9911796707
TMI Blog2019 (12) TMI 1280X X X X Extracts X X X X X X X X Extracts X X X X ..... issioner 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 Appellant. 2.2 The AO/TPO erred in considering unrealized foreign exchange gain/loss margin of the Appellant. Ground No. 3 -Determination of arm's length pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 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 study by the Assessee. 4.2 The TPO AO erred in law and on facts in disregarding the application of multiple-year data while computing the margins of alleged comparable companie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 computing the business profits. 10.3 The learned AO/DRP has erred in disregarding the fact that the loans were granted by the Appellant to its sister concerns in the normal course of business and was by way of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, modification or otherwise, the above grounds of appeal, either before or during the hearing of the appeal. 3. The first Ground, Ground 1 to 1.4 are too general in nature and does not require adjudication. 4. The next ground, Grou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icer 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 computation of the operating margin of the assesseecompany. The DRP relied on the decision of the ITAT, Chennai in the case of Petrofac Engineering Services India (P) Ltd v ITO [2014] 46 taxmann.com 126 (Chennai- Trib.) wherein it was held that in case of international transactions entered into by assssee with its AE, foreign exchange gain/loss is a relevant factor in computation of assessee's ALP. The DRP relied on the judgment of the Madras High Court in the case of CIT v. Pentasoft Technologies Ltd.[2012] 347 ITR 578 wherein it was held that gains due to fluctuation in foreign exchange is directly related to expo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 we read the ratio of the case of Sutlej Cotton (SC) (supra) in juxtaposition to that of the Special Bench in case of Prakash I Shah (supra), there remains no doubt that forex gain or loss from a trading transaction is not only an item of revenue nature, but is in fact, a part of the price of import or value of export transaction, as the case may be. Operating expense is ordinarily an expense that a business incurs as a result of performing its normal business operations. As the business of 'Assembly' done bv the assessee under this segment is not possible without purchases and forex gain is in relation to suc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ummary 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 Total Operating income(A) 8,127,310,889 8,127,310,889. 8,180,762,885 Expenditure Employee benefit expenses 5,17,95,49,738 5,179,549,738 5,179,549,738 Other expenses 1,61,96,04,171 1,444,597,579 1,444,597,579 Depreciation and amortization expense 35,00,73,279 35,073,279 350,073,279 Bank Charges 61,88,776 6,188,776 6,188,776 Tour Operating Expenses(B) 7,15,54,15,964 6,980,409,372 6,980,409,372 Operating Profit(A+B) 97,18,94,925 1,146,91,517 1,200,353,513 Net Cost Plus 9%) 13.58% 16.5% 17.20% Excluded finance charges amounting to INR amounting to INR 51,00,000/-. Foreign exchange loss amounting to INR 148,518,170/- provision for loans and advances amounting to INR 47,285,166/, Ireland expenses of INR 2,539,778/- and SEZ unit expenses of INR 23,948.644- 5.1 With respect to the treatment of forex gain/loss the Ld. AR drew atte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rms/o/operating_expense.asp as follows: Definition of 'Operating Expense' "A category of expenditure that a business incurs as a result of performing its normal business operations. One of the typical responsibilities that management must contend with is determining how low operating expenses can he reduced without significantly affecting the firm's ability to compete with its competitors." Hence, it was submitted that an operating expense must be incurred in the course of a company's normal business operations and capable of being controlled by the management. 5.3 It was submitted that difference in exchange rate does not satisfy either of the two limbs. The definition of "operating Expense ratio" in http://www.moneyzine.com/definitions/investing-dictionary/operatingexpense-ratio/ also emphasize the controllable aspect of these expenses by the management- 'Operating Expense Ratio' The financial ratio known as the operating expense ratio or OER, is considered a measurement of management efficiencies. Using information found on the income statement, this metric looks at the ratio of operating expenses to net sales. Calculation Operating Exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... No.6597/MUM/09, where in tribunal clarified that 'a continuing debit balance, in our humble understanding, is not an international transaction per se, but is a result of the international transaction. In plain words, a continuing debit balance only reflects that the payment, even though due, has not been made by the debtor. It is not, however, necessary that a payment is to