2022 (8) TMI 1343 - AT - Income Tax

TP Adjustment - understanding of the business model of the assessee and test the arm s length price - HELD THAT - As from clauses off the agreements submitted by the assessee it is clear that that TPO/DRP have not understood the business model of the assessee in treating the Assessee as a service provider to all of its AEs is contrary to the facts of the case. It is clear that the TPO/DRP has not appreciated the facts of business model of the assessee properly and proceeded to make the entire TP adjustment on an incorrect premise. We therefore remit the issue back to the TPO for a denovo consideration afresh basis the correct understanding of the business model of the assessee and test the arm s length price accordingly after giving reasonable opportunity of being heard to the assessee. The assessee is directed to cooperate in the proceedings before the TPO and submit all the relevant details. This ground is allowed for statistical purposes. Disallowance of depreciation - assessee has claimed depreciation @ 60% towards the addition made to the block of assets Computers - AO following the earlier years orders, allowed depreciation only @ 15% treating the additions as part of telecom equipment as they relate to functioning of mobile phones - HELD THAT - Tribunal in assessee s own case for AY 2008-09 which is confirmed by the jurisdictional High Court 2014 (9) TMI 45 - ITAT BANGALORE we hold that depreciation is to be allowed @ 60% on the CG/TX cards and switches, etc. This ground is allowed in favour of assessee. Disallowance u/s 14A r.w.r. 8D - Necessity of receording satisfaction - assessee has not maintained separate accounts and the incurring of interest expenditure, especially other administrative and general expenses cannot be ruled out - HELD THAT - The purpose of application of section 14 r.w.r 8D(2)(iii) the AO has to record reasons as to why he is not satisfied with the correctness of the claim of expenditure by the assessee. We notice that the AO though, under the head reasons for applying Rule 8D has made a detailed analysis of the provisions of section 14A has not brought anything on record to factually state that the computation of disallowance made by the assessee - AO has also not called for any details from the assessee or analysed the workings of the disallowance. No disallowance can be made u/s 14A of the Act read with Rule 8D of the IT Rules, where the A.O. failed to record dissatisfaction of correctness of the claim of the assessee. A similar view has also been taken by the Hon'ble jurisdictional High Court in the case of Essilor India (P.) Ltd. 2022 (2) TMI 286 - KARNATAKA HIGH COURT - Therefore the disallowance made under section 14A r.w.r 8D(2)(iii) is deleted. Disallowance made under Rule 8D(2)(ii) - As relying on judgment of the Hon'ble Apex Court in the case of Reliance Industries Ltd. 2019 (1) TMI 757 - SUPREME COURT we hold that disallowance u/s 14A r.w. Rule 8D(2)(ii) is not warranted in the facts of the instant given case. It is ordered accordingly. Consideration of incorrect amount of income from other sources - HELD THAT - We direct the AO to consider this issue afresh and decide the same in accordance with law. Disallowance of additional foreign tax credit - AR submitted that the AO erred in restricting the foreign tax credit to the amount claimed in the return of income, without appreciating the assessee s submission that it would be eligible for additional credit owing to assessed income being greater than returned income - HELD THAT - We direct the AO to consider this issue afresh and decide the same in accordance with law. Disallowance of TDS credit - Assessee claimed additional credit pursuant to additional certificates being received post filing of the return of income and also it had inadvertently considered duplicate entries of TDS - HELD THAT - As we direct the AO to consider the revised tax credit afresh and decide the same in accordance with law. Deduction in respect of unclaimed Foreign Tax Credit (FTC) - HELD THAT - In the case of Reliance Infrastructure Ltd 2016 (12) TMI 1293 - BOMBAY HIGH COURT has laid down the ratio that to the extent tax paid in foreign country on income which has arisen/accrued in India, has to be considered in the nature of expenditure incurred or arisen to earn income and is to be allowed as a deduction. In the given case it is submitted that out of the foreign taxes paid no credit was claimed . Of the said foreign tax paid how much is attributable to the income accrues / arises in India needs to be verified in order to arrive at the extent of allowability. This issue is raised as additional ground before the Tribunal and the issue is not factually verified by the lower authorities. We therefore remit this issue back to the AO. The AO is directed to verify the amount of foreign tax credit paid that is attributable to the income accruing / arising in India and allow the same accordingly in the light of the decision of the Hon ble Bombay High Court in the case of Reliance Infrastructure Ltd (supra) after giving reasonable opportunity of being heard. This ground is allowed in favour of the assessee for statistical purposes Disallowance u/s 14A - Suo moto addition made by assessee - HELD THAT - AO has not recorded any specific reason for the suo motu disallowance made by the assessee not being sufficient and did not bring anything to the contrary on record. Hence placing reliance on the decision of Maxopp Investment Ltd 2018 (3) TMI 805 - SUPREME COURT and decision of Essilor India (P.) Ltd 2022 (2) TMI 286 - KARNATAKA HIGH COURT we hold that the disallowance made under section 14A r.w.r 8D(2)(iii) stands deleted.

