TaxTMI 
TaxTMI 
2025 (8) TMI 287
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....es. Ground No.4: Transfer Pricing Issue - Upward adjustment of Rs. 1,64,75,839/- on account of interest on trade receivables from AEs. Ground No.5: Transfer Pricing Issue - Upward adjustment of Rs. 53,58,144/- on account of fees chargeable on the Corporate Guarantee given by the Assessee to its AEs. Ground No.6: General ground on Corporate Tax Issues Ground No.7: Corporate Tax Issue - Disallowance of depreciation claimed @ 40% on ATM machines by restricting it to 15% chargeable on 'Plant & machinery' amounting to Rs. 46,56,30,577/- Ground No.8: Corporate Tax Issue - Disallowance of Rs. 36,20,000/- pertaining to deduction claimed on account of gratuity. Ground No.9: Corporate Tax Issue - Disallowance of Rs. 7,16,76,685/- towards bad debts written off. Ground No.10: Corporate Tax Issue - Additional claim of Loss of Rs. 19,45,70,000/- not made in the Return of Income filed. Ground No. 11: Corporate Tax Issue - Additional claim of Rs. 4,02,70,000/- pertaining to additional deduction towards ATM site rent charges paid. For this, assessee has raised various sub-grounds which are factual, argumentative and hence, n....
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....stricting it to 15% chargeable on 'Plant & machinery' amounting to Rs. 46,56,30,577/-. * Issue 5: Disallowance u/s. 43B of the Act of Rs. 36,20,000/- towards provision for gratuity. * Issue 6: Disallowance of Rs. 7,16,76,685/- towards bad debts written off debited to Profit & Loss account. * Issue 7: Disallowance of loss on financial assets amounting to Rs. 24,05,80,000/- * Issue 8: Rejection of claim made of Rs. 19,45,70,000/- pertaining to loss as per the Audited Financials omitted to be claimed in the Return of Income that was filed based on Unaudited Financial Statements. * Issue 9 : Rejection of claim made of Rs. 4,02,70,000/- pertaining to additional deduction towards ATM site rent charges paid derecognized for 'Right of Use' Assets (IND AS) adjustment omitted to be claimed in the Return of Income. 5. Aggrieved by the Draft Assessment Order, the assessee had preferred an application before the Hon'ble Dispute Resolution Panel ("DRP") against the abovementioned issues except Issue no.7. The Hon'ble DRP had then issued directions u/s. 144C(5) of the Act vide Order dated 09.09.2024, wherein: a. the additions/disallowances ....
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.... payable had been calculated at an excess of Rs. 50,95,231/- while the actual tax demand payable works out to only be Rs. 24,82,66,719/- as against the demand raised at Rs. 25,33,61,950/-. The assessee had filed a rectification petition u/s. 154 of the Act on 18.11.2024 to rectify such mistake apparent from record. 8. Aggrieved by the aforesaid Assessment Order, the assessee had preferred this appeal before us, disputing the additions/disallowances/rejection of claims made therein excepting Issue No.7 on 'Disallowance of loss on financial assets' of Rs. 24,05,80,000/-. In this regard, the ld.AR submitted as under: 9. Ground No.1 : General Since the ground is general in nature, no specific submission made in this regard. 10. Ground No. 2 : General ground on Transfer Pricing Issues Since the ground is general in nature, no specific submission made in this regard. Ground No.1 and 2 are general in nature and hence not adjudicated. 11. Ground no.3: Transfer Pricing Issue - Downward adjustment of Rs. 45,28,07,087/- on Marketing services fees : DRP / Transfer Pricing Officer's ("TPO") contention: The Assessee has made payment to its AEs towards 'Marketing Servic....
