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IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES “A”, HYDERABAD

BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER AND

SHRI G. PAVAN KUMAR, JUDICIAL MEMBER

ITA No. Asst. Year Appellant Respondent

404/Hyd/16

2011-12

The Deputy

Commissioner of Income Tax, Circle-16(1), HYDERABAD

M/s. Lanco Infratech

Limited HYDERABAD

[PAN: AAACL3449H]

450/Hyd/16

M/s. Lanco Infratech

Limited HYDERABAD

[PAN: AAACL3449H]

The Deputy

Commissioner of Income Tax, Circle-16(1), HYDERABAD

C.O. No. 21/HYD/2016 (in ITA No. 404/Hyd/2016)

Assessment Year: 2011-12

M/s. Lanco Infratech Limited

HYDERABAD [PAN: AAACL3449H]

Vs

The Deputy Commissioner of Income Tax, Circle-16(1), HYDERABAD

(Cross-Objector) (Respondent)

For Revenue

:

Shri P. Chandra Sekhar, CIT DR

For Assessee : Shri Salil Kapoor, Shri Ananya Kapoor & Shri P. Murali Mohan Rao, ARs

Date of Hearing : 14-02-2017 Date of Pronouncement : 03-05-2017

O R D E R

PER B. RAMAKOTAIAH, A.M. :

These are appeals by Assessee and Revenue against the order

of the Dy. Commissioner of Income Tax, Circle-16(1), Hyderabad

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u/s. 143(3) r.w.s. 92CA(3) and 144C(13) of the Income Tax Act

[Act] and Cross-Objection by assessee.

2. Briefly stated, assessee-company M/s Lanco Infratech Limited

(LITL) is engaged in the business of civil construction

infrastructure development and generation of power through wind

mills. It filed its return of income for AY. 2011-12 admitting net

total income of Rs. 380,99,11,655/- under the normal provisions of

the Income Tax Act and book profits of Rs. 417,94,04,376/- under

the MAT provisions. In the scrutiny proceedings, the transactions

with the AE were referred to the Transfer Pricing Officer [TPO] u/s.

92CA(1) who has proposed adjustments in respect of assessee’s

international transactions for the year as under:

Transaction Adjustment (in Rs.)

Interest received on loans

2,39,69,300

Corporate Guarantee

90,19,30,000

Interest of receivables

1,45,21,83,968

Total

2,37,80,83,268

2.1. Assessee had filed certain objections against the TP

order before the AO. However, AO finalized the draft order by

incorporating the adjustments proposed. Assessee then preferred

objections before the DRP on 30-04-2015. DRP vide their order dt.

31-12-2015 has given directions in which only one of the

objections raised by assessee with reference to bank guarantee

adjustment was accepted partly. Pursuant to the directions of DRP,

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the AO passed a final order with total addition of Rs.

1,71,51,64,718/- summarized as below.

S.No. TP Additions as proposed in the assessment order

Amount (Rs)

1. Adjustment u/s. 92CA of the IT Act, 1961

171,51,64,718

a) Interest received on loans

2,39,69,300

b) Corporate Guarantee fee

23,90,11,450

c) Interest on Receivables

145,21,83,968

2. Disallowance of Sub-contract Expences.

286,00,39,638

Assessee is aggrieved on the consequential assessment order

passed on various issues, whereas Revenue is aggrieved on the

reduction ordered by the DRP with reference to commission on

corporate guarantee from 2% adopted by the TPO to 0.53%.

Assessee’s Cross-Objection is against the corporate guarantee

issue raised by the Revenue. These issues are considered in detail

after considering the detailed submissions of the Ld. Counsel and

Ld.CIT-DR and perusing the documents placed on record.

TRANSFER PRICING ISSUES:

3. Ground of Appeal 8a to 8d are general in nature.

4. Grounds 9a to 9d: The grounds relate to TP

adjustment of Rs. 2,39,69,300/- related to Interest on Loan. LITL

had given a loan amounting to USD 59 million to its AE namely

Lanco International Pte. Limited, Singapore (UPl) with first

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disbursement of USD 9 million on 5th March 2010 followed by

further three disbursements later in the Financial Year 2010-11.

The entire loan was stated to have been repaid by AE to LITL on 1st

September 2010. In order to justify the receipt of interest on the

foreign currency loans, LITL has applied Comparable Uncontrolled

Price Method (CUP) as the most appropriate method. As the loan

was provided by LITL to its AEs in foreign currency, Singapore PLR

was considered to benchmark the said transaction. The average

Singapore PLR was 5.38% whereas LITL has received interest at

6.37% from Lanco International Pte. Limited, Singapore, which is

greater than Singapore PLR, thus confirming the arm's length

nature of the transaction.

4.1. The TPO did not accept the benchmarking analysis

conducted by assessee in its transfer pricing document and instead

proceeded to determine the Arm's Length Price (ALP) by adopting

PLR prevalent in India in FY.2010-11 i.e., 12.25% as arm's length

Interest. Accordingly, TPO computed adjustment as Rs.

2,39,69,300/-. The DRP upheld the transfer pricing adjustment

made by the TPO. DRP further observed that the assessee had

significant loans outstanding on which it has paid interest cost

accordingly, assessee has incurred ‘potential loss’ as interest cost

to that extent could have been reduced. The DRP relied on the

decision of Tribunal in case of M/s. Logix Micro Systems Limited

ITA No. 524/Bang/2009.

4.2. It was submitted that the loan was provided to the AE

which is a Singapore based company i.e. the loan was

consumed/received in Singapore and also the loan was in foreign

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currency and repaid in foreign currency. Hence, the ALP should be

determined using Singapore PLR. It was the contention that

TPO/DRP, incorrectly equated the transaction of providing loan to

subsidiary situated outside India with bank rates prevailing in

India without appreciating the fact that loans are made outside

India and same should be compared with foreign market prime

lending rates. Hence, the comparison is not in accordance with the

provisions of the Act and the Rules. Assessee relied on the

following case law:

i. CIT Vs. Tata Autocomp Systems Ltd., Bombay High Court

(ITA No.1320 of 2012)

ii. Siva Industries & Holdings Ltd. Vs. ACIT (ITA No.

2148/MDS/2010)

iii. Marico Ltd. Vs. ACIT [2016 70 taxmann.com 214 (Mumbai

Trib.) / (ITA No. 8713 & 8858/Mum/2011)

iv. CIT Vs. Cotton Naturals India Pvt. Ltd., Hon'ble Delhi High

Court ((2015) 276 CTR 445 (Del)

v. Everest Kanto Cylinder Ltd. Vs. ACIT [2015] 56 taxmann.com

361 (Mumbai-Trib.) / (ITA No. 1386/Mum/2014)

vi. Transport Corporation of India Vs. ACIT, ITA No.

117/Hyd/ 2016

4.3. With respect the DRP's observation that the assessee

could have repatriated the funds and utilized the same to repay

outstanding loan, it was submitted that unlike the case of Logix

Microsystems Limited, huge funds were not blocked with AE. In

the case of the assessee the loan amount, on which the adjustment

was made amounts to USD9 million(equivalent Rs.40,78,80,000/-).

The domestic loan availed on which LITL pays interest costs

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amounts to Rs. 3,137 Crores. Further, the assessee has a paid up

capital of Rs. 238 Crores with a reserve and surplus position of Rs.

