AI Drafter 
TaxTMI 
TaxTMI 
2017 (12) TMI 301
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....s. 2,78,31,168/- under normal provisions and MAT income of Rs. 32,35,27,021/-. 3.1 As the case was covered by the provisions of section 92CA, with the prior approval of the CIT-II, the AO referred the case to TPO for determining the Arm's length price. 3.2 Assessee's Profile: The assessee is an information technology enabled service provider, specializing in help desk services, offshore support, maintenance etc. web based internal resource management module for HR services, design and deployment of backup solutions, oracle application ongoing support, infrastructure and managed services support, which are in the nature of IT enabled services/back office services. Assessee is a 100% subsidiary of GSS America Inc., USA. 3.3 International Transactions: As per 3CEB report/TP Document submitted by the assessee, the international transactions are as under: AE Nature of transaction Amount (Rs.) GSS America Inc., USA IT Enabled Services 34,85,06,258 -do- -do- 3,45,31,665 -do- Interest free loan for development of business with a 18,71,52,000 clause for converting the same into equity. Total 57,0....
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.... loan extended by its Branch in USA to the extent of Rs. 29,04,15,000/- to its AE i.e. GSS America Inc., 4.2 After considering the submissions of the assessee, the TPO observed that the contention that the funds were given out of the free reserves of the assessee company is not much relevance, as it is important to note that no independent business entity operating at arm's length will part with its substantial funds without any consideration or quid pro quo whatsoever. He further observed that the assessee had failed to show that tangible and direct benefits it had received from the interest free loan given to its AE, as the funds were used by the AE for acquisition and therefore it was the AE which had directly benefitted from the funds and not the assessee. As regards the argument of the assessee that the loan was in the nature of quasi equity and the advance was converted into equity in FY 2011-12, the TPO observed that there was a gap of almost three years between giving loan and issuance of equity and if the funds were actually given for the purpose of equity then the assessee would have insisted for issue of shares against the amount given. TPO observed that the assessee ....
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..... DCIT, 2205 of 2010, dated 12/08/2011 wherein the Tribunal observed that interest free advances on account of commercial expediency is at arm's length. 6. After considering the submissions of the assessee, the DRP rejected the objection raised by the assessee by holding that the assessee failed to show how the advancing of loan has furthered the development of business of the assessee with any facts and figures and the argument is general in nature. 7. Aggrieved, the assessee is in appeal before us raising 9 grounds of appeal, the sum and substance of which are, the ld. AO/TPO/DRP are not justified in law in determining the Arm's length price at Rs. 83,21,639/- being the interest on loan given to AE as against Rs. Nil. 8. Ld. AR submitted that the AEs had already allotted shares in respect of advances made. He submitted that investments in share capital of subsidiaries outside India are not in nature of the transactions referred in section 92B. For this proposition, he relied on the following cases: 1. Prithvi Information Solutions Ltd., ITA No. 472/Hyd/2014. 2. Vijay Electricals, 842/H/2012 3. GSS Infotech Ltd., 497/H/2015 9. Ld. DR, on the ....
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.... of 12 months. The calculation for more than 12 months by AO has to be disapproved. This ground of the assessee is considered to be allowed for statistical purposes." Facts are materially same in the present AY also as both TPO and DRP have followed the order of the DRP for the AY 2008-09. However, it will be pertinent to mention here that in course of hearing, learned DR submitted before us that the ratio laid down in case of Vijai Electricals Vs. ACIT (supra) cannot be said to be laying down the correct proposition of law as amendment brought to section 92B of the Act by the Finance Act, 2012 with retrospective effect was not taken note of by the Tribunal. Considering the totality of the facts and circumstances and keeping in view the direction of the coordinate bench in assessee's own case in the preceding AY 2008-09, we remit the matter back to the file of the AO for considering afresh keeping in view the decision of the Tribunal in case of Vijai Electricals Vs. ACIT (supra) and also the amended provisions of section 92B of the Act. We make it clear that if ultimately it is found that any amount given to the overseas subsidiaries are in the nature of loans and advances....
