TaxTMI 
TaxTMI 
2021 (11) TMI 1076
X X X X Extracts X X X X
X X X X Extracts X X X X
.... (vi) Deduction u/s 10AA of the I.T.Act to be allowed on assessed income (ground 34). We shall adjudicate the above issues as under: Transfer Pricing Adjustment Business model not understood / appreciated properly (Grounds 7 and 8) 3. The brief facts of the case are as follows: The assessee, an Indian company, is engaged in providing ITES to global customers. For its operations in USA, the company operates through its subsidiary in USA. As per the business model, Trianz India has set up a subsidiary in USA, i.e., Trianz Inc., which enters into contract with US customers for provision of services. This is supported by a service agreement. Trianz Inc., in turn enters into an agreement with Trianz India, for rendering the same services, back to back, based on SoWs, with the same conditions. Consequently, Trianz USA remits the entire revenue earned from third party customers to Trainz India. Trianz India reimburses the cost incurred by Trianz USA in procuring the contract. This arrangement is supported by two agreements, Revenue sharing agreement and cost sharing agreement. According to the assessee, based on the above business model where Trianz India receives the en....
X X X X Extracts X X X X
X X X X Extracts X X X X
....de to the TPO with a direction that the transfer pricing analysis may be carried out having regard to the business model of the assessee. The relevant finding of the Co-ordinate Bench of the Tribunal in assessee's own case, reads as follow:- "18. We observe that, Ld.TPO considered assessee to be a contract service provider, assuming minimal risk, which is contrary to the business model of assessee. We agree with contention of Ld.AR that Ld.TPO conducted TP analysis on erroneous understanding of business model of assessee, and comparables selected by Ld.TPO cannot be looked into. 19. We are therefore of opinion that, adjustment made by Ld.AO on the proposed adjustment by Ld.TPO should be revisited de novo. Accordingly, we set aside all issues raised by assessee on transfer pricing issues to Ld.AO/TPO. LD.AO/TPO is directed to carry out transfer pricing analysis having regard to the business model of assessee. It is also directed that comparables selected should be functionally similar with assessee, having similar business model like assessee. 20. Assessee is directed to produce all relevant documents to bring out its role in providing services to the part....
X X X X Extracts X X X X
X X X X Extracts X X X X
....=A-B) 486,513,640.00 642,744,395 Average net receivables 564,629,017.50 Interest Rate 4.38% Period of delay (days) 305.00 Interest Amount 2,06,65,422 *Period of delay is 365 - allowed period of 60 days. Thus, arms length interest amount to be charged works out to Rs.2,06,65,422. The same is treated as adjustment u/s 92CA for interest on delayed receivables." 5.1 Aggrieved, the assessee filed objections before the Dispute Resolution Panel (DRP). The DRP by placing on reliance on the explanation 2 inserted by section 92B of the I.T.Act with retrospective effect from 01.04.2002 and the various judicial pronouncements, held non-charging or under charging of interest on excess period of credit allowed to the AE for realization of invoices would tantamount to an international transaction. Further, the DRP held that weighted average method adopted by the TPO is incorrect. The DRP directed the TPO to compute interest adjustment invoicewise with reference to the amounts received beyond the credit period / not received within the credit period. The relevant directions of the DRP reads as follows:- ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... The learned Departmental Representative supported the order of the AO / TPO. 5.4 We have heard rival submissions and perused the material on record. The DRP has directed the TPO to re-work the interest computation based on the delay of individual invoices. However, the DRP has not complied with the directions of DRP. The TPO was wrong in stating that the assessee did not furnish the invoice wise details of trade receivables. These details are furnished by the assessee vide its letter dated 24.10.2018 and are placed on record at pages 597 to 612 of the paper book, Volume-II. The assessee had given detailed submissions on the issue (refer page 471 to 476 of the paper book) and the same has not been considered by the TPO. The TPO is directed to re-work the interest computation based on the delay of individual invoice as per the directions of the DRP. It is ordered accordingly. 5.5 In the result, grounds 26 to 31 are allowed for statistical purposes. Corporate Tax Issues Disallowance u/s 14A of the I.T.Act [ground 32(b)] 6. The assessee has claimed that it has not in receipt of any exempt income during the relevant assessment year. Therefore, it was submitted that the disa....