3,154 Crores. Thus, loan advanced to the AEs forms a very

miniscule portion considering LITL's financial position. It relied on

following case law:

i. CIT Vs. Cotton Naturals India Pvt. Ltd., Hon'ble Delhi High Court

((2015) 276 CTR 445 (Del).

ii. CIT Vs. EKL Appliances Ltd. (ITA No. 1068/2011)

4.4. Ld.DR however relied on the orders of the AO/TPO and

DRP to support the adjustments so made.

5. We have considered the rival contentions and perused

the details available on record. There is no dispute that assessee

has advanced amounts in foreign currency. Therefore, following

principles laid down by the Hon'ble Bombay High Court in the case

of CIT Vs. Tata Autocomp Systems Ltd. In ITA No.1320 of 2012, the

claim of assessee to adopt Singapore PLR as stated before the TPO

and DRP is reasonable and deserves to be accepted. Further, it is

also an established law that TPO/DRP cannot adopt the interest

rate prevailing in Indian rupees for Indian loans to compare it for

the loans advanced in foreign currency. Either LIBOR or EURIBOR

or in this case, Singapore PLR are to be considered. Further, the

said issue has been specifically considered by the Hon'ble Delhi

High Court in the case of Cotton Naturals India Pvt. Ltd with

specific reference to the case of Logix Microsystem Private Limited,

relied on by DRP in their order. The finding of Hon'ble High Court

with respect to the same is summarised as below:

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Transfer pricing determination is not primarily undertaken to

re-write the character and nature of the transaction;

Chapter X and Transfer Pricing rules do not permit the

Revenue authorities to step into the shoes of the assessee

and decide whether or not a transaction should have been

entered. It is for the assessed to take commercial decisions

and decide how to conduct and carryon its business.

Actual business transactions that are legitimate cannot be

restructured.

The transaction of lending of money by the respondent-

assessee to the subsidiary, should not be seen in isolation,

but also for the purpose of maximizing returns, propelling

growth and expanding market presence.

This ratio and rationale, when applied to the facts of the

present case, would mean that the transfer pricing

determination would decide what an independent distributor

and marketer, on the same contractual terms and having the

same relationship, would have earned/paid as interest on the

loan in question. What an independent party would have paid

under the same or identical circumstances would be the

arm's length price or rate of interest. What the assessed

would have earned in case he would have entered into or

gone ahead with a different transaction, say with a party in

India, is not the criteria. What is permitted and made subject

matter of the arm's length determination is the question of

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rate of interest and not re-classification or substitution of the

transaction.

5.1. Respectfully following the principles laid down by the

Co-ordinate Benches as relied on by the Ld. Counsel and also by

various judicial pronouncements of the High Courts relied upon,

we are of the opinion that there is no need for any adjustment on

this account, as assessee has already received 6.37% interest

which is more than the Singapore prime lending rate of 5.38%. In

view of that, we delete the addition made by the AO/TPO/ DRP.

Assessee’s grounds on this are allowed.

6. Grounds 10a to 10h: Regarding TP adjustment of Rs.

23,90,11,450/- related to Corporate Guarantee.

6.1. During FY 2010-11, LITL became the successful bidder

for acquiring a coal mine in Western Australia owned by Griffin

Coal Mining Company Pty Ltd. and Carpenter Mine Management

Pty Ltd. The bid was to acquire these companies which own coal

mine. A two level subsidiary structure was created to enable the

acquisition through bank loans. Bank loans were obtained by

Lanco Resources International Pte. Ltd (LRIPL, Singapore), Lanco

Resources Australia Pty. Ltd. (LRAPL, Australia). LITL provided

corporate guarantee, free of charge basis, for loan facility and

hedge to the lender to get the finance and did not charge any

corporate guarantee fee against the same.

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Company Amount of guarantee Lanco Resources International Pte. Ltd (LRIPL, Singapore)

6,13,93,75,000

Lanco Resources Australia Pty. Ltd (LRAPL, Australia)

34,93,86,25,000

Lanco International Pte. Ltd (LIPL, Singapore)

4,01,85,00,000

Total

45,09,65,00,000

6.2. The TPO considered provision of corporate guarantee as

an international transaction, for which arm's length price was

determined. The TPO applied CUP as the most appropriate method

and used SBI rates on loans. The TPO applied arm's length

guarantee fee at 2% (adjustment for upfront fee and credit rating).

Accordingly, adjustment of Rs. 90,19,30,000/- was made.

6.3. The DRP primarily upheld the action of the TPO that

the guarantee transaction falls within the scope of international

transaction as per Indian transfer pricing provisions. However, the

DRP directed that corporate guarantee is not in the nature of bank

guarantee, therefore rate applicable to bank guarantee provided by

bank cannot be applied to corporate guarantee which is provided

by a group company. Accordingly, the DRP directed the AO to

adopt a rate of 0.53% in place of 2.00% while determining the ALP

of the transaction and the same was recomputed at Rs.

23,90,11,450/- instead of Rs. 90,19,30,000/- originally proposed.

6.4. It was the submission that LITL provided guarantee to

its subsidiaries to enable the acquisition of a coal mine through

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bank loans. LITL being successful bidder is under obligation to pay

for acquisition of the coal mines. LITL did not charge any fees for

providing guarantee, as the purpose of obtaining loan by the

subsidiaries was to discharge LITL obligation in acquisition of coal

mines which will accrue benefits to the entire group. Guarantee

provided by assessee was part of the procedural compliance for

availing the banking facilities i.e. loan by the subsidiaries.

Corporate guarantee was given by assessee for its own commercial

expediency and for the overall benefit of LITL. The corporate

guarantee was provided by assessee as it is having shareholding

interest in the subsidiaries. Aseessee relied on the following case

law:

i. Marico Ltd. Vs. ACIT (ITA No. 8713 & 8858/MUM/2011 / [2016]

70 taxmann.com 214 (Mumbai - Tribunal)

ii. Micro Ink Ltd Vs. ACIT (ITA 2873/Ahd/10)

iii. Manugraph India Ltd. Vs. DCIT (I.T.A. No.2631/Mum/2015)

iv. Tega industries Ltd Vs. DefT (ITA No. 1912/Kol/2012

Relevant Case laws: Commercial expediency :

i. M/s Knorr Bremse India Pvt Ltd [ITA No. 182/2013

ii. CIT Vs. Cushman & Wakefield (India) Pvt Ltd, Hon'ble Delhi

High Court [2014] 46 taxmann.com 317 (Delhi)

iii. New Delhi Television Ltd. Vs ACIT (ITA No. 2851/Del/2013)

6.5. It was further contended that the corporate guarantee,

does not fall within the scope of term 'international transaction' as

even after insertion of Explanation to Section 92B by Finance Act

2012 as it does not have any bearing on LITL's profits, income,

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losses or assets. It was submitted that assessee has not incurred

any cost or earned any income by providing such bank guarantee.

Relevant case laws:

i. Siro Clinpharm Pvt. Ltd. Vs. DCIT (ITA. No. 2876/Mum/2014)

ii. Bharti Airtel Limited Vs. Addl. CIT [ITA No. 5816/Del/2012]

iii.Redington (India) Limited Vs. JCIT, 49 taxmann.com, 146

(Chennai- Tribunal)

6.6. Without prejudice, the guarantee fee should not be

calculated on the entire amount of guarantee instead it should be

restricted to the extent of withdrawal of guaranteed amount. The

withdrawal of guarantee amounted to Rs. 45 Crores, while the

entire amount of guarantee on which the adjustment has been

made is Rs. 4,509.65 Crores. Thus, the adjustment will be Rs.

