TaxTMI 
TaxTMI 
2022 (11) TMI 1341
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....rred to as "the DRP") under Section 144C(5) of the Act pertaining to the Assessment Year 2009-10. 3. The Appellant has raised the following grounds of appeal: 1. Based on the facts and circumstances of the case and in law the Ld. AO/Learned Transfer Pricing Officer (Ld. TPO") erred in proposing and the Hon'ble Dispute Resolution Panel ("DRP") further erred in upholding the transfer pricing adjustment of Rs.59.90,822 pertaining to reimbursement of expenses paid/ received by the appellant to/from its Associated Enterprise (AE) alleging the same is not at arm's length in terms of the provisions of Sections 92C(1) and 92C(2) of the Act read with Rule 10D of the Income-tax Rules, 1962 ("the Rules"). 2. Based on the facts and circumstances of the case and in law the Ld. AO/TPO /DRP grossly erred in ignoring the facts and materiality of third party invoices submitted to the Ld. AO/ TPO and in adjusting an amount of Rs.54,67,445 towards payment of reimbursement of out of pocket expenses to its AE and Rs.5,23,377 towards receipt of reimbursement of out of pocket expenses from its AE. 3. Based on the facts and circumstances of the case and in law the Ld.....
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....e, a reference was made under Section 92CA(1) to the Transfer Pricing Officer (TPO) for the determination of Arm"s Length Price (ALP) of the international transactions. The TPO, vide order, dated 22.01.2013 passed under Section 92CA(3) of the Act, proposed transfer pricing adjustment aggregating to INR 59,90,822/- consisting of the following: Sr. No. Particulars Amount (INR) 1 Reimbursement of Out of Pocket Expenses to AE [For non-submission of third party invoices pertaining to travelling, accommodation, mobile expenses etc. incurred by Woolworths, Australia on behalf of the Appellant] 70,92,807/- 2 Recovery of Expenses [Lack of supporting third party invoice /documents] 5,23,377/- Total 59,90,822/- 6. In addition to the above transfer pricing adjustments, the Assessing Officer also proposed corporate tax additions/disallowances in the Draft Assessment Order, dated 22.03.2013. The Appellant filed objections the Draft Assessment Order, dated 22.03.2013, before DRP which were disposed off by the DRP, vide order dated 26.12.2013. The Assessing Officer passed the Final Assessment Order, dated 08.01.2014, on the basis of the aforesaid order....
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....nded that no deduction was claimed by the Appellant for INR 12,66,950/- in the return of income for the relevant Assessment Year, and therefore, addition of INR 5,23,377/- made by the Assessing Officer would imply that the Appellant would suffer disallowance for expenses never claimed as deduction in the return of income. Per contra, the contention of the Ld. Departmental Representative is that the Appellant has failed to submit third party invoices and therefore, disallowance INR.5,23,377/- was justified. 13. In our view, one way to look at the transfer pricing adjustment of INR.5,23,377/- is that the recoveries of INR.5,23,377/- made by the Appellant from its AEs were not matched with the corresponding expenses claimed to have been incurred and therefore, the aforesaid amount represented income in the hands of the appellant. However, on perusal of order passed by TPO and DRP, we note that this is not the case set up by the Revenue. Both, TPO and DRP have simply cited non-submission of third party invoices as the reason for making the transfer pricing adjustment treating the same at par with the reimbursement of out-of-pocket expenditure incurred despite the Appellant taking a ....
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....o defect or discrepancy was been pointed out by the TPO/DRP in the bills/documents furnished by the Appellant and therefore, the Appellant has materially complied with the directions issued by the TPO by furnishing the supporting bills/documents in for around 80% of the out of pocket expenses. He submitted that the Assessing Officer was not justified in insisting upon the Appellant to furnish 100% of the bills/supporting documents in support of claim for deduction of out of pocket expenses. In view of the aforesaid, he prayed that the addition of INR 54,67,445/- be deleted. 17. Per contra, the Ld. Departmental Representative submitted that the TPO had asked for the bills/supporting vouchers in relation to third party expenses claimed to have been incurred by the Appellant and which the Appellant had, admittedly, failed to furnish. Therefore, the transfer pricing adjustment of INR 54,67,445/- was justified. 18. We have heard the rival submissions and perused the material on record. It is factually correct that the Assessing Officer had vide Remand Report, dated 21.10.2013, conveyed his consent for admission of additional evidence in the form of third-party invoices aggregating....
