TaxTMI 
TaxTMI 
2019 (12) TMI 1280
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.... The AO has erred in making a reference to the Joint Commissioner of income-tax, (Transfer Pricing) ('TPO'), inter alia, since the TPO has not recorded an opinion that any of the conditions in section 92C(3) of the Act, were satisfied in the instant case. Accordingly, the order passed by the TPO is without jurisdiction; On the facts and in the circumstances of the case and in law, the learned TPO and accordingly, the learned AO erred in not demonstrating that the motive of the Appellant was to shift profits outside of India by manipulating the prices charged in its international transactions, which is a pre-requisite condition to make any adjustment under the provision of Chapter X of the Act; and 1.4 The draft order passed by the AO is without jurisdiction, inter alia, insofar as it purports to give effect to an invalid order of the TPO. Ground No. 2 - Erroneous Computation of Margin of the Appellant 2.1 The AO/TPO erred in considering SEZ Unit setting up expenses and Ireland branch setting up expenses as operating in nature while computing the margin of the Appellant. 2.2 The AO/TPO erred in considering unrealized foreig....
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....d Thirdware Solutions Ltd as comparable, despite these companies being functionally dissimilar to the Appellant. The Ld. Panel also erred in confirming the same. 3.8 The Ld. AO/ TPO also erred in treating provisions for doubtful debts as non-operating in nature while calculating the net margins of the comparable companies. The Ld. Panel also erred in confirming the same. 3.9 The Ld. AO/TPO erred in considering data obtained u/s 133(6). The Ld. Panel erred in confirming the same. 3.10 The TPO/AO has erred on facts in wrongly computing the margins of certain companies identified as comparable by the TPO. The Hon'ble DRP panel has not passed a speaking order on the erroneous margin computation. 3.11 The TPO has erroneously considered high profit making companies and thus the treatment of the companies by the TPO contradicts. 3.12 The TPO/AO erred in selecting companies having exceptional year of operation. AO erred in accepting the action of TPO. Ground No. 4 - Erroneous data used by the TPO 4.1 The TPO/AO has erred in law in using data, which was not contemporaneous and which was not available in the public domain at ....
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....g of the Supreme Court in the case of Asea Brown Boveri v. Industrial Finances Corporation of India Case No. Appeal (Civil) 3574/1998 to conclude on the tax treatment of finance lease. The learned DRP failed to note that the Apex Court had only discussed the characteristics of a finance lease in the ruling and did not consider the taxability of finance lease payment, 9.4 Without prejudice, the learned AO/ DRP disregarded the principal of consistency be disallowing lease expenses which were otherwise allowed as deduction in the earlier years. 9.5 Without prejudice to the above grounds, the learned AO has erred in disregarding the directions issued by Dispute Resolution Panel ('DRP') to allow depreciation on the underlying leased assets. Ground No. 10 - Erroneous disallowance of interest expenses on account of interest free loans advanced to related parties 10.1 The learned AO/ DRP erred in law and on facts in disallowing interest expense amounting to INR 14,14.43,932 on account of interest free loans granted by USTIPL to its related parties. 10.2 The learned AO/ DRP erred in disregarding the provisions of section 36(1)(iii) of the....
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....ue and is actually incurred in the normal course of business wholly/exclusively for the purpose of business and hence allowable under section 37 of the Act. 11.3 The learned AO/DRP has failed to consider the CBDT circular (Circular No. 35D (XLV1120) [F.No. I0/48/65IT (AI), dated 24/11/1965) wherein it is held that losses arising due to embezzlement of employees or due to negligence of employees should be allowed if the loss took place in the normal course of business. 11.4 Without prejudice to the above grounds, the learned DRP erroneously failed to consider the fact that the Appellant follows a cost plus billing model, hence the additional expenditure doesn't result in a fall in profit. Ground No. 12 -Non-consideration of inadvertent disallowance of the same expense twice 12.1 On the facts and in the circumstances of the case, the learned AO failed to consider that the Appellant had inadvertently disallowed an amount of INR 41,75,973 twice under section 40(a)(ia) of the Act. 12.2 The learned AO erred in not complying with the intent of the CBDT Circular No. 14 (XL-35) dated 11 April 1955 which reiterated that the tax officers should....
