TaxTMI 
TaxTMI 
2020 (1) TMI 1478
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....s 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 appeal before us by raising the following grounds of ....
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....nalysis 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 Operating Margin of assessee 1.10 Erred in calculating the operating margin and Profit level Indicator (PU) of the appellant at Rs. 4,98,81,997/- and 13.61% respectively i....
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....han 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. Erred in selecting "Acropetal Technologies Limited (seg)" as final comparable without appreciating the fact that the said company is functionally dissimilar, has extra ordinary events and has no segmental details. 1.12.b. Erred in selecting Microgenetics Ltd" as final comparabl....
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....ting 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 Transfer Pricing uls 92B, as no income is generated from the transaction of providing loans and advances to the subsidiaries of the appellant company. 2.2 Erred in re-characterization of 'advance for investment' as 'Loans' which is not permissible under section 145 of the Act. 2.3 Erred in not appreciating the fact that the advances had been advanced by the ....
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....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 in nature: a. Real Marketing Private Limited - Rs. 5,00,00,000/- b. Vashatkara Soft Solutions Pvt Ltd - Rs. 2,00,00,000/- c. Kanchan Traders - Rs. 28,00,000/- d. Paragon Tradex Overseas (P) Ltd - Rs. 51,50,000/- 4.2 Erred in not appreciating the fact that an advance of Rs. 5,00,00,000/- given to Real Marketing Private Limited in the financial year 2008-09 is towards setting up business operations and is wholly and exclusively related to the business. 4.3 Err....
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....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 Intellicom Limited iv. Crystal Voxx Limited 10. The Ld. TPO/AO/DRP erred by not including companies which are functionally comparable and meets the filters applied by the TPO. 11. The Ld. TPO/AO/DRP erred by not appreciating that Informed Technologies Limited and Jindal Intellicom Limited are considered as comparable by the TPO in earlier assessment years in the appellant's own case. 12. The Ld. AO/DRP ought to have appreciated the fact that working capital adjustment itself takes the impact of outstanding receivable on profitability. Accordingly no separate adjustment is warranted on outstanding receivables." 3. The ld. cou....
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....omestic 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 has to be considered and not entity level margin of the assessee, particularly, when the assessee is having both domestic as well as international transactions with both AE and non-AE companies. Therefore, we direct the AO to consider only margins of the international transactions of the assessee with its AE and if it is found that the margin of the assessee at 37.54% is correct and if the negative working capital adjustment (-) 8.64% is given, the margin of the assessee would fall within +/- 3% of the margin of the comparables, then the international transaction of the assessee should be considered to be at ALP and no adjustment would be required. Therefore, ground of app....
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.... 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 recharacterizing the nature of transaction from advances to loan is not permissible u/s 145 of the Act and that the TPO cannot change the method of accounting followed by the assessee company. It was submitted that the money was invested in the 100% owned subsidiary by way of equity outside India and, therefore, no interest can be charged thereon. Further, he submitted that since the transaction is of capital nature, it cannot be considered as an international transaction u/s 92B of the Act. He also argued that the assessee has not derived any income out of this transaction and as per the provisions of transfer pricing, it cannot be considered as an international transaction and, therefore,....
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....tnam 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 payees requested for balance payment of Rs. 3 crores for clearing all the pending litigation and completing the sale transaction. In these circumstances, the management thought it prudent not to invest further money into the transaction and requested for refund of advance paid. He submitted that since the Real Marketing was not able to refund the money, they agreed to get software contracts for the assessee in Dubai and Bangladesh where they had extensive marketing ties. It is submitted that it is due to their effort that the assessee was able to bag the contract for implementing the project relating to computerization of IT division of Government of Bangladesh and that under these circumstances, the company has dec....
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....nce 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 for the purpose of business. In support of this contention, he relied on the following decisions: 1. Hon'ble High Court of Calcutta In the case of Binani cement Ltd. Vs. CIT (supra) 2. Hon'ble ITAT Cochin in the case of Apollo Tyres Ltd. Vs. ACIT, 88 Taxmann.com 656. 6.5 As regards the advance given to Paragon Tradex Overseas Pvt. Ltd., it is submitted that the advances were given for setting up of Joint Venture business operations overseas and that the amounts were paid in three trenches to the payees. It is submitted that later on, these plans had to be shelved due to sluggish market conditions. Since the assessee could not recover the amounts from the said company, it had to be written off and the loss incurred by....
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....oses. 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 principle. Further, he submitted that the AO/TPO have applied TNMM method as the most appropriate method to bench mark the transaction entered into with the AE during the year under consideration and the net margin of the transaction, takes care of such cost like notional interest on receivables i.e. interest income, if any, foregone by the assessee on account of late payment received from the AE. Therefore, according to him, once the TNMM is accepted as the most appropriate method and the principal transaction is held to be at ALP, no adjustment is required to be made towards interest on receivables. The ld. AR also submitted that the assessee has not paid any interest on trade payables or advances received from the customers and, therefore,....
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....367/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 appreciating the fact that issuance of notice of demand U/s. 156 of the Act and Penalty notices u/s. 271AA, 271BA and 271(1)(c) along with the draft assessment order dated 15.12.2017, would tantamount to passing of Final Assessment Order. 3. The Ld.TPO/DRP erred in rejecting the TP Documentation maintained by the assessee without properly appreciating the submissions made by the assessee 3.1 Erred in rejecting the search applied by the taxpayer which was made in accordance with section 92C and Rule 10D of IT, Rules and there by undertaking an independent search by applying inappropriate filters and arriving at functionally dissimilar comparables. 3.2 Erred in rejecting the TP documentation, benchmarking analysis and economic analysis submitted by the assessee by showi....
