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TMI Blog2024 (3) TMI 713X X X X Extracts X X X X X X X X Extracts X X X X ..... receivable/ accounts payable arising out of the international transaction of provision of IT enabled services by the Appellant to its Associated Enterprises ("AEs"), are closely linked to the international transaction and since the Hon'ble DRP/Learned AO/Learned TPO has determined the primary international transaction at an arm's length price after considering working capital adjusted margins of comparable companies, no separate adjustment can be made for such inter-company receivables and the same has been favourably upheld by the Hon'ble ITAT in Appellant's case for AY 2015-16 (ITA No. 4453/Del/2019). 2.2 That on the facts of the case and in law, the Hon'ble DRP/Learned AO/Learned TPO has erred in not appreciating the fact that since the weighted average period of realization of inter-company invoices of 43.59 days is less than the credit period of 60 days as stipulated in the intercompany agreement, no TP adjustment is warranted. 2.3 That on the facts of the case and in law, the Hon'ble DRP/Learned AO/Learned TPO has erred in re-characterizing the inter-company receivables as a separate international transaction of unsecured loan and imputing inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cumstances of the case and in law, the Hon'ble DRP/Learned AO has erred in making an addition of INR 7,51,20,905 on account of reallocation of direct as well as common cost between SEZ unit and non-SEZ units, by alleging that claim of deduction under section 10AA of the Act made by the Appellant is excessive, despite that fact that deduction claimed by the Appellant in earlier years was accepted by the Respondent. 4.2 On the facts and circumstances of the case and in law, the Hon'ble DRP/Learned AO has erred in allocating the direct expenses of the SEZ and non-SEZ units ('taxable units') and not appreciating the fact that separate books of account have been prepared for SEZ unit, which were duly certified by the auditor. 4.3 On the facts and circumstances of the case and in law, the Learned AO has erred in not accepting the turnover method for distribution of common expenses between SEZ and taxable units. 4.4 On the facts and circumstances of the case and in law, the Hon'ble DRP/Learned AO had grossly erred in relying on the decision of Hon'ble Supreme Court in the case of CIT vs Bilahari Investment Pvt. Ltd. and reproduced only a part of the extrac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the liability for payment of INR 37,82,75,381 had crystallized in the subject year. 6.3 Without prejudice to the above, on the facts and circumstances of the case and in law, the Learned AO has erred in not considering the fact the aforesaid payments would in any case be allowable under section 43B of the Act on payment basis. The Appellant has filed a rectification application before the Learned Respondent for rectification of the mistake of not following the direction of the Hon'ble DRP and the aforesaid ground shall not be pressed where the application is allowed by the Learned Respondent. 7 Ground No. 7 - Levy of interest under section 234A of the Act 7.1 On the facts and circumstances of the case and in law, the Learned AO has erred in charging interest under section 234A of the Act amounting to INR 26,24,780. The Appellant has filed a rectification application before the Learned Respondent for rectification of the above mistake and the aforesaid ground shall not be pressed where the application is allowed by the Learned AO. 8. Ground No. 8- Levy of interest under section 234B of the Act 8.1 On the facts and circumstances of the case and in law, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s laid down by the Hon'ble High Court decision in the case of PCIT vs. Kusum Healthcare Pvt. Ltd. 398 ITR 66 (Delhi 2017) and accordingly the case is covered in favour of the department. (i). At the outset, it is humbly submitted that why the decision of Hon'ble Delhi High Court in the case of Kusum Healthcare Pvt. Ltd. is not applicable to the facts of the case has been discussed in detail by the Hon'ble DRP in its order. However, without prejudice to the above, it is stated that even if the Hon'ble Bench follows the decision in the case of Kusum Healthcare Pvt. Ltd., even then the AO in the instant case has clearly made out a case for charging of interest on receivables by following the conditions laid down by the Hon'ble Delhi High Court in the case of Kusum Healthcare Pvt. Ltd. The operative part of the decision in the case of Hon'ble Delhi High Court is very relevant and reproduced below:- "10. The court is unable to agree with the above submissions. The inclusion in the Explanation to section 92B of the Act of the expression "receivables" does not mean that dehors the context every item of "receivables" appearing in the accounts of an enti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e AO was just on one assessment year and AO could not reflect a pattern to justify that the receivable constitute international transactions by itself. (4) In that case, the Hon'ble High Court held that the assessee has already factored the impact of receivables on the working capital and adjustments on the basis of outstanding receivables would have distorted the picture. Also, the Hon'ble High Court has held that the impact on the working capital of the assessee