TMI Blog2019 (12) TMI 1280X X X X Extracts X X X X X X X X Extracts X X X X ..... t the Assessing Officer to consider the working capital adjustment as computed by him while determining the ALP of international transactions of the assessee with its AEs. Thus, this ground of appeal of the assessee is partly allowed. Erroneous imputation of interest on recovery of expenses - HELD THAT:- As relying on M/S. ALLIANZ CORNHILL INFORMATION SERVICES PRIVATE LIMITED VERSUS THE DY. COMMISSIONER OF INCOME-TAX, CIRCLE 2 (1) TRIVANDRUM [ 2018 (6) TMI 279 - ITAT COCHIN] we direct the Assessing Officer to adopt interest at the rate of 8.15% p.a. while computing the ALP. This ground of the assessee is partly allowed. Disallowance of finance lease payments u/s. 37 - HELD THAT:- Assessee is entitled for financial lease charges as revenue expenditure only if it has not claimed depreciation on the leased asset. The assessee had not explained whether it claimed depreciation on the leased asset or not. In other words, the assessee is entitled to financial lease charges only in the event if it does not claim depreciation on such leased asset since depreciation on such leased asset is to be claimed by the lessor only. The assessee is not the owner of the leased assets. Once t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issue to the Appellant, a show cause notice, as per proviso to section 92C(3) of the Act; The AO has erred in making a reference to the Joint Commissioner of income-tax, (Transfer Pricing) ('TPO'), inter alia, since the TPO has not recorded an opinion that any of the conditions in section 92C(3) of the Act, were satisfied in the instant case. Accordingly, the order passed by the TPO is without jurisdiction; On the facts and in the circumstances of the case and in law, the learned TPO and accordingly, the learned AO erred in not demonstrating that the motive of the Appellant was to shift profits outside of India by manipulating the prices charged in its international transactions, which is a pre-requisite condition to make any adjustment under the provision of Chapter X of the Act; and 1.4 The draft order passed by the AO is without jurisdiction, inter alia, insofar as it purports to give effect to an invalid order of the TPO. Ground No. 2 - Erroneous Computation of Margin of the Appellant 2.1 The AO/TPO erred in considering SEZ Unit setting up expenses and Ireland branch setting up expenses as operating in nature while computing the margin of the Appellan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irdware Solutions Ltd as comparable, despite these companies being functionally dissimilar to the Appellant. The Ld. Panel also erred in confirming the same. 3.8 The Ld. AO/ TPO also erred in treating provisions for doubtful debts as non-operating in nature while calculating the net margins of the comparable companies. The Ld. Panel also erred in confirming the same. 3.9 The Ld. AO/TPO erred in considering data obtained u/s 133(6). The Ld. Panel erred in confirming the same. 3.10 The TPO/AO has erred on facts in wrongly computing the margins of certain companies identified as comparable by the TPO. The Hon'ble DRP panel has not passed a speaking order on the erroneous margin computation. 3.11 The TPO has erroneously considered high profit making companies and thus the treatment of the companies by the TPO contradicts. 3.12 The TPO/AO erred in selecting companies having exceptional year of operation. AO erred in accepting the action of TPO. Ground No. 4 - Erroneous data used by the TPO 4.1 The TPO/AO has erred in law in using data, which was not contemporaneous and which was not available in the public domain at the time of conducting the transfer pricing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o. Appeal (Civil) 3574/1998 to conclude on the tax treatment of finance lease. The learned DRP failed to note that the Apex Court had only discussed the characteristics of a finance lease in the ruling and did not consider the taxability of finance lease payment, 9.4 Without prejudice, the learned AO/ DRP disregarded the principal of consistency be disallowing lease expenses which were otherwise allowed as deduction in the earlier years. 9.5 Without prejudice to the above grounds, the learned AO has erred in disregarding the directions issued by Dispute Resolution Panel ('DRP') to allow depreciation on the underlying leased assets. Ground No. 10 - Erroneous disallowance of interest expenses on account of interest free loans advanced to related parties 10.1 The learned AO/ DRP erred in law and on facts in disallowing interest expense amounting to INR 14,14.43,932 on account of interest free loans granted by USTIPL to its related parties. 10.2 The learned AO/ DRP erred in disregarding the provisions of section 36(1)(iii) of the Act thai the amount of interest paid in respect of capital borrowed for the purposes of business shall be allowed as deduction in co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rned AO/DRP has failed to consider the CBDT circular (Circular No. 35D (XLV1120) [F.No. I0/48/65IT (AI), dated 24/11/1965) wherein it is held that losses arising due to embezzlement of employees or due to negligence of employees should be allowed if the loss took place in the normal course of business. 