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2016 (1) TMI 1415 - AT - Income TaxDisallowance made under the head project risk expenses (PRE) - liquidated damages for breach of contract for delay in supply of goods - Allowable expenditure incurred for the purpose of business u/s 37(1) - HELD THAT - As per the conditions of the agreement entered by the assessee with the HPCL assessee had to compensate HPCL for delay in executing the project that the factum of delay is not in dispute. Therefore in our opinion the issue is directly covered by the decision of KCP Ltd. 1990 (6) TMI 111 - ITAT HYDERABAD-B As relying on BHARAT EARTH MOVERS VERSUS COMMISSIONER OF INCOME-TAX 2000 (8) TMI 4 - SUPREME COURT liquidated damages for breach of contract for delay in supply of goods are allowable deduction in the assessment year relevant to the point of time when the breach occurred and not the point of delivery of goods and raising of bills.Ground no.1 is decided in favour of the assessee for the two amounts i.e. 1.26 crores and 81.00 lacs.As far as 31.83 lacs is concerned we are of the opinion that AO should add back the PRE while computing deduction u/s. 10A/B in view of the decision of Hon ble Jurisdictional High Court delivered in the case of Gem Plus Jewellery 2010 (6) TMI 65 - BOMBAY HIGH COURT Adjustment on account of notional interest on overdue receivable - During the assessment proceedings, the AO found that the assessee had entered in to international transactions - HELD THAT - The transaction in question is an international transaction and not a result of a transaction as argued by the AR.The assessee had provided specific services to its AE s therefore the series of events cannot be termed a result of international transaction. Once it has been decided that issue before us is a Transfer Pricing issue then the value of the transaction has to be determined. It is a case where the TPO has relied upon on the agreement entered into by the assessee with its AE and has treated it as a Benchmark.We find that no independent source was searched or relied upon by the him.It is a fact that the agreements with the third parties did not contain any clause for charging interest for delayed payment. Thus, the matter has its own peculiarities.The assessee has entered in to agreement with the AE.s.and value of the transaction will have to be decided.The arguments of factoring of delayed payment in the value of service cannot be brushed aside especially when it is found that the OPTC margin earned by the assessee was 29.41 % and it was quite higher than the parties compared with i.e.app.15%.The TPO had not considered these vital issues and had applied the flat rate of 2%, as mentioned in the agreement.In our, opinion the alternate argument advanced by the assessee of adopting LIBOR rate is worth considering, if the facts of the case under appeal are deliberated upon. In the interest of justice interest rate should be fixed at LIBOR 200 points for the delayed payments received by the assessee from its AE.s.for the period as mentioned in the agreements.AO is directed to recalculate the interest amount accordingly.Ground no.4-5 are decided in favour of the assessee, in part. Disallowance of expenditure under the heads communication and network services and IT Infrastructure Services - HELD THAT - Assessee had filed invoices and the basis of payments made under the heads communication and network related services and IT Infrastructure service charge (page- 418-425 of the PB). It is found that assessee had made submission in that regard before FAA and had produced group IT Service agreement.We find that same were not properly analysed by the TPO/ FAA.We are of the opinion that issue needs further verification and investigations. Therefore in the interest of justice we are remitting back the matter to the TPO for fresh adjudication who will decide the issue after affording a reasonable opportunity of hearing to the assessee. The assessee is directed to produce all the necessary documents related to Communication and network related services and IT Infrastructure service charge to the TPO Computation of deduction u/s 10A - reducing expenditure incurred in foreign currency for providing technical services from total turnover - HELD THAT - Hon ble Bombay High Court in assessee s own case has decided the issue in ts favour for the AY.s. 2002-03-2005-06 2013 (1) TMI 984 - BOMBAY HIGH COURT 2013 (2) TMI 878 - BOMBAY HIGH COURT and 2011 (7) TMI 1350 - BOMBAY HIGH COURT wherein as held that the expenses reduced from the figure of export turnover should also be excluded from the figure of total turnover while computing deduction under section 10A 10B
Issues Involved:
1. Disallowance of Project Risk Expenses (PRE) 2. Adjustment on account of notional interest on overdue receivables 3. Disallowance of expenditure under the heads 'communication and network services' and 'IT Infrastructure Services' 4. Deduction u/s. 10A of the Act with respect to expenses incurred in foreign exchange for providing technical services Detailed Analysis: 1. Disallowance of Project Risk Expenses (PRE): The first ground of appeal pertains to the disallowance made under the head project risk expenses (PRE), amounting to Rs. 31.83 lacs. The AO found that the assessee had debited an amount of Rs. 2.38 crores as PRE, which was provisioned for liquidated damages due to delayed delivery. The AO disallowed the claim, holding that the provision made by the assessee for possible liquidated damages was erroneous and could not be allowed as an expenditure incurred for the purpose of business u/s.37(1). The FAA upheld the AO's decision, stating that the claim of damages by the customer had not been adjudicated by arbitration, and the project was not completed in the year under appeal. The Tribunal, however, found that the issue was directly covered by the decision of KCP Ltd., where it was held that liquidated damages for breach of contract for delay in supply of goods are allowable deductions in the assessment year relevant to the point of time when the breach occurred. Thus, the Tribunal decided the ground in favor of the assessee for the amounts of Rs. 1.26 crores and Rs. 81.00 lacs, while directing the AO to add back the PRE while computing deduction u/s. 10A/B in view of the decision of Hon'ble Jurisdictional High Court delivered in the case of Gem Plus Jewellery. 2. Adjustment on account of notional interest on overdue receivables: The next effective ground is about the adjustment on account of notional interest on overdue receivables of Rs. 3.45 crores. The AO, based on the TPO's findings, made an upward adjustment for not charging interest from the AE's for delayed payments. The FAA upheld the AO's decision, stating that the terms of the agreement with the AE included a specific clause for charging interest on delayed payments, which was not present in agreements with third parties. The Tribunal, however, found that the transaction in question is an international transaction and not a result of a transaction. The Tribunal directed that the interest rate should be fixed at LIBOR+200 points for the delayed payments received by the assessee from its AE's, and the AO was instructed to recalculate the interest amount accordingly. 3. Disallowance of expenditure under the heads 'communication and network services' and 'IT Infrastructure Services': The last effective ground deals with the disallowance of expenditure of Rs. 55.19 lacs and Rs. 33.13 lacs under the heads 'communication and network services' and 'IT Infrastructure Services' respectively. The TPO had determined the arms-length price for these services due to the lack of detailed documentation provided by the assessee. The FAA upheld the TPO's decision, rejecting the aggregation of various international transactions under the TNMM method. The Tribunal found that the issue needs further verification and investigations and remitted the matter back to the TPO for fresh adjudication, directing the assessee to produce all necessary documents related to these services. 4. Deduction u/s. 10A of the Act with respect to expenses incurred in foreign exchange for providing technical services: The effective ground of appeal filed by the AO is about the direction given by the FAA for reducing expenditure incurred in foreign currency for providing technical services from total turnover while computing deduction u/s.10A of the Act. The FAA had followed the Tribunal's judgment for the AY 04-05 in the assessee's own case, holding that expenses incurred in foreign exchange towards technical services provided outside India should be reduced from both export turnover and total turnover. The Tribunal, following the Hon'ble Bombay High Court's decision in the assessee's own case for the AYs 2002-03 to 2005-06, decided the issue against the AO and in favor of the assessee. Conclusion: The appeal filed by the assessee stands partly allowed, and the appeal of the AO is dismissed. The Tribunal directed specific recalculations and remittances for further verification on certain grounds, ensuring that the issues are resolved in accordance with established legal precedents and principles.
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