AI Drafter 
TaxTMI 
TaxTMI 
TaxTMI 
2020 (1) TMI 1478
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.... 2.1 The TPO, vide order dated 31/10/2016, has proposed transfer pricing adjustment of Rs. 1,66,39,383/- towards provision of ITES; Rs. 15,08,074 for shortfall on account of interest on loans given by the assessee to AE; and Rs. 3,07,69,885/- towards interest on outstanding receivables. Thus the total adjustment proposed by the TPO was Rs. 4,89,17,342/-. In accordance with the TPO's order, a draft assessment order was proposed by the AO, in which, in addition to the TP adjustments, AO also disallowed the advances written off of Rs. 7,79,15,000/-. Assessee filed its objections to the DRP against the proposed draft assessment order. 2.2 The DRP granted partial relief to the assessee by directing the AO to reduce operating cost of the international transaction by the finance charges of Rs. 39,46,598/- for computing operating margin of the assessee from the international trasnaction. The AO while passing final assessment order, however, did not give effect to the directions of the DRP. Other additions and disallowances proposed by the AO in the draft assessment order were confirmed by the DRP and accordingly, final assessment order was passed, against which the assessee is in appea....
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....e for determining arm's length result for the controlled transaction and is preferable over all other methods. Alternative analysis under TNMM 1.8 Erred in rejecting the internal TNMM method adopted by the appellant wherein the margin earned with AE of 37.54 % was compared with margin earned with Non-AE of 37.54% as per the segment audited report and found that no ALP adjustment is required to be made. 1.8.a. Erred in not following Rule 10B(1)(e) of The Transfer Pricing Rules which provides that, the net margin of the appellant under TNMM should be calculated only in respect of transactions entered with the AE and not the overall operating margin. Incorrect benchmarking of overall margin instead of transaction level margin with AE submitted in segmental audit report by the assessee 1.9 Erred in comparing overall margin of the assessee of 13.61% instead of transaction level margin with AE of 37.54% with the average PLI of the comparables selected by TPO of 22.30%. 1.9.a. Erred in not appreciating the fact" that the margin earned from the AE transactions is as per the segment audited report. Incorrect computation of Opera....
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....turnover <Rs. 1 Cr should be excluded" without applying the filter "Companies having turnover >Rs. 200 Cr to the excluded" since the appellant's turnover is Rs. 41.65 Cr. 1.11.d. Erred in applying the filter "Companies who have more than 25% related party transactions (sales as well as expenditure combined) of the sales were excluded" without appreciating the fact that the appellant's related party transactions are Rs. 10,28,78,914/- and the sales of the appellant amounts to Rs. 39,87,66,843/- accordingly the ratio of related party transactions to the sales arrives at 25.79%. 1.11.e. Erred in applying the filter "Companies whose ITES income <75% of the total turnover are to be excluded" without appreciating the fact that the ppellant has no income from ITES. 1.11.f. Erred in applying the filter "Companies whose Export sale from ITES is less than 25% of the total sales are to be excluded" without appreciating the fact that the appellant has not earned any income from ITES. Incorrect selection of comparable companies by TPO 1.12 Erred in selecting final 7 incomparable companies for the purpose of comparability 1.12.a. Erre....
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....ng the entire receivables and payables of the comparables while computing the negative working capital adjustment without appreciating that certain portion of the comparable receivables were out of sales made to third parties and the same could not be considered while computing the working capital cycle of the appellant. 1.13.d. Erred in not appreciating the fact that the appellant is functioning under a limited risk environment whereas the comparable companies are working in a different functional profile, the risk adjustments while calculating the PLI of the appellant company should be given. 1.13.e. Erred in rejecting the appellant's claim for risk adjustment by stating that risk is a by-product of the function and is not an independent factor to be considered separately. 2. Erred in making an addition of Rs. 15,08,074/- towards interest to be charged @LIBOR+3% on the advances given to AE without appreciating the fact that the appellant has not charged any interest during the year under consideration. 2.1 Erred in not appreciating the fact that the transaction relating to advance for investment and doesn't fall under the purview of Tra....
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....e fact that the appellant, as a matter of policy, does not charge any interest on the delayed payments by sundry debtors, both AE and non AEs. 3.4 Erred in not following the ITAT order in the assessee's own case for the A Y 2010-11 wherein the honourable ITAT has deleted the said ALP adjustment in respect of interest on receivables. 3.5 Erred in not following the procedure laid down u/s.92C of the Act relating to Computation of Arm's Length adjustment. 3.6 Erred in applying domestic bank rates as external CUP which is not correct because the assessee is not in the business of banking and it cannot be compared with the banks. 3.7 Without prejudice to the above grounds, erred in calculating interest on the whole amount of Accounts receivable of the current year which includes receivable from Non-AE also. Corporate Tax Matters: 4. Erred in disallowing an amount of Rs. 7,79,50,000/- being claim made towards Advances written off as under without appreciating the fact that the said advances are made due to business expediency. 4.1 Erred in considering the advances of 7,79,50,0001- given to the following parties as capital....
