Finance costs having direct nexus with business is allowable as deduction u/s 36(1)(iii)

Facts- The assessee is a company engaged in the business of share broking and is a member of Bombay Stock Exchange (BSE) and National Stock Exchange (NSE). The activities of the assessee include providing equity research and stock broking services to institutional clients. The assessee filed the return of income for A.Y. 2012-13 on 29/11/2012 declaring a loss of Rs.2,14,399/-. The case was selected for scrutiny and the statutory notices were duly served on the assessee.

AO made various disallowances/additions. Accordingly, AO completed the assessment u/s. 143(3) assessing the income of the assessee at Rs.9,71,70,100/-. CIT(A) gave marginal relief to the assessee with regard to the disallowances/additions. Being aggrieved, the present appeal is filed.

Conclusion- Held that the finance costs have a direct nexus with the business of the assessee, i.e. stock broking for institutional clients since it is incurred to meet margin requirements of trade executed for assessee’s clients. We further notice that the CIT(A), has given a categorical finding Therefore, we are of the considered view that the finance cost should be allowed as a deduction under section 36(1)(iii) of the Act.

Held that the depository charges are incurred for opening the Demat account which is a statutory requirement for the members of NSE / BSE. Therefore there is merit in the contention that the said expense is incurred in the normal course of broking business and accordingly we hold that the depository charges should not be disallowed under section 14A r.w.r. 8D(2)(i). With regard to disallowance under rule 8D(2)(iii), it is now a settled position that the investments that are yielding exempt income only should be considered for the purpose of disallowance. Therefore we direct the assessing officer to recomputed the disallowance under section 14A r.w.r 8D(2)(iii) taking into consideration only those investments which are earning tax free income and also take into account the suo moto disallowance made by the assessee.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

This appeal is filed against the order of the Commissioner of Income-tax (Appeals), National Faceless Appeal Centre, Delhi [in short, ‘the CIT(A)’] dated 08/07/2022 for A.Y. 2012-13.

2. The assessee raised the following grounds of appeal:-

“1 Under the facts and in law, National Faceless Appeal Centre (CIT(A)) erred in confirming disallowance of Rs. 56,50,7527- under section 36(1) (iii) of Income Tax Act, 1961 (the Act).

1.1. Under the facts and in law, the learned CIT(A) failed to appreciate
the submission made by the appellant.

1.2. Under the facts and in law, the learned CIT(A) erred in stating that the appellant has not raise any ground on the addition made by the assessing officer of Rs 51,39,418/-.

1.3. The Learned CIT(A) failed to appreciate the fact that all the borrowed funds have been direct utilized in the normal course of carrying on broking business of the assessee.

1.4. The Learned CIT(A) failed to appreciate the fact that out of total finance charges of F 5,650, 752, Rs 4,949,703/- is for Bank Guarantee Charges which is for giving guarantee to stock exchange and hence is directly related to the broking business of the appellant. It also include bank charges of Rs 189,715 which are also directly related to the Broking Business of the assessee.

2. Under the facts and in law, the learned CIT(A) erred in confirming disallowance of loss of F 15,48,6477- by alleging the same as speculation loss.

2.1 The learned CIT(A) failed to appreciate the fact that assessee has not undertaken any trading equity segment and derivatives segment on its own during the captioned assessment year.

3. Under the facts and in law, the learned CIT(A) erred in confirming disallowance of Bonus payment of Rs 3,50,00,000/-.

3.1 Under the facts and in law, the learned CIT(A) erred in stating that the appellant had filed the return of income beyond the due date and hence the Bonus paid is not allowable u/s 43B of the Income Tax Act, 1961. The learned CIT(A) failed to appreciate the fact that the appellant required to furnish report u/s 92E of the Income Tax Act, 1961 and hence due date for filing return of income for it was 30.11.2012 and it has furnished return of income on 29.11.2012.

3.2 The learned CIT(A) failed to appreciate the fact that out of above Rs 3,50,00,000/-, an amount of Rs 50,77,0007- has itself been disallowed in the return of income by the appellant u/s 43B of the Income Tax Act, 1961.

4. Under the facts and in law, the learned CIT(A) erred in confirming disallowance u/s 14A of the Income Tax Act, 1961 of Rs 30,58,891/- computed in accordance to provisions of Rule 8D(2)(iii).

