L & T TECHNOLOGY SERVICES LIMITED,MUMBAI vs. ACIT CIRCLE 2(2)(1), MUMBAI

The Assessing Officer erred in not allowing the deduction claimed by the appellant in respect of reversal of provision for doubtful debts without appreciating the fact the said provision had been disallowed by the Appellant in the earlier years.

Assessee has raised Ground No. 1 in relation to international transaction and other grounds of appeal raised by the assessee are relating to corporate issues. We proceed to deal with the issues raised by the assessee ground wise.

The assessee is a Non-Government Company and it is involved in digital Engineering, mobility and augmented reality, IoT, automation of knowledge, robotics, Autonomous & near-autonomous vehicles, energy efficiency and imaging and video. It is basically a global Engineering R&D service company.

The Assessing Officer noticed that assessee has an international transaction involving corporate guarantee. Accordingly, the case was referred to Transfer Pricing Officer under section 92CA(1) of the Act. Accordingly, Transfer Pricing Officer issued notices under section 92CA(2) of the Act and collected the informations relating to the transactions as Page No. 4

The Transfer Pricing Officer vide notice dated 10.07.2021 issued to the assessee asked to furnish the complete details of working of guarantee commission and justify the same. Further, it was asked why it should not be calculated on the basis of external CUP as the information collected from the banks under section 133(6) of the Act at the rate of 2.05%. Based on the average rate of corporate guarantee given by the HDFC bank is at 1.80% and SBI Bank is at 2.30%.

In response, assessee submitted vide letter dated 13.07.2021 that the assessee has received quotes from IDBI bank wherein the corporate

Alternatively, assessee also submitted that ALP of corporate guarantee should be considered 0.5% on the basis of the Hon’ble Bombay High Court decision in the case of Everest Kanto Cylinders Ltd. v. DCIT and various other case law.

After considering the submissions of the assessee Transfer Pricing Officer dismissed the submissions of the assessee and he observed that the assessee has not discharged its onus and has not provided any comparable to benchmark the transactions and in the absence of any valid comparable in the public domain, he is constrained to benchmark this transaction using the rates applicable to bank guarantee. Further, he observed that the Hon’ble Bombay High Court in the case of Everest Kanto Cylinders Ltd. v. DCIT (supra) and Mumbai ITAT Decision in the case of Glenmark Pharmaceuticals Ltd., (in dated 13.11.2013 for the A.Y. 2008-09), a downward adjustment to the naked

Aggrieved with the above order, assessee preferred objection before CIT(DRP-1), Mumbai -2. After considering the objections and submissions of the assessee, Ld. DRP has rejected the same and sustained the proposed addition made by the Assessing Officer/Transfer Pricing Officer.

Aggrieved with the above order assessee is in appeal before us and at the time of hearing Ld. AR submitted that assessee has charged 0.65% as corporate guarantee based on the Internal CUP i.e., assessee has received the quote from IDBI bank and where IDBI bank and ICICI bank wherein they have charged the rate as quoted by the banks as corporate guarantee from its AE.

Ld. AR brought to our notice Page No. 5 of the Ld. DRP order and objected to the adoption of External CUP. In this regard he brought to Page No. 7

Further, he brought to our notice Page No. 70 of the Paper Book which is the sanction of various facilities to the assessee by the IDBI bank, wherein assessee was sanctioned limit for ₹.25 Crores from IDBI Bank wherein the assessee was quoted for financial and advance payment guarantee / other @0.65% per anum. Further, he brought to our notice Page Nos. 82 and 83 of the Paper Book wherein assessee has received bank quote from ICICI bank and ICICI Bank has given a quote of 0.6% for financial guarantee. He submitted that assessee has received financial guarantee facilities from these two banks and the average bank guarantee fees of 0.65% and he prayed that the Internal CUP should be considered for benchmarking the same wherein Transfer Pricing Officer has adopted External Benchmarking and he further, relied on the decision of Everest Kanto Cylinders Ltd. v. DCIT (supra) and prayed that 0.5% of the guarantee commission may be sustained.

On the other hand, Ld. DR relied on the orders of the lower authorities.

