LOWES SERVICES INDIA PRIVATE LIMITED,BANGALORE vs. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 4(1)(1),, BANGALORE

The ld. TPO held that filters used by the assessee out of which some of them are inappropriate and also assessee failed to use the appropriate filters, hence TP Study Report was rejected. The ld. AO carried out fresh search by using computer software and software services and consultancy for Software

The ld. TPO also found that there is a delay in outstanding receivable, therefore allowing 30 days credit period, he calculated interest @ 13.62% and computed interest of Rs.4,65,02,032.

Accordingly order u/s. 92CA(3) was passed making a total adjustment of Rs.50,69,03,201.

Based on this, the ld. AO passed a draft assessment order u/s. 144C(1) on 27.9.2023 wherein the addition of Rs.50,69,03,201 was proposed on account of TP adjustment. A further disallowance u/s. 36(1)(va) was made of Rs.132,825 on account of late payment to Provident Fund [PF]. A further addition of Rs.76,48,794 was made by disallowing deduction u/s. 80G of the Act out of CSR expenditure. Thus, total income was assessed at Rs.130,39,86,570. While computing the total income, the AO took the income processed u/s. 143(1) of the Act of Rs.78,93,01,750 against the returned income of Rs.78,61,52,120.

The assessee aggrieved with the same preferred objections before the ld. Dispute Resolution Panel [ld. DRP], who passed the direction on 7.6.2024. Based on this, the ld. TPO gave effect to the said direction vide order dated 8.7.2024 wherein the adjustment of Software Development Services segment and ITeS segment was deleted. Further the interest on delayed receivable adjustment of Rs.4,65,02,032 was determined at Rs.1,98,60,669. This is due to the direction of the ld. DRP to charge interest rate on the basis of LIBOR rate at 5.817% p.a.

Based on this, the final assessment order was passed on 19.7.2024 wherein the only Transfer pricing issue of interest on overdue receivable remained with upward TP adjustment of Rs.1,98,60,669, deduction claimed u/s. 80G of Rs.76,48,794 and disallowance u/s. 36(1) (va) of Rs.132,825.

Ground Nos.1 & 2 are general in nature. No arguments were advanced and therefore the same are dismissed.

Ground No.3 is adjustment on account of interest on outstanding receivables amounting to Rs.1,98,60,669.

The ld. AR argued that

the TPO has computed the interest till date of collection which should have been restricted upto 31.3.2020. He referred to Annexure-A of the OGE to the DRP directions and submitted that at sl. Nos. 1, 6, 7 to 9, 13, 17, 19, 21, 25 & 27, the ld. TPO has computed interest which is not pertaining to this year.

in fact the weighted average period of receivable of the assessee is 38 days only which is less than the weighted average period of 60 days in most of the comparables post-DRP direction and therefore no addition could have been made.

that as per ground of objection No.14 the assessee has considered for difference in working capital position of the assessee vis-à-vis the comparable companies. This argument has been rejected as per para 15 of the direction of the DRP. He submitted that if working capital adjustment is granted, there cannot be any separate adjustment on account of overdue interest receivable when TNMM is applied as the most appropriate method.

that the ld. DRP has directed that LIBOR+350 Basis Points should be considered for computing notional interest on outstanding receivables. It was submitted that as the amount is due from its AE, 350 Basis Points further added to the LIBOR or the LIBOR itself is not the correct benchmarking. It was submitted that the benchmarking rate adopted by the ld. DRP

The ld. DR vehemently supported the orders of the ld. DRP. It was submitted that as assessee has not benchmarked this transaction, now assessee cannot question the benchmarking of the same. With respect to LIBOR+350 Basis Points computed by the DRP, the same is appropriate and should be upheld.

We have carefully considered the rival contentions and perused the orders of the ld. lower authorities. The brief facts show that interest on delayed receivables computed by the TPO was Rs.4,65,02,032/- by taking the interest rate @ 13.62% p.a. being SBI PLR. The ld. TPO for adopting the above rate has categorically held that if in case the invoices are used in domestic currency i.e., Rupees, the interest rate is supposed to be charged on the basis of average SBI PLR of 13.62% p.a. and if the invoices have been raised in foreign currency, the interest rate is supposed to be charged on the basis of mark-up on prevailing LIBOR rate during the year. Based on this, the ld. TPO pointed out that the invoices are prepared in Rupees adopting 13.62% interest rate.