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....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 the operating cost of the assessee at Rs. 40,90,42,706/- whereas the actual operating cost of the assessee at Rs. 40,58,10,196/- 4.4.2 Erred in taking Borrowing cost of Rs. 32,32, 510/- as operating cost without appreciating the fact that it is a part of the financial cost of the assessee 4.5 Erred in rejecting the alternative analysis made by the assessee by adopting the TNMM method in respect of transaction of sale of services of Rs. 8,55,31,530/- with AE 4.5.1 Erred in not considering the fact that the overall PLI earned by assessee of 28.08% and the segment margin of 35.30% earned in respect of transactions with AE is much higher than the average PLI of 10 comparables of 7.10%. 4.5.2 Ought to have conducted the search process by selecting 'Software Development Consultancy Services' under industry as the assessee is into the business of....
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....iating 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 advances had been advanced as a share holder interest due to the fact that any financial incapacitation of the subsidiaries would jeopardize the investments of the assessee. 5.3 Erred in re-characterization of 'advance for investment' as 'Loans' which is not permissible under section 145 of the Act. 5.4 Ought to have appreciated the fact that the interest free advances given to the AE were in the nature of Share Application Money and is in the nature of Quasi Equity as per the terms of agreement and was never intended to be lent for earning interest. 5.5 Ought to have appreciated the fact that the nature of advance is towards investment and in the earlier year ITAT order it has already held that if the advance was for investment no ALP adjustment has to be made. 5.6 Ought to have accepted that the transaction relating to investments in subsidiaries is not covered by the provisions of se....
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....C 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 margin of the assessee is much higher than its comparables, hence any adjustment with regard to ALP affecting the operating margin would be unjustifiable and against the provisions of Section 92C of the Act. 6.7 Ought to have appreciated the fact that sales to AE includes a substantial profit element with interest aspect being embedded in it and therefore, interest on receivables cannot be coined as a separate international transaction as envisaged u/s 92B of the Act. 6.8 Ought to have appreciated the fact that the assessee is following a policy of not charging interest on receivables irrespective of the fact that whether the sales are made to AE or Non-AE. 6.9 Ought to have appreciated the fact that working capital adjustment itself takes the impact of outstanding receivable on profitability. Accordingly no separate adjustment is warranted on outstanding receivables. 6.10 Erred in facts and law in only allowing ad-hoc credit period of 45 days ....
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....ction in Bills and towards Penalties for delayed execution of Gujarat Aadhar Project, which were credited to Profit & Loss account in earlier years and are now written off as not recoverable 7.5 Ought to have appreciated the fact that the business advance written off of Rs. 1,48,00,000/- was paid to Vashtakara Soft Solutions Pvt. Ltd. for Development of Software Product in Library Management. 7.6 Erred in not appreciating the fact that expenditure incurred for development of application software is revenue expenditure. 7.7 Ought to have appreciated the fact that the business advances written off of Rs. 1,40,00,000/- was paid to SQL Star International Limited(SQL) in March 2011, Which became a sick company, thus amount given was not recoverable and are now written off. 7.8 Ought to have appreciated the fact that the business advance written off of Rs. 1,05,16,028/- given to GSS IT Solutions Private Limited in the financial year 2009-10 to 2011-12 become irrecoverable and written off. 7.9 Ought to have appreciated the fact that the trade advances were given in the course of the business for business expediency and are allowable u/s. 36(1)(vii) ....
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....ors u/s. 44AB of the Act, the legitimacy and nature of the expenses cannot be suspected, unless the AO points out significant discrepancies on the expenses incurred. 9.4 Ought to have appreciated that the said expenses were incurred wholly and exclusively for the purpose of business and thus are allowable expenditures u/s 37 of the Income Tax Act. 11. Erred in initiating penalty proceedings u/s. 271(1) (c) r.w.s 274, 271AA & 271BA of the Income Tax Act. 10. Ground Nos. 1 & 2 are general in nature, hence, need no adjudication. 11. Ground No. 3 is against the rejection of TP documentation by the TPO. The assessee did not seriously contest this ground and, therefore, the same is not adjudicated. 12. Ground No. 4 is against the rejection of CUP method as the most appropriate method and also rejecting the internal TNMM method adopted by the assessee. Sub-grounds of ground 4, are against filters adopted by the TPO and computation of operating margin of the assessee by taking entity level results and not the results of the international transactions alone. Grounds are also against the comparables selected by the TPO. 12.1 We find that similar issue has arisen in assessee's o....
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....ann.com 151 (Guj.) 3. Decision of ITAT Ahmedabad in the case of Arvind Ltd. Vs. DCIT in ITA No. 1816/Ahd/2011. We find that in the above cases, it was observed that dividend income declared by a foreign company is not exempt from tax and therefore it will not be covered under the provisions of section 14A and therefore, the disallowance made u/s 14A is not warranted. Respectfully following the same, disallowance made u/s 14A is held to be not sustainable and accordingly, deleted. Thus, ground N. 8 is accordingly allowed. 17. Ground No. 9 is against the disallowance of expenditure of Rs. 29,02,790/- on ad-hoc basis. The ld. counsel for the assessee submitted that the assessee has been maintaining its books of account, which have duly been audited by the statutory auditors u/s 44AB and, therefore, the nature of expenses cannot be suspected. It is submitted that since all the expenses were incurred fully and exclusively for the purpose of business, it is allowable u/s 37(1) of the Act. He submitted that the AO has not pointed out any specific discrepancy on the expenses incurred by the assessee and has also not rejected the books of account of the assessee. He, therefore, prayed t....