TaxTMI 
TaxTMI 
2025 (6) TMI 2117
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....ich is listed and domiciled in India. The assessee is primarily engaged in manufacture and selling of automotive components being braking products, advanced braking products and other related air assisted products and systems for commercial vehicles. The Company also provides software development and other services to its group companies. The assessee filed its return of income ('ROI') for Assessment Years ('AY') 2020-21 and 2021-22, which was processed under Section 143(1) of the Income Tax Act, 1961 ('the Act') and was picked up for scrutiny assessment. 3. During the scrutiny assessment proceedings, the Transfer Pricing Officer ('TPO') and the Assessing Officer ('AO') made certain adjustments / disallowances to the assessee's income. Against the draft assessment order of the AO, the assessee filed its objections before the Dispute Resolution Panel ('DRP') for AYs 2020-21 and 2021-22. The DRP provided certain directions in connection with the transfer pricing adjustments, providing partial relief and upheld the other adjustments and disallowances proposed by the AO. 4. Below is the summary of the adjustments made during the....
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....nature. The TPO adopted a fresh benchmarking study and arrived at a set of 6 comparable companies, which comprised of the existing comparable companies selected by the assessee. 8. Further, the TPO re-computed the margins of the comparable companies also by treating the miscellaneous expenses as 'non-operating' in nature. 9. Based on the above, the TPO arrived at an arm's length range of 8.3% to 9.57%, thereby proposing an adjustment of Rs.13.49 crores. Against the said adjustment proposed by the TPO, the assessee had filed various objections before the DRP. The DRP directed the TPO to include 'Admach Auto Industries India Private Limited' in the final set of comparable companies and also directed to provide the detailed margin computation of the comparable companies to the assessee, while upholding the other contentions of the TPO. 10. Accordingly, an order giving effect was issued by the TPO dated 01.10.2024 (Refer Page 29 of Memorandum of Appeal) wherein the arm's length range was re- computed by the TPO as 6.37% to 9.57% thereby, recomputing the TP adjustment as Rs.6.66 crores. A. Inclusion of Foundation Brake Manufacturing Pvt. Ltd. as a com....
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....sive losses in three years and if there is a profit in any one financial year out of three successive financial years, then that company cannot be excluded from the list of comparable on the basis of persistent loss making filter." (Emphasis Supplied) 16. In view of the above, the ld.AR submitted that the Foundation Brake Manufacturing Pvt. Ltd. must be included as a comparable company for the manufacturing segment. 17. Per contra the ld. DR supported the orders of the AO and DRP and prayed for confirming the same. 18. 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 on by both the parties. The TPO in his order has excluded the comparable company Foundation Brake Manufacturing Pvt. Ltd. for the specific reason that the company had incurred losses in 2 continuous financial years. We find that this issue is already decided by the various courts and tribunals stating that companies making losses in 2 out of 3 years cannot be excluded on the basis of persistent loss-making company filter. Further, we concur with the reliance placed by the ld.A....
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....mpanies. In this connection, the assessee also requested the TPO to obtain the same using the powers under Section 133(6) of the Act. 23. However, the TPO without considering that the miscellaneous expenses are incurred as an integral part of the business and without calling for the breakup of miscellaneous expenses reported in the XBRL financials concluded that the miscellaneous expenses are non-operating in nature and re-computed the PLI of certain comparable companies. 24. The ld.AR stated that the TPO had considered miscellaneous expenditure as operating expenditure while computing the operating margin of the assessee and that of the comparable companies for the service segment and has arbitrarily treated the same as non-operating for computing margins of the comparable companies of manufacturing segment alone. 25. Before the DRP, the assessee highlighted the above discrepancy by submitting the audited financial statements for the comparable company 'Admach Auto Industries India Pvt. Ltd.' of FY 2020-21, wherein the breakup of miscellaneous expenses for FY 2019-20 was available in the previous year column. 26. The ld.AR also highlighted that XBRL format of t....
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....ancial statements. 29. Since the data regarding the breakup of miscellaneous expenses of comparable companies are not available and further, considering that the miscellaneous expenses incurred by the company has been treated as operating in nature for computing the margin earned from the manufacturing segment, the ld.AR prayed that the miscellaneous expense shall be treated as operating in nature. 30. In this regard, the ld.AR relied upon the following decisions of the Coordinate Benches of this Tribunal wherein it has been categorically held that miscellaneous expenses are to be treated as operating expenses: - Delhi Tribunal in the case of E Value Serve. Com - 75 taxmann.com 195 - (Page 123 (Para 47) of Case Law Compilation) - Delhi Tribunal in the case of First Rain Software Centre (P.) Ltd. - ITA 4006/Del/2010 - (Page 129 (Para 6) of Case Law Compilation) 31. In view of the above arguments, ld.AR submitted that the miscellaneous expenses incurred by comparable companies should be treated as operating in nature, while computing the PLI of comparable companies. 32. Alternatively, the ld.AR prayed that in the absence of breakup of miscellaneous expen....
