TaxTMI 
TaxTMI 
2017 (9) TMI 1153
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....rowings (ECBs) 1.1 On the facts and circumstances of the case and in law, the learned AO/ Hon'ble DRP has erred in making a disallowance of Rs. 80,62.508 towards interest expenditure incurred in relation to the ECBs availed by the Appellant for acquisition of fixed assets , by invoking the proviso to section 36(l)(iii) of the Act. 1.2 Without prejudice to the above ground, on the facts and circumstances of the case and in law, the learned AO has erred in not allowing depreciation under section 32 of the Act on the disallowed interest amount, by not adding the same to the actual cost of the fixed assets. 1.3 Without prejudice to above grounds, on the facts and circumstances of the case and in law, the learned AO has erred in not allowing depreciation under section 32 of the Act on the interest expenditure, amounting to Rs. 2,216,117 and Rs. 454,131, disallowed in the preceding assessment years (i.e. AY 2008-09 and AY 2009-10 respectively). 2. Ground No. 2 - Disallowance of circuit accruals 2.1 On the facts and circumstances of the case and in law, the learned AO/ Hon'ble DRP has erred in making a disallowance of Rs. 3,217,258 on account of year-end accruals created....
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....mstances of the case and in law: 6.1 The learned Transfer Pricing Officer ('TPO')/ AO/ DRP have erred in making an addition of INR 345,442,141 under section 92CA of the Act to the total income of the Appellant on account of adjustment in arm's length price ('ALP') of the international transactions pertaining to availing of intra-group services, payment of royalty and imputed interest on outstanding inter-company receivables 6.2 The learned AO/ TPO/ DRP have erred, on facts and circumstances of the case and in law, in rejecting the combined transaction approach of benchmarking adopted by the assessee in its TP documentation and proceeding to determine the arm's length price of international transactions pertaining to availing of intra-group services and payment of royalty with its AEs on a standalone basis by rejecting Transactional Net Margin Method ('TNMM') as the most appropriate method. 6.3 The learned AO/ TPO/ DRP have erred, on facts and circumstances of the case and in law, in arbitrarily selecting Comparable Uncontrolled Price ('CUP') method as the most appropriate method to benchmark the international transactions pertaining to ....
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....1(l)(c) of the Act against the Appellant on account of the above adjustments made in the assessment order. 3. The revenue has raised the following grounds of appeal in ITA No. 1778/Del/2015 for the Assessment Year 2010-11: 1. On the facts and in the circumstances of the case, the ld DRP erred in deleting the addition of Rs. 119912445/- made on account of disallowance of support services expenditure. 4. Assessee filed its original return of income on 14.10.2010 declaring income of Rs. 32.95 crores. The return of income was revised on 03.01.2012 declaring an income of Rs. 34.77 crores. Subsequently, the return was picked up for the scrutiny and notice u/s 143(2) was issued on 24.08.2011. During the course of assessment proceedings reference u/s 92CA of the Act was also made by the ld. AO to the ld Transfer Pricing Officer to determine the arm's length price of international transactions entered into by the assessee with its Associate Enterprises. The Transfer Pricing Officer passed order u/s 92CA(3) of the act on 16.12.2013 proposing adjustment of Rs. 34,54,47,310/- .The Assessing Officer incorporating the above adjustment on account of transfer pricing passed a draft of prop....
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.... ECBs availed during the year by invoking the proviso to section 36(1)(iii) of the Act. 7. We have gone through the relevant facts of the case and arguments and submissions advanced by both the parties in connection with the disallowance towards ECBs availed during the year. This ground of appeal has already been decided in AY 2009-10 in I.T.A. No. 2538/Del/2014 even dated vide ground no 3 of that appeal. As submitted by the assessee/DR, since there is no change in facts in this year from the facts in preceding year, accordingly, the findings given therein para no 18 of that order where the claim of the assessee is allowed . hence for this year too we direct the ld AO to disallow the above disallowance. Hence, ground no 1 of the appeal is allowed. 8. The second ground of appeal is with respect of Disallowance of circuit accruals. During the Financial Year 2009-10, the appellant company incurred circuit charges aggregating to Rs. 181.50 crores (Rs. 106.40 crores towards infrastructure cost and Rs. 75.10 crores towards last mile charges for services provided by other telecom operators).The break-up of actual expense and year end accruals are given below: 9. The AO/ DRP made a disa....