11.4 Without prejudice to the above grounds, the learned DRP erroneously failed to consider the fact that the Appellant follows a cost plus billing model, hence the additional expenditure doesn't result in a fall in profit. Ground No. 12 -Non-consideration of inadvertent disallowance of the same expense twice 12.1 On the facts and in the circumstances of the case, the learned AO failed to consider that the Appellant had inadvertently disallowed an amount of INR 41,75,973 twice under section 40(a)(ia) of the Act. 12.2 The learned AO erred in not complying with the intent of the CBDT Circular No. 14 (XL-35) dated 11 April 1955 which reiterated that the tax officers should not take advantage of an assessee's ignorance to collect more tax out of him than is legitimately due from him. The Appellant craves leave to add to or alter, by deletion, substitution, modif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Other Expense 10,11,225 Annual Maintenance Contract Fee 8,07,411 Clearing charges 44,057 Rates Taxes 10,300 Total 2,39,48,644 Being so, the Assessing Officer is required to examine whether these expenses are relating to setting of off SEZ unit expenses or incurred towards operation of SEZ in the assessment year under consideration and decide accordingly. Hence, we remit this issue to the file of the Assessing Officer to examine the issue afresh in the light of the above details of expenses furnished before us. This ground of appeal of the assessee is partly allowed for statistical purposes. 4.5 Regarding treatment of foreign exchange fluctuation, the DRP observed that similar objection was raised by the assessee before DRP in relation to AY 2012-13 and AY 13-14. However, the objection of the assesses was not accepted as Tribunal in the case of SAP LABS India (P) Ltd. vs. ACIT (44 SOT 156) (Bang.) held that the foreign exchange fluctuation income cannot be excluded from the comput ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... actual payment or receipt. Since such forex loss or gain is a direct outcome of the purchase or sale transaction, it partakes of the same character as that of the transaction to which it relates. The Special Bench of the Tribunal in the case of ACIT v. Prakash I. Shah (2008) 115 ITD 167 (Mum) (SB) has held that foreign exchange fluctuation gain is a part of export turnover. Though such decision was rendered in the context of section 80HHC, but the same logic applies generally as well. The essence of the matter is that any gain or loss arising out of change in foreign currency rate in respect of transaction for import or export of goods is nothing, hut inherent part of the price of import or the value of export. The Hon'ble Supreme Court in Sutlej Cotton Mills Ltd v. CIT 116 ITR I has held that where profit or loss arises to an assessee on account of appreciation or depreciation in the value of foreign currency held by it, on conversion into another currency, such profit or loss would ordinarily be trading profit or loss if the foreign currency is held by the assessee on revenue account or as a trading asset or as part of circulating capital embarked in the business'. When ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the assessee computed operating margin at 16.43% in its transfer pricing documentation. The TPO in the TP Order had re computed the margin of the Assessee as 13.58%. In computing the above margin the TPO has erroneously considered setting up charges of Ireland branch expenses and SEZ unit expenses as operating costs. Further, the TPO had also erred in considering unrealized Forex gain/ loss as operating item in computing the margins of the assessee. The DRP upheld the order passed by the TPO. The Ld. AR requested the Tribunal to direct the Assessing Officer to consider unrealized forex gain/loss as Non-operating, A summary of margin computation of the Appellant at various stages of the assessment is as follows: Particulars As per TP order As per TP study Computed by Assessee Income Revenue 8,12,73,10,889 8,127,310,889 8,127,310,889 Realised Forex gain/loss 53,451,996 Tota ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee; Similar exclusion of gain arising on account of foreign currency fluctuation from operating revenue was found provided. So the above mentioned definition to the 'Safe Harbour Rules' very clearly excludes 'loss/gain arising on forex fluctuation', from operating expenses or operating income, as the case may be. 5.2 Also, the Ld. AR drew attention that under the Act and Rules, what has been subjected to Arm's Length Price determination is the operating profit, operating expenditure and Operating income related to transactions with an Associated Enterprise. The Ld. AR submitted that the definition of Operating Profit as per UNITED NATIONS PRACTICAL MANUAL ON TRANSFER PRICING FOR DEVELOPING COUNTRIES- PARA 6.3.7.2 , as reproduced below: Operating profit or operating income is the income of a company net of direct and indirect expenses but before deduction for interest and taxes. It is defined as sales minus COGS minus operating expenses (alternatively expressed as gross profit minus operating expenses). Operating profit is a better term than net profit because net profit is also used to represent the profit of a company after interest and taxe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ording to the ld. AR, a foreign exchange difference, which is in not in the control of the operating entity cannot be considered for the purpose of computing the ALP for the purpose of analyzing the international transaction . It was submitted that the gain or loss arising out of exchange fluctuation is not in the control of the operating entity or relating to the internal factors of the operating entity. On the contrary, it arises due to the various external economic factors prevailing like fiscal and trade deficit, inflation, borrowings, investment flow , Beta rating, etc., of the respective countries, whose currencies are at cross ends. These differences are reflective of the poor administration and economic conditions of rupee vis a vis dollar and has nothing to do with the operation of the company. Hence, it was submitted that gain/loss arising out cannot become transaction for the purpose of computing the OPM of the entity. 