & Shri Manoneet Dalal, Advocate
Respondent by: Mrs. Renu Jouhri, CIT (DR)
Date of hearing : 20-6-2012
Date of pronouncement : 17-07-2012
ORDER
PER K.G. BANSAL, AM:
In this appeal, the assessee has taken up 14 grounds. Ground Nos. 1
& 2 are general in nature. Ground Nos. 3 to 7 deal with adjustment made
by the AO in the total income on account of "transfer pricing". Ground
Nos. 8 to 10 deal with other additions made to the total income returned
by the assessee. Ground Nos. 11 to 14 are in respect of charging of
interest and initiating penalty u/s 271 (1).
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Asstt. year 2007-08
2. Briefly the facts are that the return was filed on 23.6.2008 declaring
total income of ` 30,64,480/-. Assessment proceedings were initiated by
issuing statutory notice u/s 143(2) of the Act on 1.5.2009, which was
served on the assessee. Thereafter, questionnaire was issued along with
statutory notice u/s 142(1). The draft order was made on 31.12.2010 at
total income of ` 17,66,84,460. The assessee objected the draft order.
The objections were heard by the DRP-I, New Delhi. Finally order u/s
143(3) read with section 144(c) of the Act was passed on 24.10.2011.
Determining the total income at ` 14,56,46,530/-. Aggrieved by this order,
the assessee is in appeal before us.
3. As mentioned earlier, ground Nos. 1 & 2 are general in nature. In
ground No. 1 it is mentioned that the order passed by the TPO, the draft
order passed by the AO and the final order passed by the AO in
pursuance of the directions of Ld. DRP are bad in law. In ground No. 2 it is
mentioned that the AO erred in determining the total income at `
14,56,46,530/- against the returned income of ` 30,64,480/-. These
ground are general in nature and they were not argued by the Ld. Counsel
for the assessee. Therefore, these grounds are dismissed as not pressed.
4. In ground Nos. 3 to 7, various averments have been made against
enhancement of the income by an amount of ` 13,54,69,266/- on account
of "transfer pricing adjustment" made in respect of international
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Asstt. year 2007-08
transactions with associated enterprises (AEs). Some grounds are
narrative and argumentative also and thus they are not in accordance
with ITAT Rules. These grounds are decided on the basis of submissions
made before us.
4.1. In this connection, the Ld. Counsel filed a chart regarding 25
comparable companies on the basis of which transfer pricing adjustment
was made. In respect of 10 such comparables, information was obtained
by the AO by issuing notices u/s 133 (6) of the Act. The general
observation made in the chart in respect of these comparables is that the
use of instrument of notice u/s 133(6) for gathering information is
inappropriate. However, the Ld. Counsel could not substantiate the
aforesaid observation. The case of the Ld. CIT(DR) is that the AO can use
all instruments available in the Act for bringing relevant information on
record for determining the total income. Having considered submissions
from both the sides, we are of the view that there is no substance in the
argument that the AO cannot collect information about comparables by
issuing notices u/s 133(6). Therefore, this submission is rejected.
4.2 The second argument is that in respect of 20 companies, of which
information was obtained u/s 133 (6), the same was not put across to the
assessee so that it could file its objections as to whether the cases are
comparable or not and whether any adjustment is required to the book
result of these companies for bringing them as near as possible to the
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Asstt. year 2007-08
case of the assessee. It is argued that non-sharing of the information with
the assessee has led to violation of the principle of natural justice. The
assessee was prevented from stating its case on the comparables for
want of information obtained by the AO directly from the companies. The
Ld. CIT(DR) could not rebut this argument. However, it has been argued
by her that any lacuna in the assessment order on account of this failure
can be cured if the matter is restored to the file of the AO. We have
considered this matter. Such issue arose earlier before the `A' bench of
Delhi Tribunal in the case of Adobe Systems India Pvt. Ltd. in ITA No.
5693(Del)/2011 for assessment year 2007-08. The issue has been decided
in paragraph No. 4 of this order, which is reproduced below :-
"4. We have considered the facts of the case and submissions made
before us. In the light of the decision in the case of Genisys
Integrating Systems (India) Pvt. Ltd. (supra) and also otherwise we
are of the view that any information obtained in the course of
assessment proceedings has to be supplied to the assessee for its
objections, if any. The absence of doing so leads to violation of
fundamental principle of natural justice. In view thereof, the matter
is restored to the file of the AO with a direction to supply
whatsoever information he wants to use against the assessee to it,
grant it reasonable opportunity of being heard and thereafter pass a
fresh assessment order as per law."
4.2.1 As a view has already been taken by the Tribunal in the aforesaid
case and in the case of Ameriprise India Pvt. Ltd. in ITA No. 5694/Del/2011
for assessment year 2007-08 dated 26.3.2012, we are bound the follow
the view. Therefore, it is held that it was incumbent on the AO to supply
the information to the assessee, obtain its objections, if any, and pass
order after taking into account the information and the objections of the
assessee. This has not been done in respect of 20 comparables.