has to be studied. (iii) If we analyze the transactions of the instant case then we will find that the AO has clearly been able to made out a case in line with the Hon'ble Delhi High Court decision in the case of Kusum Healthcare Pvt. Ltd. The facts are mentioned below:- (1) The AO/TPO/DRP has examined the transactions year wise and the delay in receipt of payment for supply of services, has been worked out separately, after duly allowing the 30/60 days credit period to the assessee company. (2) In the instant case, even though the AO/TPO mentioned delay in receipt of payments only for one year but the facts of the case, (as mentioned below) clearly reflects a pattern spread over at least 3 years in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e on the working capital, as claimed by the assessee. Thus, it is humbly submitted that if the invoices are raised within the year and the proceeds are also realized within the year only but beyond the stipulated period of credit, then the period of the delay will not come within the ambit of working capital adjustment because working capital adjustment are made with reference to the opening and closing basis as on 1st April and on 31st March of the respective year. For example the transactions, let us say, which occur and gets complete between, 2nd April and 30th March, during the financial year, even though these are delayed will not be factored in the working capital adjustment. (v) It is also humbly submitted that the argument that all the delays in receipt of receivables are factored in working capital adjustment cannot be true because normally it may be impossible for the company to anticipate the delays invoice wise. Like in the instant case, (as no invoice wise information is provided to TPO) the delays are usually confined within a financial year and it is simply incomprehensible to understand that how such varying delays was factored in working capital by the assessee c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... invoices as per the terms of the agreement, the international transaction of charging interest on late recovery of trade receivable covers the period which starts with the termination of the period of credit allowed under the agreement, which is subject matter of the international transaction of purchase/sale of goods." 20. The Tribunal also explained that if an invoice is raised during the year and the proceeds are realized within the year, but, beyond the stipulated period of agreement, then, the same will not come within the working capital adjustment because working capital adjustment is made with reference to the opening and closing balances as on 1st April and 31st March. Therefore, respectfully following the decision of the Tribunal noted above, we reject the assessee's contention that the interest on delayed payment of receivables get subsumed in the working capital adjustment allowed to the assessee. The Id. counsel has also advanced an argument that since it was debt free fund company, which finding is not disputed, therefore, no interest could be attributable on the late realization of receivables. In our opinion, this plea is to be rejected at the threshold becau ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee is a debt free company except ECB loan, it cannot allow its funds to be utilized by its AE for an indefinite period of time beyond the agreed credit period. We find that clause C of Explanation to section 92B of the Act has been introduced in the statute by the Finance Act 2012. For the sake of convenience, clause C of relevant explanation is reproduced hereunder:- "(c) capital financing, including any type of long-term or short-term borrowing, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business;" The aforesaid clause C states "capital financing" to include "debt arising during the course of business". Manifestly, in the instant case, the deferred receivables fall squarely within the ambit of debt arising during the course of business which is included in the category of expression "capital financing" under clause C of Explanation of section 92B of the Act. Hence, we hold that the outstanding receivables from AE constitute a separate international transaction and on which interest is to be imputed thereon and consequently ALP adjustment t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n, the decision of Hon'ble Delhi High Court does not speak about the invoices that were realized from the AE beyond the agreed credit period during the year. Hence, it could be safely concluded that the decision of the Hon'ble Delhi High Court in Kusum Healthcare (P.) Ltd. (supra) does not give any finding with regard to invoices realized during the year from AE. To that extent alone, we are giving our independent finding by treating that as a separate international transaction and directing the Id. TPO to charge interest by applying LIBOR + 200 basis points in the aforesaid manner. (b) Swiss Re Global Business Solutions India (P.) Ltd. v. Addl./Jt./Dy./ Assistant Commissioner of Income-tax/Income-tax Officer, (NFAC) Delhi [2022] 137 taxmann.com 417 (Bangalore - Trib.) (c) Maxim Integrated Products India Sales Pvt. Ltd. v. DCIT (2022) 140 taxmann.com 578 (Bangalore-Trib.) In both the above cases, the assessee have taken the ground that the interest on receivables is subsumed in the working capital adjustment and there is no requirement for separate adjustment. Further the assessee