TMI Blog2022 (1) TMI 1374X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 10A, as amended, is a provision for deduction, the stage of deduction would be while computing the gross total income of the eligible undertaking under Chapter IV and not at the stage of computation of the total income under Chapter VI. Being so, the issue is remitted to the AO to pass consequential order in compliance of the decision above. Disallowance of provision for litigation under normal provisions of the Act as well as upward adjustment to net profit while computing book profit u/s. 115JB - DR submitted that there is no basis for this provision towards legal fees or out of pocket expenses and the lump sum provision is made without specific production of details of litigation pending at various courts - HELD THAT:- As before us, the ld. AR could not establish that this provision has been made on a scientific basis relating to particular cases pending before various courts and due to particular counsel. As such, we decline to entertain this ground and the same is rejected. MAT computation - AR submitted that as per Explanation 2(i) to section 115JB of the Act, any reversal out of provision created in earlier year, if the book profit of such year has been incre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y providing appropriate adjustment for corporate guarantee received by the assessee from its arm's length. Reimbursement transactions - TPO proposed to apply CUP method and treat the payment towards the Re-imbursement as NIL and made adjustment in the intragroup payment made by the assessee - HELD THAT:- Before the lower authorities, the assessee has not placed the necessary evidence, as such this issue was decided against the assessee. Before us, it was pleaded that the assessee is in a position to place the evidence to support its claim. Accordingly, the issue is remitted to the AO/TPO to consider the same and decide the issue afresh. - IT(TP)A No. 492/Bang/2015 & 556/Bang/2016, IT(TP)A No. 459/Bang/2015 & 402/Bang/2016 - - - Dated:- 19-1-2022 - Shri N.V. Vasudevan, Vice President And Shri Chandra Poojari, Accountant Member For the Appellant : Shri Vikram Raghavan, Advocate. For the Respondent : Shri Arunkumar, CIT(DR)(TP)(ITAT), Bengaluru. ORDER PER CHANDRA POOJARI, ACCOUNTANT MEMBER These are cross appeals by the assessee and the revenue directed against the final assessment order passed by the Assessing Officer u/s. 143(3) r.w.s. 144C(13 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ple of parity between numerator and denominator in the formula prescribed under Section 10A(4) of the Act. 5. Reduction of expenditure incurred in foreign currency from Export turnover and Total turnover though the Appellant is not engaged in rendering technical services The learned AO has erred in law and on facts, by reducing an aggregate expenditure of INR 3,55,75,055 (travel and conveyance of INR 1,59,02,746, project work expenses of INR 29,08,163, foreign per diem allowance of INR 26,58,619 and contract charges of INR 1,41,05,527) from Export turnover and Total turnover of Bangalore BPO unit (10A unit), without appreciating the fact that the Appellant is not engaged in rendering technical services outside India. 6. Exclusion of loss of INR 15,31,42,273 pertaining to Bangalore IT unit (10A unit) and profit of INR 1,42,23,652, post Section 10A deduction, pertaining to Bangalore BPO unit (10A unit) at source level 6.1 The learned AO has erred in law and on facts, by not considering the loss of INR 15,31,42,273 of Bangalore IT Unit (10A unit) and profit of INR 1,42,23,652 of Bangalore BPO Unit (10A unit) while computing the gross total income of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds use of equipment as envisaged under Explanation 2 to Section 9(1)(vi) of the Act and thus, has erred in holding that the same is subject to withholding tax. 8.2 The learned AO has erred in law and on facts, by holding that the above payments are in the nature of royalty for use or right to use the equipment , on the erroneous presumption that the Appellant acquires significant economic and possessory interest in the bandwidth hired. 8.3 The learned AO has erred in law and on facts, by stating that the Appellant has acquired significant economic and possessory interest in the bandwidth provided by the service provider without any basis and/or ground and therefore, the disallowance made by the learned AO is bad in law and on facts. 8.4 The learned AO has failed to appreciate the fact that mere provision of lease line/bandwidth facility by the service provider to the Appellant will not amount to the Appellant acquiring significant economic and possessory interest over the equipment used by the service provider for provision of such facility. 8.5 The learned AO has erred in law and on facts, by not considering the Appellant s submission that the payments m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... galore BPO unit (10A unit), owing to adjustments made in the assessment order, for computing deduction under Section 10A of the Act 10.1 Without prejudice to the grounds mentioned in Para Nos. 7 to 9 above, the learned AO has erred in law and on facts, by not considering the increased profit of Bangalore BPO unit (10A unit), on account of disallowances made under the above grounds, while computing deduction under Section 10A of the Act for Bangalore BPO unit (10A unit). 