With regard to Ground Nos. 2 and 3 which is relating to premia income, relevant facts relating to the grounds are, Assessing Officer while verifying the income declared by the assessee in original return of income filed on 31.11.2018 and the revised return of income filed on 27.03.2019 observed that assessee has claimed relief under section 90 / 90A has charged from ₹.19,07,11,678/- (in the original return of income) to ₹.22,98,45,025/- (in the revised return of income). Assessing Officer observed that reported “Revenue from operation” was ₹.3506,55,10,924/- both in the original as well as revised return of income, which means that there was an under reporting of income to the tune of ₹.5,54,08,919/- though the assessee choose to increase the relief claimed under section 90 / 90A from ₹.19,07,11,678/- to ₹.22,98,45,025/- in the revised return of income. In support of the above the Assessing Officer has tabulated

Aggrieved with the above order, assessee filed objection before DRP and in support of the same assessee has submitted that assessee entered into forward contracts to hedge its foreign exchange risk. Forward contracts are bought or sold at forward rates and the difference between spot and forward rates is known as premia. Under erstwhile accounting standards i.e., prior to F.Y. 2016-17 the company was accounting the premia income or discount over the period of the forward contract. W.e.f 01.04.2016, the company was mandated to follow Ind-AS, the entity was required to recognize the changes in fair values and the derivative hedge instrument. As a result of this, the fair value gain on outstanding contracts, whose premia income was already taxed to profit and loss account under erstwhile accounting standard has been re-accounted in F.Y. 2017-18.

During the year, a Principal Only Swap (POS) whose effective date commenced from 10.04.2012 was terminated on 10.04.2017 i.e., current

The above said instrument was matured in 2017 April and therefore the gain/loss on settlement of the transaction was accounted in Profit and loss account. As per the details submitted by the assessee the income on the transaction was already taxed in the years in which premia was booked and the reversal of income of ₹.49,39,00,893/- was not effected through profit and loss account a deduction is claimed in the year of maturity, reduced by ₹.5,77,49,342. It was submitted that NFAC has denied deduction of ₹.43,61,51,550 for premia income which was already offered to tax under the previous accounting standard. On adoption of Ind-AS 109, the gain/loss on the hedge instrument was re-accounted for on settlement of the instrument during this year.

Aggrieved with the above order, assessee is in appeal before us. At the time of hearing, Ld.AR of the assessee submitted that this transaction is relating to forward contract and as per the method of accounting adopted by the assessee prior to F.Y. 2016-17 gain / losses was already offered to tax in the earlier assessment years. Since assessee has migrated to Ind-AS, assessee has to recalculate the loss on account relating to the transactions which assessee has concluded in April 2017.

On the other hand, Ld. DR supported the findings of the Assessing Officer and he submitted that assessee has not provided any information before Assessing Officer to verify the same. Therefore, without proper verification Assessing Officer cannot allow the claim of the assessee.

Considered the rival submissions and material placed on record, we observe from the record that assessee has booked certain derivative transactions having impact more than one assessment years. The relevant derivative was matured on April 2017 and as per the method of accounting adopted by the assessee prior to this assessment year, assessee has declared profit or loss in the POS transactions. As per the information submitted by the assessee before us clearly shows that assessee has declared FOREX loss / gain in A.Y.2015-16 and 2016-17 and Page No. 14

After considering the submissions of the assessee and annual financial report we observe that no doubt assessee has followed method of accounting to declare the gain / loss in the above said POS transaction. However, mere submission of financial records and computation of income does not give clear picture for the Assessing Officer to verify the same. In our considered view assessee has to submit the relevant contract notes and working of the various contracts which has matured on April 2017 before Assessing Officer and submit the gain / loss recorded by the assessee in previous year as well as the loss / gains recorded by the assessee during the current assessment year. Since it is a factual matter and which requires detailed verification, we deem it fit and proper to remit this issue back to the file of the Assessing Officer to verify the same we also direct the assessee to submit the relevant information before Assessing Officer. Accordingly, the Assessing Officer is directed to verify the same before allowing the deduction claimed by the assessee.

With regard to Ground No. 4 which relates to provisions for doubtful debts, the relevant facts are, the NFAC has reversed the provisions for doubtful debts of ₹.12,59,70,491/-. Aggrieved, assessee preferred objection before Ld. DRP and Ld. DRP after considering the submissions of the assessee gave a direction to Assessing Officer to verify the claim of the assessee that the provision was disallowed in the year in which provision was created, resultantly, it results in double taxation.

Similar to the premia income, the Assessing Officer before passing the final assessment order asked the assessee to provide the relevant information. However, assessee has submitted the provisions for doubtful debts has been created in A.Y. 2015-16 and 2016-17 and submitted the extract of the profit and loss account and ITR – 6 to substantiate the claim. However, Assessing Officer observed that the assessee has not been able to provide one to one correlation of the provisions of doubtful debts disallowed and the amount claimed on reversal in the current year. Since assessee has not submitted one to one correlation the Assessing Officer sustained the additions made in the draft assessment order.

