TaxTMI 
TaxTMI 
2016 (1) TMI 1415
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....ct of PT Unit and deduction of Rs. 26.25 crores u/s. 10B in respect of AHA unit. The AO completed the assessment u/s. 144C(3) r.w.s. 143(3) of the Act on 9.2.2011, determining the income of the assessee at Rs. 36,65,36,000/-. ITA 1778/Mum/2012-(Assessee's Appeal): 2.First Ground of appeal pertains to disallowance made under the head project risk expenses (PRE), amounting to Rs. 31.83 lacs.During the assessment proceedings,the AO found that assessee had debited an amount of Rs. 2.38 crores as PRE. He directed the assessee to furnish further breakup and to justify the claim. Vide its letter,dt.1.11.2010,it was stated that the assessee was incurring liquidated damages due to delayed delivery/additional cost, that PRE were effected under Schedule -11 in the P&L account, that it represented the provisions made during the year in accordance with the contract, that the provision was part of total project cost and had been recognised regularly on the basis of reasonable revenue milestone achieved as defined in the purchase order, that in the subsequent years the company would actually incur the expenses, that the said provision of PRE would get adjusted without affecting the P&L acco....
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....g the case of N. Sundereshwaram (Income Tax Ref 336 and 337 of 1985, dt.4.6.1996) of Hon'ble Kerala High Court,the FAA held that the claim of damages by customer had not been adjudicated by arbitration, that the assessee had only made provision, that the project was not completed in the year under appeal, that the same could not be called liquidated damages as such, that the assessee had claimed that actual expenses had been incurred in the subsequent years but it did not explain as to how much expenses were incurred in excess of the provision,that it was not explained as to how the assessee had arrived at the likely delay that would be caused, that the expenses could not be termed liquidated damages, that the provision made were actually not for any kind of output.Before the FAA the assessee had made application under Rule 46A(c) of the Income tax Rules 1962 (Rules) and requested the FAA to admit additional evidences.But, he rejected application and held that documents even after being considered would not tilt the decision in favour of the assessee as far as allowability of provisions was concerned. Finally,he upheld the order of the AO. 2.2.Before us,the AR argued that delay ....
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....e was a Public Limited Company engaged in the manufacture of sugar, cement, machinery, etc.The dispute related to the claim of the assessee for deduction of Rs. 21,47, 801/-which was a provision made in the accounts for payment of liquidated damages in respect of contracts of the assessee to supply machinery manufactured by the assessee. The assessee's claim was that time was the essence of the contract for the supply of the machinery and a specific clause has been incorporated in the agreements that in case of delay, liquidated damages at a percentage of the total value of the contract had to be paid and, therefore, since admittedly there was a breach of contract by reason of the delay, the assessee had computed the damages payable for the period of the delay falling within the previous year and had made a provision in the account. The AO, was of the view that in respect of one of the contracts, the delivery date was beyond the previous year and in the case of the other contracts such damages occur only when the delivery was actually completed which was also beyond the previous year and therefore, the deduction claimed could not be allowed. He also noted that for the earlier AY., ....
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....o pay liquidated damages did not accrue. Nor does it stand to reason because the delay in the delivery of the goods under the terms of the agreements in question constituted breach, it does not discharge the contract as such, because admittedly the contracts have not been avoided by the other side at all. The reason is that they were continuing contracts for manufacturing of articles to the specification of the purchaser and time was stipulated as the essence of the contract; nonetheless it would have served no purpose if the purchaser had cancelled the contracts when the work on the manufacture of the machinery had progressed perhaps a very large extent any payments were made in the mean time as per the terms of contract. That was the reason why penalties have been provided in the agreement itself depending in the period of delay which is intended to act as a deterrent against delays in deliveries and this is to avoid future litigation as to the quantum of damages. Sec. 74 of the Contract Act, 1872 shows that the claim for damages arises at the point of breach but the quantification of damages is subject to negotiation, though the ceiling of the amount is stipulated in the contrac....
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.... 3.Next effective ground(Gr. No.4 and 5)is about adjustment on account of notional interest on overdue receivable of Rs. 3.45 crores.During the assessment proceedings,the AO found that the assessee had entered in to international transactions.He made a reference to the Transfer Pricing Officer(TPO).He further received a reference from the AO to determine Arms Length Price(ALP)relating to interest not charged on overdue amounts from the Associate Enterprises(AE),consequent to sales made to them. The TPO noted that as per the terms of agreement with the AEs ,the assessee was required to get paid within 30 days after dispatch end of the month,that the assessee was to get interest @ 2% on delayed payment.The TPO directed the assessee to furnish certain detail with regard to interest receivable/ received. (Article 7 of the agreement).As per the TPO the assessee did not file complete details.He directed it to explain as to why interest @ 2% should not be charged for all the payment beyond 30 days from its age.Vide its working dt.13.10.10 the assessee informed that as per without prejudice working the interest chargeable @ 2% on over due AE payments amounted to Rs. 3, 45, 98, 277/-.Howe....
