Innovative Textiles Limited Vs DCIT (ITAT Delhi)
Assessee challenged assessment order framed u/s 143(3) r.w.s. 144C(13)/144B pursuant to DRP’s directions, wherein AO made transfer pricing adjustment of Rs.84,95,443/- on purchase of cotton from its AE & further added this adjustment to book profits u/s 115JB.
Assessee argued that while TP adjustment in normal computation may be contested separately, adding such adjustment to book profit u/s 115JB was impermissible. Reliance was placed on SC in Apollo Tyres Ltd. 255 ITR 273 & ITAT Delhi ruling in Cash Edge India Pvt. Ltd. (ITA 64/Del/2015), which held that AO cannot tinker with net profit as per Companies Act accounts except as provided in Explanation to s.115JB. Transfer pricing adjustments are not one of the specified adjustments.
Tribunal noted that AO had no jurisdiction to go beyond net profit in P&L a/c approved under Companies Act, except for adjustments in Explanation 1 to s.115JB(2). Since TP adjustment is not covered therein, its inclusion in book profits was contrary to law. Accordingly, Tribunal directed AO to exclude TP adjustment from MAT computation u/s 115JB. Other grounds were left open. Thus, appeal of Assessee was partly allowed.
FULL TEXT OF THE ORDER OF ITAT DELHI
This appeal is filed by the assessee against assessment order dated 26.03.2022 passed by the Income Tax Department/National Faceless assessment Centre, Delhi u/s 143(3) read with section 144C(13)/144B of the Income-tax Act, 1961 (for short ‘the Act”) for Assessment Year 2017-18 pursuant to the directions of the Dispute Resolution Panel u/s 144C(5) of the Act raising following grounds of appeal :-
“1. That the orders of the learned lower tax authorities is/are contrary to the law and facts of the case.
2. That the Order of the learned Assessing Officer is framed without following the mandatory procedural provisions of section 144B of the Income – tax Act, 1961 as no show cause notice being draft assessment order was served on the appellant before making the final assessment order.
3. That the learned Hon’ble Dispute Resolution Panel (DRP) /lower tax authorities had contrary to law and facts of the case, without any proper basis and properly appreciating and considering the submissions / evidences / material produced on record by the appellant, added Rs.84,95,443 being TP adjustment with reference to international transaction of purchase of cotton of Rs.27,14,55,905 from an associated enterprise to the returned business loss of Rs.8,54,00,730, thereby assessing / reducing the returned business loss to Rs.7,69,05,287.
4. That the Hon’ble Dispute Resolution Panel (DRP) / learned lower tax authorities erred in law and facts of the case, without any proper basis and properly appreciating and considering the submissions / evidences / material produced on record by the appellant, in rejecting the comparable Uncontrolled Price (CUP) method and applying Transactional Net Margin Method (TNMN).
5. That the Hon’ble DRP/learned lower tax authorities erred in law and facts of the case, without any proper basis and properly appreciating and considering the submissions / evidences 1 material produced on record by the appellant, In selecting functionally different companies 1 companies with extreme results as comparables for the purpose of undertaking benchmarking analysis applying TNMN.
6. That the Hon’ble DRP/ lower tax authorities erred in law and facts of the case in not appreciating that the international transactions of the appellant were accepted o be at arm’s length on Comparable Uncontrolled Price (CUP) method in the earlier assessment years viz assessment year 2012-13 and assessment year 2013-14.
7. That the learned Assessing Officer 1 TPO had failed to appreciate that the addition of Rs.84,95,443 is only marginally higher by a mere 0.13% (3.13% {addition on 84,95,443 on international transaction of~ 27,14,55,905} as against a 3% variation (ie Rs. 81,43,677 being 3% of Rs. 27,14,55,905) permitted by notification no. 50/2017; F .No. 500/1/2014 – APA – II dated 9th June 2017. In view of the said fact and considering all the facts and the materiality, the learned Assessing Officer shouldn’t have made the addition at all or limited the addition to only Rs.3,51,766 (being the difference between 3.13% and 3.00%) by allowing marginal relief on the grounds of natural justice and by drawing analogy to various marginal relief provisions 1 sections in the Income – tax Act, 1961, itself.
