| | As per explanation 3D inserted in Section 43B interest converted into loan shall not be deemed to have been actually paid |
| Posted on 18 June 2013 by Diganta Paul | |
CourtINCOME TAX APPELLATE TRIBUNAL BriefWe have heard the arguments of both the sides and perused the material placed before us. The penalty has been levied in respect of the two disallowances made by the Assessing Officer under Section 43B:- (i) Disallowance of interest amounting to `78,09,567/-; and (ii) Disallowance of employer's contribution to ESI amounting to `4,80,177 CitationAssistant Commissioner of Income Tax, Circle-15(1), C.R.Building, I.P. Estate, New Delhi.(Appellant) Vs. M/s R.T. Packaging Limited, 407/408, Deepali, 92, Nehru Place, New Delhi. PAN: AAACR0345J. (Respondent) Judgement IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH 'F': NEW DELHI BEFORE SHRI G.D.AGRAWAL, VICE PRESIDENT AND SHRI A.D.JAIN, JUDICIAL MEMBER ITA No.5899/Del/2010 Assessment Year: 2003-04 Assistant Commissioner of Income Tax, Circle-15(1), C.R.Building, I.P. Estate, New Delhi. (Appellant) Vs. M/s R.T. Packaging Limited, 407/408, Deepali, 92, Nehru Place, New Delhi. PAN: AAACR0345J. (Respondent) Appellant by: Shri Satpal Singh, Sr.DR. Respondent by: Shri Ashwani Taneja, Advocate. ORDER PER G.D.AGRAWAL, VP: This appeal by the Revenue is directed against the order of learned CIT(A)-XVIII, New Delhi dated 30th September, 2010 for the AY 2003-04 whereby he deleted the penalty of `30,46,481/- levied by the Assessing Officer under Section 271(1)(c) of the Income-tax Act, 1961. 2. We have heard the arguments of both the sides and perused the material placed before us. The penalty has been levied in respect of the two disallowances made by the Assessing Officer under Section 43B:- (i) Disallowance of interest amounting to `78,09,567/-; and (ii) Disallowance of employer's contribution to ESI amounting to `4,80,177/-. 3. Regarding the disallowance out of interest amounting to `78,09,567/-, it was explained by the learned counsel that the assessee company was running into loss year after year and, therefore, its case was referred to Board for Industrial & Financial Reconstruction. That during the accounting year relevant to the assessment year under consideration, the ICICI Bank had converted the interest amount of `78,09,567/- into the principal amount of loan. That the assessee had disclosed all the necessary facts in this regard. The disallowance made by the Assessing Officer under Section 43B was sustained by the learned CIT(A) on account of retrospective insertion of Explanation 3D to Section 43B by the Finance Act, 2006 with retrospective effect from 1.4.1997. That the view taken by the assessee that, on conversion of interest into loan, such interest is not disallowable under Section 43B, is duly supported by the decision of ITAT in the case of M/s C.G. Elsag Bailey Ltd. in ITA Nos.4850 & 4851/D/2003 and also the Board's Circular. That if the law is amended retrospectively after the filing of return by the assessee, the assessee cannot be held to have furnished inaccurate particulars of income. 4. With regard to disallowance of employer's contribution to ESI amounting to `4,80,177/-, it was stated by the learned counsel that in the audit report in Annexure XIII(c), it was clearly mentioned that this amount is not paid by the assessee. Thus, the primary facts in this regard were duly disclosed. That non-inclusion of the same in the computation of income was a bona fide mistake. That the mistake is bona fide would be proved from the fact that the assessee filed the return declaring net loss of `2.87 crores and ultimately, assessment was also completed at the loss of `1.78 crores. That when there is a huge loss in crores, there cannot be any intention to increase the loss by a sum of `4.8 lakhs. He, therefore, submitted that on the above facts, the decision of Hon'ble Apex Court in the case of CIT Vs. Reliance Petroproducts Pvt.Ltd. – 322 ITR 158 (SC) would be squarely applicable. 5. Learned DR, on the other hand, relied upon the order of the Assessing Officer as well as the penalty order and stated that since the assessee did not make the payment of interest, the same was to be disallowed under Section 43B. Since the assessee failed to disallow the interest in the computation of income, there was certainly furnishing of inaccurate particulars of income. Therefore, penalty in this regard should be sustained. 6. We have carefully considered the arguments of both the sides and perused the material placed before us. We find that Explanation 3D was inserted in Section 43B by the Finance Act, 2006 with retrospective effect from 1.4.1997. The said Explanation reads as under:- "[Explanation 3D. – For the removal of doubts, it is hereby declared that a deduction of any sum, being interest payable under clause (e) of this section, shall be allowed if such interest has been actually paid and any interest referred to in that clause which has been converted into a loan or advance shall not be deemed to have been actually paid.]." 