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....al Fee & Consultancy 11,18,379 Other Expense 10,11,225 Annual Maintenance Contract Fee 8,07,411 Clearing charges 44,057 Rates & Taxes 10,300 Total 2,39,48,644 Being so, the Assessing Officer is required to examine whether these expenses are relating to setting of off SEZ unit expenses or incurred towards operation of SEZ in the assessment year under consideration and decide accordingly. Hence, we remit this issue to the file of the Assessing Officer to examine the issue afresh in the light of the above details of expenses furnished before us. This ground of appeal of the assessee is partly allowed for statistical purposes. 4.5 Regarding treatment of foreign exchange fluctuation, the DRP observed that similar objection was raised by the assessee before DRP in relation to AY 2012-13 and AY 13-14. However, the objection of the assesses was not accepted as Tribunal in the case of SAP LABS India (P) Ltd. vs. ACIT (44 SOT 156) (Bang.) held that the foreign exchange fluctuation income cannot be excluded from the computation of the operating margin of the assesseecompany. The DRP relied on the decision of the ITAT, Chennai in the case of Petrofac Engi....
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.... the same character as that of the transaction to which it relates. The Special Bench of the Tribunal in the case of ACIT v. Prakash I. Shah (2008) 115 ITD 167 (Mum) (SB) has held that foreign exchange fluctuation gain is a part of export turnover. Though such decision was rendered in the context of section 80HHC, but the same logic applies generally as well. The essence of the matter is that any gain or loss arising out of change in foreign currency rate in respect of transaction for import or export of goods is nothing, hut inherent part of the price of import or the value of export. The Hon'ble Supreme Court in Sutlej Cotton Mills Ltd v. CIT 116 ITR I has held that "where profit or loss arises to an assessee on account of appreciation or depreciation in the value of foreign currency held by it, on conversion into another currency, such profit or loss would ordinarily be trading profit or loss if the foreign currency is held by the assessee on revenue account or as a trading asset or as part of circulating capital embarked in the business'. When we read the ratio of the case of Sutlej Cotton (SC) (supra) in juxtaposition to that of the Special Bench in case of Prakash I S....
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....r had re computed the margin of the Assessee as 13.58%. In computing the above margin the TPO has erroneously considered setting up charges of Ireland branch expenses and SEZ unit expenses as operating costs. Further, the TPO had also erred in considering unrealized Forex gain/ loss as operating item in computing the margins of the assessee. The DRP upheld the order passed by the TPO. The Ld. AR requested the Tribunal to direct the Assessing Officer to consider unrealized forex gain/loss as Non-operating, A summary of margin computation of the Appellant at various stages of the assessment is as follows: Particulars As per TP order As per TP study Computed by Assessee Income Revenue 8,12,73,10,889 8,127,310,889 8,127,310,889 Realised Forex gain/loss 53,451,996 Total Operating income(A) 8,127,310,889 8,127,310,889. 8,180,762,885 Expenditure Employee benefit expenses 5,17,95,49,738 5,179,549,738 5,179,549,738 Other expenses 1,61,96,04,171 1,444,597,579 1,444,597,579 Depreciation and amortization expense 35,00,73,279 35,073,279....
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....UNTRIES- PARA 6.3.7.2 , as reproduced below: Operating profit or operating income is the income of a company net of direct and indirect expenses but before deduction for interest and taxes. It is defined as sales minus COGS minus operating expenses (alternatively expressed as gross profit minus operating expenses). Operating profit is a better term than net profit because net profit is also used to represent the profit of a company after interest and taxes have been subtracted. Further, the term operating profit indicates more clearly that only profits resulting from operating activities are relevant for transfer pricing purposes. Operating Expense has been defined in; http://www.itivestopedia.com/terms/o/operating_expense.asp as follows: Definition of 'Operating Expense' "A category of expenditure that a business incurs as a result of performing its normal business operations. One of the typical responsibilities that management must contend with is determining how low operating expenses can he reduced without significantly affecting the firm's ability to compete with its competitors." Hence, it was submitted that an operatin....
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....rences are reflective of the poor administration and economic conditions of rupee vis a vis dollar and has nothing to do with the operation of the company. Hence, it was submitted that gain/loss arising out cannot become 'transaction' for the purpose of computing the OPM of the entity. 5.4 Further, it was submitted that pricing applies only in respect of an international transaction and a transaction that is consequential to the original transaction (like payables and receivables) and any adjustment like Exchange control difference made towards the carried forward closing balances of Receivables and Payables is not a transaction. What constitutes 'transaction' in terms of 92B has been very clearly discussed by the ITAT, Mumbai in the case case of Nimbus Communication Limited in ITA No.6597/MUM/09, where in tribunal clarified that 'a continuing debit balance, in our humble understanding, is not an international transaction per se, but is a result of the international transaction. In plain words, a continuing debit balance only reflects that the payment, even though due, has not been made by the debtor. It is not, however, necessary that a payment is to be made as soon....