has also taken the ground that TPO/DRP allowed the working capital adjustment on other t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the outstanding of Rs.62,38,68,941/- in respect of 519 invoices as mentioned hereinabove and there is no explanation given by the assessee for such a delay in receiving the amount. The very purpose of benchmarking the transaction is to ascertain whether assessee, who is similarly situated, would render the same kind of services at the same or similar price to a third party or not. If we examine the issue in the above-said context, it would be clear that the assessee would charge bank interest or any other interest with a find any error in the same. view to compensate itself on account of delay in making the payment. Hence, we do not find any error in the same. 13. The reliance of the assessee in the case of Betchel India (P.) Ltd. (supra) is also not correct as A.Y. in that case was 2010-11. By the Finance Act, 2012, the Explanation was inserted in Sec.92B of the Act and by virtue of which "payment or deferred payment or receivable or any other debt arising during the course of business" has been considered to be an international transaction which is required to be benchmarked. Following the above said Explanation, the co-ordinate Bench for the subsequent assessment yea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e a separate international transaction which is required to be bench marked separately. 3. The working capital adjustment does not subsume the invoices which are raised during the year and accordingly interest is to be separately computed for outstanding receivables. 4. Whether the assessee is a debt free company or not is immaterial as TPO is required to examine whether the Indian entity/assessee had supplied the products/ services to its AEs at ALP or not. Further being debt free does not mean that it can allow its funds to be utilized by AE for indefinite period of time. 5. As explained in above noted paras, the decision of the Hon'ble Delhi High Court in the case of Kusum Healthcare has been distinguished by several Tribunals including Delhi Tribunal. B. Inter company services agreement clearly provides for charging of interest on delay receivable after 60 days. Further, a most important and distinguishing thing in the case of assessee, is the inter company Service Agreement, which the assessee company has entered into with its holding company/AE (placed at page 976 to 984 of PB) Clause 2.3 i.e. Invoicing and Settlement of Costs of the agreement deals with the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o cannot claim that the earlier orders of the tribunal are binding for the current year also because the facts specially the inter company services agreement was not in place earlier, so the earlier tribunal orders are not binding precedent in the instant case. C. Why the earlier orders of the Hon'ble Tribunal in the case of assessee are not applicable to the facts of the instant case (i) In its defense, the assessee has relied on the order of Hon'ble ITAT in its own case for A.Y 14-15. From the perusal of the order of ITAT, it is seen that the Hon'ble ITAT has mainly decided the issue because of working capital adjustment has been allowed by the AO and the DRP has not disputed the same. It is a fact that working capital adjustment has been allowed to the assessee by TPO, in the instant case also, but, however equally true is the fact that DRP in its directions has rejected the assessee contentions that working capital adjustment subsumes the interest on delayed receivables, by relying on the judgment of Bechtel India limited following its decisions in Ameriprise India (P) Ltd and Mckinsey knowledge Centre (P) Ltd. (Para 3.7.2.3 page 20 to 21 or P order / pg 29 to 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h benefit of so called weighted average period is given in the agreement. Also the analysis has been made invoice wise and in line with the Hon'ble High Courts decision in the case of Kusum Healthcare, interest has been computed. Assessee has also taken one of the grounds that as no interest was charged from third party customers, accordingly no adjustment is to be made for related parties. In this connection, it is submitted that TP provisions clearly provides for determining ALP in the case of related parties and as these are anti tax avoidance provisions which hits at tax base of the country and accordingly are required to be strictly applied as held by several courts including the Pune Tribunal in the case of M/s. AGS Customer Services India P. Ltd., ITA No.162/PUN/2022 & C.O. No.22/PUN/2022. Being pertinent the relevant extract of the Hon'ble Tribunals order is given below:- 5. We have given our thoughtful consideration to the forgoing rival pleadings and find forced in the Revenue's stand since an advance pricing agreement "APA" is applicable only for the specified time span not exceeding five consecutive previous years u/s. 92CC(4) r.w. sub section (9A) of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at all to benefit the assessee even after the presence of the inter company service agreement. Accordingly the addition on account of interest on receivables may kindly be upheld and the assessee's appeal may kindly be dismissed on account of the issue of interest on outstanding/delayed receivables. Issue no. 2 (revised ground of appeal no. 5) Addition on account of increase in capital