TaxTMI 
TaxTMI 
TaxTMI 
2025 (11) TMI 552
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....hout appreciating the fact that the assessee has maintained all the details and relevant documents in respect of additions, merely by stating that there are certain defects and all the comparables of the assessee are also not properly selected. 2. The Ld. TPO/AO/DRP erred in treating and comparing income from digital marketing services with software development services and not considering the segmental details 2.1 Erred in considering export service income of Rs. 27,63,25,831/- from Digital marketing as Income from software development services for the purpose of calculation of the margin of the assessee. 2.2 Erred in considering the revenue from Digital Marketing services as Software development services while calculating Operating Margin of the assessee and also applied software development search process which will not give the correct comparable arm's length for the transaction undertaken with AEs. 2.3 Erred in not considering the audited segmental report provided by the assessee and rejecting the segmental data in relation to Digital marketing and Software development segment without any specific defected in it. AGRON 2.4 Ought to have apprec....
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.... Erred in selecting "Rheal Software Pvt Ltd" as final comparable without appreciating the fact that the said company is Functionally Dissimilar and the Financials for the FY 2013-14 are not available. 4.8 Erred in selecting "Mindtree Ltd (Seg)" as final comparable without appreciating the fact that the said company is functionally dissimilar and there is foreign branch expenditure. Furthermore the turnover of the company is more than 200 crores. 4.9 Erred in selecting "Larsen & Toubro Infotech Ltd" as final comparable without appreciating the fact that the said company is functionally dissimilar and does not have segmental details. Furthermore the turnover of the company is more than 200 crores. 4.10 Erred in selecting "R S Software (India) Ltd" as final comparable without appreciating the fact that the said company is functionally dissimilar and does not have segmental details. Furthermore the company is having extraordinary growth. The company during the year under consideration has also incurred business promotion expense. 4.11 Erred in selecting "Infobeans Technologies Ltd" as final comparable without appreciating the fact that the said company is funct....
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....d from companies as it does not satisfy all the factors for undertaking comparability analysis as specified under Rule 10B(2). 6. The AO/TPO/DRP erred in making the adjustment u/s. 92C(3) of the Act for Rs. 8,93,558/- towards Interest on Receivables on the basis of hypothetical and notional basis without being any material on record to show that the interest should be charged in the present case. 6.1 Erred in not following the procedure laid down under the provisions of Section 92C of the Act relating to the 'Computation of Arm's Length Price'. 6.2 Erred in the re-characterization of the nature of transaction from 'Receivables' to 'loan' which is not permissible u/s. 145 of the Act. 6.3 Ought to have appreciated the fact that the amendment in the 2012 Finance Act does not cover outstanding receivables arising out of a assessee's sale transaction as the word 'capital financing' used there is particularly refers to loans or advances during the normal course of business, whereas in Assessee's case, these are outstanding receivables arising out of services rendered but not capital financing. 6.4 Ought to have app....
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....is no exempt dividend income earned by the assessee during the year. 7.3 Ought to have appreciated the fact that the investments made by the assessee in its subsidiaries is out of own funds and for business expediency. 7.4 Ought to have appreciated the fact that section 14A of the Act does not apply to the assessee, as the assessee has not incurred any expenditure in relation to income, which does not form part of the total income under this Act. 7.5 Erred in invoking the provisions of Section 14A as there is no nexus between the expenditure which is directly or indirectly connected with investment income there from which is exempt and the expenditure booked to P/L account towards Finance cost. 7.6 Erred in disallowing certain expenditure u/s.14A, without giving a finding that the expenditure by way of interest booked is not genuine and or a part of the expenditure is relatable to the investment. 7.7 Without prejudice to above, the AO ought to have appreciated the fact that only the value of investment on which dividend income was earned should be taken as average value of investment for the purpose of calculation of disallowance u/s 14A of the Act. ....
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....re certified by a Qualified Chartered Accountant and no discrepancies were found. 11. Erred in not providing TDS credit of Rs. 86,035 while computing the tax payable 12. Erred in not providing MAT Credit while computing the tax payable of the assessee 13. The appellant may add, alter or modify any other point to the Grounds of appeal at any time before or at the time of hearing of the appeal. 3. The assessee has also raised additional grounds as under : 14. As per the ratio laid down by the Honourable Supreme Court of India in the case of National Thermal Power Co. Ltd v. CIT (1998) 229 ITR 383 (SC), the Hon'ble ITAT has jurisdiction to examine the question of law which has been taken before the Hon'ble ITAT for the first time though not taken before the first appellate authority. 15. The Ld. AO erred in passing the assessment order without considering the fact that time limit for completion of assessment u/s 153 has been lapsed, therefore the order passed/ to be passed is erroneous and bad-in-law. 16. The Ld. AO erred in not considering the fact that the time limit prescribed u/s 153 would prevail over and above the time limit prescri....