5.4 Further, it was submitted that pricing applies only in respect of an international transaction and a transaction that is consequential to the original transaction (like payables and receivables) and any adjustment like Exchange control differen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t was submitted that Finance Costs are not operating costs. The Ld. AR relied on the recent decision of ITAT, New Delhi in the case of Sumitomo Corporation of India P Ltd Vs DCIT (ITA No. 2307/D/2009) para 3 and para 5.3 providing that all costs associated with financing activities are excluded (from operating expenses). Xxxx Albeit the interest expense is incurred for the purpose of business (other than financing) and is also an allowable deduction against the business income, but the same does not assume the character of operating expense as it is not concerned with the operations of the hub activity of business. The Ld. AR also relied on the decision of the ITAT, Mumbai in the case of DHL Express (India) P. Ltd. in ITA No. 7360/Mum/2010 for A.Y 2006-07, where in the tribunal confirmed that exchange fluctuation do not form part of the operational income because these items have nothing to do with the main operations of the assessee . Further, it was submitted that while comparables are chosen by the Company, no adjustment is done on comparables operating results for arriving at the economic conditions in which the assessee Company operates. The assessee Company imports raw mat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee in foreign exchange fluctuation due to international transaction does not give any extra benefit to the Associated Enterprise who supplies the material. The loss arose due to exchange difference between the foreign currency and Indian currency. Therefore, the co-ordinate Bench of this Tribunal found that the foreign exchange loss or gain has to be excluded from operating income. In view of the decision of co-ordinate bench of this Tribunal in Hanil Tube India Pvt. Ltd.(supra), this Tribunal is of the considered opinion that the profit or loss due to foreign exchange fluctuation has to be excluded from the operating income for the purpose of PLI. Accordingly, the orders of the authorities below are set aside and the Assessing Officer is directed to exclude the loss or gain in foreign exchange fluctuation from the operating income for computing PLI. 7.1 Further, in the case of DCIT vs. Hanil tube India Pvt. Ltd. in ITA No. 1037/Mds/2014 dated 22/02/2017, it was held as follows: 8. We have considered the rival submissions on either side and perused 1the relevant material available on record. An identical issue was considered by the co-ordinate Bench of this Tribunal i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th forex filter and employee cost and functionally comparable. 8.3 The Ld. DR relied on the order of the DRP. 8.4 We have heard the rival submissions and perused the material on record. M/s. Evoke Technologies P. Ltd. has been considered as functionally comparable in the assessment year 2011-12 by the TPO. How it is not passing the forex filter and the employee cost filter has not been explained by the TPO. We have gone through the forex filter and employee filter of this company which is as follows: Forex filter Forex Calculation March 14 Particulars Amount in Rs. Forex income 361,891,528 Total Operating Income 456,330,307 Forex Income/Sales 79.32% Employee Cost filter Employee cost calculation March 14 Particulars Amount in Rs. Personal Expenses 319,556,453 Total Operating Income 454,659,098 E ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ster segment selected by the TPO is devoid of unallocable expenses as the same has been deducted from the total segmental profit. 9.2 Further, he relied on the order of the ITAT, Bangalore in the case of GXS India Technology Centre vs. ITO in ITA No. IT(TP)A No. 1444/Bang/2012 dated 31/07/2015 wherein it was held as follows: 14.2 Having considered the rival submissions and perused and carefully considered the material on record, we note that that the co-ordinate bench of this Tribunal in case of 3DPLM Software Solutions Ltd. (supra) has examined the functional profile of this company in para 18.3.1. to 18.3.3 as under: 18.3.1 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the details brought on record that this company, i.e, Quintegra Solutions Ltd. is engaged in product engineering services and is not purely a software development service provide as is the assessee in the case on hand. It is also seen that this company is also engaged in proprietary software products and has substantial R D activity which has resulted in creation of its IPRs. Having applied for trade mark registration of its products, it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... came to a similar conclusion to hold that L T Infotech should not be regarded as a comparable company. In the light of judicial precedents which remain uncontroverted, we are of the view that the aforesaid two comparable companies should be excluded from the list of comparable companies. 