amounting to Rs. 37,82,75,381/-- (a) The Assessee company has credited a sum of Rs. 37,82,75,381/- in its capital reserve account and when asked for explanation, the assessee company has stated that it has received this amount as lump-sum payment from its parent company M/s Synnex Group for discharging the obligation with regard to giving compensation to employees, which is part of salary to the employees of the company. The relevant extract of explanation given by the assessee company before the AO (page 23 of assessment order) is reproduced below:-- The assessee, Concentrix Daksh Service India Pvt. Ltd., is engaged in providing Customer Relationship Management service ("CRM") in India and worldwide. The shares of the Assessee were earlier held by IBM Corporation, USA (' IBM") up to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) From the above explanation, the following reasons emerge out for the stand taken by the assessee to show the lump-sum amount as capital receipt. (1) The assessee company has treated the lump-sum amount as capital receipt because it did not have any commercial nexus with the business carried out by the assessee. (2) The assessee company considered it as a wind fall payment which emanated out of the obligations of the parent company for acquiring the CRM business from IBM and assessee was part of the CRM business. (3) The assessee has also stated that the manner/character of the receipt shown in the books of account is also a deciding factor in treating the receipt as capital or revenue. (c) All the contentions of the assessee company have been duly rebutted by the AO in his order from page no. 25 to 27. Further the Hon'ble DRP also agreed with the AOs reasoning and rejected the assessee's contention by a speaking order mentioned at para 3.10 at page 34-35 of its order. The assessee contentions, on this issue, are not acceptable because of the following reasons:- (1) The assessee company has made the payment of Rs. 37,82,75,381/- (i.e. the same amount for which it had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... employee as revenue expenditure but on the other hand it is treating the same amount (which has been paid to the employee) received as reimbursement without any profit element, as capital in nature. The stand of the assessee is clearly inconsistent and shows lack of uniformity in the treatment of same amount in the books of accounts. (d) The Hon'ble Supreme Court in the case of Sahney Steel and Press Works Ltd. vs. CIT (1994) 94 taxmann.com 368 (SC) has clearly laid down a law /conditions i.e. when the receipt/subsidy is treated as capital or revenue receipt. The basic test to be applied in judging the character of a subsidy/grant is with respect to the purpose for which the subsidy/grant is given. Or in other words, the purpose test has to be applied and the other conditions like time of payment, the form of payment, treatment in the books of accounts etc are immaterial in determining the nature of the subsidy/grant. In this case, it is undisputed that parent company paid the exact amount (which the assessee has paid to its employee) for payment to employees as part of salary, in line with the cash settlement/employment award program. The underlying feature, is clearly the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uce the utilisation of grant in its computation of income. Further learned counsel of the assessee has claimed that neither the assessee company nor the holding company has shown the same amount as expenditure in profit and loss account. This is absolutely irrelevant claim made in the written submission by the learned counsel of the assessee. In the assessee company's computation of income the amount paid has been claimed as deduction. So it is admittedly claimed as a deduction. The claim that assessee has not debited in the profit and loss account is on the cup of a misleading statement. Another submission of the learned counsel of the assessee is that section 56(2) is not applicable to the current assessment year in this economy. Firstly we note that as discussed above, it is not the issue of taxability or the chargeable of the receipt in isolation. But the claim of deduction for utilization of the so called exempt grant which has to be considered alongwith. This is the actual subject matter of debate over here. Hence this claim of the learned counsel of the assessee that assessing officer has quoted wrong section is not at all sustainable. Moreover, it is settled law that qu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is ground of the assessee along with directions for treating the above receipts as income of the assessee. Issue no. 3 (grounds of appeal no. 6, 6.1 & 6.2) Allowance of deduction of INR 26,78,37,118/- paid to the employee towards compensation for cancelled stock awards (part of aggregate payout of INR 37,82,75,381/- This ground has been discussed in detail by the AO in second para of page 27 (page no. 71 of appeal set) of the assessment order. Further it is also mentioned that the AO has followed the directions of the Hon'ble DRP of verifying the additional claim of deduction and after verification, has taken the suitable action of disallowing the said expenditure. The facts of the case is that the assessee has itself disallowed the sum of 26,78,37,118/-as prior period expenditure pertaining to earlier years as these payments were made in F.Y. 2015-16. As per the terms of agreement with M/s Synnex Group, the assessee was entitled to receive reimbursement of cash payments as part of salary, which it has paid in earlier years also, thus the AO has rightly disallowed Rs. 26,78,37,118 as prior period expenditure based on the assessee own treatment of the amount in question. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chinery. As no cost was allocated to SEZ units, the AO has made proportionate allocation to SEZ units and taxable units. The AOs action appears to be reasonable as the asssessee could not convince the AO with proper evidences that the allocation between SEZ units and taxable units has been made in proper/scientific/actual manner. Also with regard to certain other expenses like staff welfare, contribution to gratuity, recruitment expenses, sub contract charges etc. the AO has made proportionate allocation. As both the SEZ units and the taxable unit are performing almost the same function, then there is no reason for huge discrepancy in the net profit ratio of both this unit as well as the wide deviations in allocation of expenses under lot of sub heads. The asssesee also could not explain such vide deviation and it appears that the main reasons for allocation of more expenses to taxable unit as compared to non taxable units was to claim higher 10A deductions. The various courts/tribunal have held that the AO can re allocate the expenses between the taxable and exempted units if there is no proper/ scientific basis of allocations of expenses between such units. The reliance is also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which may have dealings with foreign AEs would automatically be characterized as an international transaction. There may be a delay in collection of monies for supplies made, even beyond the agreed limit, due to a variety of factors which will have to be investigated on a case to case basis. Importantly, the impact this would have on the working capital of the Assessee will have to be studied. In other words, there has to be a proper inquiry by the TPO by analyzing the statistics over a period of time to discern a pattern which would indicate that vis-a-vis the receivables for the supplies made to an AE, the arrangement reflects an international transaction intended to benefit the AE in some way. 11.The Court finds that the entire focus of the AO was on just one AY and the figure of receivables in relation to that AY can hardly reflect a pattern that would justify a TPO concluding that the figure of receivables beyond 180 days constitutes an international transaction by itself. With the Assessee having already factored in the impact of the receivables on the working capital and thereby on its pricing/profitability vis-a-vis that of its comparables, any further adjustment only o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is being painted by the DR. However, as such determination is irrelevant to the issue at hand same is not being explained for the sake of brevity. 1.8 The DR has also sought to argue that the delay during the year cannot be factored into the working capital adjustment and thus it cannot be said that the Appellant has factored in this impact while comparing working capital margins of the comparable. This is again an attempt to improve case of the TPO which is impermissible in law as same was not even alleged by the TPO. in this regard reliance is placed on the decision of the Hon'ble Supreme Court of India in Mohinder Singh Gill v. Chief Election Commr. [1978] 1 SCC 405 wherein it has been held as under- "8. The second equally relevant matter is that when a statutory functionary makes an order based on certain grounds, its validity must be judged by the reasons so mentioned and cannot be supplemented by fresh reasons in the shape of affidavit or otherwise. Otherwise, an order bad in the beginning may, by the time it comes to court on account of a challenge, get validated by additional grounds later brought out . Orders are not like old wine becoming better as they grow older." ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansaction and will be subjected to transfer pricing provisions irrespective of whether they have any bearing on profit/loss of the relevant year or their impact on profit/loss account is determinable under normal computation procedures other than the transfer pricing regulations. The Id. DRP quoted legislative intent which has been elucidated in the Explanatory Memorandum to the Finance Bill 2012. 11. This issue has been adjudicated by the Tribunal examining the decisions in the case of Kits urn Healthcare, Mckinsey Knowledge, Ameriprise India (P.) Ltd. The details are as under. 12. The Delhi Tribunal in case of Kusum Healthcare (P.) Ltd. v. Asstt. CIT [2015] 62 taxmann.com 79 held that the working capital adjustment takes into account impact of outstanding receivables and no further adjustment required if the margin of the assesses is higher than working capital adjusted margin of comparable. 