9911796707
TMI Blog2024 (2) TMI 101X X X X Extracts X X X X X X X X Extracts X X X X ..... 6 (6.1 & 6.2) Disallowance of proportionate claim of issue discount expenses 1,49,24,355 7 Rebate under section 88E 7,08,99,317 8 Short grant of relief under section 90 4,67,30,903 9 Charging of interest under section 234B & 234D 10 (10.1 & 10.2) Provisions of section 115JB not applicable 11 General Revenue Ground No. Item of disallowance / addition Amount - Rs. 1 & 2 Depreciation on leased assets 43,43,25,891 2 Addition of non cash write back made under section 41(4) 56,19,378 3 Club Membership Fees 1,13,85,062 4 & 5 General 3. The assessee is engaged in the business of banking and related activities. The assessee filed the return of income for AY 2007-08 on 31.10.2007 declaring the total income of Rs. 30,91,68,39,720/-. The assessee later filed a revised return of income on 14.11.2007 declaring the total income of Rs. 30,91,68,39,714 which was once again revised on 28.03.2009 declaring the total income of Rs. 31,23,71,65,697. The assessee vide letter dated 04.03.2010 filed during the course of assessment proceedings filed the revised computation declaring the total income at Rs. 33,89,66,57,390/- under normal provisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rought to our attention that based on the disallowance made in the MTM loss the assessee filed a petition under section 154 to reverse the MTM gains offered to tax and the Assessing Officer reversed the gain offered to tax. The ld AR fairly submitted that if the MTM loss is allowed as a deduction, then directions may be given to the assessing officer to bring the MTM gain reverse back to tax. 6. The Ld. DR, on the other hand, vehemently argued that the MTM loss is not the real loss incurred by the assessee, but arise out of the re-instatement of the derivatives which is notional in nature. Accordingly, the Ld. DR submitted that the lower authorities have correctly disallowed the said loss. The Ld. DR made a without prejudice submission that if the loss is to be allowed as a deduction, then the gain which was deleted by the order under section 154 should be brought back to tax. 7. We heard the parties and perused the material on record. We notice that the Special Bench of the Tribunal in the case of DCIT vs Bank of Bahrain & Kuwait (supra) has considered the issue of allowability of loss arising out of MTM re-investment of foreign exchange contracts and held that- "58. In view o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rned towards administrative expenses. The Assessing Officer invoked the provisions of section 14A stating that the assessee has not discharged the onus of evidencing the source of investment is from own funds. Accordingly the assessing officer made a disallowance of Rs. 458.866 crores towards interest paid and Rs. 17.37 crores towards administration expenses after adjusting the suo moto disallowance made by the assessee. Before the CIT(A) the assessee submitted that the assessing officer has made the disallowance under Rule 8D which is not applicable for the year under consideration. The CIT(A) held that even in the year in which Rule 8D was not available disallowance can be made on a reasonable basis and accordingly upheld the disallowance stating that the Assessing Officer has made the disallowance on reasonable basis. 10. Before us, the Ld.AR submitted that the provisions of Rule 8D are applicable only prospectively from A.Y. 2008-09 and, therefore, the Assessing Officer is not correct in applying rule 8D for the year under consideration. The Ld.AR drew our attention to page 21 of the assessment order in which the Assessing Officer himself admits the fact that the assessee is h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... BAD DEBTS WRITTEN OFF 14. The assessee, during the year under consideration has written off a sum of Rs. 437,82,57,646/- as bad and doubtful debts. This claim was made after adjusting the credit balance of Rs. 201,49,16,575/- in the provision for bad and doubtful debts. Accordingly, the assessee claimed the net amount of Rs. 236,33,41,071/- as bad debts under section 36(1)(vii). The Assessing Officer held that only writing off of the debts as bad debt in the accounts is not enough and that the assessee is required to furnish complete information to the Assessing Officer to prove with conclusive evidence that the debts have become bad. The Assessing Officer further held that the assessee should furnish the documents, correspondence, action taken, etc. before the assessing authority