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.... their local regions. For the services, they are compensated at cost plus arm's length mark-up on the value-added expenses. 12. Further, ld.AR submitted that in relation to the software products sold to customers by AEs, the intellectual property in relation to the software is held by FSS India. Further, the assessee is also responsible for executing the projects/ rendering the services and bears the contractual liability related to the same. 13. Accordingly, the AEs function as marketing service providers bearing risks lower than those normally borne by an entity operating in the marketing services industry. For the services rendered, the AEs are compensated with an arm's length mark-up on the operating expenses incurred. 14. The ld.AR stated that the assessee, in the TP documentation, had benchmarked the above transactions of receipt of software support fee, provision of software services, sale of software licenses and payment of marketing service fee under the combined transaction approach using TNMM as the most appropriate method for Net margins earned by comparable companies performing activities similar to those of AEs are available in the public domain and can be ea....
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....India Pvt. Ltd., 374 ITR 118 - ITAT Bangalore in the case of Societe General Global Solution Centre Pvt Ltd [TS-56-ITAT-2022(Bang)-TP] - Delhi ITAT in the case of SRF Limited [TS-166-ITAT-2021(DEL)-TP] 17. The ld.AR further argued that the TPO had not provided any cogent reasoning for rejecting the aggregation approach adopted by the assessee. Also, while aggregation approach had been rejected for marketing fees paid by the assessee, the TPO had accepted the same with reference to other transactions wherein the same aggregation approach was followed. In support of the same the ld.AR placed reliance on the decision of the ITAT Delhi in the case of Denso Haryana (P.) Ltd. v. Deputy Commissioner of Income-tax [2023] 156 taxmann.com 573 (Delhi - Trib.). 18. With respect to the TPO's contention that the assessee has not substantiated the need for the services and provided evidence to that effect, the ld.AR submitted that there is no legal requirement or mandate for any assessee to necessarily undertake a cost-benefit analysis and a mere absence of such analysis should not necessarily lead to a pre-conceived notion that no benefits have been received by the assess....
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....R filed Additional Evidence Petition under Rule 29 of the Income Tax (Appellate Tribunal) Rules, 1963 in this regard, submitting the following documents that evidence the receipt of services by the assessee: - Sample mail correspondence between the assessee company and that of its Associated Enterprises with respect to their Marketing support services rendered to the assessee to prove that such services were rendered during the relevant previous year. - Copy of the sample Invoice copies raised by the Associated Enterprises on the assessee company with respect to their Marketing support services rendered during the subject FY 2020-21. 24. Further to the above, in support of the assessee's contention, the ld.AR also relied on the decision of the Jurisdictional Madras High Court in the case of Virtusa Consulting Services (P.) Ltd. v. Deputy Commissioner of Income Tax, Company Circle 5(2), Chennai [2021] 124 taxmann.com 309 (Madras) wherein it had been held that where assessee considered its AEs to be tested party to determine ALP of its international transactions and also submitted relevant evidences and documents to establish functional profile and risks assumed ....
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....e easily established, thus facilitating a more reliable comparability analysis. In this case, the functions performed by comparable identified by the assessee were broadly similar to the functions performed by AE's, TNMM, which involves net margin comparison, was considered as the most appropriate method for testing the above-mentioned transaction of the Assessee. 29. As the overseas subsidiaries do not own significant intangibles, where the 'Tested Party' would be the least complex of the transacting entities, hence the assessee has chosen AEs as the 'Tested party' and their margins earned were compared to that of independent comparable companies operating in similar geographies/jurisdictions under TNMM. 30. Our above view is supported by the decision of the Calcutta High Court in the case of PCIT v. ITC Infotech India Limited [2024] 159 taxmann.com 323 (Calcutta) wherein it had been held that Foreign AE can be taken as a tested party for purpose of establishing ALP of assessee and also that of the Mumbai ITAT in the case of Tata Consultancy Services Ltd. v. Deputy Commissioner of Income-tax [2024] 163 taxmann.com 671 (Mumbai - Trib.). 31. On perusal of the order of the T....