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....uity is allowable under normal provisions. Ld. AR submitted that provision for gratuity is an ascertained liability and hence it is an allowable deduction. He relied on the following decision: 1. Atlas Documentary Facilities P. Ltd., ITA No. 6563/Mum/09 11.2 Provision for gratuity added to profit u/s 115JB. Ld. AR submitted that provision for gratuity is an ascertained liability and hence it cannot be added to book profits. He relied on the following decisions: 1. Dresser Valve India Ltd., 30 SOT 495 2. Ekla Appliances, 45 SOT 7 3. Kanco Enterprises Ltd., 65 Taxmann.com 289 11.3 Any disallowance made to the total income will increase profits u/s 10A. 11.4 Ld. AR submitted that if any disallowance is made, then there will be corresponding increase in the deduction u/s 10A. He relied on the following cases: 1. Planet Online P. Ltd., ITA No. 1016/H/2007 2. Informed Technologies India Ltd., 75 Taxmann.com 128 3. Circlar No. 37/2016. 11.5 Ld. DR relied on the orders of revenue authorities. 12. Considered the rival submissions and perused the material facts on record. The assessee has claimed provision for gratuit....
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....owance u/s 14A, the business profits eligible for deduction u/s 10A, to the said extent would stand enhanced. We find that the issue involved is covered by the judgment of the Hon'ble High Court of Bombay in the case of : CIT v. Gem Plus Jewellery India Ltd. [2011] 330 ITR 175/[2010] 194 Taxman 192 (Bom.) , wherein the Hon'ble High Court held as under:- "The disallowance of the PF/ESIC payments has been made because of the statutory provisions - s. 43B in the case of the employer's contribution and s. 36(v) r/w s. 2(24)(x) in the case of the employees contribution which has been deemed to be the income of the assessee. The plain consequence of the disallowance and the add back that has been made by the A.O is an increase in the business profits of the assessee. The contention of the Revenue that in computing the deduction under s. 10A the addition made on account of the disallowance of the PF/ESIC payments ought to be ignored cannot be accepted. No statutory provision to that effect having been made, the plain consequence of the disallowance made by the AO must follow." We thus in light of the aforesaid facts of the case r.w the settl....
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....the above observations, the TPO held that the arm's length price of the interest on the loan given by the assessee to AE is 3.94% per annum and since the assessee had not charged any interest on the same, the international transaction is not within the arm's length price. Accordingly, the TPO computed the adjustment u/s 92CA(3) on account of interest was at Rs. 3,65,81,330/- and the total income of the assessee was adjusted accordingly. 14.3 When the assessee filed objection before the DRP, the DRP rejected the objection and confirmed the ALP adjustment of Rs. 3,65,81,330/-. 15. Aggrieved, the assessee is in appeal before us. 16. Before us, the ld. AR of the assessee submitted that no interest can be charged on the investments made by the assessee in its own AE and investment in AE is not an international transaction as no income is generated. He relied on the following cases: 1. DCIT vs. Cadila Healthcare Ltd., 39 Taxmann.com 51 2. Prithvi Information Solutions Ltd. Vs. DCIT, 472/H/2014 3. M/s Vijay Electricals Ltd. Vs. Addl. CIT, 842/H/12 4. Hill County Properties Ltd. Vs. ACIT, 48 Taxmann.com 94 5. Vodafone India Services (P)....
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.... one year from the date of invoiced as export turnover eligible for deduction u/s 10A of the Act as per the time allowed by the appropriate authority i.e. RBI. 22. After considering the submissions of the assessee, the DRP held that in view of the guidelines issued by the RBI and also the directions contained in the order of the DRP in the earlier year, directed the AO to provide the benefit of section 10A on the amounts realized in the period of one year. 23. In compliance with the DRP directions, the AO recomputed the export turnover at Rs. 11,48,31,673/- (Rs. 9,96,73,705 + 1,51,57,968). The AO held that as per the revised form 56F furnished by the assessee, the export turnover of Hyderabad unit is Rs. 37,24,76,941/-, however, for the purpose of computation of deduction u/s 10A, the export turnover is restricted to the extent of realization of sale proceeds i.e. Rs. 11,48,31,673/-. 24. Aggrieved, the assessee is in appeal before us. 25. As regards ground No. 3 to 3a & 3b., regarding export receivable received after 1 year 2.5 months of Rs. 17,61,37,767/-, the ld. AR submitted that letter from Authorised Dealer with regard to the regularization of export proceeds is en....