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....relied on the decision of the ITAT, Mumbai in the case of DHL Express (India) P. Ltd. in ITA No. 7360/Mum/2010 for A.Y 2006-07, where in the tribunal confirmed that "exchange fluctuation do not form part of the operational income because these items have nothing to do with the main operations of the assessee". Further, it was submitted that while comparables are chosen by the Company, no adjustment is done on comparables' operating results for arriving at the economic conditions in which the assessee Company operates. The assessee Company imports raw materials and components and incurs manufacturing expenses at Rupee terms. The comparables operating entirely under rupee terms cannot be a direct comparable unless a similar economic condition is maintained between the operating results of the assessee Company and that of comparables. This could be achieved either adopting a filter of certain percent of import compared to Sales or by eliminating in the process of comparison any gain or loss arising from exchange fluctuation. Given this context, the Ld. AR submitted that adjustment relating to foreign exchange differences, either resulting in gain or loss should be excluded as an extra....
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.... the operating income for the purpose of PLI. Accordingly, the orders of the authorities below are set aside and the Assessing Officer is directed to exclude the loss or gain in foreign exchange fluctuation from the operating income for computing PLI." 7.1 Further, in the case of DCIT vs. Hanil tube India Pvt. Ltd. in ITA No. 1037/Mds/2014 dated 22/02/2017, it was held as follows: "8. We have considered the rival submissions on either side and perused 1the relevant material available on record. An identical issue was considered by the co-ordinate Bench of this Tribunal in Hanil Tube India Pvt. Ltd. (supra). This Tribunal after referring to safe Harbor Rules, found that the loss incurred by the assessee in foreign exchange fluctuation due to international transaction does not give any extra benefit to the Associated Enterprise who supplies the material. The loss arose due to exchange difference between the foreign currency and Indian currency. Therefore, the co-ordinate Bench of this Tribunal found that the foreign exchange loss or gain has to be excluded from operating income. In view of the decision of co-ordinate Bench of this Tribunal in Hanil Tube India Pvt. Ltd. (s....
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....orex income 361,891,528 Total Operating Income 456,330,307 Forex Income/Sales 79.32% Employee Cost filter Employee cost calculation March 14 Particulars Amount in Rs. Personal Expenses 319,556,453 Total Operating Income 454,659,098 Employee Cost/Sales 70.38% Therefore, the Assessing Officer has to appraise the above data after going through the annual report of the comparable. Hence, we remit this issue to the file of the Assessing Officer for TP study by the TPO and decide accordingly. Thus, this ground of appeal of the assessee is partly allowed for statistical purposes. 9. Larsen & Toubro Infotech Ltd. The DRP held that the intangibles owned by this company are mostly software, business rights and capital work in progress which is the internal software. It was observed that the assessee also works on huge platform and enjoy significant brand value as part of the large MNC group. The DRP observed that with regard to IPR, brand and other differences, the assessee had failed to establish that such differences have material effect on the margin of the company. Accordingly, the DRP upheld the selection of the above company a....
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....vice provide as is the assessee in the case on hand. It is also seen that this company is also engaged in proprietary software products and has substantial R&D activity which has resulted in creation of its IPRs. Having applied for trade mark registration of its products, it evidences the fact that this company owns intangible assets. The co-ordinate bench of this Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. (ITA No.227/Bang/2010 dated 09/11/2012) has held that if a company possesses or owns intangibles or IPRs, then it cannot be considered as a comparable company to one that does not own intangibles and requires to be omitted from the list of comparables, as in the case on hand. 18.3.2 We also find from the Annual Report of Quintegra Solutions Ltd. that there have been acquisitions made by it in the period under consideration. It is settled principle that where extraordinary events have taken place, which has an effect on the performance of the company, then that company shall be removed from the list of comparables. 18.3.3 Respectfully following the decision of the co-ordiante bench of the Tribunal in the case of 24/7 Customer.com Pvt. Ltd. (supra), we di....