to demonstrate that the facts which compelled them to reach the conclusion that the debt is irrecoverable. The assessee contended that as per the amended provisions of section 36(1)(vii), the assessee is not required to show that the amount had become bad and that the write off in the books of account is sufficient. The Assessing Officer, however, did not accept this contention of the assessee and held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said provisions and the assessee is no more required to establish that the debt has actually become irrecoverable. The Hon'ble Supreme Court in TRF Ltd. v/s CIT, [2010] 230 ITR 14 (SC), has expressed this view. Further, in case of Vijaya Bank Ltd. v/s CIT, [2010] 323 ITR 166 (SC), the Hon'ble Apex Court held that mere debit to the Profit & Loss account is not sufficient to claim write-off as the assessee has to simultaneously reduce the amount from loans and advances or debtors on assets side of the Balance Sheet to claim right-off. The Hon'ble Supreme Court observed, closing down individual account of each debtor in the hooks of account is not-necessary. However, the Hon'ble Supreme Court taking note of Explanation-1 to section 36(1)(vii) of the Act observed that mere provisions for bad debt will not entitle for deduction under section 36(1)(vii) of the Act. On a careful perusal of the assessment order, we have noted that in case of some of the debtors the Assessing Officer has alleged that they are in the nature of mere provisions, which requires examination. In view of the aforesaid, we direct the Assessing Officer to allow assessee's claim in respect of debts wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ok). 22. The Ld. DR, on the other hand, submitted that the assessee has not discharged the onus that the loss incurred is in the regular course of business and also the computation of reported loss is arrived at. Accordingly, the Ld. DR prayed that the issue may go back to the Assessing Officer for verification, afresh. 23. We heard the parties and perused the material on record. The breakup of the loss on sale of re-possessed assets claimed by the assessee is as given below:- Disallowance of Business Loss and other expenses 178,09,16,700 Loss on sale of repossessed assets Auto Loans 43,61,88474 Construction equipment 61,39,328 Construction durable 34,19,331 Commercial Vehicles 61,03,76,060 Farm Equipment 38,07,55,377 Two wheeler 25,86,53,352 Car overdraft 7,25,19,187 Sub total-loss on sale of repossessed assets 1,76,80,51,109 Others 1,28,60,591 Total 1,78,09,11,700 24. We notice that in the details furnished by the assessee before the Assessing Officer, the assessee has furnished the loan account number, party name, and the amount. However in our considered view it is important to examine the amount of loan given, amount realized from the borrower ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... racted below:- "22. We have heard the rival contentions of the parties and perused the material available on record. As far as the nature of expenditure it of bonds / debenture and issue expenses are concerned, dispute that such expenditure is revenue in nature. In fact, in case o Madras Industrial Corp. (supra), the Hon'ble Supreme Court expenditure incurred on issue and discount of bond / debenture are revenue in nature as the liability incurred by the assessee is wholly and exclusively for the purpose of business, However, at the same time, the Hon'ble Supreme Court held that since by incurring such expenditure the assessee secures a benefit for a number of years and there is continuing benefit to the business of the assessee over the entire period of bond / debenture, the liability should be spread over the period of bond / debenture. Though, the Assessing Officer has referred to the aforesaid decision of the Hon'ble Supreme Court and accepts the legal position, however, he has not allowed even the expenditure relating to the impugned assessment year on the ground that the assessee has not furnished the books of account for verifying the correctness of the claim. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, when the claim was made in the return of income, the Assessing Officer has allowed the said claim. 31. The Ld. DR, on the other hand, submitted that the claim which is not made by the assessee in the return of income cannot be entertained. 