13.The Hon'ble Delhi Tribunal in case of Ameriprise India (P.) Ltd. (supra) considered the decision of coordinate bench in the case of Kusum Healthcare and held that the allowing working capital adjustment in the international transaction of rendering services can have no impact on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nterest amounts goes, this Court is of the opinion that the J'act that the order of 7-2-2018 referred to Kusum Health Care had expressly remitted the matter for consideration to the ITAT supports the assessee's submission. All that the court had stated on 7-2-2018 was that the matter required re-examination by the ITAT in the light of the Kusum Health Care (supra). For these reasons, the judgment to the extent it deals with adjustments made by the TPO, and regarding interest on delayed receipt oj receivables, is a clear error. The court also furthermore notes the submissions made with respect to inapplicability to Explanation of Section 92B and its prospective operation. As the order of 7-2-2018 reserved by contentions, this Court does not propose to disturb the effect of that matter. The matter will be considered by the ITA T on its own merits. " 19. In view of the aforesaid sequence of events, it would be noted that the decision of Hon'ble Delhi High Court in the case of Kusum Healthcare is still the binding precedent on the issue of interest on outstanding receivables. Needless to mention that the law laid down by the Hon'ble High Court in the case of Kus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arry any interest cost on its funds, therefore it is not necessarily required to charge an interest on delayed receipts. 1.17. The DR at page 10 of the submission has also contended that the intercompany agreement of the Assessee provides for charging interest @ prime rate + 2% p.a. in case of delay in payments beyond 60 days and thus, AE is liable to compensate the Assessee for all delayed payments in line with the terms and conditions stipulated in the agreement. 1.18. It is clarified that the allegation of the DR that the AE is liable to compensate the Assessee for all delayed payments and there is no exception granted on delayed payments is vague and incorrect as the intercompany agreement mentions that the Assessee 'may' accrue and charge interest and does not use the wording 'shall'. Thus, the intercompany agreement does not make the Assessee liable to charge interest on delayed payments from AE. See below extracts of the intercompany agreement: "2.3 Invoicing and Settlement of Costs (B) Unless otherwise specified in Exhibit A, all payments under this Agreement shall be in United States dollars and shall be due within sixty (60) days of the date of invoice and may be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anner in the ordinary course of business. The contribution was made to protect the capital investment made by the Synnex in the Appellant. Hence, the said contribution qualifies as a capital receipt and cannot be brought to tax in the hands of the Appellant. Such treatment is also in line with the accounting treatment followed towards such receipts which were accounted for as a capital contribution by Synnex to the Appellant. Mere change in the settlement mechanism between the Buyer (Synnex) and IBM (Seller) and subsequent contribution by Synnex of an equivalent amount to the Appellant would not impact the taxation of the Appellant. 2.2 Without prejudice to the above submission, during the course of hearing it was submitted that addition on this count should be restricted to the amount of corresponding salary expenditure (of 1NR 1 1,04,38,263) allowed as a deduction for the current year. The balance amount of 1NR 26,78,37,118 cannot be taxed since deduction for expenditure of equivalent amount has been disallowed as prior period expenditure in the computation of income. (Please see computation of income @ Pg. 70 of Paperbook). 2.3 With regard to the amount of INR 26,78,37,118, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nse heads (which have been considered for disallowed by the learned AO) are given below: 3.3 Assessee had maintained separate books of accounts in respect of its SEZ and taxable units, which were audited by its auditor and the certificate issued under section 56F furnished before AO. Description Total SEZ unit Taxable Direct Expenses (Specifically Identified): a. Repair and Maintenance (Building) 38,92,65,053 - 38,92,65,053 b. Repair and Maintenance (Plant) 4,80,69,893 - 4,80,69,893 c. Staff Welfare expenses 5,08,14,690 36,06,655 4,72,08,035 d. Contribution to Gratuity 10,62,22,763 1,05,71,295 9,56,51,468 e. Recruitment expenses 14,12,32,148 1,17,30,593 12,95,01,555 f. Sub-Contractor charges 50,10,02,990 17,520 50,09,85,740 Indirect/ common Expenses (allocated by the Appellant basis turnover): a. Staff Welfare expenses 6,80,44,990 5,54,37,004 1,26,07,986 b. Contribution to Gratuity 64,98,896 52,94,722 12,04,174 c. Recruitment expenses 4,49,39,505 3,66,12,711 83,26,794 d. Sub-Contractor charges 38,95,56,401 31,73,75,900 7,21,80,501 3.4 The reallocation of expense between t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the entire focus of the AO was on one Assessment Year and hence the pattern to justify undue benefit accorded could not be discerned. 12. In the case of Bechtel India Pvt. Ltd. Vs. ACIT (85 Taxman 121), after analyzing the case of Ameriprise India Pvt. Ltd (62 Taxman 237) and Mckinsey Knowledge Centre Pvt. Ltd. (77 Taxman 164) held that the interest on delayed payment of receivables cannot be subsumed in the working capital adjustment allowed to the assessee. In the case of Albany Molecular Research Hyderabad Research Center (P.) Ltd. vs. DCIT (126 taxmann.com 289), the Co-ordinate Bench of Hyderabad Tribunal held that interest on outstanding receivables is a separate international transaction and directed to charge interest by applying LIBOR + 200 Points. In the case of Apache Footwear India Pvt. Ltd. vs. ACIT (148 taxmann.com 371), the Co-ordinate Bench of Tribunal concluded that interest on outstanding receivables from the AE is required to be separately benchmarked and interest should be charged on the delayed period @ 6% on the receivables. 