TMI Blog2022 (5) TMI 352X X X X Extracts X X X X X X X X Extracts X X X X ..... O treated the above debts outstanding for a period of more than six months in respect of transaction with assessee s AEs as a deemed loan and applied CUP method to benchmark the transaction - HELD THAT:- As sales to AE is more than sales to non-AEs. Hence, the debtors are more in AE as compared to non-AE. More importantly, percentage of debtors to sales is less in AE as compared to that of non-AE. No interest is charged from both AE and non-AE. The Hon ble Rajasthan High Court in the case of PCIT v. Sharda Spuntex P Ltd. [ 2018 (5) TMI 1835 - RAJASTHAN HIGH COURT] has held that when interest is not charged on non-AE debtors, there cannot be any occasion to make ALP adjustment for notional interest on delay in realization of trade debts from the AEs. The outstanding receivables from AE even though an international transaction, is a closely linked transaction to the international transaction of sales to AE. The receivables from AE arise due to sales to AE and hence it is closely linked transaction. The TPO has accepted the net profit margin of the software services segment. The net profit margin of the assessee in software segment is 33.18% which is higher than the net profit margin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the above said reasoning cannot be a ground to reject the claim for deduction u/s 10A of the Act. The second reasoning given by the A.O. is that the unit No.2 is only a paper unit or it is a case of splitting up or reconstruction of the existing unit. Before us, the Ld. A.R. submitted that the A.O. has not brought any material on record in support of the above said reasoning - Before us, the assessee has filed details of seating capacity and other infrastructure facilities pertaining to Unit-1 2 in support of the contentions made before us. A perusal of the same would show that the capacity of Unit-1 remains intact. We notice that the AO has not examined this issue by considering factual aspects presented before us. Since the A.O. has not examined the details now furnished before us by the assessee, we restore those details to the file of the A.O. for examining them. Assessee has furnished corrected Softex forms in respect of unit-2 as additional evidences before us and they constitute about 73% of the aggregate number of forms. These additional evidences require examination at the end of the A.O. Accordingly, we restore this issue to the file of the A.O. for examining th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... only those investments, which have yielded exempt income has to be considered for the purpose of computing average value of investments for computing disallowance under Rule 8D. We direct the A.O. to compute disallowance accordingly. Short grant of TDS - HELD THAT:- A.O. in the final assessment order, despite the directions of the DRP, without any discussion has granted TDS credit of only Rs.1,19,13,873 instead of Rs.1,78,59,370 claimed by the assessee. Therefore, we restore the issue raised to the files of the A.O. TP adjustment made on buy back of shares - TPO held that the assessee has paid for buyback from its internal accruals/reserves - HELD THAT:- TPOs reasoning for rejection of two independent valuation reports have been rejected by the DRP on merits. The DRP has clearly brought out on record the various inconsistencies in the TPOs valuation. It is evident from the TPOs valuation that the TPO cherry picked the numbers and figures from different methods of valuation in both the valuation reports in the manner beneficial to revenue. The TPO has not explained the basis or rationale for adopting figures from different valuation reports. The assessee followed the valu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for scrutiny by issuing notice u/s 143(2) of the I.T.Act. During the course of assessment proceedings, the case was referred to the Transfer Pricing Officer (TPO) to determine the Arm s Length Price (ALP) of the international taxations entered by the assessee with its Associate Enterprises (AEs). The activities carried on by the assessee, the margins earned thereon and the TPO s calculation and the findings are as follows:- Transaction Assessee s margins Arm s length margin determined by TPO TPO s finding Software development support services Net operating margin (NPM) of 33.18 per cent. NPM of 24.32 percent Transactions established to be at arm s length. Management and administrative support services NPM of 10 per cent. NPM of less than 10 per cent -do- IT infrastructure support services NPM of 20 per cent. NPM of 25.03 per cent Transactions are within the 5 per cent tolerance range and hence accepted to be at arm s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 01.2014, both assessee and revenue has filed appeals before the Tribunal. We shall first adjudicate the assessee s appeal. IT(TP)A No.130/Bang/2014 (Assessee s appeal) 3. The grounds raised by the assessee are as follows:- 1. The assessment order dated January 02, 2014, passed by the learned Joint Commissioner of Income-tax, Large taxpayer unit, Bangalore ( the Ld AO ) under section 143(3) read with section 144C( 13) of the Income-tax Act, 1961 ( the Act ) is not in accordance with the law and is contrary to the facts and circumstances of the present case. Transfer Pricing adjustments 1.1. The Honourable DRP and the Ld TPO have erred in law and on the facts and circumstances of the case, by holding that the ALP of Royalty is NIL and adding back the entire amount of Rs 3.83 crores paid towards Royalty as an adjustment to ALP. 1.2. The Honourable DRP and the Ld TPO have erred in law and on facts in concluding that the' payment of royalty for the brand name owned by the AE was not justified without considering that its revenue of about Rs 130 crores out of a total revenue of Rs 433 crores was derived from non-AEs. 1.3. The Honourable DRP and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... loan and levying interest is incorrect. 