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....ng the issue back to the TPO with a direction to accept the assessee's claim of following the TNMM for payments made towards marketing service fees by considering the comparable as Foreign AEs, after verification of additional evidence furnished before us to prove the nature / kind of services received by the assessee from AEs. 36. Ground No. 4: Transfer Pricing Issue - Upward adjustment of Rs. 1,64,75,839/- on account of interest on trade receivables from AEs: DRP / Transfer Pricing Officer's contention: As a sequel to the AE transaction, the outstanding receivable constitutes another set of transactions which has an impact on the Profit and Loss Account of the Assessee in the form of opportunity cost of funds and indirectly conveying the benefit to the AEs in the form of interest free advances. There are two limbs involved in the transaction, one being the remuneration for provision of services and the other being the compensation for providing credit. Accordingly, the receivables transaction shall be treated as separate international transaction. With the retrospective amendment (Inserted by the Finance Act, 2012, w.r.e.f. 1- 4-2002) in the Act, the definition of the....
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....cts rather than levy of actual interest on belated payments made by the customer. In the assessee's case, the ld.AR submitted that the Assessee had not charged interest on delayed collection of receivables both from AEs as well as Non-AE customers which ought to be considered. Reliance in this regard is placed on the following decisions: - Jurisdictional ITAT Chennai the case of Integra Software Services (P.) Ltd. v. Dy. Commissioner of Income-tax [2022] 145 taxmann.com 460 (Chennai - Trib.) - ITAT Ahmedabad in the case of Toshiba Technical Services International Corporation v. ACIT, International Taxation [2022] 145 taxmann.com 474 (Ahmedabad - Trib.) - ITAT Mumbai in the case of WNS Global Services (P.) Ltd. v. Income-tax Officer, Ward- 10(2)(4), Mumbai [2019] 103 taxmann.com 75 (Mumbai) 39. If the ALP in respect of an international transaction is determined, then there can be no question of treating non-receipt of interest in such transaction as separate international transaction warranting any further adjustment. Once ALP is determined in respect of the sale transaction, it would be deemed to be covering all the elements and consequences of such tr....
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....tablished rule in the Transfer Pricing analysis which is applicable here. Hence, the outstanding receivables arising from the international transactions should be benchmarked along with the main transaction using a combined transaction approach. 42. The ld.AR submitted that, normally, the decision of levying interest on delayed collection of receivables is that of commercial expediency and where the assessee had adopted a uniform practice of not charging interest on delayed collection of receivables from AEs and Non-AEs alike, the TPO ought not to have made such addition on interest leviable on receivables. 43. Moreover, the TPO had suo-moto adopted a calculation method for computation of interest by considering credit period to be at 30 days and the interest rate at LIBOR plus 350 BPS (0.686% + 3.50%) without providing any appropriate reasoning / furnishing the basis on which such number was arrived at for adopting the same. The assessee was not given an opportunity of being heard against adoption of the same which defies the principles of natural justice. 44. Similarly, the DRP had also proposed an enhancement of a markup of 100 basis points over and above the upward adj....
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....t AED 3.1 million as at 31.03.2021. During the year, there was no financial obligations imposed on the assessee on account of default by FSS FZE. Hence, the assessee had not incurred any cost/outflow on account of issuance of corporate guarantee. No direct guarantee was provided by the assessee to the AE other than the same. The interest /principal repayment pertaining to the loan taken was met by the AE only. Details on interest paid and the Financial Statements of the AE for the FY 2020-21 was submitted before the TPO during the assessment proceedings. The assessee had filed Additional Evidence Petition submitting the following documents that substantiate the said facts: a) Copy of the Standby Letter of Credit issued by the Assessee company's Bank - IDFC Bank to the Associate Enterprise's bank i.e., First Abu Dhabi Bank as a security for the loan availed by the FSS Technologies FZE ("FSS FZE") for a sum of AED 11,000,000. b) Copy of the relevant extract of the Financial Statements of M/s FSS FZE for the year ended 31.03.2021 - disclosing the utilized Loan at AED 3.1 million. DRP / Transfer Pricing Officer's contention : The Corporate Guarantees ("CG"....
