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TMI Blog2022 (7) TMI 1581X X X X Extracts X X X X X X X X Extracts X X X X ..... holding that the expenditure incurred as telecommunication lines is capital in nature. This in our view is not correct as the expenditure incurred under the head 'telecommunication lines' have to be verified based on invoices submitted to decide whether they are capital or revenue in nature. From the sample invoices it is clear that the assessee incurs monthly recurring charges, towards internet, telephone lines, port charges, etc. which in our view are of revenue nature. These expenditure do not bring any benefit of enduring nature to the assessee and is incurred in the normal course of business. We therefore delete the addition made with regard to 'telecommunication lines'. This ground of the assessee is allowed. Disallowance of foreign exchange loss - AO disallowed the forex loss stating that the assessee has not provided proper explanation as to why the forex loss is claimed as an expenditure - HELD THAT:-From the perusal of the breakup of the forex loss claimed by the assessee we notice that the major portion of the loss has arisen out of the year end restatement of receivables and the balance in the EEFC a/c of the assessee which as per the ICDS VI clauses extracted above i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the assessee. The case was referred to Transfer Pricing Officer (TPO) who made a TP adjustment of Rs. 68,55,27,641/. The NFAC made a draft assessment order in which besides the TP adjustments, the following additions/disallowances were made on the corporate tax front: - i) Difference between revenue reported in ITR and ST3 - Rs. 5,49,66,590/- ii) Telecommunication line expenses treated as capital in nature - Rs. 2,06,53,968/- iii) The foreign exchange loss - Rs. 13,14,30,000/- iv) Miscellaneous expenditure - Rs. 93,50,000/- 3. The assessee filed objections before the DRP against the draft assessment order. The DRP after considering the submissions of the assessee gave partial relief. The DRP deleted the TP adjustment and on the corporate tax, reduced/sustained the addition/disallowances as given below: - i) Difference between revenue reported in ITR and ST3 - Rs. 4,16,273/- ii) Telecommunication line expenses treated as capital in nature - Rs. 2,06,53,968/- iii) Foreign exchange loss - Rs. 13,14,30,000/- iv) Miscellaneous expenditure - Rs. 16,74,733/- 4. The final order giving effect to the directions of DRP was pas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... how-cause notice and without providing an opportunity of being heard, after the Assessee inadvertently missed to provide the break-up of expenditure during course of assessment. b. Subsequent to DRP directions, the Learned AO failed to provide the Assessee adequate time to furnish additional details sought by the AO. iv. Levy of interest under section 234D of the Act The learned AO has erred in levying interest under section 234D of the Act amounting to INR 8,44,222 which is consequential in nature. v. The assessee craves leave to add, alter, rescind and modify the grounds herein above or produce further documents, facts and evidence before or at the time of hearing of this appeal. For the above and any other grounds which may be raised at the time of hearing, it is prayed that necessary relief may be provided. Disallowance of telecommunication line expenses as capital in nature 5. In the course of assessment proceedings the assessing officer (AO) noticed that the assessee has claimed a sum of Rs. 10,32,69,841/- under the head 'Telecommunication Lines' and called for details pertaining to the same. The assessee submitted that - i. The company submits that majority o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore the expenditure is revenue in nature to be allowed as a deduction. iv. That the expenditure claimed by the Assessee as telecommunication line expense broadly pertain to invoices raised by the following vendors: a. Tata teleservices (Tata Docomo) - payment towards telephone line bills; b. Dishnet Wireless Limited (Aircel) - payment towards port charges; c. Verizon Communications India Private Limited - payment towards recurring private IP ethernet, internet, LAN charges etc. v. That the AO has misconstrued it to be Centrex wireline (EPABX system), even though the copy of sample invoices did not carry any such description on the invoices and despite providing explanations, the AO has erred in observing and concluding as under: "As can be seen in the assessee's reply, the nature of these expenses pertains to laying the infrastructure for seamless internet & telephone connectivity. While the internet and telephone usage are recurring expenses, and have even been claimed separately in "Communication Expenses" by the assessee, the telecommunication lines expense is a onetime expense. It is an asset of enduring nature, and thus is liable to be treated as a capital ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arned D.R. also submitted that the DRP after perusal of the invoices has held that the expenditure to be capital in nature and therefore prayed that the same needs to be upheld. 