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....ices in respect of Accrual Control Account amounting to Rs. 4,17,83,759/- which were verified and found to be correct. As regards Provisions made for Salary Payable and SIP Accruals, the AR of the assessee company could not provide documentary evidence, i.e invoices for the payments made even after providing sufficient opportunities. Thus, the amount of Rs. 23,68,651 (Rs. 8,18,364 + Rs. 15,50,287) was added to the income of the assessee company on account of Provisions made during the year under normal provisions as well as under special provisions of the Act in the absence of documentary evidence. 13. The assessee preferred objection before the Dispute Resolution Panel who vide direction dated 16.12.2014 vide para No. 8 has held as under:- 8.2 This issue has been discussed by the AO in para 11 of the draft assessment order. During the course of proceedings before the Panel, though the Ld. AR of the taxpayer made this ground as part of the slide deck but did not press this ground of objection. Under these facts and in the absence of submission of any evidence to justify the allowability of the sum of Rs. 8,18,364/- towards salary payable and Rs. 15,50,287/- towards SIP accrual....
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....of TDS certificates to the recipient, filing of the quarterly TDS statements etc. also presuppose existence of an identified recipient and quantification of amount. 4.9 Hence, to conclude the Ld. AO has overlooked the evidences/ information filed by the Appellant and such disallowance in the hands of the appellant is totally erroneous and liable to be deleted. 15. The Ld. DR vehemently relied upon the finding of the lower authorities. 16. We have carefully considered the rival contentions and also perused the facts of the case. The assessee has explained the basis of creating the provisions for year-end accruals. As explained by the appellant, we note that the assessee has been creating the provision on any year on year basis in accordance with the mercantile system of accounting otherwise correct expenditure would not be captured as per the matching principle. The assessee has demonstrated through evidences that the provision so created is either reversed or expensed off in the subsequent year. The assessee has also been able to submit evidences for most of the reversals before the lower authorities. We also find that the lower authorities allowed the entire claim of expenditu....
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.... we are of the considered view that since creation of the year end accruals does not result accrual of income to an identified vendor, the same cannot trigger a withholding tax liability on the part of the appellant. However as the ld AO has disallowed the above amount as the assessee has not produced the relevant basis of making the above provision the issue needs to be set aside to the file of the ld AO with a direction to the assessee to produce the basis of above provisionsing before the ld AO , who may verify the same and if found in accordance with the above finding and if pertaining to the impugned assessment year allow the claim of the assessee . Thus, in the result the ground No. 3 of the appeal is allowed. 17. The fourth ground of appeal is with respect of disallowance of annual revenue shares based license fee. During the Financial Year 2009-10, the Appellant incurred expense of Rs. 24.55 crores towards revenue share based license fee for maintenance and usage of the telecom license payable to the Department of Telecom ('DoT'). It was submitted that the assessee acquired the telecom licenses in the Financial Year 2006-07 by way of agreements with the Department of Telec....
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....d AO has capitalized the annual revenue share based license fee merely on the basis that the revenue department has filed a Special Leave Petition against the order of the Hon'ble Delhi High Court in the case of CIT vs. Bharti Hexacom Limited [2014] 265 CTR 130 (Delhi), which is squarely applicable to the Appellant's case and to keep the issue alive The AO in the draft assessment order made the following findings: "The reply of the assessee was considered. In its submission, the AR of the assessee company, relied upon the decision of Hon'ble High Court of Delhi in the case of M/s Bharti Airtel Limited. The said decision was not accepted by the Department and proposal for filing SLP before the Hon'ble Supreme Court of India was moved from this office. The same is pending for litigation, hence to keep the issue alive, the entire licence fee claimed as revenue expense is amortized over the remaining period of the term of licence i.e. 17 years (F.Y. 2006-07 onwards). Therefore, the proportionate amount of Rs. 1,44,41,953/- of licence fee is hereby allowed as amortised during the year and the net amount disallowed and added to the income of the assessee company comes to Rs. 23....