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....the assessee preferred objections before the Ld. DRP, which issued directions under section 144C(5) of the Act on 23.09.2019. In accordance with the directions of Ld. DRP, the Ld. TPO revised the proposed adjustment to Rs. 6,37,32,009/- for software development segment and retaining the adjustment of Rs. 8,93,558/- for interest on trade receivables. In conformity with the directions, the Ld. AO passed the final assessment order on 30.10.2019 under section 143(3) of the Act, making total TP additions of Rs. 6,37,32,009/- and non-TP addition of Rs. 2,00,990/- on account of disallowances under section 14A of the Act Rs. 18,72,836/- on account of disallowances under section 37 of the Act towards CSR expenditure Rs. 2,07,247/- on account of disallowance towards prior period expenses and Rs. 38 lakhs on account of non-reconciliation of income as per profit and loss account and form no.26AS. Accordingly, the Ld. AO computed the total income of the assessee at Rs. 15,74,79,993/-. 6. Aggrieved with the final assessment order of Ld. AO, the assessee is in appeal before this Tribunal. The ground no.1 of the assessee is general in nature, accordingly the same is dismissed, as no separate ad....
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.... made. 9. We have considered the rival submissions and perused the material available on record. We have gone through Note No. 35 of the financial statements placed at page no. 309 of the paper book, where under segment reporting the company has stated that the assessee is engaged in providing SDS, digital marketing and related services, which is to the following effect : " Note No.35 : Segment Reporting : The Company is mainly engaged in the area of providing Software Development Services and Digital Marketing and related services. The company publishes standalone financial statements along with the consolidated financial statements in the annual report. In accordance with the AS-17, Segment Reporting, the company has disclosed the Segment Information in the consolidated financial statements." 9.1 We have also perused Note No. 24 of the financial statements placed at page no. 303 of the paper book, wherein under quantitative details, the assessee has again mentioned that it is engaged in providing digital marketing services, development of computer software, and related services, which is to the following effect : " Note No.24 : Quantitative Detail....
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....9,56,144 3,97,56,02,748 Employee Benefit Expenses 10,06,98,472 31,14,386 23,31,88,365 33,70,01,222 Administrative Expenses 1,82,50,869 5,64,460 32,99,66,738 34,87,82,067 Fianance Cost - - - - Depreciation and Amortisation Expenses 1,40,61,208 4,34,883 9,07,61,442 10,52,57,533 Other Operating Expenses 1,25,99,341 3,89,670 5,44,30,862 6,74,19,873 Total Cost 24,12,97,096 74,62,797 4,58,53,03,551 4,83,40,63,444 Profit 6,29,08,381 14,00,244 12,98,99,945 19,42,08,569 PLI(OP/OC) 26.07% 18.76% PLI(OP/OR) 20.68% 15.80% 9.6 On perusal of above, we find that in the segmental audit report, the entire revenue of the assessee from services has been grouped under the head "Digital Marketing Segment." No separate revenue has been shown under the SDS and related services. However, on perusal of audited financial statements, we found that assessee is engaged in rendering multiple services, including both digital marketing services and SDS. This creates a contradiction between the audited financial statements and the segmental audit report. 9.7 We have also gon....
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.... unexplained. In our considered view, these contradictions require thorough verification. 9.10 In view of the above, we are of the considered opinion that the issue needs to be revisited by the Ld. AO/TPO for de novo verification. The assessee shall reconcile the segmental audit report with the audited financial statements, provide complete details of revenue from all segments, and explain the variation in employee expenditure percentages. The Ld. AO/TPO shall examine these aspects afresh and pass a speaking order in accordance with law, after affording adequate opportunity of hearing to the assessee. Accordingly, ground nos. 2 to 5 of the assessee are allowed for statistical purposes. 10. Ground no.6 of the assessee is related to allowability of credit period and applicability of rate of interest for the purpose of benchmarking of interest on trade receivables. As far as the applicability of rate of interest for benchmarking of trade receivable is concerned, the Ld. AR submitted that, the Ld. TPO erred in applying the interest rate charged by SBI on short term deposits for benchmarking the interest on outstanding trade receivables relating to sale by the assessee to its Asso....
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.... interest from the Associated Enterprises in Indian rupees. Once the transaction between the assessee and the Associated Enterprises is in foreign currency and the transaction is an international transaction, then the transaction would have to be looked upon by applying the commercial principles in regard to international transaction. If this is so, then the domestic prime lending rate would have no applicability and the international rate fixed being LIBOR would come into play. In the circumstances, we are of the view that it LIBOR rate which has to be considered while determining the arm's length interest rate in respect of the transaction between the assessee and the Associated Enterprises. As it is noticed that the average of the LIBOR rate for 1-4-2005 to 31-3-2006 is 4.42 per cent and the assessee has charged interest at 6 per cent which is higher than the LIBOR rate, we are of the view that no addition on this count is liable to be made in the hands of the assessee. In the circumstances, the addition as made by the Assessing Officer on this count is deleted." 7. Thus, a transaction of loan to the AEs in foreign currency is considered as international transaction....