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....unds of appeal at any time before or at the time of hearing of the appeal. 2.3 The assessee has also filed a petition to admit the following additional grounds: Without prejudice to the grounds no. 1 to 5 filed on 28.12.2017, herewith we submit: Each of the grounds of appeal is mutually exclusive, independent and without prejudice to other. 6. We would like to submit that as per the ratio laid down by the Hon'ble Supreme Court of India in the case of National Thermal Power Co. Ltd vs. CIT (1998) 229 ITR 383 (SC) the ITAT has jurisdiction to examine the question of law which though not arose before the lower authorities but arose before the ITAT for the first time. 7. The Ld. ITO/AO erred in not following the directions of the DRP while computing the operating cost of the assessee. 8. The Ld.TPO himself in his order u/s. 92CA(3) of the act for the A Y 2014-15 has excluded Hartron Communication Ltd from the list of comparables. 9. The Ld. TPO/AO/DRP erred by not including following companies as comparables i. ACE BPO Services Limited ii. Inforrned Technologies India Limited iii Jindal Int....
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....ssee and the comparables for making the TP adjustment with regard to international transaction. 4.1 The ld. counsel for the assessee has argued that the net margin of the assessee from the international transaction was 37.54% as against 22.31% of the domestic operations. He submitted that by taking domestic sales also into consideration, margin of the assessee has been arrived at 14.84%. He has also drawn our attention to the turnover from domestic sales as well as export sales to demonstrate that there was no exchange gain in domestic sales whereas there was exchange gain in respect of AE and non-AE transactions of export sales, which has reduced the margin of the domestic sales to 20.89% as against the margin of the export sales to 37.54%. He submitted that though the assessee has raised objections before the DRP, the DRP failed to consider and adjudicate this issue. 4.2 The ld. DR was also heard, who supported the orders of the authorities below. 4.3 Having considered the rival contentions and material on record, we are in agreement with the contention of the ld. counsel for the assessee that for TP adjustment, it is only the margin of the international transaction that....
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.... initial public offer of the shares of the company made in March'08 where one of the primary objectives for raising the funds was mentioned as further acquisitions in USA for the growth of the company. It was submitted that the advance given was in the nature of equity and was never intended to be in the nature of loan for interest. 5.1 The AO however, was not convinced with the assessee's contentions and held that the assessee has failed to establish the tangible and direct benefits it has received from the interest free loans given to its AE. He observed that since the assessee has given interest free loans, the interest rate should be considered on the basis of US Libor rates prevalent in the FY 2012-13. Accordingly, he arrived at the rate of 3.94% per annum and computed the interest at Rs. 15,08,074/-. The DRP confirmed the said adjustment and final assessment order was passed and the assessee is in appeal before us. 5.2 The ld. counsel for the assessee reiterated the submissions made before the authorities below and submitted that the advances were made as investments towards share capital and not as interest free loans as considered by the TPO. He submitted that rechara....
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....the disallowance of Rs. 7,79,50,000/- being advances written off and claimed as business expenditure by the assessee, the AO had disallowed the advances treating them as capital loss. 6.1 The DRP sustained the disallowance made by the AO and the assessee is in second appeal before us. 6.2 The total disallowance of Rs. 7,79,50,000/- consists of the following: i) Advance of Rs. 5 crores given to Real Marketing Pvt. Ltd. ii) An amount of Rs. 3,40,00,000/- paid to Vashatkara Soft Solutions Pvt. Ltd. and a portion of the same i.e. Rs. 2 crores is relevant to the AY before us. iii) An amount of Rs. 28,00,000/- paid to Kanchan Traders towards advance for setting up operations in Visakhapatnam iv) The sum advanced to Paragon Trades Overseas Pvt. Ltd., towards advance for setting up of joint venture business operations overseas. The ld. counsel for the assessee submitted that a sum of Rs. 5 crores was given to Real Marketing Pvt. Ltd. for buying office premises at Ahmedabad as the assessee wanted to expand its business operations and subsequently, it was noticed that the land which was intended to be purchased had pending litigation. It is submitted that ....