be made as soon as it becomes due. Many factors, including terms of payment and normal business practices, influence the fact of payment in respect of a commercial transaction.........what can be examined on the touchstone of arm's length principles is the commercial transaction itself, as a result of which the debit balance has come into existence, and the terms and conditions, including terms of payment, on which the said commercial transaction has been entered into. The payment terms are an integral pan of any commercial transaction, and the transaction value, takes into account the terms of payment such as permissible credit period, as well." Thus, it was submitted that any adjustment like Exchange control difference made towards the carried forward closing balances of Receivables and Payables is n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at of comparables. This could be achieved either adopting a filter of certain percent of import compared to Sales or by eliminating in the process of comparison any gain or loss arising from exchange fluctuation. Given this context, the Ld. AR submitted that adjustment relating to foreign exchange differences, either resulting in gain or loss should be excluded as an extraordinary item only. If the imported purchases /exports are thus marked to the prevailing rupee value on the date of import/export, the parity of a similar economic condition of other comparables could arise. A further adjustment to the rupee's carry value at the time of payment or receipt of such import or export would vitiate and lead to a different economic condition, for which no comparable adjustment could be carried out on the comparables. Therefore, in order to bring the comparables as parimateria to the operations of the assessee company, the treatment of booking imports and exports must be on the basis of value of such imports and exports on date of such transactions and operating profit must be arrived at based on the same. 5.8 Further, the Ld. AR relied on the following judgments of various tribunal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 7.2 In view of the above decisions of the Tribunal, we direct the Assessing Officer to exclude the loss on account of foreign fluctuation from the operating expenses for computing the PLI (Profit Level Indicator). This ground of appeal of the assessee is allowed. 8. The next ground, Ground Nos. 3.4 to 3.12 is with regard to rejection of following comparables: 1. Evoke Technologies Ltd. 2. Larsen & Toubro Infotech Limited 3. Mindtree Limited 4. Cigniti Technologies L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DRP observed that with regard to IPR, brand and other differences, the assessee had failed to establish that such differences have material effect on the margin of the company. Accordingly, the DRP upheld the selection of the above company as comparable by the TPO. The TPO considered the revenue and expenses for the entity as a whole, therefore, the DRP held that discontinuation of one vertical line of business had not materially affected the profit margin. The re-organisation had taken part only in the last quarter of the financial year and some of the changes were effected as late as 28th march, 2014. 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. 9.1 Against this, the assessee is in appeal before us. The Ld. AR submitted that the assessee is engaged in product engineering services and L&T Infotech Ltd. is not functionally comparable to the assessee's case in view of the dec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that company shall be removed from the list of comparables. 18.3.3 Respectfully following the decision of the co-ordiante bench of the Tribunal in the case of 24/7 Customer.com Pvt. Ltd. (supra), we direct that this company i.e. Quintegra Solutions Ltd. be excluded from the list of comparables in the case of hand since it is engaged in proprietary software products and owns its own intangibles unlike the assessee in the case on hand who is a software service provider. 14.3 Thus, it is clear from the finding of this Tribunal that this company is engaged in the product engineering services and also owns intangible/intellectual property rights. Following the finding of the coordinate bench of this Tribunal (supra) we direct the AO/TPO to exclude this company from the list of comparables." 9.3 Further, the Ld. AR relied on the on the order of the ITAT, Bangalore in the case of Metric Stream Infotech (India) Pvt. Ltd. vs. DCIT in IT(TP)A Nos. 1418 & 2735/Bang/2017 dated 27/02/2019 wherein it was held as follows: "11. As far as L&T Infotech Ltd. and Persistent Systems Ltd. are concerned, our attention was drawn to the decision of ITAT, Hyderabad Bench in the case of M/s. EPAM Syst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company passed the filters. Hence, the TPO rejected the contentions of the assessee and held the company as comparable. The DRP held that the company is functionally similar to the assessee. 