13. We also make it clear that interest cannot be charged on each and every receivable and has to be examined o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... easonable. In the result, the appeal of the assessee on this ground is partly allowed. Ground No. 3 Capitalization - wireless ports: 16. This ground relates to the disallowance of Rs.1,43,164/- by capitalizing the cost incurred towards purchase of indoor wireless ports and allowing depreciation at the rate of 15%. It is submitted that the cost incurred for purchase of indoor wireless ports is for replacement of parts and not in the nature of acquisition of new plant and machinery. The AO has in this regard, has, recorded a categorical finding that these indoor wireless ports are not spare parts replaced but they have been purchased a fresh as a part of or as an acquisition of plant and machinery. The indoor wireless ports are in the nature of computer peripherals and hence, deprecation @60% is allowable. The appeal of the assessee on this ground is allowed. Ground No. 4 Allocation-expenses -SEZ/non SEZ units: 17. The assessee has claimed deduction under section 10AA amounting to Rs.31,58,44,806/- being 50% of taxable profits of Bangalore unit. It was submitted that the actual direct expenses incurred by the assessee are recorded on actual basis, and further indirect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3,66,12,711 83,26,794 d. Sub-Contractor charges 38,95,56,401 31,73,75,900 7,21,80,501 21. Before the DRP, the assessee has furnished the statement of computation of income, profit and loss account of the SEZ unit to substantiate that the expenses (both direct as well as direct) have been correctly accounted in the SEZ unit. It is further submitted that the AO has not pointed out any discrepancy in the aforesaid documentary evidence and thus, according to the assessee, the aforesaid reallocation of expense between the SEZ and taxable units is in gross violation of the law. It is a trite law that the accounts regularly maintained in the course of business are to be taken as correct, unless there are strong and sufficient reasons to indicate that they are unreliable. Reliance in this regard was placed, amongst others, on the Supreme Court decision in the case of CIT vs. Woodward Governor India (P) Ltd [2009] 312 ITR 254. Therefore, there cannot be any case for the AO to re-allocate direct expenses which are specifically related to and incurred in relation to the identified units and are confirmed/ certified by the statutory auditor. 22. Relying on the judgment of the Hon' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pted and accepted method of apportionment is sought to be disturbed in a few years, especially in a case such as the instant one where the deduction under section 10A is available over a period of ten years and only in some years the method of apportionment of income is disturbed. 29. Hence, we find that the reasons given by the Revenue and the case laws relied there upon cannot be said to be reasonable grounds to reallocate the expenses in existence of the facts contrary to the decision taken by the ld. DRP. The appeal of the assessee on this ground is allowed. Ground Nos. 5 & 6 Increase in Capital Reserve: Deduction of Rs. 26,78,37,118 paid to the employee towards compensation for cancelled stock award: 30. This issue relates to proposed addition of Rs.37,82,75,381/- towards increase in capital reserve, which was on account of contribution received from group company to reimburse the amount paid on cash settlement of the employee award program and disallowance of additional claim for deduction of Rs.26,78,37,118/- paid to the employee towards compensation for cancelled stock awards. 31. It is submitted by the assessee that the stock options granted by I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed and the amount paid. The nature, purpose and quantum of the payment were also the same. It was to honor the commitment when Synnex acquired the CRM business of IBM. This is neither a grant nor subsidy. This is a simple reimbursement with no profit element and direct oneto-one mapping. The Panel, therefore, agrees with the AO that there is no way that the assessee could treat the two limbs of the same transaction to be of different nature. The Panel, accordingly, upholds the action of the AO on this count and rejects the objection of the assessee." 33. The facts and arguments of the ld. AR on this issue are as under: Facts: * Synnex Corporation ('Synnex') acquired the Customer Relationship Management services ('CRM') business of IBM worldwide. As a part of this acquisition, Synnex also acquired shares of Appellant which was a subsidiary of IBM Corp. The employees of Appellant were covered by the employee reward programme (Centennial Award), pursuant to which the employees of the Appellant were entitled to stocks of IBM. As a part of acquisition of the CRM business, it was agreed between Synnex and IBM that unvested stock awards granted by IBM to the employees of CRM bus ..... X X X X Extracts X X X X X X X X Extracts X X X X
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