32. We heard the parties and perused the material on record. From the submissions of the Ld.AR it is noticed that the assessee has been allowed the rebate under section 88E in the subsequent assessment years, i.e. A.Ys 2006-07 and 2008-09 when the same is claimed in the return of income by the assessee. We, therefore, direct the Assessing Officer to consider the submissions made by the assessee in this regard vide letter dated 26/11/2010 and allow the claim in accordance with law. Needless to say that the assessee be given a reasonable opportunity of being heard. It is ordered accordingly. SHORT GRANT OF RELIEF UNDER SECTION 90. 33. Through ground No.8, the assessee is contending the issue of short grant of relief under section 90. The Ld.AR in this regard submitted that the claim is made before the Assessing Officer through letter dated 26/11/2010, which has not been considered. We accordingly, issue a direction to the Assessing Officer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of. the Co-ordinate Bench in Krung Thai Bank v/s JDIT, 45 DTR 218, and subsequent decisions of different Benches of the Tribunal, , provisions of section 115JB AND 115J Act are not applicable to banking companies, In view of the .aforesaid, we do not find any reason to interfere With, the order .of the learned Commissioner (Appeals) on this issue. Accordingly we uphold the order of the learned Commissioner (Appeals) by dismissing-the ground no.11 raised by the Revenue." 39. Respectfully following the above decision of the coordinate bench we hold that provisions of section 115JB is not applicable to assessee and allow the ground. TRANSFER PRICING ISSUE Adjustment towards margin under charged on Back officer support services 40. The Assessing Officer made a reference under section 92CA(1) to the Transfer Pricing Officer (TPO) or computing the arm's length price in relation to the international transactions. In the transfer pricing study with regard to the back office support services, the assessee has shown to have received an amount of Rs. 6,03,38,090/- i.e. Cost of Rs. 5,48,52,810 plus a 10% mark up at Rs. 54,85,280. The assessee explained that this amount includes 10% mark ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... & 17. The Ld. AR submitted that most of the other comparables included by the TPO are functionally different from that of the assessee and that certain comparables are failing the TPO's filter. In this regard, the ld. AR drew our attention to the details of the filters applied by the TPO as tabulated below to submit that some of the comparables included by the TPO fails filters applied by the TPO himself -
1
Companies whose data is not available for the FY 2006-07 are excluded
Para 8 page 2 of the TPO order
2
Companies whose ITES income X X X X Extracts X X X X X X X X Extracts X X X X ..... otogrammetry, remote sensing, cartography, data conversion, related computer based services and other related services.
6
HCL Comnet Systems & Services Ltd.
Fails TPO filter no. 7 as company has prepared financial S statements ended June 30, 2007.
7
ICRA Techno Analyties Ld.
Fails TPO filter no. 8 as company is functionally different as company providing software development services, we development and hosting services and sub license
8
Infosys BPO Ltd.
In Bombay HC-Pentair Water India P. Ltd. company was excluded on the basis of high turnover (Rs. 649 crore against Rs 11 crore)
9
Maple Solutions Ltd.
Fails TPO filter no. 8 as company is functionally different as company is in the business call centre services and sale of software.
As held in various case laws, since the directors are involved in fraud, financials are unreliable
10
Mold-Tek Technologies Ltd.
Fails TPO filter no. 8 as company is functionally different as company is business of plastic and IT. IT division of the company is providing structural engineering and healthcare billing services.
Fails TPO filter no. 3 as ITES revenue is less than 75% of total revenue i.e. ITES revenue of Rs. 11.40 crore is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ls after deal validation and manual entries are posted where system support is not available
* Validation of deals, confirmation and settlement of deals
* Verification of transactions entered with the documents, sending deal confirmations to counter parties, settlement of deals
* Settlement-related activities
* Preparation of reports and MIS, follow up with counter party in case of non payment, SWIFT inward and outward management
* Reconciliation of treasury accounts, bonds, inventory, etc
* Review of nostro accounts reconciliations, reconciliation of inventory of bonds/securities of subsidiary treasury between clearing house, internal ledger balances etc.
