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TMI Blog2020 (8) TMI 724X X X X Extracts X X X X X X X X Extracts X X X X ..... ) read with section 144C of the Income-tax Act, 1961 ("the Act") dated 20 January 2016 for the Assessment Year 2011-12 passed by the learned Deputy Commissioner of Income Tax, Large Tax Payer Unit, New Delhi (hereinafter referred to as "the Ld. AO") 1. That on the facts and in the circumstances of the case and in law, the assessment order passed by the Ld. Assessing Officer ("Ld. AO") is bad in law. 2. The Ld. Dispute Resolution Panel ("DRP") has inadvertently omitted to adjudicate on the specific ground raised by the Appellant during DRP proceedings in respect of advances available with the Appellant from the Associated Enterprise ("AE") and that pursuant to the said advances, no adjustment on account of outstanding receivables is warranted. The Appellant has filed a rectification application with the Hon'ble DRP requesting adjudication on the same, which is pending. 3. The Ld. DRP erred in confirming the Ld. AO/ Ld. Transfer Pricing Officer's ("Ld. TPO") approach of enhancing the income of the Appellant by Rs. 355,309 holding that the alleged international transactions pertaining to interest on outstanding receivables do not satisfy the arm's length principle envisaged unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... umentation; 5.3 not appropriately considering the functions, assets and risk profile of the companies used for comparison with the Appellant, thereby including in the final comparable set certain companies with completely different functional profile; 5.4 excluding certain companies considered by the Appellant in its TP documentation/ fresh search on arbitrary/ frivolous grounds even though they are comparable to the Appellant in terms of functions performed, assets employed and risks assumed; 5.5 including companies having abnormal margins/ volatile operating margins in the final comparables' set, that signify high element of entrepreneurial risk, thereby not appreciating the risk profile of the services rendered by the Appellant and not allowing risk adjustment to the Appellant; 5.5.1. without prejudice, that if risk adjustment is not allowed to compensate for risk free activities of the Appellant and hence considered it to be risk bearing, in that case appropriate tested party for the arm's length analysis should be the Appellant's overseas AE; 5.5.2. without prejudice, did not give cognizance to the overall Group profits and Appellant's contribution in the total value ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dition of notional expenditure of Rs. 12,52,630 per provisions of section 14A of the Act while calculating book profit under section 115 JB of the Act. 11. That the Ld. AO has erred in law and on the facts and circumstances of the case by disallowing expenses incurred by the Appellant on facility maintenance, advertisement and tour and travel of Rs. 19,60,055 on account of short deduction of tax at 1% instead of 2% under section 40(a)(ia) of the Act. In doing so: 11.1. The Ld. AO erred in law and on facts and circumstances of the case by ignoring the submission of the Appellant wherein it was highlighted, relying on the various judicial precedents, that no disallowance is warranted in case of short deduction of tax under the provisions of section 40(a)(ia) of the Act. 12. That the Ld. AO has erred in law and on the facts and circumstances of the case in not allowing deduction under section 10A of the Act in respect of profit and gains of business and profession as computed by the Ld. AO and not following the directions issued by the Ld. DRP wherein the Ld. DRP has directed to compute deduction under section 10A of the Act with reference to the income computed by the Ld. AO un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rent international transactions. The main international transaction was with respect to provision of IT enabled services amounting to Rs. 6975172486/- and other five transaction were related to reimbursement of expenses to its associated enterprises. The assessee adopted the transaction net margin method (TNMM) as the most appropriate method, adopted the profit level indicator of operating profit/ operating cost. The assessee arrived at set of 12 comparable companies' shows average margin at 14.29% using the multiple year data. The assessee computed its own margin at 14.89% and thus held that according to TP study report its international transactions are at arm's length. 6. Ld TPO was dissatisfied with the TP study report of the assessee, proposed certain different filters and after discussing the various judicial precedents as well as considering the objection of the assessee, carried out additional search and found with the comparable companies. He rejected the working capital adjustment also. The TPO computed the margin of these comparable at 35.78%. He applied this margin to the operating cost of the assessee at Rs. 5660241831/- compared them with the price received of Rs. 71 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion proposed by the TPO on account of overdue amount receivable from associated enterprises of Rs. 5695209/- was reduced to Rs. 355309/-. 