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TMI Blog2014 (10) TMI 469X X X X Extracts X X X X X X X X Extracts X X X X ..... s made to overseas subsidiaries. 3. Briefly the facts, as emanate from record are, assessee is a global provider of customized information technology (IT) solutions and engineering services to a number of clients in USA. Assessee generally provides services in knowledge solutions, IT and software solutions, technology, engineering services etc. Assessee, directly or indirectly, owns a number of subsidiary companies overseas. The financial results of the company as per its annual report for the accounting period 2007-08 are as under: Operating revenue Rs. 1112,79,06,165 Operating Cost Rs. 996,71,63,318 Operating profit Rs. 116,07,42,847 OP/OR 10.50% OP/OC 11.65% For the impugned assessment year, assessee filed its return of income on 29/09/2008 declaring total income of Rs. 6,54,51,540/-under the normal provisions after claiming exemption u/s 10A of the Act of Rs. 112,03,84,129/-. Assessee also declared book profit of Rs. 70,25,17,999/- u/s 115JB. 4. During the scrutiny assessment proceeding, the AO noticing that assessee has entered into international transactions with its associated enterprises during the relevant previous year exceeding the threshold limit, m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... above 'AAA' rating whereas 'D' grade is for Debt already in arrears as per the ratings scale of CRISIL. The TPO held that the advances made by the assessee falls between the category 'BB' and 'D' ratings. Further, referring to the information obtained u/s 133(6) of the Act from M/s CRISIL in respect of average yield on long term investment during FY 2007-08, TPO noted that yield from BBB grade corporate bond was 14.39% for 5 year period in FY 2007-08. Assuming the fact that BBB rated bonds are clearly considered investment grade bonds whereas the assessee falls within the range BB to D ratings, the yield rates for which is not available and since BB to D ratings are coming within the higher risk category, the interest rate would also be higher. Considering the above aspect, TPO held that ALP of interest for the loans advanced by the assessee to AE on the monthly closing balance for the period 01/04/2007 to 03/03/2008 would be at 17.2%. Applying the aforesaid interest rate to the loan advance of Rs. 35,43,69,090/-, the TPO worked out Arm's length interest at Rs. 6,11,64,105/-, which was suggested towards transfer pricing adjustment on account of i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nces given for legal expenses (reimbursement). The DRP further noted that as the assessee did not furnish any information before the TPO, on the basis of 3CEB report, the TPO computed the arm's length interest. DRP noted that as per the information available, major portion of parking of funds by the assessee with its AE is towards loans only. Hence, the TPO has not committed any wrong in computing arm's length interest on the loans advanced. Further, the DRP observed that while in Form No. 35A (objections before the DRP), the assessee has stated that the advance to Prithvi Solutions Inc., USA amounting to Rs. 29.985 crores was made out of the proceeds of FCCB and the said advance was paid for the purpose of acquisitions outside India and advance to Prithvi Information Solutions International LLC was made in the course of regular business activity, whereas on 28/08/2012, the assessee had filed share certificates regarding allotment of shares made by Prithvi Solutions Inc., USA towards investment made during the FY 2007-08 for a sum of Rs. 32,00,60,000/-. On perusing the share certificates, the DRP noted that the assessee was allotted 100 shares on 28/06/2007 and 900 shares o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 842/Hyd/2012, dated 31/05/2013 and the order of the ITAT, Ahmedabad Bench in case of Micro Inks Ltd., [2013] 36 taxmann.com 50. Further, it was submitted by the learned AR that the entire investment made by the assessee was out of the internal accruals and no borrowed fund was utilized. It was submitted, as the investment made was for expansion of the business and there is no nexus between borrowed funds and the investment, no interest can be charged. In support of such contention, he relied upon the decision of Hon'ble Supreme Court in case of CIT Vs. SA Builders, 288 ITR 1. It was submitted that when the mistake committed in the auditors report in Form No. 3CEB came to the notice, the same was corrected and a revised audit report was submitted before the AO. Further, referring to the computation of interest made by the AO, the learned AR submitted that in certain cases, the AO has computed interest for more than 12 months, which could not have been done. In this context, he referred to the computation of interest made in tabular form by the AO at page 3 of the assessment order. 