Ld.AR of the assessee submitted that assessee has submitted the relevant profit and loss account and computation of income before Assessing Officer and also he has filed the same in the form of Paper Book before us and he took us through Page No. 284, 290 of the Paper Book to demonstrate that in the financial year end 31.03.2015 and 31.03.2016 assessee has reversed the provision for doubtful debts and he submitted that assessee is following this method of accounting consistently.

On the other hand, Ld. DR reiterated the findings of the Assessing Officer that assessee has not filed any information relating to the claim made by the assessee.

With regard to Ground No. 7 and 8 relating to disallowance under section 14A of the Act, the relevant facts are during the year assessee has earned dividend income from mutual funds investment amounting to ₹.738,31,926/- in the return of income. The assessee has suomoto

During the course of assessment proceedings, Assessing Officer observed that provision of section 14A of the Act are applicable in this case as per sub section (2) of section 14A of the Act, Assessing Officer is required to determine the amount of expenditure incurred in relation to such income which does not form part of the total income under the Act. Since Assessing Officer has not satisfied with the correctness of the claim of the assessee in respect of the above said expenditure in relation to exempt income he has proceeded to make the disallowance under Rule 8D of I.T. Rules by relying on several case laws. Accordingly, he disallowed 1% of the annual average of investment of ₹.2,60,60,61,700/- to the extent of ₹.2,60,60,617/-. He adjusted suomoto disallowance of expenditure made by the assessee and disallowed the excess as disallowance of ₹.96,27,338/- under section 14A of the Act.

Aggrieved assessee preferred appeal before Ld. DRP and before Ld.DRP assessee has submitted that the investments during the year were made in mutual funds and the foreign subsidiary for which dividend from its subsidiary is taxable under section 115BBD and it is not exempt. It

After considering the submissions of the assessee Ld. DRP partly allowed the claim of the assessee to the extent of investments made by the assessee in Foreign company which is taxable under Income-tax Act, 1961. Other objections raised by the assessee accordingly, dismissed by the Ld. DRP. Accordingly, Ld. DRP has partly allowed the claim of the assessee.

While passing the final assessment order Assessing Officer has removed the foreign investments made by the assessee and accordingly, the revised annual average of investments was worked to ₹.1,70,36,84,877/- and determined the 1% of the above investments for the disallowance to the extent of ₹.1,70,36,849/- and after adjusting the suomoto disallowance made by the assessee of ₹.1,64,33,279/- and determined the 14A disallowance at ₹.60,35,270/-.

On the other hand, Ld. DR objected the submissions of the assessee on no satisfaction, he submitted that Assessing Officer at Page No. 7 of the draft assessment order has properly recorded the satisfaction. Further, he submitted that the courts have held that express satisfaction is not required, it is enough to demonstrate that the provision under section 14A is applicable in the case.

With regard to Ground No. 9, brief facts are, at the time of assessment, Assessing Officer observed that as per CBIC report of Export / Import summary data there has been an export to the value of ₹.2,47,50,375/- reported as sale of products which has been exported. However, he observed that there has been no reporting of any sale of products as per the profit and loss account statement in the ITR. Accordingly, he issued show cause notice to the assessee to submit various documents relating to export sales. Since assessee has failed to make the submissions vide their submissions dated 15.09.2021 and Page No. 23

Aggrieved with the above order, assessee filed objection before Ld.DRP and made the following submissions: - “In the notice issued by NFAC, the NFAC states that as per CBEC report of Export/Import summary data there has been export to the value of Rs. 2,47,50,325 reported as sale of products. However there has been no reporting of any sale of products in the ITR In response to this requirement, the company vide submission dated 24.09.2021 had clarified that company is a service company offering a portfolio of engineering research & development services across five major industries Transportation, Industrial products, Telecom & Hi-tech, Medical Devices and Process Industry. Being an engineering service provider, the company is not engaged in production, manufacture or sale of any goods. It was clarified that export revenue is reported in service revenue. The company has 2 types of exports: Re- exports and Product Exports (classified under service revenue).