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....e reference to the year in which the loan was granted in case of a long term loan. However, in such situations, question may arise whether the case would fall under the second exception mentioned in the case of E.K.L. Appliances (supra), when an AE has the right to recall and ask for repayment of loan. These aspects have not been considered and applied by the TPO, DRP and the Assessing Officer. Neither has this ground been argued before us on behalf the Revenue. We, therefore, would not proceed to examine the said aspect and leave the question open. Similarly, we have not expressed any opinion on the issue or question of "thin capitalization" which does not arise for consideration in the present case. 37. We observe that whatever the Revenue argues and submits in the case of outbound loans or for that matter what we have observed would be equally applicable to inbound loans given to Indian subsidiaries of foreign AEs. The parameters cannot be different for outbound and inbound loans. A similar reasoning applies to both inbound and outbound loans. Revenue has erroneously argued that different parameters would apply for inbound and outbound loans, which is not acceptable. ....
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....rrency and those in foreign currency is normally no use, because, for instance, a US $ loan advanced by a US lender is to him a debt- claim in national currency whereas to a German borrower it is a foreign currency debt (the situation being different, however, when an agreement in a third currency is involved). Moreover, a difference in interest levels frequently reflects no more than different expectations in regard to rates of exchange, rates of inflation and other aspects. Hence, the choice of one particular currency can be just as reasonable as that of another, despite different levels of interest rates. An economic criterion for one party may be that it wants, if possible, to avoid exchange risks (for example, by matching the currency of the loan with that of the funds anticipated to be available for debt service), such as taking out a US $ loan if the proceeds in US $ are expected to become available (say from exports). If an exchange risk were to prove incapable of being avoided (say, by forward rate fixing), the appropriate course would be to attribute it to the economically more powerful party. But, exactly where there is no 'special relationship', this will freque....
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....be repaid. The interest rate should not be computed on the basis of interest payable on the currency or legal tender of the place or the country of resident of either party. Once the loan or credit is given in foreign currency and also to be repaid in same currency, the interest applicable to loan granted and to be returned in Indian rupee would not be the relevant comparable. The Hon'ble High Court has held that the PLR rate would not be applicable and should not be applied for determining the interest rate in such cases where loan to be repaid in foreign currency. This issue was again considered by the Hon'ble Bombay High Court in the case of CIT vs. Tata Autocomp Systems Ltd reported in (2015) 56 Taxmann.com 206 (Bom.) and the Hon'ble Bombay High Court has upheld the decision of the Tribunal directing the Assessing Officer to benchmark the interest at the prevailing EURIBOR rate instead of rupee loan rate to be computed at Arms' Length on the loan advanced to the AE. The relevant findings of the Hon'ble High Court in para 7 & 8 are as under: "7. We find that the impugned order of the Tribunal inter alia has followed the decisions of the Bombay Bench ....
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....Symphoni Interactive LLC, USA. Be that as it may, it is seen that the ld. CIT(A) also impliedly accepted the interest earned by the assessee from Symphoni Interactive LLC, USA, at 6% as at ALP, against which the Department has no grudge as the assail is only to the application of EURIBOR of 4.42%, which relates to the loan advanced by the assessee to Mascot GmbH, Germany. As such, we are confining ourselves only to international transaction of receipt of interest from Mascot GmbH, Germany. As against the assessee charging interest at the rate of 1.50% from Mascot GmbH, Germany, the TPO determined the arm's length rate of interest at 14%, which the ld. CIT(A) reduced to 4.42% by treating it as the average EURIBOR rate for the year under consideration. 5. There are two facets of the dispute raised by the Revenue on this issue. The first is that the rate of interest should be considered with reference to the prime lending rate prevalent in India and the second is that the reduction in rate to 4.42% by the ld. CIT(A) is not justified. 6. As against the TPO's point of view that since the assessee in India advanced loan to its AE in Germany, which if not given, ....
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....consider it expedient to clarify that EURIBOR (Euro Inter-bank Offered Rate) is not a rate of interest, in itself, at which loans are advanced by banks in Euros to borrowers. EURIBOR is a reference rate which is calculated from the average interest rate at which Euro Zone Banks offer lending on inter-bank market. While calculating EURIBOR, 15% of the lowest and 15% of the highest interest rates collected by a panel of European banks are eliminated and the remaining 70% form the basis for its calculation. In such circumstances, EURIBOR, being, not an average rate at which the loans are advanced by European banks to borrowers, cannot per se be characterized as a comparable uncontrolled rate of interest at which loans are advanced in Germany. 9. On lines of EURIBOR, there is LIBOR (London Inter-bank Offered Rate), another rate which is applied on behalf of British Bankers Association. Similar to EURIBOR, LIBOR is also a rate at which major global banks lend to one another in the international inter-bank market on short-term basis. In calculation of LIBOR, 25% of lowest and 25% of the highest values are eliminated and the remaining 50% are considered for determining LIBOR. The....