22.01 Crores instead of Rs. 23.90 Crores.

(in crores)

Company Name Effective value

Guarantee value

Lanco Resources International Pte. Ltd (LRIPL, Singapore)

558.13 613.94

Lanco Resources Australia Pty. Ltd (LRAPL, Australia)

3192.48 3493.86

Lanco International Pte. Ltd (LIPL, Singapore)

401.85 401.85

Total 4152.46 4509.65 Adjustment @ 0.53% 22.01 23.90

6.7. It was alternately contended that rate fixed by DRP is

arbitrary and submitted that corporate guarantee fee has to be

applied at reasonable percentage. Following case law were relied:

i. Asian Paints Ltd. Vs. CIT (ITA No. 7801/Mum/2010)

ii. Reliance Industries Ltd. ACIT (ITA No. 4475/Mum/2007)

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6.8. Without prejudice, the guarantee fee should not be

calculated on the entire year under consideration instead it should

be restricted to the period from which the corporate guarantee

agreements were entered into by LITL with various banks. The

dates on which the corporate guarantee agreements were entered

in to by LITL with different banks are tabulated below:

Agreement Date of agreement LITL and ICICI Bank (in relation to LRIPL, Singapore)

18th February 2011

LITL and ICICI Bank (in relation to LRAPL, Australia)

18th February 2011

LITL and Barclays Bank (in relation to LIPL, Singapore)

1st September, 2010

LITL and DBS Bank (in relation to LIPL, Singapore)

10th June 2010

LITL and Standard Chartered Bank (in relation to LIPL, Singapore)

6th May 2010

6.9. Ld.DR however submitted that corporate guarantee is

an international transaction and relied on the provisions of Section

92B and the order of the Co-ordinate Benches at Hyderabad, in the

case of M/s. Foursoft Ltd., in ITA No. 1903/Hyd/2011 and other

cases in which corporate guarantee is considered as international

transaction. With reference to the rate of corporate guarantee fee

Ld. DR referred to the order of the TPO to submit that 2% is a

nominal fee which should be upheld. He also referred to the

Revenue grounds on this issue contesting that decision of the DRP

to reduce it to 0.53%.


the documents placed on record. There is a difference of opinion

as far as in the corporate guarantee fee to be considered as

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international transaction. However, the Hyderabad Benches of

ITAT is consistently following the principle that corporate

guarantee is to be considered for the purpose of Transfer Pricing

adjustments as the transaction of providing corporate guarantee is

considered as ‘international transaction’. To be consistent with the

opinion already taken in earlier decisions, Ld. Counsel was given

an option to press or not to press the issue on this. Ld. Counsel

however, submitted that if reasonable rate of 0.27%, confirmed by

Asian Paints Ltd. Vs. CIT (ITA No. 7801/Mum/2010) was adopted,

assessee has no objection to withdraw the above contention.

Considering that the corporate guarantee provided by the company

will fall within the scope of the term ‘international transaction’ after

the insertion of Explanation to Section 92B by Finance Act, we

reject the contention of assessee on this issue. However,

considering the Co-ordinate Bench decision given in the case of

Asian Paints Ltd. Vs. CIT (ITA No. 7801/Mum/2010) (supra) we

however, direct the AO/TPO to consider only 0.27% as the

guarantee commission on the amount involved. The contention

that corporate guarantee fee to be considered proportionately with

the period it availed, cannot be accepted as guarantee fee is

upfront and one time fee paid at the beginning and therefore, on

the corporate guarantees provided during the year, the rate is to be

applied. However, if any of the corporate guarantees are provided

in earlier year, they may not be subjected to transfer pricing during

the year under consideration. Assessee has stated that some of

the guarantees were withdrawn during the year. If the guarantees

are given during the year and also withdrawn during the year, AO

is directed to consider accordingly. Subject to quantification of

corporate guarantee provided by assessee during the year, we

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direct the AO/TPO to fix the fees at 0.27% on that amount. With

these directions, the grounds are considered partly allowed as far

as the appeal of assessee is concerned. Since the issue is

considered in the light of the Co-ordinate Bench decisions, we find

no merit in Revenue contentions of adopting rate at 2% adopted by

the TPO which has no basis. Accordingly, Revenue grounds on

this issue are rejected. Cross-Objection is in support of the DRP

order which in our view, becomes academic. Accordingly, the

Cross-Objection is also considered dismissed for statistical

purposes.

8. Grounds 11a to 11f: regarding TP adjustment of Rs.

1,45,21,83,968/- related to Interest on Mobilization advance. It

was submitted that LITL has not done any export of goods or

services to its foreign AEs and hence, there are no trade receivables

outstanding in its books from foreign AEs. LITL sub-contracted

EPC contracts to its AE namely Lanco International Pte. Ltd (LIPL)

(Formerly known as Lanco Enterprises Pte Ltd) in respect of which

mobilization/ material advance was paid by LITL to Lanco

International Pte. Ltd (LIPL) for the execution of the projects. As the

EPC contracts for power plant are long term contracts with

involvement of huge capital base, it is submitted that it is an

accepted practice in industry to release advances for mobilization

of resources like man, material and machinery for execution of

contract which are given as non-interest bearing advances and the

same will be adjusted against supplies made or work executed by

contractor over the period of contact. As an EPC contractor, LITL

has also received as well as given mobilization/material advance.

Since LITL had placed some of the contracts amongst AEs, it had

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paid advances as per the terms of contract, which were being

adjusted from supplies or works made on regular basis. The

outstanding mobilization advance amount receivable from AEs as

on March 31, 2011, was Rs. 11,85,45,63,000/- on which the AO

has made an adjustment of Rs. 1,45,21,83,968/-. Further, the

amount payable by LITL to its AEs as on March 31st 2011 was Rs.

52,92,82,68,321/-. The TPO considered mobilization advances as

loans and advances / receivables and made an adjustment @

12.25% treating them as international transaction. The DRP

upheld the transfer pricing adjustment made by the TPO. DRP

further observed that the assessee had significant loans

outstanding on which it has paid interest cost. The DRP relied on

the ruling provided by Hon'ble Tribunal in case of M/s. Logix Micro

Systems Limited ITA No. 524/Bang/2009.

8.1. It was the submission that the nature of the transaction

is "Mobilization advances". The nature has been re-characterised to

"Loans & Advances" instead of treating it as 'mobilization advance'

given in due course of business. Ld counsel relied on the decision

of CIT vs. EKL Appliances Ltd. (ITA No. 1068/2011), Hon'ble Delhi

High Court that transaction can not be re-characterised. Further

submissions can be summarized as under:

I) Mobilisation advance has been wrongly treated as trade

receivable. Moreover, interest on receivables is not an 'international

transaction' as per the provision of Section 92B of the Act.

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Relevant case laws :

i. M/s. Tally Solutions Pvt. Ltd. Vs ACIT (I.T.(T.P)A.