10.1 Against this, the assessee is in appeal before us. The Ld. AR submitted that it was not functionally comparable as it was engaged in significant product development. The Ld. AR relied on the order of the ITAT, Chennai in the case of Symantec Software & Services India (P) Ltd. vs. DCIT 79 taxmann.com (Chennai -Trib.) wherein it was held as follows: "10. We heard the rival submissions, perused the material on record. We found that the company is engaged in product development and cannot be comparable to the software development services and has income from license fee. The Revenue Recognition Policy in notes of accounts and segmental information is available in respect of infrastructure and systems, telecom and wireless life sciences and Health care. Further, it renders services in cost plus to its Associate Enterprise and sail with partnership and alliances, intellectual property led solutions and end-toend solutions, strategic acquisitions and financial year 2010-11 is an exceptional y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company, i.e. Persistent Systems Ltd. be omitted from the list of comparables. 17.2 Per contra, the learned Departmental Representative support the action of the TPO in including this company in the list of comparables. 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 and product design services while the assessee is a software 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 decision of the Mumbai Tribunal 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 comparability analysis. We hold that this company, i.e., Persistent Systems Ltd. ought to be omitted from the set of comparables for the year under consideration. It is ordered accordingly." We rely on the above facts and Tribunal decision and we direct the TPO to exclude Persistent Systems Ltd. from the lis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have heard the rival submissions and perused the material on record. In view of the above orders of the ITAT cited in para 10.1 to 10.4 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. 11. Mindtree Ltd. The DRP held that the comparable like the assessee is engaged in software development only. The products are platforms used by the comparable to enable design and developing software for use by the customer in a particular industry. The comparable enjoys significant brand value as part of the huge Global MNC group. The comparable is engaged in development of IP and owns intangibles. Scale of operation is no anappropriate filter. 11.1 Against this, the assessee is in appeal before us. The Ld. AR submitted that it was not functionally comparable as it was leader in product engineering services and incurred huge branch expenses and office expenses and acquired tangibles. The Ld. AR relied on the decision of the ITAT, Delhi in the case of M/s. Alcatel-Lucent India Ltd. vs. Addl. CIT in ITA No.6979/Del/2017 dated 09/05/2019 wherein it was held as under: "(v) In view of the ab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ied 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. Thus, the DRP rejected the contentions of the assessee. 12.1 Against this, the assessee is in appeal before us. The Ld. AR submitted that the comparable is world's third largest software testing services and acquisition during F.Y. 2013-14 resulted in substantial impact on profit. Thus, it was submitted that M/s. Cigniti Technologies Ltd. is not functionally comparable to the assessee's case. The Ld. AR relied on the decision of the ITAT, Bangalore in the case of Trilogy E-Business India Private Limited vs. DCIT in ITA No.1054/Bang/2011 dated 23/11/2012 wherein it was held as follows: "71. M/s. Indium India Ltd., a comparable considered by the Assessee in the TP study was rejected by the TPO as not comparable on the ground that the said company was rendering testing services. It is the plea of the assessee that software testing is an integral part of software development cycle. It is further pointed out tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and held the company as functionally comparable to the assessee. 13.1 Against this, the assessee is in appeal before us. The ld. AR submitted that this company was not functionally comparable to the assessee as it was engaged in sale of products, subscription contracts, sale of user licenses and revenue generated from activities other than software development. It was submitted that the related party transactions was 23.26%. It was submitted that the Singapore entity Thirdware Solutions Singapore Pvt. Ltd. was liquidated due to solvency of business activities and this liquidation had led to slowdown of goodwill in Thirdware Solutions. It was submitted that the comparable had acquired intangible assets for internal use and therefore, it is involved in development products. The ld. AR relied on the decision of the ITAT, Delhi in the case of NXP India Private Limited in ITA No.5140/Del/2018 dated 28/02/2019 wherein it was held as under: ""13.14. We have heard the rival submissions and perused the relevant material on record. We find from the profit and loss account of the company available on page 616 of the Annual Report compilation, that Revenue of Rs. 20,675.74 