2016 (3) TMI 1209 - AT - Income Tax

Determination of arm s length interest rate - Held that - This issue is similar to the issue raised in earlier year, wherein the DRP has directed the AO to adopt the interest rates of the loanee country and to search in the Loan connector data base which was not done by the AO/TPO. Thus we direct the TPO to follow accordingly in this year also and examine the ALP on similar lines. Deduction claimed u/s. 35D - Held that - We direct the AO to examine the above and allow relief as in earlier years, since claim is arising in earlier years. With this, this ground is considered as allowed. Adjustment made under the head Foreign Exchange Loss - Held that - Respectfully following the decision taken in earlier year, we direct the AO to allow the loss as claimed. Moreover, as seen from the order of the DRP, the DRP also directed the AO to include the foreign exchange loss or gain as part of operating cost vide para 4 & 5 with reference to foreign exchange fluctuation gain on restatement of FCCBs. When the DRP directed the AO to treat the foreign exchange fluctuation as an operational cost revenue/cost vide para 8.3, we are unable to understand how the AO can take a decision now treating it as a speculative loss, contrary to the direction of the DRP Un-realized foreign exchange gain on FCCBs - whether treated as income or not? - Held that - We direct the AO to treat the above amount as on capital account, to be adjusted in capital accounts. However, if any benefit was obtained by assessee in the TP provisions by treating this amount as operational income, we direct the AO/TPO to examine the working again, so as to exclude the amount from the computation and if any adjustment is required. Assessee cannot take advantage of its own stand to the detriment of Revenue in TP provisions. There should be a constant approach. Treatment of this gain as operational income does not arise as the same was not treated as income, therefore any computation based on that has to be reexamined. This issue can be considered by the TPO afresh and if necessary, necessary proceedings can be initiated under the TP provisions as a direction by the Bench. With these directions, these grounds are allowed. Realised foreign exchange fluctuation pertaining to assets as business income - Held that - AO is directed to allow the claim from the computation of income to adjust the same from the cost of assets in accordance with the provisions of Section 43A. These grounds are also treated as allowed Disallowance of depreciation on computer software - Held that - There is no adjustment to be made u/s. 43(6) towards the cost of assets which are capitalised, in case of failure to deduct tax. The provisions of Section 40(a)(ia), therefore cannot be extended to the disallowance of depreciation which is allowable u/s. 32. In case any default is there for non-deduction of tax, AO could have invoked the provisions of Section 201/201(1A), but cannot resort to disallowance of depreciation u/s. 40(a)(ia) on an asset which was capitalised in the Books of Account and depreciation was claimed. The action of the AO cannot be upheld. Accordingly, he is directed to allow depreciation as claimed by assessee in its computation. The alternate contention of excess disallowance becomes academic. The disallowance so made by the AO is deleted. Adjustments made to the export turnover for the purpose of computing deduction u/s. 10AA - Held that - We direct the TPO to exclude the amounts which are considered for disallowance, other than those expenses pertaining to freight, telecommunication charges or insurance attributable to the delivery of articles or things outside India or directly relatable to service outside India. Grounds are considered allowed accordingly. Non-grant of Foreign Tax Credit - Held that - Since the taxable income as per the return of income was NIL, assessee did not claim the FTC in its return of income. While making the various disallowances, AO was informed about the details of FTC but AO did not consider the same. It was the submission that AO should examine the FTC entitlement in case, there is any taxable income while giving effect to the order of the ITAT. After considering the rival contentions, we agree with assessee s contentions. In case, assessee s claim of total income being NIL was not accepted by the AO and any disallowances or adjustments are made, then, assessee s claim for FTC also should be examined, before raising any tax demand on assessee.With these directions, the ground is considered allowed for statistical purposes. Disallowance of year end professional charges - invoking the provisions of Section 40(a)(ia) - Held that - The order of the DRP cannot be accepted. First of all, DRP should have seen whether the amounts are credited to individual accounts or general provision was made. Not only that explanation to the section 194J specifies that credit in the Books of Account also attracts TDS. Since the direction of the DRP is not in accordance with the provisions of the Act, we have no hesitation in reversing the said decision. The AO s action is upheld. However, AO is directed to examine whether the amounts so disallowed are pertaining to the unit in which assessee has claimed 10AA deduction and if so, the disallowance would increase the profits of such unit. Accordingly, deduction u/s. 10AA may have to be increased. This aspect requires examination by the AO. Subject to that, Revenue s ground is treated as allowed. Disallowance of depreciation on servers - Held that - No reason to interfere with the order of the DRP. The servers are the part of computer equipment and cannot work in isolation. Accordingly, the directions are upheld. Revenue s ground on this issue is rejected. Adjustments made to export turnover for the purpose of deduction of Section 10AA - Held that - It is admitted that on a parity of comparison, whatever is reduced from the export turnover has to be reduced from the total turnover and this principle was accepted by the jurisdictional Karnataka High Court in the case of CIT Vs. Tata Elxsi Ltd. 2014 (9) TMI 1013 - KARNATAKA HIGH COURT , which the DRP has followed. We do not see any reason to interfere with the above principle, however, we have already directed in assessee s appeal to exclude certain expenditure which was disallowed by the AO from the export turnover. Consequently, there will be adjustments to be made to the total turnover also.