No.1364/Bang/2011)

ii. Wipro Ltd Vs DCIT, Bangalore ITAT [ITA Nos .624, 817 and 1178

(Bang)/2007]

iii. Pega Systems Worldwide India Pvt Ltd vs. ACIT, Hyderabad

ITAT [ITA No. 1758/Hyd/2014]

iv. Det Norske Veritas A/S Vs. ADIT (ITA No. 200/Mum/2014)

v. Evonik Degussa P. Ltd. V ACIT – OSD, Circle 3(1), Mumbai (ITA

No.7653/Muml2011).

vi. Excellence data research Vs. ACIT, ITA No. 292/Hyd/2015

vii. Essar Steel Orissa Ltd. - [2016] 74 taxmann.com 70 (Mumbai -

Trib.)/ I.T.A. No. 2289/Mum/2014

Relevant case law - No interest on trade advances :

i. Mascon Global Ltd Vs. DCIT (ITA No. 2205/MDS/2010

ii. GSS Infotech Ltd. Vs. ACIT (ITA No.497/Hyd/2015

iii. Lintas India P. Ltd. Vs. ACIT (ITA No. 2024 (Mu) of 2007)

II) LITL has received advance from both AEs and non-AEs

without giving any interest. Further, LITL has also given advance to

both AEs and non-AEs during the year and has not charged any

interest from both AE and non-AE. Hence, even if Internal CUP is

applied, and the AE and non-AE transactions are compared, no

adjustment can be called for.

Relevant case laws :

i. Indo American Jewellery Ltd. Vs. CIT, Hon'ble Bombay High

Court (ITA No. 1053 of 2012)

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ii. Mastek Ltd. Vs. ACIT (I.T.A. No.3120)

iii. Nimbus Communications Ltd. Vs ACIT (ITA No. 6597/Mum/09)

iv. Sony Ericsson Mobile Communications India Pvt. Ltd. (ITA No.

16/2014)

The outstanding mobilization/ material advances from AEs and

Non-AEs are as below:

Particulars Outstanding receivables Outstanding payables AEs 11,88,18,38,737 52,92,82,68,321 Non-AEs 4,80,92,70,245 10,85,32,67,385 Total 16,69,11,08,982 63,78,15,35,706

III) Domestic PLR of 12.25% cannot be applied and the

transaction cannot be equated to investment in bank deposit,

stocks, mutual funds or real estate.

Relevant Case law:

i. CIT Vs. Cotton Naturals India Pvt. Ltd. (2015) 276 CTR 445 (Del)

/ ITA No. 233 of 2014

IV) Without prejudice, the TPO/AO has not taken into

consideration the fact that there are amounts payables to same AE

i.e. Lanco International Pte. Limited, Singapore (AE) while making

adjustment towards alleged outstanding receivables as on March

31st 2011. The total outstanding payables in respect of Lanco

International Pte. Limited, Singapore is Rs. 1,25,94,03,883/-.

(Additional Ground 11g)

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Relevant Case laws:

i. Satyam Venture Engg. Services Pvt. Ltd. Vs ACIT (ITA No. 431 &

432/Hyd/2015)

ii. Bentley Systems India Pvt. Ltd. Vs ACIT (ITA No.

6161/Del/2013)

V) Without prejudice, the adjustment has been made wrongly

for full year and not on the basis of actual number of days.

(Additional Ground 11h).

8.2. It was also submitted that in the Assessment Year i.e.

AY 2013-14, the TPO has himself accepted the contention of

assessee that the assessee is not exporting or supplying any goods

and in fact the balances appearing in the balance sheet are

mobilization advance which are to be adjusted against future

supply bills. Without prejudice, the outstanding balance of

mobilization advance as on 31st March 2011 amounting Rs.

11,85,45,62,551/- also included an amount of Rs. 68,37,99,719/-

which was the outstanding balance as on 31st March 2010. In the

previous year i.e., FY. 2010-11, the TPO/AO has accepted the ALP

of the same. Thus, this amount should be reduced from Rs.

11,85,45,62,551/-.

8.3. Ld.DR however, relied on the orders of the TPO/DRP

and submitted that the decision taken in later year cannot be

binding on this year, as each year is separate and principles of res

judicata does not apply to IT matters.

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9. We have considered the rival contentions. It is well

accepted practice that the construction industry pay advances at a

certain percentage of the contract value to mobilise various

resources for the execution of contract and these advances are

given in the regular course of business. As seen from the facts of

assessee’s case, assessee is undertaking an EPC contract and has

received mobilization advances as part of that. Like-wise, assessee

has given some works to other parties on sub-contract basis and

necessarily it has to provide mobilization advances to the parties.

It is also noticed that assessee has advanced mobilization advances

to both AEs and non-AEs and no interest has been charged from

either party. Not only that assessee is also not required to pay any

interest on the mobilization advances received, which are in fact

more than the amounts advanced by assessee. Thus, there is

complete uniformity in the act of assessee in not charging interest

from both AE and non-AE and also not paying interest/claiming

interest for the advances received. Following the principles laid

down by the Hon'ble Bombay High Court in the case of Indo

American Jewellery Ltd. Vs. CIT, Hon'ble Bombay High Court (ITA

No. 1053 of 2012), we are of the view that there is no need for

charging any interest on the amounts advanced as receivables.

Since this amount is part of contract work, in our view it does not

attract any adjustment under TP provisions. Moreover, advances

given as part of contract work does not require any special

addition, when the TPO was already examined and held that the

transaction relating to ‘work contract expenses’ are within the ALP

during the year. Thus, when the whole work contract is considered

within the ALP, we are of the opinion that the advances given in

the course of contract does not call for special adjustment.

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Moreover, these business advances cannot be categorised as ‘loans

and advances’ so as to consider them for adjustment. Relying on

the various case law relied upon by the Ld. Counsel, we are of the

opinion that since assessee-company is not charging any interest

from the AEs and non-AEs and also not paying any interest on the

amounts received by it from the main contractor, this adjustment

is not warranted. Respectfully following the principles laid down in

various case law relied upon by assessee above, we have no

hesitation in deleting the above adjustment. As seen from the

order of the TPO in the next year AY 2013-14, he has considered

the same issue and has not made any adjustment by stating as

under:

“7.5 Receivables: With regard to receivables it is noticed from the

information filed that the company is not exporting and supplying any

goods or services to AEs. The balances appearing in the Balance Sheet

are mobilization advances which are to be adjusted against future supply

bills and hence no adverse inference is drawn. “

Since the TPO order is in tune with the provisions of the Act and

the principles laid down on this issue, we are of the opinion that no

adjustment is required on the issue of mobilization advances

during the impugned year also. Accordingly, grounds raised by

assessee including additional grounds are allowed.

Non-TP Matters:

10. Ground Nos. 3, 4 and 5 - Disallowance of sub-contract

expenditure of Rs. 41,08,00,000/- and Rs. 2,44,92,39,638/-: The

grounds pertaining to this issue arises out of the disallowance

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made towards sub-contract expenses by assessee. Consequent to

information received, a survey was conducted u/s. 133A on 17-03-

2015 on assessee-company at Hyderabad and also at Gurgaon. AO

records that ‘Pre-survey enquiries revealed that assessee is inflating

expenditure by way of debiting non-genuine sub-contract expenses.

Further, the department seems to have enquired from one Shri

Pravin Kumar Agarwal who is categorized as an entry operation

based at Calcutta’.

10.1. During the survey it was found that work orders

claimed to have been issued by assessee to six companies being

operated by Shri Pravin Kumar Agarwal are unsigned. AO also

records that assessee failed to provide relevant work orders for all

the works claimed to have been carried out by the companies of

Shri Pavin Kumar Agarwal. Accordingly, AO categorized the

payments made to six companies to an extent of Rs.

