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TMI Blog2017 (12) TMI 301X X X X Extracts X X X X X X X X Extracts X X X X ..... ion. Provision for gratuity added to profit u/s 115JB - Held that:- The approval of the fund is only the procedural aspect, which can be cured. But it is not clear from the record submitted before us that these funds were actually deposited. We refuse to entertain the claim of the assessee that this can be claimed as expenditure. The same is the case with the treatment in the calculation of 115JB. In case the funds are deposited in the separate fund based on actuary valuation, this cannot be added back in the calculation of 115JB to determine the book profit. We direct the AO to allow the increase in profit consequent to disallowance of provision for gratuity as deduction u/s 10A. Accordingly, ground raised by the assessee is allowed in this regard and the other grounds relating to claim of gratuity as expenditure are dismissed. Deduction u/s 10A - Held that:- When the assessee seeks permission from the RBI through the authorized dealers for the delayed remittance and the same are ratified by RBI, such realizations are eligible to claim deduction u/s 10A. As per provision of section 10A(3), the realization should be brought to India within 6 months or as approved by proper authorit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e above asset - Held that:- In the present case, assessee has purchased this software to improve the business by linking the transaction of different countries. It is not always end up with good decision, it is part of business decisions. It is not always relevant how much revenue it has generated or improved the business. It is not sometimes quantifiable. It is enough to prove that the purchase transaction and relevant payment is proper. AO is expected to verify only the legality and genuineness of the transaction and not the rationale of such transaction, it should be the domain of the management. Accordingly, we direct the Assessee to submit the relevant information relating to purchase and payment of ERP software. The assessee has to submit the copy of bills and payment vouchers with bank statement in which such payments were cleared. We note that assessee has not submitted such information even before AO/DRP even though opportunity was extended. Now, ld. AR has submitted that all the information is available, accordingly, we remit this issue back to the file of the AO with a direction to verify the transaction as per due procedure only for the genuineness of purchase and payme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee has carried out the economic analysis and has summarized it as under: Nature of international transaction MAM PLI Margin of assessee Margin of comparable Provision of IT enabled back office support services (received) TNMM OP/OC 29.65% 19.59% The TPO noted that the assessee company had considered TNMM as MAM for all the international transactions other than interest free loan. Further, the TPO examined TP documentation and relevant information furnished by assessee. On verification, it was found that the profit level indicator (PLI) of the assessee (OP/OR) was at 29.65% for the FY ending 31/03/2009. As the same falls above the arm's length price determined by the TPO, no adjustment was proposed in respect of IT enabled services reported in 3CEB report for the FY 2008-09 relevant to the AY 2009-10. Interest free loan to the AE (Rs. 18,71,52,000/- and ₹ 29,04,15,000/-) 4. The TPO observed that during FY 2008-09, assessee had advanced a sum of ₹ 18,71,52,000/- and ₹ 29,04,15,000/- to its AE without any interest. The assessee was asked to explain the reasons why interest was not charged on the loan advanced by the assessee to its AE. The as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngly, the arm's length price of the interest on loan given by the assessee to its AE was determined by the TPO on the basis of 12 months US LIBOR prevalent during FY 2008-09, as under: Particulars Rate ofinterest (%) Difference in %age points from US LIBOR 12 month US LIBOR rate for FY 2008-09 2.71 Average interest rate on US treasury securities for FU 200809 4.12 1.41 Average rate at which banks lend to prime customers (official site of the world bank) 4.63 1.92 Prime lending rate in USA (www. Trading economics. Com) 4.35 1.64 The TPO computed the arm's length interest on the loan given by the assessee to its AE by taking US LIBOR plus 3 percent points, which comes to 5.7% per annum, as under: S. No. Amount of loan (Rs.) Period (days) ALP Interest @ 5.7% p.a. (in Rs.) Interest charged by taxpayer (in Rs.) Shortfall being adjustment u/s 92CA (in Rs.) 1 18,71,52,000 210 61,37,560 NIL 61,37,560 2 3,05,70,000 90 4,29,655 NIL 4,29,655 3 15,28,50,000 70 16,70,880 NIL 16,70,880 4 10,69,95,000 5 83,544 NIL 83,544 Total 83,21,639 Thus, the shortfall on account of interest on the loan given by the assessee to AE worked out to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unt of ₹ 8,37,25,903 is claimed to be towards share application money and ₹ 1,01,90,000 is an advance. Therefore, once the amount of ₹ 8,37,25,903 is accepted as investment in share application money the same cannot be treated