of the company h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0.633; ''Revenue from subscription' - Rs. 1,53,13,736/-; 'Sale of licence' - Rs. 1,51,38,618/- and 'Software Services' - Rs. 5,72,23,072/-. This company has segments only on geographical basis and not on functional level. As such, there is no bifurcation of operating profit from Software Services and others including Sale of licence and Revenue from subscription etc. Even the first two major items of 'Exports from SEZ units' and 'Export from STPI units' do not show as to whether these were exports of Software products or Software Services. In the absence of the availability of any concrete information in respect of Software Services, we fail to comprehend as to how this company, also having software products in its portfolio, can be construed as comparable. The same is accordingly directed to be excluded." 13.3 The Ld. AR relied on the order of the ITAT, Bangalore in the case of DCIT vs. CSG Systems International Pvt. Ltd. in IT(TP)A No. 1086/Bang/2013 dated 16.11.2018 wherein it was held as follows: "45.3 We have heard rival submissions and perused the material on record. The comparability of Thirdware Solutions Ltd. has come up for consideration before co-ordinate bench of thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, it ought to be rejected as a comparable for software development services. In the case on hand, the assessee is rendering software development services. In this factual view of the matter and following the afore cited decision of the Pune Tribunal (supra), we direct that this company be omitted from the list of comparables for the period under consideration in the case on hand." 16.4.2 Following the above decision of the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Pvt. Ltd. (supra) for Assessment Year 2008-09, we direct the Assessing Officer/TPO to omit this company from the list of comparables in the case on hand." Respectfully following the ratio of the decision of the coordinate bench in the case of M/s.Hewlett-Packard (India) Software Operation P. Ltd. (supra) we direct the AO/TPO to exclude Thirdware Solutions Ltd., from the list of comparables." Following the decisions of the Tribunal referred to above, we hold that the above said 3 companies should be excluded from the list of comparable companies." 13.4 The Ld. AR relied on the order of the ITAT, Delhi in the case of StEricsson India Pvt. Ltd. vs. DCIT in ITA No.4434/Del/2018 dated 26/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt/services are available in the case of company, and, therefore, it cannot be compared with the assessee at entity level. Accordingly, we direct the Ld. TPO/AO to exclude this company from the set of comparable. 13.6 The Ld. AR relied on the order of the ITAT, Delhi in the case of Wipro Energy IT Services India Private Limited vs. DCIT in ITA No.1594/Del/2014 dated 11.04/2018 wherein it was held as follows: "As regards Thirdware Solutions Ltd. the same deals with sale of licenses Software, Services Export and Revenue from subscription. Thus, the Thirdware Solutions is not exclusively dealing with the Software Services. Infact, the TPO himself stated that majority of expenses are in the form of Software Service Charges and Salaries, but he has not considered exact expenses for the Software Charges and Salaries. This has not come up from the annual report to deal with the assessee company as a comparable as there is no segmental results provided by the said company. Thus, we direct the TPO/A.O to exclude this comparable as it is not having similar functions to that of the assessee company and also there is no segmental record given in the annual report of that company." 13 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Infosys Ltd. has not been considered as a comparable by the Tribunal in the case of M/s. Lime Labs (I) Pvt. Ltd. vs. ITO in ITA No.1703/Delhi/2015 dated 12/12/2018 wherein it was held as follows: 17. When we examine the functional profile of Infosys in its annual report, available at pages 208 of the paper book, it shows that the Infosys provides end-to-end business solutions that leverage cutting edge technology, thereby enabling clients to enhance business performance. The company provides solutions that span the entire software lifecycle encompassing technical consulting, design, development, re-engineering, maintenance, systems integration, package evaluation and implementation, testing and infrastructure management services. In addition, the company offers software products for the banking industry. Furthermore, Infosys spent 2.1% of the total revenue on its R&D expenditure during the year under assessment as is evident from pages 187 & 188 of the paper book. Moreover, Infosys is having huge intangible assets, it being a "brand" in itself. 18. Comparability of Infosys vis-à-vis routine software development and support services provider has been examined by Hon'ble D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oned in the tabulated form. The chart has not been controverted." 