2023 (6) TMI 175 - AT - Income Tax

TP adjustment - determining ALP of the international Transaction of Information Technology Consulting Charges at NIL - HELD THAT - The basis for determining the ALP at Nil by the AO/DRP, being that no services as such were rendered by the AE, we find is totally contrary to facts and in fact is without considering and addressing the voluminous evidences filed by the assessee demonstrating the fact of having received services for implementation of SAP software. All the evidences filed by the assessee in this regard, as noted above by us, are to the effect that there was an agreement entered into by the AE for provision for these services the evidences demonstrate rendering services, by way of bills raised on the assessee by the AE; the fact of the services rendered are also demonstrated by the minutes of the meeting, and engagement of employees of the AE for the implementation of SAP projects. We also agree with assessee that merely because cost paid by the assessee for the implementation of the SAP software was disproportionately high, as compared to the cost of software itself, that alone cannot be basis for arriving at the conclusion that no services were rendered by the AE to the assessee. Such high cost for services rendered for implementing a software does raise doubts, but mere suspicion cannot be the basis for holding that no services were rendered by the AR for the said purpose, more particularly when the assessee had filed evidences showing rendering of services. It is for the Department to make further inquiry to find out whether any constructive services as such was rendered by the AE or not to the assessee. Without pointing out any infirmity in the evidences furnished by the assessee, demonstrating rendering of IT services, the Revenue authorities, we hold could not have casually gone on to state that no services were rendered by the AE to the assessee, and that the evidences did not establish nature of services rendered. We do not agree with the AO/DRP that no services were rendered by the AE to the assessee on account of IT consultancy services, and we therefore, direct the deletion of the adjustment made to the same by treating the ALP of the said services at NIL as opposed as claimed by the assessee. TP adjustment made in relation to international transactions of payment of guarantee fees to its AE - ALP as determined at NIL by AO/TPO, objection of the assessee to which, was dismissed by the DRP - HELD THAT - We agree with the TPO that there was no rendering of any service of guarantee in the present case by the AE to the assessee, warranting payment of guarantee, if at all. It is not denied that the loan had been taken by the assessee for acquiring long term assets i.e. land etc. and therefore, the assets itself could serve as a collateral securities, doing away the need for any guarantee to be provided, more particularly, considering that the assessee was a financially sound company, as the loan could have been sufficiently guaranteed by the collateral securities itself. Also, as rightly noted by the TPO, the assessee had been advanced loan at PLR rate itself, and no benefit, as such had accrued to the assessee on account of guarantee provided, if any, by its AE - considering all the above, we agree with the TPO that the assessee was unable to demonstrate rendering of services of any sort of guarantee by the AE to the assessee, and therefore, we hold, the TPO/DRP has rightly determined the ALP of the transactions at NIL. Basis for rejecting the comparable provided by the assessee for benchmarking its transactions using CUP was also not controverted by the ld.counsel for the assessee before us. TPO had pointed out that while the comparable transaction was a short term loan transaction which the assessee had shown to have attracted interest rate at 16%. The transactions undertaken by the assessee with its AE for borrowing of Rs. 100 crores was for the acquisition of capital assets, and was a long term borrowings, therefore, noting this basic distinction in the character of two transactions, the comparable selected was not suitable and appropriate, and has been rightly rejected by the Revenue authorities, we hold. We confirm the upward adjustment made on account of guarantee fees and dismiss ground no. 4 raised by the assessee. DRP classifying office equipment under the head furniture and fittings instead of plant machinery and thereby disallowing differential depreciation - HELD THAT - We hold that the assessee is entitled to claim of depreciation at 15% on office equipments and disallowance of excess depreciation made by the AO by treating these assets as furniture and fittings entitled to depreciation at the rate of 10% is directed to be deleted. Ground of the assessee s appeal is allowed. Disallowing provision for advertisement expenses - HELD THAT - As noted that basis of making disallowance was contrary to the facts of the case, since it has been demonstrated before us that complete details of this provision made by the assessee had been furnished to the DRP, pointing out the specific expenses in relation to which the provision had made by the assessee. The assessee clearly had demonstrated that it was not an adhoc provision made by it, but based on specific bills of advertisement expenses incurred by the assessee. DRP for the reason best known chose to ignore this evidence filed by the assessee. The order passed therefore by the DRP disallowing the expense is grossly incorrect