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Income Tax Appellate Tribunal, MUMBAI BENCH “J”, MUMBAI
Before: VIKAS AWASTHY & MS. PADMAVATHY S.
O R D E R PER : MS PADMAVATHY S. (AM)
These two appeals are against the final orders of assessment passed by the Assistant Commissioner of Income-tax, Circle 14(1)(2), Mumbai under section 143(3) r.w.s. 144C(13) of the Income-tax Act, 1961 (in short, ‘the Act’) dated 31/07/2022 for A.Y. 2017-18 and for A.Y. 2018-19. The issues contended in both the appeals are common and hence both the appeals were heard together and disposed off by this common order.
2 ITA 2450 & 2451/Mum/2022 WNS Global Services Pvt Ltd 2. The common issues contended by the assessee for both assessment years through various grounds are as tabulated below:- Issues AY 2017-18 AY 2018-19 General Ground No.1 Ground No.1 Transfer pricing adjustment on Ground Nos.2 to 10 Ground Nos.2 to 6 account on account of purchase of shares of the AE Disallowance of depreciation on Ground No.11 Ground No.7 intangibles representing acquisition of business contract Disallowance under section 14A Ground No.12 Ground No.8 Disallowance under section Ground No.13 Ground No.9 36(1)(va) Disallowance under section 43B Ground No.14 Ground No.10 Short credit for Advance Tax - Ground No.11 Denial of Foreign Tax Credit - Ground No.12 Short credit of TDS Ground No.15 Ground No.13 Interest under section 234C & Ground No.16 Ground No.14 234D Initiating penalty proceedings Ground No.17 Ground No.15 ITA 2451/Mum/2022 - A.Y. 2017-18) 3. The assessee is an IT enabled service (ITeS) provider engaged in delivering a wide portfolio of outsourcing services to its customers around the world. The assessee provides ITeS such as back-office administration, data management and contract centre management primarily to travel, banking, financial services and insurance industries. For the assessment year 2017-18 the assessee filed the return of income on 29.03.2019 declaring an income of Rs.4,38,93,95,100. The return was processed under section 143(1) where a disallowance towards employees contribution towards ESI/PF that was not paid within the due date as specified in the respective Acts was disallowed. Subsequently the case has been selected for scrutiny under CASS and the statutory notices were duly served on the assessee. Since the assessee had certain international transactions, a reference was made to 3 ITA 2450 & 2451/Mum/2022 WNS Global Services Pvt Ltd the Transfer Pricing Officer (TPO) in order to determine the arm’s length price of the international transaction entered into by the assessee with its Associated Enterprises (AEs). The TPO vide order dated 29.01.2021 passed under section 92CA(3) made the following adjustments:- 1. Depreciation on business rights - Rs. 10,20,00,702/- 2. Interest on deemed loan -Rs. 6,53,02,720/- The Assessing Officer passed the draft assessment order incorporating the transfer pricing adjustment. Besides the transfer pricing adjustment, the Assessing Officer also made a disallowance under section 14A to the tune of Rs.5,47,14,762/- and also made an addition on account of disallowance depreciation on intangible assets amounting to Rs.33,72,60,635/-. Aggrieved, the assessee filed its objections before the DRP. The Ld.DRP gave partial relief to the assessee whereby the transfer pricing adjustment of Depreciation on business rights was deleted and the notional interest on deemed loan was reduced to Rs.3,84,97,764/-. The DRP also reduced the disallowance of depreciation to the tune of Rs.10,88,199. The AO passed the final assessment order pursuant to the directions of the Ld.DRP against which the assessee is in appeal before the Tribunal. Transfer pricing adjustment on account of purchase of shares of the AE (Ground No.2 to 10) 4. During the year under consideration, the assessee has acquired 1,32,500 shares of WNS Global Sevices UK Ltd from WNS Holdings Ltd for an aggregate consideration of USD 25,484,976 and its equivalent value in Indian Rupees is Rs.439,32,93,339/- The face value of the shares in INR is Rs.11,66,000 and the premium is Rs. 439,21,27,000. The assessee submitted, the valuation certificate obtained from the merchant banker and the transaction of purchase of shares was undertaken at the value determined in the valuation certificate. The assessee