2.4. Without prejudice to the above, the Honourable DRP and the Ld AO 1 TPO have erred in law and on facts in benchmarking the outstanding trade receivables with interest receivable on loan transactions 2.5. The Ld AO 1 TPO have erred in law by not giving effect to the directions of the Honourable DRP despite the DRP explicitly ruling in its order that there should be any adjustment if the margins after adjustments for working capital differences are higher than the arm's length margin determined based on comparable company data 2.6. The Ld AOI TPO have erred in law in not giving effect to the order of the DRP, which action purports that the DRP should have itself examined the working capital adjustment and the mere direction to the Ld AOITPO to examine the workings amounted to a set aside without considering that it was only incidental to the DRP's explicit ruling that the adjustment should be deleted once the Appellant's margins after the working capital adjustment is higher than the margins of the comparable companies. 3. Other Transfer pricing related grounds 3.1. Without prejudice to all of the ab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rward contracts and options amounting to INR 684,273,980 holding the same as being notional loss which was contingent in nature- 5.2. The Ld AO and the honorable DRP have erred in law and on facts in holding that the Appellant had entered into speculative transactions and booked MTM losses without any basis and disregarding the fact that the forward contracts and options were in relation to underlying financial assets of the Appellant that were outstanding as at March 2009. 5.3. The Ld AO and the honorable DRP have erred in law and on facts in holding that the MTM loss of INR 684,273,980 is a speculative loss as envisaged under section 43(5) of the Act and is to be assessed separately as profit or loss from speculation. 5.4. The Ld AO and the honorable DRP have erred in law and on facts in concluding that the transaction was speculative in nature merely by relying on the internal instruction No 3/2010 dated March 23, 3010 issued by the Central Board of Direct Taxes ( CBDT ). 5.5. The Ld AO and the honorable DRP have erred in law and on facts in holding that the principles enunciated by the Honorable Supreme Court in the case of Woodward Governor India Private Li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... honorable DRP to allocate the amount of disallowance amongst the various STPI units and computing the correct amount of relief under section 10A of the Act for each unit. 7. Disallowance under section 14A of the Act 7.1. The Ld AO and the honorable DRP have erred in law and on facts in disallowing the amount of Rs 2,740,203 under the provisions of section 14A of the Act by invoking the provisions of Rule 8D of the Income-tax Rules, 1962 without providing any cogent reasons and making conclusions on the basis of conjectures and surmises and without considering the relevant facts and submissions. 7.2. The Ld AO and the honorable DRP have erred in law and on facts in not appreciating that disallowance under section 14A of the Act requires that such expense should have an inherent nexus with an exempt income. 7.3. Without prejudice to the above objection, in relation to the additional disallowance of Rs 2,740,203 under section 14A of the Act, the Ld AO and the honorable DRP have erred in not appreciating the fact that such disallowance should have been made in the computation of Profits and Gains from Business and Profession ( PGBP ) in respect of each of the U ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TPO ) / AO has erred in law and on facts and circumstances of the case, by invoking provisions of section 92C of the Act and rule 10Bof the Income tax Rules, 1962 for buyback of shares in the absence of income accruing to the Company. 4. The Ld TPO / AO has erred in law and on facts and circumstances of the case, in considering that the alleged excess payment made by the Appellant to its shareholders on account of Buy-back of its own shares is in the nature of income to the Appellant and further erred in considering notional interest on the alleged excess amount of buyback of shares as income of the Appellant. The said grounds are independent and without prejudice to the other grounds of appeal preferred by the Appellant. The Appellant craves leave to add, alter, vary, omit, substitute or amend the above ground of appeal, at any time before or at, the time of hearing, of the appeal, so as to enable the Honorable Income Tax Appellate Tribunal to decide this appeal according to law. The Appellant does not have a Managing Director and hence these additional grounds of appeal are signed by the Director of the Company in accordance with the provisions of the Act. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty as Nil by applying test which he felt were relevant in determining the ALP of intra-group services. Accordingly, an amount of Rs.3,83,20,329 paid by the assessee to PSE was treated as ALP adjustment. 4.2 The DRP upheld the order of the TPO. The brief finding of the DRP are as follows:- (i) The DRP held that the action of the assessee in aggregating the transaction of royalty with the software development services, for benchmarking was not in accordance with law. The DRP observed that the TNMM applied at enterprise level does not follow that each class of transaction including royalty paid are at arm s length. (ii) The DRP has further observed that the assessee has not submitted any documentary evidence to justify receipt of service. The DRP therefore held that the assessee has not discharged the obligation to support the arm s length nature of transaction and hence, the arm s length price is taken as NIL using Comparable Uncontrolled Price (CUP) as MAM. (iii) The DRP relied on the Tribunal decision in Aztec and held that the onus on benchmarking was on the assessee and since the assessee had not produced any comparable uncontrolled transaction, the TPO had the optio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1807 of 2013) (Bombay High Court) (ii) M/s.Ghyssen Krupp Industries India (P) Ltd v. ACIT (ITA No.6460/Mum/2012) (Mum ITAT) (iii) ACIT v. Dow Agrosciences India (P) Ltd. v. ACIT (2016) 76 taxmann.com 124 (Mumbai-Trib.) (iv) Dow Agrosciences India (P) Ltd. v. ACIT (ITA No.6618/Mum/2018) (Mum ITAT) para 11 (internal page 13 reliance on earlier ITAT order for AY 2011-12) 4.4.2 Lastly, it was contended that the TPO erred in concluding the ALP of the transaction to be NIL in totally arbitrary manner. It was stated that even if the TPO were to reject bench marking of the assessee, the TPO has to necessarily adopt one of the methods prescribed u/s 92C r.w.r 10B of the I.T.Rules, 1962. It was contended that if the TPO were to adopt CUP method as he purportedly to do, the TPO ought to have identified similar uncontrolled transaction to benchmark the royalty payment and cannot conclude the same to be NIL. 4.5 The learned Departmental Representative, on the other hand, by referring to section 92B of the I.T.Act, submitted that the payment of royalty is a separate international transaction between assessee and its AE and the assessee ought to have made TP analysis for paymen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sales to AE stands at Rs. 303 crore. Hence, the TPO stated that brand name of Perot used by the assessee does not deserves a separate payment in the form of Royalty. The TPO also stated that the assessee has not justified how other companies under similar circumstances have paid royalty and no benchmarking analysis has been provided in this regard to justify arms length nature of this transaction. The TPO determined the ALP of royalty paid at NIL for the reason that no independent party would have paid for royalty under similar circumstances. 4.6.2 The DRP held that the assessee should have separately analysed the transaction of payment of royalty. It was held that the combined approach i.e., aggregation of the royalty transaction with other international transactions is possible only when they cannot be evaluated on separate basis. The ALP of royalty paid was taken as NIL using CUP (comparable uncontrolled price) method as the most appropriate method. The decision of the Special Bench in the case of Azte Software Technology Services Ltd v AClT [2007] 107 ITD 141 (Bang) (SB) was relied on by the DRP to conclude that the onus of benchmarking is on the assessee. It was held that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e TNM Method has seen a transition from a disfavoured comparable method, to possibly the most appropriate Transfer Pricing method due to ease and flexibility of applying the compatibility criteria and enhanced availability of comparables. Net profit record/data is assessable and within reach. It is readily and easily available. entity-wise in the form of audited accounts. The TNM Method is a preferred transfer pricing arm's length principle for its proficiency, convenience and reliability. Ideally, in TNM Method preference should be given to internal or in-house comparables. In absence of internal comparables, the taxpayer can and would need to rely upon external comparables. i.e. comparable transactions by independent enterprises. For several reasons, database providers, it is apparent. have the requisite information and data of external comparables to enable comparability analysis of the controlled and uncontrolled transactions with necessary adjustment to obtain reliable results under TNM Method. This method also works to the benefit and advantage of the tax authorities in view of convenience and easier availability of data not only from third party providers, but on their o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion that functions, assets and risk being broadly similar and once suitable adjustments have been made all things get taken into account and stand reconciled when computing the net profit margin.Once the comparables pass the functional analysis test and adjustments have been made, then the profit margin as declared when matches with the comparables would result in affirmation of the transfer price as the arm s length price. Then to make a comparison of a horizontal item without segregation would be impermissible. 