10.2 The learned AO has erred in law and on facts, by holding that the apportionment of adjustments between 10A eligible units and other units is neither available on records nor submitted by the Company while such information was submitted during the proceedings under Section 144C of the Act. 10. Non-consideration of voluntary disallowance of performance incentive amounting to INR 35,91,493 while computing taxable income of the Appellant The learned AO has erred in law and on facts, by not considering the directions issued by the Honourable DRP for consideration of voluntary disallowance of performance incentive amounting to INR 35,91,493 (pertaining to 10A eligible units) while comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it may be admitted in the interest of justice. The additional grounds are as follows:- Ground No 16: Without prejudice to other grounds, the learned AO and the learned TPO have erred, in law and in facts, by considering corporate guarantee transaction as an international transaction subject to transfer pricing. Ground No. 17: Without prejudice to our contention that the provision for onerous lease is an ascertained liability, the provision reversed during the year amounting to INR 2,50,68,510, out of provision of INR 6,41,61,438 created during Assessment Year 2009-10 and added to book profit for that year, should be excluded in book profit computation for Assessment Year 2010-11 in terms of clause (i) of Explanation I to Section 115JB(2) of the Act. Corporate tax matters 18. Without prejudice to other grounds, the learned AO has failed to appreciate that during impugned Financial Year 200910, the Appellant was not liable to withhold tax on the payments made as there was no provision under the Act, or the relevant DTAA, mandating the deduction of tax at source on bandwidth charges while there were many favorable judicial precedents for the Appellant includ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... similar to section 80A(2), the entire deduction to be restricted to total income in all the loss/profit of 10A units to be excluded at source level. For this purpose, he relied on the order of the Supreme Court in the case of Yokogawa India Ltd., 391 ITR 274 (SC) wherein it was held that though section 10A, as amended, is a provision for deduction, the stage of deduction would be while computing the gross total income of the eligible undertaking under Chapter IV and not at the stage of computation of the total income under Chapter VI. Being so, the issue is remitted to the AO to pass consequential order in compliance of the decision of Yokogawa India Ltd., 391 ITR 274 (SC). 9. Ground No.7 is regarding disallowance of provision for litigation of Rs.32,00,000 under normal provisions of the Act as well as upward adjustment to net profit while computing book profit u/s. 115JB of the Act. The ld. AR submitted that the provision is created at Rs.32 lakhs as provision for litigation on the legal representative fees and out of pocket expenses to be incurred by the legal counsel for representing the company on various matters. According to him, it is a business liability that has arisen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essed and dismissed as such. 16. Grounds No.11 to 14 are not pressed before us and hence dismissed. 17. Ground No.15 regarding interest u/s. 234C of the Act is consequential in nature and does not require adjudication. 18. Regarding the additional ground No.17, the ld. AR submitted that as per Explanation 2(i) to section 115JB of the Act, any reversal out of provision created in earlier year, if the book profit of such year has been increased by those provisions, be reduced from net profit while computing book profit in the year of reversal, if such amount is credited to Profit Loss account. 19. The ld. DR relied on the orders of the lower authorities. 20. We have heard both the parties and perused the material on record. In our opinion, if the book profit is increased by provision created in that year and on reversal of that provision in the present assessment year, net profit of this assessment year to be reduced so as to compute the correct book profit. With these observations, we remit the issue to the AO for fresh consideration. 21. The assessee s appeal is partly allowed for statistical purposes. Revenue s appeal [IT(TP)A No.459/Bang/2015] 22. The groun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... these and such other grounds that may be urged at the time of hearing, it is humbly prayed that the order of the DRP be reversed and that of the Assessing Officer be restored. 9) The appellate craves leave to add, to alter, to amend or delete any of the grounds that may be urged at the time of hearing of the appeal. 