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....by issuing SBLC and thus the same is in the nature of stewardship activity. In essence, the decision to extend a corporate guarantee underlines the assessee's commitment to supporting its associates' growth and expansion initiatives. 50. The ld.AR highlighted that during the year, there was no financial obligations imposed on the assessee on account of default by FSS FZE. Hence, ld.AR submitted that the assessee had not incurred any cost/outflow on account of issuance of corporate guarantee. 51. The ld.AR reiterated that the assessee had issued SBLC to its AE only to enable them to raise monies from financial institutions. Being issued for their benefit, it did not involve any cost to the assessee and did not have any bearing on the profits, income, losses or assets of the assessee, whereby it fails to fall under the definition for 'international transaction'. Further, even after the amendment in Section 92B, a corporate guarantee issued for the benefit of the AEs, which does not involve any costs to the assessee, does not have any bearing on profits, income, losses or assets of the enterprise and, therefore, it is outside the ambit of 'international transaction' to wh....
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....ny bearing on profits, income, losses, or assets are international transactions per se. The ambiguity continues to persist. Reliance in this regard is placed on the following decisions: - ITAT Kolkata in the case of DCIT vs EIH Ltd. [2018] 89 taxmann.com 417 (Kolkata - Trib.) - ITAT Kolkata in the case of IFGL Refractories Ltd. v. Assistant Commissioner of Income-tax (OSD) [2021] 128 taxmann.com 462 (Kolkata - Trib.). 59. Without prejudice to the above, the ld.AR submitted that if at all a fee has to be charged on SBLC issued construed as 'Corporate Guarantee' provided to AE, it cannot be based on bank guarantee rates as made by the TPO / AO. Reliance in this regard is placed on the decision of the ITAT Mumbai in the case of Crayon Group AS vs ACIT (IT) [2023] 153 taxmann.com 345 (Mumbai - Trib.) wherein it was held that bank guarantee rates could not be considered for benchmarking corporate guarantee fee and it depends on creditworthiness of parties and benefit arising out of same in hands of parties to transaction; therefore, benchmarking of TPO was incorrect. 60. Alternatively, the fees chargeable on Corporate Guarantee could be restricted to 0.5% of the ....
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....of the corporate guarantee, that the corporate guarantee fee, if any, to be charged should be restricted only to the utilised amount of AED 3.1 million and not the sanctioned amount of AED 11 million as computed by the TPO. Our above view is supported by the judicial precedents relied upon by the assessee. Therefore, respectfully the following judicial precedents (supra) we direct the TPO to recompute the Upward adjustment of fee on corporate guarantee provided by restricting to 0.5% of the utilized sum of AED 3.1 million. 65. In the result the related grounds of appeal of the assessee are partly allowed. 66. Ground no. 6 : General ground on Corporate Tax Issues Since the ground is general in nature, no specific submission made in this regard. Ground No.6 is general in nature and hence not adjudicated. 67. Ground No. 7 : Corporate Tax Issue - Disallowance of depreciation claimed @ 40% on ATM machines by restricting it to 15% chargeable on 'Plant & machinery' amounting to Rs. 46,56,30,577/- DRP / Assessing Officer's contention: During the course of scrutiny proceedings, it has been noticed that the assessee has claimed depreciation on ATMs at the rate of 40%,....
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.... in the context of Income Tax wherein the Hon'ble HC has held that ATM cannot be classified as computer terminal. 71. Hence, ATM machines are eligible for only depreciation at par with equipment and not computers. Accordingly, the depreciation on ATM is limited to15% as against the claim of 40% by the assessee and the excess claim of depreciation by the assessee on ATMs works out to Rs. 46,56,30,577/- and the same is added to its returned income. 72. Assessee's contention : Ld.AR submitted that the ATM machines are computerized telecommunication device and would fall under the definition of 'computer network' which is included in the definition of 'computers' as per the provisions of section 2(i) of the Information Technology Act, 2000. ATM is the computerized telecommunication device that allows bank's customers to access the bank at places other than the normal bank without having to take the trouble to go to the bank in person and collect the cash as is done under the conventional method of withdrawing money from the bank. The ATM machines are computerized machines which not only allow the customers to withdraw money, but they can check the account balance, pay bills....