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....should be considered as an ALP Bench mark, that 2% interest per month chargeable for delayed payment as mentioned in agreement with AE.s could not form basis of considering ALP Bench mark, that third party contracts were with domestic companies as well as overseas companies, that it did not charge any interest to its third party customers where amount remained outstanding for more than the stipulated payment terms, that it had applied a consistent policy of not charging interest on delayed receivables for both domestic and overseas clients, that the average data collection period of comparable companies worked out to 140 days, that the assessee recovered its dues from the AE.s within 58 days,that its average data collection period from its AE.s was much less in comparison to the average data collector period of comparable selected in the TP study, that in comparison to third parties,pricing /margin was sufficient to compensate for higher credit period, that the OP TC margin of comparable was 14.23 %,that OPTC margin earned by the assessee was 29.41 %, that a working capital adjustment had already been taken into consideration, the element of notional interest income attributable to....
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.... arms length rate of interest,that it should be bench marked with third parties,that the TPO had applied the rate of 2.5% that arose in controlled transaction, that no interest was charged form third parties and some of the AE.s, that it was not an international transaction .He relied upon the cases of Dania Oro Jewellery Pvt. Ltd(ITA 6827/ Mum/2012 AY.08-09, dt.20.12.2013), Tecnimont ICB (P) Ltd. (ITA4608&5085/ Mum/ 2010 dt.13.7.2012)and Akzo Noble Chemicles(India) Ltd.)(ITA/1477/PN/2010 AY.06-07 dt. 11. 2. 14).Alternatively,he stated that LIBOR rate should be adopted for charging interest on delayed receipts from the AE.s.The DR argued that the transaction n question was international transaction and not a result of such transaction, that no documents were furnished for not charging interest from the AE.s for delayed payments by them, that the TPO had rightly applied the rate of 2% as mentioned in the agreement, that the facts of Dania Oro Jewellery Pvt. Ltd case were different from case under appeal.He referred to the case of iGATE Computer System Ltd.(ITA/2504/PN/2012 dt.27.5.2015) . 3.3.We have heard the rival submissions and perused the material before us.We find that whil....
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.... Rs. 55.19 lacs and Rs. 33.13 lacs under the heads 'communication and network services' and 'IT Infrastructure Services' respectively. During the assessment proceedings,the AO had made reference to the TPO with regard to certain payments made to AE.s.As per the TPO (letters dt.9.9.10 and 1. 10.2010),the assessee had not provided details so as to enable him to ascertain cost contribu - tion arrangement. He directed the assessee to give the basis of payment for communication and network related services (Rs. 2,20,78,272/-),IT Infrastructure Service charges (Rs. 1,25,32, 468/-)and Software licence(Rs. 2.04,60,897/-).The TPO observed that the assessee did not provide actual computation of figures based on actual data except that of software licence amount, that it merely provided some invoices, that the invoices did not provide basis of such charge.He held that he was not going into genuineness or otherwise of payments,that merely receiving of invoices was not sufficient compliance with arms length principle, that assessee had not provided hard figures and facts.He determined the arms length price at Rs. 1.65 crores for communication and net work related services.Similarly for IT Infra....
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....e umbrella of TNMM was rightly rejected by the TPO. Finally, he upheld the order of the FAA. 4.2.During the course of hearing before us the AR stated that the assessee had aggregated both the transaction, that the PIL level was roughly double of the comparables, that the services availed by the assessee were essential for the main job i.e. software development, that the assessee had used infrastructure facility and applications made available by the AE.s, that the TPO had made no separate benchmarking.He referred to page No.418, 419, 556, 558, 565 and 566 of the paper book.The DR argued that the assessee had not supplied necessary details to the TPO/FAA, that entity level of TNMM was not acceptable, that there were two types of transaction and therefore, benchmarking had to be done separately. 4.3.We have heard the rival submissions and perused the material before us.We find that the assessee had filed invoices and the basis of payments made under the heads communication and network related services and IT Infrastructure service charge (page- 418-425 of the PB). It is found that assessee had made submission in that regard before FAA and had produced group IT Service agreement....