23. After hearing both the parties we are of the opinion that this issue has been decided in favour of the assessee by the judgment of the Karnataka High Court in the case of Tata Elxsi Ltd., 349 ITR 98 (Karn) holding that for the purpose of computing deduction u/s. 10A if the export turnover in the numerator is to be arrived at after excluding the communication expenses, the same should also be excluded in computing the export turnover as a component of total turnover in the denominator. This has been confirmed by the Hon ble Supreme Court in the case of HCL Technologies Ltd. 404 ITR 719 (SC). Being so, we dismiss the grounds raised by the revenue. AY 2011-12 [IT(TP)A No.556/Bang/2016] 24. The assessee has raised the following grounds:- General 1. The order of the learned AO and directions of the Hon'ble DRP are based on incorre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... economic analysis undertaken by the Assessee in accordance with the provisions of the Act read with the Rules, conducting a fresh economic analysis for the determination of the ALP in connection with the impugned international transaction, and holding that the Assessee s international transaction is not at arm s length. 6. The learned AO and the learned TPO have erred, in law and in facts, by determining the arm s length margin/ price using only FY 2010-11 data, which was not available to the Assessee at the time of complying with the transfer pricing documentation requirements. 7. The learned TPO and the learned AO have erred, in law and in facts, by accepting certain companies based on unreasonable comparability criteria: ► Acropetal Technologies Limited ► e-Zest Solutions Limited ► E-Infochips Limited ► ICRA Techno Analytics Limited ► Infosys Technologies Limited ► Tata Elxsi Limited 8. The learned AO and the learned TPO have erred, in law and in facts, by rejecting certain comparable companies based on unreasonable comparability criteria: i. the learned AO and the learned TPO erred i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in facts, by considering corporate guarantee transaction as an international transaction subject to transfer pricing. 12. Without prejudice to ground 12 above, the learned AO and the learned TPO have erred, in law and in facts, by applying an arbitrary rate of 3% as guarantee fee. 13. The learned AO and the learned TPO have erred, in law and in facts by not providing an opportunity of being heard to the Appellant before making the adjustment with respect to reimbursement of expenses which is violative of principles of natural justice, resulting in unjustified demand. 14. The learned AO and the learned TPO have erred, in law and in facts, by making an adjustment with respect to the reimbursement of expenses as the revenue authorities have no jurisdiction to question the commercial rationale and or the wisdom of the assessee to incur expenditure towards its business. 15. The learned AO and the learned TPO have erred, in law and in facts, by not taking cognizance of the fact that the reimbursement of costs pertain to provision of Services and are routed through the profit and loss account. Accordingly, these expenses form part of the cost base for mark-up and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts. Placing reliance on the Hon ble Supreme Court judgment in the case of M/s National Thermal Power Co. Ltd. Vs. CIT, 229 ITR 383 (SC), the additional grounds are admitted for adjudication. 28. By ground No.7, the assessee seeks to include certain companies as comparables. The ld. AR submitted that E-Infochips Ltd. is functionally different as the revenue from software development services (Rs.192,106,661) is less than 75% of its operating revenue (Rs.260,384,251) and the company earns revenue both from software development and sale of products where the revenue bifurcation is not available. 28.1 Acropetal Technologies Ltd. is also functionally different as it fails 75% revenue filter as income from IT services is Rs.81.40 crores out of total income of Rs.141 crores. It provides various services such as Engineering Design Services, Healthcare and IT Infrastructure Management Services like network security solution, cloud services and enterprise software solution and engaged in diversified revenue model. The company is also engaged in R D as part of its business operations which is included in operating expenditure. The break up of revenue for various services under ITS is no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ear of the comparable, observed as follows: R. Systems International Limited 11.1 The assessee included this case in a list of comparables. The TPO applied a filter of excluding companies whose data for the financial year 2008-09 was not available. As the data considered by R. Systems International Ltd. was for the year ending other than March, the TPO held that this case was not comparable. The assessee is contesting the exclusion of this case. 11.2 The ld. AR fairly conceded that R. Systems was following calendar year for maintaining its annual accounts and, as such, the assessee adopted data for 31.12.08 for including it in the list of comparables. It was, however, stressed that this case ought not to have been excluded on this count alone, when it was otherwise comparable. The ld. DR opposed this contention by placing reliance on certain decisions in which it has been held that if the data for the financial year of the comparable case similar to that of the tested party is not available, then, such case should be expunged from the list of comparables. 