2015 (10) TMI 2375 - AT - Income Tax

Disallowance u/s 14A - Held that - Already DRP has taken note of the fact that; firstly, Rule 8D is not applicable in this year; and secondly, there is no interest expenditure attributable for the earning of exempt income; and lastly, for the purpose of indirect expenses, already direction have been given to the AO to identify the manpower cost of the persons directly concerned with the making of the decision of the investments and to work-out the disallowance. The AO after analyzing the entire details has restricted the disallowance at ₹ 1 lakh on account of manpower / administrative cost, which can be said to be attributable for earning of exempt income. Such a finding of AO cannot be faulted with in absence of any proper rebuttal and also the disallowance as it is appears to be quite reasonable. Thus on the facts if the case, disallowance u/s 14A as restricted after DRPs direction is confirmed - Decided against asseessee. Depreciation allowance on purchase of printers and UPS - Held that - So far as claim of depreciation on UPS and printer is concerned the same is to be allowed @ 60% as they are part and parcel of computer itself and are peripheral component/equipment connected with the computer. In the decision of Omini Club Informational Technology Ivt P Ltd. 2010 (4) TMI 769 - ITAT, DELHI and also in catena of other decisions by the co-ordinate Benches of the Tribunal there has been a consistent view that printer and UPS are part of computer and hence depreciation has to be allowed @ of 60%. However, so far as claim of depreciation on air-conditioners installed in server s room, the same cannot be treated as part of computer and therefore, restricting the claim of depreciation @ 15% by the AO is fully justified - Decided partly in favour of assessee. Disallowance of software expenses incurred on purchase of printer-server software - Held that - Of the expenditure incurred on the software is to facilitate the assessee s business or enable the management to conduct the business more efficiently or profitably, then it has to be treated as revenue expenditure. In all these cases, the expenditure incurred on the software expenses were allowed as revenue expenditure. Here also, the software purchase for print server is nothing but to facilitate the assessee s business and to conduct day-to-day activity in an efficient manner and, therefore, it has to be allowed as revenue expenditure. Thus, following the principle and ratio laid down in the case of CIT vs Raychem RPG Ltd 2011 (7) TMI 953 - Bombay High Court and CIT vs Amway India Enterprise 2011 (11) TMI 4 - DELHI HIGH COURT we allow the claim incurred on print software as revenue expenditure - alternate contention of allowing depreciation @ 60%, in case it is treated as capital expenditure have been rendered purely academic - Decided in favour of assessee Addition on account of container detention charges (CDC) - collection by the assessee on behalf of the principal and retained in terms of RBI direction, which has been treated as income accrued to the assessee during the year by the AO - Held that - The assessee has offered the entire amount of CDC charges collected right from year 1993 to December, 2008 as income and paid the entire taxes in AY 2010-11. This has been done so only when the principal had written a letter dated 25th May, 2009, whereby, the principal has authorized the assessee to retain the CDC charges collected on its behalf right from period 1st April, 1993 to 31st March, 2009. By virtue of this letter, the principal has authorized its agent to treat the amount as agent s income. Hence forth, now it can be held that this income belongs to the agent and hence it has been rightly taxed by the Department in the AY 2010-11. Thus, on these facts and circumstances, we hold that the taxing of CDC charges in AY 2007-08 or 2008-09 is not sustained and is uncalled-for. Therefore, the additions made by the AO are deleted. - Decided in favour of assessee. Transfer pricing adjustments - Held that - Wuhu Cold Storage and Transportation Co. is a complete service provider, whereas, the assessee is more of service recipient of such activities. Once it has been found that this comparable is performing activities and functions which are different from the functions carried out by the assessee, then without there being any change in the facts and circumstances in this year, the said company cannot be held to be a good comparable in this year. Simply the assessee has included this comparable in Transfer Pricing Study Report in this year as well as in the earlier years, it does not preclude the assessee from raising the objection that the said comparable cannot be included in this year, if the assessee is able to demonstrate the factors and circumstances leading to its exclusion, specifically functional dissimilarity and also the factors leading to huge variation in profit margin. Here in this year, the assessee before the TPO as well as before the DRP has disputed the comparable based on high margins. This plea of the assessee has been accepted by the department in the subsequent year. Thus, following subsequent order of the DRP, we exclude the Wuhu Cold Storage and Transportation Co. from the list of final comparables. Accordingly, the Assessing Officer is directed to exclude the same and benchmark the average margin of other comparables with that of the assessee and if the margin of such comparables falls within the range of 5% of the Arm s length price, then needless to say, no adjustment should be made - Decided partly in favour of assessee. Disallowance of claim of expenditure on account of feasibility study - Held that - The assessee has made the payment to professional firm, McKinsey & Co. for conducting a Feasibility Study Report for establishing a BPO business for assessee s own function. Nothing has been brought on record that some kind of new line of business was to be set up or was to be controlled by different management. Hence, it cannot be treated as capital expenditure, or for non business purpose or any kind of pre-operative expenses. Here in this case, BPO business could not take off and whatever expenditure has been incurred has to be allowed either as business expenditure or as a business loss incurred during the course of business. Thus, the claim of such an amount cannot be disallowed either as a capital expenditure or for non-business purpose