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....en outsourced by clients and the company does not own IP to these products and the product development is nothing but software development services. With respect to the intangibles of the comparable company, it was found that overseas subsidiary companies have acquired certain IP products and that the comparable is predominantly engaged in the software development services. Further, the intangibles with the comparable are in the nature of software license acquired for use in the operation of the company and they are not the software products generating revenue. The disclosure in the annual report regarding the acquisition of the products relate to the group as a whole and not to the stand alone as entity whose financials are compared. The R&D expenditure of the comparable relates to cross improvements and not to innovate on new products or earning additional revenue. Hence, the R&D is not affecting the margin of the company. The TPO had applied related party filter of greater than 25% and clearly this company passed the filters. Hence, the TPO rejected the contentions of the assessee and held the company as comparable. The DRP held that the company is functionally similar to the....
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.... software designing services and analytic services and therefore it is not purely a software development service provider as is the assessee in the case on hand. ii) Page 60 of the Annual Report of the company for F.Y. 2007-08 indicates that this company is predominantly engaged in 'Outsourced Software Product Development Service' for independent software vendors and enterprises. iii) Website extracts indicate that the company is in the business of product design services. iv) The ITAT, Mumbai Bench in the case of Telecordia Technologies India Pvt. Ltd. (supra) while discussing the comparability of another company namely Lucid Software Ltd. had rendered a finding that in the absence of segmental information, a company be taken into account for comparability analysis. This principle is squarely applicable to the company presently under consideration, which is into product development and product design services and for which the segmental data is not available. The learned Authorised Representative prays that in view of the above, the company, i.e. Persistent Systems Ltd. be omitted from the list of comparables. 17.2 Per contra, the learned....
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....pment services provider. We find that, as submitted by the assessee, the segmental details are not given separately. Therefore, following the principle enunciated in the case of Telecordia Technologies India Pvt. Ltd. (supra) that in the absence of segmental details/information a company cannot be taken into account for comparable analysis, we hold that this company, i.e., Persistent Systems Ltd. ought to be omitted from the set of comparables for the year under consideration. It is ordered accordingly." 13.3 It is clear from the finding of this Tribunal that this company is engaged in the product developing and product design services which is similar with the software development services provided by the assessee. Accordingly, following the decision of the co-ordinate bench of this Tribunal (supra) we direct the TPO/A.O. to exclude this company from the list of comparables." 10.4 The Ld. AR relied on the order of the ITAT, Bangalore in the case of MetricStream Infotech (India) Pvt. Ltd. vs. DCIT in IT(TP)A Nos. 1418 & 2735/Bang/2017 dated 27/02/2019 which we have discussed in earlier para. 10.5 We have heard the rival submissions and perused the material o....
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..... 12. Regarding Cigniti Technologies Ltd., the DRP observed that the company is engaged in generic IT services and Health related services which falls under the software development and is comparable to the assessee company. On examination of the annual report of M/s. Cigniti Technologies Ltd., i.e., Schedule 'Non current investments' reported in page 71, it can be seen that Gallop Solutions Inc and M/s. Gallop Solutions Pvt. Ltd. were shown as 100% subsidiary held as investment by M/s. Cigniti Technologies Ltd. from which it is evident that above mentioned companies had not been merged with M/s. Cigniti Technologies Ltd. Therefore, they do not impact the standalone profit margins of M/s. Cigniti Technologies Ltd. The DRP observed that the assessee has erroneously compared and considered the consolidated figures of the Cigniti Group reported in page 3 of the annual report, instead of considering the standalone financial of M/s. Cigniti Technologies Ltd. The DRP held that the margins of the comparable company are not affected by any extraordinary events. The DRP held that decision rendered for the earlier year cannot be automatically applied to determine as to whether the company....
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.... company earned revenue out of sale of software services only. The DRP observed that the comparable is functionally similar to the assessee as the products are platforms used by the comparable to enable design and developing software for use by the customer in a particular industry. The TPO had applied related party filter of greater than 25% and clearly this company passes that filter. The TPO observed that the method of computation adopted by the assessee is wrong and the RPT by sales for this comparable works out to only 6.4%. The DRP observed that slowdown of business would lead to reduced margins. According to the DRP, purchase of licensed software for internal use is done by all companies including the assessee as it will be hit by piracy laws. The DRP held that decision rendered for the earlier year cannot be automatically applied to determine as to whether the company is functionally comparable and the comparability of a company has to be decided on the basis of the information available in the Annual Report of the assessment year in respect of which the company was selected as a comparable. Thus, the DRP rejected the contentions of the assessee and held the company as func....