11.3 In order to appreciate the rival submissions on this issue, it would be apt to note the relevant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the international transaction has been entered into is directly available from the annual accounts of that comparable, then it cannot be held as not passing the test given under sub-rule (4) of rule 10B. In the case under consideration before the Mumbai Bench, there is no mention of the audited quarterly data of such comparable being available for consideration. It is quite natural that if the data of the financial year is not available or not capable of being directly deduced from the annual accounts of such company, then such case deserves to be excluded. If, however, the audited accounts of such comparable directly give the figures in such a manner that the data of the financial year in which the assessee has entered into an international transaction can be easily deduced, then there is no reason for excluding such an otherwise comparable case. 11.7 We find that R. Systems International Ltd. has been excluded by the TPO solely for the reason that its financial year is different without considering that the data for the financial year adopted by the assessee can be easily compiled from the audited statements of such company. We, therefore, set aside the impugned order on t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... record in respect of Fortune Infotech Ltd. meets the aforementioned requirements and, therefore, the comparable could not be rejected. Accordingly, we remit this issue to the AO/TPO to consider this company as a comparable after extrapolating the data relating to assessment year under consideration. 37. The next issue is regarding lower authorities considering corporate guarantee transaction as an international transaction and applying arbitrary rate of 3% as guarantee fee. 38. The DRP after considering its order for the AY 2010-11 rejected the contention of the assessee. 39. After hearing both the parties, we find that this issue came up for consideration in assessee s own case for the AYs 2008-09 2009-10 before the Tribunal and vide order dated 31.10.2016 it was held as under:- 15. We have considered the rival submissions as well as the relevant material on record. At the outset we note that the assessee has raised the objection before the DRP as recorded in paras 6.1 and 6.2 as under : '6.1 Grounds 1, 2 and 3 are considered together for convenience. Briefly stated the assessee provides software development and information technology enabled servi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... prior to the decisions of Mumbai Bench in the case of Siro Clinpharm (P.) Ltd. (supra) there are series of decisions of this Tribunal including the decision in cases of Four Soft (P.) Ltd. (supra) and Nimbus Communications Ltd. v. Asstt. CIT [2010] 38 SOT 246 (Mum.) wherein the Tribunal has taken a consistent view that providing corporate guarantee to AE is an international transaction however, the ALP of such transaction was to be computed having regard to the financial consideration as the nature of transaction between the related parties. The Tribunal has taken a view that the guarantee fees for providing corporate guarantee should not be more than 0.5%. The Hyderabad Benches of this Tribunal in the case of Four Soft (P.) Ltd. (supra) has considered an identical issue in paras 24 to 26 as under : 24. It is noted by the TPO, during the F.Y. 2005-06 the assessee has provided bank guarantees on behalf of its Overseas subsidiary, Foursoft BV, Netherlands for an amount of Rs.69,81,16,000/- which is continuing for the year under consideration also. The TPO following the order passed for A.Y. 2006-07 treated the commission changed by ICICI Bank at 3.75% arms length price for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y type of advance, payments or deferred payment or receivable or any other debt arising during the course of business. 25.3 A reading of the aforesaid clause from the Explanation would make it clear that the corporate guarantee provided by the assessee comes within the scope and ambit of 'international transaction' as per the aforesaid clause. Therefore, the contention of the learned AR that the issue is covered in favour of the assessee by virtue of the order passed in assessee's own case for AY 2006-07 no longer holds good since the order passed by the coordinate bench is prior to the amendment made to provision of section 92B of the Act. It will be pertinent to mention here that this issue was also considered by the ITAT Mumbai Bench in case of Mahindra Mahindra v. DCIT in ITA No. 8597/Mum/2010, 54 SOT (UR) 146. The coordinate bench of this Tribunal while considering similar argument advanced on behalf of the assessee by placing reliance on the decision of the Four Soft Ltd. (supra), held as under: 15.2 After hearing the rival submissions