TMI Blog2017 (12) TMI 301X X X X Extracts X X X X X X X X Extracts X X X X ..... cured. But it is not clear from the record submitted before us that these funds were actually deposited. We refuse to entertain the claim of the assessee that this can be claimed as expenditure. The same is the case with the treatment in the calculation of 115JB. In case the funds are deposited in the separate fund based on actuary valuation, this cannot be added back in the calculation of 115JB to determine the book profit. We direct the AO to allow the increase in profit consequent to disallowance of provision for gratuity as deduction u/s 10A. Accordingly, ground raised by the assessee is allowed in this regard and the other grounds relating to claim of gratuity as expenditure are dismissed. Deduction u/s 10A - Held that:- When the assessee seeks permission from the RBI through the authorized dealers for the delayed remittance and the same are ratified by RBI, such realizations are eligible to claim deduction u/s 10A. As per provision of section 10A(3), the realization should be brought to India within 6 months or as approved by proper authority, in the given case, it is RBI, which is the approved authority. Hence, assessee is eligible to claim deduction u/s 10A. Therefor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nking the transaction of different countries. It is not always end up with good decision, it is part of business decisions. It is not always relevant how much revenue it has generated or improved the business. It is not sometimes quantifiable. It is enough to prove that the purchase transaction and relevant payment is proper. AO is expected to verify only the legality and genuineness of the transaction and not the rationale of such transaction, it should be the domain of the management. Accordingly, we direct the Assessee to submit the relevant information relating to purchase and payment of ERP software. The assessee has to submit the copy of bills and payment vouchers with bank statement in which such payments were cleared. We note that assessee has not submitted such information even before AO/DRP even though opportunity was extended. Now, ld. AR has submitted that all the information is available, accordingly, we remit this issue back to the file of the AO with a direction to verify the transaction as per due procedure only for the genuineness of purchase and payment. Assessee may be given proper opportunity of being heard. This ground of appeal is allowed for statistical purpo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Total 57,01,89,923 3.4 Financial results for FY 2008-09 Item Amount in Rupees Operating Revenue 54,69,69,370 Operating Cost 25,12,24,031 Operating Profit 29,57,45,339 OP/OR 54.07% OP/OC 127.73% 3.5 Examination of TP study conducted by assessee: The assessee has carried out the economic analysis and has summarized it as under: Nature of international transaction MAM PLI Margin of assessee Margin of comparable Provision of IT enabled back office support services (received) TNMM OP/OC 29.65% 19.59% The TPO noted that the assessee company had considered TNMM as MAM for all the international transactions other than interest free loan. Further, the TPO examin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly benefitted from the funds and not the assessee. As regards the argument of the assessee that the loan was in the nature of quasi equity and the advance was converted into equity in FY 2011-12, the TPO observed that there was a gap of almost three years between giving loan and issuance of equity and if the funds were actually given for the purpose of equity then the assessee would have insisted for issue of shares against the amount given. TPO observed that the assessee had neither received any interest nor any dividend for this period. He opined that in an arm s length scenario, no commercial enterprise will part with such substantial amount of funds without any consideration and forego interest and/or dividend. He, therefore, rejected the submissions of the assessee. Accordingly, the arm s length price of the interest on loan given by the assessee to its AE was determined by the TPO on the basis of 12 months US LIBOR prevalent during FY 2008-09, as under: Particulars Rate ofinterest (%) Difference in %age points from US LIBOR 12 month US LIBOR rate for FY 2008-09 2.71 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wherein the Tribunal observed that interest free advances on account of commercial expediency is at arm s length. 6. After considering the submissions of the assessee, the DRP rejected the objection raised by the assessee by holding that the assessee failed to show how the advancing of loan has furthered the development of business of the assessee with any facts and figures and the argument is general in nature. 7. Aggrieved, the assessee is in appeal before us raising 9 grounds of appeal, the sum and substance of which are, the ld. AO/TPO/DRP are not justified in law in determining the Arm s length price at ₹ 83,21,639/- being the interest on loan given to AE as against Rs. Nil. 8. Ld. AR submitted that the AEs had already allotted shares in respect of advances made. He submitted that investments in share capital of subsidiaries outside India are not in nature of the transactions referred in section 92B. For this proposition, he relied on the following cases: 1. Prithvi Information Solutions Ltd., ITA No. 472/Hyd/2014. 