2018 (7) TMI 2239 - AT - Income Tax

TP Adjustment - working capital adjustment - provision written back was accepted to be operating margin of assessee in AY 2009-10 - In rectification application, assessee has submitted that these provisions no longer are required by assessee for year under consideration and has to be reversed because of which these provisions are to be treated as operating items for computation of working capital adjustments - HELD THAT - We find considerable force in submissions of Ld.Counsel, as mistake has crept in which is apparent from record. Ld.TPO even after directions by DRP has not granted working capital adjustment by not considering the written back amount as operating items. In the application for rectification filed by assessee, assessee has submitted all relevant information/details regarding the breakup of the provision written back. We therefore direct Ld.TPO to recompute working capital adjustment by considering these items as operating items after due verification. It is observed that DRP has directed to compute working capital adjustment by using safe harbour rules. It is very much evident from observations of order passed by DRP that CBDT had notified these rules vide notification dated 18/09/13. However Hon ble Delhi Tribunal in case of Rolls-Royce India Pvt. Ltd. vs. DCIT 2015 (12) TMI 516 - ITAT DELHI has held it to be applicable from 18/09/2013. With the above direction we remit this issue back to Ld. TPO/AO for recomputing the working capital adjustment by considering provisions written back as operating items without applying Safe Harbour Rules. Adjustment in respect of receivables - TPO computed interest on outstanding receivables at the rate equal to 11.69 % LIBOR (SBI base rate) 300 basis points - HELD THAT - There is no specific period mentioned for the payments to be received from its AE. Ld.TPO, therefore estimated a period of 30 days as allowable for payment receivables and any delay beyond 30 days has been bench marked as international transaction by imputing interest at the rate of 11.69% LIBOR 300 basis points. We deem it appropriate to set aside the impugned order on this issue and remit the matter to the file of the Assessing Officer/TPO for deciding it in conformity with the above referred judgment in case of Orange Business Services India Solutions Pvt. Ltd 2018 (2) TMI 1151 - ITAT DELHI Disallowance of 25% of expenditure incurred towards sales promotion on adhoc basis and expenditure incurred by assessee towards legal and professional expenses - HELD THAT - It is observed that corporate tax grounds raised before us involve disallowance towards sales promotion expenses and legal and professional expenses. Application for admitting additional evidence in respect of sales promotion expenses has been filed by assessee before us. We therefore set aside these issues to Ld.AO for verification of invoices placed in the form of additional evidences in respect of the sales promotion expenses and then allow the claim as per law. Assessee is directed to file evidence in respect of legal and professional expenses if any, to Ld.AO. Ld.AO shall verify the same and consider the claim of assessee as per law. Disallowance of prior period expenses - HELD THAT - It is observed that expenses claimed by assessee pertain to prior period, in respect of which additional evidence has been filed. This needs to be verified by Ld.AO. Ld.AO is directed first to apply test of allowability of these expenses u/s.37(1). In the event these expenses passed through threshold test, Ld.AO shall consider whether these are to be allowed as deduction for the year under consideration.

Issues Involved:
1. Transfer Pricing adjustments
2. Corporate Tax disallowances
3. Interest on outstanding receivables
4. Prior period expenses
5. Foreign tax credit
6. Penalty proceedings

Detailed Analysis:

Transfer Pricing Adjustments:
1. Addition under Chapter X: The authorities made an addition of ?10,22,69,751 under Chapter X of the Income-tax Act, 1961. The Tribunal remitted the issue back to the TPO/AO for recomputation of the working capital adjustment, directing that provisions written back should be considered as operating items.

2. Selection/Rejection of Comparables: The Tribunal addressed issues concerning the selection and rejection of comparables, directing the TPO to verify and recompute the operating margins correctly, considering the taxpayer’s objections and factual inaccuracies pointed out.

3. Provision of Telecommunication and Related Support Services: The Tribunal found that the TPO erred in not considering working capital adjustments for Telecommunication Consultants India Ltd. and directed the TPO to reconsider this based on the details furnished by the assessee.

4. Interest on Receivables: The Tribunal noted that the issue of interest on receivables was covered by the Delhi Tribunal in the assessee’s own case for the previous year and by the Delhi High Court in Kusum Healthcare. The Tribunal remitted the matter back to the AO/TPO for fresh consideration in line with these judgments.

Corporate Tax Disallowances:
1. Sales Promotion Expenses: The Tribunal set aside the issue of disallowance of 25% of sales promotion expenses to the AO for verification of invoices and to allow the claim as per law.

2. Legal and Professional Expenses: The Tribunal directed the AO to verify the evidence submitted by the assessee and consider the claim as per law.

Interest on Outstanding Receivables:
1. Characterization as International Transaction: The Tribunal noted that the issue of interest on receivables was covered by the Delhi Tribunal and the Delhi High Court in Kusum Healthcare. The Tribunal remitted the matter to the AO/TPO for fresh consideration, emphasizing the need for a proper inquiry into the impact on the working capital of the assessee.

Prior Period Expenses:
1. Disallowance of Prior Period Expenses: The Tribunal directed the AO to verify the additional evidence submitted by the assessee and apply the test of allowability under Section 37(1). If allowable, the AO should consider whether the expenses should be deducted in the year under consideration or in the previous year.

Foreign Tax Credit:
1. Disallowance of Foreign Tax Credit: The Tribunal directed the AO to verify the relevant documents regarding the payment of foreign taxes and consider the claim of the assessee accordingly.

Penalty Proceedings:
1. Initiation of Penalty Proceedings: The Tribunal noted that the penalty proceedings under Sections 271(1)(C) and 271G were premature at this stage and did not require adjudication.

Conclusion:
The appeals for both assessment years 2011-12 and 2012-13 were partly allowed for statistical purposes, with several issues remitted back to the AO/TPO for fresh consideration and verification. The Tribunal emphasized the need for proper verification and application of legal principles as per the directions provided.

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