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TMI Blog2020 (1) TMI 1478X X X X Extracts X X X X X X X X Extracts X X X X ..... l as treated as allowed for statistical purposes Interest free loans given to its AE - assessee has given interest free loans, the interest rate should be considered on the basis of US Libor rates prevalent in the FY 2012-13 - HELD THAT:- We find that the inclusion of the Explanation by the Finance Act, 2012 is applicable for the AY before us, according to which, capital financing has become an international transaction and in such a case, the ALP has to be determined for such transaction. We find that the TPO has adopted LIBOR + basis points as reasonable rate of interest and since the loan is given to a foreign company, we do not see any reason to interfere with the rate of LIBOR + basis points for charging interest on the advances given by the assessee, which has later been converted into capital introduced by the assessee. Therefore, assessee s ground against such addition is rejected. Disallowance being advances written off and claimed as business expenditure by the assessee - AO had disallowed the advances treating them as capital loss - HELD THAT:- We deem it fit and proper to hold that interest on receivables is an international transaction and credit period as ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... statutory auditors u/s 44AB and, therefore, the nature of expenses cannot be suspected - HELD THAT:- we find that the only reason given by the AO is that the assessee has not furnished its books of account along with bills and vouchers for verification. Before the DRP, the assessee had stated that all the books of account were produced before the AO and the DRP had directed the assessee to file the necessary evidence within 7 days of the receipt of the order before the AO, failing which, the disallowance made by the AO is sustained. The AO has observed that the assessee has not produced any bills and vouchers and supporting documents for verification. Since the assessee has failed to substantiate its claim by way of documentary evidence before the authorities below or before us, we see no reason to interfere with the order of the AO. Thus, the disallowance made by the AO is confirmed and this ground of the assessee is rejected. - ITA No. 2255/Hyd/2017 and 2367/Hyd/2018 - - - Dated:- 23-1-2020 - SMT. P. MADHAVI DEVI AND SHRI A. MOHAN ALANKAMONY, JJ. Appellant by: Shri P. Murali Mohan Rao Respondent by: Smt. Y.V.S.T. Sai ORDER P. MADHAVI DEVI, J. ITA N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds Adjustment u/s. 92CA towards provision of IT Enabled services to GSS Infotech Inc without appreciating the fact that Comparable Uncontrolled Price (CUP) is selected as the most appropriate method. Incorrect Rejection of Transfer Pricing Documentation 1.1 Erred in rejecting the TP documentation, benchmarking analysis and economic analysis submitted by the appellant by showing inappropriate reasons and not supported by any material evidence, which is not correct. 1.2 Erred in not appreciating the fact that the company has billed its services on hourly basis in the past years and the same has been followed by the appellant in the year under consideration. 1.3 Erred in not appreciating the fact that appellant's turnover with AE and Non-AE of ₹ 10,89,93,166/- and ₹ 19,67,23,559/- respectively which clearly explains that the manpower employed has worked on regular basis upon satisfaction the customers has availed services. CUP is the most appropriate method 1.4 Erred in rejecting the CUP method adopted by assessee wherein the price charged per hour to AE was compared with price charged per hour to Non-AE under similar circumstances ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the fact that it is a part of Financial cost and shall not be included in the operating cost while calculating the operating margin of the appellant. 1.10.c. Erred in not excluding the extra capacity cost of ₹ 3,74,96,407/- from the operating cost while calculating the operating margin of the appellant. 1.10.d. Erred in not appreciating the fact that the employee cost is not incurred for the transactions with AEs. Hence, the PU of the appellant should be calculated before extra capacity cost by following Rule 10B of the Income Tax Rules. 1.10.e. Erred in not appreciating the fact that the ratio of employee cost to Operating cost has been increased as that of previous years and accordingly the appellant claimed 20% of the employee cost as extra capacity cost. 1.10.f. Erred in not considering the fact that the appellant company expected growth in the business and employed excess staff in expectation of projects in India, but unfortunately due to reduction in sales certain employees remained on bench and the appellant incurred excess cost. Incorrect application of independent search by TPO 1.11 Erred in carrying of independent search by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... turnover of more than ₹ 200Cr, NIC activity and code is different, high operating margin and has extra ordinary events. 1.12.d. Erred in selecting Microland Ltd as final comparable without appreciating the fact that the said company is functionally dissimilar and having turnover more than ₹ 200 Cr. 1.12.e. Erred in selecting Capgemini Business Systems (India) Ltd as final comparable without appreciating the fact that the said company is functionally dissimilar, with different NIC code and activity and having turnover of more than ₹ 200 Cr. 1.12.f. Erred in selecting e4e Healthcare Ltd as final comparable without appreciating the fact that the said company is functionally dissimilar and having different NIC code and activity. 1.12.g. Erred in selecting Hartron Communications Limited (seg) as final comparable without appreciating the fact that the said company is functionally dissimilar and having different NIC code and activity. 