8. That the lower tax authorities had contrary to law and facts of the case, without any jurisdiction, basis and merely on surmises and conjectures, added Rs.84,95,443 being TP adjustment to the book profits under section 115JB of the Income – tax Act, 1961.
9. That the lower tax authorities had contrary to law and facts of the case, without any basis and merely on surmises and conjectures, charged interest under section 234A, 234B, 234C & 234D of the Income – tax Act, 1961 that the lower tax authorities had contrary to law and facts of the case, without any basis and merely on surmises and conjectures, initiated penalty proceedings under section 270A of the Income – tax Act, 1961.
10. That the lower tax authorities had contrary to law and facts of the case, without any basis and merely on surmises and conjectures, initiated penalty proceedings under section 270A of the Income – tax Act, 1961.
11. It is prayed as under:
a. That the Order of the learned lower tax authorities be declared null, void & non – est as not being in accordance with the mandatory procedural provisions of section 144B of the Income – tax Act, 1961 as no show cause notice being draft assessment order was served on the appellant before making the final assessment order;
b. That the addition of Rs.84,95,443 being TP adjustment with reference to international transaction of purchase of cotton of Rs.27,14,55,905 from an associated enterprise to the returned business loss of Rs.8,54,00,730, thereby assessing / reducing the returned business loss to Rs.7,69,05,287 be deleted;
c. That the Hon’ble DRP / learned lower tax authorities be directed to apply Comparable Uncontrolled Price (CUP) method and accept the price at which international transaction has been entered by the appellant), more so, when it has been accepted in earlier years;
d. That the Hon’ble DRP / learned lower tax authorities be directed to select only functionally similar companies with normal results if TNMN has to be applied;
e. That the lower tax authorities, in any case, be directed to limit the addition to Rs.3,51,766 (being the difference between 3.13% and 3.00% variance permitted by notification no. 50/2017; F.No. 500/1/2014 – APA – II dated 9th June 2017) by allowing marginal relief on the grounds of natural justice and by drawing analogy to various marginal relief provisions / sections in the Income – tax Act, 1961, itself;
f. That the lower tax authorities had contrary to law and facts of the case, be directed to delete Rs.84,95,443 being TP adjustment from the book profits under section 115JB of the Income – tax Act, 1961;
g. That the lower tax authorities be directed not to charge interest under section 234A, 234B, 234C & 234 D of the Income – tax Act, 1961;
h. That the lower tax authorities be directed to drop penalty proceedings under section 270A of the Income – tax Act, 1961.”
2. At the time of hearing, ld. AR of the assessee pressed the issue in Ground No.3 only. In this regard, he submitted that the TPO has raised TP adjustment of Rs.84,85,443/- and submitted that in the final assessment order, the Assessing Officer has made the abovesaid TP adjustment in the normal computation of income and reduced the returned business loss from Rs.8,54,00,730/- to Rs.7,69,05,287/-. Further he submitted that the Assessing Officer proceeded to make the abovesaid TP adjustment in computing the book profit under section 115JB of the Income-tax Act, 1961 (for short ‘the Act’) and added to the declared book profit of Rs.93,55,782/-. In this regard, he submitted that the abovesaid adjustment in the determination of book profit is not in accordance with law and contrary to the judgment of Hon’ble Apex Court in the case of Apollo Tyres Limited 255 ITR 273 and further submitted that in the decision of ITAT, Delhi in ITA No.64/Del/2015 in Cash Edge India Private Ltd., the similar issue was considered and adjudicated that Assessing Officer erred in adding back the transfer pricing adjustment of the book profit u/s 115JB of the Act. He submitted that exactly similar issue was considered by the coordinate Bench in the abovesaid decision. Therefore, he prayed that the abovesaid adjustment in the book profit is patently untenable and not in accordance with law and, therefore, it should be deleted.
