TMI Blog2016 (1) TMI 1415X X X X Extracts X X X X X X X X Extracts X X X X ..... the PRE while computing deduction u/s. 10A/B in view of the decision of Hon'ble Jurisdictional High Court delivered in the case of Gem Plus Jewellery [ 2010 (6) TMI 65 - BOMBAY HIGH COURT] Adjustment on account of notional interest on overdue receivable - During the assessment proceedings,the AO found that the assessee had entered in to international transactions - HELD THAT:- The transaction in question is an international transaction and not a result of a transaction as argued by the AR.The assessee had provided specific services to its AE's therefore the series of events cannot be termed a result of international transaction. Once it has been decided that issue before us is a Transfer Pricing issue then the value of the transaction has to be determined. It is a case where the TPO has relied upon on the agreement entered into by the assessee with its AE and has treated it as a Benchmark.We find that no independent source was searched or relied upon by the him.It is a fact that the agreements with the third parties did not contain any clause for charging interest for delayed payment. Thus,the matter has its own peculiarities.The assessee has entered in to agreeme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder section 10A 10B - ITA No.1778, 2134/Mum/2012, Assessment Year-2007-08 - - - Dated:- 13-1-2016 - S/Sh. Rajendra And Amit Shukla, JJ. Assessee by: Sh. Kanchan Kaushal Revenue by: Sh. Aliasger Rampurwala Rajendra, Challenging the order dated 02.01.2012 of CIT(A)-15, Mumbai, the Assessee and the Assessing Officer(AO), have filed cross appeals for the above mentioned appeals raising various grounds. During the course of hearing before us, the Authorised Representative (AR) stated that the assessee was not interested in pursuing Ground.No. 2 and 3. Hence, same stand dismissed as not pressed. Assessee-company,engaged in the business of development and maintenance of computer software,development,sale/export of software services and provision of technical consultancy , filed its return of income on 31.10.2007,declaring total income at ₹ 18.84 crores, after claiming deduction u/s.10A of the Act of ₹ 7.26 crores in respect of AK Unit deduction u/s. 10A of ₹ 16.55 crores in respect of PT Unit and deduction of ₹ 26.25 crores u/s. 10B in respect of AHA unit. The AO completed the assessment u/s. 144C(3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see had furnished relevant documents before the AO, that the agreement with HPCL was towards the supply and installation of various items for automating and integrating their petrol pumps and regional offices, that the time period of the project was 14 months from the date of signing the project, that the project had to be completed on or before 15.9.2006, that it could be completed only in May 2007, that it had debited its P L account for the year under consideration, that the same was claimed as deduction, that the PRE had been calculated on the value specified in the project order, that the liability for the PRE had crystallised in the year in question,that it had rightly claimed the same as a deduction in the year under consideration. It relied upon the case of KCP Ltd.(34 ITD 50).Further, it was argued that PRE amounting to ₹ 81.00 lacs toward Phase-II of HPCL,that terms and conditions were similar to Phase-I.Alternatively,it was argued that the expenses should be allowed in the year in which the same had been actually incurred. After considering the submission of the assessee and considering the case of N. Sundereshwaram (Income Tax Ref 336 and 337 of 1985, dt.4.6.1996) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ements with parties including HPCL, that the claim was made for ₹ 1.26 crores for the First Phase to be carried out for HPCL, that further a claim of ₹ 81.00 lacs was made for phase-II of the work assigned by HPCL,that ₹ 31.83 lacs was relatable to 10A units, that as per the agreement entered into with HPCL for both the phases the assessee was to pay liquidated damages @ 0.5% - 5% for the period of delay, that the first phase was completed belatedly i.e.in May 2007,that the second phase was also delayed,that as per the agreement the HPCL was entitled to deduct the damage amount from the amount due to the assessee, that the assessee while finalizing the account had considered the liquidated damages, that the AO and the FAA had rejected the claim made by the assessee. In our opinion as per the conditions of the agreement entered by the assessee with the HPCL, assessee had to compensate HPCL for delay in executing the project, that the factum of delay is not in dispute.Thereofre, in our opinion the issue is directly covered by the decision of KCP Ltd. (supra). In that case the facts were as under : The assessee was a Public Limited Company engaged in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the agreements of the assessee for the supply of goods, time was the essence of the contract and any delay in the delivery of the goods would result in the liability to pay damages. That the parties meant it seriously is proved by the fact of provision for bank guarantee up to the maximum value of liquidated damages. The stipulation in the contract clearly shows that the liability for liquidated damages is certain, accrued and is not to depend upon the happening of any event other than delay in deliveries. The only point in dispute in the present case is whether the liability for payment of damages should be taken at the point of time when the breach occurred or at the point of time when the assessee delivered the goods and raised the bill. The clause in the agreement extracted above does clearly provide for the payment of liquidated damages no sooner than the delay takes place and as a guarantee for payment of liquidated damages bank guarantee was to be given for the full amount of liquidated damages. There may be a possibility for the deduction of liquidated damages on negotiation. But that is not to say that the liability to pay liquidated damages did not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pay the liquidated damages arise on delivery. Claiming the liquidated damages as and when delays take place is an easier method, and should there be any difficulty in calculations or quantification, that may render the amount provided as damages incorrect but that does not postpone the accrual of liability. We find that in the case of Bharat Earth movers (supra)the Hon'ble Supreme Court has also laid down certain principles about quantification of liabilities.Respectfully following the above, we hold that liquidated damages for breach of contract for delay in supply of goods are allowable deduction in the assessment year relevant to