1.12.h. Erred in not considering the submissions made by the appellant in relation to rejection of comparables selected by the TPO. Risk and Working Capital adjustment 1.13 Erred in not pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dize the investments of the taxpayer. 2.4 Erred in not appreciating the fact that the advances given to the AE are with the intention of investment and was never lent for earning interest. 2.5 Erred in not appreciating the fact that the advances to the AE were made from the free reserves available with the appellant and no borrowed funds were used for this purpose. 2.6 Erred in not appreciating the fact that the appellant has used the funds raised through the Initial Public Offer (IPO) in March 2008, wherein it was mentioned as a primary objective that such funds were raised for the purpose of investments in further acquisitions in USA for the growth of the company. 2.7 Erred in not appreciating the fact that the USA subsidiary does not have any deposits or other interest yielding investments, that it may be inferred that the parent company transferred funds in order to avoid interest income, while the subsidiary enjoyed income from interest based on interest free funds received from the parent company. 3. Erred in making the adjustment u/s. 92C(3) of the Act for ₹ 1,49,75,581/- towards Interest on Receivables on the basis of hypothetical and not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o Vashatkara Soft Solutions Pvt Ltd during FY 2010-11 is for buying a Software Producton computerization of Libraries. 4.4 Erred in not appreciating the fact that an advance of ₹ 28,00,000/- given to Kanchan Traders is towards advance for setting up operations in Visakhapatnam. 4.5 Erred in not appreciating the fact that an advance of ₹ 51,50,000/- given to Paragon Tradex Overseas (P) Ltd for the purpose of setting up Joint venture business operations overseas. 4.6 Erred in not appreciating the fact that the appellant has satisfied all the conditions for claiming deduction for advances written off of ₹ 7,79,50,000/- under section 37(1) of Income Tax Act. 4.7 Erred in not appreciating the fact that advances written off are in the nature of business loss as defined u/s 28 of the Act and hence allowable as business expenses. 4.9 Erred in not appreciating the fact that trade advanced were made during the course of its business by the appellant, any loss on account of recoverability would automatically fall under the category of trade debt I receivable and hence is allowable as business loss. 4.10 Erred in not appreciating the fact t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see has filed detailed written submissions and also relevant case laws on which he placed reliance. Taking the same into consideration and after hearing the ld. DR, we proceed to dispose of the appeal as under: 4. The assessee has raised a ground against the incorrect rejection of transfer pricing document and that the most appropriate method for determining ALP should be CUP. However, the ld. counsel for the assessee did not advance any arguments on these grounds and hence the same are not adjudicated. The assessee has therefore accepted TNMM as the most appropriate method, which has been adopted by the TPO. The ld. counsel for the assessee argued that the assessee had entered into similar international transactions with AE as well as non-AE companies, and therefore, internal TNMM should be adopted for computing the ALP. 4. Further, as regards Ground No. 1.9 with regard to the incorrect adoption of the overall margin of the assessee, the ld. counsel for the assessee submitted that instead of international transaction margin of the assessee, the TPO has adopted the entity level margin of the assessee. The ld. counsel has drawn our attention to page 239 of the paper book where ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1.9 is treated as allowed for statistical purposes. 4.4 Further, the AO is also required to give effect to the directions of DRP by reducing the finance charges from the operating cost. Therefore, the AO is directed to recompute the ALP by making necessary adjustments as directed by the DRP and by taking operating margin of the international transactions only into consideration. 4.5 Since we have set aside the issue of computation of the margin of the assessee, and if it would fall within +/- 3% of the comparables, no adjustment would be required, we are not going into acceptability or otherwise of the functional dissimilarities of the comparables challenged by the assessee as it would only result in an academic exercise at this stage. Thus, Grounds against comparables adopted by the TPO are also not adjudicated at this stage. 5. As regards ground No. 2, brief facts of the case are that the assessee had given a loan of ₹ 12,24,95,135/- to its AE i.e. GSS Infotech Inc. without any interest. The assessee explained to TPO that the same was lent to the subsidiary on 01/04/2012 as interest free loan and the same was converted into equity in the subsequent years. Therefore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therefore, ALP cannot be determined u/s 92C of the IT Act. He submitted that the advance given to AE, has subsequently been converted into equity and shares were allotted to the assessee company and, therefore, no interest can be charged on the same. In this connection, he placed reliance on decision of the Tribunal in the assessee s own case in ITA No. 267/Hyd/2014 in support of his contention that no interest can be charged. 5.3 The ld. DR, on the other hand, submitted that as per the Explanation to section 92B w.e.f. 01/04/2002 included in the Statute by way of Finance Act, 2012, capital financing is also an international transaction and, therefore, interest on such capital financing is to be considered as an international transaction and the TPO/DRP have rightly adopted the LIBOR + basis points as reasonable rate of interest on capital financing and, therefore, no interference is called for in the orders of revenue authorities. 