TaxTMI 
TaxTMI 
2016 (8) TMI 774
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....m's Length Price of the international transactions to the TPO without 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 D....
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.... stand that such method has been adopted. xii) ignoring the ratio laid down by the Hon'ble ITAT, Mumbai in the case of M/s.Nimbus Communications Ltd V. ACIT Circle 11 (1), Mumbai (2010) 38 SOT 246 (Mum), 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 Goe....
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....t company was: possession of funds like share capital, reserves and surplus to the extent of Rs. 141 ,03,34,117/- on which no interest was paid for application. ix) ignoring the fact that the interest on capital work in progress was also to the same extent in the earlier years being A.Ys. 20t,*.;-06 and 2006-07 and no interest disallowance 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....
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....ue in nature and offered for tax and the intermediary transaction of transfer and retransfer would not vary the nature of debt. Ground No.11 In view of the above and the other grounds to be adduced at the time of hearing, the appellant prays that the Hon'ble Tribunal may kindly delete i) the addition of Rs. 4,60,42,886/- made consequent to adjustment of arms length price. ii) the addition of Rs. 6,76,599/- under electricity expenses. iii) 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 a....
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....s in Prowess and Captialine databases by applying certain criteria. The search yielded 26 comparables with arithmetical mean margin of 25.14% on cost. As the margin of the taxpayer at 81.89% on cost is higher than the arithmetical mean margin, the price charged by the taxpayer for rendering software development services is treated as at arm's length. Significant debts are outstanding from its AE, Tally Solutions FZ LLC, Dubai. These transactions are analysed separately under CUP method as under." The TPO accepted the international transactions in respect of technical services rendered by the assessee to its 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 tran....
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....he learned counsel for the assessee has submitted that allowing the credit period of realization of the sale proceeds to the AE does not constitute an international transaction. He has referred to the Section 92(1) of the Income Tax Act, 1961 (in short 'the Act') and submitted that the provisions of Chapter X can be applied only for computation of income arising from an international transaction having regard to the ALP. When a transaction does not result any income or no income arises from the transactions then the same cannot be the subject matter of computation of ALP as per the provisions of Chapter X. The term " any income " arising from an 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 c....
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....ncome from the said international transaction has to be computed having regard to the ALP. He has relied upon the orders of the authorities below. 4.4 We have considered the rival submissions as well as the relevant material on record. As regards the first proposition put forth by the ld. counsel for the assessee that the extending credit period cannot be regarded as international transaction in the absence of any income arises from the said transaction, we do not agree with the said proposition advanced by the ld. counsel for the assessee. It is pertinent to note that if the argument advanced by the ld. counsel for the assessee is accepted then it would result to render the provisions 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 a....
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.... This would take us to the meaning of the word income under the Act as defined in Section 2(24) of the Act. The amounts received on issue of shares is admittedly a capital account transaction not separately brought within the definition of Income, except in cases covered by Section 56(2) (viib) of the Act. Thus such capital account transaction not falling within a statutory exception cannot be brought to tax as already discussed herein above while considering the challenge to the grounds as mentioned in the impugned order. 39. In tax jurisprudence, it is well settled that following four factors are essential ingredients to a taxing statute:- a) subject of tax; b) person liable to pay the tax; 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 manu....
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....rt regarding sale to its AE from manufacture of jewellery units and diamond trading unit. The TPO accepted the price charged by the assessee from AE at arm's length. However, the TPO has made the adjustment on account of notional interest for the excess period allowed by the assessee to AE for realization of dues. The TPO applied 18.816% per annum as arm's length on the over due amounts of AE and proposed adjustment of Rs. 2,49,95,139/-. The DRP though concurred with the view of the Assessing Officer/TPO on the issue of international transaction, however, the adjustment was reduced by applying the interest rate of 7% instead of 18.816% applied by the TPO. The first issue raised by the assessee is whether the aggregate period extended by the assessee to 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 transact....