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....tion of Rule 46A. The CIT(A) after considering the objection of the Assessing Officer came to the conclusion that the defects pointed by the Assessing Officer is a procedural nature and it can be cured by permitting appropriate rectification at the first appellate stage. Being so, we do not find any infirmity in admitting the additional evidence by CIT(A) for adjudication. The CIT(A) during the first appellate stage called for the summary of monies remitted and received through different modes by the assessee. The CIT(A) after examination of documents came to the conclusion that all the remittance were supported with FIRCs or approval from RBI for investing in Wholly Owned Subsidiary or remittance into approved bank accounts maintained in abroad. The assessee also furnished all the required statements in the form of FIRCs or RBI approvals. This has been considered by the CIT(A) after confronting the same to the Assessing Officer. All the monies received by the assessee were supported by the FIRCs. The Assessing Officer has rejected the benefit u/s 10A(3) on the reason that the provisions of section 10A(3) are specific and does not include the deeming provisions as per the RBI (rela....
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...., the process of developing and delivering software to its clients involve various stages. Sometimes, even when the software has been incidental, the sale is not complete as many other jobs such as training, hand holding etc. are yet to be completed. Such events were considered as work in progress and only after the complete jobs are done, sale proceeds are realized from such instances. Till such time, the amounts spent on developing this software have been shown as work in progress and the same on realization were transferred to Wholly Owned Subsidiary as investment. In our opinion, the work in progress/future receivables cannot be considered for deduction u/ s 10A. However, when these amounts on realization were actually transferred to Wholly Owned Subsidiary as an investment within the extended time by RBI, it is to be considered for exemption u/s 10A if the other conditions are fulfilled by the assessee and similar is the position in case of work in progress. The Assessing Officer has to re-compute deduction u/s 10A considering the work in progress/future receivables as not entitled for exemption u/s 10A. However, as soon as it is realized and transferred from work in progress/....
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....eard both the parties and perused the material available on record. In our opinion 'export turnover' means the sale proceeds of any goods or merchandise exported out of India, but does not include freight or incidence attributable to the transport of goods or merchandise beyond the customs stations as defined in the Customs Act. The Sec. 10B was brought into statute book with a object to grant incentive to export oriented undertaking engaged in export of article of things or computer software. The "deduction is made available on export of software turnover, the proceeds whereof are received in foreign exchange. It is not available on other export turnover, the receipts whereof are in an Indian currency or in currency which is not a convertible foreign exchange. The object therefore, appears to be to encourage more inflow of convertible exchange and not the mere export of goods. Making it available with reference to the realization in convertible exchange is suggestive of the fact that it was with a view to encourage foreign exchange inflow. Under the provisions of S.10B to avail the deduction under this sec. the undertaking has to bring into India the sale proceeds in convertible f....
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.... comparables after analyzing the databases, the annual reports and considering the objections filed by the assesse: S.No. Company Name OP/OC% 1 Accentia Technologies Ltd. 11.16 2. Datamatics Global Services Ltd. 16.84 3. Eclerx Services Ltd. 61.37 4. E4e Health Care 13.73 5. Informed Technologies India Ltd. 7.10 6. Infosys BPO Ltd. 34.68 7. Jindal Intellicom Ltd. 1.98 8. Microgenetic Systems Ltd. 7.01 9. TCS E-Serve Ltd. (merged) 65.82 10 Cross Domain Solutions Pvt. Ltd. 29.88 Total 249.59 24.96 After applying the average margins of the comparables to the financials of the assessee, the result is as under: Description Amount Arm's length Margin 24.96% Less: WCA -2.51% Adjusted Arm's length margin 27.47% Operating Cost (OC) 65,82,78,605 Adjusted Arm's length Margin (%) AALM) 27.47% % of AE sales on total revenue 13.31% Proportionate cost on AE sales 8,76,16,882 Arm's length price = (100+AALM)*OC 11,16,85,239 Price received (OR) 7,71,72,081 Adjustment u/s 92C....