1,83,81,30,566/- as non-genuine expenditure. AO also made

additions of Rs. 41,08,00,000/- and Rs. 61,11,09,082/-- towards

Sub-Contract Expenditure incurred by assessee during the year

under consideration on the ground that the said sub-contract

expenditure is not a genuine expenditure. The break-up of total

amount claimed against 9 companies is as under:

Sl. No.

Name of the Company Amount Rs.

1. NKG Infrastructures Limited 41,08,00,000 Total(A) 41,08,00,000 2. Makesworth Projects Pvt Ltd 33,37,97,879 3. Pioneer Prodev Pvt Ltd 30,47,68,611 4. Link Point Infra Pvt Ltd 30,79,96,487

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5. Suryamukhi Projects Pvt Ltd 34,30,19,698 6. Subhsree Hirise Pvt Ltd 30,77,37,072 7. Subhadristi Complex Pvt Ltd 24,08,10,819 Total(B) 1,83,81,30,566 8. Jain Infra Projects Ltd 37,80,29,798 9. Horizon Infrastructures Ltd 23,30,79,284 Total(C) 61,11,09,082 Total(B+C) 2,44,92,39,638

10.2. A statement stated to have been recorded from Shri

Pravin Kumar Agarwal on 12-11-2012 has been extracted by the

AO in the assessment order and vide para 5.5 of the order, AO

records that some employees of the said person are operating the

companies. The statements of Shri Pramod Ramdin Sharma, Shri

Vishal Sharma, Shri Pulak Bagchi and Shri Umesh Singh were

extracted in the order. In addition to that, AO also notices the

fund flow and he was of the opinion that majority of the funds were

diverted from the said companies and in view of those findings, the

claim of assessee with reference to sub-contract payments cannot

be accepted as genuine and accordingly, the entire amount of Rs.

244.92 Crores was disallowed as ‘unexplained expenditure’ u/s.

69C.

10.3. Assessee raised objections before the DRP not only in

not giving enough opportunity for furnishing necessary details but

also invoking the provisions of Section 69C, when entire

expenditure was recorded in the books of account. DRP, however,

while accepting that provisions of Section 69C are not applicable to

the facts of the case, agreed with the AO that assessee failed to

justify the expenditure. Even though assessee filed certain

additional evidence which could not be furnished before the AO, to

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the DRP, DRP rejected the same as they were not filed before the

AO and accordingly, confirmed the disallowance.

11. It was submitted that the addition has been made by

AO based on mere suspicions, surmises and without any cogent

reasons. The DRP/AO has erred in law and on fact in disallowing

such huge sub-contract expenditure without appreciating the fact

that payment has been made to the sub-contractors for execution

of contract works in the projects and such work has been

completed/services have been rendered. Such expenditure has

been wholly and exclusively incurred for the purpose of the

business of assessee and is an allowable expenditure under

Section 37 of the Act.

11.1. It was submitted that the AO/DRP erred in making

such huge additions/disallowances merely on the basis of

statements recorded. Further, it was submitted that assessee had

filed the additional evidence before the DRP such as work orders,

RA bills, service entry sheets, invoices/vouchers, Form 16A etc. in

respect of the above referred sub-contractors in order to prove the

genuineness of the sub-contract expenditure. It was stated that the

AO had asked for the information only on 24-03-2015 and did not

give a reasonable time for submitting the above documents during

the course of assessment proceedings. These additional evidences

were made available to AO as per the letter issued by the Secretary

DRP in response to which the AO had submitted a report. However,

the DRP stated that if the evidences would have been genuine, they

could have been produced before the AO and in absence of the

same, the AO was justified in treating the expenses to be non-

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genuine. It is submitted that the assessee could not produce the

documents before AO, since the AO did not give a reasonable time

for submitting the above documents during the course of

assessment proceedings.

11.2. It was submitted that Lanco Babandh Power Limited

(LBPL), Lanco Amarkantak Power Limited (LAPL) and Lanco

Kondapalli Power Limited entered into memorandum of

understanding / implementation agreements with State

Governments for development of thermal power projects in the

states of Odisha, Chhattisgarh and Andhra Pradesh. For execution

of the above contracts, the aforesaid mentioned entities awarded

Engineering, Procurement and Construction (EPC) contract to M/s.

Lanco Infratech Limited (L1TL/assessee) on lnternational

Competitive Bidding (ICB). The scope of work included civil works

contract, Offshore BTG supply contract and onshore supply

contract and Services contract.

11.3. The EPC work sub-contracted to assessee along-with

consideration is summed up as below:

Project Name Civil Works Contract (INR Cr)

Off-Shore BTG Supply

Contract (USD Mn)

On-shore Supply contract (INR Cr)

Services Contract (INR Cr)

Babandh 1005.10 485 (USD Mn) 1479.88 297.87 Amarkantak 1016.30 450 (USD Mn) 1597.00 290.40 Kondapalli 250.00 1640.00 216.00

The above referred projects namely Babandh, Amarkantak and

Kondapalli are carried out on 897 acres, 640 acres and 190 acres

of land. Due to these projects being carried out on large area of

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land, there are many activities to be carried out in levelling the

land, cutting and clearing the bushes/trees, excavation of soil,

loading, unloading and dumping of soil, strengthening of ground

with mass pouring of concrete beneath the basic foundations to

enable the ground to withhold the construction of huge structures

like Boiler, Turbine and Generator (BTG), Chimneys, Coal Handling

plant, Ash handling plant etc in addition to construction of various

structures which are visible.

11.4. For the Civil works contract, LITL used the services of

various contractors including the 9 sub-contractors namely (1)

Link Point Infrastructure Private Limited, (2) Makesworth Projects

and Developers Private Limited, (3) Pioneer Prodev Private Limited,

(4) Subhdrishti Complex Private Limited, (5) Subhshree Highrise

Private Limited, (6) Suryamukhi Projects Private Limited, (7)

Horizon Infrastructure Limited, (8) Jain Infra Projects Limited and

(9) NKG Infrastructure Private Limited. The AO however held the

above subcontractors to be bogus/ non-genuine.

11.5. During FY 2010-11, it was submitted that these sub-

contractors performed various activities and the above named 9

sub-contractors submitted their bills for the work done. It was

submitted that in case of LBPL project while assessee incurred a

cost of Rs. 1,96,08,03,192/- (Rs. 196 Crores appxly) towards Civil

works for works done by the 9 contractors in LBPL Project which

were allegedly held to be bogus/ non-genuine, assessee has in turn

raised an invoice of Rs. 3,56,03,76,357 (Rs. 356 crores

approximately) on LBPL for the Civil works done the assessee. For

LAPL (Amarkantak) Project, assessee incurred a cost of Rs. 320.67

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Crores on civil works against the receipt of Rs. 471 Crores which

were taxed by the AO. Also, for LKPI (Kondapalli) Project, the

assessee incurred a cost of Rs. 80.82 Crores for execution of civil

works against receipt of Rs. 110.49 Crores, which was again taxed

by the AO. The income against the aforesaid invoices has already

been received by assessee and the same has also been taxed by the

AO. It cannot be thought that such huge quantum of civil works

could have been carried out without incurrence of any costs

against the same. Further, VAT/Service obligations have been

duly complied with by assessee and the concerned Government

Authorities have accepted these transactions. Therefore, if one arm

of the government has accepted the transactions, the other arm of

the government must also respect the same- (Apollo Tyres Ltd Vs.

