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2015 (10) TMI 2375 - ITAT MUMBAI

2015 (10) TMI 2375 - ITAT MUMBAI - TMI - Disallowance u/s 14A - Held that:- Already DRP has taken note of the fact that; firstly, Rule 8D is not applicable in this year; and secondly, there is no interest expenditure attributable for the earning of exempt income; and lastly, for the purpose of indirect expenses, already direction have been given to the AO to identify the manpower cost of the persons directly concerned with the making of the decision of the investments and to work-out the disallo .....

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reciation allowance on purchase of printers and UPS - Held that:- So far as claim of depreciation on UPS and printer is concerned the same is to be allowed @ 60% as they are part and parcel of computer itself and are peripheral component/equipment connected with the computer. In the decision of Omini Club Informational Technology Ivt P Ltd. [2010 (4) TMI 769 - ITAT, DELHI] and also in catena of other decisions by the co-ordinate Benches of the Tribunal there has been a consistent view that print .....

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to facilitate the assessee’s business or enable the management to conduct the business more efficiently or profitably, then it has to be treated as revenue expenditure. In all these cases, the expenditure incurred on the software expenses were allowed as revenue expenditure. Here also, the software purchase for print server is nothing but to facilitate the assessee’s business and to conduct day-to-day activity in an efficient manner and, therefore, it has to be allowed as revenue expenditure. T .....

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C) - collection by the assessee on behalf of the principal and retained in terms of RBI direction, which has been treated as income accrued to the assessee during the year by the AO - Held that:- The assessee has offered the entire amount of CDC charges collected right from year 1993 to December, 2008 as income and paid the entire taxes in AY 2010-11. This has been done so only when the principal had written a letter dated 25th May, 2009, whereby, the principal has authorized the assessee to ret .....

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he additions made by the AO are deleted. - Decided in favour of assessee.

Transfer pricing adjustments - Held that:- Wuhu Cold Storage and Transportation Co. is a complete service provider, whereas, the assessee is more of service recipient of such activities. Once it has been found that this comparable is performing activities and functions which are different from the functions carried out by the assessee, then without there being any change in the facts and circumstances in this ye .....

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in profit margin. Here in this year, the assessee before the TPO as well as before the DRP has disputed the comparable based on high margins. This plea of the assessee has been accepted by the department in the subsequent year. Thus, following subsequent order of the DRP, we exclude the Wuhu Cold Storage and Transportation Co. from the list of final comparables. Accordingly, the Assessing Officer is directed to exclude the same and benchmark the average margin of other comparables with that of .....

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rd that some kind of new line of business was to be set up or was to be controlled by different management. Hence, it cannot be treated as capital expenditure, or for non business purpose or any kind of pre-operative expenses. Here in this case, BPO business could not take off and whatever expenditure has been incurred has to be allowed either as business expenditure or as a business loss incurred during the course of business. Thus, the claim of such an amount cannot be disallowed either as a c .....

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bai (hereinafter referred to as DRP) for the quantum of assessment passed u/s 143(3) r.w.s. 144C for the assessment year 2007-08 and 2008-09 respectively. Since issues involved in both the appeals are common, therefore, they were heard together and are being disposed off by way of this consolidated order, for the sake of convenience. 2. We will first take-up assessee s appeal for AY 2007-08 being ITA No. 8549/Mum/2011, vide which following issues have been raised in various grounds of appeal :- .....

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penditure then depreciation should be allowed @ 60%; (iv) Addition on account of container detention charges of ₹ 1,18,65,365/- collected on behalf of the Principal and retained in terms of RBI direction by the assessee, which has been treated as income accrued to the assessee its in the course of its activity as an agent; (v) Addition on account of transfer pricing adjustment of ₹ 1,49,35,518/-; (vi) Charging of interest u/s 234B; and (vii) Initiation of proceedings of levy of penal .....

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it has earned a dividend income of ₹ 30,29,856/- which was claimed as exempt. In response to the show cause notice, the assessee submitted that no expenditures have been incurred directly or indirectly for earning of the dividend income for the reason that; firstly, the entire investment was made out of its own funds and secondly, dividend earned have been directly credited to the bank account and no cost at all can be said to be allocated. It was further pointed out that in AY 2002-03, th .....