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....main transaction of sale. The sale price of the product or service determined between the parties is always influenced by the credit period allowed by the seller. Therefore, the transaction of sale to the AE and credit period allowed in realization of sale proceeds are closely linked as they are inter linked and the terms and conditions of sale as well as the price are determined based on the totality of the transaction and not on individual and separate transaction. The approach of the TPO and DRP in analyzing the credit period allowed by the assessee to the AE without considering the main international transaction being sale to the AE will give distorted result by disregarding the price charged by the assessee from AE. Though extra period allowed for 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 cha....
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.... to the AE is a closely linked transaction with the transaction of providing services to the AE and therefore cannot be treated as an individual and separate transaction of advance or loan. Accordingly, we direct the A.O/TPO to redo the exercise of determination of ALP by considering the credit period allowed in realization of sales proceeds as closely linked transaction with the transaction of providing services to the AE and therefore both has to be clubbed and aggregated for the purpose of determination of ALP. 6. Ground No.5 is regarding disallowance of electricity expenses. 6.1 During the course of assessment proceedings, the Assessing Officer noted that the assessee has debited an amount of Rs. 24,55,949 towards electricity expenses. On verification of record, 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 O....
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....ted in the articles of association of the company or in accordance with the resolution or if provided by articles, by a special resolution which might be passed by the company in the general meeting. This payment of remuneration is subject to overall limits of managerial remuneration laid down in s. 198 of the Act. What is more material for the purpose of the present controversy is Explanation to s. 198 of the Companies Act which permits and provides that "remuneration" shall include (a) any expenditure incurred in providing any rent-free accommodation, etc., (b) any expenditure incurred in providing any other benefit or amenity free of charge or at a concessional rate, (c) any expenditure which would have been incurred by the director but for such expenditure having been incurred 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 remunera....
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....ee fund which could have been used for the purpose of capital work in progress. Accordingly, the Assessing Officer has disallowed the proportionate interest expenditure amounting to Rs. 62,22,859 by applying 12.25% average prime lending rate. 8.2 Before us, the ld. counsel for the assessee has submitted that the expenditure of capital work in progress has been incurred for business asset therefore, the provisions of section 36(1)(iii) is applicable in respect of the claim of interest. He has further contended that the assessee is having its own sufficient fund for use of capital work in progress. Therefore no disallowance on account of interest is called for. He has referred the details of the assessee's own fund at page No.8 of the paper book and submitted that the assessee's own 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 hav....
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....4,44,012 was incurred in the process of development of new accounting system namely Tally Ascent and claimed that the same is revenue in nature. An expenditure of Rs. 20,92,721 was incurred in creating a reference manual and dictionary of words of various languages. Since the assessee company is in the business of Tally products, the expenditure incurred is in the nature of revenue. The next item of expenditure is Rs. 4,50,000 was claimed towards subscription for web site for providing information to Tally customers. Such payment is made at Rs. 50,000 per month. The expenditure is incurred in the business interest of the assessee and is an allowable expenditure. The DRP did not accept the contention of the assessee as regards the expenditure on system development in relation to Tally Ascent as well as Tally Dictionary and reference 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 s....
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....essing Officer. 10.2 Before us, the ld. counsel has reiterated the contentions raised before the authorities below and submitted that the expenditure has been incurred wholly and exclusively for the business purpose of the assessee as the travel was undertaken by the Directors of the assessee company. 10.3 On the other hand, the learned Departmental Representative has relied upon the orders of the authorities below and submitted that it is clear from the facts recorded by the Assessing Officer that the expenditure was incurred for personal visits of the Directors. 10.4 We have considered the rival submissions as well as the relevant material on record. The assessee explained before the Assessing Officer as recorded by the Assessing Officer in paras 12.3 and 12.4 as under : " 12.3 In response to the above, the assessee company 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 cust....
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....on being loss on account of non-realisation of sundry debtors (bad debts). The said claim of the assessee has been disallowed by the Assessing Officer by holding that the loss claimed by the assessee is not permissible as it is a capital loss. In alternative, capital loss of Rs. 16,25,61,749 at the best is allowable in Assessment Year 2009-10 as per the agreed terms . Thirdly, the Assessing Officer observed that the claim of the assessee would be allowable if it prove beyond reasonable doubt that the sundry debtors were not realizable by TIPL after it has taken effective steps to recover the amounts. The assessee challenged the action of the Assessing Officer before the CIT (Appeals) but could not succeed. 11.2 Before us, the learned Authorised Representative of the assessee has submitted that the amount claimed as written off unrealizable debt pertain to 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 y....