as loans and advances. Hence, arms length rate of interest either @ 5% or by applying LIBOR cannot be charged on such transaction. In so far as the advance of ₹ 1,01,90,000 is concerned, it is the claim of assessee that it is in the regular course of business. This aspect has not been properly considered either by TPO or by DRP. While considering identical issue for the preceding AY i.e. AY 2008-09, in assessee's own case, the coordinate bench of this Tribunal in ITA No. 1816/Hyd/2012, dated 08/08/2014 held as under: "12. Therefore, considering the facts of the assessee's case, in the light of the orders passed by the coordinate benches referred to hereinabove, it is to be held that if the investments are in the nature of equity, then, they cannot be treated as loans and advances. However, for coming to a definite conclusion in this regard necessary details need to be examined from the books of account and other related documents. S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r from the records that the purpose for which the loan was given. The assessee claims that it is for the business exigencies (quasi capital) and then it was converted as equity. The assessee has submitted that the parent company has allotted the shares in the FY 2011-12 but it is not clear, when the decision was made to convert the loan into equity. Considering the above facts and issues relating to this transaction, in our considered view, this matter needs further verification at the AO/TPO level to find out the purpose of loan, whether for business exigencies. If it is for the business exigencies and particularly it comes under definition of international transaction, the same has to be considered as financial transaction. This transaction will attract interest as per foreign currency lending. Before this, it is relevant, when the decision is taken to convert the loan transaction into equity ? These are pertinent questions to be answered. Therefore, we remit this matter back to AO/TPO to call for the relevant record/information to determine the nature of transaction and date of decision to convert the loan into equity. If the decision was made during this AY, then, this transact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s can be claimed as expenditure. The same is the case with the treatment in the calculation of 115JB. In case the funds are deposited in the separate fund based on actuary valuation, this cannot be added back in the calculation of 115JB to determine the book profit. This is as per case law relied on by the assessee in the case of Dresser Valve India Ltd., (supra) and Ekla Appliances (supra). 12.1 Coming to alternate claim of the assessee that the disallowance will increase the profit which is eligible as the deduction u/s 10A. The coordinate benches of Mumbai held that the consequence of disallowance will increase profit eligible to get deduction u/s 10A. the relevant finding is given below: "6.2 We have given a thoughtful consideration to the factual position so averred by the Ld. A.R. before us and find that the CIT(A) had absolutely failed to deal with and adjudicate the aforesaid specific ground of appeal raised by the assessee before him. The Ld. A.R had submitted before us that the assessee company had business income only from one source, i.e software unit located in Software Technology Park (for short 'STP'), which pursuant to its corresponding entitlement toward ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are dismissed. ITA No. 329/Hyd/2016 for AY 2011-12 13. Ground No. 1 was not pressed by the assessee, therefore, the same is dismissed as not pressed. 14. As regards ground No. 2 relating to the addition of ₹ 3,65,81,330/- towards interest attributed on investment made in GSS America Inc., USA of USD 2,38,08,597/-, during the FY 2010-11, the assessee had advanced a sum of USD 7,821,517 as an interest free loan to its AE i.e. GSS Americal Inc whereas the opening balance as on 01/04/2010 was USD 15,987,080/-. 14.1 The contention of the assessee that the funds were given out of the free reserves of the assessee was rejected by the TPO by observing that no independent business entity operating at arm's length will part with its substantial funds without any consideration or quid pro quo whatsoever. He further observed that the assessee had failed to show the tangible and direct benefits it had received from the interest free loan given to its AE and the funds were used by the AE for acquisition and therefore, it was the AE which had directly benefitted from the funds and not the assessee. As regards the argument of the assessee that the loan was in the nature of quasi equity ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts. The assessee company claimed an amount of ₹ 11,71,67,722 as exemption u/s 10A. The assessee had claimed that during the year it raised export invoices to an extent of ₹ 37,39,38,516/- from its Hyderabad Branch. The assessee realized the sale proceeds of ₹ 37,39,38,516 as given below: 20.1 The assessee had brought ₹ 9,96,73,705/- to India in convertible foreign exchange within the stipulated period that is within 6 months from the end of FY 2010-11 (i.e. before 30/09/2011 as per section 10A(3) of the Act. S.No. Particulars as to when the sale proceeds were received Amount received in Rs. Details as to how deduction u/s 10A is allowable 1 Within 6 months from the end of FY 2010-11 (i.e. before 30/09/2011) 9,96,73,705 As per section 10A(3). 