4 ITA 2450 & 2451/Mum/2022 WNS Global Services Pvt Ltd submitted the valuation report showing the calculation of value of shares as reproduced hereunder:- “7.2 Method for valuation of shares by the Assessee: 7.2.1 It is seen from form 3CEB as well as TPSR that during the year under consideration assessee has acquired 74,000 shares of WNS Global Services UK Limited from WNS (Holdings) Limited for an aggregate consideration of USD 6,55,87,500 and its equivalent value in Indian Rupees is Rs.2,24,02,09,481. The assessee has submitted that this share purchase transaction was based on a valuation report obtained from merchant banker. As per the valuation report, the assessee has purchased share at the rate of USD 471 equivalent to Rs.30273/- per share.” 7.2.2 The assessee was therefore, asked to furnish the valuation report in this regard. The valuation report furnished by the assessee showed the calculation of value of shares which are being reproduced as under: Particulars Weights Fair Value USD Mn Income Approach:Discounted Cash Flow Method 50.0% 233.0 Market Approach: Comparable Companies 50.0% 236.0 Method Concluded Business Enterprise Value 234.5 Less:Borrowings 0.0 Less: Derivative Financial Instruments liability 2.2 Less: Other Non current liabilities 1.0 Less: Deferred Revenue 1.6 Add : Cash 18.0 Add: Derivative Financial Investments Asset 1.4 Add: Other Net current Assets 0.3 Estimated Fair Value of Equity (Rounded) 250.0 Total number of diluted shares outstanding 505.050 Estimated Fair value of Equity on a per share 495.0 basis-USD Estimated Fair value of Equity on a per share basis-INR 32741.0 An exchange rate of 66.14 has been considered for the conversion from USD to INR In our opinion value per equity share of the company on an equal weighted basis as on March 31, 2016 is USD 495.0 or INR 32,741.0
5 ITA 2450 & 2451/Mum/2022 WNS Global Services Pvt Ltd 5. The assessee placed reliance on the decision of the Bombay High Court in the case of Vodafone Services (P) Ltd vs UOI (WP No.871 of 2014) and Shell India Market Pvt Ltd vs ACIT (WP No.1205 of 2013) wherein the Hon’ble High Court has held that in the absence of income from admitted international transaction, the Indian Transfer Pricing provisions are not applicable. The assessee, without prejudice, as a matter of abundant caution, has disclosed the above international transaction by adopting (other method). For the purpose of valuation of shares, the assessee adopted the weighted average of two methods, namely, markets multiple method (MMM) and discounted cash flow method (DCF). The TPO did not accept this contention of the assessee with respect to non-applicability of transfer pricing provisions. With regard to the valuation method adopted by the assessee the TPO was of the view that shares of a going concern should be valued using DCF method only and rejected the benchmarking done by the assessee.
The TPO re-worked the valuation as per DCF by replacing the projections with the actual for the reason that there is huge difference in the figures adopted for valuation and accordingly arrived at value of Rs.19,612/- per share. The assessee submitted that the valuation is obtained from independent and reviewed third party valuation expert and that the valuation conducted by independent valuer must not be interfered with. The assessee further objected to the working of valuation of share where the projections used were replaced with actual while arriving at value under DCF method. The assessee also submitted that he alleged excessive consideration for purchase of shares cannot be characterized as loan.
The TPO rejected the contentions of the assessee and proceeded to treat the excess amount on account of share transfer, i.e. the difference between Rs.32,741/-
6 ITA 2450 & 2451/Mum/2022 WNS Global Services Pvt Ltd and Rs.19,612/- as loan during the year under consideration and the TPO imputed interest by applying the rate at 2.74%. Accordingly, the TPO arrived at an adjustment of rs.4,72,31,854/-. The TPO also imputed interest for the similar treatment of excess premium as loan pertaining to A.Y. 2016-17 to the tune of Rs.1,80,70,872/-. The DRP gave partial relief to the assessee by applying interest rate at 6 months LIBOR (+) 100 basis points and accordingly the TP adjustment was reduced to Rs.2,41,20,209/- for A.Y. 2017-18 and Rs.1,43,77,555/- for share purchased in A.Y. 2016-17.