9. On the corporate issues, the ld DRP retained disallowance on account of depreciation of software, disallowance u/s 14A, deduction u/s 10A of other income and short credit of TDS resulting into disallowance as per AIR information. In short the ld DRP upheld the addition/ disallowance only at Rs. 3784743/-. The normal income computation resulted into determination of income of assessee at Rs. 658393110/- against the return income of Rs. 654608370/-. 10. While computing the book profit the ld DRP directed to retain the disallowance u/s 14A of the Act of Rs. 1252630/- which resulted into adjusted book profit u/s 115JB of Rs. 1096523035/- against the book profit shown by the assessee at Rs. 1095270405/-. 11. Thus, final assessment order was passed by the ld AO on 20.01.2016. The assessee is aggrieved with the sum of the addition retained in the final assessment order and the ld AO is aggrieved with the addition directed to be deleted by the ld TPO. Therefore, both the parties are in appeal before us. 12. We first come to the appeal of the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from its associated enterprise beyond the agreed credit period, no interest can be charged for delay in receipt of receivable by treating the same as an international transaction separate from the international transaction of rendering of the services. Without prejudice to the above submission, he submitted that the interest cost has already been suitably factored in the sale price as the learned transfer pricing officer has benchmarked its operating profit margin earned from international transaction with the associated enterprises at 14.89% with average working capital adjustment of operating profit margin of comparable companies at 14.29%. He therefore submitted that since the operating margin of the appellant is higher than the operating margin to the comparable companies after taking into consideration the difference in working capital, the impact of account of delayed realization of the receivable has already been built into the sale price or profit margin of the appellant. Therefore, it was submitted that no separate adjustment on account of the alleged delay in realization of the receivable is warranted. For this proposition he relied on the decision of the honourable Delhi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8 of the appeal are not pressed and therefore those grounds are dismissed. 18. Ground number 9 of the appeal is with respect to the disallowance of depreciation claimed by the appellant at the rate of 60% on voice recording software licenses amounting to Rs. 3,31,030/-. On this voice recording software license purchased by the assessee, the assessee claimed depreciation of Rs. 1 98618/- at the rate of 60% however the learned assessing officer held that it is actually a license as opposed to software and assessee is eligible for depreciation at the rate of 25% only, disallowed differential depreciation of an amount of Rs. 115860. The learned dispute resolution panel on objection by the assessee confirms the finding of the learned assessing officer following its directions for assessment year 2010 - 11 and held that the rate of 60% was applicable only to the computer software purchased or acquired along with the computer and not to software license. 19. The learned authorised representative submitted that this issue is squarely covered in favour of the appellant by the order of coordinate bench in appellants own case for assessment year 2010 - 11 in ITA number 302/del/2015. He ext ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The learned authorised representative challenged the above addition on the fact that no satisfaction was recorded by the assessing officer having regard to the accounts of the assessee, which is mandatory. He relied upon the several judicial precedents for the proposition. He further submitted that appellant has earned dividend from investment in mutual fund only and mutual funds are required to pay dividend distribution tax on dividends distributed and only the net income has been received as dividends by the appellant. He further stated that mutual funds are covered by SEBI rules and charge fund management charges. Out of the income earned by the fund the fund management charges are deducted and net income is available for distribution to unit holders. He therefore submitted that during the year under consideration the assessee has received only the net income of Rs. 186,74,678 after deduction of such fund management charges. He further stated that no effort/ time was utilized in receiving the dividend income and the investment activity only requires filing of mutual fund standard printed requisition forms and issue of cheques. The dividend on maturity proceeds are straightway ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Thereafter he proceeded to compute the disallowance applying the provisions of rule 8D and computed such disallowance at Rs. 1,252,630. On careful consideration of the reasons given by the learned assessing officer we do not find any satisfaction with respect to the books of accounts maintained by the assessee that assessee has incurred any expenditure with respect to the earning of exempt income. In view of this, according to us, the learned assessing officer has failed to record any satisfaction with regard to the correctness of the claim of the assessee that it has not incurred any expenditure. The learned assessing officer did not cite any of the expenditure in the profit and loss account of the assessee, which is incurred by