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....e of Rs. 27,39,02,750/- has been made. 78. Per contra, the ld.DR argued that the order of Hon'ble ITAT in allowing deprecation on ATM machines @ 40% has not been accepted by the department and appeal before Hon'ble HC has been filed. Hence prayed for confirming the order of the AO/DRP. 79. We have heard the rival contentions perused the material available on record and gone through the orders of the authorities along with the paper books filed and the case laws relied. The rate of depreciation on ATM Machines claimed by the assessee is @ 40%. However, the department has treated ATM Machines as Plant and machinery and restricted the deprecation to 15%. The assessee claimed that the ATM machines are computerized telecommunication device and would fall under the definition of 'computer network' which is included in the definition of 'computers' as per the provisions of section 2(i) of the Information Technology Act, 2000. ATM is the computerized telecommunication device that allows bank's customers to access the bank at places other than the normal bank without having to take the trouble to go to the bank in person and collect the cash as is done under the conventional method of....
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....notice issued, which being against the principles of natural justice, is unsustainable in law. The AO, based on his observation on submission made in response to the notices issued, had made this addition of Rs. 36,20,000/- towards 'provision for gratuity', without calling for the relevant details. 83. In this regard, the ld.AR submitted that the deduction was nothing but 'reversal of excess provision' that was claimed as deduction in the computation of Taxable income and not payment as construed by the AO. 84. As per the Actuarial Valuation Report for the relevant FY 2020-21, the provision for gratuity at 31.03.2021 stood at Rs. 3,35,36,226/-. To align the books in line with the provision prescribed by the Actuarial Valuation Report as per the Accounting Standards, the excess provision of Rs. 36,21,917/- was reversed in the books of accounts. Since the relevant provision was disallowed in the preceding AY 2020-21, the reversal thereon was claimed as deduction in the subject AY 2021-22. Copy of the computation of Taxable income statement for the preceding AY 2020-21 had been submitted to substantiate the same. 85. Per contra, the ld.DR relied on the orders of the authoriti....
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.... said amount has actually been taken into account in computing the income of the assessee in the earlier years and offered to tax. Hence, the bad debts written off amounting to Rs. 7,16,76,685/- debited to Profit & Loss account had been disallowed and added to income returned. 88. Assessee's contention : The ld.AR submitted that, on perusal of the list of parties receivables from whom had been written off in the books of accounts, it is very much evident that all excepting two or so line-items are banks only. Given that the Assessee is engaged in the business of setting up and maintenance of ATMs for various banks in India, the list in itself proves the fact that the receivables arise only from income that had been offered to tax earlier. 89. The Assessee has provided the year-wise line-item breakup for the sum written off and the respective ledger extracts across the applicable years have also been submitted. On perusal of the ledger extract itself, the income offered to tax in earlier years, and the bad debt written off during the subject FY 2020-21 on non-realisation of the receivable is clearly understood. 90. The ld.AR stated that the AO, in fact, in the show-ca....