2. Vijay Electricals, 842/H/2012 3. GSS Infotech Ltd., 497/H/2015 9. Ld. DR, on the other hand relied on the orders of revenue authoritie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re than 12 months by AO has to be disapproved. This ground of the assessee is considered to be allowed for statistical purposes. Facts are materially same in the present AY also as both TPO and DRP have followed the order of the DRP for the AY 2008-09. However, it will be pertinent to mention here that in course of hearing, learned DR submitted before us that the ratio laid down in case of Vijai Electricals Vs. ACIT (supra) cannot be said to be laying down the correct proposition of law as amendment brought to section 92B of the Act by the Finance Act, 2012 with retrospective effect was not taken note of by the Tribunal. Considering the totality of the facts and circumstances and keeping in view the direction of the coordinate bench in assessee s own case in the preceding AY 2008-09, we remit the matter back to the file of the AO for considering afresh keeping in view the decision of the Tribunal in case of Vijai Electricals Vs. ACIT (supra) and also the amended provisions of section 92B of the Act. We make it clear that if ultimately it is found that any amount given to the overseas subsidiaries are in the nature of loans and advances, AO/TPO may consider charging interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l provisions. Ld. AR submitted that provision for gratuity is an ascertained liability and hence it is an allowable deduction. He relied on the following decision: 1. Atlas Documentary Facilities P. Ltd., ITA No. 6563/Mum/09 11.2 Provision for gratuity added to profit u/s 115JB. Ld. AR submitted that provision for gratuity is an ascertained liability and hence it cannot be added to book profits. He relied on the following decisions: 1. Dresser Valve India Ltd., 30 SOT 495 2. Ekla Appliances, 45 SOT 7 3. Kanco Enterprises Ltd., 65 Taxmann.com 289 11.3 Any disallowance made to the total income will increase profits u/s 10A. 11.4 Ld. AR submitted that if any disallowance is made, then there will be corresponding increase in the deduction u/s 10A. He relied on the following cases: 1. Planet Online P. Ltd., ITA No. 1016/H/2007 2. Informed Technologies India Ltd., 75 Taxmann.com 128 3. Circlar No. 37/2016. 11.5 Ld. DR relied on the orders of revenue authorities. 12. Considered the rival submissions and perused the material facts on record. The assessee has claimed provision for gratuity as expense for the year but the AO has observed that the Assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 10A, to the said extent would stand enhanced. We find that the issue involved is covered by the judgment of the Hon'ble High Court of Bombay in the case of : CIT v. Gem Plus Jewellery India Ltd. [2011] 330 ITR 175/[2010] 194 Taxman 192 (Bom.) , wherein the Hon'ble High Court held as under:- The disallowance of the PF/ESIC payments has been made because of the statutory provisions - s. 43B in the case of the employer's contribution and s. 36(v) r/w s. 2(24)(x) in the case of the employees contribution which has been deemed to be the income of the assessee. The plain consequence of the disallowance and the add back that has been made by the A.O is an increase in the business profits of the assessee. The contention of the Revenue that in computing the deduction under s. 10A the addition made on account of the disallowance of the PF/ESIC payments ought to be ignored cannot be accepted. No statutory provision to that effect having been made, the plain consequence of the disallowance made by the AO must follow. We thus in light of the aforesaid facts of the case r.w the settled position of law, herein direct the A.O that pursuant to the disallowa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h price of the interest on the loan given by the assessee to AE is 3.94% per annum and since the assessee had not charged any interest on the same, the international transaction is not within the arm s length price. Accordingly, the TPO computed the adjustment u/s 92CA(3) on account of interest was at ₹ 3,65,81,330/- and the total income of the assessee was adjusted accordingly. 14.3 When the assessee filed objection before the DRP, the DRP rejected the objection and confirmed the ALP adjustment of ₹ 3,65,81,330/-. 