Re-exports: Re-exports means export of foreign goods which are imported to India. The company imports items from the customer on returnable basis for rendering various services such as testing, analysis, re-processing etc. After performing such services, the items are sent back to the customer again. The ownership of such goods always remains with the customer and thus they do not form part of sales when they are sent back to the customer. The sample copy of invoice/packing list was submitted in Annexure wherein re-exports were mentioned in the description. We also clarified that no custom duty is paid on import of such goods when they are imported merely for the purpose of re- exports as we operate from SEZ units. The company also Page No. 24 (A.Y. 2018-19) L & T Technology Services Limited submitted sample copy of Guaranteed Remittance waiver certificate from the commercial bank evidencing that there is no inward foreign remittance for re-exports undertaken by us. Copy enclosed in Annexure.

After considering the submissions of the assessee Ld. DRP unable to concede the additions proposed by the Assessing Officer under section 69C of the Act and they directed the Assessing Officer to verify from the records the details of goods exported, considering the fact that the ownership of the goods still lying with the other party. While passing the final assessment order the Assessing Officer called for the informations from the assessee and after analyzing the information submitted by the assessee he observed that the assessee has two types of exports i.e.,

Aggrieved assessee is in appeal before us and submitted that all the value declared in CBIC data relating to re-export only and assessee has only collected service charges which are also recorded in its books of accounts. In support of the same assessee has filed the additional evidences before us and explained that these goods were only re-exported and only recorded the service charges collected from the parties and prayed that these additional evidences may be admitted and remit this issue back to the file of the Assessing Officer to verify and duly allow the same after due verification. In this regard he relied on the decision of the Anaikar Trades and Estates (P.) v. CIT dated 23 February, 1990 [186 ITR 313(Madras)].

On the other hand, Ld. DR objected to the additional evidences filed by the assessee and he submitted that assessee files the evidences bits

Considered the rival submissions and material placed on record, it is brought to our notice that assessee is re-exporting the goods after providing the services. Therefore, these goods re-exported are nothing but the goods imported by the assessee and after providing the services same goods were being re-exported. He agreed that certain documents were filed before Assessing Officer. However, he submitted that additional evidences will prove the nature of transactions. Considering the importance of these documents we deem it fit and proper to admit the additional evidences and remit this issue back to the file of the Assessing Officer to verify the same and after due verification if found proper the claim of the assessee may be allowed. Assessee shall cooperate with the proceedings before the Assessing Officer without taking unnecessary adjournments. Needless to say that the Assessing Officer shall provide

With regard to Ground No. 10, brief facts relevant to the ground are, Assessing Officer has rejected the claim of the assessee an amount of ₹.5,54,08,919/- being the double taxation relief claimed by the assessee for not filing any supporting documents of DIT relief. Assessee filed objection before Ld. DRP and filed the relevant information and Ld.DRP directed the Assessing Officer to verify the claim in line to tax paid in foreign countries on the income the assessee has included in his return of income after due verification and in accordance of law.

In final assessment order Assessing Officer called for the relevant information and assessee has submitted copy of CA certificate, copy of original and revised Form – 67`, after considering the same Assessing Officer observed that similar addition has been made in A.Y. 2017-18, the appeal for the same is still pending before Ld. CIT(A) and further, he observed that the reliance of the assessee on CA certificate is not enough to establish that the assessee has offered the income during the year and accordingly, he rejected the submissions of the assessee.

On the other hand, Ld. DR agreed with the submissions of Ld.AR of the assessee to remit this issue back to the file of the Assessing Officer so that Assessing Officer could verify the relevant information and consider the documents submitted by the assessee.

Considered the rival submissions and material placed on record, assessee has filed original and revised Form – 67 and since assessee has declared income of “income earned by it outside India” and any tax suffered by it has to be given credit based on the income declared by the assessee and the relevant tax paid by the assessee. Before us, assessee has filed Form 67 which requires verification. Accordingly, we direct the Assessing Officer to verify the above Form – 67 and claim of the assessee

With regard to Ground No. 11, this issue is relating to payment of dividend distribution tax amounting to ₹.8,30,52,816/- and granting credit of DDT of ₹.8,32,63,338/- as against the credit claimed by the assessee ₹.16,63,16,153/-.

Before us, Ld.AR of the assessee submitted evidences of remittance at Page No. 292 and 293 of the Paper Book these evidences are against the credit of dividend distribution tax claimed by the assessee. We deem it fit and proper to remit these evidences to the file of the Assessing Officer with the direction to verify the same and allow the same as per law. Assessee shall cooperate with the proceedings before the Assessing Officer without taking unnecessary adjournments. Needless to say that the Assessing Officer shall provide adequate opportunity of being heard to the assessee. Accordingly, Ground No. 11 raised by the assessee is allowed for statistical purpose.

In the result, appeal filed by the assessee is allowed for statistical purpose.