and unjustified, we hold that the assessee having proved by way of evidence that provision or advertisement expenses were not adhoc in nature -no reason to make the impugned disallowance. Decided in favour of assessee. Disallowing devaluation of inventory - HELD THAT - Assessee consistently following the system all along and the system was in compliance with AS-2 and section 145A of the Act also. Assessee, had furnished details of each and every inventory which it had devalued, substantiating its basis of the devaluation on age-wise analysis giving complete details of last date on which inventory was purchased showing that they were slow moving items, and based on age-wise analysis adopted by the assessee company, assets were accordingly devalued. The assessee, we have noted, has adopted a scientific basis of reduction in value of its inventory based on age-wise analysis and has been applying it universally to all its inventory consistently from year to year. We fail to understand what further evidence the assessee was required to furnish to justify its claim. The claim of the assessee being based on scientific basis, approved by the statutory auditors also, and which has been following consistently year to year, we find no reason or justification for disallowing the same. The claim of the devaluation of inventory is accordingly allowed. Capitalising interest expense to the capital work-in-progress ('CWIP') - As per assessee assessee was that the assessee had sufficient own interest free funds for investing in CWIP and presumption therefore was that interest bearing funds were utilized for the said purpose warranted no disallowance of interest as per the provisions of section 36(1)(iii) - HELD THAT - Assessee has demonstrated that it was consistently following AS-16 which prescribes basis for accounting of interest cost in relation to fixed assets, and had demonstrated so also from its financial statement pertaining to the succeeding year and this fact was certified by the statutory auditors and even the tax auditors and further noting the fact that the assessee had sufficient interest free funds of its own for investing in CWIP, we hold that there was no basis with the Revenue nor any justification for holding that the assessee had huge interest bearing funds for CWIP and thus capitalizing the interest - we direct the deletion of disallowance of interest expenditure. Addition being provision for product support - assessee has made only provision in the P L account and failed to produce any evidence to prove - DRP deleted the addition - HELD THAT - As noting the facts that the issue stood decided in favour of the assessee by the ITAT in the earlier years, the DRP agreed to the objection of the assessee to the disallowance made by the AO for provision for products support/services, and accordingly, the DRP directed the AO to delete the disallowance so made. Before us, the ld.DR was unable to point out any infirmity in the order of CIT(A). DR was also unable to distinguish the earlier year case of the assessee with the present one - since the issue already stands decided in favour of the assessee in earlier years by the ITAT, we see no reason to interfere in the order of the DRP directing the deletion of product supports/service charge. TP adjustment proposed by the TPO on account of intra-group services - adjustment related to template charges and infrastructure consultancy charges - HELD THAT - DR before us has been unable to controvert the fact demonstrated by the assessee as above, both to TPO and the DRP that template charges was paid for acquiring the SAP software which was developed by its AE for streamlining the business transactions of the assessee. We, therefore, agree with the DRP that the cost of acquisition of software cannot be treated at NIL. Since undisputedly, the purpose of the software was to smoothen the business activity and information management system in the assessee-company, it cannot be said to be providing services only of supervisory and stewardship nature. Benefits from this software surely arose to the assessee directly. The ld.DR was unable to point out as to how this SAP software provided to the assessee was only for the purpose of playing a supervisory role - we concur with the DRP that TPO had erred in treating intra-group services of template acquired by the assessee as being in the nature of supervisory services. We accordingly uphold the order of the DRP directing deletion of adjustment made to the template charges by determining ALP at NIL. Infrastructure consultancy and support charges paid by the assessee - As noted from the orders of the authorities below that the assessee had explained the services rendered by the AE in relation to the said expenditures being for setting up of plant at Sanad; that the AE was providing consultancy and support services for the development of this infrastructure of the assessee for which these charges had been paid. DR was unable to controvert the factual finding of the DRP that infrastructure and consultancy services were for development of a new plant in Sanand. We therefore see no reason to interfere in the order of the DRP holding that these services cannot be held to be supervisory and stewardship services rendered by the AE to the assessee, as contended by the TPO and as argued by the ld.DR before us. Thus uphold the order of the DRP directing the deletion of adjustment made to the infrastructure consultancy and support services by the TPO at NIL.