we feel that Assessing Officer will have to follow the decision of the ITAT Hyderabad or the amended provision of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssets in favour of the bank/financial institution and to that extent the transaction of providing corporate guarantee is having bearing on the assets of the assessee and in turn the assessee cannot use those assets under charge for the purpose of availing further financial credit/loans from the bank/financial institution. Thus this Tribunal held that by providing corporate guarantee falls in the definition of international transactions as per Section 92B(1) without considering the Explanation to the said Section. As we have discussed in the foregoing part of this order that the Tribunal has been taken a consistent view that corporate guarantee provided to the AE falls in the ambit of international transactions as per Section 92B(1) even without considering the Explanation inserted vide Finance Act, 2012. The Mumbai Bench of this Tribunal in the case of Siro Clinpharm (P.) Ltd. (supra) has restricted its finding only to the applicability of Explanation in the cases where the assessment was completed prior to the insertion of the said Explanation retrospectively. Even otherwise the earlier decisions of the Tribunal on this issue were not considered by the Delhi Bench of the Tribunal. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y such business strategy adopted by the assessee in not charging commission in respect of guarantees issued for its Associated Enterprises. As a matter of fact, there is nothing to suggest that any such business strategy was adopted by the assessee with specific intention or motive and the case has been sought to be made out merely on the basis of commercial expediency by claiming that the assessee was benefited as a result of giving the guarantees in the form of commercial benefits secured for future. In our opinion, such commercial expediency cannot be equated with business strategy, which is specific and well laid out. As rightly held by the ld. CIT(A), a financial loan guarantee is a commitment entered into by the assessee company with a third party lender of its Associated Enterprises which obliges the assessee company to cover the risk of default by its Associated Enterprise and this act thus involves performance or carrying out of service to cover the risk of default for which price has to be charged. Even the OECD Transfer Pricing Guidelines 2010 supports this view in para 7.13 where it is explained that where higher credit rating of Associated Enterprise is due to a guar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtly allowed whereas ground No. 2 of assessee's appeal is dismissed . 5. As the issue involved in the year under consideration as well as all the material facts relevant thereto are similar to A.Y. 2005-06, we respectfully follow the order of the coordinate Bench of this Tribunal for A.Y. 2005-06 and direct the A.O. to restrict the TP adjustment by recomputing the commission for guarantee given by the assessee to its AEs at 0.5% being the arm's length price. Ground No. 2 of the assessee's appeal for A.Y. 2006-07 is partly allowed.' As it is clear that the Tribunal has followed the decision of the Tribunal for the earlier assessment year and while taking a consistent view held that guarantee provided by the assessee gives the benefit to the AE and such benefit was passed on by the assessee to the said AE and therefore should have been charged at ALP. 16. We further note that the DRP for the Assessment Year 201112 vide its direction dt. 30.11.2015 as well as for the Assessment Year 2010-11 accepted the assessee's argument that an appropriate adjustment that the value of corporate guarantee received from its arm's length be granted. In para 2. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsactions, the Income Tax Act, 1961, Income Tax Rules, 1962, the OECD guidelines and the Circulars of the Board permit the TPO to reject the method used by the assessee and to use in its place the most appropriate method, if the assessee has not successfully discharged it. The TP study does not become infallible simply on the basis that it has been prepared by the independent auditors who constitute the third party for this purpose. Likewise, no existing Court decision on this issue has declared that the ALP determined by the assessee cannot be disturbed by anyone even if it is found to be not determined correctly in terms of circumstances given in the TP Documentation. 42. Further, after elaborate discussion on the issue, the TPO has concluded that to sum up, the payment of the Payment of Re-imbursement of expenses in the case of the taxpayer is not at all justified. There is no proof of any service having actually been rendered by the AE. The existing facts and circumstances amply show that the services even if any render by the AE were mere duplication of the functions being carried out by the taxpayer on his own and independently. The taxpayer did not get any economic value ..... X X X X Extracts X X X X X X X X Extracts X X X X
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