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....ystem and it could be uninstalled depending upon the need and exigency of the assessee's business. Thus, according to him, the expenditure incurred for acquiring application software is revenue in nature and advances given for such application software which was subsequently written off, should be allowed as revenue loss. In support of this contention, he relied on the decision of the Ho'ble High Court of Delhi in the case of Maruti Udyog Ltd. Vs. CIT, 88 Taxmann.com 98. 6.4 As regards the advance of Rs. 28,00,000/- given to Kanchan Traders, it is the case of the assessee that this advance was given for setting up its operations in Visakhapatnam, i.e. to set up necessary infrastructure facilities like payment of advance for the premises, setting up 100 work stations and management cabins. It was submitted that since the anticipated contract was not received and the amount incurred was lost, it was claimed as revenue loss. It is submitted that the expenditure, incurred for building up infrastructure facilities which are subsequently abandoned, has to be treated as revenue expenditure and is allowable as expenditure u/s 37(1) of the Act as it was incurred wholly and exclusively fo....
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....made oral submissions before the AO about the purpose of advances and the AO has held it to be in capital field. However, the AO has not materially examined the business expediency or otherwise of these expenses. Even the DRP has confirmed the order of AO without really going into the nature of the transactions. Since the relevant details are also not filed before us, as regards the real nature of the transactions, we deem it fit and proper to remand the issue to the file of the AO with a direction to the assessee to file all the necessary details before the AO, who shall then examine the nature of the transactions and reconsider the allowability of such expenditure. Therefore, this ground of appeal is treated as allowed for statistical purposes. 7. As regards the issue of TP adjustment of Rs. 1,49,75,581/- towards interest on receivables is concerned, the ld. counsel for the assessee submitted that the assessee has been following a policy of not charging interest on delayed payments, whether the transaction is with AE or non AE to maintain a long term business relation with the clients and to ensure smooth realization of receivables and, therefore, it is consistent with the ALP....
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....ssee is liable to charge interest on receivables at Libor + basis points for the relevant FY. However, if the working capital adjustment has taken into consideration, the interest on delayed receivables beyond the agreed credit period or ninety days from the date of the invoice, no separate adjustment is required. Further, in this case, the AO/TPO has granted credit period of only 30 days in the year. Therefore, the AO/TPO is directed to recompute the interest on such receivables which exceeded 90 days and by applying the rate of interest at LIBOR + basis points. Accordingly, the grounds raised on this issue are treated as allowed for statistical purposes. 8. In the result, appeal of the assessee is partly allowed for statistical purposes. ITA No. 2367/Hyd/2018 for AY 2014-15 9. This is the assessee's appeal against the order of AO dated 30/10/2018 passed u/s 143(3) rws 92CA(3) and 144C(13) of the IT Act, 1961. In this appeal, the assessee has raised the following grounds of appeal: S.No. Grounds of Appeal 1. The ld. AO erred in not passing the Draft Assessment order as per the procedure laid down u/s. 144C(1) of the Act. 2. The Ld. AO erred in not apprec....
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.... AE and same was found to be within ALP. 4.2.2 Erred in rejecting the segmental audit report submitted by the assessee. 4.2.3 Ought to have appreciated the fact that the assessee has got audited the segment results relating to margin earned with AE and Non-AE. 4.3 Erred in making adjustment at entity level without restricting the same to transaction with associated enterprises 4.3.1 Erred in adopting the assessee's entity level margin instead of margin earned in respect of transaction with AE of 35.30% as PLI for comparing with the average PLI of the external comparables. 4.3.2 The TPO ought to have followed Rule 10B(1)(e) of The Transfer Pricing Rules which provides that, the net margin of the assessee under TNMM should be calculated only in respect of transactions entered with the AE. 4.3.3 The TPO ought to have appreciated the fact that the provisions of section 92C of the Act relates to computation of ALP in respect of the transactions entered with AE and not the transactions entered with Non-AE. 4.4 Erred in incorrectly computing the operating margin of the assessee at 27.06% instead at 28.08% 4.4.1 Erred in computing t....
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.... code and activity, having turnover of more than Rs. 200 Cr and has no clear segmental report in the financial statements. 4.6.5 Erred in selecting "Crossdomain Solution Private Limited" as final comparable without appreciating the fact that the said company is functionally dissimilar, Non availability of Complete Annual Report. 4.6.6 Erred in selecting "MPS Limited" as final comparable without appreciating the fact that the said company is into Publishing solutions which is functionally dissimilar to assessee, huge changes in Work in Progress, has Huge R & D expenditure. 4.6.7 Erred in not giving cogent reasons for rejections of comparables selected during the search process conducted by assessee. 5. The Ld. TPO/AO/DRP erred in making an addition towards interest on the outstanding advances given by the assessee to the AE adopting SBI Interest rate. 5.1 Erred in not appreciating the fact that the advance are given towards investment out of business expediency and for administrative convenience on which no interest was accrued to the taxpayer during the year under consideration. 5.2 Erred in law by disregarding the fact that the advan....