Summary

Issues Involved:

1. Adjustment to International Transaction of IT Consultancy Charges
2. Adjustment on Account of Guarantee Fees
3. Classification of Office Equipment for Depreciation
4. Disallowance of Seminar, Exhibition, and Advertisement Expenses
5. Disallowance of Provision for Advertisement Expenses
6. Disallowance of Devaluation of Inventory
7. Capitalization of Interest Expense
8. Disallowance of Provision for Product Support
9. Transfer Pricing Adjustment for Template Charges and Infrastructure Consultancy Support

Summary:

1. Adjustment to International Transaction of IT Consultancy Charges:
The assessee incurred IT consultancy expenses of Rs. 4,84,28,143/- for SAP software implementation. The TPO determined the ALP at NIL, stating the services were supervisory. The Tribunal found that the AO/DRP erred in determining the ALP at NIL, as the evidence demonstrated actual services rendered. The adjustment was deleted, and the assessee's grounds were allowed.

2. Adjustment on Account of Guarantee Fees:
The assessee paid guarantee fees of Rs. 52,91,667/- to its AE. The TPO determined the ALP at NIL, stating no services were rendered and no benefit accrued. The Tribunal upheld the TPO's findings, agreeing that no distinct benefit was demonstrated and the comparable selected by the assessee was inappropriate. The adjustment was confirmed, and the assessee's ground was dismissed.

3. Classification of Office Equipment for Depreciation:
The AO classified office equipment as "furniture and fittings" and allowed depreciation at 10% instead of 15%. The Tribunal found that the office equipment qualified as plant and machinery and had been consistently allowed depreciation at 15% in earlier years. The disallowance was deleted, and the assessee's ground was allowed.

4. Disallowance of Seminar, Exhibition, and Advertisement Expenses:
The ground was dismissed as not maintainable, as it did not arise from the order of the DRP.

5. Disallowance of Provision for Advertisement Expenses:
The AO disallowed Rs. 85,500/- considering it an ad hoc provision. The Tribunal noted that the assessee provided specific details of the expenses, demonstrating they were not ad hoc. The disallowance was deleted, and the assessee's ground was allowed.

6. Disallowance of Devaluation of Inventory:
The AO disallowed Rs. 1,79,49,564/- for devaluation of inventory, stating no evidence was provided. The Tribunal found that the assessee followed a scientific basis for devaluation, complying with AS-2 and section 145A. The disallowance was deleted, and the assessee's ground was allowed.

7. Capitalization of Interest Expense:
The AO capitalized interest expense of Rs. 59,12,913/- to CWIP. The Tribunal noted that the assessee had sufficient interest-free funds and followed AS-16 for accounting borrowing costs. The disallowance was deleted, and the assessee's ground was allowed.

8. Disallowance of Provision for Product Support:
The AO disallowed Rs. 60,22,515/- for product support, stating no evidence of actual expenditure. The DRP noted that similar claims were allowed in earlier years. The Tribunal upheld the DRP's direction to delete the disallowance, and the Revenue's ground was dismissed.

9. Transfer Pricing Adjustment for Template Charges and Infrastructure Consultancy Support:
The TPO determined the ALP of template charges (Rs. 2,91,40,800/-) and infrastructure consultancy support (Rs. 31,86,790/-) at NIL, stating they were supervisory services. The DRP found that the services provided direct benefits to the assessee. The Tribunal upheld the DRP's deletion of the adjustments, and the Revenue's grounds were dismissed.

Conclusion:
- The appeal of the Revenue is dismissed.
- The appeal of the assessee is partly allowed.
- The CO of the assessee is dismissed.