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TMI Blog2018 (9) TMI 1544X X X X Extracts X X X X X X X X Extracts X X X X ..... iving a cogent and germane reason for adjudication of the objections of the assessee. We direct accordingly. After receiving the order from DRP, the Assessing Officer will again pass order u/s 144C(13) and the present assessment passed by the Assessing Officer is set aside as the DRP is directed to readjudicate the objections raised by the assessee as per directions give above. We direct accordingly. This ground of appeal of the assessee is allowed for statistical purposes. Disallowance of working capital adjustments - Held that:- We are inclined to direct the Assessing Officer to consider working capital adjustment while determining the ALP of international transactions of the assessee with its AEs in this case also. Hence this ground of appeal of the assessee is partly allowed. Disallowance made u/s. 14A - Held that:- We are inclined to direct the Assessing Officer to exclude interest and bank charges which are not related to exempt income yielding investments. Hence, this ground of appeal of the assessee is partly allowed for statistical purposes. - I.T.A. No.113/Coch/2016 & 509/Coch/2016 And S.P. No. 13/Coch/2016 - - - Dated:- 12-9-2018 - SHRI CHANDRA POOJARI, AM AND G ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce. The advance was from the holding company to its subsidiary company as the assessee had not managed funds abroad and thus given advance to the subsidiaries. Thus the DRP confirmed the findings of the TPO and held that the transactions with Branches are in the nature of loans and commercial expediency will not override the law relating to Transfer pricing. 3.3 Against this, the assessee is in appeal before us. The Ld. AR submitted that the advances were not in the nature of loans or advances and were short term advances of temporary nature given in the ordinary course of business based on commercial expediency. The assessee submitted that the imputation of interest on international transactions carried out by the assessee was outside the purview of Transfer Pricing Regulations in India. He has further asserted that the foreign branch and the Indian company were to be treated as one legal entity. The Ld. AR relied on the decision by the ITAT, Hyderabad Bench in the case of Semantic Space Technologies Ltd. vs. DCIT in I.T.A. No. 824/Hyd/2010 dated 07/03/2012. 3.4 The Ld. DR relied on the order of the DRP. 3.5 We have heard the rival submissions and perused the record. We ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2014 judgment Ph.D degrees with which that judgment was concerned were also granted prior to 2009. There is, therefore, no distinction between the facts of the two cases. What is even more distressing is that only sub para 4 of the conclusion in the 2012 judgment is set out without any of the other sub paragraphs of Paragraph 104 extracted above to arrive at a result which is the exact opposite of the earlier judgment. This judgment is also set aside only for the reason that it did not follow an earlier binding judgment. In view of the above, Ground No. 1 raised by the assessee is dismissed. 3.6 In view of the above order of the Tribunal, we are inclined to decide the issue against the assessee and in favour of the department. Hence, this ground of appeal of the assessee for both the assessment years is dismissed. 3.7 The next ground in both the appeals is with regard to erroneous imputation of interest on advances given to subsidiaries. 3.8 The Ld. AR submitted that the TPO computed interest at the rate of 5% per annum which is not an internal comparable uncontrolled price instead of using LIBOR. The Ld. DR relied on the order of the DRP. 3.9 We have heard th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l revenue from operation. During the previous year, the assessee had entered into a contract with Citibank, NA ( Citi ). 4.2 The Ld. AR submitted that there was a dispute in the contract as a result of which the company had to differ recognizing the cost incurred on the contract in the previous year as well as advance received during the previous year and the same was recognized in the current year and this being an extraordinary item, the same needed to be removed while considering the segmental profitability of the assessee. The Ld. AR drew our attention to the segmental profitability of the assessee. It was submitted that the profit earned by Sun Tec India from its AE segment is 17.89% was higher than the profit earned from Non-AE segment at 12.06%. Since the margins earned by the assessee from its operations with its AE s was more than the margins earned from non-AE s, it was submitted that the assessee had not shifted any profits outside India and thereby the upward adjustment made to the IT segment by the TPO was erroneous. It was submitted that the TPO had proposed to make an upward adjustment on the total revenue earned by the