5. Under the facts and in law, the learned CIT(A) erred in confirming disallowance of Rs 71,01,0007-being 20% of Staff Welfare, Repairs & Maintenance, Printing & Stationery, Postage, Telephone & Fax and Advertising & Publicity.

5.1 Under the facts and in law, the learned CIT(A) failed to appreciate the fact that there is no such provision of ad-hoc disallowance under the provisions of Income Tax Act, 1961.

6. Under the facts and in law, the learned CIT(A) erred in confirming Transfer Pricing adjustment made of Rs 2,87,62,981/-.

6.1 Under the facts and in law, the learned CIT(A) failed to appreciate the fact that the assessing officer cannot to transfer pricing adjustment without referring the matter to Transfer Pricing officer. Hence, the assessment order passed is bad in law to the extent of transfer pricing adjustment made by the assessing officer.

6.2 Under the facts and in law, the learned CIT(A) failed to appreciate the submission made by the appellant.

7. Under the facts and in law, the learned CIT(A) erred in confirming disallowance of provision of professional fees payment to IDFC Capital USA of Rs 1,28,75,981/-.

8. Under the facts and in law, the learned A. O. erred in charging Interest u/s 234B of the Income Tax Act, 1961 on higher side.

9. The appellant craves leave to add, alter or delete any of the above grounds of appeal.”

3. The assessee is a company engaged in the business of share broking and is a member of Bombay Stock Exchange (BSE) and National Stock Exchange (NSE). The activities of the assessee include providing equity research and stock broking services to institutional clients. The assessee filed the return of income for A.Y. 2012-13 on 29/11/2012 declaring a loss of Rs.2,14,399/-. The case was selected for scrutiny and the statutory notices were duly served on the assessee. The Assessing Officer made the following disallowance:-

4. Accordingly, the Assessing Officer completed the assessment under section 143(3) assessing the income of the assessee at Rs.9,71,70,100/-. The CIT(A), on further appeal, gave marginal relief to the assessee with regard to the above disallowances/additions. The assessee is in appeal before the Tribunal being aggrieved by the order of the CIT (A).

DISALLOWANCE UNDER SECTION 36(1)(iii) r.w.s. 57(iii)

5. The Assessing Officer, during the course of assessment proceedings, noticed that the assessee has given loans and advances of Rs.22,95,00,000/- to subsidiary company, M/s IDFC Capital Limited. The Assessing Officer, in this regard, called on the assessee to furnish details pertaining to the loan and also to show cause why the interest claimed by the assessee as expenditure to the tune of Rs.56,50,752/- should not be disallowed. The assessee submitted before the assessing officer that own funds are available and that there is no borrowing to state that there has been diversion of funds. The assessee also submitted that the interest cost debited to the P&L Account is mainly towards bank guarantee charge which is required to be submitted to BSE / NSE towards margin for trade executed on behalf of the clients. Accordingly, the assessee submitted that the interest expenses incurred wholly and exclusively for the purpose of business and the same shall be allowed as a deduction. With regard to the query that why interest should not be disallowed under section 57(iii), the assessee submitted that the claim of finance charges is made against the business income of the assessee from broking business and, therefore, there is no question of triggering disallowance under section 57(iii). The Assessing Officer held the submissions of the assessee to be unacceptable stating that the nexus has not been established by the assessee and the assessee was not able to fulfill the conditions prescribed under section 36(1)(iii) and section 57(iii) of the Act. Accordingly, the assessing officer disallowed the interest expenses. The CIT(A) upheld the disallowance by upholding that –