19. Keeping in view the functional dissimilarity between Infosys vis-à-vis the taxpayer and the fact that Infosys is incurring huge expenditure to the tune of 2.1% of its total revenue on its R&D activities leading to the creation of significant intangible property and the fact that Infosys is a brand in itself and the fact that it assumes entrepreneurial risk and it also deals in software product and following the decision rendered by Hon'ble Delhi High Court in CIT vs. Agnity India Technologies Pvt. Ltd. (supra), it cannot be taken as a valid comparable. So, we direct the AO/ TPO to exclude Infinite from the final set of comparables." 14.3 Being so, Infosys Ltd. is engaged in providing business consultation, technology engineering and outsourcing services and segmental data is not available. Further, Infosys Ltd. had spent hugh amount for R&D coupled with huge intangible asset and built up brand value. In such circumstances, it cannot be compared with assessee's case. Accordingly, we direct the AO/TPO to exclude this company. Thus, the ground of appeal of the assessee with regard to rejection of comparabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e in working capital employed by the tested party and the comparables cannot be ascertained. The adjustment calculated with such figures would only show the difference in working capital as on a particular date and not throughout the year. It was stated that segmental working capital was not disclosed in the annual reports. The disclosures of the figures of debtors and creditors which are important for comparing the working capital adjustment does not provide the break up of trade and non trade nature of such balances. Sundry creditors and debtors which are out of non trade transactions are also clubbed with the balances outstanding out of trade transactions. It was stated that cost of capital is different for different companies. After working out the difference in the working capital employed between the tested party and the comparable companies, the cost of financing such working capital is to be adjusted to eliminate the impact of such difference in working capital on the profit margins The cost of working capital would depend on the source of funds and the credit standing of the borrower. The cost of capital for MNCs is determined by the global interest rates rather than India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bench in the case of Foxteq Services India (P) Ltd. vs. ACIT in 74 taxman.com 216 where in it was held as under: "7. We have considered the rival submissions on either side and perused the relevant material available on record. The assessee objected to the adjustment made by the Transfer Pricing Officer. With regard to working capital adjustment, the assessee claims that the difference in working capital between the assessee and the comparable companies would materially affect the profit determined. Therefore, certain adjustment needs to be made to bring them on equal footing. The assessee also brought to the notice of the DRP that the working capital adjustment, which was to ensure the profit derived by the comparable companies, can be compared with the profit of the assessee. This Tribunal is of the considered opinion that the capital employed by the assessee, including the working capital, and that of comparable companies needs to be taken into consideration. Without comparing the working capital employed by the comparable companies and that of the assessee, this Tribunal is of the considered opinion that there cannot be any transfer pricing adjustment." 5.4 In view o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rency. The TPO had granted the request of the assessee to adopt the domestic cost of borrowings at 11.13% to impute arms length interest instead of SBI PLR. The TPO considered the average domestic cost of borrowings of the assessee at 11.13% p.a. for F.Y. 2013-14 for the purpose of benchmarking the interest. To arrive at the spread on the rate of interest that the assessee ought to have charged, the TPO adopted the spread prescribed by the RBI for factoring in the risks and credit rating of the AE. The RBI in its guidelines RBI/2010-11/8, Master Circular No. 08/2010-11 dated July 1, 2010, prescribed a spread of 300 base points for a term of less than 5 years. 17.2 On appeal, the DRP observed that even if the advances were made for business exigencies, the advances are outstanding for a considerable long period of time. The assessee also incurred substantial interest expenses. The DRP observed that in view of the amendment inserted by way of Explanation to sec. 92B with retrospective effect from 01/04/2002, 'international transaction' would specifically include within its ambit, 'deferred payment or receivable or any other debt arising during the course of business' and hence, non ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The DRP held that adoption of average domestic cost of borrowings of the assessee should be adopted since it is an internal CUP and there was no necessity to add a spread on the same. The TPO recomputed the arm's length price of the interest at 11.13%. The