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....come and other income as nonoperating income: 38. The assessee had adopted OP/TC (Operating Profit on Total Cost) as PLI for benchmarking the margin earned from the manufacturing segment and had arrived at a margin of 6.54% (Page 170 of paperbook). 39. The TPO during the assessment proceedings, proposed to treat the income from government grants, test track usage income and other income as non-operating in nature, thereby recomputing the Appellant's PLI as 5.46% (Page 11 of TP Order - Page 173 of Memorandum of Appeal). 40. The ld.AR submitted that before the TPO and the DRP the assessee had claimed that the income from government grants which pertains to export subsidy under the Merchandise Exports from India scheme ('MEIS'), duty drawback, etc. relates to the primary business activity of the assessee and must be treated as operating income. 41. In this regard, the ld.AR submitted that it has been held by this Jurisdictional Tribunal in the case of Hyundai Motor India Limited (ITA 3192/Chny/2017) (Page 160 - Para 52 of Case Law Compilation) and in the case of Greenland Exports Pvt. Ltd. (ITA No. 514/Mds/2016) (Page 139 - Para 6 of Case Law Compilation) that ....
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....st track which is used to undertake stability testing on trucks, buses and heavy vehicles at high speed for customers is an important and essential nature of activity of the assessee. The facility has also been rented to third parties from which they earn test track usage income which is incidental to the nature of activities of the assessee, and we find that the TPO has accepted such revenue as incidental to the business of the assessee. 51. Therefore, considering the test track facility to undertake stability testing on trucks, buses and heavy vehicles at high speed for customers is incidental to the business, the income earned from such facilities from third parties are to be treated as part of the operating income for computing the margin. The numerous decisions have been delivered in support of treating the incidental income as operating in nature and hence by following the decision of the tribunal decisions we direct the TPO to consider 'test track usage income' received by the assessee as operating income and ordered accordingly. Thus, we allow the grounds of appeal filed by the assessee. E. OTHER INCOME - TO BE TREATED AS OPERATING IN NATURE: 52. Further, t....
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....us objections before the DRP, seeking for inclusion of certain comparable companies and exclusion of alleged comparable companies. The DRP rejected the objections filed by the assessee and upheld the order of the TPO. Exclusion of alleged comparable companies 57. The ld.AR submitted that the TPO had allegedly included certain comparable companies which are not functionally comparable to that of the assessee. In this regard, the ld.AR submitted below the reasons for exclusion of certain companies from the final set of comparable companies selected by the TPO. Exclusion of INFOSYS LIMITED 58. Infosys Ltd. is engaged in providing diversified services in the nature of sale of software services, consulting, technology, outsourcing, business IT services, engineering services, system integration services etc. Further, Infosys also earns revenue from sale of software products. 59. Further, there is no segmentation or bifurcation of income or expenses towards software products. It may also be noted that Infosys Ltd. has a huge brand value, which results in higher sales and premium pricing, thereby resulting in higher profits and are hence, not comparable with routine captive ....
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....s upon the ruling of the Bangalore Tribunal in the case of Intuit India Product Development Centre (P.) Ltd. (163 taxmann.com 3) (Page 210 of Case Law Compilation), wherein it has been held that Tata Elxsi Ltd. is not a valid comparable in the absence of segmental information and after noting that they are engaged in providing high end services and cannot be compared to a routine captive service provider like the assessee. 66. The ld.AR further relied upon the ruling of the Bangalore Tribunal in the case of Logica (P.) Ltd. (36 taxmann.com 374) (Page 197 of Case Law Compilation), wherein it has been held that companies owning significant IPR and involved in significant R&D cannot be comparable to routine captive service providers: 67. In light of the above arguments, the ld.AR submitted that Elxsi Ltd. must be excluded from the list of comparable companies. Exclusion of LTIMINDTREE LIMITED 68. The Id.AR submitted that M/s. LTIMindtree Ltd., formed by merging of 'L&T Infotech and Mindtree' primarily derives its revenue from IT enabled services i.e., Banking, Financial services & Insurance. Further, the Company is engaged in the provision of high-end IT services a....