9.4 We have heard the rival submissions and perused the material on record. In view of the above orders of the ITAT, Delhi and ITAT, Bangalore cited supra, we direct the AO/TPO to exclude this company from the list of comparables on the same reason given by the co-ordinate Bench of Bangalore. 10. Persistent Systems Ltd. The TPO obtained information u/s. 133(6) based on which it was concluded that the comparable is predominantly engaged in the business of rendering software development to various customers worldwide. The TPO observed that the company is engaged in developing products which have been outsourced by clients and the company does not own IP to these products and the product development is nothing but software development services. With respect to the intangibles of the comparable company, it was found that overseas subsidiary companies have acquired certain IP products and that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mental results are not available. The TPO rejected the assessee s objections on the ground that as per the Annual Report for the company for Financial Year 2007-08, it is mainly a software development company and as per the details furnished in reply to the notice u/s. 133(6) of the Act, software development constitutes 90% of its revenue. In this view of the matter, the Assessing Officer included this company, i.e., Persistent Systems Ltd. in the list of comparables as it qualified the functionality criterion. 17.1.2 Before us, the assessee objected to the inclusion of this company as a comparable submitting that this company is functionally different and also that there are several other factors on which this company cannot be taken as a comparable. In this regard, the ld. Authorised Representative submitted that: i) This company is engaged in software designing services and analytic services and therefore it is not purely a software development service provider as is the assessee in the case on hand. ii) Page 60 of the Annual Report of the company for F.Y. 2007-08 indicates that this company is predominantly engaged in Outsourced Software Product Development Service ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al set of the comparables. 10.3 Further, the Ld. AR relied on the on the order of the ITAT, Bangalore in the case of GXS India Technology Centre vs. ITO in ITA No. IT(TP)A No. 1444/Bang/2012 dated 31/07/2015 wherein it was held as follows: 13.2 We have considered the rival submissions as well as the relevant material on record. As pointed out by the learned AR of the assessee that the functional comparability of the company has been examined by the co-ordinate bench of this Tribunal in case of 3DPLM Software Solutions (Supra) in para 17.3 as under: 17.3 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the details on record that this company, i.e., Persistent Systems Ltd., is engaged in product development services provider. We find that, as submitted by the assessee, the segmental details are not given separately. Therefore, following the principle enunciated in the case of Telecordia Technologies India Pvt. Ltd. (supra) that in the absence of segmental details/information a company cannot be taken into account for comparable analysis, we hold that this company, i.e., Persistent Systems Ltd. ought to be om ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncial statement of the company, the company at entity level cannot compare functionally with the CSD Segment of assesses and accordingly, we direct the Ld. A.O./TPO to exclude the company from final set of the comparables. 11.2 The Ld. AR also relied on the order of the ITAT, Bangalore in the case of GXS India Technology Centre vs. ITO in ITA No. IT(TP)A No. 1444/Bang/2012 dated 31/07/2015 which we have discussed in earlier para. 11.3 We have heard the rival submissions and perused the material on record. In view of the above orders of the ITAT, Delhi and ITAT, Bangalore cited in para 11.1 to 11.2 of this order, we direct the AO/TPO to exclude this company from the list of comparables on the same reason given by the co-ordinate Bench of Bangalore. 12. Regarding Cigniti Technologies Ltd., the DRP observed that the company is engaged in generic IT services and Health related services which falls under the software development and is comparable to the assessee company. On examination of the annual report of M/s. Cigniti Technologies Ltd., i.e., Schedule Non current investments reported in page 71, it can be seen that Gallop Solutions Inc and M/s. Gallop Solutions Pvt. Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The question therefore would be as to whether software testing services would be equivalent to software development services. Software testing is only part of software development life cycle. It cannot be equated with software development services. The TPO in our view rightly excluded this company for comparability purposes. 12.2 We have heard the rival submissions and perused the record. In view of the above order of the ITAT, Bangalore in the case of Trilogy E-Business India Private Limited vs. DCIT cited supra, we direct the A.O./TPO to exclude this company from the list of comparables. 