Ld.AR relied on the following case laws to support that LIBOR/EURIBOR for intercompany loans and advances given in foreign currency has been adopted: 1. Four Soft Limited (ITA No.495/Hyd/2010) 2. Mahindra & Mahindra Ltd. vs. ACIT (ITA No.8597/Mum/2010 and ITA No.7999/Mum/2011 3. Siva Industries & Holdings Ltd. vs. ACIT (145 TTJ 530) (Chennai Trib.) 4. DCIT vs. Tech Mahindra Limited (46 SOT 141) (Mum) 5. Cotton Naturals (India) Pvt. Ltd. vs. DCIT (2012-ITAT-5855-Del) 6. Tata Autocomp Systems Ltd. vs. ACIT (2012-ITAT-7354-Mum.) 7. Apollo Tyres Ltd. vs. ACIT (ITA No. 616/Coch/2011) 8. Aurionpro Solutions Ltd. vs. Addl. CIT 9ts-75-ITAT-2013(Mum)-TP) 17.5 The Ld. DR relied on the order of the DRP. 17.6 We have heard the rival submissions and perused the material on record. A similar issue came up for consideration before the Tribunal in the case of M/s. Allianz Cornhill International Service Pvt. Ltd. in ITA No ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ards the finance lease are nothing but towards acquisition of capital asset and thus, is capital in nature. Therefore, the same was disallowed u/s.37 of the I.T. Act and added back to the total income of the assessee. 18.2 On appeal, the DRP relied on the judgment of the Supreme Court in the case of M/s. Asia Brown Boveri Ltd. vs. Industrial Finances Corporation of India, No. Appeal (Civil) 3574/1998 dated27/10/2004 wherein it was stated as follows: "Financial lease has been defined by International Accounting Standards Committee as "an lease that transfers substantially all the risks and rewards incident to ownership of an asset. Title may or may not eventually be transferred." Lessor is only a financier and is not interested in the assets. This is the reason that financial lease is known as full payout lease where contract is irrevocable for the primary lease period and the rentals payable during which period are supposed to be adequate to recover the total investment in the asset made by the lessor." 18.3 The DRP was of the opinion that primary purpose of financial lease is the financing of the purchase by the financier. According to the DRP, the purchase of asset or equipme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenditure as the assessee had not acquired any ownership rights. The Ld. AR relied on the following judgments: i) Sutlej Cotton Mills Ltd. vs. CIT 116 ITR 1 (SC) ii) Kedarnath Jute Mfg. Co. Ltd. vs. CIT 82 ITR 363 (SC) iii) CIT vs. Banswara Synthetic Ltd. 15 taxmann.com 247 (Raj.) iv) Banashankari Medical & Oncology Research Centre Ltd. vs. Jt. CIT 316 ITR 407 (Kar.) v) Rajshree Roadways vs. Union Of India 263 ITR 206. Thus, it was submitted that the entries in books of accounts by itself, will have no implication on the allowance of expenditure under the provisions of the Act. The Ld. AR submitted that there is distinction between operating lease and finance lease as per the Act. The Ld. AR placed reliance on the CBDT Circular No. 2/2001 dated 09/02/2001 wherein it was explicitly stated that the treatment of lease as per accounting standards will have no implication for the purposes of the Act. The relevant portion of the Circular reads as follows: "It has come to the notice of the Board that the New Accounting Standard on "Leases" issued by the Institute of Chartered Accountants of India require capitalization of the asset by the lessees in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on Ltd. vs. DCIT 69 taxmann.com 317. However, we find that the 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 the assessee proves that it has not claimed depreciation on the assets taken on lease, the assessee is entitled for lease rentals paid by the assessee as a revenue expenditure. With this observation, we remit this issue to the file of the Assessing Officer to examine the assessee's Profit and Loss account and balance sheet with reference to the agreements entered into by the assessee with the lessor. This ground of appeal of the assessee is partly allowed for statistical purposes. 22. The Ld. AR has raised following additional ground which is independent ground for modification and extension of ground No. 9, to enable ground No. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee had sufficient own funds in the form of reserves, which are adequate to cover the aforesaid loan, details of which are as follows: AY Loan granted to USTGPL Loan granted to USTSPL Loan granted to Fincuro fo Total loan granted Reserves Opening Closing balance balance 2009-10 1,618,441 - - 1,618,441 717,455,603 951,397,562 2010-11 38,391,944 - - 38,391,944 951,397,562 1,499,315,279 2011-12 95,319,973 14,861,141 - 110,181,114 1,499,315,279 2,105,104,183 2012-13 102,312,883 143,394,962 - 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 opera ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssets - 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%) ICICI Bank Limited Cash credit 16,450,893 - 16,450,893 - B+2.25% (12.25%) Total 733,741,267 136,790,030 210,289,524 660,241,773 80,916,236 It was submitted that out of the total borrowings made by the Company, certain amount