Before us, the Ld.AR reiterated the submissions made before the lower authorities. The Ld.AR submitted that the TPO has adopted actual against the projections while applying DCF method, which is not correct. The Ld.AR further submitted that the transaction is a capital account transaction with no income element and, therefore, there cannot be any TP adjustment. The Ld.AR submitted that the decision of the Hon'ble Bombay High Court in the case of Vodafone India (P) Ltd (supra) has been accepted and the CBDT vide Instruction No.2/2015 dated 29/01/2015 has stated that he ratio decidendi of the judgment must be adhered to by the field officers in all cases where this issue is involved. Therefore the ld AR submitted that the impugned transaction cannot be subject to any TP adjustments. The Ld.AR further submitted that the assessee had carried out the sale of shares during assessment years 2016-17, 2017-18 and 2018-19 and though the TP adjustment was made in AY 2016-17 and 2017-18 the TPO did not make any adjustment towards the sale carried out in A.Y. 2018-19. Therefore it was argued that the revenue is not consistent in its stand that the excess premium on the sale of shares is deemed loan transaction warranting levy of notional interest. Without prejudice the ld AR submitted that under DCF method the TPO has replaced the 7 ITA 2450 & 2451/Mum/2022 WNS Global Services Pvt Ltd projected figures with actual which is not correct and the valuation done by the third party valuation expert cannot be interfered with. The Ld.AR drew our attention to the fact that the same issue for A.Y. 2016-17 was considered by the co- ordinate bench in assessee’s own case (ITA No.1259/Mum/2021) order dated 09/12/2022 where the Hon’ble Tribunal has deleted the transfer pricing adjustment.
The Ld.DR, on the other hand, relied on the orders of the lower authorities. The ld DR submitted that the department is in appeal before the Hon'ble Supreme Court in the case of TOPS Group of Electronics System Ltd where the question of law contested related to explanation (i)(c) to section 92B wherein international transaction includes "capital financing". The ld DR further submitted that the SLP has been admitted by the Hon'ble Supreme Court and therefore the issue has not reached finality.
We heard the parties and perused the materials on record. We notice that the co-ordinate bench in assessee’s own case for A.Y. 2016-17 has considered the same issue and has held that-
12. We have thoroughly considered the issue with reference to the contentions of the TPO / AO and point-wise rebuttal of the assessee. We thoroughly analysed the judicial pronouncements relied up on by both the parties. In our considered opinion we found force in the contentions of the assessee that Projections can’t be substituted by actual and hindsight ought not to effect a valuation report, without prejudice to this even if it is assumed otherwise for the time being in force, if projections are to be relied up on, all events that have occurred till that date should be considered.
Moreover, reference to TPO on this issue is un-warranted hence, bad in law. As transaction of purchase of equity shares is a capital transaction and the same is not falling in the category of International Transaction as defined in section 92 of the 8 ITA 2450 & 2451/Mum/2022 WNS Global Services Pvt Ltd Act, as there is no income arising on account of such transactions. In the light of these observations, we set aside the action of authorities below and allow ground no. 7 to 17 raised by the assessee.
