2016 (6) TMI 632 - AT - Income Tax

Transfer pricing adjustment - DRP determining the arm s length price of the international transaction pertaining to management charges (Area Management Cost/Corporate Management Cost) at Nil - Held that - The assesse has fairly accepted that the assessee could not lead the necessary evidence, in support of rendition of services, at the assessment stage, and it was only before the DRP that the assessee could produce the evidence. He submits that this was the first year for payment of management services and that there were genuine difficulties preventing the assessee from submission of these details at the assessment stage. He has now submitted voluminous evidences before us but, in our considered with you, the right course of action will be that all these evidences are examined at the assessment stage. The examination of basic evidence at the appellate stage or even at the stage of the DRP is neither appropriate nor desirable, and even doing so, in appropriate cases, calls for the comments from the assessment stage. We donot want to conduct this exercise of appreciating the evidence, for the first time in the case of the assesse, at this level. Learned Departmental Representative has also not seriously opposed this suggestion of the matter being remitted to the assessment stage. In this view of the matter, and with the consent of the parties, the matter stands restored. As the matter is being remitted to the assessment stage, it will be open to the assessee to take all such pleas, as he may be advised, and the TPO shall adjudicate upon the same in accordance with the law, by way of a speaking order and after giving yet another fair opportunity of hearing to the assessee. Disallowance of expenses under section 14 A - whether the investment in Mutual Funds (growth scheme) will be included in the assets yielding tax exempt income, for the purpose of computing disallowance under section 14A r.w.r. 8D, when this investment does not actually yield any tax exempt income - Held that - There is no dispute that gains on redemption of this investment has been offered to tax, and that no tax exempt income was earned by this investment. On these facts, and bearing in mind the fact that the issue is covered, in favour of the assessee, by decision of the coordinate bench in assessee s own case for the assessment year 2008-09, we uphold the grievance of the assesse and direct the Assessing Officer to modify the disallowance accordingly. As for the small amount of ₹ 1,307, no arguments were advanced in respect of the same. It is treated as abandoned in view of the smallness of the amount. Taxing foreign receipts on gross basis - Held that - We are of the considered view that there is no ambiguity on the aspect whether it is the gross amount of foreign income, or the amount net of tax in respect of foreign income, which is to be brought to tax. The tax is on the income, and, as for the tax imposed in the source country i.e. Zambia in this case, double taxation relief is very well admissible under section 90 read with Article 24 of India Zambia Double Taxation Avoidance Agreement. Just because an assessee does not claim double taxation relief in respect of an income, it does not entitle the assessee to exclude that income from taxable income. Nothing, therefore, turns on not claiming double taxation relief on an income, so far as taxability of that income is concerned. As for the relief under section 90, the assessee is entitled to relief for the entire income. When entire income is brought to tax, as a corollary to the same, double taxation relief is to be given in respect of the same. To that extent, grievance of the assessee is justified. Disallowance of software expenses - Held that - There is no dispute about genuineness of the expenses and the dispute before us is confined to the question whether it should be treated as revenue expenditure or as capital expenditure. We have noted that out of a total expense of ₹ 5,88,62,091, an amount of ₹ 5,29,32,320 is aid to the Aker Norway for actual use of software. Since the amount is paid on the basis of actual use of software, and not for acquisition of software, there cannot be any occasion for treating the same as capital expenditure. As regards the remaining amount also, as evident from the copies of invoices before us, the payment is for the licence fees on annual basis, and not for the entire project period. The fact that the licence is used in a project which has a life span of over one year does not mean that the benefit from the licence fees was more than one year. In our considered view, in the light of these facts evident from material on record, it is unambiguous that the authorities below have wrongly held the software payment to be capital expenditure in nature. We, therefore, uphold the grievance of the assessee and direct the Assessing Officer to treat the software expenses as revenue expenditure in nature. Expenses on sale of capital asset disallowed - Held that - Wwe find that the expenses pertains to legal expenses in connection with structuring of the transaction and related aspects. These expenses were incurred in the course of the business and for its operations, though the specific issue on which advice was sought pertained to the sale transaction. Merely because the transaction in question is a capital asset, the legal expenses will not also become capital expenditure. See CIT vs Bush Boake Allen India Ltd 1981 (10) TMI 32 - MADRAS High Court Addition made against the negative contracts margin and prior period expenses to be deleted as relying on assessee s own case for AY

Summary

Issues Involved:
1. Transfer pricing adjustment under section 92CA(3)
2. Disallowance of expenses under section 14A
3. Taxing foreign receipts on a gross basis
4. Disallowance of software expenses
5. Disallowance of expenses on the sale of capital assets
6. Negative contracts margin and prior period expenses

Detailed Analysis:

1. Transfer Pricing Adjustment under Section 92CA(3):
The assessee challenged the adjustment of ?1,36,27,169 made by the Addl. CIT/DRP, determining the arm's length price of management charges at Nil. The assessee argued that the DRP ignored submitted evidence and misapplied the Comparable Uncontrolled Price Method. The Tribunal noted that the assessee failed to provide necessary evidence at the assessment stage but did so before the DRP. The Tribunal decided to remit the matter back to the assessment stage for a thorough examination of the evidence, allowing the assessee to present all relevant pleas. Ground no. 2 was allowed for statistical purposes.

2. Disallowance of Expenses under Section 14A:
The issue was whether investment in Mutual Funds (growth scheme) should be included in assets yielding tax-exempt income for computing disallowance under section 14A r.w.r. 8D. The Tribunal upheld the assessee's grievance, directing the Assessing Officer to exclude investments that do not generate tax-free income from the computation. The small amount of ?1,307 was treated as abandoned due to its insignificance. Ground no. 3 was allowed accordingly.

3. Taxing Foreign Receipts on a Gross Basis:
The assessee contended that only the net income after withholding tax should be taxed in India. The Tribunal held that the gross foreign income is taxable, with double taxation relief admissible under section 90 read with Article 24 of the India-Zambia Double Taxation Avoidance Agreement. The Tribunal dismissed the ground but acknowledged the assessee's entitlement to relief for the entire income. Ground no. 4 was dismissed.

4. Disallowance of Software Expenses:
The assessee argued that software expenses of ?5,82,62,091, treated as capital expenditure, should be considered revenue expenses. The Tribunal found that the expenses were for actual use of software and annual license fees, not for acquisition, thus qualifying as revenue expenditure. The Tribunal directed the Assessing Officer to treat the software expenses as revenue expenditure. Ground no. 5 was allowed.

5. Disallowance of Expenses on Sale of Capital Assets:
The assessee challenged the disallowance of ?8,30,000 as expenses related to the sale of a capital asset. The Tribunal concluded that legal expenses incurred for business operations, even if related to a capital transaction, should be treated as revenue expenditure. Ground no. 6 was allowed.

6. Negative Contracts Margin and Prior Period Expenses:
The Assessing Officer's appeal against the deletion of an addition of ?2,30,71,801 was discussed. The Tribunal noted that the issue was already covered by a previous coordinate bench decision in the assessee's favor. The Tribunal upheld the CIT(A)'s decision, dismissing the Assessing Officer's appeal.

Conclusion:
The appeal filed by the assessee was partly allowed, while the appeal filed by the Assessing Officer was dismissed. The judgment was pronounced in the open court on April 6, 2016.