2 Within one year from the date of invoice as per RBI Circular 1,51,57,968 Not eligible for deduction 3 After 30/11/2011 and after one year from the date of invoice 17,61,37,767 -do- 4 Not received till date 14,61,575 -do- 5 Accounts receivable invested as equity investment in the AE 8,15,07,501 -do- Total 37,39,38,516 Accordingly, the AO computed the eligible deduction u/s 10A of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xport proceeds, we admit the additional evidence and hereby hold that the assessee is entitled to exemption u/s 10A(3) of the act and we direct the AO accordingly." 26. Ld. DR relied on the order of DRP. 27. Considered the rival submissions and perused the material facts on record. As the issue under dispute is squarely covered by the decision of the coordinate bench of this Tribunal in the case of Prithvi Information Solutions Ltd. (supra) that when the assessee seeks permission from the RBI through the authorized dealers for the delayed remittance and the same are ratified by RBI, such realizations are eligible to claim deduction u/s 10A. As per provision of section 10A(3), the realization should be brought to India within 6 months or as approved by proper authority, in the given case, it is RBI, which is the approved authority. Hence, assessee is eligible to claim deduction u/s 10A. Therefore, we direct the AO to allow the assessee's claim of exemption u/s 10A. Accordingly, this ground is allowed. 28. As regards ground No. 4 to 4 & 4b regarding export receivable converted into equity of ₹ 8,15,07,501/-, the ld. AR submitted that when realizations were actually transfer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be adequate for the purpose of benefit u/s 10A even though the same is considered for foreign exchange laws. We have carefully gone through the facts of the case. Explanation 1 to section 10A(3) which has defined the competent authority as RBI and the competent authority being RBI authorize the capitalization and then such authorization should automatically get validated as the said authority specifically authorized under the provisions of section 10A(3) of the 1T Act. Further, the Wholly Owned Subsidiary has been incorporated in France by the name 'Sankhya Sari' with the appropriate approval from RBI that certain amount of Euros be invested into this company within one year from the date of approval. This approval is relevant for the assessment year 2002-03 to 2003-04 and in both the years, it has been proved by the assessee that the said monies were invested 'into the Wholly Owned Subsidiary within the period of one year from the date of RBI's approval. Hence the conditions laid down is complied with by the assessee and the department has not brought on record the that the conditions laid down by RBI has not complied with. Being so, we are in agreement with the or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tments were out of sale proceeds. The authorized dealer has adjusted against such investment and issues FIRC's to the assessee, then, it amounts to realization of export proceeds within the meaning of actual receipts for the purpose of section 10A. Since, the assessee has not submitted any document in support of approval granted by RBI and FIRC certificates, we remit this issue to the file of the AO to examine the FIRC's and approval from RBI, in case it is in order, the assessee is eligible for deduction u/s 10A on such sum. Accordingly, ground raised by the assessee is allowed for statistical purpose. 31. Ground No. 5 is as follows: "5. Erred in wrongly considering the profits of business at ₹ 8,15,07,501/- instead of ₹ 8,59,12,141/-while calculating the deduction u/s 10A. 31.1 It is general in nature and has already been adjudicated in the above paragraphs. 32 Ground No. 6 is as follows: 6. Erred in not excluding the invoice of Bangladesh Branch of ₹ 1,71,48,146/- from the total turnover while calculating the deduction u/s 10A of the Act." 33. Ld. AR of the assessee submitted that onsite sales should not be excluded from export turnover. He submitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... site development of software at abroad. This argument of the assessee's counsel is bereft of any merit since the branch sales cannot be equated with on site development of software which is not identical. In our humble opinion, assessee is not entitled for benefit of Sec. 10B on the Branch sales and it is to be excluded both from export turnover as well as from total turnover. Accordingly, this ground raised by the revenue and as well as by the assessee is dismissed." 34. Ld. DR relied on the order of DRP. 35. Considered the rival submissions and perused the material facts on record. As the issue under dispute is squarely covered by the decision of the coordinate bench of this Tribunal in the case of Seven Hills Business Solutions P. Ltd. (supra), we direct the AO to allow the assessee's claim of exemption u/s 10A by excluding the branch turnover from both export turnover and total turnover. Accordingly, this ground is allowed. 