TaxTMI 
TaxTMI 
2016 (8) TMI 774
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.... demonstrating as to why it was necessary and expedient to do so and ii) passing the order without demonstrating that the appellant had any motive of tax evasion. 3. GROUNDS RELATING TO CHARGE OF INCOME TAX The learned Assessing Officer has erred in not appreciating that: (i) there is no amendment to the definition of the term "income" to include amounts computed under chapter X. (ii) the charging or computation provision relating to income under the head "Profits & Gains of Business or Profession" do not refer to or include the amounts computed under chapter X. (iii) there is no provision in chapter X indicating that it would override the computation provisions of business income or the normal understanding of the term "income". 4. GROUNDS ON DETERMINATION OF ARMS LENGTH PRICE & ADJUSTMENT MADE THEREON The learned Assessing Officer has erred in - i) making an adjustment to the extent of Rs. 4,60,42,886/- towards the arms length price on the basis of the order of the TPO U/s.92CA of the Act, dated 26.10.2010 and the direction of Dispute Resolution Panel, dated 28.09.2011. ii) making an adjustment towards the Arms length price without appreciating. the fact that....
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....um), wherein it has been held that no adjustment -towards interest can be quantified on bills outstanding for services rendered. xiii) ignoring the ratio laid down by the Hon'ble ITAT, Murnbai in the case of M/s.Nimbus Communications Ltd for the A.Y.2004-05 in ITA No. 6597/Mum/09 relying on its own order for the A.Y.2003-04 wherein it has been held that no adjustment towards interest can be quantified on bills outstanding for services rendered. xiv) not considering the reasons & objections submitted by the appellant in totality. xv) not appreciating the spirit of the circular No.12 of 2001 dated 23.08.2001 issued by Central Board of Direct Taxes governing transfer pricing of an international transaction. OTHER ISSUES Ground No.5 - The learned Assessing Officer has erred in i) disallowing Rs. 6,76,598/- out of the electricity expenses claimed by the appellant. ii) not appreciating the fact that Mr. Bharat Goenka for whose residence the electricity expenses were incurred, operates from the residence also for the reason that the product manufactured and marketed by the appellant is of such nature that it needs the intellectual input of Mr.Bharat Goenka who in fact i....
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....was made during the relevant years. Ground No.8 - The learned Assessing Officer erred in i) holding that an expenditure in the nature of business development expenses to the extent of Rs. 39,86,733/- is capital in nature and allowable as revenue. ii) ignoring the fact that expenditure to the extent of Rs. 14,44,012/- out of the above represented expenses revenue in nature incurred in the process of development of a new accounting package which was shelved and therefore ought to be allowed as revenue. iii) ignoring the fact that expenditure to the extent of Rs. 20,92,721/- out of the above represented expenses revenue in nature in printing a reference manual in various languages for the purpose of operating Tally package in those languages and therefore ought to have been allowed as revenue. iv) ignoring the fact that expenditure to the extent of Rs. 4,00,000/-out of the above is towards development of website for providing information to tally customers and therefore ought to have been allowed as revenue. v) ignoring the fact that during the proceedings before the Dispute Resolution Panel, himself had sent a report on this issue wherein the Assessing Officer has recomme....
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.... the addition of Rs. 5,42,999/- out of foreign exchange loss. iv) the addition of Rs. 62,22,589/- consequent to disallowance out of interest claimed. v) the addition of Rs. 39,86,733/- made on the ground that the expenditure is not revenue in nature. vi) the addition of Rs. 21 ,03,465/- consequent to disallowance out of travel expenses. vii) the addition of Rs. 16,25,61 ,749/- made consequent to disallowance of bad debts claimed towards not realization of sundry debtors. The appellant submits that each of the above grounds/sub-grounds are independent and without prejudice to one another. The appellant craves leave to add, alter, vary, omit, substitute or amend the above grounds of appeal, at any time before or at the time of hearing of the appeal so as to enable the Income Tax Appellate Tribunal to decide the appeal according to law. The appellant prays accordingly." 3. The Ground Nos.1 to 3 are general in nature and does not require any specific adjudication. 4. Ground No.4 is regarding Transfer Pricing Adjustment on account of interest on delayed realization of marketing expenses from Associated Enterprises (AEs). 4.1 The assessee is a private limited company engag....
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....ts AE of Rs. 28,16,18,522 at arm's length by noting the fact that the assessee's margin at 81.89% in comparison to the mean margin of comparables at 25.14%. However the TPO proposed to proceed to apply the provisions of Chapter X by treating the outstanding due with the AE as international transaction. The TPO observed that the assessee has extended credit facility similar to a working capital loan to its AE without charging any interest. Similarly uncontrolled transaction would have provided for interest. Accordingly, the TPO was of the view that the international transactions representing extended credit facility without charging interest is not at arm's length price within the meaning of Section 92C(3)(a)(b)(c) of the Act r.w. Rule 10B(1)(a) of the I.T. Rules. Consequently, the arm's length interest is determined by the TPO by applying CUP method wherein the interest rate is determined @ 14% per annum being average outstanding balance as computed for the F.Y. 2006-07 as under : " The taxpayer has extended credit facility similar to a working capital loan to its AEs without charging any interest. Similar uncontrolled transaction would have provided for interest. In view of this....
