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TMI Blog2016 (8) TMI 774X X X X Extracts X X X X X X X X Extracts X X X X ..... P. 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 availabi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. - I.T. (T.P) A. No. 1364/Bang/2011 - - - Dated:- 19-8-2016 - Shri A. K. Garodia, Accountant Member And Shri Vijay Pal Rao, Judicial Member Appellant By : Shri Arvind Sonde, Senior Counsel Respondent By : Smt. Neera Malhotra, CIT-II (D.R) ORDER Per Shri Vijay Pal Rao, J. M. This appeal by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich is an issue which was not' referred to him for determining the arms length price and the action of the TPO is beyond jurisdiction. v) ignoring the ratio laid down by the High Court of Delhi in the case of Commissioner of Income tax Vs Amadeus India (P) Ltd and Hon'ble ITAT, Mumbai bench IL' in the case of 3i Infotech Ltd Vs. DCIT, Circle - 10(3), Mumbai, wherein it has been held that, TPO cannot U/s.92CA(3) determine ALP in relation to an international transaction which is not referred to him by the Assessing Officer. vi) ignoring the fact that the provisions of section 92CA(2A) which provides for TPO to consider any other international transaction for adjustment, which has not been referred to him also was introduced w.e.f 01.06.2011 which confirms the fact that prior to 01.06.2011 the TPO could not have' exercised such power. vii) ignoring the fact that not charging interest on debtors cannot be considered as an international transaction within the meaning of section 928 of the Act and therefore no adjustment could be made towards arms length price. viii) ignoring the fact that in the absence of any interest being charged, there is no inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urrency made to the subsidiary were revenue in nature and consequently the loss on exchange fluctuation was also allowable as revenue. Ground No.7 - The learned assessing officer erred in i) making a disallowance of ₹ 62,22,859/- out of the interest claimed as not revenue on the ground that on capital work in progress of ₹ 5,07,98,8501- interest at 12.25% is required to be disallowed. ii) ignoring the position of law laid down under the provisions of section 36(1 )(iii) of the Act, wherein the interest on capital borrowed is allowable as revenue once such funds are utilized for the purpose of the business activity. iii) quantifying an arbitrary disallowance at 12.25% on the amount of ₹ 5,07,98,8501- shown as capital work in progress. iv) quantifying an arbitrary disallowance on the total capital work in progress of ₹ 5,07,98,850/- ignoring the fact that the addition to the capital work in progress during the previous year is ₹ 5 lakhs only and the balance was opening balances. v) quantifying an arbitrary disallowance on the capital work in progress of ₹ 5,07,98,850/- ignoring the fact that the opening balance was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the extent of ₹ 21 ,03,465/- Ion the ground that the same was incurred for the foreign travel of directors Mr.Bharat Goenka and Mrs. Sheela Goenka and therefore cannot be allowed as expenditure. ii) not appreciating the fact that the product of the company, Tally package is invented by Mr. Bharat Goenka who alone can contribute to improve/update the package and therefore the expenditure on his travel ought to have been allowed as business expenditure, since the same is incidental to business. Ground No.1 0 - The learned Assessing Officer erred in i) disallowing an amount of ₹ 16,25,61 ,749/- (net) claimed as bad debts on non realization of the trade debtors. ii) not appreciating the fact that these are trade debtors were consequent to sale of Tally packages in the earlier years by the appellant and under law if not recovered are to be allowed as bad debts. iii) ignoring the fact that M/s.Tally India Pvt Ltd is a subsidiary of the appellant and therefore under the provisions of section 47(iv) of the Act any transaction of transfer of asset is not regarded as a transfer and the debt continued to be the debts of the appellant. iv) ignoring t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the assessee has been reproduced by the TPO in para 2 as under : 2. Taxpayer s Profile. M/s. Tally Solutions Pvt. Ltd. renders software research and development services and other related services to its AE, Tally Solutions FZ LLC, Dubai, UAE. The services are rendered on time and material basis. 2.1 Financial Results. The financials of the company for the FY 2006-07 are as under : Description Rs. Operating Revenue 28,16,18,522 Operating Cost * 15,48,26,006 PBIT 12,67,92,516 PBIT as % of Cost 81.89% *Exceeding provision for doubtful advances, investment written off, forex loss and interest expenses. 2.2 International transactions The following are the new international transactions entered into by the taxpayer with its AE for the FY 2006-07. Particulars Amount Rs. Marketing expenses met during the year not recovered and hence interest free loan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... F.Y. 2006-07 as under : The taxpayer has extended credit facility similar to a working capital loan to its AEs without charging any interest. Similar uncontrolled transaction would have provided for interest. In view of this fact the international transaction representing extended credit facility without charging interest is not at arm s length price, within the meaning of section 92C(3)(a), (b) and (c) of the Income Tax Act read with Rule 10B(1)(a) of the Income Tax Act, the arm s length interest is determined by following CUP method wherein the interest rate is determined under the circumstances in which the tax payer