15. Aggrieved, the assessee is in appeal before us. 16. Before us, the ld. AR of the assessee submitted that no interest can be charged on the investments made by the assessee in its own AE and investment in AE is not an international transaction as no income is generated. He relied on the following cases: 1. DCIT vs. Cadila Healthcare Ltd., 39 Taxmann.com 51 2. Prithvi Information Solutions Ltd. Vs. DCIT, 472/H/2014 3. M/s Vijay Electricals Ltd. Vs. Addl. CIT, 842/H/12 4. Hill County Properties Ltd. Vs. ACIT, 48 Taxmann.com 94 5. Vodafone India Services (P) Ltd. Vs. Union of India, 50 Taxmann.com 300 6. Dana Corporation Re, 321 ITR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... should not have restricted the allowance u/s 10A to the extent of foreign exchange received up to 30/09/2011 alone, ignoring the directions contained in various circulars issued by RBI under the regulations of FEMA. It was further submitted that the AO should have considered the amounts realized to the extent of ₹ 1,51,57,968/- within the period of one year from the date of invoiced as export turnover eligible for deduction u/s 10A of the Act as per the time allowed by the appropriate authority i.e. RBI. 22. After considering the submissions of the assessee, the DRP held that in view of the guidelines issued by the RBI and also the directions contained in the order of the DRP in the earlier year, directed the AO to provide the benefit of section 10A on the amounts realized in the period of one year. 23. In compliance with the DRP directions, the AO recomputed the export turnover at ₹ 11,48,31,673/- (Rs. 9,96,73,705 + 1,51,57,968). The AO held that as per the revised form 56F furnished by the assessee, the export turnover of Hyderabad unit is ₹ 37,24,76,941/-, however, for the purpose of computation of deduction u/s 10A, the export turnover is restricted to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d on the decision of the coordinate bench in the case of Sankhya Infotech Ltd. in ITA No. 316- 320/Hyd/2010 wherein the coordinate bench has held as under: 6. Since the CIT(A) has called for remand report on receipt of the additional evidence in the form of extension of time for receipt of monies beyond six months from RBI, it cannot be said that there is a violation of Rule 46A. The CIT(A) after considering the objection of the Assessing Officer came to the conclusion that the defects pointed by the Assessing Officer is a procedural nature and it can be cured by permitting appropriate rectification at the first appellate stage. Being so, we do not find any infirmity in admitting the additional evidence by CIT(A) for adjudication. The CIT(A) during the first appellate stage called for the summary of monies remitted and received through different modes by the assessee. The CIT(A) after examination of documents came to the conclusion that all the remittance were supported with FIRCs or approval from RBI for investing in Wholly Owned Subsidiary or remittance into approved bank accounts maintained in abroad. The assessee also furnished all the required statements in the form of FIR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct of invoices which has not fallen due and according to the DR, the RBI letter of approval dated 31.7.2003 is applicable only for those invoices for which extension of time had been granted but not for which has not fallen due and it cannot be given exemption for future receivables and work in progress. According to Learned Authorized Representative for the assessee, the process of developing and delivering software to its clients involve various stages. Sometimes, even when the software has been incidental, the sale is not complete as many other jobs such as training, hand holding etc. are yet to be completed. Such events were considered as work in progress and only after the complete jobs are done, sale proceeds are realized from such instances. Till such time, the amounts spent on developing this software have been shown as work in progress and the same on realization were transferred to Wholly Owned Subsidiary as investment. In our opinion, the work in progress/future receivables cannot be considered for deduction u/ s 10A. However, when these amounts on realization were actually transferred to Wholly Owned Subsidiary as an investment within the extended time by RBI, it is to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submitted that whatever amount has been excluded from the export turnover should also be excluded from the total turnover for the purpose of computation of exemption u/s 10A of the Act. He relied on various cases including the case of DCIT Vs. Seven Hills Business Solutions P. Ltd. in ITA No. 82/Hyd/2009 wherein the coordinate bench has held as under: 5. We have heard both the parties and perused the material available on record. In our opinion export turnover means the sale proceeds of any goods or merchandise exported out of India, but does not include freight or incidence attributable to the transport of goods or merchandise beyond the customs stations as defined in the Customs Act. The Sec. 10B was brought into statute book with a object to grant incentive to export oriented undertaking engaged in export of article of things or computer software. The deduction is made available on export of software turnover, the proceeds whereof are received in foreign exchange. It is not available on other export turnover, the receipts whereof are in an Indian currency or in currency which is not a convertible foreign exchange. The object therefore, appears to be to encourage more ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der was not pressed by the ld. AR of the assessee at the time of hearing, therefore, the same are dismissed as not pressed. 