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....for the Assessment Year 2009-10. 23. We note that the Appellant had not pressed the ground relating to disallowance of aforesaid software expenses in appeal before the Tribunal for the Assessment Year 2008-09 (ITA No. 7718/Mum/2012) disposed vide order dated 13.10.2022. Accordingly, the Appellant is entitled to claim of depreciation in respect of Software Expenses of INR 80,07,197/- disallowed during the Assessment Year 2008-09 as capital in nature as per the provisions of the Act. Accordingly, the Assessing Officer is directed to allow depreciation at the rate of 60% in respect of aforesaid Software Expenses of INR 80,07,197/- for the Assessment Year 2009-10. Ground No. 6 raised by the Appellant is allowed. Ground No. 7 24. Ground No. 7 pertains to addition of INR 81,800/- made by the Assessing Officer on account of mismatch of AIR details. The Ld. Authorised Representative for the Appellant stated that the Appellant does not wish to pursue this ground on account of given the small amount involved. Accordingly, this ground is disposed off as being not pressed. Ground No. 8 & 9 25. Ground No. 8 & 9 pertains to disallowance of INR 3,16,53,132/- made under Section 40(a....
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....;Corporate Tax Grounds 5. Based on the facts and circumstances of the case and in law, the Ld. AO, relying on the directions of the DRP, erred in disallowing software expenses incurred by the appellant amounting to Rs.1,00,56,108 on the ground that the same was capital expenditure. 6. Based on the facts and circumstances of the case and in law, the Ld. AO erred in not granting depreciation @ 60% on software expenditure of Rs.80,07,197 and Rs.74,71,642 considered as capital expenditure in AY 2008-09 and AY 2009-10 respectively. 7. Disallowance of lease rental a. Based on the facts and circumstances of the case and in law, the Ld. AO, relying on the directions of the DRP, erred in not allowing lease rent payments of Rs.1,00,59,112 on the ground that the same was capital expenditure. b. Without prejudice to the above, the learned AO erred in not allowing depreciation on the principal payment of lease rental treated as capital in nature 8. Based on the facts and circumstances of the case and in law, the Ld. AO, relying on the directions of the DRP, erred in not allowing the write off of negative balance of creditors amounting to Rs.....
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....2014, in relation to the aforesaid proposed additions before DRP which were rejected by the DRP, vide order dated 27.12.2014. The Assessing Officer passed the Final Assessment Order, dated 27.02.2015, on the basis of the aforesaid order/directions of DRP making, inter alia, the disallowances/additions: (a) Addition of INR 40,07,005/- on account of Transfer Pricing Adjustment (b) Disallowance of deduction of lease rentals amounting to INR 1,00,56,108/- 31. Being aggrieved, the Appellant is in appeal before us challenging the Final Assessment Order, dated 27.02.2015, on the grounds reproduced in paragraph 27 above which are taken up in seriatim hereinafter. Ground No. 1 32. Ground No. 1 is general in nature and therefore does not require adjudication. Ground No. 2 33. Ground No. 2 is directed against the transfer pricing adjustment of INR 15,37,812/- pertaining to reimbursement of the out of pocket expenses. 34. The relevant facts for the adjudication of the issue, in brief, are that the Appellant had claimed deduction for payments of INR 62,90,123/- made by the Appellant to its AEs contending the same to be reimbursement of out of pocket expenses ....
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.... for the relevant assessment year, and no qualifications regarding accounting systems followed by the Appellant or the books of accounts maintained by the Appellant have been made by the Auditors in the audit report and has certified the financial statements to be true and correct after carrying out verification on test check basis. Further, the TPO/Assessing Officer has not pointed out any defect/discrepancy in the bills/supporting documents furnished by the Appellant which constitute 78% of the out of pocket expenses reimbursed by the Appellant to its AE. The Appellant has not furnished bills/supporting documents for INR 42,40,116/- which constitute balance 22% out of pocket expenses reimbursed and only 3.5% [(42,40,116/11,85,22,998) x 100] of the total expenses reimbursed by the Appellant to its AEs for the relevant assessment year. In view of the aforesaid facts, we are inclined to accept the submission advanced by the Ld. Authorised Representative for the Appellant that the Appellant has substantially complied with the directions given by the Assessing Officer and therefore, in our view, the TPO/Assessing Officer was not justified in making additions of INR 42,40,116/-. Furthe....