7. The assessee had furnished the return of income on 2.12.2003 which was much before the introduction of Explanation 3D. That before the introduction of Explanation 3D, the ITAT in the case of M/s C.G. Elsag Bailey (supra) held as under:- "We find that it is not in dispute that the sales tax liability has been converted into an interest free loan by the State Government. The AO has made addition only on the ground that the said conversion of the sales tax liability into the loan was not made during the assessment year or before the due date of the filing of return of income by the assessee. The ld.CIT(A) has allowed the claim of the assessee by considering a letter from the General manager, District Industries Centre, Gurgaon to the assessee company stating therein that an interest free loan has been granted for deferred payment of sales tax for the assessment year 1996-97 and 1998-99. The assessee has also filed before us copy of the Sales Tax Exemption Certificate from which it is seen that deferment of sales tax exemption has been granted according to the provisions of Rule 28A of the Haryana General Sales Tax Act, 1963 for the period from 28.11.92 to 27.11.99. This covers the Financial Year's 1995-96 and 1997-98 which are the years involved in the present appeal. Keeping in view the above facts and circumstances of the case, we are of the view that as the sales tax liability was converted into an interest free loan by the State Government the same amounted to payment of the sales tax liability to the State Government and, therefore, the AO was not justified in making addition u/s 43B of the Act." 8. Therefore, if the assessee has not disallowed the interest which is converted into loan under Section 43B, it cannot be said that the assessee furnished inaccurate particulars of income. The learned counsel for the assessee has also stated that all the facts relating to conversion of interest into loan as well as non-deposit of employer's contribution to ESI was duly disclosed in the audit report. Therefore, the decision of Hon'ble Apex Court in the case of Reliance Petroproducts Pvt.Ltd. (supra), wherein their Lordships held as under, would be squarely applicable:- "Where there is no finding that any details supplied by the assessee in its return are found to be incorrect or erroneous or false there is no question of inviting the penalty under section 271(1)(c). A mere taking of a claim, which is not sustainable in law, by itself, will not amount to furnishing inaccurate particulars regarding the income of the assessee. Such a claim made in the return cannot amount to furnishing inaccurate particulars." 9. That the ratio of the above decision of Hon'ble Apex Court would be squarely applicable to the case of the assessee. That all the facts relating to conversion of interest into loan as well as non-deposit of employer's contribution of ESI were duly disclosed. It is not the case of the Revenue that the details furnished by the assessee were either incorrect or erroneous or false. 10. In view of the above, we do not find any infirmity in the order of learned CIT(A). The same is sustained and the Revenue's appeal is dismissed. 11. In the result, the appeal of the Revenue is dismissed. Decision pronounced in the open Court on 17th May, 2013. Sd/- Sd/- (A.D.JAIN) (G.D.AGRAWAL) JUDICIAL MEMBER VICE PRESIDENT Dated: 17.05.2013 VK. Copy forwarded to: 1. Appellant: Assistant Commissioner of Income Tax, Circle-15(1), C.R.Building, I.P. Estate, New Delhi. 2. Respondent: M/s R.T. Packaging Limited, 407/408, Deepali, 92, Nehru Place, New Delhi. 3. CIT 4. CIT (A) 5. DR, ITAT Assistant Registrar |
 | Computation of arm's length price for royalty |
| Posted on 18 June 2013 by Diganta Paul | |||||||||||||||||||||||||||||
CourtINCOME TAX APPELLATE TRIBUNAL BriefThat on the facts and circumstances of the case and in law, the ld.CIT(A) has erred in holding that the TPO was not justified in including other income with regard to computation of arm's length price for royalty CitationAssistant Commissioner of Income Tax, Circle-15(1), C.R.Building, I.P. Estate, New Delhi. (Appellant) Vs. M/s Reebok India Co., 503/1, 3 & 4, Village Bijwasan, New Delhi. PAN: AAACR3007K. (Respondent) Judgement IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH 'F' : NEW DELHI BEFORE SHRI G.D.AGRAWAL, VICE PRESIDENT AND SHRI A.D.JAIN, JUDICIAL MEMBER ITA No.5361/Del/2010 Assessment Year: 2004-05 Assistant Commissioner of Income Tax, Circle-15(1), C.R.Building, I.P. Estate, New Delhi. (Appellant) Vs. M/s Reebok India Co., 503/1, 3 & 4, Village Bijwasan, New Delhi. PAN: AAACR3007K. (Respondent) Appellant by: Shri Satpal Singh, Sr.DR. Respondent by: Shri Ajay Vohra, Advocate. ORDER PER G.D.AGRAWAL, VP: This appeal by the Revenue is directed against the order of learned CIT(A)-XX, New Delhi dated 30th September, 2010 for the assessment year 2004-05. 2. The only ground raised by the Revenue reads as under:- "That on the facts and circumstances of the case and in law, the ld.CIT(A) has erred in holding that the TPO was not justified in including other income with regard to computation of arm's length price for royalty." 3. At the time of hearing before us, it was stated by the learned counsel that though the learned CIT(A) has allowed the relief to the assessee on merits, but, even otherwise, the addition is not called for because as per TPO's order, the difference between the net operating profit of the assessee and the arm's length price determined by the TPO is only 1.21% which squarely falls within the safe harbour zone as provided in proviso to Section 92C(2) of the Income-tax Act, 1961 at the relevant time. He, therefore, submitted that without going into the merits of the learned CIT(A)'s order, though the same is in favour of the assessee, the addition made by the Assessing Officer is not sustainable. 4. Learned DR, on the other hand, stated that in page 11 of the TPO's order, the TPO has pointed out that the assessee's case does not fall within the range of +- 5% as provided in proviso to Section 92C(2). He, therefore, submitted that the order of the TPO should be sustained. 5. We have carefully considered the submissions of both the sides and perused the material placed before us. From a perusal of the order of the TPO, we find that during the accounting year relevant to assessment year under consideration, the assessee has undertaken various international transactions as under:-