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....ble companies. 75. Alternatively, in case IDS Infotech Ltd. engaged in providing IT and IT enabled services is considered as a comparable company, the ld.AR prayed that M/s.Yudiz Solutions Pvt. Ltd, also must be included in the final set of comparable companies, considering that Yudiz Solutions passed all the filters of the TPO and is engaged in IT related services. Exclusion of GREAT SOFTWARE LABORATORY PRIVATE LIMITED 76. The ld.AR submitted that M/s.Great Software Laboratory Pvt. Ltd. is engaged in diverse operations including software development, with expertise into cloud applications, communication, identity management and system technologies, provision of professional services and resale of products. 77. Further, the company does not maintain segmental information in respect of profitability reported from business activities in the nature of software services and software products and hence cannot be treated as a comparable company. 78. The ld.AR relied upon the ruling of the Bangalore ITAT in the case of Intuit India Product Development Centre (P.) Ltd. (163 taxmann.com 3), wherein it has been held that Great Software Laboratory Pvt. Ltd. (Page 215 of Case La....
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....) Ltd. (36 taxmann.com 374) 85. In view of the facts and circumstances of the present case, and respectfully relying upon the judicial precedents cited hereinabove, we are of the considered opinion that Infosys Ltd., Tata Elxsi Ltd., LTIMindtree Ltd., IDS Infotech Ltd., and Great Software Laboratory Pvt. Ltd. are not comparable to the assessee. This conclusion is drawn on the grounds that the assessee does not possess a turnover of a similar magnitude, nor does it own significant intangible assets such as intellectual property rights, brand value, or engage in substantial research and development activities as those companies do. Accordingly, we direct that the aforementioned entities be excluded from the final list of comparable, as they are not functionally similar to the service profile of the assessee. Ordered accordingly. 4. TP adjustment towards notional interest on overdue receivables: AY 2020-21 - IT(TP)A 50/CHNY/2024 - Grounds 3.1 to 3.5 AY 2021-22 - IT(TP)A 132/CHNY/2024: Grounds 14 to 19 86. For the AY 2020-21, the TPO vide his order dated 26.07.2023 proposed an upward adjustment towards notional interest on outstanding receivables to the extent of Rs.6.67....
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....debt secured by assessee on which interest is to be paid by the assessee. Hence, the delayed receivables will not impact in any way. 15. After taking note of above judicial pronouncements, the ITAT had deviated from its earlier order for AY 2012-13 and followed the judgment of Hon'ble Delhi High Court and Hon'ble Supreme Court concerning AY 2010-11. The Delhi Bench of the Tribunal in Bechtel India Pvt. Ltd., for the assessment year 2013-14 had categorically held that there need not be any transfer pricing adjustment for imputing interest cost for the outstanding trade receivables from AEs when the assessee in the said case is a debt free company. Therefore, the DRP's reliance on the order of Delhi Bench of the Tribunal in Bechtel India Pvt. Ltd., concerning assessment year 2012-13 (which according to us has not laid down a correct proposition of law) is legally not tenable. In light of the above discussion, we delete the transfer pricing adjustment imputing interest income on the outstanding trade receivable." (Emphasis Supplied) 95. Based on the above, notwithstanding the other contentions, the ld.AR submitted that, since the assessee is a debt free comp....
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....adjustment towards notional interest on outstanding receivables on the basis that trade receivables due from the foreign AE have been delayed beyond the credit period allowed, for which appropriate compensation has not been received, thus concluding that the receivables have resulted in an interest free loan being provided by the assessee to the foreign AEs. 101. The TPO accordingly, imputed an interest adjustment based on the ageing details provided charging an interest at the rate of 6 months LIBOR plus 350 bps (5.818%) after allowing 30 days credit period. However, the TPO while undertaking this exercise failed to note the actual credit period agreed between the assessee and its AEs and even third parties is 90 days, and no interest is charged to third parties in case of delay in collection beyond 90 days. 102. The ld.AR submitted that the TPO had arbitrarily adopted the credit period allowable as 30 days without considering the actual credit period of 90 days agreed upon with AEs as per contractual terms entered into between the assessee and its AEs. (Sample Invoices in Page 183, 185, 187 and 189 of paperbook dated 21.01.2025 for AY 2020-21; Page 268 to 271 of paperbook d....
