ITAT Delhi on Prior Period Expenses and Low Tax Effect Appeals: ACIT Vs Escorts Ltd.

1. Background of the Dispute

The Delhi Bench of the Income Tax Appellate Tribunal dealt with cross appeals in the case of ACIT Vs Escorts Ltd. (ITAT Delhi) relating to Assessment Year 2009-10. The impugned order was passed by the Commissioner of Income-tax (Appeals)-44, New Delhi on 31.10.2017.

The Bench comprised:

  • Shri O.P. Kant, Accountant Member
  • Ms. Suchitra Kamble, Judicial Member

The appeals were heard on 15.03.2021 and the consolidated order was pronounced on 19.03.2021.

The assessee, M/s Escorts Ltd., is engaged in:

  • Manufacturing and sale of tractors
  • Manufacturing and sale of shockers
  • Manufacturing and sale of railway equipment
  • Other trading-related activities

For AY 2009-10, the assessee filed its return of income on 30.09.2009 declaring:

  • Nil income under the normal provisions of the Income Tax Act 1961
  • Book profit of ₹27,77,81,818 computed under Section 115JB

The case was selected for scrutiny. During the assessment proceedings, the Assessing Officer (AO) noted international transactions with Associated Enterprises (AEs) and made a reference to the Transfer Pricing Officer (TPO) for determination of the arm’s-length price.

The learned TPO proposed an adjustment of ₹1,55,00,000 to the value of the international transactions.

The AO then issued a draft assessment order on 28.02.2013 proposing, inter alia:

  • Transfer pricing addition of ₹1,55,00,000
  • Disallowance of royalty expenditure of ₹1,39,00,000
  • Other additions under the normal provisions

As the assessee did not file objections before the Dispute Resolution Panel (DRP) within the statutory period of 30 days, the AO passed the final assessment order on 29.04.2013 determining total income at ₹3,01,58,760 under the normal provisions.

The assessee filed an appeal before the CIT(A), who granted partial relief. Both the Revenue and the assessee carried the matter further to the Tribunal.

2. Grounds Raised in the Cross Appeals

2.1 Revenue’s Appeal

The Revenue’s appeal contained the following grounds:

  1. The CIT(A) erred, both in law and on facts, in deleting the addition of ₹1,39,00,000 made by the AO on account of disallowance of royalty expenditure.
  2. The Revenue reserved the right to modify, add or withdraw grounds at the time of hearing.

2.2 Assessee’s Appeal

The assessee raised the following grounds:

  1. The CIT(A) was not justified in law and on facts in upholding the action of the AO/TPO in rejecting a comparable selected by the assessee in its transfer pricing analysis.
  2. The CIT(A) erred in rejecting the assessee’s plea that a company with financial statements for a 9‑month period should not be excluded as a comparable when it otherwise satisfied the comparability criteria.
  3. The CIT(A) wrongly sustained disallowance of ₹1,58,512 on account of prior period expenses, despite the assessee’s contention that the expenditure accrued during the relevant assessment year, though relating to an earlier accounting period.
  4. The assessee reserved liberty to amend, add or withdraw grounds any time before the hearing.

3. Revenue’s Appeal: Dismissal on Low Tax Effect

At the outset of the Tribunal hearing, the Departmental Representative (DR) submitted that:

  • The tax effect involved in the Revenue’s appeal was below the monetary limit prescribed for filing appeals before the Tribunal as per CBDT Circular No. 17/2019 dated 08.08.2019.
  • Hence, the appeal should be treated as withdrawn in terms of the said circular.

On the other side, the learned counsel for the assessee pointed out that:

  • The issue of royalty expenditure had already been decided in favour of the assessee in earlier assessment years by the Tribunal.
  • The CIT(A) had followed such earlier Tribunal orders while granting relief on the royalty issue.

After considering the rival contentions, the Tribunal:

  • Accepted the DR’s submission regarding low tax effect.

  • Dismissed the Revenue’s appeal as withdrawn, while granting explicit liberty to the Revenue to move an application for recall if:

    • The tax effect in this case is later found to exceed the threshold prescribed in the CBDT Circular, or
    • The matter is discovered to fall within any exception carved out in the circular.

Accordingly, the Revenue’s appeal was dismissed without adjudication on merits.

4. Assessee’s Appeal: Issues Considered by the Tribunal

4.1 Transfer Pricing Grounds – Not Pressed

With regard to Ground Nos. 1 and 2, dealing with transfer pricing comparables, the assessee’s counsel stated during the hearing that these grounds were not being pressed.

The Tribunal therefore treated:

  • Ground No. 1, and
  • **Ground No.