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Therefore, the matter of transfer pricing adjustment is restored to the file
of the AO for following proper procedure as mentioned above and decide
the matter denovo.
4.3 The assessee has also taken other objections, i.e. super-normal
profits in some cases, difference in skills of the employees, R & D
expenditure, difference in business models etc. These are matter of
details on which the objections can be raised by the assessee, if any, to
decide whether the cases are really comparables or not or whether some
adjustment is necessary to be made. Thus it is not necessary for us at this
stage to go into these submissions.
4.4. In the result, the matter of transfer pricing adjustment is restored to
the file of the AO for fresh decision after hearing the assessee. Therefore,
these grounds are treated as allowed for statistical purpose.
5. Ground No. 8 is to the effect that the AO erred in disallowing
deduction u/s 10A on foreign exchange fluctuation gain and other income
of ` 71,68,081/-, consisting of excess provision written back and
miscellaneous income.
5.1 The Ld. Counsel referred to page No. 6 of PB II, which shows that the
assessee earned income of ` 68,94,022/- on account of fluctuation in rate
of foreign exchange, ` 38,532/- on account of excess provision made in
earlier years and written off in this year and miscellaneous income of `
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Asstt. year 2007-08
4,30,527/-. It is submitted that the finding of the AO is that these incomes
are not related to export business and therefore they cannot be termed as
income derived from the eligible undertaking. It is argued that the finding
of the AO is not in consonance with the relevant provisions. Section 10A
grants deduction of such profits as are derived by the eligible undertaking
from the export of articles, things or computer software for a period of 10
years. It is admitted that sub section (I) does use the word "derived".
However, sub section (4) defines the term "profit derived from export of
articles, things or computer software" to mean the amount which bears
to the profit of the business of the undertaking the same proportion as the
export turnover bears to the total turn over of the business carried on by
the undertaking. It is argued that in the light of this definition, what is to
be computed at the first instance is the "profit of the business" of the
undertaking. While doing so the provisions contained in sections 28 to
44DA come into play. Therefore, such profit has to be computed as
normally understood without insisting on proximate connection between
the business of undertaking and the profit. In the alternative, it is argued
that the claim on account of fluctuation in rate of foreign exchange is in
the revenue field as it is relates to export proceeds. Further, in earlier
years provisions were made which were found to be in excess of the
actual liability by an amount of ` 38,532/-. The miscellaneous income is
also the income derived from the business of the undertaking.
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5.2 In reply, the Ld. CIT(DR) submitted that since the major issue
regarding transfer pricing adjustment is to be decided denovo by the AO,
this matter may also be restored to his file. In particular, it was mentioned
by her that exact details are not available.
5.3 In the rejoinder reply, the Ld. Counsel submitted that the issue is
clear and the basis of deduction is same as u/s 80HHC. There is ample
authority under that section that proximate connection is not required to
be established between the business and the income and the same has to
be computed as the profit is computed under the business head.
5.4 We have considered the facts of the case and submissions made
before us. There is no dispute that foreign exchange fluctuation gain is in
respect of export proceeds, therefore, the amount represents income as it
is in the revenue field. It is also clear that the amount, being in the nature
of export proceeds, leads to increase in turn - over and total turn over.
Further, the provisions made in earlier years would have reduced the
income of the assessee for those years, leading to lower deduction u/s
10A. In this year the sum of ` 38,532/- is found to be excess provision
which has been credited to profit and loss account. This amount is clearly
in the nature of income. The miscellaneous income also represents the
income of the business. The only point which we find is that the income is
shown at ` 4,30,527/- on page No. 6 of the PB, while the Ld. Counsel is
mentioned that the income is of the order of ` 2.30 lacs. This fact may be
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Asstt. year 2007-08
verified by the AO. However, the point of law is clear that the profit of the
business has to be found out under the business head and there is no
necessity to establish proximate or immediate connection between the
business and the profit. Thus, these accounts are includible in the profits
of the business. The AO is directed to recompute the deduction
accordingly after verifying the figure of miscellaneous income.
6. Ground No.9 is to the effect that the AO erred in disallowing office
maintenance expenditure of ` 24,08,018/- by holding it to be capital
expenditure. The AO has furnished the details of the expenditure under 6
heads and held that all of them are of capital nature. Before the Ld. DRP,
the assessee submitted the details of expenditure and the vouchers in
letter dated 5.9.2011. The expenditure has been incurred on office
maintenance, electricity connection charges, metal detector and scanner
trolley, assorted civil work and other expenses. The bills in respect of the
expenses were also filed. The Ld. DRP mentioned that looking to the
nature of expenses, the action of the AO is upheld but depreciation is to
be allowed at appropriate rate.