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....al contentions and gone through the orders of the authorities along with the paper and book and decided case laws relied on by the parties. The issue of TP adjustment on account of interest on overdue receivables from AE is covered by the decision of this Tribunal in the case of Temenos India Private Limited (ITTPA No.32/CHNY/2024). Since the assessee is a debt free company and the assessee does not incur any significant interest cost, the TP adjustment of notional interest on overdue receivable is not warranted. The above principle has also been followed in the recent decision of this Tribunal in the case of Trimble Information Technologies India Private Limited (ITTPA No.28/CHNY/2024). 110. In light of the factual matrix of the present case, and in consonance with the judicial precedents of this Hon'ble Tribunal, we are of the considered view that the transfer pricing adjustment on account of notional interest pertaining to overdue receivables is unwarranted. Accordingly, we direct the Transfer Pricing Officer (TPO) to delete the said adjustment and to recompute the Arm's Length Price (ALP) in accordance with the above observations. In view thereof, the grounds of appe....
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....al in nature and is not a real income earned by the assessee during the subject assessment year. The claim of the assessee is founded on the above factual matrix and following two legal principles - accounting entries are not determinative for tax liability and only real income can be taxed. 117. The Id.AR placed a reliance in this respect on the decision of the Hon'ble Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd - 82 ITR 363 (Refer Page 50 of Case Law Compilation II) wherein it was held that, the way in which entries are made by an assessee in his books of account is not determinative of the question whether the assessee has earned any profit or suffered any loss. Further reliance is also placed on the following decisions: 118. In this regard, the Id.AR placed a reliance on the decision of the Hon'ble Supreme Court in the case of Shoorji Vallabhdas & Co. - 46 ITR 144 (Refer Page 47 of Case Law Compilation II) wherein the Hon'ble Court held that if income does not result at all, there cannot be a tax, even though in book-keeping, an entry is made about a hypothetical income, which does not materialise. 119. Furthermore, only because the assessee ad....
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.... find that the AO and the DRP have denied the claim of assessee stating that no supporting documents were furnished in relation to the same. As argued by ld.AR the above adjustment is notional in nature, since it is not a real income earned by the assessee during the subject assessment year. The claim of the assessee is founded on the above factual matrix and following two legal principles - accounting entries are not determinative for tax liability and only real income can be taxed. 124. We find that the decision of the Hon'ble Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd - 82 ITR 363 and Hon'ble Supreme Court in the case of Shoorji Vallabhdas & Co. - 46 ITR 144 wherein the Hon'ble Court held that if income does not result at all, there cannot be a tax, even though in book-keeping, an entry is made about a hypothetical income, which does not materialise. The above ratio has been followed and decided that the assessment based on IND-AS compliance and disclosure is not tenable and only real income is taxable in the Jurisdictional Tribunal in the case of Shriram Properties Ltd - ITA 431/CHNY/2022. 125. In view of the facts and circumstances of the presen....
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.... evidence to support the claim of the assessee, rejected the deduction claimed u/s.35(1)(iv) of the Act (Page 36 of Final Assessment Order - Page 49 of Memorandum of Appeal for AY 2020-21). 130. The DRP disregarding the copy of Form 3CM submitted and submissions made by the assessee including the breakup of capital expenditure incurred during the year, upheld the contentions of the AO by stating that the Form 3CM does not quantify the expenses claimed by the assessee without appreciating that the claim made by the assessee was not u/s.35(2AB) of the Act. (Page 24 of DRP Directions - Page 87 of Memorandum of Appeal for AY 2020-21) 131. The AO during the assessment proceedings for AY 2021-22, rejected the claim of the assessee stating that Form 3CM submitted by the assessee is valid only till 31.03.2020 and allegedly denied the claim u/s.35(1)(iv) of the Act in the absence of Form 3CM (Page 8 of Final Assessment Order - Page 22 of Memorandum of Appeal for AY 2021-22). 132. The DRP for the subject year arbitrarily concluded that the claim u/s.35(1)(iv) of the Act cannot be claimed since the assessee had adopted for concessional tax regime under Section 115BAA of the Act witho....
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..... Therefore, the ld.AR argued that the contention of lower authorities to deny the claim u/s.35(1)(iv) of the Act on the basis of failure to obtain Form 3CM or failure to quantify the expenses in Form 3CM is not tenable since it is not a mandate prescribed under the provisions of the Act for the claim of deduction u/s.35(1)(iv) of the Act and the same is only a requirement for the purpose of claiming deduction u/s. 35(2AB) of the Act. 138. In this regard, the ld.AR relied upon the following rulings, wherein it has been held that capital expenditure incurred towards scientific research is allowable u/s.35(1)(iv) of the Act. - Apex Laboratories (P.) Ltd - 80 taxmann.com 236 (Page 221 (Para 4) of Case Law Compilation II) - MAHLE Behr India (P.) Ltd - 130 taxmann.com 7 (Page 231 (Para 16) of Case Law Compilation II) 139. Further, the ld.AR also stated that the denial of weighted deduction u/s. 35(2AB) of the Act shall not disable the assessee from claiming normal deduction for research and development expenditure both revenue and capital, u/s. 35(1)(iv) of the Act. The above principle has been upheld by the Jurisdictional Tribunal in the case of Ashok Leyland Lt....
