Integra Software Services P. Ltd., CHENNAI V. DCIT, Pondicherry

ITA 736/CHNY/2017

• Counselvise Citation: [2022] 103 COUNSELVISE.COM (IT) 9982 (ITAT-CHENNAI)
• Duration Of Justice: 5 year(s) 6 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-10-2022
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: D
• Next Hearing Date: 05-09-2022
• Assessment Year: 2012-2013
• Appeal Filed On: 23-03-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: R. BHOOPATHI KUMAR AJEET LD.
• Assessee Lawyers: N. ARJUNRAJ S. SRIDHAR LD
• Keywords: Transfer pricing; Permanent establishment; TDS
• Section: 143(3); 14A; 43(5); 195

Judgement Text

आयकर अपीलीय अिधकरण ’डी’ ायपीठ चे ई म । IN THE INCOME TAX APPELLATE TRIBUNAL “D” BENCH, CHENNAI माननीय -ी महावीर िसंह, उपा34 एवं माननीय -ी मनोज कु मार अ9वाल ,लेखा सद< के सम4। BEFORE HON’BLE SHRI MAHAVIR SINGH, VICE PRESIDENT AND HON’BLE SHRI MANOJ KUMAR AGGARWAL, AM आयकरअपीलसं./ITA No. 736/Chny/2017 (िनधाDरणवषD / Assessment Year: 2012-13) M/s. Integra Software Services P Ltd No. 51, II Cross,Jawahar Nagar, Nellithope, Pondicherry. बनाम/ V s . DCIT Pondicherry Circle, Pondicherry. थायीलेखासं. /जीआइआरसं. /P AN / G I R N o . AAAC I - 6 1 9 3 - B (अ पीलाथ /Appellant) : ( थ / Respondent) अपीलाथ कीओरसे/ Appellant by : Shri N. Arjunraj (CA) for Shri. S. Sridhar (Advocate) – Ld. AR थ कीओरसे/Respondent by : Shri R. Bhoopathi (JCIT) / Shri. Kumar Ajeet Ld. CIT-DR सुनवाईकीतारीख/ Date of Hearing : 06-09-2022 घोषणाकीतारीख / Date of Pronouncement : 21-10-2022 आदेश / O R D E R Manoj Kumar Aggarwal (Accountant Member) 1. Aforesaid appeal by assessee for Assessment Year (AY) 2012-13 arises out of final assessment order dated 15.02.2017 passed by Ld. Assessing Officer (AO) u/s 143(3) r.w.s. 144C(5) pursuant to the ITA No.736/Chny/2017 - 2 - directions of Ld. Dispute Resolution Panel-1, Bengaluru (DRP) u/s 144C(5) dated 30.12.2016. The Ld. Transfer Pricing Officer-2(1), Chennai (TPO) has determined Arm’s Length Price (ALP) of international transactions u/s 92CA(3) vide order dated 27.01.2015. The grounds raised by the assessee read as under: - 1. The order of The Deputy Commissioner of Income Tax, Pondicherry Circle, Pondicherry dated 15.02.2017 u/s 143(3) r/w section 144C(5) of the Act for the above assessment year is contrary to law, facts, and in the circumstances of the case. 2. The DCIT erred in mechanically adopting the directions of the DRP vide order dated 30.12.2016 in computing the taxable total income for the Assessment Year under consideration without assigning proper reasons and justification. 3. The DCIT failed to appreciate that the directions of the DRP for maintaining the additions in the computation of taxable total income were wrong, erroneous, unjustified, incorrect and not sustainable in law. 4. The DCIT erred in adding back Rs.25,11,973/- representing interest at 7.75% on the AE sales receivables in the computation of taxable total income without assigning proper reasons and justification. 5. The DCIT failed to appreciate that the upward adjustment of interest notionally charged in the determination of ALP relating to the transactions with AEs was wrong, erroneous, unjustified, incorrect and not sustainable in law. 6. The DCIT erred in adding back Rs.2,57,86,434/- for want of further documentary evidence for availing various services from foreign vendors/ outsourced agencies in the computation of taxable total income without assigning proper reasons and justification. 7. The DCIT failed to appreciate further that the sustenance of the said addition on the reckoning of the outsourced services as FTS within the scope of section 9(1)(vii) of the Act r/w the provisions of section 195 of the Act on the application of section 40(a)(i) of the Act in the computation of taxable total income without assigning proper reasons and justification. 