the assessee for earning of the exempt income. The satisfaction of the learned assessing officer as provided Under subsection 2 of Section 14 A of the income tax act is a preliminary requirement for invoking the provisions of rule 8D of the income tax rules for making a disallowance u/s 14 A of the act. Therefore, in absence of any satisfaction recorded by the learned AO with respect to the examination of the books of account of the assessee to verify the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 40(a)(ia) of the Act cannot be sustained for short deduction of tax at source, as held in i. CIT vs. S.K Tekriwal: 361 ITR 432 (Cal. HC) ii. ACIT vs. Pankaj Bhargava: ITA No. 86/Del./2012 (Del.) iii. Micromax Informatics Ltd. vs. DCIT: 154 ITD 156 (Del.) iv. UE Trade Corpn. (India) Ltd. vs. DCIT: 28 taxmann.com 77 (Del.) v. Hero Motocorp Ltd. vs. ACIT: 60 SOT 25 (Del.) Without prejudice, learned authorised representative further submitted that disallowance under section 40(a)(ia) of the Act should, if at all, be restricted to 30% of the expenditure, in view of the amendment made by the Finance Act 2014 to the following effect: "40. Notwithstanding anything to the contrary in sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head "Profits and gains of business or profession",- ................... (ia) thirty per cent of any sum payable to a resident, on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction, has not been paid on or before the due date specified in sub-section (1) of section 139 ....................." (emphasis supplied) The Memorandum e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the following decisions, where it has been held that amendment to section 40(a)(ia) of the Act restricting the disallowance to 30% of expenditure, being clarificatory/ curative in nature, is applicable retrospectively: i. Smt. Kanta Yadav vs. ITO: ITA No. 6312/Del/2016 (Del) ii. Prabhatam Advertising Pvt. Ltd. vs. DCIT: ITA No.5798 of 2014 (Del) iii. RH International Ltd. vs. ITO: ITA No. 6724 of 2018 (Del) iv. Sh. Rajendra Yadav vs. ITO: ITA No. 895/JP/2012 (Jaipur) v. Smt.Sonu Khandelwal vs. ITO: ITA No. 597/JP/2013 (Jaipur) - vi. Siddi Vinayak Sarees vs. ITO: 2056 of 2018 (Kol) 31. The learned department representative vehemently supported the order of the learned assessing officer and stated that when the assessee has failed to deduct tax at the appropriate rate in accordance with the Chapter XVIB of the income tax act the disallowance has rightly been made. 32. We have carefully considered the rival contentions and perused the orders of the lower authorities. Here the facts stated before us undisputedly shows that the assessee has deducted tax on the above sum the rate of one percent instead of 2% as held by the assessing officer. Therefore there is no failure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n and find that this issue is squarely covered in favour of the assessee by the decision of the coordinate bench in assessee's own case as per para number 64 of ITA number 302/del/2015 for assessment year 2010 - 11 wherein the coordinate bench held that the receipt from sale of scrap being part and parcel of the activity and having the proximate relationship would also be within the ambit of gain derived from the industrial undertaking and therefore the deduction u/s 10 B was granted. We have also noted from the assessment order that the learned assessing officer has treated this income from sale scrap as business income and not income from other sources. Therefore, it is profits of the business of the undertaking that are considered by the learned assessing officer himself. According to this, subsection 4 of Section 10 B the profit derived from export of article or things or computer software shall be the amount which bears to the profits of the business of the undertaking in the same proportion as the export turnover in respect of such article or things or computer software bears to the total turnover of the business carried on by the undertaking. Therefore, according to that pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned departmental representative payment please submitted that for the purpose of the claim of the depreciation merely an accounting entry could not suffice. He submitted that there has to be an asset available with the assessee, which should be owned by the assessee. He submitted that it is merely an accounting entry which does not result into an asset automaticaly. He relied upon the order of the learned assessing officer. 40. The learned authorised representative submitted that the issue squarely covered in favour of the assessee by the decision of the coordinate bench for assessment year 2000 - 11 in ITA number 302/del/2015 at para number 74 of the order. 41. We have carefully considered the rival contention and perused the orders of the lower authorities. As stated by us earlier that this issue is not a new as the claim of the depreciation on the goodwill has already been allowed to the assessee in assessment year 2010 - 11 by the coordinate bench vide para number 71 of its order. Therefore respectfully following the decision of the coordinate bench in assessee's own case, we dismiss this ground of appeal. 42. 3rd ground of appeal of the AO is against the disallowance of ref ..... X X X X Extracts X X X X X X X X Extracts X X X X
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