* Development of operational policies
* Ensuring that operational policies of the subsidiary are aligned to the Bank's policy
* Preparation of reports
* Preparation and sending MIS reports
* Cash and Fund management
* Transfer of funds as per directions of AE to corresponding central bank for liquidity management
Note: Revenue from this service constitutes 24% of total activity
Back office account processing and related activities
* Processing of applications for various products and services
* ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith the assessee which is engaged in providing back office support services to its AE, therefore, we hold that Accentia Technologies Ltd. be excluded from the list of comparables.
Bodhtree Consulting Ltd.
From the perusal of the Director's report (page 769 of PB) of the company where it is stated that Bodhtree has only one segment namely software development and is engaged in providing open and end to end web solutions, software consultancy, design and development of solutions using latest technology. We also noticed that the income of the company (page 772 of PB) mainly consists of export sales from software development services, therefore, in our considered view the functions of the company is different from that of the assessee which is rendering captive back office support services to its AE. Accordingly, we direct the TPO to exclude Bodhtree Consulting Ltd. from the list of comparables.
Cosmic Global Ltd.
From the perusal of the financial statement of the company (page 830 of PB), the company is deriving income from medical transcription and consultancy services from translation charges and their accounts BPO. From the perusal of the expenditure of the company, we no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , we hold that Genesys International Corporation Ltd. is not functionally comparable with the assessee and therefore to be excluded from the list of comparables.
HCL Comnet Systems and Services Ltd.
The exclusion of this company is contended on the ground that the company has prepared the financial statements for the year ended 30.06 whereas the assessee is financial year ended is 31.03. It is also contended that the company is having large scale operations as compared to the assessee and therefore, the same is to be excluded. In this regard, we noticed that from the perusal of the P&L A/c of the company. The company is having revenue of Rs. 314 crores which is significantly higher than the turnover of the assessee from back office support services. Further, it is noted that the Jurisdictional High Court in the case of CIT Vs. Pentair Water India Pvt. Ltd. (ITA No.18/2015) had rejected the inclusion of the company for the reason that the company is having large turnover. On perusal of the annual accounts of the company (page 887 of PB) we noticed that in ITES Segment, the company is rendering services to data centre management, individual computer managed securities services a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iced in this regard that Hon'ble Bombay High Court in the case of Pentair Water India P. Ltd. (supra) has excluded the company on the basis of high turnover and also that on same basis the company is excluded in various decisions of the Jurisdictional High Court and also in the decisions of the Co- ordinate Bench. In view of this discussion, we are of the view that the company is not comparable with the assessee and therefore, we direct the TPO to exclude Infosys PBP Ltd. from the list of comparables.
Maple Solutions Ltd.
From the perusal of the P&L A/c (page 959 of PB), we noticed that the operating revenue of the company is mainly deriving from call centre services and nominal income is derived from sale of software. It is also submitted by the ld. AR during the course of hearing that in various decisions including the decision of the Co- ordinate Bench in the case of Morgan Stanley Advantage Services Pvt. Ltd. (supra) it has been held that since the directors of the company are involved in fraud, the financials of the company are unreliable and therefore, cannot be taken as comparable. We also notice that a similar view is held by the Hon'ble Bombay High Court in the ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bles.
Spanco Ltd.
The exclusion of the company is sought on the ground of functionality dissimilar and that the ITES revenue is only 8.2% of the total revenue of the company. On perusal of the annual accounts of the company, we noticed that the main revenue of the company is derived from sale of Network Integration and other traded goods and also from sale of developed software and service income from network integration and others (page 1027 of PB). On further perusal, we noticed that the income derived from BPO operations is Rs. 35 crores out of the total turnover of Rs. 426 crores which is around 8.2%. From the perusal of the filters applied by the TPO which is extracted in the earlier part of this order one of the filters applied is to exclude companies whose ITES revenue is less than 75% of the total revenue. Accordingly, the company whose income from ITES is 8.2% fails the filter applied by the TPO and should be excluded accordingly. It is also noted that even on functionality the company is not comparable to that of the assessee since the major business of the company seems to be network integration of traded goods. In view of the above, we hold that the company be excl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business model was completely different. In view of the decision of the Delhi High Court as well as the decision of the co-ordinate bench in assessee's own case, the Assessing Officer/TPO was to be directed to exclude Vishal information technologies Ltd. from comparability analysis.