9. The learned DR submitted before us that along with return of income, assessee has furnished audit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urse, it is a fact on record that in the auditor's report in form No. 3CEB submitted along with the return of income the amount of Rs. 29.985 crores was shown as loans to subsidiary. Therefore, it is the duty of the assessee to explain why investment was shown as loan and what is the true nature of the investment. Further, it is to be noted that the DRP has observed that loans stated in the auditor's report in form No. 3CEB and shares of Rs. 30,60,50,000/- allotted to the assessee are not one and the same. What is the basis for such conclusion is not forthcoming from the order of the DRP. Unless there are evidences and material to show that assessee has made investment of Rs. 30,60,50,000/- in shares in addition to the amount mentioned as loan in form No. 3CEB, it cannot be presumed that loans stated in auditor's report in Form No. 3CEB and shares allotted are different. Unless this fact is verified properly by examining the books of account and final accounts of the assessee, no inference can be drawn merely on presumption and surmises. If the assessee's claim that the investment was towards equity is correct, then, it cannot be brought within the purview of 'i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y of financial support from HIRL, including assistance in negotiating and guaranteeing debt arrangements with company's banks. Such financial support may be subject to the approval of Reserve Bank of India. HIRL has pledged its financial support to the company through March 31, 2003. The company has a US $ 3,170,000 note payable to HIRL and HIRL either guaranteed or secured all of the company's outstanding debts at March 31,2002. HIRL is company's principal supplier of raw materials. ...................... During the next twelve months, ending March 31, 2004, US $ 12.70 million of debt must be paid or refinanced, and US $ 29 million is payable to the parent. The company expects to meet these obligations with the continued support and guarantees of the parent ...................... During the next twelve months, ending March 31, 2005, US $ 19.42 1million of debt must be paid or refinanced, and US $ 12.48 million is payable to the parent. The company expects to meet these obligations with the continued support and guarantees of the parent 17. As is evident from the above discussions, the relationship between the assessee and its step down subsidiary Micro USA was sim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te. While the international transaction before us is that of advancing an interest free unsecured loan for helping a entity overcome its teething problems and pending the approval for capital subscription is received from the Reserve Bank of India, a typical LIBOR plus rate transaction is the transaction in which banks gives secure advances, for making profits out of so lending the money, to its customers. Strictly speaking, there is no parity between these two types of transactions. Secondly, we are dealing with a situation in which the two enterprises are mutually dependent for commercial reasons. While Micro USA is dependent on the assessee for its sheer existence, the assessee is dependent on Micro USA for its business. Let us assume for a while that Micro USA is unconnected with the assessee so far as its management, capital and control is concerned, but even then and without this management, capital and control relationship, the assessee, as an independent enterprises, will make sense in giving interest free advances to Micro USA so as to ensure its continued market access in USA and for other commercial reasons. This is quite unlike a typical transaction on LIBOR plus rate i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a comparable uncontrolled transaction between independent enterprises, in which all other factors, except the commonality of management, control and capital, remain the same. The comparable uncontrolled price for interest on such a transaction in which advances are made pending capital subscription in a company which plays strategically significant commercial role in assessee's business , in our considered view, would be nil. The levy of interest would not come into play in such a case, except to the extent of refund of US $ 10,000 for which no shares were allotted. When it was so pointed out during the hearing, learned counsel for the assessee very fairly did not press his grievance to the extent of this amount. In the light of these discussions, the variations in the nature of transactions between the assessee and Micro USA and variations in the nature of relationship between the assessee and Micro USA are so fundamental that the entire LIBOR plus rate, which was the starting point of our computation of ALP of these interest free loans, is to be reduced to zero to take care of the differences in terms of Rule 10B(1)(a)(ii) of the Income Tax Rules. The impugned ALP adjustment, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sallowed the amount of Rs. 25,16,90,008/- and added it to the income of the assessee. The assessee objected to such disallowance before the DRP. 15. In course of proceeding before the DRP, it was contended by the assessee that it has not incurred expenses of Rs. 25,16,90,008/-, hence, the question of deduction of tax at source does not arise. It was contended by the assessee that it has deducted tax on all expenses wherever TDS provisions are applicable. Hence, disallowance made by the AO is not correct. On the basis of submissions made by the assessee, AO was asked to submit a remand report. In remand report dated 26/07/2012 and 13/09/2012, it was stated by the AO that the assessee has accepted that tax was not deducted at source on the amount of Rs. 25,16,90,008/-. On the basis of the report submitted by the AO, DRP confirmed the addition of Rs. 25,16,90,008/-. 