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....international transaction therefore computation of income under this Chapter at "Arm's Length" is subject to the condition that an income arises from the international transaction. The transaction of extending credit period to the AE does not give rise to income to the assessee and therefore in the absence of any income arising from the transaction, the same cannot be computed having regard to the ALP. The assessee did not charge any interest or has any right to charge interest on the outstanding due to the AE then the question of computation of income having regard to the ALP does not arise as per the provisions of Chapter X of the Income Tax Act, 1961. For applying the provisions of Chapter X income must arise from the transaction. In the absence of any income arising from the transaction the computation of ALP is not mandated under Chapter X of the Act. In support of his contention, he has relied upon the decision of Hon'ble Bombay High Court in the case of Vodafone India Services Pvt. Ltd. Vs. UOI (2014) 368 ITR 1(Bom) and submitted that the Hon'ble High Court has held that income as understood in the Act must arises from an international transaction then only the measure i....
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....s of Chapter X redundant. The proposition advanced by the ld. counsel for the assessee would lead to the situation where in a case the assessee is charging less price in comparison to the arm's length price from its AE then the said transaction would be decided as per the provisions of Chapter X by comparing the same with uncontrolled comparable prices. On the contrary if the assessee does not charge any price for any international transaction with the AE then the provisions of Chapter X cannot be applied as claimed by the ld. counsel for the assessee. Thus such a proposition would be inconsistent with the object and scheme of the Chapter X of I T Act and hence cannot be accepted. Even otherwise if the intent of the legislature was to introduce the provisions of Chapter X was to compute income from international transaction only in the case where the assessee is charging or receiving the price under the international transaction then there cannot be any computation of income having regard to the ALP where the related parties decided not to charge any price of the international transaction and consequently the said provision of Chapter X would be conveniently circumvented by each an....
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....c) rate at which tax is to be paid, and d) measure or value on which the rate is to be applied. Thus, there is difference between a charge to tax and the measure of tax (a) & (d) above. This distinction is brought out by the Supreme Court in Bombay Tyres India Ltd. Vs. Union of India reported in 1984 (1) SCC 467 wherein it was held that the charge of excise duty is on manufacture while the measure of the tax is the selling price of the manufactured goods. In this case also the charge is on income as understood in the Act, and where income arises from an International Transaction, then the measure is to be found on application of ALP so far Chapter X of the Act is concerned. The arriving at the transactional value/ consideration on the basis of ALP does not convert non-income into income. The tax can be charged only on income and in the absence of any income arising, the issue of applying the measure of ALP to transactional value/consideration itself does not arise. The ingredient (a) above is not satisfied i.e. subject of tax is income which is chargeable to tax. The issue of shares at a premium is a capital account transaction and not income. The classical distinction between ....
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....the AE which is more than the average credit period extended to the non-AE would constitute international transaction. We are of the view that after the insertion of explanation to section 92B(1), the payment or deferred payment or receivable or any debt arising during the course of business fall under the expression international transaction as per explanation. Therefore, in view of the expanded meaning of the international transaction as contemplated under clause (i) (e) of explanation to section 92B(1), the delay in realization of dues from the AE in comparison to non-AE would certainly falls in the ambit of international transaction. However, this transaction of allowing the credit period to AE on realization of sale proceeds is not an independent international transaction but it is a closely linked or continuous transaction along with sale transaction to the AE. The credit period allowed to the party depends upon various factors which also includes the price charged by the assessee from purchaser. Therefore, the credit period extended by the assessee to the AE cannot be examined independently but has to be considered along with the main international transaction being sale to ....
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....realization of sale proceeds from the AE is an international transaction, however, for the purpose of determining the ALP, the same has to be clubbed or aggregated with the sale transactions with the AE. Even by considering it as an independent transaction the same has to be compared with the internal CUP available in the shape of the credit allowed by the assessee to non AE. When the assessee is not making any difference for not charging the interest from AE as well as non-AE then the only difference between the two can be considered is the average period allowed along with outstanding amount. If the average period multiplied by the outstanding amount of the AE is at arm's length in comparison to the average period of realization and multiplied by the outstanding from non AEs then no adjustment can be made being the transaction is at arm's length. The third aspect of the issue is that the arm's length interest for making the adjustment. Both the TPO and DRP has taken into consideration the lending rates, however, this is not a transaction of loan or advance to the AE but it is only an excess period allowed for realization of sales proceeds from the AE. Therefore, the arm's length ....