13. Thirdware Solutions Ltd. The TPO held that the company s operation comprises of software development, implementation and support services. The company earned revenue out of sale of software services only. The DRP observed that the comparable is functionally similar to the assessee as the products are platforms used by the comparable to enable design and developing software for use by the customer in a particular industry. The TPO had applied related party filter of greater than 25% and clearly this company passes that filter. The TPO observed that the method of computation adopted by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... during the year under consideration. Thus, there is no effect of purchase of stock-in-trade on the revenue stream, when it has not been sold during the year under consideration. As far as contention of the Ld. Counsel that assessee is having diversity business operation is concerned, we find that for this argument, the Ld. Counsel has relied on the policies followed by the assessee for recognising Revenue from different streams of the Revenue mentioned on page 627 of the Annual Report compilation. This disclosure of accounting policies, nowhere established that assessee was having income from subscription contract or sale of user license as claimed by the Ld. Counsel of the assessee. On perusal of page 598 of the Annual Report compilation (page 78 of the annual report of the company), it is evident that operation of the company comprises of software development, implementation and support services. Further Revenue from different geographical segment has also been reported. But as far as, functions of the company are concerned we do not find any segment other than software development, implementation and support services. In view of the above discussion, we reject the contention of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... objection of the assessee to its inclusion in the list of comparables on the ground that its turnover was in excess of ₹ 500 Crores. 16.2 Before us, the assessee objected to the inclusion of this company as a comparable that apart from software development services, it is in the business of product development, trading in software, giving licenses for use of software and that segmental details are not available. It was also submitted that a co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra) in its order for Assessment Year 2008-09 has held that this company is to be omitted from the list of comparables for providers of software development services. 16.3 Per contra, the learned Departmental Representative supported the orders of the TPO including this company in the list of comparables. 16.4.1 We have heard the rival contentions and perused and carefully considered the record; including the judicial decision relied upon. We find that a co-ordinate bench of this in the case of DPLM Software Solutions Pvt. Ltd. (supra) for Assessment Year 2008-09 that since this company is engaged in product development and earns revenue from sale o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mation technology enable services is not available. From page 882 of the paper book, we find that the revenue recognition policy is that Revenue from Subscription contract is recognized on acceptance or renewal of the contract and is accrued over the period of the contract. Revenue from sale of user licenses for software applications is recognised on e-delivery of Software Licence Key to end user. This company has intangibles worth ₹ 108.22 crores. 25. We further find that this comparable has been rejected by the Tribunal in assessee s own case in assessment year 2010-11 in ITA No. 609/Del/2015 and the relevant finding is given at page 1644 Volume IV. Considering the functional profile of this company in the light of the finding of the co-ordinate bench (supra), we direct for exclusion of this company from the final list of comparables. 13.5 The Ld AR relied on the order of the ITAT, Delhi in the case of Opera Solutions vs. ITO in ITA No.5761/Del/2014 dated 16/11/2018 wherein it was held as follows: 9.2 We have heard the submission of the rival parties and perused relevant material on record. The detail of the sales of the company in the year under consideration ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... forms and hence, functionally similar. The DRP held that decision rendered for the earlier year cannot be automatically applied to determine as to whether the company is functionally comparable and the comparability of a company has to be decided on the basis of the information available in the Annual Report of the assessment year in respect of which the company was selected as a comparable. The total revenue of the company was from the sale of software services and products. Only 4% of sales are attributable to products which is very insignificant and the company also enjoys significant brand value being part of global MNC group. The company earned 36.13% margin which is abnormally high and the sales and marketing expenses is insignificant and only at 0.07% of sales. The scale of operations is not an appropriate filter. A comparable cannot be rejected solely on the basis of a high turnover. Thus, the DRP rejected the contentions of the assessee and held the company as functionally comparable to the assessee. 