and its associated enterprises are operating i.e. ;what is the interest that would have been earned if such credit in the form of working capital loan given to unrelated parties in similar situation as that of associated enterprises. Since the tested party is tax payer, the prevalent interest that could have earned by the tax payer by advancing similar to an unrelated party in India with the same financial health as that of the tax payer s associated enterprises is considered. In view of the above discussion, the interest rate of 14% p.a. (average yield ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is not mandated under Chapter X of the Act. In support of his contention, he has relied upon the decision of Hon ble Bombay High Court in the case of Vodafone India Services Pvt. Ltd. Vs. UOI (2014) 368 ITR 1(Bom) and submitted that the Hon'ble High Court has held that income as understood in the Act must arises from an international transaction then only the measure is to be found on application of arm s length so far Chapter X of the Act is concerned. The computation of ALP does not convert non-income into income. The tax can be charged only on income and in the absence of any income arising the issue of completing the measure of ALP to the value for consideration of itself does not arise. There must be an international value which is chargeable to tax for invoking the provisions of Chapter X. 4.2.1 Alternately the ld. counsel has submitted that it is not an independent international transaction when the TPO has accepted the international transactions provided to the AE at arm s length. Therefore no separate adjustment can be made by treating the extension of the credit period to the AE as a separate international transaction. In support of his contention, he has relied u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom international transaction only in the case where the assessee is charging or receiving the price under the international transaction then there cannot be any computation of income having regard to the ALP where the related parties decided not to charge any price of the international transaction and consequently the said provision of Chapter X would be conveniently circumvented by each and every assessee having international transaction with the AE by not charging any price or receiving any price from the international transaction. We find that the reliance placed by the ld. counsel for the assessee on the judgment of Hon ble Bombay High Court in the case of Vodafone India Services Pvt. Ltd. (supra) is misconceived and misplaced as the Hon'ble High Court has made such observations while dealing with the issue of application of TP provisions of Chapter X in respect a transaction in capital field being transfer of share without charging premium. The relevant observation of the Hon'ble High Court in paras 38 39 as under : 38. If the above provision is contrasted with the provisions of Chapter X of the Act and in particular Section 92 thereof, it would be noticed tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income into income. The tax can be charged only on income and in the absence of any income arising, the issue of applying the measure of ALP to transactional value/consideration itself does not arise. The ingredient (a) above is not satisfied i.e. subject of tax is income which is chargeable to tax. The issue of shares at a premium is a capital account transaction and not income. The classical distinction between income and capital is that which exists between fruits and tree. Income is a flow while capital is a fund. The Privy Council in CIT v/s. Shaw Wallace Co., Ltd. 6 ITC 178 (PC) has colourfully stated Thus income has been likened pictorially to the fruit of a tree or the crop of a field. It is essentially the produce of something which is often loosely spoken of as capital. It is clear from the above observation of the Hon'ble High Court that there is a classical distinction between the income and capital which has been explained by the Hon'ble High Court by comparing the distinction between the fruits and trees. Therefore the said decision of the Hon'ble High Court in the case of Vodafone India Services Pvt. Ltd. Vs. UOI (supra) would not support the cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal transaction but it is a closely linked or continuous transaction along with sale transaction to the AE. The credit period allowed to the party depends upon various factors which also includes the price charged by the assessee from purchaser. Therefore, the credit period extended by the assessee to the AE cannot be examined independently but has to be considered along with the main international transaction being sale to the AE. As per Rule 10A(d) if a number of transactions are closely linked or continuous in nature and arising from a continuous transactions of supply of amenity or services the transactions is treated as closely linked transactions for the purpose of transfer pricing and, therefore, the aggregate and clubbing of closely linked transaction are permitted under said rule. This concept of aggregation of the transaction which is closely linked is also supported by OECD transfer pricing guidelines. In order to examine whether the number of transactions are closely linked or continuous so as to aggregate for the purpose of evaluation what is to be considered is that one transaction is follow-on of the earlier transaction and then the subsequent transaction is carried ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng from non AEs then no adjustment can be made being the transaction is at arm s length. The third aspect of the issue is that the arm s length interest for making the