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.... 78 of the annual report of the company), it is evident that operation of the company comprises of software development, implementation and support services. Further Revenue from different geographical segment has also been reported. But as far as, functions of the company are concerned we do not find any segment other than software development, implementation and support services. In view of the above discussion, we reject the contention of the Ld. Counsel that the company is not functionally similar to the assessee and direct the Ld. A.O./TPO to retain the company in the set of comparables." 13.2 Further, the Ld. AR relied on the order of ITAT, Pune in the case of John Deere India Pvt. Ltd. in ITA No.518/Pun/2015 dated 25/04/12019 wherein it was held as follows: "We have heard the rival submissions and gone through the relevant material on record. The Annual Report of this company is available at page 415 onwards of the paper book. Profit and Loss account of this company shows 'Sales'' of Rs. 67,56,06,505/-. Break-up of such sale has been given in Schedule 12, which records ''Export from SEZ units'- Rs. 47,58,40,447/-; 'Export from STPI units' - Rs. 11,20,90.633; ''Re....
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....ed Departmental Representative supported the orders of the TPO including this company in the list of comparables. 16.4.1 We have heard the rival contentions and perused and carefully considered the record; including the judicial decision relied upon. We find that a co-ordinate bench of this in the case of DPLM Software Solutions Pvt. Ltd. (supra) for Assessment Year 2008-09 that since this company is engaged in product development and earns revenue from sale of licenses it is to be omitted from the list of comparables for software development services, holding as under at para 15.3 of the order: "15.3 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the material on record that the company engaged in product development and earns revenue from sale of licenses and, subscription. However, the segmental profit and loss accounts for software development services and product development are not given separately. Further, as pointed out by the learned Authorised Representative, the Pune Bench of the Tribunal in the case of E-Gain Communications Pvt. Ltd. (supra) has directed that since the income of th....
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....profile of this company in the light of the finding of the co-ordinate bench (supra), we direct for exclusion of this company from the final list of comparables." 13.5 The Ld AR relied on the order of the ITAT, Delhi in the case of Opera Solutions vs. ITO in ITA No.5761/Del/2014 dated 16/11/2018 wherein it was held as follows: "9.2 We have heard the submission of the rival parties and perused relevant material on record. The detail of the sales of the company in the year under consideration are available on page 285 of the Paper Book, Volume II, which are reproduced as under: "Schedule 12 Sales As on 31.03.09 As on 31.03.08 Total Sale of Licence 23,237,588 3,916,427 Software Services 89,177,023 76,724.371 Export from SEZ Unit 478,572,420 263,971,033 Export from STPI Unit 162,900,630 168,863,049 Revenue from Subscription 16,433,714 9,293,874 770,321,375 522,768,754 . 9.3 It is evident from the above detail that the revenue streams of the company consist from sale of license and revenue from subscription along with software services and export of services. The activity of sale of license and subscription are functionally different from the activity....
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....3% margin which is abnormally high and the sales and marketing expenses is insignificant and only at 0.07% of sales. The scale of operations is not an appropriate filter. A comparable cannot be rejected solely on the basis of a high turnover. Thus, the DRP rejected the contentions of the assessee and held the company as functionally comparable to the assessee. 14.1 Against this, the assessee is in appeal before us. The Ld. AR submitted that the company is not functionally comparable with the assessee as it is engaged in product development and segmental data is not available. The company is engaged in diversified activities and has high brand value. The Company is engaged in providing business consulting, technology, engineering and outsourcing services. The assessee claimed that the TPO had taken inconsistent approach in different years for this comparable. It was contended that the company derived 51% of its revenue from onsite activities and the company had earned abnormal profits. The company had incurred sales and marketing expenses and it had huge turnover. The Ld. AR relied on the decision of the ITAT, Delhi in the case of Lime Labs (I) (P) Ltd. vs. ITO in ITA No.1703/Del....
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....acle") Onsite Vs. Offshore As much as half of the software development services rendered by Infosys are onsite (i.e.,services performed at the customer's location overseas). And offshore (50.20%) (Refer page 117 of the paper book) than half of its service, income from onsite services. The appellant provides only offshore services (i.e., remotely from India) Expenditure on Advertising/Sales promotion and brand building Rs. 61 Crores Rs. Nil (as the 100% services are provided to AEs) 6. Learned counsel for the Revenue has submitted that the tribunal after recording the aforesaid table has not affirmed or given any finding on the differences. This is partly correct as the tribunal has stated that Infosys Technologies Ltd. should be excluded from the list of comparables for the reason latter was a giant company in the area of development of software and it assumed all risks leading to higher profits, whereas the respondentassessee was a captive unit of the parent company and assumed only a limited risk. It has also stated that Infosys Technologies Ltd. cannot be compared with the respondent assessee as seen from the financial data ....