10. We have perused the evidences submitted and have heard both the parties. The assessee is in the business of providing IT/ITES services to its group companies. The assessee is having operations in Bangalore & Mumbai. Given the number of employees employed in different locations, the argument that the assessee is incurring huge expenses towards interest and data circuit charges, has to be accepted. During the course of hearing the learned A.R. submitted the below table giving the breakup of expenditure along with a note on the nature of expenditure :- Sl. No Party Name/ Expense Amount Nature of expense 1 Tata Docomo Telephone Charges 36,64,064 Monthly charges levied on actual basis for various telephone lines taken across Company for internal and external communications 2 Aircel Port Charges 5,45,417 Port charges are broadly towards charges for providing a place of termination on a switch/ distribution frame to provide a point of access or interconnection for ingress and egress of traffic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s' is of revenue nature. We also notice that the AO in assessee's own case for AY 2018-19 has allowed the expenditure after verifying the sample invoices on the basis that the expenditure is 'recurring charges' and paid for a 'specified period'. The DPR/AO has in the order had stated that the assessee has claimed telephone and interest charges separately and stated it as reason for holding that the expenditure incurred as telecommunication lines is capital in nature. This in our view is not correct as the expenditure incurred under the head 'telecommunication lines' have to be verified based on invoices submitted to decide whether they are capital or revenue in nature. From the sample invoices it is clear that the assessee incurs monthly recurring charges, towards internet, telephone lines, port charges, etc. which in our view are of revenue nature. These expenditure do not bring any benefit of enduring nature to the assessee and is incurred in the normal course of business. We therefore delete the addition made with regard to 'telecommunication lines'. This ground of the assessee is allowed. Disallowance of foreign exchange loss 12. During the year under consideration the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce sheet was an item of expenditure under section 37(1) b. Exchange differences arising on foreign currency transactions have to be recognized as income or as expense in the period in which they arise. The important point to be noted is that AS-11 stipulates effect of changes in exchange rate vis-a-vis monetary items denominated in a foreign currency to be taken into account for giving accounting treatment on the balance sheet date. Therefore, an enterprise has to report the outstanding liability relating to import of raw materials using closing rate of exchange. Any difference, loss or gain arising on conversion of the said liability at the closing rate, should be recognized in the profit and loss account for the reporting period. iii. The Apex court has also identified certain factors which would be critical to determine if an expenditure is deductible, viz; 1) whether the system of accounting followed by the assessee is mercantile system (which allows accrual system for expenditure and revenue); 2) whether the same system is followed by the assessee from the very beginning and if there was a change in the system, whether the change was bona fide; 3) whether the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (iii) forward exchange contracts; (iv) foreign currency translation reserves. ICDS VI - Effect of changes in foreign exchange rates Foreign currency monetary items are those items where there is the right/obligation to deliver a fixed/ determinable amount of currency units e.g. cash, receivable, payable. Foreign currency non-monetary items are items other than foreign currency monetary items e.g. fixed assets, inventories, investment in equity etc. Initial recognition of a foreign currency transaction is to be done based on the exchange rate prevailing on the date of transaction. An average rate for a week/month that approximates the actual rate may also be used. On the last date of the previous year the following treatment to be given: Foreign currency monetary items - to be converted into reporting currency based on closing rate and the difference shall be recognized as income/expense. Foreign currency non-monetary items - to be converted into reporting currency by using the exchange rate at the date of transaction and the difference shall not be recognised as income/expense. Inventory if carried at Net Realisable Value, shall be reported using the exchange rate th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le invoices substantiating the claim. The DRP issued directions to the AO to verify the details and allow the claim accordingly. The AO after verification allowed a sum of Rs. 76,75,267 based on invoices submitted. The AO disallowed a sum of Rs. 16,74,733/- as per details below, on the ground that the assessee did not provide explanations and furnish supporting documents to this extent. :- S.No. Miscellaneous Expenses Amount (Rs.) 1. Foreign Exchange Fees Rs.15,226/- 2. Laundry Rs.58,998/- 3. Cost Allocation Employee Benefits Rs.1,334/- 4. Director-Travel Expenses Rs.4,252/- 5. Bank Charges Rs.15,94,923/- Total Rs. 16,74,733/- 20. The learned AR submitted before us that the issue may be remanded back to the AO, before whom the details for the balance amount disallowed would be furnished by the assessee. The learned D.R. did not raise any objections to this submission. 21. In view of the above, we remand this issue back to the AO for verification of further details and supporting documents and decide the allowability in accordance with law. The assessee is directed to submit the relevant details in this regard before the AO and cooperate with ..... X X X X Extracts X X X X X X X X Extracts X X X X
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