adjustment. Both the TPO and DRP has taken into consideration the lending rates, however, this is not a transaction of loan or advance to the AE but it is only an excess period allowed for realization of sales proceeds from the AE. Therefore, the arm s length interest in any case would be the average cost of the total fund available to the assessee and not the rate at which a loan is available. Accordingly, we direct the Assessing Officer/TPO to re-do the exercise of determination of ALP in terms of above observation. By following the said decision the Tribunal in the case of Information System Resource Centre P. Ltd. (supra), has again taken the same view and thereafter in the case of M/s. Avnet India P. Ltd. (supra), the Tribunal has again reiterated the same view. Even the Hon ble Bombay High Court in the case of Indo American Jewellery Ltd. (supra) has upheld the order of the Tribunal in para 5 as under : 5. On appeal filed by the Revenue, the ITAT upheld the order of CIT (Appeals). While, upholding the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... given any specific finding except the confirmation of action of the Assessing Officer. 6.2 Before us, the ld. counsel for the assessee reiterated the contentions raised before the authorities below and submitted that Director was working from his residence therefore the expenditure was incurred for the purpose of business of the assessee. He has relied upon the decision of Hon ble Gujarat High Court in the case of Sayaji Iron Engineering Co. Vs. CIT 253 ITR 749. 6.3 On the other hand, the learned Departmental Representative has submitted that there is no dispute that the payment in question was towards the electricity bill of the residence of the Director and therefore it cannot be allowed as an expenditure incurred wholly and exclusively for the purpose of business of the assessee. He has relied upon the orders of the authorities below. 6.4 We have considered the rival submissions as well as the relevant material on record. There is no such condition in the employment contract of the Director in question that the assessee company will bear the electricity expenditure of the residence of the Director. The Assessing Officer has emphatically stated in the assessment order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned it was a business expenditure and not disallowable as such. Thus it is clear that the expenditure incurred by the assessee in the said case for maintenance of vehicle was part of the remuneration as well as terms and conditions of the employment/service contract. Therefore the same was considered as business expenditure. In the case of the assessee on hand, no such 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. 7.1 Ground No.6 is regarding foreign exchange loss on advance to the subsidiaries. The Assessing Officer noted that an amount of ₹ 7,30,389 debited as foreign exchange loss. On verification of record, it was found that the above amount includes a sum of ₹ 5,42,999 was towards foreign exchange loss on loan to subsidiaries. The Assessing Officer observed that this foreign exchange loss on loan is capital in nature and therefor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the relevant material on record. 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. 9.1 Ground No.8 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the authorities below. On the other hand, the learned Departmental Representative has relied upon the orders of the authorities below and submitted that the enduring benefit would be received by the assessee on account of the said expenditure not limited to the financial year under consideration. 9.3 We have considered the rival submissions as well as the relevant material on record. 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 Offi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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. 11. Ground No.10 is regarding disallowance of claim of bad debts. 11.1 During the Financial Year relevant to Assessment Year under consideration the assessee company transferred its software business division (sales and marketing of Packet software products and services and incidental thereto) to its wholly owned subsidiary Tally (India) Private Limited ( TIPL ) on a going concern basis with effect from 1.2.2006 for a lumpsum consideration of ₹ 121,42,46,954 vide Slump Sale Agreement Dt.11.12.2006. The said division was taken over by the TIPL which includes outstanding amount from sundry debtors. The payment of the slump sal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... subsidiary TIPL under Slump Sale Agreement and pursuant to the said sale the assets and liabilities including debtors and creditors have been transferred to TIPL with an understanding that if the debtors are not realized by the TIPL then same shall be transferred to the assessee. During the year under consideration as agreed between the parties the unrealized debts have been retransferred by the TIPL to the assessee. Thus on retransfer of the debtors by the TIPL to the assessee it again became debtors of the assessee. The debtors were transferred by the TIPL directly related to the sale in the preceding previous year. Hence when this debtors are written off, the assessee complied with the condition of Section 36(2) of the Act as it has duly recorded in the books of accounts in the earlier previous year. Alternatively, the learned Authorised Representative has submitted that the transfer of this sales and marketing division was for the purpose of better control over the business on the core areas. Thus the transfer of the division has business purposes in view of the fact that a division was transferred