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.... ITAT, Chennai in the case of M/s. Mobis India Ltd. vs. DCIT (TS-235-ITAT2013(CHNY)-TP wherein working capital adjustment was rejected on the ground that the impact of the difference in working capital has not been demonstrated by the taxpayer. The TPO had stated that the assessee had not been able to demonstrate that the working capital differences had impacted its profits. It has not been established whether the comparable companies have financed their working capital by own funds or borrowed funds. It was stated that difference in working capital levels itself cannot be accurately measured as data with regard to the working capital employed by the assessee and the comparable companies are not available on daily basis. It was stated that Average working capital will not show the actual working capital employed during this year. The TPO stated that the differences in the working capital levels cannot be measured with reasonable accuracy. The opening and closing figures of debtors and creditors do not show the movements in their accounts during the year. Working capital requirements are not uniform during the entire period of the year and they differ with the changes in the working....
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....ng capital would be different in different enterprises depending on the cost of fund to the enterprise, the cost of money in the economy it operates etc. In view of these, a reasonable accurate adjustment is not possible, as the differences in working capital requirements itself is based on various assumptions. Besides, we also note that the assessee had failed to demonstrate such demonstrate such material differences so as to warrant an adjustment. In these circumstances, the DRP upheld the TPO's reasoning and rejected the assessee's claim for working capital adjustment. 16.3. Against this, the assessee is in appeal before us. The Ld. AR relied on the decision of this Tribunal in the case of Zafin Software Centre of Excellence Pvt. Ltd. vs. ACIT in IT(TP)A No. 331/Coch/2017 for the assessment year 2013-14 dated 16/05/2018 wherein the claim of working capital adjustment was allowed by the Tribunal. 16.4. The Ld. DR relied on the order of the DRP. 16.5. We have heard the rival submissions and perused the material on record. A similar issue was considered by this Tribunal in the case of Zafin Software Centre of Excellence Pvt. Ltd. vs. ACIT in IT(TP)A No. 331/Coch/2017 for t....
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....nses and hence, expenses incurred on behalf of and for the benefit of AEs are required to be reimbursed at arm's length. Such arm's length interest would be charged by unrelated parties in similar circumstances. The TPO stated that the assessee had made advances to its AEs in Indian currency. The third party invoices submitted by the assessee were in INR only. Hence, the appropriate benchmark rate of interest to be applied would be the domestic rates instead if LIBOR. It was stated that the assessee did not borrow in foreign currency to make advances to its AEs. The majority of the assessee's borrowings were in Indian currency. Thus, the opportunity cost of the assessee's funds have to be determined in relation to its interest earning capacity in the domestic market. The DRP-2, Bangalore in its proceedings dated 17/12/2015 in the case of M/s. IBS Software Services Pvt. Ltd. for A.Y. 2011-12 observed that LIBOR cannot be taken as the benchmark for an intercompany international loan. The suitability of adopting domestic rates for interest rate benchmarking was further cemented by the adoption of the SBI base rate with markup in the Safe Harbour Rules notified as per Notification No. ....
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....ion. Thus, the DRP justified the findings of the TPO on this issue. 17.3 Regarding the rate, the assessee argued that Prime Lending Rate is not appropriate rate for calculating interest on foreign currency loans/advances and that LIBOR should be adopted. According to the DRP, assessee is an Indian company located in India and is the tested party. The TPO while bench marking the loans and advances to AEs calculated the opportunity cost in India and therefore, adopting the Indian market rates is appropriate. The DRP observed that the average domestic cost of borrowings of the assessee at 11.13% should be adopted as it is an internal CUP and there is no necessity to mark up the same. The DRP directed the TPO to re-compute the ALP of the interest. 17.4 Against this, the assessee is in appeal before us. The Ld. AR submitted that the assessee had advanced amount to its AEs which were in the nature of recovery of expenses. It was submitted that these expenses pertained to recovery of travel expenses incurred by the assessee on behalf of the AEs on a cost to cost basis. These short term advances were of a temporary nature, given in the ordinary course of business of USTIPL, based on ....