During the course of hearing the ld AR submitted that the impugned transaction of sale of shares took place in tranches spread over 3 assessment years i.e. during AY 2016-17 9% of shares were sold, during AY 2017-18 26% and during AY 2018-19 14% were sold. Considering this fact, we are of the view that the above decision of coordinate bench in assessee's own case for AY 2016-17 is applicable for the year under consideration also. Therefore, respectfully following the above decision of the Hon’ble Tribunal, we hold that there cannot be any TP adjustment. These grounds are allowed in favour of the assessee Disallowance of depreciation on intangible assets – Ground No.11
During the year, the assessee has claimed depreciation of Rs.33,72,60,637/- as per the details given below:- Parties Nature of Intangibles Depreciation for AY 2017- 18 (in Rs.) WCIL Customer Contracts 29,16,57,838 WNS UK – Town & Country Customer Contracts 10,88,199 Value Edge Customer Contracts 58,75,000 Customer Relationships 1,58,75,000 Non-Compete fees 2,22,50,000 Denali Customer Contracts 5,14,600 Total 33,72,60,637
13. The assessee submitted that the depreciation claimed on customer contracts, customer relationships and non compete acquired from M/s Value Edge and Denali are same as customer contracts acquired from WNS (UK)(Town & Country Contract) and WCIL (Aviva Contracts) acquired in financial year 2003-04 and 9 ITA 2450 & 2451/Mum/2022 WNS Global Services Pvt Ltd financial year 2011-12, respectively. The assessee also submitted that the Hon'ble Tribunal in assessee's own case for AY 2005-06 and 2008-09 had allowed the depreciation claim on customer contracts and with WNS UK and depreciation on WCIL was allowed by the order of the Hon'ble Tribunal for AY 2011-12 and AY 2012-13. Therefore the assessee prayed that the contracts with Value Edge and Denali being similar in nature the depreciation on customer contracts should be allowed. With respect to non-compete fee the assessee submitted that the same is paid whereby the sellers of Value Edge will not engage in business which is directly or indirectly competing with the business which it sold to the assessee. Accordingly it was submitted that the same would fall within the definition of intangible assets under section 32(1)(ii) i.e. "business of commercial rights of similar nature". The assessee relied on the following decisions in this regard – (i) Areva T and D India Ltd vs DCIT (2012) 345 ITR 421 (Del) (ii) Skyline Caterer (P) Ltd (2018) 118 TTJ 344 (Mum) (iii) Weizmann Forex Ltd (2013) 21 Taxmann.com 99 (iv) India Capital Markets (P) Ltd vs DCIT (2013) 56 SOT 32 (Mum)
14. The assessee further submitted that in the case of CIT vs Areva T and D India Ltd (2021) 129 taxmann.com 55 (Madras) where the depreciation on non- compete fee has been allowed. The Assessing Officer did not accept the contention of the assessee that the customer contracts and non-compete fee falls within the definition of 'intangible assets’ as enumerated in section 32(1)(ii) and therefore, disallowed the depreciation on the same. The DRP gave relief to the assessee with respect to the depreciation on customer contract with WNS UK – Town & Country to the tune of Rs.10,88,199 by relying on the decision of the Hon'ble Tribunal in assessee's own case for AY 2006-07 and AY 2008-09. The DRP relied on its own order for AY 2012-13 to uphold the disallowance of depreciation claimed on 10 ITA 2450 & 2451/Mum/2022 WNS Global Services Pvt Ltd customer contract with WCIL. With respect to depreciation claimed on customer contract and non-compete fee acquired from Value Edge and Denali DRP upheld the disallowance by relying on the decision of the Hon'ble Delhi High Court in the case of Sharp Business Systems vs CIT (2012) 27 taxmann.com 50 (Del)
15. The Ld.AR during the course of hearing submitted that the customer contracts acquired from WCIL is covered by the decision of co-ordinate bench in assessee’s own case for A.Y. 2011-12. The Ld.AR further submitted that the customer contracts acquired from Value Edge Reserve Services Pvt Ltd are identical to the contracts entered into with WNS (UK) and WCIL and, therefore, should be covered by the decision of the co-ordinate bench. The Ld.AR further submitted that the depreciation on non-compete fee which is disallowed by the Assessing Officer is also covered by the decision of the Pune Bench of the Tribunal in the case of Serum Institute of India Ltd vs ACIT (2012) 135 ITD 69 (Pune). The Ld.DR on the other hand, relied on the orders of the lower authorities.