“13. What is pertinent is that taxpayer has not charged interest on loans and advances to subsidiary concern, the assessment order has also not dealt with it elaborately. Out of the interest expenses, only a small portion can be directly linked i.e interest on temporary OD @ Rs 5,11,334. Apart from that bank guarantee charges of Rs 49,49,703 and bank charges of Rs 1,89, 715 are debited under finance charges. Since the taxpayer has diverted funds to subsidiary concern without charging interest to that extend interest bearing funds were diverted without yielding income and the same would have been available for business purposes. Apparently there is no interest bearing funds available with the taxpayer as on 3 1/3/2012. There is only share capital and reserves and surplus available for investment. Leaving apart reserves and surplus which cannot be appropriated for matters other than declaring dividends (and certain other things like investment) share capital is the only source of capital available for making investment, the assessing officer was mandated to verify the working capital utilised by the taxpayer – the operating expenses as per the IT return can be verified, if funds are remaining after the working capital requirements are met then only it can be deemed that expenses were incurred towards investment in subsidiary. It is pointed out that the temporary OD was utilised directly for the broking business for the usage of funds. There is a direct nexus between borrowal and utilisation of borrowed fund and the interest on OD account is correctly debited and falls under sec 36(1) (iii) . To that extend the addition made by the AO @ Rs 5,11,334 is upheld. After going through the written submissions it is found that there is no capital borrowed for the purpose of business. The taxpayer has internally generated resources to run business. The claim of the taxpayer is allowable u/s 3 7(1). The taxpayer cannot claim the benefit under a specific section like 36 (1)(iii). It can only claim it under a general section like sec 37, since there is no one to one nexus between borrowal and interest debited in the P & L account. The taxpayer has not raised a ground on this issue. To that extend the addition made by the assessing officer @ Rs 51,39,418 is upheld.”

6. The Ld.AR reiterated the submissions made before the lower authorities. The Ld.AR further submitted that the finance charges debited to the P&L Account do not pertain to any borrowed funds since the assessee did not have any The Ld.AR also submitted that during the course of assessment proceedings, the assessee has given a detailed written submission explaining the nexus between the finance charges paid and the business of the assessee which have not been considered. The Ld.AR drew our attention to the findings given by the CIT(A) wherein he has held that there is nexus between the interest cost and the business of the assessee, but has upheld the disallowance, which is contrary to his own findings.

7. The Ld.DR relied on the order of the lower authorities.

8. We heard the parties and perused the material on record. We notice that the assessee has submitted the break up of the finance cost as extracted below before the lower authorities:-

9. With regard to the interest on bank overdraft, we notice that as per the submissions it is paid towards the temporary overdraft facility to meet the margin requirements for trades executed on behalf of the various institutional clients. The CIT(A), in his order, as extracted hereinabove, has given a finding that there is a direct nexus between the interest on OD account and the broking business of the assessee. With regard to the bank guarantee, we notice that the same is required to be submitted to BSE / NSE towards margin call trade executed on behalf of clients and that the assessee has submitted sample copies of the bank guarantee issued in favour of exchangers before the lower authorities. The third item in the finance cost is the bank charges debited by the bank towards various banking related activities. From these details, it is clear that the entire finance cost debited by the assessee in the P&L Account are not towards any borrowings which is claimed to have been used for lending interest free loans. We notice that these costs have a direct nexus with the business of the assessee, i.e. stock broking for institutional clients since it is incurred to meet margin requirements of trade executed for assessee’s clients. We further notice that the CIT(A), has given a categorical finding Therefore, we are of the considered view that the finance cost should be allowed as a deduction under section 36(1)(iii) of the Act. This ground of the assessee is allowed in favour.

ADDITION TOWARDS BUSINESS LOSS HELD AS SPECULATION LOSS

10. The Assessing Officer, during the course of assessment noticed that assessee has offered a net amount of Rs.(-)15,48,648/- under the head ‘Profits and gains from business or profession’. The Assessing Officer held that the assessee has derived the loss from the trading of purchase and sale of shares that is settled otherwise than the actual delivery. Accordingly, the Assessing Officer treated the loss as arising out of speculative transaction as per provisions of section 43(5) and held the same as not to be allowed. On appeal, the CIT(A) held that the Assessing Officer has given a categorical finding with regard to the assessees involved in business of trading in securities predominantly and derivatives to a lesser extent. Accordingly, the CIT(A) upheld the order of the Assessing Officer to this extent.

11. The Ld.AR submitted that from the break up of income as given in the P&L Account, it can be seen that the income is derived from brokerage, income from advisory activities and other income consisting of dividend from long term and short term activities, interest on deposits, etc. The Ld.AR further submitted that the Assessing Officer has himself given a detailed finding in the assessment order with regard to the income and expenditure of the assessee from which it is clear that the assessee is not involved in any speculative transactions. The Ld.AR further submitted that the assessee during the course of assessment proceedings has given reasons for the returned loss and also the break up of fees income as required by the Assessing Officer. The Ld.AR also submitted that the Assessing Officer has ignored the various submissions made by the assessee and has simply taken the loss from the computation of income and held the same to be arising out of share transactions which are speculative in nature. The Ld.AR drew our attention to the break up of total income as has been extracted in the assessment order to submit that the assessee has not derived any income out of share trading and, therefore, the addition made in this regard is not tenable.