5.4 Having regard to the rival contentions and material on record, we find that the inclusion of the Explanation by the Finance Act, 2012 is applicable for the AY before us, according to which, capital financing has become an international transact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h and that under these circumstances, the company has decided to write off the amount as it was not able to recover the amount from Real Marketing. Further, ld. counsel for the assessee submitted that the above expenditure has been incurred for construction of a new facility for extension of existing project but since subsequently it was abandoned due to non-feasibility of the project, the expenditure incurred till the date of conclusion by the Board of Directors to withdraw such construction, is to be treated as revenue expenditure. He submitted that the amount written off is therefore, allowable u/s 37(1) of the Act, as it has been incurred wholly and exclusively for the purpose of business. In support of his contention, he relied on the decision of the Hon ble High Court of Calcutta in the case of Binani Cement Ltd. Vs. CIT, 60 Taxmann.com 384. 6.3 As regards the advance of ₹ 3,40,00,000/- paid to Vashatkara Soft Solutions Pvt. Ltd. for buying application software for computerization of libraries, it was submitted that assessee was participating in tenders to bag certain projects for computerization of libraries in AP and since the application software was not delivered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unts from the said company, it had to be written off and the loss incurred by the assessee was in connection with the business of the assessee and, therefore, was eligible for deduction u/s 37(1) of the Act. In support of this contention, he placed reliance on the decision of the Hon ble ITAT, Calcutta in the case of IMS Ld. Vs. DCIT in ITA No. 813/Kol/2009. 6.6 Thus, he prayed for deletion of the disallowance made by the AO on this account. 6.7 The ld. DR, on the other hand, supported the orders of revenue authorities and has drawn our attention to the findings of AO and DRP that the assessee has not filed any details or the evidence in support of the claims made by the assessee. He submitted that the expenditure incurred by the assessee is in the nature of capital field and, therefore, it cannot be allowed as revenue loss. The ld. DR has also filed additional evidence to demonstrate that the expenditure incurred on these companies to whom advances have been given by the assessee are in the businesses which are totally unconnected to the business carried on by the assessee and, hence, business expediency is not proved. The ld. AR objected to the additional evidence filed by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id any interest on trade payables or advances received from the customers and, therefore, the assessee also should not be held to be receiving the interest on trade receivables. Further, he submitted that working capital adjustment itself takes the impact of interest on receivables and, therefore, no separate adjustment should be made towards interest on receivables. He placed reliance on various case law in support of his contentions. 7.1 The ld. DR, however, supported the orders of the authorities below and argued that non charging of interest from AEs or non-AEs by the assessee will not determine the ALP of the transaction. He also argued that the working capital adjustment takes care of only the opening and closing balances of the trade receivables and not the delay in receivables during the relevant financial year. Therefore, he justified the adjustment made towards interest on receivables. 7.2 With regard to rate of interest charged by the AO and TPO at Indian Banks PLR @ 14.45%, the ld. counsel for the assessee made an alternate argument that the rate of interest should be charged only at LIBOR + basis points, since the receivables are from foreign AE. 7.3Having reg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2C and Rule 10D of IT, Rules and there by undertaking an independent search by applying inappropriate filters and arriving at functionally dissimilar comparables. 3.2 Erred in rejecting the TP documentation, benchmarking analysis and economic analysis submitted by the assessee by showing inappropriate reasons and not supported by any material evidence, which is not correct. 3.3 Erred in rejecting the TP documentation without appreciating the fact that the assessee has maintained all the details and relevant documents in respect of additions, merely by stating that there are certain defects and the comparables of the assessee are also not properly selected. 4. The Ld. TPO/AO/DRP erred in making Arms Length Price Adjustment towards international transaction of Sale of Services to AE 4.1 Erred in rejecting Comparable Uncontrollable Price Method (CUP) adopted by assessee as the most appropriate method for bench marking the transaction of sale. 4.1.1 Erred in not following Rule 10B(1)(a) of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4.4.1 Erred in computing the operating cost of the assessee at ₹ 40,90,42,706/- whereas the actual operating cost of the assessee at ₹ 40,58,10,196/- 4.4.2 Erred in taking Borrowing cost of ₹ 32,32, 510/- as operating cost without appreciating the fact that it is a part of the financial cost of the assessee 4.5 Erred in rejecting the alternative analysis made by the assessee by adopting the TNMM method in respect of transaction of sale of services of ₹ 8,55,31,530/- with AE 4.5.1 Erred in not considering the fact that the overall PLI earned by assessee of 28.08% and the segment margin of 35.30% earned in respect of transactions with AE is much higher than the average PLI of 10 comparables of 7.10%. 