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....nses incurred in relation to the contractual arrangement with a third party contractor to provide connectivity whereas the software development expenses amounting to INR 66,37,327/- were incurred for customization of AS-400 software. The TPO was not satisfied with the explanation furnished by the Appellant as the TPO concluded that Appellant had failed to furnished the third party contractor bills/invoices. Scrutiny of the Project Closer Report issued by the third party contractor (M/s. Telstra Corporation Limited) showed that the report was prepared on 10.10.2006 and the services were availed for the previous year ending 31.03.2007. The expenses did not pertaining to the previous year 2009-2010 relevant to the Assessment Year 2010-2011. Thus, the TPO proposed transfer pricing adjustment of INR.24,69,193/- determining the arms length price of this transaction as "Nil". The aforesaid transfer pricing adjustment was incorporated by the Assessing Officer in the Draft Assessment order. The Objections filed by the Appellant against Draft Assessment Order on this issued were dismissed resulting in addition of INR.24,69,193/- on account of the said transfer pricing adjustment. Being aggri....
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....sed off as being infructuous. Ground No. 5 42. Ground No. 5 pertains to disallowance of Software Expenses of INR 1,00,56,108/- held by the Assessing Officer/DRP to be capital in nature. The Ld. Authorised Representative for the Appellant appearing before us submitted that the aforesaid expenses were disallowed on the ground that the same were capital in nature and depreciation @ 60% was allowed in respect of the same. He submitted that the appellant does not wish to press this Ground of appeal and is satisfied with the grant of depreciation at the rate of 60% in respect of the aforesaid expenses. Accordingly, Ground No. 5 raised in the appeal is dismissed as not pressed. The Assessing Officer is directed to allow deprecation in respect of the aforesaid amount at the rate of 60% as per law. Ground No. 6 43. Ground No. 6 pertains to claim of depreciation in respect of Software Expenses of INR 80,07,197/- and INR 74,71,642/- (INR 1,06,73,775/- Less INR 32,02,133/-) disallowed during the Assessment Year 2008-09 and Assessment Year 2009-10, respectively, as being capital in nature. 44. The Ld. Authorised Representative for the Appellant appearing before us submitted that ....
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....Officer during the course of assessment proceedings, he submitted that the Appellant had itself submitted that warehouse was taken from DHL on a finance lease. The Appellant was not the owner of the warehouse and has not claimed depreciation. The Appellant had claimed deduction for the lease rental payment of INR 1,00,59,112/- while computing taxable income. 49. In rejoinder, the Ld. Authorised Representative for the Appellant submitted that the submissions were advanced on incorrect understanding of facts. He vehemently contended that the Appellant had placed on record, the Lease Agreement which was not in the nature of a finance lease. 50. We have heard the rival contention and perused the material on record. We note that the Appellant is in the business of wholesale cash and carry and it has taken warehouse on lease from DHL. Some of the relevant clauses of the Lease Agreement are as under: Definitions:: Management Services" means the management of the facility and resources to achieve the Service as outlined in Schedule 4, reporting as outlined in schedule 5 and day to day operations to the Standard Operating Procedures as detailed in schedule 7. ....
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....e-Premises and the movement of Woolworths India's Goods. Provider shall use the system in performing the Services as described in schedule Woolworths India shall be responsible for installing, integrating, testing, supporting and maintaining this software system, and Provider's access to this system, and training Provider's personnel in the use of the system, at Woolworths India's cost." 51. Perusal of the above extracts of the contract shows that the Lease Agreement is not in the nature of a finance lease. Schedule 1 to the Lease Agreement provides that the details of the premises admeasuring 100,000/- Square Feet to be provided to the Appellant. Schedule 2 provides description of service charges which includes monthly warehouse charge of INR 6,25,000/- 52. We have perused the orders passed by the Assessing Officer and DRP on this issue. The Appellant had itself contended before the authorities that the Lease Agreement was in the nature of finance lease and therefore, the discussion proceeds on that premise. 53. It is admitted position that lease payment of INR 1,00,59,112/- were made by the Appellant to DHL and had also claimed deduction for the ....
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....s of account would not entitle the appellant to claim of bad debt under Section 36(1)(vii) of the Act. Further, no evidence was brought on record to show the aforesaid amounts were not recoverable. 57. Having considered the rival submission we are of the view that the INR 2,60,035/- is not in the nature of a debt which has gone bad. It cannot be said that the Appellant has indirectly offered to tax amount of INR 2,60,035/- representing purchase returns by claiming deduction for the correct amount of purchase cost pertaining to goods received and accepted. Therefore, deduction under Section 36(1)(vii) of the Act cannot be allowed. In our view, the amount of INR 2,60,035/- is in the nature of advance for purchases in respect of which goods were never received resulting in loss from business operations. Accordingly, the issue is remanded back to the file of Assessing Officer to examine the allowability of deduction of INR.2,60,035/- representing negative balance of creditors written off during the relevant previous year in terms of Section 37 of the Act after giving appellant an opportunity of being heard. Ground No. 8 raised by the Appellant is allowed for statistical purposes. ....