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....e, the Assessing Officer has not examined whether the debt has, in fact, been written off in accounts of the assessee. When bad debt occurs, the bad debt account is debited and the customer's account is credited, thus, closing the account of the customer. In the case of companies, the provision is deducted from sundry debtors. As stated above, the Assessing Officer has not examined whether, in fact, the bad debt or part thereof is written off in the accounts of the assessee. This exercise has not been undertaken by the Assessing Officer. Hence, the matter is remitted to the Assessing Officer for de novo consideration of the above-mentioned aspect only and that too only to the extent of the write off." 94. Therefore, in the present facts and circumstances of the case and respectfully following the decision of the Hon'ble Supreme Court (supra), we are of the considered view that the AO/DRP has erred in disallowing the expenditure claimed by the assessee and hence we are inclined to direct the AO delete the addition of Rs. 7,16,76,685/- by allowing the related grounds of the appeal filed by the assessee. 95. Ground No. 10 : Corporate Tax Issue - Additional claim of Loss of Rs. 1....
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....AR submitted that, thus, due to non-availability of Audited Financial Statements then, due to the facts enumerated above, to comply with the Income Tax Return filing requirements under the Income Tax Act, the Return of Income for the subject AY 2021-22 had been filed on 10.03.2022 based on unaudited books of accounts. h. On completion of Statutory Audit, it was observed that the loss as per Profit & Loss account was less claimed by about Rs. 19.46 crores and that deduction towards ATM site rent charges paid derecognized for 'Right of Use' Assets (IND AS) adjustment was claimed less by Rs. 40.27 million or Rs. 4,02,70,000/- in its Income Tax Return filed for the subject AY 2021- 22. i. However, the claim made towards the same during the assessment proceedings had been rejected by the AO. 97. From the facts enumerated above, the ld.AR stated that it is quite evident that the omission in the Return of Income filed was bonafide and was caused by factors beyond the assessee's control which ought to be given due consideration. The ld.AR filed Additional Evidence Petition before us under Rule 29 of the Income Tax (Appellate Tribunal) Rules, 1963 in this regard, submit....
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....view is supported by the decision of the Jurisdictional Hon'ble Madras High Court in the case of Ramco Cements Limited vs DCIT, Special Range-I, Madurai [2015] 55 taxmann.com 79 (Madras) and Hon'ble Calcutta High Court in the case of Commissioner of Income-tax v. Hindustan Pilkington Glass Works Ltd. [1994] 73 TAXMAN 631 (CAL). In view of the above and respectfully following the judicial precedents (supra), we are inclined to remit the issue back to the AO for verification of the additional documents filed for claiming the loss of Rs. 19.46 crores and decide the issue in accordance with law. 101. Ground No. 11 - Corporate Tax Issue - Additional claim of Rs. 4,02,70,000/- pertaining to additional deduction towards ATM site rent charges paid: DRP / Assessing Officer's contention: The Assessee had reduced a sum of Rs. 607.81 million relating to deduction towards ATM site rent charges paid derecognized for 'Right of Use' Assets (IND AS) adjustment and had claimed a sum of Rs. 4,031.64 million under the head 'Hosted payment and other services' as reported in Note 19 - 'Purchase and service charges' to the Audited Financial Statements for the FY 2020-21 (Page No.39 of the Paper ....
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....e rent charges derecognized for Right of Use Assets. The same being IND AS adjustment entry, in line with the provisions of the Act, it should be deducted while computing the Taxable income. However, the said sum of Rs. 607.81 million was deducted at Rs. 567.54 million while filling the Income Tax Return based on unaudited books of accounts due to factors enumerated in the preceding para no.19.2.1. The line-item breakup of the sum of Rs. 72,37,22,348/- shown under 'Any other amount allowable as deduction' under Column 33, Table A of Schedule BP in Income Tax Return filed for the subject AY 2021- 22 is given as below: S.No. Nature of deduction Amt. in INR million 1 IND AS adjustment towards ATM site rent charges derecognized for ROU 567.54 2 Office Rent de-recognised for ROU 54.28 3 AMC Software License de-recognised for ROU 95.01 4 Loss/(profit) on sale of asset 3.27 5 Gratuity Provision 3.62 TOTAL 723.72 106. The above facts are evident from the Audited Financial Statements and the Income Tax Return filed (Page Nos.1 to 54 audited financials and 746 to 871 return of income of paper book). The ld.AR stated ....