4.6.8 The co-ordinate bench in the case of JCIT v Toyota Kirloskar Motor P Ltd in ITA No. 2016/B/2018 1972/B/2018 decision dated 18.8.2021 relied on the above decision and rejected the separate computation of ALP of royalty payment by the revenue and held as under: 11.4 We have heard rival submissions and perused the material on record. The AO/TPO had made TP adjustment for shortfall in margins as well as royalty. The royalty adjustment has been made despite royalty being part of operating cost, although the royalty adjustment is held by the TPO as subsumed within the margin adjustment. We are of the view that once the net profit margin is tested on the touchs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ers, both from AEs and third parties. 5.1 The TPO treated the above debts outstanding for a period of more than six months in respect of transaction with assessee s AEs as a deemed loan and applied CUP method to benchmark the transaction. The TPO had obtained details from CRISIL u/s 133(6) of the I.T.Act and applied interest rate of corporate bond rates as the ALP. The TPO on adhoc basis held that receivables due from AEs were deemed BBB rated loan that had a yield of 20% more than BBB rated corporate bonds for five years. On this basis, the TPO arrived at a rate of 17.22 % as the arm s length interest rate chargeable for the relevant assessment year. The computation of arm s length for the outstanding dues from the AEs (beyond six months) are as follows:- Particulars Annualized average yield for FY 2008-09 for BBB rated bonds as per CRISIL date (refer page 10 of TP order) 14.35 per cent Yield considered by the Ld.TPO to be 20 per cent more than the BBB rated bond 17.22 per cent Outstanding AE receivables exceeding six months Rs.1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5.4 Aggrieved, the assessee has raised this issue before the Tribunal. The gist of the submissions raised by the assessee are as follows:- (i) Section 92B(1) of the I.T.Act can have no application as an unpaid purchase price is not a loan. The unpaid purchase price is a consequence of the international transaction of rendering of software service. In this regard, reliance was placed on the order of the Tribunal in Nimbus Communications (9 taxmann.com 26) and Goldstar (65 SOT 259). (ii) The transaction of outstanding debtors cannot be treated as a separate international transaction and examined independently as it is inextricably linked to transaction of rendition of services. In this regard, the Hon ble Delhi High Court in the case of Kusum Healthcare Pvt. Ltd. (ITA No.765/2016) (page 1456-1460 of the case law compilation) has affirmed the said principle. (iii) Notwithstanding the above, the amendment to section 92B has been made by Finance Act, 2012 with prospective effect and hence cannot apply retrospectively for the subject A.Y. 2009-2010. (iv) Further, even if the amendment were to apply retrospectively, clause (c) can apply only in case where the agreement provide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsaction of sales to AE. The receivables from AE arise due to sales to AE and hence it is closely linked transaction. The TPO has accepted the net profit margin of the software services segment. The net profit margin of the assessee in software segment is 33.18% which is higher than the net profit margin of the 11 comparable companies selected by the TPO at 24.32%. 5.8 The NPM of the assessee was within arm s length range even after working out the comparability adjustment on account of working capital. The working capital adjustment available to the assessee on comparison with all the comparable companies selected by the TPO would be (-)6.94 per cent (refer page 1350 to paper book Vol.1). Accordingly, the ALP margin post working capital works out to be 31.25 per cent which is lower than the margin of the assessee at 33.18 per cent (refer page 4 of TP order). Accordingly, the margin of the assessee includes the compensation for the credit period in connection with the delayed receivables and hence there is no need for a separate adjustment on account of interest should have been charged on debtors outstanding for more than six months. This is exactly in consonance with the direc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r commencement of business; (iii) The purchase order / agreement does not specify the particulars of the Unit; (iv) The enquiry with STPI Authorities had revealed that the softex forms were pertaining to Unit-l and not for Unit-2; (v) The invoices raised by Unit-l and Unit-2 were inseparable: (vi) The AO, therefore, concluded that the Unit-wise profit and loss account, and the Form 56F issued by independent Chartered Accountant was incorrect; (vii) The Ld. AO concluded that the profit of the Unit-2 was not genuine since the assessee had not maintained Unit-wise softex, bank account copies, purchase orders, invoices, etc; (viii) The AO therefore concluded that it was a clear cut case of splitting up or reconstruction of the business already in existence as per section 10A(2)(ii) of the Act; (ix) The AO also concluded that the invoices raised by the Assessee were not pertaining to any ITeS but rather were pertaining to several other services that did not qualify for tax benefit under section 10A of the Act. 6.3 The assessee being aggrieved by the adjustment proposed in the DAO filed its objections before the DRP. The DRP upheld the order of the Ld. AO and conf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... before the AO as annexure-2 to the submission dated 25th March, 2013. Sample copies of statement of work for specific projects have been filed before the AO vide submission dated 7th February, 2013. 