Summary

Issues Involved:
1. Disallowance under Section 14A.
2. Disallowance of depreciation on UPS, Printers, and Air-conditioners.
3. Disallowance of printer software as capital expenditure.
4. Addition on account of container detention charges.
5. Addition on account of transfer pricing adjustment.
6. Charging of interest under Section 234B.
7. Initiation of penalty proceedings under Sections 271(1)(c) and 271BA.
8. Additional grounds on violation of principles of natural justice (not pressed).
9. Disallowance of expenditure on Feasibility Study.
10. Non-receipt of refunds and non-granting of TDS credit.
11. Levy of interest under Section 234D.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A:
The assessee made investments in shares and mutual funds, earning a dividend income of Rs. 30,29,856, which was claimed as exempt. The AO made an ad-hoc disallowance of Rs. 1 lakh for manpower/administrative costs attributable to earning the exempt income. The Tribunal upheld the disallowance, finding it reasonable and confirming the DRP's direction.

2. Disallowance of Depreciation on UPS, Printers, and Air-conditioners:
The assessee claimed depreciation on UPS and printers at 60%, which was restricted to 15% by the AO. The Tribunal allowed the claim at 60%, considering them as computer peripherals. However, the claim of 60% depreciation on air-conditioners installed in the server room was restricted to 15%, treating them as plant and machinery.

3. Disallowance of Printer Software as Capital Expenditure:
The AO treated the expenditure on printer-server software as capital expenditure, allowing depreciation at 15%. The Tribunal, relying on decisions from higher courts, allowed the expenditure as revenue expenditure, facilitating the assessee's business operations.

4. Addition on Account of Container Detention Charges:
The AO treated container detention charges collected and retained by the assessee as income accrued during the year. The Tribunal held that the assessee acted as an agent, collecting CDC on behalf of the principal, and no income accrued to the assessee. The amount was rightly taxed in AY 2010-11 when the principal authorized the retention.

5. Addition on Account of Transfer Pricing Adjustment:
The TPO included Wuhu Port Storage and Transportation Co. in the comparables, leading to a TP adjustment of Rs. 1,49,35,500/-. The Tribunal excluded Wuhu from the comparables, following the DRP's decision in AY 2008-09, due to functional dissimilarity and high margins, directing the AO to benchmark the average margin of other comparables.

6. Charging of Interest under Section 234B:
The Tribunal noted that charging interest under Section 234B is consequential and dismissed the related ground.

7. Initiation of Penalty Proceedings under Sections 271(1)(c) and 271BA:
The Tribunal dismissed the grounds related to initiation of penalty proceedings as premature.

8. Additional Grounds on Violation of Principles of Natural Justice:
The additional ground on the violation of principles of natural justice was not pressed and treated as dismissed.

9. Disallowance of Expenditure on Feasibility Study:
The AO treated the expenditure on a feasibility study for setting up a BPO unit as capital expenditure. The Tribunal allowed the expenditure as revenue expenditure, noting it was for exploring opportunities within the same line of business.

10. Non-receipt of Refunds and Non-granting of TDS Credit:
The Tribunal directed the AO to verify the claim and grant relief/credit if admissible.

11. Levy of Interest under Section 234D:
The Tribunal directed the AO to verify the claim that no interest was received and decide accordingly.

Conclusion:
Both appeals filed by the assessee for AYs 2007-08 and 2008-09 were partly allowed, with the Tribunal providing detailed rulings on each issue. The order was pronounced in the open court on 23rd September 2015.