assessee by way of transfer pricing assessme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat certain comparables identified by the assessee are not proper comparables. The proper comparability can be achieved only after making proper FAR analysis of the tested party and based on this analysis significant economic functions are identified and thereafter the relevant filters are adopted based on significant economic functions performed by the tested party. Once proper filter are chosen and applied on the public data base the proper comparables can be identified. Seen from this perspective this panel finds that there are certain filters which the assessee has not applied. This deficiency was cured by the TPO who applied proper filters as mentioned in the TP order. The TPO has given reasons for rejecting these comparables suggested by the assessee. Therefore, the action of the TPO suggests that the reason for rejection of ALP determined by the assessee has been use of data by the assessee which is not reliable or correct. Considering the above discussion, we consider that the action of the TPO is justified and the claim of the assessee company is not acceptable. 4.5 Against this, the assessee is in appeal before us. According to the Ld. AR, the above findings of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iven to the assessee and the Assessing Officer on such directions which are prejudicial to the interest of the assessee or the interest of the revenue respectively. Under sub-section (12), directions under sub-section (5) cannot be passed after nine months from the end of the month in which draft order is forwarded to the eligible assessee. Under sub-section (13), on receipt of directions issued under subsection (5), the Assessing Officer has to pass the assessment order in conformity with the directions without providing any further opportunity of being heard to the assessee within one month from the end of the month in which such directions are received. 4.9 The directions passed by DRP u/s 144C (5), as it can be seen in the present case, are not speaking about what objections were raised by the assessee and how they have been found to be not acceptable. The DRP has simply observed that the TPO has given reasons for rejecting the comparables and by the Assessing Officer in the draft order. Therefore, the order passed by the DRP is a non-speaking order on the issues raised by the assessee, not stating the objections raised by the assessee and the reasons have also not been give ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the ITAT, Cochin Bench in the case of Zafin Software Centre of Excellence Pvt. Ltd. vs. ACIT in IT(TP)A No. 331/Coch/2017I dated 16/05/2018. 5.3 The Ld. DR relied on the order of the DRP. 5.4 We have heard the rival submissions and perused the record. A similar issue came up for consideration before this Tribunal in the case of Zafin Software Centre of Excellence Pvt. Ltd. vs. ACIT (supra) wherein it was held as under: 5.3 We have heard the rival submissions and perused the record. The Ld. AR relied on the decision of the ITAT, Chennai Bench in the case of Foxteq Services India (P) Ltd. vs. ACIT in 74 taxman.com 216 where in it was held as under: 7. We have considered the rival submissions on either side and perused the relevant material available on record. The assessee objected to the adjustment made by the Transfer Pricing Officer. With regard to working capital adjustment, the assessee claims that the difference in working capital between the assessee and the comparable companies would materially affect the profit determined. Therefore, certain adjustment needs to be made to bring them on equal footing. The assessee also brought to the notice of the DRP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . For this proposition, he relied on the order of the Chennai bench of the Tribunal in the case of Tafe Motors Tractors Ltd. vs. ACIT (48 ITR 150) (Tribunal). 8.3 The Ld. DR relied on the order of the DRP. 8.4 We have heard the rival submissions and perused the record. We find that a similar issue came up for consideration of the ITAT, Chennai Bench in the case of Tafe Motors Tractors Ltd. vs. ACIT (supra) wherein it was held as under: 5. We have heard both the parties and perused the material on record. The main contention of the assessee's counsel is that the AO considered the investments yielding taxable income and also investments not yielding taxable income to apply the formula in Rule 8D of I.T Rules. According to him, the AO also included the interest expenditure which is incurred for a specific purpose while computing the amount of expenditure by way of interest, other than the amount of interest included in clause (i) incurred 17 during the previous year and all the components in Rule-8D being applied wrongly, it is to be recomputed. 