36. The grounds Nos. 7 to 10 are alternative grounds to the above grounds, therefore, the same is not required to be adjudicated as the main grounds are adjudicated in favour of the assessee. ITA NO. 602/Hyd/2017 for AY 2012-13 37. Ground Nos. 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee-on the reason that the assessee failed to establish the peculiar circumstances existing in the case to apply the PBDIT. However, it is noticed by us that in the Draft Assessment Order (DAO) the AO has disallowed the depreciation on the computer software on the ground that the transaction itself has not been established by the assessee to be genuine, in such circumstances when there is a dispute with regard to the depreciation in respect of a certain asset, it is a fit case for considering the PBDIT in the case of the assessee. This view is also finds support from the decision of the Hon'ble AP & Telangana High Court in the case of BA Continuum India Pvt Limited (ITTA 440 of 2014) (supra) and also by OECD guidelines, accordingly, we direct the assessing officer to consider the margin in the case of the assessee as well as comparables after excluding depreciation." 39.1 As per the above directions of the DRP, the TPO determined the adjustment of ₹ 10,19,56,655/- as against ₹ 9,36,79,227/- made by him without considering the above direction to analyse the operating profit by adopting PBDIT in all comparable cases. 40. Aggrieved, the assessee is in appeal bef ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s determined as equity, then, no interest can be charged in this transaction. Accordingly, ground raised by the assessee is allowed for statistical purposes. 45. As regards ground No. 7 & 7a to 7k regarding addition of ₹ 1,04,34,308/- towards interest on receivables, the TPO observed that there are outstanding receivables to the tune of ₹ 7,71,72,081/-, which were not reported either in Form 3CEB or in the TP Document. Further, the TPO observed that on perusal of the schedule of receivables, it was noticed that the entire receivables had not been received during the year. When asked for explanation, the assessee stated that interest should be levied at LIBOR + 3% as was decided by the DRP in its own case as against PLR of 14.75% proposed by TPO. However, the TPO levied interest @ PLR i.e. @ 14.75% on the outstanding receivables amounting to ₹ 7,71,72,081/-, which comes to ₹ 1,04,34,308/-. 46. When the assessee objected the same before the DRP, the DRP directed the assessee to furnish the necessary details to the TPO which is necessary for computation of interest in accordance with the directions within 15 days of receipt of this order on receipt of which t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TPO to charge interest of LIBOR + 200 bps on the outstanding amount beyond 6 months. In order to determine the period and computation of interest, the issue is remitted back to AO/TPO. Accordingly, ground raised by the assessee is allowed for statistical purposes. 49. As regards the ground No. 8 & 8a to 8k relating to the addition of ₹ 14,62,50,000/- towards asset written off and ₹ 4,87,57,000/- towards depreciation claimed on the above asset, in the computation of total income, the AO observed that the assessee claimed ₹ 14,62,50,000/- towards loss on asset written off. Further, from the depreciation schedule as per IT Act, it was observed that the assessee claimed depreciation of ₹ 4,87,57,000/-, in addition to the write off of ₹ 14,62,50,000/- on the same block of asset. When the assessee was asked to furnish a note on asset written off of ₹ 14,62,50,000/- and justify the allowability of the same along with evidence, the assessee submitted that in the year 2009 it had devised a plan to target SME to move into a SAS based ERP model and an ERP package was considered that could be used to meet this requirement, accordingly, the product was bough ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and write off the same without giving any valid justification. Write off of such a valuable asset that too soon after its acquisition without there being any proper business rationale supports the view taken by the AO. It is also pertinent to observe that the assessee has chosen to write off the asset in this transaction soon after its tax holiday came to an end and was to pay taxes on its profits. In view of the above and also relying on the reasoning given by the AO in the original draft assessment order and also in the RR submitted to us, we are of the view that the assessee has failed to prove the genuineness of the transaction. Accordingly, we confirm the action of the AO and reject the objections of the assessee on this ground." 51. Ld. AR reiterated the submissions as submitted before the DRP, while ld. DR relied on the order of DRP. 52. Considered the rival submissions and perused the material facts on record. The above said ERP software was purchased and installed in the FY 2009-10 relevant to AY 2010-11. The same was accepted by the department and accordingly assessments u/s 143(3) were completed. The same asset was written off by the assessee due to change in the b ..... 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