14.1 Against this, the assessee is in appeal before us. The Ld. AR submitted that the company is not functionally comparable with the assessee as it is engaged in product d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... risk taking entrepreneurs Operate at minimal risks as the 100% services are provided to AEs Nature of services Diversified-consulting, application design, development, reengineering and maintenance system integration, package evaluation and implementation and business process management, etc. (refer page 117 of the paper book) Contract Software Development Services. Revenue ₹ 9, 028 Crores ₹ 16.09 Crores Ownership Of branded/proprietary products. Develops/owns proprietary products like Finacle, Infosys Actice Desk, Infosys iProwe, Infosys mConnect, Also, the company derives substantial portion of its proprietary products (including its flagship banking product suite Finacle ) Onsite Vs. Offshore As much as half of the software development services rendered by Infosys are onsite (i.e.,services performed at the customer s location overseas). And offshore (50.20%) (Refer page 117 of the paper book) than half of its service, income from onsite services. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e dismissed as not pressed. 16. The next ground, Ground No. 5 is with regard to erroneous disallowance of working capital adjustment. 16.1. The facts of the case are that the TPO rejected the assessee s request for working capital adjustment on the ground that there was no basis for the same as differences in intensities of working capital between the assessee and the comparables was not established. Rule 10B of the Income Tax Rules, 1962 provides for making reasonably accurate adjustments to the uncontrolled comparable transaction to eliminate the material effects of such differences on the price, cost or profits. If the taxpayer is able to demonstrate that difference in its working capital vis- -vis the comparable companies had affected its profit margin, adjustment is warranted provided that such adjustment could be computed in a reasonably accurate manner. The TPO relied on the decision of the ITAT, Chennai in the case of M/s. Mobis India Ltd. vs. DCIT (TS-235-ITAT2013(CHNY)-TP wherein working capital adjustment was rejected on the ground that the impact of the difference in working capital has not been demonstrated by the taxpayer. The TPO had stated that the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al, DRP observed that Rule 10B provides for making reasonably accurate adjustment to the uncontrolled comparable transaction to eliminate the material effects of differences on the price, cost or profits. The DRP observed that working capital requirements and impact depends on various factors such as business cycle, the nature of business activity with its correlation on the general economic trends, the fund and capital position of the company, its marketing strategies, its market share etc. all of which cannot be captured in the year end Receivable or Payable position. Besides, the Payable and Receivable position stated by the in the balance sheet may not exactly reflect as to whether it arises from transaction relating to revenue account or capital account as there is no uniformity in the accounting or reporting requirements, and an intermixing is generally possible. The cost ascribable to the working capital would be different in different enterprises depending on the cost of fund to the enterprise, the cost of money in the economy it operates etc. In view of these, a reasonable accurate adjustment is not possible, as the differences in working capital requirements itself is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consider the working capital adjustment as computed by him while determining the ALP of international transactions of the assessee with its AEs. Hence, this ground of appeal taken by the assessee is partly allowed. 16.6. In view of the above order of the Tribunal in the case of Zafin Software Centre of Excellence Pvt. Ltd. vs. ACIT cited supra, we are inclined to direct the Assessing Officer to consider the working capital adjustment as computed by him while determining the ALP of international transactions of the assessee with its AEs. Thus, this ground of appeal of the assessee is partly allowed. 17. The next ground, Ground No. 8 is with regard to erroneous imputation of interest on recovery of expenses. 17.1 The facts of the case are that assessee is a captive service provider whose 99.99% of the shares are held by the AE. It also incurred substantial interest expenses and hence, expenses incurred on behalf of and for the benefit of AEs are required to be reimbursed at arm s length. Such arm s length interest would be charged by unrelated parties in similar circumstances. The TPO stated that the assessee had made advances to its AEs in Indian currency. The third party ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the AE for the realization of invoices would amount to an international taxation. For this, the DRP relied on the decision of the ITAT, Delhi in the case of Bechtel India Pvt. Ltd. in ITA No.6530/Del/2016 dated 16/05/2017. The DRP also relied on the decision of the ITAT Delhi in the case of BT e-Serv (India) Pvt. Ltd. in (2017) 87 taxmann.com 251 wherein it was held that receivable or any other debt arising during the course of business is included in the definition of capital financing as an international transaction as per Explanation 2 to section 92B w.e.f. 1.4.2002 by the Finance Act, 2012. The DRP also relied on the decision of the ITAT, Delhi in the case of Techbooks International Pvt. Ltd.(ITA No.240/Del/2015 dated 06/07/2015 Even the outstanding receivable partake the character o capital financing and consequently, overdue outstanding is an international transaction. Thus, the DRP justified the findings of the TPO on this issue. 