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....ed to the subsequent financial year, for which license fee is to be paid separately upon the adjusted gross revenues of such subsequent year. Therefore, payment of the aforesaid annual fee cannot be said to confer any right of an enduring nature upon appellant. 5.3. It is submitted that the action of the Ld. AO in applying the provisions of section 35ABB is grossly erroneous and liable to be reversed for the elementary reason that Section 35ABB applies only where an assessee incurs a capital expenditure for obtaining/ acquiring any right to operate telecommunication services. Thus, if the expenditure is not for obtaining or acquiring any right and also it is not in the nature of a capital expenditure, section 35ABB of the Act is not applicable. The relevant extracts of Section 35ABB of the Act is as under: "Expenditure for obtaining licence to operate telecommunication services. 35ABB(1) In respect of any expenditure, being in the nature of capital expenditure, incurred for acquiring any right to operate telecommunication services either before the commencement of the business to operate telecommunication services or thereafter at any time during any previous year and for whi....
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....d under the 1999 policy to 20 years but this itself does not justify treating the licence fee paid on revenue sharing basis under the 1999 policy as a capital expense made to acquire an asset. As observed in Empire Jute Co. Ltd. (supra), the enduring benefit test has limitation and cannot be mechanically applied without considering the commercial or business aspects. Practical and pragmatic view and considerations rather than juristic classification is the determinative factor. The payment of yearly licence fee on revenue sharing basis is for carrying on business as cellular telephone operator. It is a normal business expense. 36. Read in this manner, the licence granted by the Government/ authority to the assessee would be a capital asset, yet at the same time, the assessee has to make payment on yearly basis on the gross revenue to continue, to be able to operate and run the business, it would also be revenue in nature. Failure to make stipulated revenue sharing payment on yearly basis would result in forfeiting the right to operate and in turn deny the assessee, right to do business with the aid of the capital asset. Non- payment will prevent and bar an assessee from providing....
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....on. Therefore, for this reason alone the Assessee is entitled for deduction of entire expenditure which is allowable u/s 37(1) of the Act. 5.9. The above view has also been affirmed by the Mumbai Tribunal in the case of Bharti Airtel Ltd vs. ACIT in ITA No 398/Mum/2006 dated June 25, 2010, wherein it was held that deduction for annual license fee paid to the Department of Telecommunications ('DoT') should be allowed under section 37(1) of the Act. The Tribunal held as follows in this regard: "Since the license fee does not confer any enduring benefit, the license granted can be revoked on the breach of any of the conditions subject to which it was issued or any default of payment of any fee payable for the license and the license is non-exclusive, non-transferrable and it is open to the Government of India to grant similar licenses to other persons as well by virtue of powers conferred upon it under section 4 of the Telegraph Act, thus there is no monopoly right conferred upon the Assessee and further though the license was granted for 10 years initially, however, as per the terms of the license, the Assessee is required to pay license fee payable every year on quarterly....
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....he subsequent financial year, for which license fee is to be paid separately upon the adjusted gross revenues of such subsequent year. Therefore, payment of the aforesaid annual fee cannot be said to confer any right of an enduring nature upon appellant. We are convinced that the appellant's case is squarely covered by the decision of Hon'ble Delhi High Court in the case of CIT vs. Bharti Hexacom Limited [2014] 265 CTR 130 (Delhi) other case laws relied upon by the appellant as cited above. The Ld. DR could not controvert that how this issue is not squarely covered by the decision of the jurisdictional High Court. It is also important to note that in the immediately succeeding year on same facts, the DRP has allowed the claim of the licence fees on revenue basis u/s 37(1) of the Act. In view of the above facts and respectfully following the decision of the Hon'ble jurisdictional High Court we allow the claim of the assessee. In the result the ground No. 4 of the appeal is allowed. 22. The fifth ground of appeal is with respect of Disallowance of unexplained investments. This ground of appeal was not pressed by the Ld. AR and hence, dismissed. 23. The sixth ground of a....