the point of time when the breach occurred and not the point of delivery of goods and raising of bills.Ground no.1 is decided in favour of the assessee for the two amounts i.e. ₹ 1.26 crores and ₹ 81.00 lacs.As far as ₹ 31.83 lacs is concerned we are of the opinion that AO should add back the PRE while computing deduction u/s. 10A/B in view of the decision of Hon'ble Jurisdictional High Court delivered in the case of Gem Plus Jewellery (supra). Ground No.1.3 is decided in favour of the assessee in part. 3.N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ond normal credit period, that the assessee was not bearing interest cost, that as a result of not realizing the debts from AE.s within a specified period there had been no impact on assessee s profit/income, that the TPO had relied on a single transaction,that vide letter dt.15.12.09 the assessee submitted another inter-company agreement which did not contain a clause on charging interest on delayed receivables,that in all inter-company agreements clause of charging interest for delayed payments was not present,that there was no intention to charge interest except in very exceptional circumstances,that as per the normal industrial practice interest element on overdue payment was factored into inter-company agreement only to act as a deterrent and were triggered only in exceptional circumstances,that the assessee was not charging interest from the third parties on delayed payments, that there were delays in recievables not only from AE.s but also from third parties, that the assessee generally recovered its dues from third party customers in 97 days, that it had recovered dues from its AE.s in only 58 days, that nil rate of interest was charged in an uncontrolled transaction, that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clause for charging interest with the AEs that it had not included the clause for charging interest while dealing with the third parties, that it led to the conclusion that when assessee conducted its business with third parties it had factored the delayed realization into its pricing of services, that assessee itself had stated that the agreement with the third parties had varying credit period, that there was no clause relating to interest charging for delayed payments, that considering the terms of the agreement the rate would become independent CUP rate for the Bench marking,that there would no justification to adopt any other Bench mark, that there would be specific clause for charging of interest in the agreement, that the rate of interest mentioned in the agreement would be arms length rate,that in absence of specific rate mentioned in the agreement the assessee could adopt different rate, that honouring the terms of agreement was essential in third party situation.Rejecting the various arguments taken by the assessee,the FAA dismissed the appeal filed by the assessee. 3.2.During the course of hearing before us,the AR argued that controlled transaction could not be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elied upon by the him.It is a fact that the agreements with the third parties did not contain any clause for charging interest for delayed payment.Thus,the matter has its own peculiarities.The assessee has entered in to agreement with the AE.s.and value of the transaction will have to be decided.The arguments of factoring of delayed payment in the value of service cannot be brushed aside especially when it is found that the OPTC margin earned by the assessee was 29.41 % and it was quite higher than the parties compared with i.e.app.15%.The TPO had not considered these vital issues and had applied the flat rate of 2%,as mentioned in the agreement.In our,opinion the alternate argument advanced by the assessee of adopting LIBOR rate is worth considering,if the facts of the case under appeal are deliberated upon.We are of the opinion that in the interest of justice interest rate should be fixed at LIBOR+200 points for the delayed payments received by the assessee from its AE.s.for the period as mentioned in the agreements.AO is directed to recalculate the interest amount accordingly.Ground no.4-5 are decided in favour of the assessee,in part. 4.Last effective ground(Gr. No.6) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rk the assessee s international transaction,that payment of communic ation and network related services and IT Infrastructure service charges were closely interlinked with the main international transaction of software development services, that both of them were aggregated along with the main international transaction, that operating profit/total cost was selected as the profit level indicator, that assessee s Operating Profit/Total Cost (OP/TC) margin of 29.01% was higher than the average OP/TC margin of the comparable companies, that the payments made by the assessee to its AE.s was in accordance with the APL,as required by the Act. After considering the submission of the assessee,the FAA held that the assessee had not submitted backup documents and working of the allocation of the cost during the course of hearing before the TPO, that during the appellate proceedings the assessee was directed to file certain details, that the assessee had not been able to give any details in respect of quantum of services that it might have received, that it was not able to give details in respect of the basis on which the cost had been quantified,that aggregation or grouping of the v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The assessee relied upon certain cases and submitted that if expenses were to be reduced from export turn over then the same should be reduced from total turnover as well.However, the AO did not agree with the assessee and recomputed the exemption u/s.10A of the Act. 5.1.In the appellate proceedings the assessee brought to the attention of the FAA,the judgment delivered by the Tribunal for the AY.2002-03 and other cases.Referring to the judgment of the Tribunal for the AY 04-05 in assessee s own case,the FAA held that expenses incurred in foreign exchange towards technical services provided outside India amounting to ₹ 6.65cr from export turnover alone was not as per law,that same had also to be reduced from total turnover. 5.2.During the course of hearing before us,the DR left the issue to the discretion of the bench.The AR stated that the Hon ble Bombay High Court in assessee s own case has decided the issue in ts favour for the AY.s. 2002-03-2005-06. We have heard the rival submission and perused the material before us we find that the Tribunal as well as the Hon ble Bombay High Court has decided the issue against the AO and in favour of the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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