12. The Ld.DR relied on the order of lower authorities.

13. We heard the parties and perused the material on record. We notice that the assessee is deriving income as per the break up given below:-

It is also noticed that the assessee has submitted the following break up with regard to the advisory income before the Assessing Officer:-

14. It is also noticed that the assessee submitted before the Assessing Officer that there has been a significant fall in the revenue from operations as compared to previous financial year and that to be the reason for the overall loss as per the P& L From the perusal of records, we notice that the Assessing Officer has considered the net loss computed by the assessee in the computation of income and has treated the same as speculative. On further perusal of the computation we notice that the said loss is computed after making various adjustments towards suo motu disallowances and items considered separately. Therefore, we are unable to appreciate the basis on which, the Assessing Officer has come to the conclusion that the loss computed by the assessee is arising out of share trading. The CIT(A) also has completely ignored the various submissions made by the assessee on the merits of the issue but has simply relied on the finding given by the Assessing Officer that the income is arising out of share trading. From the above extracted break up of income, it is clear that the assessee is not deriving any income out of share trading that is speculative in nature and, therefore, the finding given by the lower authority stating that assessee is involved in speculation is factually incorrect. In view of this discussion, we delete the addition made by the Assessing Officer and allow the ground in favour of the assessee.

DISALLOWNCE OF BONUS

15. The assessee had debited a sum of Rs.3.50 crores towards bonus in the P& L Out of the said amount, the assessee has disallowed a sum of Rs.50,77,000/- in the computation of income as unpaid bonus. The Assessing Officer called on the assessee to furnish the details pertaining to the bonus and in response the assessee filed the details such as employee-wise bonus paid details along with their PAN, Form No.26Q, employee-wise Annexure of salary etc.

After perusal of the details submitted by the assessee, the Assessing Officer held that –

“16.2 The submissions made by the assessee company is duly considered. However, the same is not found to be acceptable. It is seen from the material available on record that assessee has claimed Bonus payable to its employees and most of the employees fall in lower/lowest income tax slab rate as compared to assessee company who falls in highest tax rate slab i.e 30%. Assessee has claimed Bonus to most of its employees merely in the range of Rs 210 to a few thousands only. The intention of claiming such deduction is clear from above fact that assessee company wants to evade tax on an amount of Rs.350 lacs by diverting the said fund to its employees in the name of bonus. The tax on total bonus of Rs.350 lacs comes in the tax rate of 30% in the hands of assessee company; whereas by diverting the said fund to its employees in the form of bonus (whose salaries falls in lowest /lower tax slab), assessee company has diverted its fund to avoid tax.

6.3 In the present case, the assessee has not given any justifiable reason of claiming such payment. It also failed to prove that it was made ‘wholly & solely’ for the purpose of the business. Assessee had no legal liability to pay to its employees bonus payment of Rs. 350 lacs. It sole purpose was to evade tax only by diverting the funds to its employees. Further, it is a disputed and debatable fact that the assessee has paid bonus incentive to its employees in-accordance with the terms of service contracts etc., or not?

6.4 Hence, as discussed above, it cannot be said that assessee has fulfilled the condition for claiming such deduction u/s.37 of the Act. Accordingly, I hold that the said claim of deduction cannot be allowed as business expense u/s.37 of the Act. Hence, disallowance comes to Rs.350 lacs and is added to the total income of the assessee as not allowable expense u/s.37 of the Act as not incurred wholly & solely for business purpose but to avoid tax on the same.”

16. On further appeal, the CIT(A) upheld the disallowance made by the Assessing Officer stating that the assessee has not filed the return of income within the due date.

17. The Ld.AR submitted that the assessee before the lower authorities has shared all the relevant details with regard to the bonus payment which have been completely ignored. The Ld.AR further submitted that the assessee himself has made a suo motu disallowance to the extent of unpaid bonus and there is double disallowance to this extent since the assessing officer has once again disallowed the entire amount.