We notice that the co-ordinate bench in assessee’s own case for A.Y. 2005- 06 (ITA No.631/Mum/2011) read with Miscellaneous Application (No.261/Mum/2019 dated 16/01/2019), has considered the issue of depreciation on customer contract entered into by the assessee for acquisition of Town Country Assistance Ltd and held that - “40. We have considered rival submissions and perused materials oi record. Insofar as factual aspect of the issue is concerned, there is no dispute that by virtue of acquisition of M/s. Town and Country Assistance Ltd., various contracts executed by the said concern with third party clients were assigned to the assessee. It is also a fact that such acquisition took place by virtue of an agreement executed on 13th January 2004. It is also a fact on record that in assessment year 2004-05, the assessee for the first time claimed depreciation by treating the capitalized value of 11 ITA 2450 & 2451/Mum/2022 WNS Global Services Pvt Ltd the amount paid towards acquiring M/s. Town and Country Assistance Ltd., as an intangible asset and claimed depreciation @ 25%. Notably, the Assessing Officer while completing assessment under section 143(3) of the Act also allowed assessee's claim of depreciation. However, learned Commissioner of Income Tax revised the assessment order under section 263 of the Act. Subsequently, while deciding assessee's appeal against the said order the Act and restored the assessment order. Thus, in effect, assessee' claim of depreciation in respect of intangible asset became final. In any case of the matter, there is no dispute that by acquiring M/s Town and Country Assistance Ltd, the assessee has also acquired contractual rights which, no doubt, is a valuable commercial right, Therefore, it comes within the meaning of intangible asset as per section 32(l)(ii) r/w Explanation 3(b) of the Act. Hence, depreciation claimed by the assessee is allowable. The decisions relied upon by the learned Sr. Counsel for the assessee also supports our aforesaid view. Accordingly, we uphold the decision of the learned Commissioner(Appeals) by dismissing the grounds raised.”
The ratio laid down by the Hon'ble Tribunal in the above order is that the contractual rights is a valuable commercial right and comes within the meaning of intangible asset as per section 32(l)(ii) r/w Explanation 3(b) of the Act. Applying the same ratio we hold that the depreciation claimed by the assessee on customer contracts acquired from WCIL, Value Edge and Denali are allowable.
With regard to the depreciation claimed on capitalization of non-compete fee, we notice that the Pune Bench of the Tribunal in the case of Serum Institute of India Ltd (supra) has held that – 13. Therefore, the limited disputed for adjudication before us relates to if the capital expenditure by way of 'non compete fee' in question is an 'intangible asset' and if the same is depreciable asset for the benefits u/s 32 of the Act. There is no dispute on the capital nature of the impugned 'non compete fee' in view of the reported judgment of the Supreme Court in case of Guffic Chem (P.) Ltd. v. CIT [2011] 332 ITR 602/198 Taxman 78/10 taxmann.com 105, which is adopted in the judgment in the case of Hari Shankar Bhartia v. CIT [2011] 203 Taxman 6 (Mag.)/15 12 ITA 2450 & 2451/Mum/2022 WNS Global Services Pvt Ltd taxmann.com 113 (Cal.). In any case, both the parties accepted the fact that the said fee is capital in nature. On going through the facts, arguments, submissions, documents available before us and the orders of the revenue, we find the issue is squarely covered by the decision of the Chennai Bench of the ITAT in the case of Real Image Tech (P) Ltd (supra). It is our endeavor to make this order self contained and therefore, we reproduce the relevant HELD portions of the said decision and the same read as under. Held: When a businessman pays money to another businessman for restraining the other businessman from competing with the assessee, he gets a vested right which can be enforced under law and without that the other businessman can compete with the first businessman. When by payment of non-compete fee, the businessman gets his right what he is practically getting is kind of monopoly to run his business without bothering about the competition. It is just like separating big plant from other plants affecting the growth of the big plant. Generally, non-compete fee is paid for a definite period which in this case is five years. The idea is that by that time, the business would stand firmly on its own footing and can sustain later on. This clearly shows that the commercial right comes into existence whenever the assessee makes payment for non- compete fee. Now, the second question is whether such right can be termed as "or any other business or commercial rights of similar nature" for construing the same as "intangible asset". Here, the doctrine of ejusdem generis would come into operation. The term "or any other business or commercial rights of similar nature" has to be interpreted in such a way that it would have some similarities as other assets mentioned in cl. (b) of Expln.
The other assets mentioned are knowhow, patents, copyrights, trademarks, licenses, franchises, etc. In all these cases no physical asset comes into possession of the assessee. What comes in is only a right to carry on the business smoothly and successfully and therefore even the right obtained by way of non-compete commercial rights of similar nature" because after obtaining non-compete right, the assessee can develop and run his business without bothering about the competition. The right acquired by payment of non-compete fee is definitely intangible asset. Moreover, this right (asset) will evaporate over a period of time of five years in this case because after that the protection of non-competition will not be available to the assessee. This means, this right is subject to wear and tear by the passage of time, in the sense, that after the lapse of a definite period of five years, this asset will not be available to the assessee and, therefore, this asset
13 ITA 2450 & 2451/Mum/2022 WNS Global Services Pvt Ltd must be held to be subject to depreciation. Assessee would be entitled to depreciation in respect of non-compete fee which is in the nature of intangible asset.