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....sis. As on March 31, 2010, the Appellant had outstanding receivables to the tune of INR 104,101,286. The Appellant submits that the outstanding receivables are emanating from the primary transaction of provision of network connectivity services and hence, there is no need to benchmark the same separately. 6.2 The Ld. TPO/Hon'ble DRP erroneously treated inter- company receivables as stated above as loan given by the assesse to its AEs ignoring the bona-fide nature of the agreement (i.e. provision of network connectivity services) between the assesse and its AEs and proceeded to benchmark the same by application of CUP. (Refer page no. 367-368 of the Appeal Set for TPO Order) 7. Legal Submission Re-characterisation of overdue receivables as loan by the TPO is incorrect 7.1 At the outset, The Appellant invites Your Honour's attention to clause (i) (c) of Explanation to Section 92B(1) of the Act which specifically covers delay in realization of dues from the AE as international transaction: "(c) capital financing, including any type of long-term or short-term borrowing, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or d....
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....on the profitability of the Appellant. Thus the Appellant submits that as a result of not realizing the debts from AEs within a specified period, there has been no impact on the Appellant's profits or income. The average credit period allowed to the third party customers is shown below: Average receivable days of comparable companies - Provision of network connectivity services S. No. Name of the company Average receivable days (No. of days) 1. City Online services Limited 107 2. Karuturi Telecom private limited 56 3. Sify Technology Limited (seg.) 69 4. Southern Online Bio Technologies Limited (seg.) 100 5. Tata Communication Limited 162 Arithmetic mean 99 7.7 The above table clearly shows that the average credit period allowed to the third party customers is more than the normal credit period allowed to the customers of AE i.e. 30 days. Without prejudice to this, the Appellant's operating margin during the relevant period is significantly higher than the comparable company which reiterates the fact that the impact of credit period allowed to the customers of AEs is already embedded in the sale price of services. Therefore, the Appel....
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....ed notional interest on the same. Approach adopted by the Hon'ble DRP 7.12 The Hon'ble DRP upheld the contentions of Ld. TPO and determined that interest be charged at the rate of SBI Base rate plus 150 basis points instead of 300 basis points since the aggregate amount of receivables does not exceed INR 50 crores. 7.13 In this connection, we wish to draw your attention to the following Tribunal rulings, wherein the principle of interestbeing calculated from the borrower's perspective (i.e., using currency LIBOR rate), has been upheld: -DCIT vs Tech Mahindra Ltd (ITA No. 1176/Mum/2010) (Refer Para 6 on Page no. 567 and 568 of the Case Law Compendium) -M/s Siva Industries & Holding Ltd. vs ACIT (ITA No. 2148/Mds/2010) (Refer Para 11 on Page no. 409 of the Case Law Compendium) -Four Soft Ltd. vs. DCIT ITA No 1495/HYD/2010 (Refer Para 19 on Page no. 195 and 196 of the Case Law Compendium) -Cotton Natural (I) Pvt. Ltd. vs. DCIT (ITA No 5855/Del/2012) (Refer Para 14 on Page no. 72 of the Case Law Compendium) -Tata Autocomp Systems Ltd. vs ACIT (ITA No.7354/MUM/11) (Refer Para 19 on Page no. 561 and 562 of the Case Law Compendium) -Kohinoor Foods Ltd (former....
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....les from the unrelated parties in cases where the payment was not received for more than six months, it cannot charge interest for outstanding dues from its AE. Hence it was contended that assessee follows a uniform policy of not charging interest from AE as well as non AEs. In support of its above submission the assessee has placed reliance: - CIT vs. Indo American Jewellery Ltd. (44 taxmann.com 310) (Bom.) - VIP Industries Ltd. Vs. ACIT (ITA 526/Mum/2014) - Nimbus Communications Ltd (145 ITD 582) (Mum.) 29. The assessee has also also submitted that that the average credit period allowed to third parties customer is more than normal credit period allowed to its AE. Assessee also disputed the separate benchmarking of this transaction by applying CUP. 30. We disagree with the views of the assessee that outstanding receivables is not an international transaction. According to us the explanation (i) (c) covers this transactions. However as assessee has raised contention that assessee as a policy, is not charging any interest either from AE or non AE, then notional interest should not be included on the outstanding dues from the AEs and further the claim of the assessee that no....