17.3 Regarding the rate, the assessee argued that Prime Lending Rate is not appropriate rate for calculating interest on foreign currency loans/advances and that LIBOR should be adopted. According to the DRP, assessee is an Indian company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... We have heard the rival submissions and perused the material on record. In the instant case, the assessee had incurred expenditure on behalf of its AEs in Indian currency. The invoices are raised against the AE in Indian currency only. Since the expenditure has been incurred in Indian currency and not in dollars, the plea of the assessee to adopt LIBOR rates is rejected. However, we find the opportunity cost to the assessee s funds have to be calculated in relation to the interest earning capacity in the domestic market. The assessee had parked its surplus funds in FDs with the banks. It is also found by the DRP that the assessee has not taken any interest bearing funds and thus was not incurring any interest expenditure. Therefore, the fixed interest rate is the maximum the assessee could have got if the recovery of the amounts were not delayed. Therefore, the SBI-PLR rates alone should be calculated without any 3% spread. The weightage average interest of SBI-PLR on FDs has been worked out by the DRP at 8.15%. We are of the considered view that only 8.15% should be adopted while calculating ALP interest on the amounts outstanding from the assessee s AEs. It is ordered accordingl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tical purposes, the borrower becomes the owner of the property in as much as it is the borrower who chooses the property to be purchased, take delivery, enjoys the use and occupation of the property, bears the wear and tear, maintains and operates the machinery/equipment, undertakes indemnity and agrees to bear the risk of loss and damage, if any. According to the DRP, he is the one who gets the property insured and he remains liable for payment of taxes and other charges and indemnity and he cannot recover from the lessor, any of the above expenses. The period of lease covers the entire life of the property for which it may remain useful for either one or two terms with clause for renewal . Thus, the DRP was of the view that the expenses are not to be capitalized. However, he directed the Assessing Officer to allow depreciation on such capitalized assets as per law. 19. Against this, the assessee is in appeal before us. The Ld. AR submitted that as per section 37 of the Act, any expenditure not being an expenditure which is capital or personal in nature and if such expenditure is expended wholly and exclusively for the purpose of the business, can be claimed as deduction/s. 37 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tandard will have no implication on the allowance of depreciation on assets under the provisions of the Income-tax Act. 19.3 The Ld. AR submitted that the lease rentals paid during the year were on the basis of the lease agreements entered by the assessee in earlier years. Further, it was submitted that lease payments made in earlier years were also claimed as deductions during the prior years and were allowed as deduction by the Department. The Ld. AR submitted that in the event that the lease rent capitalized is treated as a capital asset, the assessee ought to be granted depreciation on such assets capitalized. He relied on the judgment of the Supreme Court in the case of I.C.D.S. Ltd. vs. CIT 29 taxmann.com 129 wherein it was held that the lessor was entitled to claim depreciation in respect of assets leased out since it has satisfied both the requirements of section 32, namely ownership of the asset and its usage in the course of business. The DRP while disallowing the claim of lease rentals during the current year, had directed to grant depreciation on the underlying assets. However, the Assessing Officer had not granted depreciation. As the assessee had been claiming le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for modification and extension of ground No. 9, to enable ground No. 9.6 be considered as additional ground to ground No 9.1: The learned AO has erred in not allowing the interest portion amounting to INR 5,210,574 forming part of the finance lease payments (of INR 2,42.78,880) as deduction. All the facts are already on record and no fresh information is required for the admission of the above ground as additional ground. 22.1 In respect of above additional ground, Ld. AR has filed petition for admission of additional ground stating that the assessee was raising the additional grounds with bona fide intention and also in accordance with law. It was submitted that the additional ground is modification and extension of Ground No. 9 and may be treated as part of the grounds in the appeal. It was submitted that the additional grounds raised are only in relation to question of law vis- -vis facts already raised in the appeal filed. It was submitted that in the interest of justice, it was only just and proper that the additional ground raised be admitted on record and accepted as part of grounds of appeal and adjudicated upon by the Tribunal. 