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2019 (12) TMI 1280 - AT - Income TaxTP Adjustment - consideration of SEZ Unit setting up expenses and Ireland branch expenses as operating in nature while computing the margin of the assessee and consideration of unrealized foreign exchange gain/loss while computing the margin of the assessee - HELD THAT - The issue with regard to foreign fluctuation expenses, the Chennai Bench in the case of Infac India Pvt. Ltd. vs. DCIT 2018 (10) TMI 1814 - ITAT CHENNAI , we direct the Assessing Officer to exclude the loss on account of foreign fluctuation from the operating expenses for computing the PLI (Profit Level Indicator). This ground of appeal of the assessee is allowed. Companies not passing the forex filter and the employee cost filter need to be deselected as comparable. Assessee is engaged in product engineering services thus companies functionally dissimilar with that of assessee need to be deselected from final list. TPO had applied related party filter of greater than 25% Disallowance of working capital adjustment - We are inclined to direct the Assessing Officer to consider the working capital adjustment as computed by him while determining the ALP of international transactions of the assessee with its AEs. Thus, this ground of appeal of the assessee is partly allowed. Erroneous imputation of interest on recovery of expenses - HELD THAT - As relying on M/S. ALLIANZ CORNHILL INFORMATION SERVICES PRIVATE LIMITED VERSUS THE DY. COMMISSIONER OF INCOME-TAX, CIRCLE 2 (1) TRIVANDRUM 2018 (6) TMI 279 - ITAT COCHIN we direct the Assessing Officer to adopt interest at the rate of 8.15% p.a. while computing the ALP. This ground of the assessee is partly allowed. Disallowance of finance lease payments u/s. 37 - HELD THAT - Assessee is entitled for financial lease charges as revenue expenditure only if it has not claimed depreciation on the leased asset. The assessee had not explained whether it claimed depreciation on the leased asset or not. In other words, the assessee is entitled to financial lease charges only in the event if it does not claim depreciation on such leased asset since depreciation on such leased asset is to be claimed by the lessor only. The assessee is not the owner of the leased assets. Once the assessee proves that it has not claimed depreciation on the assets taken on lease, the assessee is entitled for lease rentals paid by the assessee as a revenue expenditure. With this observation, we remit this issue to the file of the Assessing Officer to examine the assessee s Profit and Loss account and balance sheet with reference to the agreements entered into by the assessee with the lessor. This ground of appeal of the assessee is partly allowed for statistical purposes. Disallowance of interest expenses on account of interest free loans advanced to related parties - HELD THAT - Since this ground of appeal of the assessee is allowed since the assessee was having sufficient funds in the form of reserves for granting loans to its sister concerns. Disallowance of additional expenditure incurred owing to the misconduct of the employees u/s. 37 - HELD THAT - The assessee has neither produced any documents before the Assessing Officer nor produced before the DRP nor even before us. The nature of the expenditure has not been substantiated by the assessee. Hence, we do not find any infirmity in the order of the CIT(A) and confirm the ground. Thus, this ground of appeal of the assessee is dismissed. Non consideration of inadvertent disallowance of the same expense twice - HELD THAT - This issue is remitted to the file of the Assessing Officer to ascertain the correct position of the disallowance. Thus, this ground of appeal of the assessee is partly allowed for statistical purposes.
Issues Involved:
1. Assessment and Reference to Transfer Pricing Officer (TPO) are bad in law. 2. Erroneous Computation of Margin of the Appellant. 3. Determination of arm's length price by the TPO in relation to the 'IT Services.' 4. Erroneous data used by the TPO. 5. Erroneous disallowance of Working Capital Adjustment. 6. Appropriate adjustments to the comparable companies. 7. Variation of 5% from the arithmetic mean. 8. Imputation of interest on recovery of expenses. 9. Erroneous disallowance of finance lease payments. 10. Erroneous disallowance of interest expenses on account of interest-free loans advanced to related parties. 11. Erroneous disallowance of additional expenditure incurred owing to the misconduct of the employees. 12. Non-consideration of inadvertent disallowance of the same expense twice. Issue-Wise Detailed Analysis: 1. Assessment and Reference to Transfer Pricing Officer (TPO) are bad in law: The Tribunal found Ground No. 1 to 1.4 too general in nature and did not require adjudication. 2. Erroneous Computation of Margin of the Appellant: The Tribunal remitted the issue regarding SEZ Unit setting up expenses and Ireland branch expenses to the Assessing Officer (AO) to examine whether these expenses were related to the setting up or operation of the SEZ unit during the assessment year under consideration. Regarding the treatment of foreign exchange fluctuation, the Tribunal directed the AO to exclude the loss on account of foreign fluctuation from the operating expenses for computing the Profit Level Indicator (PLI). 3. Determination of arm's length price by the TPO in relation to the 'IT Services': The Tribunal addressed various sub-grounds under this issue: - Comparable Companies: The Tribunal directed the AO to re-examine the inclusion/exclusion of certain companies like Evoke Technologies Ltd., Larsen & Toubro Infotech Ltd., Persistent Systems Ltd., Mindtree Ltd., Cigniti Technologies Ltd., Thirdware Solutions Ltd., and Infosys Ltd. based on functional comparability and other criteria. - Foreign Exchange Fluctuation: The Tribunal directed that foreign exchange gain/loss should be excluded from the operating income for computing PLI. 4. Erroneous data used by the TPO: Ground Nos. 4, 6, and 7 were not pressed by the assessee and hence were dismissed as not pressed. 5. Erroneous disallowance of Working Capital Adjustment: The Tribunal directed the AO to consider the working capital adjustment as computed by the AO while determining the ALP of international transactions of the assessee with its AEs, following the decision in the case of Zafin Software Centre of Excellence Pvt. Ltd. 6. Appropriate adjustments to the comparable companies: This ground was not pressed by the assessee and hence was dismissed as not pressed. 7. Variation of 5% from the arithmetic mean: This ground was not pressed by the assessee and hence was dismissed as not pressed. 8. Imputation of interest on recovery of expenses: The Tribunal directed the AO to adopt an interest rate of 8.15% p.a. while computing the ALP for the imputed interest on recovery of expenses, following the decision in the case of M/s. Allianz Cornhill International Service Pvt. Ltd. 9. Erroneous disallowance of finance lease payments: The Tribunal remitted the issue to the AO to examine whether the assessee claimed depreciation on the leased assets. If the assessee did not claim depreciation, the lease rentals paid should be allowed as revenue expenditure. 10. Erroneous disallowance of interest expenses on account of interest-free loans advanced to related parties: The Tribunal allowed the ground, noting that the assessee had sufficient own funds in the form of reserves for granting loans to its sister concerns, following the decision in the assessee’s own case for AY 2008-09. 11. Erroneous disallowance of additional expenditure incurred owing to the misconduct of the employees: The Tribunal dismissed this ground as the assessee neither produced any documents before the AO nor the DRP to substantiate the nature of the expenditure. 12. Non-consideration of inadvertent disallowance of the same expense twice: The Tribunal remitted this issue to the AO to ascertain the correct position of the disallowance, following the assessee’s claim that the same expense was disallowed twice under section 40(a)(ia) of the Act. Conclusion: The appeal of the assessee was partly allowed for statistical purposes, with several issues remitted back to the AO for fresh examination and others being decided in favor of the assessee based on existing precedents and detailed analysis.
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