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....he amounts were not delayed. Therefore, the SBI-PLR rates alone should be calculated without any 3% spread. The weightage average interest of SBI-PLR on FDs has been worked out by the DRP at 8.15%. We are of the considered view that only 8.15% should be adopted while calculating ALP interest on the amounts outstanding from the assessee's AEs. It is ordered accordingly." 17.7 In view of the above order of the Tribunal, we direct the Assessing Officer to adopt interest at the rate of 8.15% p.a. while computing the ALP. This ground of the assessee is partly allowed. 18. The next ground, Ground No. 9 is with regard to disallowance of finance lease payments u/s. 37 of the I.T. Act. 18.1 The facts of the case are that the assessee had debited Rs. 2,42,78,880/- as financial lease charges in the P&L account. According to the TPO, financial leases incidental to ownership of the leased items, were capitalized at the lower of the fair value and present value of the minimum lease payments at the inception of the lease term and disclosed as leased assets. The TPO stated that lease payments are apportioned between the finance charges and reduction of the lease liability based on the imp....
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....epreciation on such capitalized assets as per law. 19. Against this, the assessee is in appeal before us. The Ld. AR submitted that as per section 37 of the Act, any expenditure not being an expenditure which is capital or personal in nature and if such expenditure is expended wholly and exclusively for the purpose of the business, can be claimed as deduction/s. 37 of the Act. Therefore, the assessee claimed the expenditure incurred towards lease rental u/s. 37 of the Act. The Ld. AR submitted that the expenditure incurred by way of lease rentals (including principal and interest) is revenue in nature. On expiry of the lease term, the ownership of the asset will not automatically transfer to the assessee. Hence, it cannot be held that the payment was for acquisition of capital asset. The ld. AR submitted that the expenditure was incurred during the normal course of business and the assessee had incurred lease rental expenses mainly towards leasing of computers and networking equipment which are essential for the business of the assessee which provided information technology services. 19.1 The Ld. AR relied on the decision of the ITAT, Delhi in the case of Minda Corporation Lt....
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....s entitled to claim depreciation in respect of assets leased out since it has satisfied both the requirements of section 32, namely ownership of the asset and its usage in the course of business. The DRP while disallowing the claim of lease rentals during the current year, had directed to grant depreciation on the underlying assets. However, the Assessing Officer had not granted depreciation. As the assessee had been claiming lease rentals consistently for the past years, it would be difficult to ascertain the opening WDV of the underlying assets and compute the eligible depreciation for the current year on the assets taken on lease in the preceding years. As per AS-116 w.e.f. F.Y. 2019-20, every lease would be treated as finance lease in the books of lessee and lessee would be eligible for depreciation and interest on lease as expenditure going forward. Details of lease rentals paid during the year is as follows: Nature of assets taken on lease Total lease rentals paid during the year Lease rentals pertaining to assets acquired during prior years Lease rentals pertaining to assets acquired during current year Computers and leasehold improvements 2,42....
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....nly in relation to question of law vis-à-vis facts already raised in the appeal filed. It was submitted that in the interest of justice, it was only just and proper that the additional ground raised be admitted on record and accepted as part of grounds of appeal and adjudicated upon by the Tribunal. 22.2 We find bona fide reasons in the act of the assessee in not raising the additional ground on earlier occasion by placing reliance on the judgment of the Supreme Court in the case of National Thermal Power Corporation Ltd. vs. CIT (229 ITR 383) wherein it was held that Tribunal has the discretion to allow or not to allow additional ground to be raised for the first time before the Tribunal. Accordingly, we admit the other additional ground. However, this ground of appeal of the assessee does not require any further adjudication in view of our findings in the main Ground No. 9. Hence, he additional ground raised by the assessee is dismissed. 23. The next ground, Ground No. 10 is with regard to disallowance of interest expenses on account of interest free loans advanced to related parties. 23.1. The facts of the case are that the Assessing Officer rejected the claim of....
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....st paid in respect of capital borrowed is ought to be allowed as expenditure as the Company had sufficient own funds more than the loans/advances granted to related parties. The Ld. AR relied on the judgment of the Bombay High Court in the case of CIT vs. Reliance Utilities and Power Ltd. 3132 ITR 340 wherein it was held that where an assessee possessed sufficient interest free funds of its own, apart from substantial shareholders' funds, presumption stands established that the investments in sister concerns were made by the assessee out of interest free funds and, therefore, no part of interest on borrowings can be disallowed on the basis that the investments were made out of interest bearing funds. If there are interest free funds available to an assessee sufficient to meet its investment and at the same time the assessee had raised a loan, it can be presumed that the investments were from the interest free funds available. This principle was affirmed by the Supreme Court recently in the case of CIT vs. Reliance Industries 410 ITR 436. The above principle was also upheld in the following judicial precedents: a) CIT & Anr vs. Microlabs (2016) 383 ITR 490 (Kar) ....