6.1 Before us, the Ld. Counsel for the assessee submitted that payment
in respect of electrical connection does not lead to acquisition of a capital
asset. In respect of other items, it was suggested that the matter may be
decided on merits by the bench. As in respect of earlier grounds, the
submissions of the Ld. CIT(DR) has been that this matter may also be
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Asstt. year 2007-08
restored to the file of the AO because the main issue of pricing adjustment
is being restored to his file.
6.2 We have considered the facts of the case and submissions made
before us. We find that the first expenditure of ` 37,584/- is on purchase
of door access controller, proximity readers units for central access
control panel and power supply units. These are new items and therefore
represent capital expenditure. The second expenditure of ` 14,09,610/- is
for obtaining electrical connection. It is seen from the corresponding
order that 600 KVA load was served on 24.8.2006. In this connection
security deposit of ` 13.16 lacs was paid alongwith supervision charges
and system loading charges. The assessee has claimed expenditure only
in respect of supervision charges and system loading charges. The
expenditure is in the nature of initial expenditure granting benefit of
enduring nature to the assessee. Without initialization of electricity
connection, no work can be done in office. Therefore, we are of the view
that the expenditure is capital in nature. The third expenditure of `
47,942/- is on purchase of carpets which is obviously a capital expenditure
as a new asset has been created. Similarly 4th expenditure of ` 22,275/- is
for purchase of 4 handled metal detector, scanner trolley. This has led to
acquisition of a new asset and therefore it is a capital expenditure. In
respect of other miscellaneous expenditure for Civil Work etc. no
particular reason has been assigned to hold them to be capital
expenditure. These expenses amount to ` 5,47,895/- and ` 3,42,713/- it is
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held that these expenses are allowable as business expenditure u/s 37(1).
The result is that while expenditure of ` 8,90,608/- is held to be revenue in
nature, the balance expenditure is held to be capital in nature. Thus this
ground is partly allowed.
7. Ground No. 10 is that the AO erred in disallowing debonding charges
of ` 13,59,057/-. In this connection, it has been submitted before the lower
authorities that the amount represents three items 1) duty paid on loss
of laptop of ` 70,731/- ; 2) duty paid of ` 7,71,021/- on capital asset on
debonding the goods and 3) duty paid of ` 5,17,305/- on capital goods
located at Bangalore for debonding. The submission of the assessee is
that it was already in possession of these assets and depreciation was
being claimed and allowed. Payment of debonding charges does not lead
to creation of any new capital asset, hence the charges should be treated
as revenue expenditure. In particular reliance has been placed on the
decision of Hon'ble Supreme Court in the case of Empire Jute company of
India Ltd. vs. CIT, 124 ITR,1 in which it has been held that apart from the
tests of creation of an asset or obtaining benefit of enduring nature, it
should also be examined whether the expenditure is in capital field or
revenue field.
7.1 Before us, the Ld. Counsel referred to the submissions made before
the lower authorities and reiterated that shifting of capital goods from
bonded ware house on payment of duty does not create any asset and
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does not lead to benefit of enduring nature as the asset remains the
same. Therefore, the expenditure is revenue in nature. The argument of
Ld. CIT(DR) has been that the matter may be restored to the file of AO.
7.2 We have considered the facts of the case and submissions made
before us. The capital goods placed in the bonded area are subject to
restrictions that they cannot be sold and they cannot be removed outside
the area for use of self. This encumbrance is removed once the goods are
cleared from the bonded area on payment of duty. The result is that the
assessee can deal with the goods in any manner it desires including sale
thereof. Therefore, payment of custom duty for de bonding increases
value of the asset and it is required to be added to the costs or written
down value, as the case may be. Therefore, this ground is dismissed.
7.3. Ground No. 11 is general in nature against confirming of the
additions proposed by the AO by the Ld. DR(P). In absence of any specific
argument, this ground is taken as dismissed.
7.4 Ground No. 12 and 13 are against charging of interest under
sections 234B, 234D and 244A. The assessment has been set aside on
one ground and relief has been granted to the assessee on some other
grounds. Therefore, the chargeability of these interests requires a fresh
look on making denovo assessment and giving effect to this order.
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Therefore, these matters are restored to the file of the AO. The result is
that these grounds are treated as allowed.
8. There is no appeal provided for initiating penalty u/s 271(1)(c),
therefore ground No. 14 is dismissed.
9. In the result, the appeal is treated as partly allowed as discussed
above.
sd/- sd/-
[C.M. GARG] [K.G. BANSAL]
JUDICIAL MEMBER ACCOUNTANT MEMBER
Veena
Copy forwarded to: -
1. Appellant
2. Respondent
3. CIT
4. CIT (A)
5. DR, ITAT TRUE COPY By Order,
Deputy Registrar, ITAT
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