TaxTMI 
TaxTMI 
2022 (7) TMI 1581
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....ncome of Rs. 1,32,81,87,980/- under normal provisions of the Act and a book profit of Rs. 1,12,46,32,841/- u/s. 115JB of the Act. The case was selected for scrutiny and notice u/s. 143(2) was served on the assessee. The case was referred to Transfer Pricing Officer (TPO) who made a TP adjustment of Rs. 68,55,27,641/. The NFAC made a draft assessment order in which besides the TP adjustments, the following additions/disallowances were made on the corporate tax front: - i) Difference between revenue reported in ITR and ST3 - Rs. 5,49,66,590/- ii) Telecommunication line expenses treated as capital in nature - Rs. 2,06,53,968/- iii) The foreign exchange loss - Rs. 13,14,30,000/- iv) Miscellaneous expenditure - Rs. 93,50,000/- 3. The assessee filed objections before the DRP against the draft assessment order. The DRP after considering the submissions of the assessee gave partial relief. The DRP deleted the TP adjustment and on the corporate tax, reduced/sustained the addition/disallowances as given below: - i) Difference between revenue reported in ITR and ST3 - Rs. 4,16,273/- ii) Telecommunication line expenses treated as capital in ....
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....failed to consider the above ambiguity highlighted by the Assessee. iii. Disallowance of miscellaneous expenditure a. The Learned AO erred in adding entire miscellaneous expenditure without issuing any show-cause notice and without providing an opportunity of being heard, after the Assessee inadvertently missed to provide the break-up of expenditure during course of assessment. b. Subsequent to DRP directions, the Learned AO failed to provide the Assessee adequate time to furnish additional details sought by the AO. iv. Levy of interest under section 234D of the Act The learned AO has erred in levying interest under section 234D of the Act amounting to INR 8,44,222 which is consequential in nature. v. The assessee craves leave to add, alter, rescind and modify the grounds herein above or produce further documents, facts and evidence before or at the time of hearing of this appeal. For the above and any other grounds which may be raised at the time of hearing, it is prayed that necessary relief may be provided. Disallowance of telecommunication line expenses as capital in nature 5. In the course of assessment proceedings the assessing officer (AO) noticed that the asse....
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....ices pertaining the similar expenses and have accepted the same as revenue in nature. iii. That the nature of expenditure remain unaltered, as the assessee incurs the same expenditure year on year and therefore the expenditure is revenue in nature to be allowed as a deduction. iv. That the expenditure claimed by the Assessee as telecommunication line expense broadly pertain to invoices raised by the following vendors: a. Tata teleservices (Tata Docomo) - payment towards telephone line bills; b. Dishnet Wireless Limited (Aircel) - payment towards port charges; c. Verizon Communications India Private Limited - payment towards recurring private IP ethernet, internet, LAN charges etc. v. That the AO has misconstrued it to be Centrex wireline (EPABX system), even though the copy of sample invoices did not carry any such description on the invoices and despite providing explanations, the AO has erred in observing and concluding as under: "As can be seen in the assessee's reply, the nature of these expenses pertains to laying the infrastructure for seamless internet & telephone connectivity. While the internet and telephone usage are recurring expenses, and have even bee....
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....igation Co [1953] (P) Limited v CIT [1965] 56 ITR 52 (SC) 9. The learned D.R. supported the orders of the DRP and submitted that the assessee had claimed the telephone and internet charges separately. The learned D.R. also submitted that the DRP after perusal of the invoices has held that the expenditure to be capital in nature and therefore prayed that the same needs to be upheld. 10. We have perused the evidences submitted and have heard both the parties. The assessee is in the business of providing IT/ITES services to its group companies. The assessee is having operations in Bangalore & Mumbai. Given the number of employees employed in different locations, the argument that the assessee is incurring huge expenses towards interest and data circuit charges, has to be accepted. During the course of hearing the learned A.R. submitted the below table giving the breakup of expenditure along with a note on the nature of expenditure :- Sl. No Party Name/ Expense Amount Nature of expense 1 Tata Docomo Telephone Charges 36,64,064 Monthly charges levied on actual basis for various telephone lines taken across Company for internal and external communications 2 Aircel Port Ch....
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....ee are towards telephone lines, monthly port charges and recurring internet charges and hence we are of the considered view that the expenditure incurred by the assessee under the head 'telecommunication lines' is of revenue nature. We also notice that the AO in assessee's own case for AY 2018-19 has allowed the expenditure after verifying the sample invoices on the basis that the expenditure is 'recurring charges' and paid for a 'specified period'. The DPR/AO has in the order had stated that the assessee has claimed telephone and interest charges separately and stated it as reason for holding that the expenditure incurred as telecommunication lines is capital in nature. This in our view is not correct as the expenditure incurred under the head 'telecommunication lines' have to be verified based on invoices submitted to decide whether they are capital or revenue in nature. From the sample invoices it is clear that the assessee incurs monthly recurring charges, towards internet, telephone lines, port charges, etc. which in our view are of revenue nature. These expenditure do not bring any benefit of enduring nature to the assessee and is incurred in the normal course of business. We....
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....etermination of whether foreign exchange loss is a deductible expenditure. It was held that - a. "the 'loss' suffered by the assessee on account of the exchange difference as on the date of the balance sheet was an item of expenditure under section 37(1) b. Exchange differences arising on foreign currency transactions have to be recognized as income or as expense in the period in which they arise. The important point to be noted is that AS-11 stipulates effect of changes in exchange rate vis-a-vis monetary items denominated in a foreign currency to be taken into account for giving accounting treatment on the balance sheet date. Therefore, an enterprise has to report the outstanding liability relating to import of raw materials using closing rate of exchange. Any difference, loss or gain arising on conversion of the said liability at the closing rate, should be recognized in the profit and loss account for the reporting period. iii. The Apex court has also identified certain factors which would be critical to determine if an expenditure is deductible, viz; 1) whether the system of accounting followed by the assessee is mercantile system (which allows accrual system f....
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....ge rates shall be in respect of all foreign currency transactions, including those relating to- (i) monetary items and non-monetary items; (ii) translation of financial statements of foreign operations; (iii) forward exchange contracts; (iv) foreign currency translation reserves. ICDS VI - Effect of changes in foreign exchange rates Foreign currency monetary items are those items where there is the right/obligation to deliver a fixed/ determinable amount of currency units e.g. cash, receivable, payable. Foreign currency non-monetary items are items other than foreign currency monetary items e.g. fixed assets, inventories, investment in equity etc. Initial recognition of a foreign currency transaction is to be done based on the exchange rate prevailing on the date of transaction. An average rate for a week/month that approximates the actual rate may also be used. On the last date of the previous year the following treatment to be given: Foreign currency monetary items - to be converted into reporting currency based on closing rate and the difference shall be recognized as income/expense. Foreign currency non-monetary items - to be converted into reporting currenc....