22.2 We find bona fide reasons i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 102,312,883 143,394,962 - 245,707,845 2,105,104,183 2,534,606,602 2013-14 296,930,414 84,852,701 22,258,389 404,041,504 2,534,606,602 3,114,462,010 2014-15 715,783,881 284,875,181 6,998,261 1,007,657,323 3,114,462,010 3,551,807,586 Total 1,250,357,536 527,983,985 29,256,650 1,807,598,171 23.4. It was submitted that the Company had sufficient own funds in the form of reserves which were adequate to cover the aggregate interest free loans/advances granted. It was submitted that from the cash flow statement of the Company for the subject year, it was evident that the net cash flow from operating activities (1NR 1,342,173.143) was sufficient for covering the interest free loans (INR 1,007,657,323). Also, it was submitted that the net cash fl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ital (India) Pvt. Ltd. Purchase of fixed assets - 16,489,440 5,248,420 11,241,020 1,011,225 12% IBM India(P) Limited -do- 301,009,145 - 111,909,068 32,943,900 32,943,900 11.85%-12% HP Financial Services (India) Pvt. Ltd. -do- 60,704,319 - 39,064,911 21,639,408 4,010,230 11.45%-11.85% SREI Equipment finance Pvt. Ltd. -do- 41,648,651 - 37,616,232 4,032,419 3,050,523 11.95%-12.13% ICICI Bank Limited Export packing credit 313,928,259 120,300,590 - 434,228,849 39,900,349 B+0.75% (10.75%) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e space in such facility developed was rented out to the assessee and the loans granted by the Company to its subsidiaries, Fincuro and USTSPL were for working capital purpose. Both the subsidiary companies provides IT/ITES services, which is similar business line of USTSPL. However, AO held that the loans and advances were not made in the ordinary course of business. 23.8. The Ld. AR relied on the judgment of the Supreme Court in the case SA Builders Ltd. vs. CIT 289 ITR 26 wherein it was held that the assessee is entitled to deduction of interest on its borrowed loans, if the loans granted to its subsidiary is utilized for their business purpose. The Ld. AR relied on the following judicial precedents which have upheld the view that interest expenditure is allowable subject to the factor of commercial expediency: (a) Ambience Properties vs. DCIT (ITA No. 58/Hycl/20I2): The ITAT, Hyderabad held that in view of the commercial expediency of investments made in associate Company, no disallowance could be made under section 36(1)(iii) of the Act for the proportionate interest. (b)Sree Rayalaseema Green Energy v DCIT (ITA 485/Hyd/2012): The ITA, Hyderabad held that interest s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... )A No.02/Coch/2013 dated 23/08/2018, wherein it was held as follows: 6. We have heard the rival contention and carefully perused the record. From the assessment order, we notice that the AO has disallowed a part of interest expenditure claim on the reasoning that (a) that assessee has given interest free advances to sister concerns as per the Balance Sheet as at 31.3.2008 and (b) the decision rendered by Jurisdictional Hon'ble Kerala High Court in the case of V.I. Baby (supra) supports disallowance of interest attributable to the funds diverted. In the written submissions, the assessee has tabulated the year wise details of funds given to the sister concerns as well as the reserves and surplus funds available with it in those years. For the sake of convenience, we extract below the said details: Financial Year Amt disbursed to TeN Amt disbursed to Toonz Total advances Reserves and surplus 2002-03 2,551,812 - 2,551,812 51,459,144 2003- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed disallowance of ₹ 8,24,600/- is liable to be deleted. We order accordingly. 9. In the result, the appeal filed by the assessee is partly allowed. 24.1 In view of the above order of the Tribunal, this ground of appeal of the assessee is allowed since the assessee was having sufficient funds in the form of reserves for granting loans to its sister concerns. 25. The next ground, Ground No. 11 is with regard to disallowance of additional expenditure incurred owing to the misconduct of the employees u/s. 37 of the Act. 25.1 The facts of the case are that the assessee had entered into an agreement with a vendor for recruiting contract based employees to the company during the year. The employees of the company who was in charge of entering into such contract had colluded with the vendor, owing to which the assessee had to actually pay more than the amount that ideally should be paid to such contracted employees. The expense of fraud was not disclosed as a separate line item in the Statement of Profit and Loss but formed part of the expense paid in connection with contract for recruiting employees. The fraud committed by the employees resulted in the assessee paying ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fied that the losses arising due to embezzlement of employees or due to negligence of employees should be allowed if the loss took place in the normal course of business. It was submitted that since the company was following cost plus billing model, the subject additional expenditure had resulted in additional profits based on which taxes were paid. 25.4 The Ld. DR relied on the order of the DRP. 25.5 We have heard the rival submissions and perused the material on record. The assessee has neither produced any documents before the Assessing Officer nor produced before the DRP nor even before us. The nature of the expenditure has not been substantiated by the assessee. Hence, we do not find any infirmity in the order of the CIT(A) and confirm the ground. Thus, this ground of appeal of the assessee is dismissed. 26. The next ground, Ground No. 12 is with regard to non consideration of inadvertent disallowance of the same expense twice. 26.1 The facts of the case are that the company had inadvertently disallowed the same expense twice u/s. 40(a)(ia) of the Act amounting to ₹ 4,175,973/- while filing the return of income. The line items as per the computation of tota ..... X X X X Extracts X X X X X X X X Extracts X X X X
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