18. The Ld.DR relied on the order of the lower authorities.

19. We heard the parties and perused the material on record. From the perusal of details submitted by the assessee before the Assessing Officer (pages 42 to 72) we notice that the assessee has submitted relevant details to substantiate the payment of bonus to the employees. We also notice that the assessee has made a suo motu disallowance of Rs.50,77,000/- towards unpaid bonus. The assessee before the CIT(A) has made a submission with regard to the bonus provision and the actual payment as below:-

20. We notice that besides the above details, the assessee has also furnished the employee wise bonus paid details, tax deducted there from, details of payment etc., which have been not considered by the assessing officer. From the perusal of the facts and records submitted before us it is clear that the assessee has claimed the deduction towards bonus based on actual payment and has suo moto disallowed the un-paid bonus. Given this, we are of the considered view that the lower authorities are not correct in making the disallowance by completely ignoring the various factual submissions made by the assessee and accordingly, we delete the disallowance. This ground is allowed in favour of the assessee.

DISALLOWANCE UNDER SECITON 14A READ WITH RULE 8D

21. During the year, the assessee has earned a dividend income of Rs.2,03,69,606/-. The assessee made a suo motu disallowance of Rs.4,07,392/-. The Assessing Officer held that the suo motu disallowance is not commensurate with the dividend income earned by the assessee and accordingly proceeded to make the disallowance under section 14A read with rule 8D as below:-

22. The CIT(A) on further appeal deleted the addition made under rule 8D(2)(ii) for Rs. 20,18,642 and upheld the rest of the disallowance.

23. The Ld.AR submitted that the depository charges disallowed by the assessing officer is not incurred towards earning the dividend income but is incurred in the normal course of business. The Ld.AR accordingly submitted that the said expenses is not pertaining to earning the dividend income and, therefore, cannot be considered for the purpose of disallowance under rule 8D(2)(i). The ld AR further submitted for the purpose of disallowance as per rule 8D(2)(iii), the Assessing Officer has considered the entire investments. The Ld.AR in this regard prayed that the investments that are earning dividend income only should be considered for the purpose of disallowance under rule 8D(2)(iii). The Ld.AR relied on various judicial precedents in this regard. The Ld. DR relied on the orders of the lower authorities.

24. We heard the parties and perused the material available on record. The assessing officer has invoked the provisions of section 14A r.w.r. 8D for the reason that the suo moto disallowance made by the assessee is not commensurate with the amount of exempt income earned by the assessee. The CIT(A) gave partial relief to the assessee for the reason that the assessee has not incurred any interest expenditure towards earning the exempt income. On perusal of materials on record, we notice that the assessee has incurred the expenditure of Rs.3,20,003 towards depository charges. We notice that the depository charges are incurred for opening the Demat account which is a statutory requirement for the members of NSE / BSE. Therefore there is merit in the contention that the said expense is incurred in the normal course of broking business and accordingly we hold that the depository charges should not be disallowed under section 14A r.w.r. 8D(2)(i). With regard to disallowance under rule 8D(2)(iii), it is now a settled position that the investments that are yielding exempt income only should be considered for the purpose of disallowance. Therefore we direct the assessing officer to recomputed the disallowance under section 14A r.w.r 8D(2)(iii) taking into consideration only those investments which are earning tax free income and also take into account the suo moto disallowance made by the assessee.

DISALLOWANCE UNDER SECTION 37(1)

25. The Assessing Officer, during the course of assessment called on the assessee to furnish various details with regard to the five ledger expenses. The assessee submitted the details of the expenses along with sample invoices and supporting documents. After considering the submissions of the assessee, the Assessing Officer made an adhoc disallowance of 25% of the entire expenditure by holding that –

“8.3 The submissions of the assessee company is considered but the same is not found to be acceptable due to the reason that the same is very general and casual in nature and is not supported by any cogent evidence or strong nexus for inclination to say that the expenses has got a business incidence. On verification of details filed, it is observed that these expenses are not fully supported by proper bills/vouchers and certain expenses are incurred through self made vouchers in cash. Further, the hon’ble jurisdictional High Court in its judgment of Ramanad Sagar vs. DCIT reported in 256 ITR 134(BOM) has laid down that the burden of proof is on the assessee to establish beyond doubt that the expenditure has been solely incurred for the purpose of business. Further, the assessee has not maintained any log book/record for the use of these expenses for the use of business as well as no business purposes separately. Further, the personal element embedded in these head’s of expenditure cannot be ruled out for want of itineraries, log book and finer details.