From the above, it is vivid that the, by payment of non compete fee to another person to reduce the business or commercial competition for a period, the assessee acquires a right and it is a capital asset, which is a business or a commercial right as held by the above said decision of the Tribunal-Chennai Bench. Such rights are intangible ones and they are covered by the provisions of clause (ii) of section 32(1) of the Act relating 'Depreciation'. The said provisions w e f 1.4.1999 read as follows. " 32. (1) In respect of depreciation of- (i).... (ii) know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the 1st April, 1998……….
The said right is acquired undisputedly after the 1.4.1998 and there is no dispute on this fact. In such circumstances, without going into other aspects of the submission relating to segregating an asset from the 'block of assets' for purpose of denial of depreciation on such asset, which is of course is a settled proposition against the revenue, in our opinion, the assessee must win on this issue in view of the cited ratio in the case of Real Image Tech (P.) Ltd. (supra). Further, it is a settled issue that the non compete fee is intangible and depreciable asset as held by the cited supreme court's judgments, which are discussed in the preceding paragraphs. On both the counts, the arguments of the revenue are dismissed. Accordingly, the grounds raised in the appeal of the assessee are decided in favour of the assessee.
In the above decision it is held that the payment made towards non-compete fee is an intangible depreciable asset. Respectfully following the above decision we hold that the depreciation claimed on non-compete fee acquired from Value Edge should be allowed. Accordingly this ground of the assessee is allowed.
14 ITA 2450 & 2451/Mum/2022 WNS Global Services Pvt Ltd Disallowance under section 14A (Ground 12) 20. The Assessing Officer during the course of hearing noticed that the assessee has made investments in mutual funds, equity and preference shares. It is also further noticed that the assessee has earned exempt dividend income of Rs.27,70,22,617/-. The assessee, in the computation of income has made a suo moto disallowance under section 14A of Rs.12,52,224/-. The Assessing Officer was of the view that the said disallowance by the assessee is not commensurate with the provisions of Rule 8D read with section 14A. Accordingly, the Assessing Officer proceeded to compute the disallowance under section 14A at Rs.5,42,98,096/-. The Ld.DRP confirmed the disallowance by following its own order for AY 2016-17.
The Ld.AR submitted that the assessee is having sufficient own funds and, therefore, no disallowance under section 14A read with rule 8D is warranted. The Ld.AR further submitted that the Assessing Officer, while rejecting the suo moto disallowance made by the assessee, has not recorded any satisfaction and has also not stated why the suo moto disallowance is rejected. The Ld.AR also submitted that the DRP while confirming the disallowance has simply followed the order of assessment year 2016-17 and has not considered any of the submissions of the assessee. The Ld.AR brought to our attention that the co-ordinate bench of the Tribunal for A.Y. 2016-17 has deleted the disallowance made under section 14A read with rule 8D which has been relied by the DRP while confirming the AOs decision.
The Ld.DR relied on the order of the lower authorities.