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....ord, it was found that the above electricity expenses also includes an amount of Rs. 6,76,598 which has been paid towards electricity expenses of residence of Director Mr. Bharat Goenka. The Assessing Officer proposed to disallow the said expenses. The assessee contended before the Assessing Officer that the Director contributed to the activity of the business of the assessee from his residence. However the Assessing Officer did not accept this explanation of the assessee as the assessee did not furnish any supporting evidence. Accordingly, the Assessing Officer disallow the payment of electricity expenses and added to the total income of the assessee. The assessee challenged the action of the Assessing Officer before the DRP. The DRP has not given any specific finding except the confirmation of action of the Assessing Officer. 6.2 Before us, the ld. counsel for the assessee reiterated the contentions raised before the authorities below and submitted that Director was working from his residence therefore the expenditure was incurred for the purpose of business of the assessee. He has relied upon the decision of Hon'ble Gujarat High Court in the case of Sayaji Iron & Engineering Co....
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.... by the company, (d) any expenditure incurred by the company for the purpose of any insurance on the life, etc. Therefore, it is clear that the expenditure incurred by the assessee-company on maintenance of vehicles which were available to the directors for their personal use would fall within the meaning of "remuneration" as defined in the Explanation to s. 198 of the Companies Act, and once such remuneration is fixed as provided in s. 309 of the Companies Act, it is not possible to state that the assessee-company incurred an expenditure for the personal use of the directors i.e., even if there was any personal use by the directors, the same was as per the terms and conditions of service and insofar as the assessee-company was concerned it was a business expenditure and not disallowable as such." Thus it is clear that the expenditure incurred by the assessee in the said case for maintenance of vehicle was part of the remuneration as well as terms and conditions of the employment/service contract. Therefore the same was considered as business expenditure. In the case of the assessee on hand, no such employment/service condition was relied upon or produced by the assessee either be....
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....n fund is much more than the balance shown in the capital work in progress. In support of his contention, he has relied upon the judgement of Hon'ble Bombay High Court in the case of CIT Vs. Reliance Utilities & Power Ltd. 313 ITR 340 (Bom). 8.3 On the other hand, the learned Departmental Representative has submitted that the Assessing Officer has given finding that the assessee is not having his own fund therefore the assessee has utilized the borrowed fund for capital work in progress. Accordingly the Assessing Officer is justified in disallowing the proportionate interest expenditure. He has relied upon the orders of the authorities below. 8.4 We have considered the rival submissions as well as the relevant material on record. There is no quarrel on the issue that if capital business asset is acquired by using the borrowed fund, then interest on such borrowed fund is allowable under Section 36(1)(iii) of the Act. However, in the case on hand it is not clear whether the capital work in progress is for acquisition of new capital asset or the extension of the existing business of the assessee. Further the assessee has claimed before us that the assessee is having sufficient n....
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....ference manual and held that the said expenditure has given enduring benefit to the assessee company which is not related to a single financial year. As regards the expenditure of Rs. 4,50,000 towards web consulting and development, the DRP has observed that the details were not furnished during the appellate proceedings and therefore in absence of details the said expenditure of Rs. 4,50,000 was allowed. 9.2 Before us, the learned counsel for the assessee has reiterated the submissions made before the authorities below. On the other hand, the learned Departmental Representative has relied upon the orders of the authorities below and submitted that the enduring benefit would be received by the assessee on account of the said expenditure not limited to the financial year under consideration. 9.3 We have considered the rival submissions as well as the relevant material on record. We find that the expenditure incurred for system development in relation to Tally Ascent which is a tool for the assessee to develop further accounting software and therefore undisputedly the said expenditure is having an enduring benefit for a long period of time. Similarly, the expenditure on Tally dicti....
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.... vide its letter dt.29.11.2010 has contended that Mr. Goenka and Mrs. Sheela Goenka the Director of the assessee company travelled to get away from daily Hustle-Bustle. 12.4 This enables them to recharge their Batteries and Provides tremendous opportunity for New Discovery and perspective. It further contends that they meet local customers and potential business partners." It is clear from the explanation furnished before the Assessing Officer that the foreign travel by the Directors was to break the monotony of the daily work and therefore it is not the case of the assessee that the foreign trip of the Directors were for any business purpose. In the absence of any terms and conditions of the service of the Directors that they will be allowed to travel for personal foreign trip, this expenditure cannot be considered as laid out wholly and exclusively for the purpose of business of the assessee as per section 37(1) of the Act. Accordingly, we do not find any error or illegality in the orders of the authorities below. 11. Ground No.10 is regarding disallowance of claim of bad debts. 11.1 During the Financial Year relevant to Assessment Year under consideration the assessee compa....