8.4 The assessee had furnished some ledger accounts for the said expenses, however the assessee has not furnished sufficient details to substantiate the claim of expenses incurred for business and non business purposes separately as the volume of the same are huge and bulky. However, it is seen that some of the expenses are incurred in cash and made on self made vouchers. It cannot be verified from the details submitted i.e. copies of sample bills and identity and genuinity of the same which are “wholly and exclusively incurred for the purpose of business.” Therefore in the absence of above complete details in the fitness of things it is very reasonable to disallow 25% of the entire expenditure for want of verification. Therefore an amount of ‘88.76 lacs is hereby added back to the total income.”

26. On appeal, the CIT(A) reduced the adhoc disallowance to 20% of the expenses. Before us, the Ld.AR submitted that all the details with regard to the expenses have been furnished before the Assessing Officer. The Ld.AR also submitted that the assessee did not incur any expenses in cash through self made vouchers as has been claimed by the Assessing Officer. The Ld.AR further submitted that out of total expenditure of Rs.47 crores debited to the P&L Account a meager amount was spent in cash and therefore, the findings recorded by the Assessing Officer on this ground are without any basis. The Ld.AR further argued that the assessee which is in the business for a long time is the subsidiary of IDFC Ltd in which 70% stake is held by Government of India and therefore making adhoc disallowance questioning the credibility of the expenditure incurred is not correct. Further the accounts of the assessee are subject to audit and no adverse finding is given by the auditors. The Ld.AR accordingly submitted that the lower authorities are not correct in making the disallowance without verifying the details submitted by the assessee with regard to the expenses.

27. We heard the parties and perused the materials on record. We notice that the assessee has vide letter dated 28.11.2014, submitted party wise details of the expenses along with the details of tax deducted on the said expenses. The assessee has also submitted the ledger copies, copy of invoices and other supporting documents substantiating the genuineness of the expenditure (page 88 to 92 of paper book). We further notice that the books of accounts are subject to audit and there is no finding given by the auditors stating that the expenses include anything of personal nature. The lower authorities have made the adhoc disallowance by stating that the certain expenses are claimed through self made vouchers, without recording any specific adverse finds with regard to the various details furnished by the assessee. We also notice in this regard that the lower authorities did not call on the assessee to submit any further details nor did they confront the assessee with any defects in the supporting documents filed by the assessee. Given the volume of expenditure incurred by the assessee towards various expenses and considering the fact that assessee is part of I DFC in which government holds shares, the lower authorities are not correct in making adhoc disallowance without any specific adverse findings with regard to the details furnished substantiating the expenses. Accordingly we hold that the adhoc disallowance made by the assessing officer without recording any specific adverse finding with regard to the expenditure incurred is not tenable. This ground of the assessee is allowed.

DISALLOWANCE OF PROFESSIONAL FEES PAID

28. During the year under consideration, the assessee has paid an amount of Rs.2,87,62,981/- to I DFC Capital (USA) Inc. towards rendering of marketing support services. During the course of assessment, the assessee submitted a copy of agreement entered into between the assessee and IDFC (USA) Inc. along with invoices in this regard. The assessee also submitted the Transfer Pricing Study Report (TPSR) of I DFC (USA) Inc. prepared by Deloitte Haskins. The TPSR stated that the transaction meets the arm’s length standard while taking IDFC (USA) Inc as the tested party. The Assessing Officer held that the assessee has not met the basic requirement of transfer pricing documentation and compliance as per the Indian Transfer Pricing Regulations, inspite of having international transactions with I DFC (USA) Inc. In the TPSR of I DFC (USA) Inc submitted by the assessee, the Assessing Officer noted certain deficiency and accordingly rejected the said document. The Assessing Officer further held that the assessee did not submit the required details and documents justifying the claim that the transaction with IDFC (USA) Inc is at arm’s length. The Assessing Officer, therefore, made an adjustment of Rs.2,87,62,981/- by determining the ALP of the professional fees paid to IDFC (USA) Inc as Nil.