CIT (2002) 255 ITR 273 and Vadilal Chemicals Vs. State of AP

(2005) 6 SCC 292).

11.6. It is submitted that a perusal of the Reports generated

by Independent Engineers appointed by Lender Banks clearly

shows a substantial amount of work being carried out by the

assessee' sub-contractors on ongoing basis. There is no allegation

in the assessment order or the DRP order that no work has been

carried out. Therefore, it is absolutely clear that such huge amount

of work (as also certified by Lender Bank's Engineers and

independent auditors) cannot be carried out without incurring

substantial expenditure. If the allegation of the AO is to be

accepted then no work would have been carried out through these

sub-contractors and expenditure has not been incurred in the first

instance. In this regard reliance is placed on the following case

laws:

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a. Judgement of Hon'ble Gujarat High Court in the case of

Bholanath Polyfab [355 ITR 290] (Para 6) wherein it was held as

under:

"The Tribunal committed no error. Whether the purchases themselves were bogus or whether the parties from whom such purchases were allegedly made were bogus is essentially a question of fact. The Tribunal having examined the evidence on record came to the conclusion that the assessee did purchase the cloth and sell the finished goods, as natural corollary, not the entire amount covered under such purchase, but the profit element embedded therein would be subject to tax. In the result, tax appeal is dismissed."

b. Judgement of Hon'ble Gujarat High Court in the case of Simith P

Sheth [356 ITR 451] wherein it was held as under:

"In the present case, the Commissioner of Income-tax (Appeals) believed that when as a trader in steel the Assessee sold certain quantity of steel, he would have purchased the same quantity from some source. When the total sale is accepted by the Assessing Officer, he could not have questioned the very basis of the purchases. In essence, therefore, the Commissioner (Appeals) believed the assessee's theory that the purchases were not bogus but were made from the parties other than those mentioned in the books of account. That being the position, not the entire purchase price but only the profit element embedded in such purchases can be added to the income of the assessee. So much is clear by the decision of this court. In particular, the court has also taken a similar view in the case of CIT Vs. Vijay M. Mistry Construction Ltd. (2013) [355 ITR 498] (Guj) and in the case of CIT Vs. Bholanath Poly Fab (P.) Ltd. (2013) [355 1TR 290] (Guj)."

11.7. It was further submitted that in the event the

expenditure is held to be bogus, then the corresponding receipts

cannot also be subject to tax because without incurring of

expenditure, it was not possible to carry on the Civil works and

raise invoices LBPL/LAPL/LKPL. Further, it may also be noted that

when the assessing officer has not disputed the receipts of the

assessee (which have been duly offered to tax) and no doubts have

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been raised upon the corresponding completion of the project, then

the corresponding expenditure incurred towards completion of the

project cannot be treated as bogus in view of the fact that assessee

has furnished all the details and supporting evidence. In this

regard reliance is placed on the following case laws:

a. Judgement of Hon'ble Bombay High Court in the case of CIT Vs.

Nikunj Eximp Enterprises (P) Ltd. (2013) [372 ITR 619] (Mum)

wherein it was held as under:

"The Tribunal records that the Books of Accounts of the respondent-assessee have not been rejected. Similarly, the sales have not been doubted and it is an admitted position that substantial amount of sales have been made to the Government Department i.e. Defence Research and Development Laboratory, Hyderabad. Further, there were confirmation letters filed by the suppliers, copies of invoices for purchases as well as copies of bank statement all of which would indicate that the purchases were infact made. In our view, merely because the suppliers have not appeared before the Assessing Officer or the CIT(A), one cannot conclude that the purchases were not made by the respondent-assessee. The Assessing Officer as well as CIT(A) have disallowed the deduction of Rs.1.33 crores on account of purchases merely on the basis of suspicion because the sellers and the canvassing agents have not been produced before them. We find that the order of the Tribunal is well a reasoned order taking into account all the facts before concluding that the purchases of Rs. 1.33 crores was not bogus."

b. Decision of ITAT, Mumbai in the case of Cannon Industries (P)

Ltd. Vs. DCIT (2015) (59 taxmann.com 65).

"It is pertinent to note that the statement recorded under s. 133A without corroborative evidence has no evidentiary value as held by the Hon'ble Madras High Court in the case of S. Khader Khan Son (supra), which has been confirmed by the Hon'ble Supreme Court in S. Khader Khan Son's case (supra). Further, we note that the AO has not disputed the sales of the assessee and out of the total sale, export sale constitutes 92 per cent. Apart from the sales, the AO has also not disputed the quantitative figures regarding opening stock, purchases and closing stock as well as sales. Therefore, when there was no dispute or discrepancy in the quantitative

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figures of purchase, stock, sales including closing stock then the purchases cannot be treated as bogus ....

.. .. In view of the facts and circumstances of the case, we are of the opinion that the addition in question on account of bogus purchases is not sustainable and accordingly the same is deleted."

It was submitted that the Sub-contract expenditure was incurred

wholly and exclusively for the purpose of the business and it

cannot be held as non-genuine:

11.8. It was further contended that DRP/AO has also erred

by ignoring the evidences which were placed on record such as

bills, invoices, work orders and service entry sheets. The AO ought

to have appreciated the fact that these documents are standard

documents for proving the genuineness of the transactions and

they are very much available on record. Further, invoking the

provisions of section 37(1) of the Act is itself incorrect, while

disallowing the said expenditure as the expenditure is neither

personal nor capital in nature.

11.9. It was submitted that AO disallowed the expenditure

incurred in execution of these projects, although corresponding

income was offered to tax in the return of income. It is a settled

legal position that the entire amount cannot be subjected to tax

and only the profit embedded therein can be subjected to tax. It

was further contended that the sub-contractors to whom the

payments were made are assessed to tax as this contract receipts

are taxable in their hands. Thus, they have filed their ROI's and

admitted the receipts. The gross receipts have already suffered tax

in sub-contractors hands. The basic commercial principles are that

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one person's income is other person's expenditure. It may be noted

that the payment had also been made through banking channels.

In this regard, reliance is placed on the decision of ITAT, Mumbai

in the case of ITO Vs. Growel Energy Co. Ltd (2014) 47

taxmann.com 371 (Mumbai - Trib). The AO relied on extraneous

and irrelevant factors for making the disallowances such as low

profit margins of sub-contractors, having common auditor,

common addresses etc. without appreciating the production of

documentary evidence in support of the work that has actually

been executed. The AO erred in relying on the statements of

external parties who are not concerned with the assessee:

11.10. It was stated that the basis of the disallowance

are the statements of certain persons which were not even recorded

by the AO himself. Such statements have no evidential value. The

AO, for making the disallowance, has relied on the statement of Sri

Praveen Agarwal who is not connected to the assessee and whose

statement has not been recorded by the AO himself. Further, it is

submitted that statements of Sri Praveen Kumar Agarwal and

others, without bringing in record any clinching corroborative

evidence in support of such person's statement, cannot be taken as

the basis for the disallowance made.

11.11. It was submitted that the AO called for certain

supporting information from the assessee company like Copy of

Work Order/ RA Bills/Form 16A etc. against the work executed by

NKG Infrastructure P Ltd vide a show cause notice issued only on

24-03-2015. However, the AO had completed his assessment and

passed the draft assessment order as on 31-03-2015 which is less

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than a period of 7 days from the date of such issuance of notice. It

is a fact that the assessee-company, had been carrying out

contract works on a national level with Turn Over running into

crores of rupees. It naturally, requires time for any company

working at such a huge platform to retrieve all the information

sought for by the department which involves great amount of time,

manpower etc. When the information that' is sought for, involves a

matter of huge quantum documentation of money, the company is

bound to take time in complying with sanctioning or approval

process from various internal departments of the company in order

to maintain confidentiality norms entered with such third party.