6.4.2 As regards the A.O. s observation that Unit-2 of the assessee has been established by splitting and reconstruction of business, it was contended by the learned AR that Unit-1 was operating at optimal capacity and continued to do so, even post setting up of the Unit-2. The details of the seating capacity and actual utilization of both units are detailed in page 766 to 770 of the paper book Vol.II. Further, the learned AR relied on the decision of the Hon ble Karnataka High Court in the case of Fusion Software Engg (P) Ltd. reported in (2012) 18 taxmann.com 57 (Kar.) wherein the Hon ble Court has held that non-maintenance of separate accounts regarding STP Units and other Units cannot be a ground to deny deduction u/s 10A of the Act, when the assessee is otherwise entitled to the deduction. The learned AR further placed reliance on the observations of the Hon ble High Court that the AO can presume that a Unit has been split and reconstructed only when it is formed by transfer of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubmitted that there is no material or reason to believe that the new unit was set up by splitting up or on reconstruction of the existing unit. Before us, the assessee has filed details of seating capacity and other infrastructure facilities pertaining to Unit-1 2 in support of the contentions made before us. A perusal of the same would show that the capacity of Unit-1 remains intact. We notice that the AO has not examined this issue by considering factual aspects presented before us. Since the A.O. has not examined the details now furnished before us by the assessee, we restore those details to the file of the A.O. for examining them. (c) The next major mistake pointed out by the A.O. is that the Softex forms approved by STPI have reference of Unit-1 only and not unit-2. The Ld. A.R. submitted that various Softex forms issued by STPI authorities consisted of many mistakes. Hence the assessee has got majority of Softex forms corrected and the copies of those corrected forms have been given as additional evidence. He submitted that additional evidence furnished by the assessee is almost equivalent to 73%. He submitted that the assessee has claimed deduction u/s 10A in respect o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ized in the profit and loss account. In the case of currency options, changes in the fair value of option contracts resulting in losses were recognized in the profit and loss account. 7.1 For the financial year ended 31st March, 2009 relevant to the AY 2009-10, the Assessee in its profit and loss account had debited an amount of Rs.68,42,74000 as MTM loss on forward and options contracts. The loss was due to the revaluation of contract value based on exchange rate as on March 31, 2009. The said loss was not on account of actual realization / termination of the contract before the end of FY, but was quantified in respect of outstanding forward and option contracts as at March 31, 2009, based on prevailing forex rate as at March 31, 2009. The said amount of loss was distributed and debited against the STPI units of the assessee in the proportion of turnover of the Units (Refer page 309 of paper book Vol I for the basis of allocation). The assessee in the submission dated December 18,2012 filed before the AO had provided the details with respect to the MTM loss (refer page 253 of paper book Vol.I). 7.2 The A.O. proposed disallowance of MTM losses in draft assessment. The observa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssue before the Tribunal. The learned AR submitted that the foreign exchange losses arising on account of reinstatement of foreign currency assets and liabilities including inter-company balances, was in accordance with the requirements of AS-11. It was stated that MTM loss is on account of reinstatement of forward and option contracts with banks entered for the purpose of hedging the forex risk on receivables, and hence, was a business loss and not speculative loss. The learned AR submitted that foreign exchange losses pertaining to unexpired forward and the hedge is backed by an underlying contract between two parties. Further, although the forward contract transactions were recorded along with other foreign currency transactions, the same were identifiable and were segregated by the assessee during the relevant assessment year. It was therefore submitted that the contention of the A.O. that no separate accounts are maintained is misplaced. It was further stated that the A.O. has failed to take note of the forward contract confirmation details from