4.5.2 Ought to have conducted the search process by selecting Software Development Consultancy Services under industry as the assessee is into the business of information technologies service provider, specialized in IT Consultancy, IT Infrastructure management services and enterprise applicat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rocess conducted by assessee. 5. The Ld. TPO/AO/DRP erred in making an addition towards interest on the outstanding advances given by the assessee to the AE adopting SBI Interest rate. 5.1 Erred in not appreciating the fact that the advance are given towards investment out of business expediency and for administrative convenience on which no interest was accrued to the taxpayer during the year under consideration. 5.2 Erred in law by disregarding the fact that the advances had been advanced as a share holder interest due to the fact that any financial incapacitation of the subsidiaries would jeopardize the investments of the assessee. 5.3 Erred in re-characterization of advance for investment as Loans which is not permissible under section 145 of the Act. 5.4 Ought to have appreciated the fact that the interest free advances given to the AE were in the nature of Share Application Money and is in the nature of Quasi Equity as per the terms of agreement and was never intended to be lent fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nature of any advance/loans and therefore it cannot come under the purview of International Transaction as defined u/s 92B of the Act. 6.4 Erred in the re-characterization of the nature of transaction from Receivables to loan which is not permissible u/s. 145 of the Act. According to Sec. 145 of the Income Tax Act, 1961, the TPO cannot change the character of the transaction followed by the assessee company and accordingly cannot re-characterize the nature of asset, (i.e., treating receivables as loan/advance) as it is not permitted in the eyes of law. 6.5 Erred in not following the procedure laid down under the provisions of Section 92C of the Act relating to the Computation of Arms Length Price 6.6 Ought to have appreciated the fact that, the assessee has adopted TNMM method for determining the ALP of its transactions and the operating margin of the assessee is much higher than its comparables, hence any adjustment with regard to ALP affecting the operating margin would be unjustifiable and against the provisions of Section 92C of the Act. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... les accrued during the year should be taken into consideration. 7. The Ld. AO /DRP erred in disallowing an amount towards bad debts written off. 7.1 Erred in disallowing an amount of ₹ 7,88,71,537/- which consists of bad debts for an amount of ₹ 3,95,55,509/- written off u/s.36(1)(vii) of the Act and business advances written off of ₹ 3,93,16,028/- claimed as deduction u/s.37(1) of the Act. 7.2 Ought to have appreciated the fact that the bad debt written off of ₹ 2,56,65,945/- are against supplies made by Branches in Bangladesh, Dubai and USA against Invoices raised by the company which were already credited to Profit Loss account of earlier years and now written off since the same are not recoverable. 7.3 Ought to have appreciated the fact that the bad debt written off of ₹ 3,93,309/- are against supply of services in respect of Aadhar Project which were credited to Profit Loss account in earlier years and are now written off as not recoverable 7.4 Ought to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... u/s 28 of the Act and hence allowable as business expenses. 7.14 Ought to have appreciated the fact that the assessee has written off the amount in compliance with the accounting standard. 7.15 Erred in not following the directions of the Hon ble DRP given u/s. 144C(5) of the Act without appreciating that they are binding. 7.16 Erred in not accepting the submissions made by the assessee and in completing the assessment. 8. Erred in making disallowance of ₹ 2,62,93,938/- U/s. 14A of the Act 8.1 Erred in invoking the provisions of section 14A without appreciating the fact that the assessee has not earned any income which does not part of total income for the year under consideration. 8.2 Erred in not following the decision of the Apex Court in the case of Commissioner of income tax(central) 1 Vs. Chettinad Logistics (P.) Ltd. 9. Erred in making disallowance of expenses of ₹ 29,02,790/- . ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ustment towards interest on outstanding advances given by the assessee to AE adopting SBI interest rate. The contention of the assessee is that the advances are given as investments and that the assessee has subsequently allotted shares and, therefore, no interest is chargeable on the said advances. This ground is also similar to assessee s grounds of appeal raised for the AY 2013-14 and for the reasons given therein, this ground of appeal is partly allowed. 14. As regards ground No. 6 on ALP adjustment towards interest on receivables, we find that this ground is also similar to the assessee s grounds of appeal for the AY 2013-14 and for the detailed reasons given therein, interest on receivables is held to be an international transaction and after giving credit period of 90 days, the interest is chargeable at LIBOR + basis points as applicable to the relevant period. Thus, this ground of appeal is partly allowed. 15. As regards ground No. 7 against disallowance of bad debts written off, it is seen that the assessee has not filed any details before the AO/DRP, but, it has now filed a paper book containing additional evidence to explain the bad debts. We find that similar issu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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