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.... exceeding the amount availed during the year. Regarding the working capital loan, there was a net increase of INR 10.38 crores during the year. It was submitted that there was a net increase of 1NR 73.63 crores of loans granted to associate entities. Hence, it was submitted that the AO ought to have taken into consideration the fact that the assessee had the option of utilizing the borrowed funds to the extent of only 10.38 crores towards granting advances (INR 73.63 crores) to the related parties. Based on the same, the AO should have considered the incremental loan amounting to INR 10.38 crores for disallowance computation. 23.7. It was submitted that the company had granted interest free loans to its subsidiary companies and associate companies during the normal course of business. The Company had granted advance to USTGPL for the purpose of fixed asset purchase and working capital requirements. It was submitted that the group company USTGPL was engaged in the business of construction of infrastructure development facilities, and the space in such facility developed was rented out to the assessee and the loans granted by the Company to its subsidiaries, Fincuro and USTSPL we....
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....(SC) upheld the view that a company is fully entitled to give a loan to its subsidiary company and which can be done for business expediency. (e) Gulf Oil Corporation Ltd. vs. ACIT (ITA No.649/Hyd/2010): The ITAT, Hyderabad by placing reliance on the Apex court ruling in the case of S.A. Builders vs. CIT, 288 ITR I (SC) held that advances made by the assessee to its sister concerns is incidental to carrying on the business by assessee itself and consequently, the borrowed money should be considered as having been utilized for the purpose of business of the assessee. 23.9.1 Further, it was submitted that the following Judicial precedents had upheld the view that revenue need not step into the shoes of businessman for checking the reasonableness of expenditure: (a) Hero Cycles (P) Ltd v CIT (Civil Appeal No. 514 of 2008) (b) Gulf Oil Corporation Lid V/s ACIT (ITA No.649/Hyd/2010) 24. The Ld. DR relied on the order of the DRP. 25. We have heard the rival submissions and perused the material on record. A similar issue was considered by the Tribunal in assessee's own case in IT(TP)A No.02/Coch/2013 dated 23/08/2018, wherein it was held as follow....
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....see has shown that it was having "Reserves and Surplus", more than the amount advanced to the sister concerns. Accordingly, in our view, the facts prevailing in the case of V.I Baby & Co (supra) is totally different from the facts prevailing in the instant case and accordingly, in our view, the decision rendered in the case of V.I. Baby (referred supra) by the jurisdictional High Court shall not apply to the facts of the instant case. 8. Thus, both the grounds on which the impugned disallowance was made the assessing officer fails and consequently, in our view, the impugned disallowance of Rs. 8,24,600/- is liable to be deleted. We order accordingly. 9. In the result, the appeal filed by the assessee is partly allowed." 24.1 In view of the above order of the Tribunal, this ground of appeal of the assessee is allowed since the assessee was having sufficient funds in the form of reserves for granting loans to its sister concerns. 25. The next ground, Ground No. 11 is with regard to disallowance of additional expenditure incurred owing to the misconduct of the employees u/s. 37 of the Act. 25.1 The facts of the case are that the assessee had entered into an ....
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....nditure was incurred in carrying on the business. The Ld. AR relied on the decision of the ITAT, Jaipur in the case of Pawan Specialities (P) Ltd. vs. ACIT in ITA No. 809/JP/2016 wherein it was held that the losses arising due to embezzlement of employees or due to negligence of employees should be allowed if the loss took place in the normal course of business. In view of this, the assessee was eligible to claim the entire additional expense owing to misconduct of the employees. The Ld. AR relied on the CBDT Circular No. 35D(XL VII20) (F.No.10/48/65IT(AI) dated 24/11/1965 has clarified that the losses arising due to embezzlement of employees or due to negligence of employees should be allowed if the loss took place in the normal course of business. It was submitted that since the company was following cost plus billing model, the subject additional expenditure had resulted in additional profits based on which taxes were paid. 25.4 The Ld. DR relied on the order of the DRP. 25.5 We have heard the rival submissions and perused the material on record. The assessee has neither produced any documents before the Assessing Officer nor produced before the DRP nor even before ....