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....epreciation. Since AO/TPO has arrived ALP adjustment without excluding depreciation, in our considered view the ALP adjustment arrived at by the TPO is not as per the directions of DRP. Hence, we remit this issue back to the AO/TPO to calculate the TP adjustment excluding depreciation. Accordingly, this ground raised by the assessee is allowed on this aspect. Hence, we are not inclined to adjudicate the other grounds raised by the assessee relating to TP adjustment. 42. As regards ground No. 6 to 6a & 6k regarding addition of Rs. 4,87,31,761/- towards interest on advances towards investment given to AE, the TPO observed that during the FY 2011-12, the assessee had advanced a sum of Rs. 31,96,87,941/- as an interest free loan to its AE i.e. GSS America Inc., whereas the opening balance as on 01/04/2011 was Rs. 108,96,88,358/-. Thus, the loan outstanding as on 31/03/2012 is Rs. 140,93,76,299/-. The explanation of the assessee is that the funds were given out of the free reserves of the assessee company, which was rejected by the TPO and computed the interest as under: Opening balance as on 01/04/2012 Rs. 108,96,88,358/- Closing Balance as on 31/03/2012 Rs. 140,93,76,29....
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....ts on record. The issue is squarely covered by the decision of the coordinate bench in assessee's own case for AY 2010-11 in ITA No. 497/Hyd/2016 order dated 29th April, 2016 wherein the coordinate bench has held as under: 11. We have considered the issue and examined the contentions. As seen from assessee's contentions, assessee is neither charging interest on any of the receivables outstanding. There is also no basis for adopting only two months as credit period. RBI itself allows an year for the amounts to be realised, if they are in foreign exchange. Whether it is AE or non-AE, it is in the interest of business that assessee receives the foreign exchange early so that it can claim deduction u/s 10A. Therefore, in our view, putting a limit of two months of credit period itself is arbitrary. Moreover, as seen from the calculation provided in page 7 of the assessment order, the date of realization was shown as 0202-2011 and interest was levied from 01-04-2010 to 02-02-2011 which is not pertaining to the year under consideration. As far as this year is concerned, the invoices raised on 31-12-2009 were outstanding only for a period of three months by the end of the acco....
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.... package which was written off during FY 2011-12, the assessee furnished a copy of the invoice. 49.1 The AO referring to the provisions of section 37(1) and section 50 of the Act, observed that the assets written off of Rs. 14,62,50,000/- as claimed by the assessee is not allowable u/s 32(1)(iii), section 37 and section 50 of the Act as there were inconsistencies in the submission made by the assessee and the assessee failed to substantiate the allowability of its claim of assets written off. Therefore, the AO disallowed the assessee's claim. 49.2 As regards the disallowance of depreciation on the ERP package, the AO noticed from the depreciation schedule for AY 2012- 13, that the assessee claimed a depreciation of Rs. 4,87,57,000/- on the above mentioned asset in addition to the claim of written off of Rs. 14,62,50,000/-. The AO observed that the Assessee failed to prove the following: 1. The purchase of ERP package was not proved 2. Utilisation of the ERP package for the purpose of business was not proved. 3. The ERP package was really written off in its books of account was not proved. In view of the above, the AO disallowed the depreciation o....
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....ertificate in this regard which was not accepted by AO is proper. Ld. DRP also expressed flaw in the decision of purchasing this software and genuineness of the transaction. In our considered view, the department has accepted the software purchased and allowed the depreciation in the scrutiny assessment u/s 143(3) in the earlier AYs. No doubt the assessee has discharged the duty of compliance but that does not mean the present AO cannot verify the relevant verification filed in earlier year, particularly, when the transaction is of huge value. The assessee is expected to retain the relevant information of this transaction. Considering the huge investment on the softwaree, it should have passed due process of approval in the organization. It is the duty of the assessee to submit the information whenever it is called for until the asset is fully depreciated or written off. In the present case, assessee has purchased this software to improve the business by linking the transaction of different countries. It is not always end up with good decision, it is part of business decisions. It is not always relevant how much revenue it has generated or improved the business. It is not sometimes....