8. The DCIT failed to appreciate that having not properly examined the nature of services obtained and further having not noticed the actual payments for such services, the addition made in the computation of taxable total income on two counts was wrong, erroneous, unjustified, incorrect and not sustainable in law. 9. The DCIT failed to appreciate that the sustenance of the said addition for the payments made to the outsourced agencies without considering the prescription of DTAAs was wrong, erroneous, unjustified, incorrect and not sustainable in law. 10. The DCIT erred in disallowing Rs.1,64,24,085/- being the loss suffered in dealing in forex derivatives on the misconstruction of section 43(5) of the Act and consequently erred in adding back such sum in the computation of taxable total income both under normal computation as well as in the MAT regime without assigning proper reasons and justification. 11. The DCIT erred in quantifying the notional expenses at Rs.74,865/- as per Rule 8D of the Income Tax Rules, 1962 on the application of section 14A of the Act and consequently erred in adding back such sum in the computation of taxable total ITA No.736/Chny/2017 - 3 - income both under normal computation as well as in the MAT regime without assigning proper reasons and justification. 12. The DCIT failed to appreciate that there was no proper opportunity given before passing of the impugned order and any order passed in violation of the principles of natural justice would be nullity in law. As is evident, the issues that form the subject matter of the appeal are- (i) Transfer Pricing (TP) Adjustment on Sales Receivables; (ii) Disallowance u/s 40(a)(i); (iii) foreign exchange loss; & (iv) disallowance u/s 14A. 2. The Ld. AR advanced arguments and drew attention to various documents. The Ld. CIT-DR controverted the arguments of Ld. AR and supported the assessment framed by Ld. AO. Having heard rival submissions and after due consideration of material facts, our adjudication would be as under. The assessee being resident corporate assessee is stated to be engaged in providing IT enabled services. 3. Transfer Pricing Adjustment of AE Receivable 3.1 The assessee had outstanding receivable from its Associated Enterprises (AE). The Ld.TPO held that excessive outstanding receivables have to comply with Transfer Pricing (TP) provisions. The outstanding beyond comparable period was proposed to be treated as separate transaction of interest free advances as per Sec. 92B(1). The maximum credit period was accepted to be 90 days and outstanding receivables beyond that time period were benchmarked at prime lending rate of 14.4%. The same resulted in to an adjustment of Rs.57.14 Lacs. 3.2 Before DRP, the assessee submitted that it did not charge any interest from AE as well as non-AEs. No finance cost was incurred. The delayed realization was beyond the control of the assessee and not to bestow any benefit on the AE. It was also submitted that the assessee ITA No.736/Chny/2017 - 4 - was a zero debt company and it did not have any borrowings from external sources and therefore, it was not required to pay any interest. Further, Ld. TPO having chosen TNMM method erred in making further adjustment for interest on overdue receivable since the application of TNMM would take care of the same. Lastly, the assessee advanced loans to its AEs and charged interest at LIBOR and therefore, the same should be applied to benchmark the transactions. 3.3 However, Ld. DRP chose to confirm the approach of Ld. TPO. The only relief granted was on account of applicable rate and Ld. TPO was directed to benchmark the same on the basis of interest rates on short term fixed deposits prevailing at relevant point of time. The said directions reduced the impugned adjustment to Rs.25.11 Lacs. Aggrieved, the assessee is in further appeal before us. 3.4 From the fact, it emerges that the assessee has not charged any interest on outstanding receivables from AEs and non-AEs. Further, the loans advanced to AEs have been benchmarked separately. It also emerges that the assessee is a zero-debt entity and do not incur significant interest expenditure. Therefore, to allege that the assessee accommodated its AEs in the guise of receivables would not be a correct proposition. Therefore, this addition is not sustainable. We order so. The corresponding grounds raised by the assessee stand allowed. 