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....ed merely on the basis that the assessee had opted for the concessional tax regime u/s. 115BAA of the Act. 144. Based on the above submissions, the ld.AR submitted that the disallowance of capital expenditure u/s.35(1)(iv) of the Act should be deleted and the capital expenditure incurred during the year towards scientific research should be allowed. 145. Per contra the ld. DR supported the order of the AO / DRP and prayed that the disallowance of deduction of capital expenditure be confirmed. 146. We have heard the rival contentions and gone through the orders of the authorities along with the paper and book and decided case laws relied on by the parties. Admittedly the assessee has opted to section 115BAA of the Act for concessional tax rate of 22% plus surcharge of 10% and cess of 4% for domestic companies subject to satisfaction of certain conditions. 147. As per clause (i) of sub-section (2) to Section 115BAA of the Act, certain deductions are not allowed to claim the concessional rate of tax, which is reproduced below: "(2) For the purposes of sub-section (1), the total income of the company shall be computed,- (i) without any deduction under the ....
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....atories (P.) Ltd - 80 taxmann.com 236 - MAHLE Behr India (P.) Ltd - 130 taxmann.com 7 153. In light of the foregoing facts and discussion, and respectfully relying upon the judicial precedents cited supra, we are of the considered view that the assessee is eligible for deduction under Section 35(1)(iv) of the Income-tax Act, 1961. The Assessing Officer and the Dispute Resolution Panel have erred in disallowing the said deduction. Accordingly, we direct the Assessing Officer to allow the deduction as claimed, and the grounds of appeal raised by the assessee are allowed. 7. Disallowance of subscription charges of associations and clubs: AY 2020-21 - IT(TP)A 50/CHNY/2024 - Grounds 5.1 and 5.2 154. During the AY 2020-21, the assessee has incurred expenditure towards subscription charges for association and clubs amounting to Rs. 0.13 crores for business purposes of the assessee. The subscription towards membership of these associations were paid for the purpose of enjoying updates on business data, strategies and technical information which were vital to the business of the assessee and not for any individual membership or clubs. 155. The ld.AR submitted that th....
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....enue expenditure u/s. 37 of the Act and the disallowance made by the AO is not tenable and prayed for deleting the same. 161. We have heard the rival contentions and gone through the orders of the authorities along with the paper and book and decided case laws relied on by the parties. Admittedly the assessee has claimed certain expenditure during the A.Y. 2020-21 under the head subscription charges to the clubs and associations. We note that these expenses are paid towards renewal of memberships in various professional associations like The American Chamber of Commerce in India, Confederation of Indian Industries, Madras Management Association and All India Management Association etc. The assessee had also submitted the complete details of expenses incurred for subscription charges along with invoice references and sample copies of invoices before the lower authorities. Further, we find that these expenditure has not been spent for the welfare of the employees. The allowability of subscription fee u/s. 37 of the Act has been settled by the decision of the Hon'ble Supreme Court in the case of United Glass Mfg. Co. Ltd - 28 taxmann.com 429. 162. In view of the factual matr....
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.... of Certain Provisions) Act read with Circular 01/2022 dated 11.01.2022. 169. However, the above referred Circular clarified that the extension of dates for filing of return of income shall not apply to Explanation 1 of Section 234A of the Act, in cases where the amount of tax on total income as reduced by the amounts specified in clauses (i) to (vi) of sub-section (1) of Section 234A of the Act exceeds rupees one lakh. 170. In this connection, the ld.AR submitted that even though the assessee for the AY 2021-22 had filed the return of income on 13.03.2022, had duly paid the self- assessment taxes (i.e., the taxes payable as reduced by the amounts specified in clauses (i) to (vi) of sub-section (1) of Section 234A of the Act) within the due date as per Section 139(1) of the Act, i.e, within 30.11.2021. (The relevant excerpts from the return of income as enclosed as Annexure 2). Considering that the tax dues have been duly paid within the due date for filing of return of income u/s. 139(1) of the Act, the ld.AR prayed that no interest shall be chargeable u/s. 234A of the Act. 171. The Id.AR also relied upon the ruling of the Hon'ble Supreme Court in the case of Prano....