2022 (11) TMI 1341 - AT - Income Tax

TP Adjustment - recovery of expenses made by the Appellant from its AEs during the relevant previous year - HELD THAT - Both TPO and DRP have simply cited non-submission of third party invoices as the reason for making the transfer pricing adjustment treating the same at par with the reimbursement of out-of-pocket expenditure incurred despite the Appellant taking a position that deduction was never claimed in the return of income which fact has not been challenged/controverted by the Revenue during appellate proceedings before us. The third party invoices submitted during the assessment proceedings were accepted. It was not the case of the Revenue that some mark-up was been charged by the Appellant while making recoveries from AEs. Accordingly transfer pricing adjustment made by the Assessing Officer is deleted. Reimbursement of Out-of-Pocket expenses - AO had vide Remand Report conveyed his consent for admission of additional evidence in the form of third-party invoices and requested the DRP to decide the issue on merits - HELD THAT - Remand this issue back to DRP for fresh adjudication as per law after giving Appellant a reasonable opportunity of being heard. While doing so the DRP shall take into consideration the thirdparty-invoices already filed by the Appellant and the Remand Report dated 21.10.2013 submitted by Assessing Officer in respect of the same as well as any further invoices/documents that may be filed by the Appellant before DRP to support the claim. Accordingly addition on account of the transfer pricing adjustment is set aside. Nature of expenditure - Disallowance of Software Expenses - Appellant appearing before us submitted that the aforesaid expenses were disallowed on the ground that the same were capital in nature and depreciation @ 60% was allowed in respect of the same - HELD THAT - Ground No. 5 raised in the appeal is dismissed as not pressed. The Assessing Officer is directed to allow depreciation in respect of the aforesaid amount at the rate of 60% as per law. TP adjustment - reimbursement of software maintenance expenses (connectivity charges) - HELD THAT - On closure scrutiny we note that the amount of USD 5, 440/- is the sum total of amount reflected in column with heading Supply and Installation Total Monthly Cost and the column with heading Manage and Maintain (per Month) . On perusal of Tesla Scope Statement it becomes clear that project is for obtaining Global IP VPN connection to help in connectivity between Chullora Sydney Australia and Mumbai India. Thus the connectivity expenses are separate from Software Maintenance Expenses - Further as per the Project Closure Report and the monthly intra-group account statements the same are being reimbursed at cost. TP addition is deleted. Ground No.3 is allowed. Allowability of lease payment - addition u/s 37(1) - HELD THAT - we note that in cash flow statement lease rent paid on finance lease has been shown under the head cash flow from the financing activity . Under Schedule 15 Operating and Administrative Expenses forming part of financial statement for the previous year relevant to the Assessment Year 2009-10 rent is shown as INR 5, 50, 82, 263/- and warehouse and facility charges are shown at INR 3, 45, 86, 682/-. Further Schedule 17 Notes to Accounts mentioned the maturity profile of finance lease obligations. Thus it is not clear whether the payment of INR 1, 00, 59, 111/- pertain to operating or finance lease obligations of the Appellant. Further before the Assessing Officer as well as before the DRP the Appellant has maintained the position that the payments pertain to finance lease. In view of the aforesaid facts we hold that the issue requires verification by the Assessing Officer. Deduction as bad debt written off - HELD THAT - In our view the amount is in the nature of advance for purchases in respect of which goods were never received resulting in loss from business operations. Accordingly the issue is remanded back to the file of AO to examine the allowability of deduction representing negative balance of creditors written off during the relevant previous year in terms of Section 37 of the Act after giving appellant an opportunity of being heard. Ground raised by the Appellant is allowed for statistical purposes. Granting of tax credit - HELD THAT - As the issue is remanded to the file of Assessing Officer with the directions to verify amount of tax credit available and grant the benefit of the same to the Appellant as per law. In case on verification the Assessing Officer is of the view that credit is not available the Appellant would be granted reasonable opportunity of being heard to justify its claim. Ground No. 10 is allowed for statistical purposes.

Summary

Issues Involved:
1. Transfer Pricing Adjustments
2. Disallowance of Software Expenses
3. Depreciation on Software Expenses
4. Addition on Account of Mismatch of AIR Details
5. Disallowance under Section 40(a)(iii)
6. Deduction of Lease Rentals
7. Write-off of Negative Balance of Creditors
8. Short Granting of Tax Credit

Detailed Analysis:

Issue 1: Transfer Pricing Adjustments

Ground No. 2, 3, and 4 pertain to the transfer pricing adjustment of INR 59,90,822/- for the AY 2009-10. The TPO proposed adjustments due to non-submission of third-party invoices. The Tribunal noted that the Appellant submitted third-party invoices amounting to INR 27,22,692/- which were not considered by the DRP. The Tribunal remanded the issue back to the DRP for fresh adjudication, considering the invoices and remand report.

For AY 2010-11, the Tribunal deleted the transfer pricing adjustment of INR 15,37,812/- for out-of-pocket expenses, following the reasoning adopted for AY 2008-09, as the Appellant had substantially complied with the directions. The Tribunal also deleted the transfer pricing adjustment of INR 24,69,193/- for software maintenance expenses, as the connectivity charges were separate from software maintenance expenses and reimbursed at cost.

Issue 2: Disallowance of Software Expenses

Ground No. 5 for both AY 2009-10 and AY 2010-11 pertained to disallowance of software expenses treated as capital expenditure. The Appellant did not press this ground and accepted depreciation at 60%. The Tribunal directed the Assessing Officer to allow depreciation as per law.

Issue 3: Depreciation on Software Expenses

Ground No. 6 for both AY 2009-10 and AY 2010-11 pertained to the claim of depreciation on software expenses disallowed in previous years. The Tribunal allowed the claim and directed the Assessing Officer to allow depreciation at 60% for the disallowed software expenses for AY 2008-09 and AY 2009-10.

Issue 4: Addition on Account of Mismatch of AIR Details

Ground No. 7 for AY 2009-10 pertained to the addition of INR 81,800/- due to mismatch of AIR details. The Appellant did not wish to pursue this ground, and it was disposed of as not pressed.

Issue 5: Disallowance under Section 40(a)(iii)

Ground No. 8 and 9 for AY 2009-10 pertained to disallowance of INR 3,16,53,132/- under Section 40(a)(iii). The Appellant did not wish to pursue these grounds as the deduction was allowed in AY 2010-11, and they were disposed of as not pressed.

Issue 6: Deduction of Lease Rentals

Ground No. 7(a) and 7(b) for AY 2010-11 pertained to disallowance of lease rental payments of INR 1,00,59,112/-. The Tribunal noted that the lease agreement was not in the nature of a finance lease and remanded the issue back to the Assessing Officer for verification and fresh adjudication.

Issue 7: Write-off of Negative Balance of Creditors

Ground No. 8 for AY 2010-11 pertained to the addition of INR 2,60,035/- claimed as bad debts written off. The Tribunal noted that the amount was not in the nature of a debt but a loss from business operations and remanded the issue back to the Assessing Officer to examine the allowability of the deduction under Section 37.

Issue 8: Short Granting of Tax Credit

Ground No. 10 for AY 2010-11 pertained to the short granting of tax credit of INR 21,57,321/-. The Tribunal remanded the issue back to the Assessing Officer for verification and directed to grant the benefit of tax credit as per law.

Conclusion:

Both appeals were partly allowed, with several issues remanded back to the Assessing Officer or DRP for fresh adjudication and verification. The Tribunal provided specific directions for each issue, ensuring compliance with legal provisions and giving the Appellant a reasonable opportunity of being heard.