4. Disallowance u/s 40(a)(i) 4.1 The assessee outsourced its work of editing and indexing etc. to foreign vendors and paid an amount of Rs.257.86 Lacs without deduction of tax at source, The same led Ld. AO to invoke the disallowance u/s 40(a)(i). The assessee submitted that TDS was not required in terms of Sec.195 since the vendors were foreign nationals ITA No.736/Chny/2017 - 5 - and the services were rendered outside India. These vendors do not have permanent establishment in India and therefore, the income would not arise in India. However, the assessee could not produce any agreement to demonstrate the nature of services availed by the assessee. The services were termed as technical services u/s 9(1)(vii) which would require TDS u/s 195. Accordingly, disallowance u/s 40(a)(i) was made by Ld. AO. 4.2 The position remained the same before Ld. DRP and the assessee could not submit requisite documentary evidences in support of its claim. Accordingly, this issue was held against the assessee. Aggrieved, the assessee is in further appeal before us. 4.3 It emerges that the assessee could not file any documentary evidences in support of the payment so made to foreign entities. The claim of the assessee has to cross the hurdles of Sec.37(1) as well as the provisions of Sec.40(a)(i). We find that similar payments were made by the assessee in AY 2011-12 and adjudication of this issue was done by Tribunal in ITA No.2189/Chny/2017 order dated 11.10.2019. In Para- 20 of the order, it was held that the services were not technical in nature. Considering the facts of this year, this issue stand restored back to the file of Ld. AO for fresh consideration with a direction to the assessee to file requisite evidences in support of the claim. The decision of this Tribunal as rendered for 2011-12 shall be duly considered by Ld. AO. The corresponding grounds stands allowed for statistical purposes. 5. Foreign Exchange Loss on forward contracts 5.1 The assessee incurred loss of Rs.164.24 Lacs on forward contracts and claimed the deduction of the same. However, relying upon CBDT ITA No.736/Chny/2017 - 6 - instruction no. 03 of 2010 dated 23.03.2010, such losses were held to be notional loss and accordingly, the same was disallowed. 5.2 Before Ld. DRP, the assessee submitted that it entered into forward contracts as an integral part of export business to safeguard against losses that could arise due to foreign exchange fluctuations on account of receivables from export. These transactions could not be termed as speculative transaction u/s 43(5). However, rejecting the same, Ld. DRP confirmed the stand of Ld. AO. Aggrieved, the assessee is in further appeal before us. 5.3 The Ld. AR explained that the assessee was exposed to foreign exchange risk which was sought to be covered by forex derivatives. Accordingly, these transactions could not be termed as speculative or notional loss in nature. The Ld. AR submitted that the quantum of transactions is commensurate with the forex exposure of the assessee and represented by underlying assets. Considering the same, we restore this issue back to the file of Ld. AO for fresh consideration with a direction to the assessee to substantiate its claim. 6. Disallowance u/s 14A 6.1 The assessee earned tax free dividend of Rs.23.27 Lacs and submitted that no expenditure was incurred to earn the same. However, Ld. AO computed disallowance of 0.5% of average investments u/r 8D(2)(iii) which came to Rs.0.74 Lacs. This ground was not contested by the assessee before Ld. DRP. 6.2 The only plea of Ld. AR is that this disallowance is not to be added while computing Book Profits u/s 115JB. Concurring with the same, we direct Ld. AO to exclude the same while computing Book Profits u/s 115JB. ITA No.736/Chny/2017 - 7 - 6.3 No other ground has been urged in the appeal. Conclusion 7. The appeal stands partly allowed in terms of our above order. Order pronounced on 21 st October, 2022. Sd/- (MAHAVIR SINGH) उपा34 /VICE PRESIDENT Sd/- (MANOJ KUMAR AGGARWAL) लेखासद< /ACCOUNTANT MEMBER चे+ई/ Chennai; िदनांक/ Dated : 21-10-2022 JPV JPVJPV JPV आदेशकीXितिलिपअ9ेिषत/Copy of the Order forwarded to : 1. अपीलाथ /Appellant2. यथ /Respondent 3. आयकरआयु (अपील)/CIT(A) 4. आयकरआयु /CIT 5. िवभागीय ितिनिध/DR6. गाड फाईल/GF