Summary

Issues Involved:
1. Transfer Pricing (TP) Adjustments
2. Deduction under Section 35D
3. Foreign Exchange Fluctuations
4. Depreciation on Computer Software
5. Computation of Deduction under Section 10AA
6. Non-grant of Foreign Tax Credit
7. Disallowance of Year-End Professional Charges
8. Depreciation on Servers

Issue-wise Detailed Analysis:

1. Transfer Pricing (TP) Adjustments:
The primary issue was the determination of arm’s length interest rate by the TPO. The assessee received interest on loans given to its AE at 6% p.a., but the TPO adopted a rate of 14.74%. The DRP did not follow its previous year’s order, which directed the AO to adopt interest rates of the loanee country and verify from the 'Loan connector' database. The Tribunal directed the TPO to follow the previous year’s method and examine the ALP on similar lines.

2. Deduction under Section 35D:
The assessee claimed a deduction under Section 35D for expenses incurred during the acquisition of two companies and raising capital through GDR and FCCBs. The AO restricted the claim, but the Tribunal directed the AO to allow the claim as in earlier years, following the Tribunal’s order for AY 2008-09, which recognized FCCBs as debentures eligible for calculation as part of 'capital employed in the business of the company'.

3. Foreign Exchange Fluctuations:
The AO treated foreign exchange losses as speculative, but the Tribunal held that such losses are not contingent or speculative. The Tribunal directed the AO to allow the losses as business losses, following the principles established by the Supreme Court in the case of ONGC and the Bombay High Court in Badridas Gauridu (P.) Ltd. The Tribunal also addressed the treatment of unrealized foreign exchange gains on FCCBs, directing the AO to treat these as capital account adjustments.

4. Depreciation on Computer Software:
The AO disallowed depreciation on computer software due to non-deduction of tax at source, but the Tribunal held that Section 40(a)(ia) does not apply to capitalized software purchases. The Tribunal directed the AO to allow depreciation as claimed by the assessee.

5. Computation of Deduction under Section 10AA:
The AO reduced certain expenses from the export turnover for computing the deduction under Section 10AA. The Tribunal directed the AO to exclude only those expenses directly attributable to the delivery of articles or services outside India. The Tribunal also upheld the DRP’s direction to adjust the total turnover accordingly.

6. Non-grant of Foreign Tax Credit:
The assessee claimed a foreign tax credit which was not considered by the AO. The Tribunal directed the AO to examine the FTC entitlement while giving effect to the order of the ITAT, in case there is any taxable income.

7. Disallowance of Year-End Professional Charges:
The AO disallowed year-end professional charges due to non-deduction of tax at source. The DRP accepted the assessee’s contention that the identity of the payee could not be ascertained at the time of provision. However, the Tribunal reversed the DRP’s decision, directing the AO to examine whether the amounts pertain to the unit eligible for Section 10AA deduction and adjust the profits accordingly.

8. Depreciation on Servers:
The AO treated servers as Plant & Machinery instead of computer equipment. The DRP allowed depreciation at the rate applicable to computers. The Tribunal upheld the DRP’s decision, recognizing servers as part of computer equipment.

Conclusion:
The Tribunal allowed the assessee’s appeal for statistical purposes and partly allowed the Revenue’s appeal, providing specific directions to the AO and TPO for re-examination and adjustments based on the established principles and previous orders.