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.... AO/TPO to apply LIBOR + 200 basis points for benchmarking of interest on trade receivables. 12.2 As far as the allowability of credit period is concerned, we found that the Ld. TPO has allowed credit period of only 30 days. Considering the general trend prevailing in the line of business of the assessee, in our considered view, the justice would be met by allowing a credit period of 60 days. Therefore, we direct the Ld. AO/TPO to allow the credit period of 60 days for the purpose of benchmarking of interest on trade receivables. 12.3 Accordingly, the ground no.6 of the assessee is partly allowed. 13. Ground No. 7 raised by the assessee relates to the disallowance of Rs. 2,00,990/- made by the Ld. AO under section 14A of the Act. In this regard, the Ld. AR submitted that during the year under consideration, the assessee has not earned any exempt income. Therefore, no disallowance under section 14A of the Act could be made in the hands of the assessee. He relied upon the decision of the Hon'ble Supreme Court in the case of CIT Vs. Chettinad Logistics (P.) Ltd. [95 taxmann.com 250 (SC)], wherein the Hon'ble Supreme Court dismissed the SLP filed by the Revenue and upheld the ....
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....gal position, we hold that in the absence of exempt income, no disallowance under section 14A of the Act is warranted. Therefore, the disallowance of Rs. 2,00,990/- made by the Ld. AO is directed to be deleted. Accordingly, the ground no. 7 of the assessee is allowed. 16. Ground No. 8 raised by the assessee relates to the disallowance of Rs. 18,72,836/- made by the Ld. AO on account of CSR expenditure. In this regard, the Ld. AR submitted that the assessee has incurred the impugned expenditure towards CSR activities, which, though not directly related to its core business, indirectly facilitated the carrying on of business and enhanced its commercial reputation. It was argued that such expenditure was incurred wholly and exclusively for the purpose of business and hence allowable under section 37(1) of the Act. In support of this contention, reliance was placed on the decisions of Societe General Securities India Pvt. Ltd. v. PCIT [2023] 157 taxmann.com 533 (Mumbai Tribunal) and Optum Global Solutions (India) Pvt. Ltd. v. DCIT in ITA No.145 & 482/Hyd/2022 for AYs 2017-18 and 2018-19 dated 16.08.2023, wherein, according to the Ld. AR, the Tribunal had taken a favourable view for ....
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.... Act. In support of this contention, reliance was placed on the decision of this Tribunal in the case of M/s. Ocimum Bio Solutions India Ltd. in ITA No.2090/Hyd/2018 for AY 2014-15 dated 11.05.2021, wherein the Tribunal, following the judgment of the Hon'ble Gujarat High Court in PCIT v. Adani Enterprises Ltd. (Tax Appeal No.566 of 2016, dated 20.07.2016), decided the issue in favour of the assessee. The Ld. AR pointed out that in those decisions it was held that where the expenditure has crystallised during the year, deduction cannot be denied merely because the liability pertained to an earlier year. 20. Per contra, the Ld. DR submitted that the expenses under consideration are not related to the year under appeal and, therefore, are liable to be disallowed. He further submitted that verification is required as to whether the corresponding revenue has been offered by the assessee in the earlier year. 21. We have heard the rival submissions and perused the material available on record. The assessee's contention is that the expenses crystallised during the current year and should therefore be allowed under section 37(1) of the Act. The Ld. AR has relied on the decision of thi....
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....ring the year under consideration or not. If, on verification, it is found that the corresponding revenue has already been offered to tax and it is crystalised during the year under consideration then in line with the principle of revenue neutrality laid down by this Tribunal in Ocimum Bio Solutions India Ltd. (supra), the Ld. AO shall delete the addition. The assessee shall be given due opportunity of being heard and to file supporting evidence. Accordingly, the ground no. 9 of the assessee is allowed for statistical purposes. 22. Ground No.10 raised by the assessee relates to the addition of Rs.38 lakhs made by the Ld. AO on account of non-reconciliation between the income as per the profit and loss account and the income reflected in Form 26AS. In this regard, the Ld. AR submitted that during the year under consideration, an amount of Rs.38 lakhs was received by the assessee from M/s. Smile Foundation as an advance, on which tax had been deducted at source (TDS). Consequently, the said sum was reflected in the assessee's Form 26AS for the relevant year. It was further submitted that the corresponding sale was actually effected by the assessee in the subsequent financial year ....