16. The learned AR submitted before us that since there was a mistake in the original audit report, assessee had submitted a revised audit report. Referring to P&L Account and balance sheet of the impugned assessment order, which are at pages 35 & 36 of the assessee's paper book, the learned AR again reiterated that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and maintenance. The total expenditure incurred by the assessee without deducting tax at source was found to be Rs. 5,03,24,607/-. As noted by the AO, though the assessee was given opportunity to furnish vouchers and substantiate its claim with regard to non deduction of tax at source, since the assessee failed to furnish vouchers for verification the AO disallowed the same u/s 40(a) of the Act. The Assessee challenged the disallowance before the DRP. 21. In course of proceeding before the DRP assessee produced various documentary evidence in support of its claim. On the basis of submissions made by the assessee, the DRP called for a remand report from AO. The AO in his report dated 13/09/2012 accepted most of the claims of assessee except the amounts of Rs. 48,00,000/- paid to M/s Kedia Silk House for logo expenses and amount of Rs. 18,97,993/- as rent to Vakson Real Estate on Dubai. AO commented that while payment of Rs. 48 lakhs attract Section 194C, the rent paid to the party in Dubai attracts Section 194I. The DRP after examining the evidences filed by the assessee before it and the remand report submitted by the AO sustained the disallowance of Rs. 66,97,993/- by holding tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e direct the AO to delete addition of Rs. 18,97,993/-. 25. The next issue as raised in ground No. 18 is in respect of disallowance of an amount of Rs. 99,86,33,523/- from the deduction claimed u/s 10A of the Act. 26. Briefly the facts are during the assessment proceeding, the AO noticed that the assessee had claimed exemption u/s 10A an amount of Rs. 112,03,84,129/-. The AO however while completing the draft assessment disallowed the deduction claimed. The assessee objected to such disallowance before the DRP. The DRP allowing assessee's objection directed the AO to allow exemption claimed by the u/s 10A of the Act. However, while completing the assessment in pursuance to the direction of the DRP, the AO allowed claim of exemption u/s 10A to the extent of Rs. 12,17,50,606/- thereby disallowing an amount of Rs. 99,86,33,523/- as excess claim made by the assessee u/s 10A. 27. We have heard the parties, perused the materials on record and gone through the orders of the revenue authorities. The sole contention of the learned AR before us is if at all the amount of Rs. 99,86,33,523/- is excluded from the export turnover the same is also to be excluded from the total turnover whil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tantiated its claim with supporting evidence. The assessee has only submitted break-up of the advances. Therefore, in absence of supporting evidence, the deduction claimed has been correctly disallowed. 32. We have heard the submissions of the parties and perused the materials on record. As can be seen from the facts and materials on record, the AO as well as DRP have disallowed the deduction claimed alleging that the assessee has failed to substantiate the deduction claimed with supporting evidence. However, it is the contention of the assessee that all details were produced. In this context, the learned AR has referred to the details of advances written off at page 217 & 218 of the paper book. It is the specific claim of the assessee that it has entered into contracts with different persons for various projects for which amounts were advanced to them. However, as the contracts were cancelled due to cost overrun and inability of other parties the advance paid to them had to be written off as the assessee was not able to recover them. However, as it appears from the finding of the DRP the assessee has not produced the copies of the agreement entered into with the parties in respec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment proceeding the AO noticed that the assessee has collected employees contribution towards provident fund amounting to Rs. 22,42,444/- but has not remitted the share to the govt. account within the stipulated time available under the relevant statute as per section 36(1)(va) read with section 2(24)(x). Accordingly, the AO disallowed the same and added it to the income of the assessee. Before the DRP it was contended by the assessee that though the amount in question was remitted beyond the due date as provided under the PF Act, but, the same was remitted before the due date of filing of the return of income for the impugned assessment year. It was therefore submitted that as per the amended provision of section 43B of the Act, no disallowance can be made. On the basis of submissions made by the assessee, the DRP called for a remand report from the AO wherein the AO after examining the details stated that only an amount of Rs. 6,60,655/-having been paid beyond the grace period of 5 days as per the relevant statute needs to be disallowed. Accordingly, the DRP sustained the disallowance of Rs. 6,60,655/-. 38. We have considered the submissions of the parties and perused the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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