Therefore, if compliance could take naturally long time, then the

AO is expected to give adequate and proper time to the assessee

before he completes his assessment. Hence, the assessment

completed by the AO on 31-03-2015, without providing sufficient

and reasonable time to the assessee to furnish the required

information, is against the principles of natural justice.

11.12. Ground No. 5i (Additional Ground) - That without

prejudice, the AO has erred in law and in facts in making the

addition of Rs. 2,44,92,39,638/- u/s. 69C, whereas the DRP has

clearly held that the provisions of Section 69C are not applicable in

respect of these additions. Hence, the addition made is bad in law

and without jurisdiction.

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12. Disallowance of service tax as part of disallowance of

sub-contract expenditure:

Ground No. 16 (Additional Ground) - That without prejudice, in

view of facts and circumstances of case, the AO had erred in

disallowing the amount of sub-contract expenditure given to

certain parties including the amount of service tax which was

never claimed as expenditure.

Ground No. 17 (Additional Ground) - That without prejudice, in

view of facts and circumstances of the case, the AO has wrongly

made the disallowance of entire service tax amount of Rs.

11,31,32,746/- in context of said sub-contractors, without

appreciating the fact that service tax amount is not claimed as

deduction.

12.1. It is submitted that AO while passing the final

assessment order has erred in disallowing the amount incurred as

service tax as part of the total amount paid to-aforesaid sub-

contractors without appreciating that the assessee has not claimed

service lax as expenditure in the Profit and Loss A/c of the subject

year. Further, as per the accounting method followed by assessee it

may be mentioned that such service tax is routed through Balance

sheet and no deduction in respect of the same is being claimed in

the Profit and Loss A/c. In view of the above, it was requested to

vacate the addition in respect of service tax amounting to Rs

11,31,31,746/-, since the same is bad in law and on facts.

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13. Ld.DR, however, supported the orders of the AO and

TPO. It was his submission that those companies are paper

companies as identified by the Investigation Unit at Calcutta and

survey was also conducted in the premises of assessee on 17-03-

2015. It was established that Mr. Pravin Kumar Agarwal was only

an entry operator and was operating these companies so as to help

other persons, like assessee, to inflate the expenditure. It was a

façade created and so corporate veil has to be pierced so as to

realize the actual transaction. It was submitted that assessee has

only unsigned work orders and entries made in the books of

account. Assessee inspite of giving opportunity has not furnished

the proper work orders or the details. With reference to fund flow

also, it was submitted that AO has clearly established that the

funds flows indicate that the payments are layered so that the

actual beneficiary is not immediately known. With reference to not

giving enough opportunity, he referred to the notices issued giving

opportunity to assessee [Pg. 134 of the Paper Book] and submitted

that without the survey operations and survey operations at

Calcutta, the nature of inflated expenditure would not have come

to the knowledge. It was submitted that assessee has not furnished

any evidence that it has really executed the job and necessary

evidence was not furnished to the AO. Relying on the judgment of

the Hon'ble Supreme Court in the case of Premier Breweries Ltd.,

Vs. CIT [372 ITR 180] (SC), it was submitted that the expenditure

has to be disallowed as ‘non-genuine expenditure’.

13.1. It was further submitted that Shri Pravin Kumar

Agarwal has given statement that all the companies are paper

companies and also admitted additional income and as assessee is

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relying merely on the documentation, which are made belief

agreements. The provisions of Section 37(1) can be invoked and

relied on the decision of the CIT Vs. Dalmia Cement (Bharat) Ltd.,

[254 ITR 377]. It was submitted that the transactions are collusive

and colourable and assessee has not proved the genuineness of the

expenditure. It was further submitted that assessee was given

nine months time before the DRP. It was submitted that in the

absence of any evidence, there is no option than to uphold the

disallowance made by the AO. While accepting that in the

consequential order/final order AO has wrongly stated the

disallowance u/s. 69C, it was submitted that the disallowance

made was u/s. 37(1). He supported the orders of the AO and DRP.


the documents placed on record. It is a fact that the so called

statement recorded by the Investigation Unit in Calcutta has not

been furnished to assessee in the course of assessment

proceedings. The copies filed before us are also are not fully legible

and the CIT-DR has filed another copy as legible copy, but still it is

also not fully readable, as some of the parts of the statement were

missing in the Photo copies furnished on record. Prima-facie as

seen from the statement, those statements are recorded, not in the

case of assessee but in proceedings pertaining to L&T and PACL

and in either case, it seems no action has been taken as submitted

by assessee. Revenue also has not placed anything on record to

show that necessary disallowances have been made in the case of

L&T and PACL in whose cases mainly, the enquiries were

conducted. Even as seen from the so called funds flow statement,

it is obvious that AO could only allege about small amount of

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money that these were diverted. For example in the case of

Makesworth Projects and Developers Private Limited, AO

acknowledges that assessee-company has paid an amount of Rs.

55,75,91,650/- and out of this, AO notices that an amount of Rs.

2,10,70,764/- was paid on 25-04-2011 out of which an amount of

Rs. 1,78,00,000/- was in turn passed on to M/s. Alishan Estates

Pvt. Ltd., and the balance amount (out of the above amount) to

M/s. Subhdrishti Complex Pvt. Ltd., on the same date. Thus, AO

was only talking about an amount of Rs. 2.10 Crores out of 55.75

Crores paid by assessee-company as sub-contract expenses, that

too an amount paid in a later assessment year (on 25-04-2017).

Like-wise, in M/s. Pioneer Prodev Pvt. Ltd., assessee stated to have

been paid an amount of Rs. 50,87,86,807/- out of which again AO

identifies an amount of Rs. 2,10,70,764/- stated to have been paid

on 08-12-2010 out of which again an amount of Rs. 2,10,00,000/-

was stated to have been paid to M/s. Mangalmayee Hirise Pvt. Ltd.,

stated to be a paper company operated by Shri Pravin Kumar

Agarwal. Here also AO records the transactions pertaining to AY.

2012-13. With reference to Link Point Infrastructure Pvt. Ltd., AO

discussed the three payments made in AY. 2011-12, 2012-13 and

2013-14 totalling to almost about Rs. 60 Crores. AO notices that

assessee paid an amount of Rs. 6,32,12,293/- on 06-10-2010 out

of which an amount of Rs. 1,15,00,000/- was paid to M/s. Alishan

Estates Pvt. Ltd., Rs. 2 Crores to M/s. Suryamukhi Projects Pvt.

Ltd., and Rs. 1 Crore to M/s. Mangalmayee Hirise Pvt. Ltd., and

Rs. 55 Lakhs and 57 Lakhs to two more companies. Thus, out of

Rs. 60 Crores, AO examined only an amount of Rs. 6.32 Crores in

this company case. Like-wise, in all other cases relied on by the

AO, the amount which AO examines for fund flow analysis it was

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hardly 10% of the amount stated to have been paid by assessee,

that too payments made in later year. Thus the so called

statements and analysis of fund flow does not establish that the

sub contract payments are not genuine.