JP Morgan Bank, which were furnished before the A.O. vide submissions dated 07.02.2013 and the A.O. has erroneously held that no cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the export transactions the same is to be treated as income derived from industrial undertaking for the purpose of section 10A. The Honourable jurisdictional High Court in case of CIT Vs. Motorola India Electronics Private Limited 225 taxmann.com 11 (Kar.)) after considering the judgment of Honourable Supreme Court in case of Liberty India v. CIT (supra) has held in para 7 and 8 as under: 7. The submission of the appellant(s) [assessee(s)] in nutshell was that the amount of duty drawback/DEPB was intended to neutralize the incidence of duty on inputs consumed/utilized in the manufacture of exported goods resulting into increased profits derived from the business of the industrial undertaking which profits qualified for deduction under s. 80-IB. According to the appellant(s) since no excise duty/customs duty was payable on raw materials consumed/utilized in manufacturing goods exported out of India, the duty paid stood refunded under s. 37(2)(xvia) of the Central Excise Act, 1944 and under s. 75 of the Customs Act, 1962 read with Customs, Central Excise Duties and Service-tax Drawback Rules, 1995. 8. On the nature of DEPB it was submitted that the amount of DEPB was g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith availability of deduction under s. 80HH with respect to profit on sale of import entitlements. The said decision, according to the appellant, had no applicability to the issue under consideration for the reason that import entitlement/REP licence was granted by the Government on the basis of exports made; the same were granted gratuitously without antecedent cost having being incurred by the industrial undertaking, unlike duty drawback and DEPB, which had direct link to the costs incurred by such industrial undertaking by way of payment of customs/excise duty in respect of duty paid inputs used in the manufacture of goods meant for export and in such circumstances, profit from sale of import entitlements/REP licence was in the nature of windfall and it was in those circumstances, that the apex Court held that source of profit on sale of import entitlements was not the industrial undertaking but the source was the Export Promotion Scheme. According to the appellant(s), in the case of sale of import entitlements/REP licence, the source was the scheme framed by Government of India whereas in the case of DEPB/duty drawback, the source was the fact of payment of duty in respect of i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gly. Disallowance under section 40(a)(ia) of the Act (Ground No.6.1 to 6.6) 8. For the relevant assessment year 2009-2010, the statutory auditors of the Assessee in the tax audit report in Form 3CD had reported that the Assessee had complied with the provisions pertaining to taxes deducted at source. The AO in the draft assessment order proposed to disallow the following amounts under section 40(a)(ia) of the Act for non-deduction of taxes:- S No. Particulars Amount in (Rs.) Comments of AO Rent A 1. Car lease rental 26,64,719 The AO held that car lease rentals attract provisions of TDS 2. Lease rentals for office facilities 83,80,880 The AO disallowed the said amount for nonsubmission of the exemption certificate with respect to payments made to M/s.Roshini Enterprises. Travel and conveyance B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) of the Act are not attracted for provisions that are created at the end of the year on the basis of an estimate, when the payee cannot be identified. 8.2 Pursuant to the direction of the DRP, the A.O. observed that the Assessee had not furnished any evidence in support of the expenditure incurred. The AO further observed that the details of the expenditure distributed and debited to the unit-wise profit and loss account were not submitted by the Assessee and as such, the AO was not able to allocate expenditure against various units. The AO confirmed the addition of Rs.4,41,36,799 proposed in the draft assessment order. 8.3 Being aggrieved, the assessee has preferred appeal before the ITAT. The gist of the AR s submission are as follows:- The assessee submits that as per clause 27(b) of the Tax Audit Report for the relevant assessment year, the assessee had not committed any default with respect to TDS provisions. The assessee further submits that it had contended before the AO that due to significant transactions, it was not possible to provide a reconciliation at a transaction level. The assessee had however provided a broad reconciliation of the various expens ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e while determining the taxable income for the relevant assessment year 2009-2010. 