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making on investment. In pursuance thereof, the AO after calling for the details from the assessee and after analyzing such details has made an ad-hoc disallowance of ₹ 1 lakh. 5. Before us the Ld. Counsel, Shri F V Irani submitted that in the assessment year 2002-03, the Tribunal has deleted the said disallowance on the ground that there is no nexus between any expenditure incurred and earning of tax free dividend income. In this year also no such expenditure can said to be allocable esp .....

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t income; and lastly, for the purpose of indirect expenses, already direction have been given to the AO to identify the manpower cost of the persons directly concerned with the making of the decision of the investments and to work-out the disallowance. The AO after analyzing the entire details has restricted the disallowance at ₹ 1 lakh on account of manpower / administrative cost, which can be said to be attributable for earning of exempt income. Such a finding of AO cannot be faulted wit .....

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computer for which the rate of depreciation is @ 60%, whereas, the AO held that these assets cannot be equated with computer and admissible depreciation provided for computer will not be applicable. He accordingly allowed depreciation @ 15%. Similarly, for the airconditioner installed in the server room assessee, has claimed depreciation @ 60% which has been restricted to 15% by the AO by treating it as plant and machinery. 9. Before the DRP, the assessee relied upon the decision of Special Benc .....

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f computer on which depreciation is to be allowed @ 60%. On the other hand, Ld. DR relied upon the order of the AO as well as DRP. 11. After considering the rival submissions and on perusal of the relevant finding given in the impugned order, we find that so far as claim of depreciation on UPS and printer is concerned the same is to be allowed @ 60% as they are part and parcel of computer itself and are peripheral component/equipment connected with the computer. In the decision of : ITAT Delhi B .....

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justified. Accordingly, ground no. 3 is treated as allowed whereas ground no. 4 is treated as dismissed. 12. In ground no. 5 & 6, the assessee has challenged the disallowance of software expenses of ₹ 8,70,755/- incurred on purchase of printer-server software from RILCON at ₹ 8,07,755/-, which has been treated as capital expenditure, because as per the AO, said software was to be used by the assessee company for five years to come and hence its benefit were of enduring in nature .....

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that expenditure incurred on purchase of software is to be treated as revenue expenditure. The Ld. DR on the other hand, relied upon the order of the AO. 15. After considering the rival submission and on perusal of relevant finding given in the impugned order, we find that the assessee has claimed payment made for purchase of print server software as revenue expenditure, which has been disallowed by the AO on the ground that it has an enduring benefit to the assessee. From the perusal of the de .....

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sessee s business and to conduct day-to-day activity in an efficient manner and, therefore, it has to be allowed as revenue expenditure. Thus, following the principle and ratio laid down by the Hon ble High Court, as cited above, we allow the claim of ₹ 8,70,755/- incurred on print software as revenue expenditure. Accordingly, ground no. 5 is treated as allowed whereas ground no. 6 raising an alternate contention of allowing depreciation @ 60%, in case it is treated as capital expenditure .....

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ct of shipping activity of its principal, NYK Japan (which is a worldwide Shipping Line) in India. The primary activity of the assessee company was to derive income from shipping agency services in India to its overseas principal, for which it receives commission income only. The shipping agency services of the assessee are governed by the agency agreement. The activities of the assessee included booking of container cargo for ships owned or operated by NYK Japan. In case of import cargo, the as .....

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k to its overseas principal i.e. NYK in accordance with the regulation prescribed under FEMA. Container detention Charges (CDC) represented on such receipts collected and remitted by the assessee on behalf of the principal in India. CDC is a charge levied for the detainment of the containers in excess of the permissible time period. It is levied on third party importers by the principal. Reserve Bank of India vide its circular has directed to retain container detention charges at US $ 1.5 per da .....

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edited an amount aggregating ₹ 56,508,629/- as at 31 March, 2007 (previous year : ₹ 44,743,264) to the principal s account. The management believes that if the Company is required to retain this amount in compliance with RBI regulation, its commission income on cargo or vessels handled will be revised to the extent of such retention amount. Hence the management believes that the aforesaid does not have an impact on the financial statement of the Company . 18. Thus, the assessee s con .....