29. The assessee preferred further appeal before the CIT(A). Before the CIT(A), the assessee submitted the TPSR prepared under section 92D of the Act as additional evidence. In the remand report called for by the CIT(A) from the Assessing Officer, the assessing officer stated that additional evidence should not be admitted and did not give any finding on merits. However, the CIT(A) admitted the TPSR and proceeded to adjudicate the issue on merit. The CIT(A) held that the comparables identified by the TPSR are US companies and using US comparables to benchmark an Indian company’s professional services in providing information to non US company where information can be made is very specialized. Therefore, the CIT(A) rejected the TP analysis and upheld the addition made by the assessing officer. During the course of assessment proceedings, the Assessing Officer also made an addition towards provision for expenses to the tune of Rs.1 ,28,75,981/-. The assessee submitted that the said provision is made towards professional fees paid to I DFC (USA) Inc which has already been considered for TP adjustment and accordingly, no separate addition can be made for the provision. The CIT(A) in this regard directed the Assessing Officer to verify whether the provision of expenses of Rs.1,28,75,981/- is included in the TP adjustment of Rs.2,87,62,981/- and provide relief to the assessee accordingly.

29. Before us, the Ld.AR submitted that the entire TP adjustment is made without proper examining the TPSR of the assessee and the ALP is considered at Nil without any bench marking by the assessing officer. The CIT(A), though has held that additional evidence is admitted, has rejected the TP study to confirm the TP adjustment. Therefore, the Ld.AR prayed that the issue may go back to the Assessing Officer with a direction to examine the TPSR of the assessee.

30. The Ld. DR submitted that the assessee, inspite of several opportunities, did not submit the TPSR before the Assessing Officer, and therefore, the TPSR of the assessee cannot be admitted for adjudication. The Ld. DR further supported the order of the lower authorities.

31. We heard the parties and perused the material on record. We notice that the Central Board of Direct Taxes, vide instruction no.3/2016 dated 10^th March 2016 has issued Guidelines for Implementation of Transfer Pricing Provisions replacing the Instruction No. 15/2015 dated 16^th October 2015. The relevant guidelines as per the said circular are as extracted below –

3.2. All cases selected for scrutiny, either under the Computer Assisted Scrutiny Selection [CASS] system or under the compulsory manual selection system (in accordance with the CBDT’s annual instructions in this regard for example, Instruction No. 6/2014 for selection in F.Y 2014-15 and Instruction No. 8/2015 for selection in F. Y 2015-16), on the basis of transfer pricing risk parameters (in respect of international transactions or specified domestic transactions or both] have to be referred to the TPO by the AO, after obtaining the approval of the jurisdictional Principal Commissioner of income-tax (PCIT) or Commissioner of Income-tax (CIT). The fact that a case has been selected for scrutiny on a TP risk parameter becomes clear from a perusal of the reasons for which a particular case has been selected and the same are invariably available with the jurisdictional AO. Thus, if the reason or one of the reasons for selection of a case for scrutiny is a TP risk parameter, then the case has to be mandatorily referred to the TPO by the AO, after obtaining the approval of the jurisdictional PCIT or CIT.

3.3. Cases selected for scrutiny on non-transfer pricing risk parameters but also having international transactions or specified domestic transactions, shall be referred to TPOs only in the following circumstances:

(a) where the AO comes to know that the taxpayer has entered into international transactions or specified domestic transactions or both but the taxpayer has either not filed the Accountant’s report under Section 92E at all or has not disclosed the said transactions in the Accountant’s report filed;

(b) where there has been a transfer pricing adjustment of Rs. 10 Crore or more in an earlier assessment year and such adjustment has been upheld by the judicial authorities or is pending in appeal; and

(c) where search and seizure or survey operations have been carried out under the provisions of the Income-tax Act and findings regarding transfer pricing issues in respect of international transactions or specified domestic transactions or both have been recorded by the Investigation Wing or the AO.