9.1 The AO computed the disallowance under section 14A of the Act as follows in accordance with Rule 8D of the Incometax Rules, 1962. Rule Amount in (Rs.) Amount in (Rs.) Rule 8D(2)(i) The amount of expenditure directly relating to income which does not form part of total income. The assessee has voluntarily disallowed an amount of Rs.3,50,000 u/s 14A of the Act 3,50,000 In a case where the assessee has incurred expenditure by way of interest during the previous year which is not directly attributable to any particular income or receipt, an amount computed in accordance with the following formula, namely A x B/C Rule 8D(2)(ii) Where A = amount of expenditure by way of interest other than the amount of interest included in clause (i) incurred during the previous year NIL B = the averag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in regard to the investments made from which income can arise which is tax exempt; The DRP observed that the Assessee had not maintained separate accounts in regard to the investments, the income from which was exempt and hence, the claim of the Assessee of not incurring any expenditure in relation to the tax-free income was not supported by documentary evidence as mandated in section 14A(2)/(3) of the Act and hence the Assessee had not discharged the onus cast upon it; 9.3 Further, in relation to the alternate ground raised by the Assessee that even if notional expenditure is disallowed under section 14A of the Act, the Ld. AO should consider such disallowance in the computation of profits and gains from Business and Profession ( PGBP ), the DRP held that exempt income is not income derived from business exports but arises from investments made by the Assessee. The DRP therefore dismissed the alternate ground of the Assessee. 9.4 Pursuant to DRP s directions, the TO confirmed the addition of Rs.27,40,203 proposed in the draft assessment order. 9.5 Being aggrieved, the Assessee raised this issue before the Tribunal. The gist of submission of the learned AR are as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AO again restricted the claim of credit for TDS at Rs.1,19,13,873. 10.3 Being aggrieved by the same, the Assessee filed appeal before the Tribunal. The assessee prays to allow the credit for TDS as claimed in the return of income filed for the relevant assessment year 2009-2010 i.e., Rs 1,78,59,370. 10.4 The learned DR was duly heard. 10.5 The A.O. in the final assessment order, despite the directions of the DRP, without any discussion has granted TDS credit of only Rs.1,19,13,873 instead of Rs.1,78,59,370 claimed by the assessee. Therefore, we restore the issue raised in ground No.8 to the files of the A.O. 10.6 Therefore, ground No.8 is allowed for statistical purposes. IT(TP)A No.121/Bang/2014 (Department s appeal) 11. The assessee, during the relevant assessment year, brought back 94,30,794 equity shares of Rs.2 each from Perot Systems TSI (Mauritius) Private Limited at a price of Rs.90 per share. The buyback price was backed up with two valuation reports of independent valuers - one by the statutory auditors i.e., PwC and another by an Independent Chartered Accountant Mr Chajjed Kedia. In view of these independent valuation reports, the assessee claimed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... res. The TPO held that the assessee has paid for buyback from its internal accruals/reserves. Had it not been for this excess payment, the money would have remained with the taxpayer and it would have earned at least 17.22% interest. The TPO therefore made a TP adjustment of Rs. 3,98,07,877 for not charging interest in respect of excess amount paid to AE for buy back of shares. 11.3 The DRP held that the valuation carried out by the TPO in his order is erroneous and in view of the range of valuations provided in the two independent valuation reports submitted by the assessee, the adjustment carried out by the TPO is required to be deleted. In coming to the above conclusion, the DRP held as under:- (i) The net asset value per share calculated as per PwC report was Rs.512.3 and that of Chajjed Kedia report was Rs.53; (ii) The value observed by the TPO (Rs.110.31) was actually the final valuation as per the RBI valuation approach using linkage on book value of the assessee s share with the book value multiple of BSE Index; (iii) The TPO therefore confused himself with the net asset value per share as per the PwC report with the final valuation as per Chajjed Kedia Report. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of valuation in both the valuation reports in the manner beneficial to revenue. The TPO has not explained the basis or rationale for adopting figures from different valuation reports. The assessee followed the valuation prescribed by RBI in AP (DIR Series) Circular No.16 dated 4.10.2004 for the purpose of determining the value of share buy back. The same is not disputed by the TPO. Further, the TPO has disturbed the independent valuation reports without bringing on record another independent valuation report to justify the addition. The TPOs valuation is also not as per the prescribed methods of determining the ALP. In view of the same. we affirm the findings of the DRP which deleted the TP addition of Rs.55,48,13,611 on buy back of shares. Consequently. deletion of the secondary TP adjustment of Rs. 3,98,07,877 by the DRP is also confirmed. 11.7.1 The assessee has raised the additional 'grounds in non applicability of transfer pricing provisions for the buy back of shares and the consequent secondary adjustment of the notional interest. The assessee relied on the Bombay High Court decision in the case of Vodafone India Services P Ltd v Union of India [2014] 368 ITR 1 and ot ..... X X X X Extracts X X X X X X X X Extracts X X X X
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