38. As regards ground Nos. 3, 4 5 relating to the addition of ₹ 9,36,79,227/- u/s 92CA(3), the TPO, after rejecting the TP study filed by the assessee and having conducted a new search for comparables, the following comparables were selected as final comparables after analyzing the databases, the annual reports and considering the objections filed by the assesse: S.No. Company Name OP/OC% 1 Accentia Technologies Ltd. 11.16 2. Datamatics Global Services Ltd. 16.84 3. Eclerx Services Ltd. 61.37 4. E4e Health Care 13.73 5. Informed Technologies India Ltd. 7.10 6. Infosys BPO Ltd. 34.68 7. Jindal Intellicom Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the Draft Assessment Order (DAO) the AO has disallowed the depreciation on the computer software on the ground that the transaction itself has not been established by the assessee to be genuine, in such circumstances when there is a dispute with regard to the depreciation in respect of a certain asset, it is a fit case for considering the PBDIT in the case of the assessee. This view is also finds support from the decision of the Hon'ble AP Telangana High Court in the case of BA Continuum India Pvt Limited (ITTA 440 of 2014) (supra) and also by OECD guidelines, accordingly, we direct the assessing officer to consider the margin in the case of the assessee as well as comparables after excluding depreciation. 39.1 As per the above directions of the DRP, the TPO determined the adjustment of ₹ 10,19,56,655/- as against ₹ 9,36,79,227/- made by him without considering the above direction to analyse the operating profit by adopting PBDIT in all comparable cases. 40. Aggrieved, the assessee is in appeal before us. 41. Considered the rival submissions and perused the material facts on record. In our considered view, the TPO has not followed the directions of D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e basis of LIBOR + 200 bps. In case, it is determined as equity, then, no interest can be charged in this transaction. Accordingly, ground raised by the assessee is allowed for statistical purposes. 45. As regards ground No. 7 7a to 7k regarding addition of ₹ 1,04,34,308/- towards interest on receivables, the TPO observed that there are outstanding receivables to the tune of ₹ 7,71,72,081/-, which were not reported either in Form 3CEB or in the TP Document. Further, the TPO observed that on perusal of the schedule of receivables, it was noticed that the entire receivables had not been received during the year. When asked for explanation, the assessee stated that interest should be levied at LIBOR + 3% as was decided by the DRP in its own case as against PLR of 14.75% proposed by TPO. However, the TPO levied interest @ PLR i.e. @ 14.75% on the outstanding receivables amounting to ₹ 7,71,72,081/-, which comes to ₹ 1,04,34,308/-. 46. When the assessee objected the same before the DRP, the DRP directed the assessee to furnish the necessary details to the TPO which is necessary for computation of interest in accordance with the directions within 15 days o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble period outstanding. Accordingly, we direct the AO/TPO to charge interest of LIBOR + 200 bps on the outstanding amount beyond 6 months. In order to determine the period and computation of interest, the issue is remitted back to AO/TPO. Accordingly, ground raised by the assessee is allowed for statistical purposes. 49. As regards the ground No. 8 8a to 8k relating to the addition of ₹ 14,62,50,000/- towards asset written off and ₹ 4,87,57,000/- towards depreciation claimed on the above asset, in the computation of total income, the AO observed that the assessee claimed ₹ 14,62,50,000/- towards loss on asset written off. Further, from the depreciation schedule as per IT Act, it was observed that the assessee claimed depreciation of ₹ 4,87,57,000/-, in addition to the write off of ₹ 14,62,50,000/- on the same block of asset. When the assessee was asked to furnish a note on asset written off of ₹ 14,62,50,000/- and justify the allowability of the same along with evidence, the assessee submitted that in the year 2009 it had devised a plan to target SME to move into a SAS based ERP model and an ERP package was considered that could be used to m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... afford to buy such expensive software without a proper business plan and write off the same without giving any valid justification. Write off of such a valuable asset that too soon after its acquisition without there being any proper business rationale supports the view taken by the AO. It is also pertinent to observe that the assessee has chosen to write off the asset in this transaction soon after its tax holiday came to an end and was to pay taxes on its profits. In view of the above and also relying on the reasoning given by the AO in the original draft assessment order and also in the RR submitted to us, we are of the view that the assessee has failed to prove the genuineness of the transaction. Accordingly, we confirm the action of the AO and reject the objections of the assessee on this ground. 51. Ld. AR reiterated the submissions as submitted before the DRP, while ld. DR relied on the order of DRP. 52. Considered the rival submissions and perused the material facts on record. The above said ERP software was purchased and installed in the FY 2009-10 relevant to AY 2010-11. The same was accepted by the department and accordingly assessments u/s 143(3) were com ..... X X X X Extracts X X X X X X X X Extracts X X X X
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