3.4. For cases to be referred by the AO to the TPO in accordance with paragraphs 3.2 and 3.3 above, in respect of transactions having the following situations, the AO must, as a jurisdictional requirement, record his satisfaction that there is an income or a potential of an income arising and/or being affected on determination of the ALP of an international transaction or specified domestic transaction before seeking approval of the PCIT or CIT to refer the matter to the TPO for determination of the ALP:

• where the taxpayer has not filed the Accountant’s report under Section 92E of the Act but the international transactions or specified domestic transactions undertaken by it come to the notice of the AO,’
• where the taxpayer has not declared one or more international transaction or specified domestic transaction in the Accountant’s report filed under Section 92E of the Act and the said transaction or transactions come to the notice of the AO; and
  
• where the taxpayer has declared the international transactions or specified domestic transactions in the Accountant’s report filed under Section 92E of the Act but has made certain qualifying remarks to the effect that the said transactions are not international transactions or specified domestic transactions or they do not impact the income of the taxpayer.

In the above three situations, the AO must provide an opportunity of being heard to the taxpayer before recording his satisfaction or otherwise. In case no objection is raised by the taxpayer to the applicability of Chapter X [Sections 92 to 92F] of the Act to these three situations, then AO should refer the international transaction or specified domestic transaction to the TPO for determination the ALP after obtaining the approval of the PCIT or CIT. However, where the applicability of Chapter X [Sections 92 to 92F] to these three situations is objected to by the taxpayer, then AO must consider the taxpayer’s objections and pass a speaking order so as to comply with the principles of natural justice. If the AO decides in the said order that the transaction in question needs to be referred to the TPO, he should make a reference after obtaining the approval of the PCIT or CIT.

3.5. In addition to the cases to be referred as per paragraphs 3.2 and 3.3, a case involving a transfer pricing adjustment in an earlier assessment year that has been fully or partially set-aside by the ITAT, High Court or Supreme Court on the issue of the said adjustment shall invariably be referred to the TPO for determination of the ALP.

3.6. Since the provisions of Section 92CA of the Act, inter-alia, refer to the computation of the ALP of the international transaction or specified domestic transaction, it is imperative for the AO to ensure that all international transactions or relevant specified domestic transactions or both, as the case may be, are explicitly mentioned in the letter through which the reference is made to the TPO. In this regard, guidelines as under may be followed:

(a) If a case has been selected for scrutiny on a TP risk parameter pertaining to international transactions only, then the international transactions shall alone be referred to the TPO:

(b) If a case has been selected for scrutiny on a TP risk parameter pertaining to specified domestic transactions only, then the specified domestic transactions shall alone be referred to the TPO; and

(c) If a case has been selected for scrutiny on the basis of TP risk parameters pertaining to both international transactions and specified domestic transactions, then the international transactions and the specified domestic transactions shall together be referred to the TPO.

Since international transactions may be benchmarked together at the entity level due to the inter-linkages amongst them, if a case has been selected for scrutiny on a TP risk parameter pertaining to one or more international transactions, then all the international transactions entered into by the taxpayer except those about which the AO has decided not to make a reference as per paragraph 3.4 – shall be referred to the TPO.

3.7. For administering the transfer pricing regime in an efficient manner, it is clarified that though AO has the power under Section 92C to determine the ALP of international transactions or specified domestic transactions, determination of ALP should not be carried out at all by the AO in a case where reference is not made to the TPO. However, in such cases, the AO must record in the body of the assessment order that due to the Board’s Instruction on this matter, the transfer pricing issue has not been examined

(emphasis supplied)

32. From the above it is clear that the assessing officer does not have the jurisdiction to propose any transfer pricing adjustment in case where he has not made any reference to the TPO. Therefore the additional made by the assessing officer to the tune of Rs.2,87,62,981 towards transfer pricing adjustment is not tenable and is deleted. This ground is allowed in favour of the assessee.

33. With regard to the addition of Rs.1,28,75,981, the assessing officer has held that the assessee did not submit any justification or documentary evidence substantiating the provision made towards professional fees paid to AE. We therefore remit the issue back to the assessing officer to examine the issue afresh by calling for relevant details and decide the allowability of the claim in accordance with law. The assessee is directed to submit the required details as may be called for and cooperate with the proceedings. It is ordered accordingly.

34. Ground No.8 is consequential and Ground 9 is general and therefore these grounds do not warrant any separate adjudication.

35. In the result, appeal is allowed.

Order pronounced in the open court on 27/10/2023