14.1. It was the contention of assessee these contracts are

given as part of EPC sub-contracts and these works are analysed

not only by the main contractor but also by various banks while

releasing funds. It was submitted that assessee has billed these

amounts to the main contractor on the basis of the sub-contracts

executed by various companies and there are various documentary

evidences which are furnished before the DRP, but unfortunately

not accepted. The project receipts were offered as income and so

the sub contract expenditure can not be bogus. It was however

submitted that various tribunal decisions have estimated only the

profit in those contracts, but no disallowance of the entire amount.

14.2. As seen from the submissions and the orders of the

authorities, it is noticed that assessee was given no opportunity to

justify the expenditure. A survey was conducted on 17-03-2015 at

two places whereas assessee’s projects were spread all over India.

Draft assessment order has been passed on 31-03-2015. In the

short period available, assessee’s MD placed on record that

obtaining the information pertaining to earlier years, that to from

various project sites will take lot of time. It is also submitted that

no cross-examination was provided and principles of natural

justice have been violated. When assessee has furnished

additional evidence before the DRP such as work orders, RA bills,

service entry sheets, invoices/vouchers, Form 16A etc. in respect of

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the above referred sub-contractors in order to prove the

genuineness of the sub-contract expenditure, it is noticed that the

DRP instead of remitting the matter to the AO for fresh

examination has refused to entertain the said additional evidence

on the reason that they are not furnished before the AO. It was not

explained how assessee could furnish voluminous information in a

short period from 17-03-2015 to 31-03-2015, for an expenditure

pertaining to four years earlier, that too the details available at

various project sites. We are of the opinion that the principles of

natural justice have been violated by both the authorities and there

is logic in assessee’s contention that

(a) statement of Shri Pravin Kumar Agarwal is not pertaining to

assessee’s transactions;

(b) that Shri Pravin Kumar Agarwal is no way connected to the

companies in which there are various other directors as noted by

the AO himself and

(c) there are various payment made in the course of regular

business transactions and no adverse inference has been drawn

either in the case of L&T or in the case of PACL or even in the case

of the so called eight paper companies.

14.3. It was further noticed that the so called diversion of

funds was only to the extent of 10% of the amounts of the total

contract value, which could be the profit of the other company or

may be funds of the other company, which has no bearing on

assessee. There is no evidence that the amounts so paid have been

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received back by assessee. Considering that assessee has billed

the contract works to the main contractor, it cannot be stated that

the sub-contract expenses are not genuine. Therefore, the action

of the AO and DRP in treating the expenditure as bogus cannot be

justified on the facts of the case.

14.4. The contention that the assessee billed the main

contractor and sub contract expenditure was incurred by those

persons/companies has not been examined by AO as he did not

give adequate time to furnish evidence and DRP also refused to

examine the evidence furnished justifying the sub contracts.

Therefore, we are of the opinion that AO can examine this aspect

afresh after giving due opportunity to assessee. There is also

justification in assessee’s claim that AO erred in disallowing the

amount of sub-contract expenditure, including service tax which

was never claimed as expenditure to an extent of Rs.

11,31,32,746/. This contention is also required to be examined.

Question of disallowance of an amount which was not claimed

should not arise. Consequently, without relying on the so called

statements which has no evidentiary value considering that no

action was taken either in those companies or in the companies in

whose cases the said enquiries were conducted( L& T, PACL), we

direct the AO to independently examine the claim of sub contract

expenditure. In case assessee billed and offered the said contract

receipts, AO is directed to accept the sub contract payments, as

assessee received the corresponding amounts from main contractor

and offered the same for taxation. In case there is any failure or the

nexus was not fully established, Assessee agrees that being a sub-

contractor a small percentage of the expenditure can be estimated

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for disallowance, following the principles laid down by the Co-

ordinate Benches as relied upon above. In that event, AO is

directed to disallow only a certain percentage of the above amount,

if necessary. The addition made is accordingly deleted and the

issue of examination of impugned sub contract payments is

restored to AO to consider afresh as directed. Grounds are

considered allowed for statistical purposes.

15. Ground No. 6 - Disallowance of Rs. 24,99,777/- on

account of License Membership, Subscriptions & Access Fee . It

was submitted that the DRP/AO erred in making a disallowance of

Rs. 24,99,777/- without appreciating the fact that such expenses

have been incurred for the purpose of the business of assessee and

assessee had placed sufficient evidence on record for

substantiating its claim of expenditure. Hence the same should be

allowed u/s 37(1) of the Act.

16. After considering the rival contentions, we are of the

opinion that the quantification of the amount at Rs. 24,99,777/-

has not been furnished by the AO. Assessee is not in a position to

examine which expenditures were disallowed. Since the AO

disallowed specific expenditure, we direct him to provide the

quantification of the said expenditure and to what nature of

expenditure the supporting bills or vouchers are not provided by

assessee. After furnishing the details of the disallowance of Rs.

24,99,777/- to assessee, assessee is directed to furnish the

supporting bills or vouchers. AO is accordingly directed to examine

this issue again. In case assessee fails to furnish the relevant

vouchers/justify the expenditure, disallowance to that expenditure

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can be made. With these observations, the issue in this ground is

set aside to the file of AO to examine the same afresh by giving due

opportunity to assessee, after providing the details of the amount

so quantified so that assessee will be an opportunity to explain.

17. Ground No. 7 - Disallowance of Rs. 5,51,715/- on

account of Miscellaneous and Entertainment expenses. It was

submitted that the DRP/AO erred in making a disallowance of Rs.

5,51,715/- on account of Miscellaneous and Entertainment

expenses incurred for the purpose of the business of the assessee.

Further, the disallowance is purely on ad-hoc basis, which is

arbitrary and bad in law.

18. As seen from the order, AO quantified the expenditure

as un-vouched expenditure at Rs. 27,58,572/-, the quantification

of which was not furnished to assessee. However, in this case, he

has quantified the amount for disallowance at 20% of the above

amount. As seen from the earlier ground, AO disallowed 100% of

the amount un-vouchered and in this case, AO disallowed 20% of

the amount un-vouched, Thus, there is no consistency in the AO’s

approach. We are of the opinion that in case AO furnishes the

details of un-vouchered expenditure quantified and assessee could

furnish the necessary details as directed in earlier ground, AO is

directed to accept the same to the extent assessee could furnish

the vouchers. AO is however, directed to restrict the disallowance

to 10% of the above expenditure instead of 20% made in the order.

With these observations, the issue is again restored to the AO for

fresh examination.

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19. In the result, appeal of assessee is allowed for statistical

purposes and appeal of Revenue and Cross-Objection of assessee

are dismissed.

Order pronounced in the open court on 03rd May, 2017

Sd/- Sd/- (G. PAVAN KUMAR) (B. RAMAKOTAIAH) JUDICIAL MEMBER ACCOUNTANT MEMBER

Hyderabad, Dated 03rd May, 2017

TNMM

Copy to :

1. The Deputy Commissioner of Income Tax, Circle-16(1), Hyderabad. 2. M/s. Lanco Infratech Ltd., Lanco House, Plot No. 4, Software Units Layout, Hitech City, Madhapur, Hyderabad. 3. Dispute Resolution Panel (DRP), Bengaluru. 4. Director of Income Tax (IT & TP), Hyderabad. 5. Addl. Commissioner of Income Tax (Transfer Pricing), Hyderabad. 6. D.R. ITAT, Hyderabad.

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