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.... the sale made by the assessee in the earlier previous year to various parties which has been accounted in the books. Therefore this amount was already considered as income in the earlier assessment year. The receivable on account of the above sale have been shown as debtors in the books of accounts. In the immediate preceding year i.e. Assessment Year 2006-07 the assessee company transferred this sale and marketing division to its wholly owned subsidiary TIPL under Slump Sale Agreement and pursuant to the said sale the assets and liabilities including debtors and creditors have been transferred to TIPL with an understanding that if the debtors are not realized by the TIPL then same shall be transferred to the assessee. During the year under consideration as agreed between the parties the unrealized debts have been retransferred by the TIPL to the assessee. Thus on retransfer of the debtors by the TIPL to the assessee it again became debtors of the assessee. The debtors were transferred by the TIPL directly related to the sale in the preceding previous year. Hence when this debtors are written off, the assessee complied with the condition of Section 36(2) of the Act as it has duly ....
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.... the amount that being not-realisable/recoverable which has satisfied the requirement of claim as deduction as well as complied with the terms of transfer agreement. He has further contended that the assessee shall not be required to prove that the debts have become non-recoverable as held by Hon'ble Supreme Court in the case of TRF 323 ITR 397. Thus in view of the settled principle laid down by the Hon'ble Supreme Court, the books of accounts is sufficient to claim the deduction under Section 36(1)(vii) of the Act. He has further submitted that in the Slump Sale Agreement no specific mode for disbursement of consideration was specified. Therefore the TIPL has paid the part consideration in money and pat consideration has been discharged by way of returning the sundry debtors as agreed upon between the parties. The assets and liabilities were transferred with clear understanding that unrealized debtors would be retransferred to the assessee within a period of three years. On retransfer of the sundry debtors, the consideration receivable from TIPL on slump sale has been reduced to the extent of unrealized debtors. Thus in effect the debtors were returned as part of settlemen....
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.... Under the said slump sale transfer all assets and liabilities including sundry debtors of Rs. 186.87 Crores and sundry creditors of Rs. 77.03 Crores pertaining to the said division were transferred to TIPL. The Assessing Officer has noted that the assessee has disclosed the arrangements between the assessee and its subsidiary in the accounts for the Assessment Year 2006-07 that it may have to recognize eventual loss if any arising out of non-realisation of the sundry debtors transferred to TIPL. The said note to accounts has been placed at page 53 of the paper book as under : "1. Transfer of business to subsidiary During the financial year, the company as ;authorized by the Board of Directors vide their resolution dated 19th January, 2006 for a lumpsum consideration of Rs. 1,214,246,954 by entering into a Slump Sale Agreement dated 1st Feb., 2006. The assets taken over by Tally (India) Pvt. Ltd. as part of the Slump Sale Agreement include outstanding from sundry debtors. The company has agreed that Tally (India) Pvt. Ltd. may make payment of the lumpsum sale consideration in parts within a period of three years from the date of Agreement. There is no gain or loss on the transf....
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....d case that the assessee claimed the deduction on account of debts written off as irrecoverable in respect of the business which was succeeded by the assessee and the question arises for consideration of their Lordship is whether money owned by the debtor under a transaction with a predecessor can be written off as irrecoverable in the accounts of his successor (the assessee) in a subsequent year and could be claimed as a bad debt under Section 36(1)(vi) of the Act. The Hon'ble Supreme Court has observed that the recovery of debt is a right transfer along with the number of other rights comprising the subject of the transfer. If the law permits the transfer to treat the whole or part of the debt as irrecoverable and to claim as deduction on that account it seems difficult to accept that the same right should not be recognized in the transferee. It is merely an incident flowing from transfer of business together with its assets and liabilities from the previous owner to the transferee. The decision which should be on a proper appreciation of all i.e. employee in the transfer of business be recorded as belonging to the new owner. Thus the Hon'ble Supreme Court has finally hel....
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.... adjusted against the gross amount of the provision of Rs. 43,22,86,450. Once the sundry creditors written back as well as sundry debtors written off are accepted on parity then the claim of written off amount cannot be given a different treatment by assigning the reason that it is a los in capital field. In any case when this amount of bad debt written off was undisputedly allowable in the hands of the assessee prior to the transfer of division and also allowable in the hands of the subsidiary after the transfer then on retransfer of these debts by the subsidiary to the assessee as per their mutual agreement and arrangement at the time of slump sale would not change their character being sundry debtors of assessee as it was prior to transfer and the same status was also with the subsidiary of the assessee subsequent to the transfer. The Hon'ble Bombay High Court in the case of CIT Vs. Shreyas S. Morakhia (supra) by following the judgment of Hon'ble Supreme Court in the case of CIT Vs. T. Veerabhadra Rao & K. Koteswara Rao (supra) has held in paras 11 & 12 as under : " 11. The view which we are inclined to take finds support from a decision of the Supreme Court inCommissi....