15 ITA 2450 & 2451/Mum/2022 WNS Global Services Pvt Ltd
We heard the parties and perused the material on record. The assessee against the exempt income earned has disallowed a sum of Rs. 12,52,224/- on its own in computation of income. The assessing officer did not accept this disallowance stating that the same is not commensurate with the income earned and arrived at a disallowance of Rs. 5,42,98,096/-. The DRP did not go into the merits of the case for the year under consideration but has sustained the disallowance by relying on its own order for AY 2016-17. It is relevant here to note that the coordinate bench in assessee's own case for A.Y. 2016-17 has deleted the disallowance made under section 14A r.w.r.8D. The relevant observations of the Hon'ble Tribunal is as given below –
22. In view of the above facts and judicial pronouncements relied up on No disallowance under rule 8D (2)(i) can be made, as there is no direct expense in the case of assessee, still assessee itself offered Rs. 9,29, 819/-. Disallowance under rule 8D (2)(ii) Can’t be made at all as assessee is using its own funds and no borrowed funds were utilised and disallowance under rule 8D (2)(iii) Also must be limited to the extent of Rs. 54 Lacs only as worked out by the assessee reliance is placed on the recent ITAT decision in the case of Tata Projects Limited (ITA. No.459/Mum/2019) dated 22 October 2020 wherein the ITAT has accepted the above method of apportionment and disallowance computed by the assessee under Section 14A of the Act. The Tribunal held that on perusal of the method adopted by assessee it could be stated that the method of computing disallowance was very fair reasonable and scientific. 24. For the year under consideration the own funds as per the Balance Sheet as at 31.03.2017 is Rs.2540.52 crores whereas the total investments are at Rs.566.26 crores. Hence we see merit in the argument of the ld AR that no borrowing cost is incurred by the assessee for the purpose of earning exempt income warranting any disallowance under rule 8D(2)(i). Plancing reliance in this regard in the decision of 16 ITA 2450 & 2451/Mum/2022 WNS Global Services Pvt Ltd jurisdictional High Court in the case of CIT vs Reliance Utilities and Power Ltd., (178 taxman 135) (Bom) we hold that no disallowance under section 14A r.w.r.8D(2)(i) is warranted. With regard to disallowance under rule 8D(iii) the rule provides that the disallowance can be made provided the Assessing Officer is not satisfied with the correctness of the claim of expenditure by the assessee. In other words the AO has to record reasons as to why he is not satisfied with the correctness of the claim of expenditure or the suo moto disallowance made by the assessee. We notice that the AO has not brought anything on record to factually state that the computation of disallowance made by the assessee is not correct but has elaborated only the provisions of section 14A and Rule 8D before recomputing the disallowance. Further the AO has also not called for any details from the assessee or analysed the workings of the disallowance. In this regard we notice that the Hon’ble Supreme Court in the case of Maxopp Investment Ltd. v. CIT [2018] 91 taxmann.com 154 (SC) has held as follows:-
41. Having regard to the language of Section 14A(2) of the Act, read with Rule 8D of the Rules, we also make it clear that before applying the theory of apportionment, the AO needs to record satisfaction that having regard to the kind of the assessee, suo moto disallowance under Section 14A was not correct. It will be in those cases where the assessee in his return has himself apportioned but the AO was not accepting the said apportionment. In that eventuality, it will have to record its satisfaction to this effect. Further, while recording such a satisfaction, nature of loan taken by the assessee for purchasing the shares/making the investment in shares is to be examined by the AO.
25. In view of the above Hon'ble Apex Court judgment, it is clear that no disallowance can be made u/s 14A of the Act read with Rule 8D(iii) of the IT Rules, where the A.O. failed to record dissatisfaction of correctness of the claim of the assessee. Therefore the disallowance made under section 14A r.w.r 8D(2)(iii) is deleted. This ground of the assessee is allowed
17 ITA 2450 & 2451/Mum/2022 WNS Global Services Pvt Ltd Disallowance under section 36(1)(va) - Ground No.13 26. The Ld.AR in this regard submitted that the entire amount as mentioned in the tax audit report has been disallowed. However, the Ld.AR submitted that for the year under consideration, a disallowance of R.3,92,71,750/- was paid within the extended due date of Employees’ Provident Act and, therefore, the same is not affected by the decision of the Hon’ble Supreme Court in the case of Checkmate Services Pvt Ltd 448 ITR 518 (SC) where it has been held that the employees’ contribution towards PF & ESI be allowed only if paid within the due date as specified in the respective Acts. The Ld.AR in this regard drew our attention to the circular issued with regard to extension of due date for payment of contribution towards PF & ESI for the month of December, 2016 (page 575 of paper book). The Ld.AR further submitted that the assessee has paid the amount within the extended grace period of 20th January, 2017.
We heard the parties and perused material available on record. The Hon’ble Supreme court has now settled the issue of payment of employee’s contribution to PF by holding that the same should be paid before the due date as specified in the respective Act. The assessee’s claim that the contribution paid in the month of December, 2016 is paid before the extended due date as per the notification issued under the Employees Provident Fund Act needs factual verification. We, therefore, remit the issue back to the Assessing Officer to verify the claim of the assessee and allow the claim in accordance with law keeping in mind the decision of the Hon’ble Supreme Court in the case of Checkmate Services Pvt Ltd (supra).