The ratio laid down by the Tribunal in the above case is that the outsourcing model has its impact on the overall profitability of the company and therefore the business model of the comparable company is different than the assessee and hence it is required to be excluded. In assessee's case, the back office support services are rendered by the assessee through its own staff and therefore the business model of the assessee is different from that of the company. According we hold that Vishal information technologies Ltd. be excluded from the list of comparables.
Wipro Ltd
From the perusal of the financial statement of the company we notice that the revenue generated by the company from ITES services is 939.78 cores (page 1079 of paper book) which is much higher than the revenue derived by the assessee from rendering back officer support services rendered to AE. It is a well settled positi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red towards common services rendered by the third parties which are used by the AEs and the cost paid to third parties is allocated using allocation keys to all AEs using such services. Since the assessee does not do any value addition to the services and merely makes the payment and recover the same from AEs. For assessee these are pass-through costs and therefore no mark up is added to these costs
53. The ld DR relied on the order of TPO / CIT(A).
54. With regard to the pass through cost for which the TPO has added a margin of 11.59, we notice that from the nature of expenses that these costs are incurred on behalf of the AE and the same is allocated to the AE, using allocation key. Therefore, we are of the considered view that since the costs are pass-through costs and no value addition is made by the company by paying the cost on behalf of the AE and claiming the reimbursement there is no requirement of a mark up. Accordingly, we delete the adjustment made in this regard.
ITA No. 4158 Mum 2014 - Revenue's appeal.
DEPRECIATION ON LEASED ASSETS
55. During the year under consideration, the assessee has claimed depreciation amounting to Rs. 387,34,77,774/- which included ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e year under consideration see no reason to interfere with the decision of the Ld. CIT(A). This ground of the Revenue is dismissed.
ADDITION OF NON-CASH WRITE BACK MADE UNDER SECTION 41(4)
59. During the year under consideration, the assessee in the financial statements has shown Rs. 17,28,03,297/- as write back of bad-debts in respect of interest and principle of loan credit card right off in earlier year now considered as good. The said write back included non-cash write back to the tune of Rs. 56,19,378/-. The assessee in the return of income did not offer the non-cash write back to tax for the reason that there was no cash recovery made in respect of the said amount and therefore, it is not offered to tax as per provisions of section 41(1) of the Act. However, the AO did not accept the submissions of the assessee holding that the word "recovery" used in section 41(4) also includes "recoverable" depending on the method of accounting followed by the assessee. The AO further held that since the assessee is following mercantile system of accounting even though no cash recovery is made, the non-cash write backs also should be brought to tax. Accordingly, the AO made addition of R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ership Fees paid to Club is allowable as Business Expenditure. Since the same is incurred to promote business interest. The assessee in this regard relied on the decision of the Hon'ble Bombay High Court in the case of Otis Elevators Co. (India) Ltd. (195 ITR 682). The AO, however, did not accept the submissions of the assessee and proceeded to treat the Membership Fees as capital in nature for the reason that the payment made is towards initial payments for entrance that pertains to several years and therefore, held it as capital expenditure. 65. The Ld. CIT(A) deleted the disallowance made by the AO by relying of its own order for Ay 2006-07 in assessee's own case.
66. The Ld. DR relied on the order of the AO.
67. The Ld. AR submitted that the issue is covered by the decision of the Co- ordinate Bench in assessee's own case for AY 2004-05 and 2005-06 (supra), where it has been held that -
"56. We have heard rival contentions and perused the material available on record. The Hon'ble Supreme Court in United Glass Manufacturing Co. Ltd., Civil Appeal no.6649 of 2012, has held that club membership fees for employees are to be treated as business expenditure of a company under ..... X X X X Extracts X X X X X X X X Extracts X X X X
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