Summary

Issues Involved:
1. Transfer Pricing adjustment
2. Disallowance of depreciation under Section 32 of the Income-tax Act
3. Disallowance under Section 14A of the Income-tax Act
4. Incorrect adoption of income from other sources
5. Disallowance of additional foreign tax credit
6. Disallowance of TDS credit
7. Interest under Section 234B
8. Non-grant of interest under Section 244A
9. Penalty proceedings
10. Deduction in respect of unclaimed Foreign Tax Credit (FTC)

Detailed Analysis:

1. Transfer Pricing Adjustment:
The assessee contended that the Transfer Pricing (TP) adjustment made by the TPO was based on a misunderstanding of the business model. The Tribunal noted that the assessee provides mobile value-added services (MVAS) and has subsidiaries that perform routine functions. The TPO incorrectly classified these services as software development services (SWD). The Tribunal found that the TPO and DRP failed to appreciate the business model correctly and thus remitted the issue back to the TPO for de novo consideration. The Tribunal directed the TPO to reassess the arm's length price based on a correct understanding of the business model.

2. Disallowance of Depreciation under Section 32:
The assessee claimed depreciation at 60% on additions to the block of assets categorized as "Computers," including items like NMS CG/TX cards and switches. The AO allowed only 15%, treating them as telecom equipment. The Tribunal, following earlier decisions, held that these items should be classified as computers and allowed depreciation at 60%.

3. Disallowance under Section 14A:
The AO disallowed Rs. 17,18,651 under Section 14A r.w. Rule 8D, but the assessee argued that it had already disallowed Rs. 1,96,199 suo motu. The Tribunal noted that the AO did not record any dissatisfaction with the assessee's computation and thus deleted the disallowance under Rule 8D(2)(iii). For disallowance under Rule 8D(2)(ii), the Tribunal found that the assessee had sufficient own funds and thus deleted the interest disallowance.

4. Incorrect Adoption of Income from Other Sources:
The AO considered the gross total income as income from other sources instead of the correct amount of Rs. 4,70,10,723. The Tribunal directed the AO to reconsider this issue afresh.

5. Disallowance of Additional Foreign Tax Credit:
The AO restricted the foreign tax credit to the amount claimed in the return, without considering the assessed income being higher. The Tribunal directed the AO to reconsider this issue afresh based on the assessed income.

6. Disallowance of TDS Credit:
The assessee claimed additional TDS credit during assessment proceedings, which the AO did not consider. The Tribunal directed the AO to reconsider the revised TDS credit claim.

7. Interest under Section 234B:
This issue was noted as consequential and did not require separate adjudication.

8. Non-grant of Interest under Section 244A:
This issue was also noted as consequential and did not require separate adjudication.

9. Penalty Proceedings:
This issue was noted as consequential and did not require separate adjudication.

10. Deduction in respect of Unclaimed Foreign Tax Credit (FTC):
The assessee claimed a deduction for foreign taxes paid but not claimed as credit. The Tribunal, following the Bombay High Court's decision in Reliance Infrastructure Ltd., remitted the issue back to the AO to verify and allow the deduction for foreign taxes paid attributable to income accruing/arising in India.

Conclusion:
The Tribunal partly allowed the appeals, remitting several issues back to the AO/TPO for fresh consideration based on correct understanding and verification of facts. The Tribunal also provided specific directions on the treatment of depreciation, disallowance under Section 14A, and foreign tax credits. The judgments were consistent with earlier decisions and legal precedents.