to the wholly owned subsidiary. The losses having nexus with the business are al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... counts is sufficient to claim the deduction under Section 36(1)(vii) of the Act. He has further submitted that in the Slump Sale Agreement no specific mode for disbursement of consideration was specified. Therefore the TIPL has paid the part consideration in money and pat consideration has been discharged by way of returning the sundry debtors as agreed upon between the parties. The assets and liabilities were transferred with clear understanding that unrealized debtors would be retransferred to the assessee within a period of three years. On retransfer of the sundry debtors, the consideration receivable from TIPL on slump sale has been reduced to the extent of unrealized debtors. Thus in effect the debtors were returned as part of settlement of consideration. The learned Authorised Representative has submitted that in order to claim the deduction as debt and part thereof the only condition need to be fulfilled is that the debt or part thereof must have been taken into account in computing the income of the assessee of previous year in which the amount of such debt or part thereof is written or in earlier previous year. Undisputedly the income pertaining to the debt has been record ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sing out of non-realisation of the sundry debtors transferred to TIPL. The said note to accounts has been placed at page 53 of the paper book as under : 1. Transfer of business to subsidiary During the financial year, the company as ;authorized by the Board of Directors vide their resolution dated 19th January, 2006 for a lumpsum consideration of ₹ 1,214,246,954 by entering into a Slump Sale Agreement dated 1st Feb., 2006. The assets taken over by Tally (India) Pvt. Ltd. as part of the Slump Sale Agreement include outstanding from sundry debtors. The company has agreed that Tally (India) Pvt. Ltd. may make payment of the lumpsum sale consideration in parts within a period of three years from the date of Agreement. There is no gain or loss on the transfer of the said business. In terms of Slump Sale Agreement dated 01st February 2006 between the company and its subsidiary, Tally (India) Pvt. Ltd., for the sale of the software business division of the company, the company may have to recognize eventual loss, if any arising out of non-realisation of sundry debtors (debtors not realized within three years from the date of the agreement). Transfer to Tally India Pvt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... could be claimed as a bad debt under Section 36(1)(vi) of the Act. The Hon'ble Supreme Court has observed that the recovery of debt is a right transfer along with the number of other rights comprising the subject of the transfer. If the law permits the transfer to treat the whole or part of the debt as irrecoverable and to claim as deduction on that account it seems difficult to accept that the same right should not be recognized in the transferee. It is merely an incident flowing from transfer of business together with its assets and liabilities from the previous owner to the transferee. The decision which should be on a proper appreciation of all i.e. employee in the transfer of business be recorded as belonging to the new owner. Thus the Hon'ble Supreme Court has finally held at page 157 as under : 7. It seems to us that even if the debt had been taken into account in computing the income of the predecessor firm only and had subsequently been written off as irrecoverable in the accounts of the assessee, the assessee would still have been entitled to a deduction of the amount written off as a bad debt. It is not imperative that the assessee referred to in sub-cl. ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... utedly allowable in the hands of the assessee prior to the transfer of division and also allowable in the hands of the subsidiary after the transfer then on retransfer of these debts by the subsidiary to the assessee as per their mutual agreement and arrangement at the time of slump sale would not change their character being sundry debtors of assessee as it was prior to transfer and the same status was also with the subsidiary of the assessee subsequent to the transfer. The Hon'ble Bombay High Court in the case of CIT Vs. Shreyas S. Morakhia (supra) by following the judgment of Hon'ble Supreme Court in the case of CIT Vs. T. Veerabhadra Rao K. Koteswara Rao (supra) has held in paras 11 12 as under : 11. The view which we are inclined to take finds support from a decision of the Supreme Court inCommissioner of Income Tax v T. Veerabhadra Rao. (155 ITR 152) In that case the assessee succeeded to the business of a firm and took over all its assets and liabilities including a debt due from a third party. The assessee carried on the business of the firm and for Assessment Year 1963-64. Income tax was paid on the interest accrued on the debt due from the debtor. On 31 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich they took. 12. The point to be emphasized from the above extract from the decision is that according to the Supreme Court, the debt was taken into account in the income of the assessee for Assessment Year 1963-64 when the interest income accruing thereon was taxed in the hands of the assessee. The Supreme Court noted that the transaction was a debt and that debt was taken into account in computing the income of the assessee of the relevant previous year. 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 allowabl ..... X X X X Extracts X X X X X X X X Extracts X X X X
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