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....cularly refers to loans or advances during the normal course of business, whereas in Assessee's case, these are outstanding receivables arising out of services rendered but not capital financing. 6.3 Ought to have appreciated the fact that the outstanding receivables relate to sale and not in the nature of any advance/loans and therefore it cannot come under the purview of 'International Transaction' as defined u/s 92B of the Act. 6.4 Erred in the re-characterization of the nature of transaction from 'Receivables' to 'loan' which is not permissible u/s. 145 of the Act. According to Sec. 145 of the Income Tax Act, 1961, the TPO cannot change the character of the transaction followed by the assessee company and accordingly cannot re-characterize the nature of asset, (i.e., treating receivables as loan/advance) as it is not permitted in the eyes of law. 6.5 Erred in not following the procedure laid down under the provisions of Section 92C of the Act relating to the 'Computation of Arms Length Price' 6.6 Ought to have appreciated the fact that, the assessee has adopted TNMM method for determining the ALP of its transactions and the operating ma....
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....rred in disallowing an amount towards bad debts written off. 7.1 Erred in disallowing an amount of Rs. 7,88,71,537/- which consists of bad debts for an amount of Rs. 3,95,55,509/- written off u/s.36(1)(vii) of the Act and business advances written off of Rs. 3,93,16,028/- claimed as deduction u/s.37(1) of the Act. 7.2 Ought to have appreciated the fact that the bad debt written off of Rs. 2,56,65,945/- are against supplies made by Branches in Bangladesh, Dubai and USA against Invoices raised by the company which were already credited to Profit & Loss account of earlier years and now written off since the same are not recoverable. 7.3 Ought to have appreciated the fact that the bad debt written off of Rs. 3,93,309/- are against supply of services in respect of Aadhar Project which were credited to Profit & Loss account in earlier years and are now written off as not recoverable 7.4 Ought to have appreciated the fact that the bad debt written off of Rs. 1,34,96,255/- are towards Reduction in Bills and towards Penalties for delayed execution of Gujarat Aadhar Project, which were credited to Profit & Loss account in earlier years and are ....
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....red in invoking the provisions of section 14A without appreciating the fact that the assessee has not earned any income which does not part of total income for the year under consideration. 8.2 Erred in not following the decision of the Apex Court in the case of Commissioner of income tax(central) 1 Vs. Chettinad Logistics (P.) Ltd. 9. Erred in making disallowance of expenses of Rs. 29,02,790/- . 10. 9.1 Erred in making an ad-hoc disallowance of amounts of expenses in the nature of travelling, conveyance and other expenses purely on surmise and without recording a reasonable and justifiable basis for the same. 9.2 Erred in adopting an ad-hoc rate of 10% on the expenses incurred for the purpose of disallowance on estimate basis, which is baseless & not justifiable by law. 9.3 Erred in making the disallowance merely on the ground that the vouchers and bills for the said expenses were not produced before the AO. However, since the accounts of the company in question along with bills and vouchers have been regularly maintained and audited by statutory auditors u/s. 44AB of the Act, the legitimacy and nature of the expenses cannot....
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....ed. 15. As regards ground No. 7 against disallowance of bad debts written off, it is seen that the assessee has not filed any details before the AO/DRP, but, it has now filed a paper book containing additional evidence to explain the bad debts. We find that similar issue had arisen in AY 2013-14 and we have set aside the issue to the file of AO for reconsideration. Therefore, we deem it fit and proper to admit the additional evidence filed by the assessee and remand the issue to the file of AO for deciding the issue afresh in accordance with law. Thus, this ground is treated as allowed for statistical purposes. 16. Ground No. 8 is against the disallowance u/s 14A of the Act. The ld. counsel for the assessee submitted that the assessee has made investments in foreign companies and, therefore, there can be no disallowance u/s 14A of the Act with regard to such investments. In support of this contention, he placed reliance on the following decisions: 1. Decision of ITAT, Hyderabad in the case of Aster Pvt. Ltd. Vs. DCIT in ITA No. 220/Hyd/2015. 2. High Court of Gujarat in the case of CIT Vs. Suzlon Energy Ltd., [2013] 33 Taxmann.com 151 (Guj.) 3. Decis....