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owned by NYK Japan and CDC)are charges levied on 3rd parties importer by the principal on certain circumstances and conditions; (ii) the assessee merely collects CDC on behalf of principal as an agent which is deposited in separate bank account; (iii) the remittance of CDC by shipping agents in India to the overseas principal is regulated under FEMA and only a certain part of CDC is allowed to be remitted and certain part to be retained by the shipping agent in India for meeting expenses of prin .....

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alf of the principal II 1.50 USD 1.50 towards admini- Strative charges TOTAL 12.50 CDC collected in excess of USD 12.50 will be blocked and can be utilized in India Only for such permissible purposes as the RBI may prescribe. (v) Lastly, the CDC which is collected on behalf of principal, though retained by the assessee company as per the RBI guideline, is the receipt belonging to the principal and no part of the said receipts can be said to be accrued to the assessee at all either in terms of ag .....

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see s hand. The only aspect that remains to be adjudicated upon is the year of taxability, and accordingly the amounts having accrued and collected, received by the assessee during the year, the same has to be brought to tax during the year under consideration. The principles of RESJUDICATA being not applicable to Income-tax proceedings, the assessee s argument that the amount has not been taxed in the past is irrelevant. We, therefore decline to interfere with the AO s order in this regard . 20 .....

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DC is actually the receipts of the shipping company. Solely due to RBI guidelines on remittance, a portion of CDC charges remains with the agent for meeting the administrative expenses of the principal in India. This amount has always been treated as liability in the Balance sheet, because the assessee only acted in fiduciary capacity i.e. money was held in a trust even in view of the RBI Circular. No actual income had accrued to the assessee nor assessee had any right on such receipts or income .....

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2. On the other hand, Ld. CIT DR, submitted that, as per the RBI guidelines, the assessee could not have remitted the said amount to the principal. Once it cannot be remitted, then whether it can it be held that same is taxable or is to be assessed in the hands of foreign enterprise i.e. principal. If the said CDC is never received by the principal, then it cannot be taxed in the hands of the principal and therefore, the said amount will go untaxed as it is neither taxed in the hands of the prin .....

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sessee has right to receive the CDC charges on its own accounts, which can be treated to be income arising or accruing to the assessee. In other words, whether as a shipping agent there is a debt created in favour of the assessee qua the CDC charges. From the facts as discussed above, it is abundantly clear that assessee is a shipping agent of NYK Japan, the principal who owns the ships and the containers. In accordance with the agency agreement, the assessee collects the freight income and othe .....

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l in accordance with the foreign exchange regulations. The RBI had issued a Circular, whereby a small portion of CDC charges are to be retained in India towards discharging of administrative charges on and behalf of principal in India. Thus, the agent is bound to conduct the business of its principal according to the terms and conditions and directions given by the principal. Here CDC collected on behalf of the principal, though retained by the assessee in view of RBI Circular, however, belongs .....

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ischarge the obligation which are purely that of the principal only. The assessee-agent undertakes to collect the amount in its fiduciary capacity and hold the money as a trust. Thus, it cannot be held that assessee had any enforceable right to receive the CDC charges or any income can be said to have arisen or accrued to the assessee qua the CDC charges. Accordingly, we hold that no income has accrued or arisen to the assessee in this year. Now as brought on record by the Ld. Counsel, in the AY .....

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agent s income. Hence forth, now it can be held that this income belongs to the agent and hence it has been rightly taxed by the Department in the AY 2010-11. Thus, on these facts and circumstances, we hold that the taxing of CDC charges in AY 2007-08 or 2008-09 is not sustained and is uncalled-for. Therefore, the additions made by the AO are deleted. 24. The next issue relates to transfer pricing adjustments of ₹ 1,99,35,518/-. 25. As stated earlier, the assessee provides agency services .....

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e found it to be at arm s length price. During the year, the assessee has reported international transaction of ₹ 14,83,83,874/- on account of agency commission and other services. For benchmarking the transaction, the assessee has adopted TNMM as a most appropriate method (MAM) and selected 9 comparables after taking PLI as operating profit to total sales. However, after certain corrections in the TP proceedings, the corrected margins of the comparables were as under :- The TPO noted out .....