6. In our opinion, there is merit in the plea of the assessee. The interest paid by the assessee on borrowings, wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s prohibit utilization of funds for purposes other than for the utilization for which they are sanctioned. From the ledger extract for the year ended 31.03.2008 for both loan accounts, it is seen that no amount has been utilized for investment in subsidiaries which earns tax-free income. The loan amounts were fully disbursed and utilized in the year ended 31.03.2008 (A.Y. 2008-09) itself. Taking into all the facts as stated above, I am of the considered opinion that if loans/borrowed amounts are granted for specific projects/expansion and no amount from the same has been directly utilized for investments, then the first and second limb of rule 8D attributing the interest payments to the investments will not be applicable. Accordingly, interest on bank loan and term loan amounting to ₹ 67,92,000/- and ₹ 3,82,11,000/- respectively are to be excluded from the calculation to determine the disallowance under rule 8D(2)(ii). The AO is, therefore, directed to take into account only the remaining interest on other accounts amounting to ₹ 1,29,43,000/- for computing the proportionate disallowance under rule 80 (2)(ii). 11. On going through the order of the Commissio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under rule 8D(2)(ii) is clearly incongruous inasmuch while it specifically excludes interest expenditure directly related to tax exempt income, it does not exclude interest expenditure directly related to taxable income. Resultantly. while rule 8D(2)(ii) admittedly seeks to allocate expenditure by way of interest, which is not directly attributable to any particular income or receipt it ends up allocating expenditure by way of interest, which is not directly attributable to any particular income or receipt, plus interest which is directly attributable to taxable income (emphasis by underlining supplied by us). This incongruity will be more glaring with the help of following simple example: In the case of A Co Ltd, total interest expenditure is ₹ 1,00,000, out of which interest expenditure in respect of acquiring shares from which tax free dividend earned is ₹ 10,000. Out of the balance ₹ 90,000, the assessee has paid interest of ₹ 80,000 for factory building construction which clearly relates to the taxable income. The interest expenditure which is not directly attributable to any particular receipt or income is thus only ₹ 10,000. However, in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wing observations made by Their Lordships of Hon'ble Bombay High Court in the case of Godrej Boyce (supra): 60. In the affidavit-in-reply that has been filed on behalf of the Revenue an explanation has been provided of the rationale underlying r. 8D. In the written submissions which have been filed by the Addl. Solicitor General it has been stated, with reference to r. 8D(2)(ii) that since funds are fungible, it would be difficult to allocate the actual quantum of borrowed funds that have been used for making tax-free investments. It is only the interest on borrowed funds that would be apportioned and the amount of expenditure by way of interest that will be taken (as 'A' in the formula) will exclude any expenditure by way of interest which is directly attributable to any particular income or receipt (for example-any aspect of the assessee's business such as plant/machinery etc.)............... The justification that has been offered in support of the rationale for r. 8D cannot be regarded as being capricious, perverse or arbitrary. Applying the tests formulated by the Supreme Court it is not possible for this Court to hold that there is writ on the statute ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 13. In view of the decision of the Calcutta Bench of this Tribunal cited above, we uphold the order of the Commissioner of Income Tax (Appeals) in excluding the interest on bank loan and term loans for the purpose of computing disallowance under Rule 8D(2)(ii). The grounds raised by the Revenue are rejected on this issue. 8.5 In view of the above order of the Tribunal, we are inclined to direct the Assessing Officer to exclude interest and bank charges which are not related to exempt income yielding investments. Hence, this ground of appeal of the assessee is partly allowed for statistical purposes. 9. The next ground in both the appeals is with regard to levying consequential interest u/s. 234B and 234C. This ground is consequential in nature and does not require adjudication. 10. The next common ground in both the appeals is with regard to non granting of credit in respect of prepaid taxes as per the withholding tax certificates in its possession. 10.1. We have heard the rival submissions and perused the material on record. We find that a similar issue came up for consideration of this Tribunal in assessee s own case in ITA No. 167/Coch/2015 dated 13/10/2015 wherei ..... X X X X Extracts X X X X X X X X Extracts X X X X
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