18 ITA 2450 & 2451/Mum/2022 WNS Global Services Pvt Ltd Disallowance under section 43B – Ground No.14 28. The assessee during the year under consideration has reversed the provisions made towards bonus and leave encashment which was created for A.Y. 2016-17. The said provisions were disallowed under section 43B in the return of income filed for the assessment year 2016-17. However, due to peculiar format of the online form 3CD, the auditor could fill in the details regarding deduction under section 43B of the Act of only the amounts that are actually paid and not the amount reversed. The Ld.AR submitted that provisions reversed had to be allowed as a deduction since the same is disallowed in the assessment year 2016-17. The Ld.AR also drew our attention to the directions given by the DRP (page 91 para 16.3.1 of DRP order) where the DRP gave a direction for the Assessing Officer to verify and allow claim if the same has already been disallowed in the earlier year. It was submitted that the Assessing Officer while passing the final assessment order did not give effect to the said direction of the DRP.
We heard the parties and perused the material available on record. It is noticed that the Assessing Officer in the final order of assessment has retained the same disallowance made towards reversal of provisions claimed by the assessee based on the disallowance made in the earlier assessment year. It is also noticed that the DRP has given a direction to the Assessing Officer to verify the facts and the consider the return of income filed by the assessee for this year as well as the earlier year and allow the claim if it has already been disallowed. We, therefore, remit this issue back to the Assessing Officer with the direction to consider the relevant details filed by the assessee in this regard and allow the claim in accordance with law.
19 ITA 2450 & 2451/Mum/2022 WNS Global Services Pvt Ltd Short Grant of TDS (Ground 15) 30. The Ld.AR in this regard submitted that the Assessing Officer did not give credit for the entire TDS claim by the assessee and prayed for a direction in this regard. We accordingly direct the Assessing Officer to verify the claim of the assessee with respect to the TDS and allow the credit in accordance with law after giving a reasonable opportunity of being heard to the assessee.
Ground No.16 is consequential and Ground No.17 is premature. Therefore these grounds do not warrant separate adjudication.
ITA No.2450/Mum/2022 (A.Y.20-18-19)
22. The return of income for the assessment year was filed on 24/11/2018 declaring a total loss of Rs.2,52,72,70,660/-. The TPO made an addition of Rs.7,65,00,526/- towards depreciation on business rights and Rs.6,33,96,077/- towards interest on the deemed loan. The Assessing Officer also made disallowance under section 43B and also disallowance under section 14A. The DRP on appeal, deleted the TP adjustment made towards depreciation on business rights and upheld the other TP adjustment. The DRP also upheld the disallowance made by the Assessing Officer. The issues and the relevant grounds raised for assessment year is tabulated in the earlier part of this order. Accordingly the issues contended through Ground Nos. 2 to 10 and 13 to 15 of year under consideration are common for both the assessment years and the facts pertaining to these issues are also identical. Therefore our decision with respect to these issues for AY 2017- 18 are mutatis mutandis applicable to AY 2018-19 also.
20 ITA 2450 & 2451/Mum/2022 WNS Global Services Pvt Ltd 23. Ground No.11 pertains to the Assessing Officer not giving credit towards the advance tax paid by the assessee for an amount of Rs.30,00,00,000. The ld AR in this regard submitted that the assessing officer has not provided any reason as why there was a short credit towards advance tax. We therefore remit the issue back to the Assessing Officer with a direction to examine the advance tax paid by the assessee based on the supporting evidences and allow credit accordingly.
Ground No.12 is with regard to denial of Foreign Tax Credit (FTC) claimed by the assessee. The ld AR submitted that the Assessing Officer did not call for any details in this regard and there was no reason provided as why the FTC is denied. We heard the parties and it is noticed that there is no mention in the assessment order with regard to the denial of FTC claimed by the assessee. In our view this issue needs factual verification and therefore we remit the issue back to the Assessing Officer to examine the claim of FTC afresh and allow credit in accordance with law after giving a reasonable opportunity of being heard to the assessee.
In result the appeals for AY 2017-18 and 2018-19 are partly allowed.
Order pronounced in the open court on 26/07/2023.