6. The TPO accepted the assessee's explanation with regard to the arm's length price of all other transactions except royalty. This would be evident from the following observations at page 5 of the TPO's order:- "Since the arm's length price of the International Transactions related to the receipt of commission, export of goods to the AE and purchase of goods from the AE hasalready been computed by the assessee, the arm's length price of the international transactions related to the payment of royalty has only to be determined. For that purpose the net operating margin of the assessee attributable to the payment of royalty are only to be calculated." 7. The arm's length price of the royalty is determined at pages 9 & 10 of the TPO's order. He determined the arm's length price of royalty under TNMM method, the relevant portion of which at page 9 reads as under:- "Net operating profit Rs.5,40,98,579 NPM (%) 5.02% Arm's length NPM as computed by the assessee 6.23% Net operating margin at Arm's Length Rs.6,70,80,532 Difference Rs.1,29,81,953 Accordingly, the Arm's length price of international transaction related to payment of royalty is computed at Rs.3,12,29,088/- against the declared value of Rs.4,42,11,041/-." 8. At page 11, the TPO has given the following reasons why the proviso to Section 92C(2) which provides for not making of adjustment if the variation is within the limit of +- 5% is not permissible:- "The Arm's Length Price of the international transaction related to payment of royalty has thus been computed at Rs.3,12,29,088/-. The (+) range of the Arm's Length Price is Rs.3,27,90,542/- (+5%) to 2,96,67,633/- (-5%). Since the value of international transaction is Rs.4,42,11,041/-, which falls outside the (+5%) tolerance band, the assessee is not entitled to the benefit of proviso to sub-section (2) to section 92C of the Income Tax Act." 9. The proviso to Section 92C as it stood at the relevant time reads as under:- "Provided that where more than one price is determined by the most appropriate method, the arm's length price shall be taken to be the arithmetical mean of such prices, or, at the option of the assessee, a price which may vary from the arithmetical mean by an amount not exceeding five per cent of such arithmetical mean." 10. From the above, it is evident that the assessee has an option to adopt a price which may vary from the arithmetical mean of ALP by an amount not exceeding 5% of such arithmetical mean. In the case of the assessee, the Assessing Officer has determined the ALP of royalty by only one method, i.e., TNMM which was determined at 6.23%. Therefore, arithmetical mean of ALP determined by the TPO is 6.23%. The net profit margin of the assessee was 5.02%. The assessee has an option to adopt a price which may vary from arithmetical mean of ALP up to five per cent. The difference between the net profit of the assessee and NPM of the arm's length price is certainly less than 5% and, therefore, the assessee has a right to claim that the NPM of the assessee i.e. 5.02% should be adopted as arm's length price. The TPO had determined the arm's length price of royalty by TNMM. Thereafter, he worked out the addition which may be required to be made under the head 'royalty' and then he compared the royalty paid by the assessee and the ALP of royalty determined by him. However, we find that the proviso refers to the arm's length price determined by various methods and adopting of the mean of such method and then the assessee had been given an option to adopt a value which should not vary more than 5% from the mean of the ALP determined by the TPO. Therefore, what is to be varied is the percentage of the ALP determined by the TPO as per most appropriate method. In this case, the TPO considered TNMM to be the most appropriate method and accordingly determined the arm's length price at 6.23%. Therefore, the assessee has a right to adopt the ALP within the variation of 5% from 6.23%. The NPM declared by the assessee is 5.02% and, therefore, as per proviso to Section 92C(2), the assessee is fully justified to claim that since the difference between the NPM declared by him and the ALP determined by the TPO is less than 5%, no addition is called for. We, therefore, agree with the assessee's contention and uphold the order of learned CIT(A) deleting the addition of `1,29,81,953/- made by the TPO, of course, for the reasons different than the reasons given by learned CIT(A) for deleting the addition. 11. In the result, the appeal of the Revenue is dismissed. Decision pronounced in the open Court on 17th May, 2013. Sd/- Sd/- (A.D.JAIN) (G.D.AGRAWAL) JUDICIAL MEMBER VICE PRESIDENT Dated: 17.05.2013 VK. Copy forwarded to: - 1. Appellant: Assistant Commissioner of Income Tax, Circle-15(1), C.R.Building, I.P. Estate, New Delhi. 2. Respondent: M/s Reebok India Co., 503/1, 3 & 4, Village Bijwasan, New Delhi. 3. CIT 4. CIT (A) 5. DR, ITAT Assistant Registrar | |||||||||||||||||||||||||||||
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