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2023 (3) TMI 502 - AT - Income TaxTP adjustment - international transaction pertaining to onsite development and project coordination fee - HELD THAT - In the present case, assessee develops software development services and hardware solutions for telecom equipment manufacturers, carriers and service providers. While, the associated enterprise has been set up primarily for the purpose of front end support for offshore business, liaison with clients and prospective clients, client interaction and limited project support. Having considered the function, asset and risk profile of the foreign associated enterprise and the assessee, we are of the considered opinion that, in the present case, foreign associated enterprise is the least complex entity vis- -vis the assessee. Further, the relevant and reliable data for comparison with the associated enterprise is also available in public domain, which was also used by the assessee for benchmarking the international transaction. Thus, we are of the view that associated enterprise can be considered as a tested party, in the present case. Accordingly, we direct the TPO to conduct fresh benchmarking analysis after considering foreign associated enterprise as the tested party and arrive at the arm s length price for the international transaction pertaining to onsite development and project coordination fee . We also direct the assessee to provide all the data as may be required by the TPO for conducting the aforesaid exercise. In view of the above directions, the transfer pricing adjustment made by the TPO and upheld by the learned CIT(A) is set aside. We order accordingly. As a result, ground No. 1 raised in assessee s appeal is allowed for statistical purpose. Nature of expenses - Disallowance of custom duty paid - AR submitted that custom duty was paid towards debonding and shifting of the assets and therefore be allowed as revenue expenditure - HELD THAT - From the perusal of record, we find that claim of the assessee was denied by the lower authorities without examining details pertaining to these assets as well as details of the debonding. Thus, we deem it appropriate to remand this issue to the file of the Assessing Officer for de novo adjudication. Further, assessee is directed to provide complete details of the assets and demonstrate the debonding of the assets to the Assessing Officer. We further direct that upon examination if it is found that custom duty was paid for debonding of the assets, which were earlier brought in STPI premises, relief be granted to the assessee to that extent. As a result, ground No. 2 raised in assessee s appeal is allowed for statistical purpose. Disallowance under section 14A - Sufficiency of own funds - HELD THAT - As assessee had sufficient funds available for making the investment and in such a case, it can only be presumed that the investments were made out of such available funds. Thus we direct the Assessing Officer to delete the disallowance made under Rule 8D(2)(ii) of the Rules. AO by treating half percent of average investment made disallowance u/r 8D(2)(iii) of the Rules. In this regard, it is the claim of the assessee that only investments which yield dividend income during the year should be considered. We find that claim of the assessee is supported by decision of Special Bench of the Tribunal in ACIT vs Vireet Investment (P) Ltd 2017 (6) TMI 1124 - ITAT DELHI wherein it was held that only those investments are to be considered for computing average value of investment, which yields exempt income during the year. Accordingly, we direct the Assessing Officer to only considered those investments, for purpose of computation of disallowance Rule 8D(2)(iii) of the Rules, which yield dividend income during the year. As a result, ground No. 3, raised in assessee s appeal is allowed for statistical purpose. Disallowance of foreign exchange loss - HELD THAT - We find that lower authorities have not examined the claim of the assessee that the purpose of the forward contract entered into by the assessee was in fact hedging against the foreign exchange fluctuation risk and the claim of the assessee was rejected merely by treating it as a speculative transaction under section 43(5) of the Act. In view of the above, we considered it appropriate to remand this issue to the file of Assessing Officer for de novo adjudication after examination of the details regarding the hedging as alleged by the assessee. Further, the assessee is directed to provide the complete details to the AO regarding its claim of hedging against exchange fluctuation risk. Upon examination, if the claim of the assessee is found to be correct then the loss on account of forward contract to the extent same pertains to hedging against the risk of foreign exchange fluctuation be allowed to the assessee. As a result, ground No. 4 raised in assessee s appeal is allowed for statistical purpose.
Issues Involved:
1. Transfer Pricing Adjustments 2. Disallowance of Custom Duty Paid as Revenue Nature 3. Disallowance under Section 14A of the Income Tax Act 4. Disallowance of Foreign Exchange Loss Issue-wise Detailed Analysis: 1. Transfer Pricing Adjustments: The primary issue in the assessee's appeal pertains to a transfer pricing adjustment of Rs. 9,95,09,950 related to the 'onsite development and project coordination fee.' The assessee, engaged in telecom software development services, filed its return of income declaring a total loss after claiming deduction under section 10A of the Act. The assessee selected the Transactional Net Margin Method (TNMM) with the associated enterprise as the tested party, claiming it was less complex. The Transfer Pricing Officer (TPO) rejected this analysis, treating the assessee as the tested party and selecting Indian comparables, resulting in an adjustment. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld this decision. However, the Tribunal found that the associated enterprise, being less complex and having relevant data available in the public domain, should be considered the tested party. The Tribunal directed the TPO to conduct a fresh benchmarking analysis considering the associated enterprise as the tested party. 2. Disallowance of Custom Duty Paid as Revenue Nature: The second issue involves the disallowance of Rs. 11,78,884 towards custom duty paid for debonding and shifting assets. The Assessing Officer (AO) and CIT(A) treated these expenses as capital expenditure. The Tribunal noted that the lower authorities did not examine the details of the assets and the debonding process. The issue was remanded to the AO for de novo adjudication, directing the assessee to provide complete details of the assets and the debonding process. If the custom duty was indeed for debonding of fully depreciated assets, relief should be granted to the assessee. 3. Disallowance under Section 14A of the Income Tax Act: The third issue pertains to the disallowance of Rs. 8,78,823 under section 14A read with Rule 8D, related to expenses incurred in earning exempt income. The AO computed the disallowance, including Rs. 56,140 as interest expenditure not directly attributable to any income or receipt. The Tribunal found that the assessee had sufficient funds for investments, directing the AO to delete the interest expenditure disallowance. Furthermore, the Tribunal directed the AO to consider only those investments that yielded exempt income during the year for computing disallowance under Rule 8D(2)(iii). 4. Disallowance of Foreign Exchange Loss: The fourth issue involves the disallowance of Rs. 47,97,489 as foreign exchange loss, treated by the AO as a speculative transaction under section 43(5). The assessee claimed the loss was due to forward contracts entered for hedging against foreign exchange fluctuations. The Tribunal found that the lower authorities did not examine the details of the hedging claim and remanded the issue to the AO for de novo adjudication. The AO was directed to allow the loss if it was indeed for hedging against foreign exchange fluctuations. Conclusion: The Tribunal allowed the assessee's appeal for statistical purposes, directing fresh analysis and examination on various issues, while the Revenue's appeal was dismissed.
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