was towards the purchase of fixed assets. It was submitted that in the financing arrangement for the purchase of assets, the loan amount was not routed through the assessee, instead the same was paid directly by the lender to the vendor of assets. Hence, the interest pertaining to such specific purpose borrowing should not be considered for the computation of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0I2): 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 shall be allowed as deduction under section 36(1)(iii) of the Act subject to the fact that investments were made out of commercial expediency. (c) Hero Cycles (P) Ltd. v CIT (Civil Appeal No. 514 Of 2008): The Apex court in the subject case upheld the view of Delhi High court in the case of CIT vs. Dalmia Cement Ltd (2002) 254 ITR 377 wherein it was held that once nexus is established between the expenditure and the purpose of business (which need not be necessarily the business of assessee itself), then the revenue need not step into the shoes of businessman to check the reasonableness of the expenditure. 23.9. Further, the Apex court in the subject case taking note of the fact that advances granted to sister concern provided additional margin to meet the working capital requirements held that the interest should not be disallowed under section 36(1)(iii)of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rsed to Toonz Total advances Reserves and surplus 2002-03 2,551,812 - 2,551,812 51,459,144 2003-04 5,959,312 - 5,959,312 93,539,478 2004-05 961,388 - 961,388 139,593,897 2005-06 325,049 - 325,049 209,274,643 2006-07 - 700,000 700,000 467,452,244 2007-08 - - - 717,455,603 Total 9,797,561 700,000 10,497,561 Thus, it is seen that the assessee has advanced the amounts to its sister concerns in the earlier years and not during the year under consideration, as presumed by the assessing officer. Thus, the presumption entertained by the AO is against the facts available on record. 7. Further, the AO has placed reliance on the decision rendered by the Hon'ble jurisdictional High Court in the case of V.I. Baby and Co., referred supra. The Ld D.R also placed heavy reliance on the above said decision rendered by the Hon'ble jurisdictional High Court. We have carefully gone through the said decision and notice that the assessee therein was a partnership firm and the withdrawals made by its partners resulted in converting the Capital balances into "debit balances". There should not be any doubt that the debit balance in the capital accou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of expenditure. 25.2 On appeal, the DRP observed that the Assessing Officer had specifically mentioned that the said expenditure is allowable on production of documents substantiating the same and that the AR was further required to prove the genuineness of the same. The DRP observed that the assessee has neither produced any documents before the Assessing Officer nor produced before the DRP. The nature of the expenditure has not been substantiated by the assessee. According to the DRP, the assessee could have produced facts and details to substantiate their claim instead of trying to make mere legal arguments. The DRP held that only on complete examination of facts as to what was the nature of contract, how was the contract prejudiced, how was the quantification of the loss done etc. can a proper assessment of the allowability of the same be made. Thus, the DRP rejected the claim of the assessee on this issue. 25.3 Against this, the assessee is in appeal before us. The Ld. AR submitted that the expenditure incurred by the company was with respect to the contract entered for recruiting employees on contract basis for providing software development services, which was the main o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4,08,506 Total disallowance u/s. 40(a)(ia) by the Company 8,351,946 8,351,946 The amount disallowed in the return of income u/s. 40(a)(ia) of the Act was INR 83,51,946/-. The sum of expenses on which tax had not been deducted at source as disclosed in clause 21(b) of the Tax Audit Report amounts to INR 4,175,973/-. The Assessing Officer did not consider the request of the assessee. 26.2 On appeal, the DRP observed that as per section 144C(1) of the I.T. Act, if the Assessing Officer proposes variations to the income/loss returned which is prejudicial to the interests of the assessee, he forwards the draft order to the assessee. AS per section 144C(8) of the I.T. Act, the DRP may confirm, reduce or enhance the variations proposed in the draft assessment order passed by the Assessing Officer. Therefore, the DRP held that since the issue was not related to the variations to income proposed by the Assessing Officer in the draft assessment order, the same was outside the jurisdiction of DRP. 26.3 Against this, the assessee is in appeal before us. The ld. AR submitted that from the Tax Audit Report for the relevant A.Y., it was evident that the total amount ought to be di ..... X X X X Extracts X X X X X X X X Extracts X X X X
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