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7.66 4 Wuhu Port Storage & Transportation Company 52.43 5 Chu Kong Shipping Development Company 4.17 26. The assessee s objection now before the TPO that Wuhu Port cannot be included in the comparable list because of very abnormal high margin. It was pleaded that after removing the Wuhu the arithmetic mean margin of the four other comparables would be less. However, the TPO rejected the assessee s contention and included Wuhu as the comparable company for benchmarking the assessee s margin i .....

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ri F V Irani, submitted that in AY 2008-09, the DRP has specifically excluded Wuhu Cold Storage and Transportation Company on the ground of very high margin and functional dissimilarity. If this comparable is excluded from the final list, then assessee s margin will fall within the range of ± 5% of the arm s length price. 28. On the other hand, Ld. CIT DR submitted that, if the comparable with abnormal profits are removed then on the same logic, comparables with lower profits should also .....

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d. 29. We have considered the rival submissions and perused the relevant finding given in the impugned order and also the order of the DRP for the subsequent year. Before us, the main dispute which has been raised is, with regard to the inclusion/exclusion of one comparable, i.e. Wuhu Cold Storage and Transportation Co which has an updated margin of 52.43% as compared to assessee s margin 8.86%. In the subsequent year, the DRP has directed the AO/TPO to remove the said comparable from the final .....

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sessee is more of service recipient of such activities. Once it has been found that this comparable is performing activities and functions which are different from the functions carried out by the assessee, then without there being any change in the facts and circumstances in this year, the said company cannot be held to be a good comparable in this year. Simply the assessee has included this comparable in Transfer Pricing Study Report in this year as well as in the earlier years, it does not pr .....

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equent year. Thus, following subsequent order of the DRP, we exclude the Wuhu Cold Storage and Transportation Co. from the list of final comparables. Accordingly, the Assessing Officer is directed to exclude the same and benchmark the average margin of other comparables with that of the assessee and if the margin of such comparables falls within the range of ± 5% of the Arm s length price, then needless to say, no adjustment should be made. Accordingly, grounds related to transfer pricing .....

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ake-up assessee s appeal for AY 2008-09 in ITA No. 7354/Mum/2012. 34. In this year, the assessee has raised following issues in various grounds : (i) Disallowance of ₹ 3,75,092/- under Rule 8D; (ii) Disallowance on account of restriction of claim of depreciation on UPS and Printers at 15% as against 60% claimed by the assessee; (iii) Disallowance of claim of depreciation on air conditioner installed in server room, which has been restricted to 15% by the AO as against the claim of 60% made .....

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e the finding given therein will apply mutatis mutandis in this year also. Accordingly, these grounds are treated as partly allowed i.e. depreciation on UPS and printers is held to be allowable @ 60% whereas, the depreciation on Air-conditioners is allowable only @ 15%. 36. As regards the issue relating to taxability of container detention charges, the same is also similar to the grounds raised in AY 2007-08 and accordingly, in view of the finding given therein, it is held that the said charges .....

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as well as before the Assessing Officer, the assessee has not made out any claim as to why no expenditure can be said to be attributable for the purpose of making the investment which has yielded exempt income. Already the assessee s submissions with regard to direct expenses and indirect expenditure has already been accepted. As regards indirect expenditure, that is, under Rule 8D(2)(iii) nothing has been brought on record that having regard to the accounts of the assessee, no expenditure can b .....

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ortunities for setting up business process outsourcing (BPO) unit in India. The assessee had appointed McKinsey & Co. a professional firm for conducting the Feasibility Study for setting up of BPO Unit and had advanced an amount of ₹ 26,02,846/- towards the professional fees. However, later on, the company took a decision that BPO activity will not be suitable for it and accordingly, certain amount was written off and claimed as an expenditure. The Assessing Officer held that such an e .....

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on control. It was definitely not for any new line of business as held by the Assessing Officer. The BPO business was meant for assessee s own function and business. Thus, it cannot be held that assessee s had new business which was to be started, therefore, such an expenditure is nothing but for average expenditure. 43. On the other hand, the Ld. DR strongly relied upon the order of the AO as well as DRP. 44. After considering the rival submissions and on perusal of the finding given in the imp .....

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