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e had sought to argue that because exempt income could be earned in future years, therefore, recourse could be taken to the provisions of Section 14A of the Act, to disallow expenditure. In other words the stand taken by the Revenue was irrespective of the fact whether or not income was earned in the concerned assessment year expenditure under Section 14A could be disallowed against anticipated income. 11.3.Pertinently, the Division Bench in M/s.Redington (India) Limited case has repelled this precise argument. 12.The Division Bench, in our view, quiet correctly held that, the computation of total income, in terms of Section 5 of the Act, is made qua real income and not, vis-a-vis, notional income. 12.1.The Division Bench went on to hold that Section 4 of the Act brings to tax, that income, which is relatable to the assessment year in issue. The Division Bench, thus, held that where no exempt income is earned in the previous year, relevant to the assessment year in issue, provisions of Section 14 A of the Act, read with Rule 8 D could not be invoked. 12.2.While coming to this conclusion, the Division Bench also took note of the aforementioned Cir....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the earning of income exempt from taxation. As observed by the Supreme Court in the judgment in the case of Commissioner of Income Tax vs. Walfort Share and Stock Brokers (P) Ltd (2010) 326 ITR 1 '.... The mandate of s.14A is clear. It desires to curb the practice to claim deduction of expenses incurred in relation to exempt income against taxable income and at the same time avail of the tax incentive by way of an exemption of exempt income without making any apportionment of expenses incurred in relation to exempt income.' 10.The provision this is clearly relatable to the earning of actual income and not notional or anticipated income. The submission of the Department to the effect that s.14A would be attracted even to exempt income 'includable' in total income would entail the assessment of notional income, assumed to be exempt in the future, in the present assessment year. The computation of total income in terms of s.5 of the Act is on real income and there is no sanction in law for the assessment of admittedly notional income, particularly in the context of effecting a disallowance in connection therewith. 11.The computation of disallowance i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....k of the expenses were paid to residence and not liable for TDS. On verification of the same, partial relief was granted and payments made to nonresidents towards purchase of software was disallowed u/s 40(a)(ia) of the I.T.Act by treating the same as "royalty" and hence liable for TDS. 7.2 Aggrieved, the assessee has raised this issue before the Tribunal. The learned AR submitted that the payments made for purchase of software whether it is "royalty" or not is covered in favour of the assessee by the judgment of the Hon'ble Apex Court in the case of Engineering Analysis Centre of Excellence Private Limited v. CIT & Anr. [(2021) 432 ITR 471 (SC)] 7.3 The learned Departmental Representative was duly heard. 7.4 We have heard rival submissions and perused the material on record. In view of the latest judgment of the Hon'ble Apex Court in the case of Engineering Analysis Centre of Excellence Private Limited v.CIT & Anr. (supra), we restore the issue to the files of the A.O. The A.O. is directed the examine whether expenses incurred for purchase of software is "royalty" and liable for deduction. The A.O. is directed to follow the dictum laid down by the Hon'ble Apex Court in th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....owed, the same would have to be added to the profits of the undertaking on which the assessee would be entitled for deduction under section 80-IB of the Act." 7. Applying the same analogy, it can be held that if deduction u/s. 40[a][ia] of the Act is not allowed, the same would have been to be added to the profits of the undertaking on which the Assessee would be entitled for deduction u/s. 10A of the Act. This view is fortified by the decision of Bombay High Court in the case of 'Commissioner of Income Tax v. Gem Plus Jewellery India Ltd.,' [2011] 330 ITR 175 [Bom] , wherein it is held thus: "13. By reason of the judgment of the Supreme Court in Commissioner of Income Tax v. Alom Extrusions Limited [2009] 319 ITR 306 the employer's contribution was liable to be allowed, since it was deposited by the due date for the filing of the return. The peculiar position, however, as it obtains in the present case arises out of the fact that the disallowance which was effected by the Assessing Officer has not, the Court is informed, been challenged by the assessee. As a matter of fact the question of law which is formulated by the Revenue proceeds on the basis th....