2016 (8) TMI 774 - AT - Income Tax

Transfer Pricing Adjustment on account of interest on delayed realization of marketing expenses from Associated Enterprises (AEs) - Held that - The transaction is otherwise capable of generating income but due to the related parties decided not to charge or pay to each other the basic character and nature of transaction would not change. Hence we do not find any substance in the arguments and propositions raised by the ld. counsel for the assessee that provisions of Chapter X are not applicable in this case. Extending credit period for realization of sales to the AE is a closely linked transaction with the transaction of providing services to the AE and therefore cannot be treated as an individual and separate transaction of advance or loan. Accordingly, we direct the A.O/TPO to redo the exercise of determination of ALP by considering the credit period allowed in realization of sales proceeds as closely linked transaction with the transaction of providing services to the AE and therefore both has to be clubbed and aggregated for the purpose of determination of ALP. Disallowance of electricity expenses - Held that - In the case of the assessee on hand, no employment/service condition was relied upon or produced by the assessee either before the authorities below or before us to show that it was an obligation of the assessee company to pay the electricity bill of the residence of the Director. Accordingly, in the facts and circumstances of the case, we do not find any reason to interfere with the orders of the authorities below. Disallowance of interest of capital work-in- progress - Held that - There is no quarrel on the issue that if capital business asset is acquired by using the borrowed fund, then interest on such borrowed fund is allowable under Section 36(1)(iii) of the Act. However, in the case on hand it is not clear whether the capital work in progress is for acquisition of new capital asset or the extension of the existing business of the assessee. Further the assessee has claimed before us that the assessee is having sufficient non- interest bearing fund. Therefore no disallowance of interest was contended before us. Since the Assessing Officer has given only a passing reference without examining the details of the availability of the assessee s own fund therefore in the facts and circumstances of the case, we are of the opinion that this issue requires a proper examination and verification of the fact with regard to the availability of sufficient fund with the assessee for the purpose of capital work in progress. Accordingly, we set aside this issue to the record of the Assessing Officer for reconsideration and adjudication after considering the relevant facts as well as the contentions of the assessee Disallowance of software expenditure as capital in nature - Held that - We find that the expenditure incurred for system development in relation to Tally Ascent which is a tool for the assessee to develop further accounting software and therefore undisputedly the said expenditure is having an enduring benefit for a long period of time. Similarly, the expenditure on Tally dictionary and manual in various languages is also one time expenditure for creating/acquiring the software to be used in long run. Accordingly, we do not find any error or illegality in the order of the authorities below treating these expenditure as capital in nature. However, since the Assessing Officer has disallowed the claim by treating the same as capital in nature, consequently, the depreciation on the said amount is allowable as per the rate applicable. Accordingly, we direct the Assessing Officer to allow depreciation on this amount. Disallowance of foreign expenses - Held that - It is clear from the explanation furnished before the Assessing Officer that the foreign travel by the Directors was to break the monotony of the daily work and therefore it is not the case of the assessee that the foreign trip of the Directors were for any business purpose. In the absence of any terms and conditions of the service of the Directors that they will be allowed to travel for personal foreign trip, this expenditure cannot be considered as laid out wholly and exclusively for the purpose of business of the assessee as per section 37(1) of the Act. Accordingly, we do not find any error or illegality in the orders of the authorities below. Disallowance of claim of bad debts - Held that - In the case on hand undisputedly the debt was taken into account in the hand of the assessee for the earlier assessment year and thereafter it was transferred to the subsidiary and again retransfer to the assessee. Therefore, the character of debts will not change merely because it was transferred and retransferred when all other conditions are satisfied as required under Section 36(1)(vii) and under Section 36(2) of the Act. In view of the above facts and circumstances of the case as well as the various precedents stated above, we are of the considered opinion that when the claim of bad debts written off in question was an allowable claim against the income of the assessee prior to the transfer and was also allowable claim in the hands of the subsidiary post transfer then the retransfer of the said debts to the assessee as per the agreement between the parties would not change its character from allowable deduction under Section 36(1)(vii) to a non-allowable capital loss. Accordingly, we hold that the claim of the assessee on account of non-realisable sundry debtors written off is allowable.

Issues Involved:
1. Natural Justice
2. Procedure
3. Charge of Income Tax
4. Determination of Arm's Length Price & Adjustment
5. Disallowance of Electricity Expenses
6. Disallowance of Foreign Exchange Fluctuation Loss
7. Disallowance of Interest Claimed on Capital Work in Progress
8. Disallowance of Business Development Expenses
9. Disallowance of Foreign Travel Expenses
10. Disallowance of Bad Debts

Detailed Analysis:

1. Natural Justice:
The assessee contended that the Assessing Officer (AO) erred by not considering all submissions and facts properly. However, these grounds were deemed general and did not require specific adjudication.

2. Procedure:
The AO was criticized for referring the determination of the Arm's Length Price (ALP) to the Transfer Pricing Officer (TPO) without demonstrating necessity or tax evasion motive. The tribunal did not find merit in these procedural objections.

3. Charge of Income Tax:
The assessee argued that the AO failed to appreciate that amounts computed under Chapter X do not amend the definition of "income" or override the computation provisions of business income. The tribunal did not specifically adjudicate these grounds.

4. Determination of Arm's Length Price & Adjustment:
The primary issue was the TPO's adjustment of ?4,60,42,886 towards the ALP for delayed realization of marketing expenses from Associated Enterprises (AEs). The TPO treated the extended credit facility without interest as not at ALP and applied a 14% interest rate. The tribunal found that extending credit periods to AEs constitutes an international transaction under Section 92B and must be computed at ALP. However, it held that such credit periods should be aggregated with the main transaction for determining ALP, directing the AO/TPO to re-evaluate the ALP accordingly.

5. Disallowance of Electricity Expenses:
The AO disallowed ?6,76,598 towards electricity expenses for the Director's residence, as the assessee failed to provide evidence that it was incurred for business purposes. The tribunal upheld the disallowance, noting the absence of contractual obligation for the company to bear these expenses.

6. Disallowance of Foreign Exchange Fluctuation Loss:
The AO disallowed ?5,42,999 claimed as revenue loss on advances to subsidiaries, treating it as capital in nature. The tribunal remanded the issue to the AO for reconsideration in light of the Supreme Court judgment in CIT Vs. Woodward Governor India Pvt. Ltd.

7. Disallowance of Interest Claimed on Capital Work in Progress:
The AO disallowed ?62,22,859 of interest on the grounds that the assessee used borrowed funds for capital work in progress. The tribunal remanded the issue for verification of whether the capital work in progress was for new capital assets or extension of existing business and the availability of sufficient non-interest bearing funds.

8. Disallowance of Business Development Expenses:
The AO disallowed ?39,86,733 as capital expenditure. The tribunal upheld this, noting enduring benefits from system development and translation expenses. However, it directed the AO to allow depreciation on these amounts.

9. Disallowance of Foreign Travel Expenses:
The AO disallowed ?21,03,465 for foreign travel expenses of the Directors, as the travel was deemed personal. The tribunal upheld the disallowance, finding no evidence that the travel was for business purposes.

10. Disallowance of Bad Debts:
The AO disallowed ?16,25,61,749 claimed as bad debts. The tribunal allowed the claim, noting that the debts were originally part of the assessee's income and re-transferred from the subsidiary under mutual agreement. The tribunal held that the re-transfer did not change the character of the debts, making them eligible for deduction under Section 36(1)(vii).

Conclusion:
The tribunal partly allowed the appeal, directing the AO/TPO to re-evaluate certain issues and allowing specific claims while upholding some disallowances.

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