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....t when the employee of the assessee withdrew the money from the bank account and misappropriate the same, the claim of business loss was disallowed by the Assessing Officer. The Hon'ble Supreme Court has allowed the claim as business loss sustained by the assessee as a result of misappropriation by the employee which is incidental to carrying on his business. The learned Authorised Representative thus submitted that the assessee has disclosed in the notes to the accounts for the year ended 31.3.2006 that the assessee made to have recognized the loss if any arising within a period of three years due to non-realisation of sundry debtors. The learned Authorised Representative has pointed out that within a period of 3 years means any of the years between the first year to third year and not at the end of the third year. Thus once the assessee has written off 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 cas....
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....presentative has submitted that under the Slump Sale Agreement it is a condition that there could be transfer of entire undertaking or entity and therefore part of undertaking is not permissible. A slump sale includes a transfer of entire assets and liabilities and the consideration is lump sum consideration of the entire business an individual asset and liability is not permissible. The bad debts in any case does not belong to the assessee but to the transferee TIPL and therefore the assessee cannot claim the deduction of the bad debts written off. He has relied upon the orders of the authorities below. 11.4 We have considered the rival submissions as well as the relevant material on record. The undisputed fact giving raise to the dispute is that vide Slump Sale Agreement dt.1.2.2006, the assessee transferred its sale and marketing division to its wholly owned subsidiary. 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 an....
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....redecessor firm and took over all its assets and liabilities, including the debt due from Laxmi Trading Company. The business carried on by the predecessor firm was now carried on by the assessee. The facts also show that the assessee paid income-tax on the interest income accruing on the debt for the asst. yr. 1963-64. It is also not disputed that the parties effected a settlement on 31st March, 1965, whereby a sum of Rs. 25,000 was accepted by the assessee in satisfaction of the debt and that the balance of Rs. 15,100 was written off by the assessee as irrecoverable. The question is whether money owed by a debtor under a transaction with a predecessor firm can be written off as irrecoverable in the accounts of its successor, the assessee, in a subsequent year and could be claimed as a bad debt under cl. (vii) of sub-s. (1) of s. 36 of the IT Act, 1961." As it is clear from the relevant facts of the said 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....
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....have claimed the deduction of bad debts written off. It is not in dispute that the conditions as prescribed under section 36(2) has been satisfied in this case that the amounts of debts has already been considered as part of the income in the earlier year in the hands of the assessee. It is borne out from the record that the assessee has made provision of an amount of Rs. 43,22,86,450 and amount of Rs. 21,68,82,431 has written back as sundry creditors and further an amount of Rs. 5,28,42,270 has been added back in the computation of income. Therefore the assessee has claimed only a net amount of Rs. 16,25,61,749 after giving the adjustment of sundry creditors written back against the original provision of Rs. 43,22,86,450 as recorded by the Assessing Officer in para 13.2 of the assessment order. The Assessing Officer has not distributed the amount of written back of sundry creditors to the extent of Rs. 21,68,82,431 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....
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....f, has been taken into account in computing the income of the assessee of that previous year or an earlier previous year and that it has also been written off as irrecoverable in the accounts of the assessee for that previous year. In the present case, the debt was taken into account in the income of the assessee for the assessment year 1963-64 when the interest income accruing thereon was taxed in the hands of the assessee. The interest was taxed as income because it represented an accretion accruing during the earlier year on money owed to the assessee by the debtor. The item constituted income because it represented interest on a loan. The nature of the income indicated the transaction from which it emerged. The transaction was the debt, and that debt was taken into account in computing the income of the assessee of the relevant previous year. It is the same assessee who has subsequently, pursuant to a settlement, accepted part payment of the debt in full satisfaction and has written off the balance of the debt as irrecoverable in his accounts. It appears therefore that the conditions in both Sub-clauses (a) and (b) of Clause (i) of sub-section (2) of section 36 are satisfied in....