The assessee challenged the same before the DRP wherein at para 17.10 the ld. DRP directed the TPO to adopt LIBOR based rates. The DRP at para 17.10.6 has held that RBI Master Circular on ECB dated 23.6.2019 specifies a cost ceiling of 6

It is a case of capital financing between two AE; therefore, it should be benchmarked as loan transaction for a noticeably brief period between two related parties where there is a minimum risk as it is transaction between holding company to subsidiary or a joint venture company. As LIBOR is not appropriate base rates , bills are denominated in us currency, SOFR or any other appropriate rates , may also be adopted.

In view of the above facts, we restore the whole issue back to the file of the ld. AO with directions to the assessee to benchmark the outstanding receivable based on currency in which invoices are prepared. Appropriate mark-up thereon or reduction from that interest bank rate would depend upon the risk factors involved in the above transaction which is between the holding company/AE and its subsidiary. The ld. AO thereafter may examine in accordance with the provisions of section 92CA for the determination of ALP of the international transaction and then decided the issue afresh. The assessee is also entitled to raise an issue that if in the international transaction of Software Development Services segment and ITeS segment, working capital adjustment is granted to the assessee, no separate addition is required to be made. Therefore, this aspect is also left to be adjudicated by the ld. AO. In view of these facts, ground No.3 of the appeal is restored back to the file of the ld. AO.

Coming to ground No.4, it was submitted that disallowance of Rs.132,825 was a double addition because it was first disallowed u/s. 143(1) and subsequently once again while framing the final assessment order. The ld. DR submitted that the same may be verified.

In view of the above facts, we direct the ld. AO that if there is a double addition of Rs.132,825 once in the proceedings u/s. 143(1) of the Act and then in the final assessment order, it deserves to be deleted, we direct to delete the disallowance. Ground No.4 is allowed.

Ground No.5 is with respect to the incorrect amount of book profit computed by the AO while computing the income tax liability u/s. 115JB of the Act. It was submitted that book profit computation as per s. 115JB is of Rs.118,10,19,785 against which the ld. AO computed the same at Rs.158,55,16,806.

After hearing both the parties, we find that in the draft assessment order we do not find any such computation. We also do not find any direction of the ld. DRP on the same. While looking at the final assessment order, we find that in the tax computation sheet, the deemed income computed u/s. 115JB at sl.No.19 is at Rs.158,55,16,806. First of all, if there is adjustment to the book profit of the assessee, it was not made in the draft assessment order. As the assessee says that the correct book profit is Rs.118,10,19,785, the ld. AO could not have made any adjustment to the book profit in the final assessment order without first putting it into the draft assessment order. As there is no adjustment to the book profit in the draft assessment order, the ld. AO is directed to take the book profit of Rs.118,10,19,785 only for computing the tax liability of the assessee. Accordingly ground No.5 is allowed.

As per ground No.6 assessee has a grievance that MAT credit of Rs.2,25,79,720 was not granted to the assessee and further as per ground No.7 credit for TDS of Rs.2,35,452 was denied.

After hearing both the parties, we direct the ld. AO to verify the above facts and grant MAT credit as well as credit for TDS in accordance with law.

As per ground No.8 assessee has challenged the action of the AO in disallowing deduction of Rs.76,48,794 u/s. 80G of the Act.

The brief facts show that during the year, assessee has contributed Rs.1,52,97,588 to 4 different charitable trusts. It claimed deduction u/s. 80G on the same @ 50% amounting to Rs.76,48,794. During the course of assessment proceedings assessee furnished deduction receipt and bank statements, but failed to furnish certificate of exemption u/s. 80G. Therefore a show cause notice was issued. In response to that, assessee submitted copies of the certificate of exemption for FY 2018-19 and submitted that approval granted is one time approval which would be valid till it is withdrawn. The ld. AO held that assessee failed to submit complete documentary evidence and in the return of income assessee has shown it as CSR expenditure. Therefore deduction u/s. 80G of Rs.76,48,794 was disallowed.

The assessee filed objections before the ld. DRP which gave a direction that the allowance of deduction u/s. 80G on CSR expenditure wholly defeats the legislative intent behind introducing the CSR expenditure which is share of the burden of the Govt. sector by the corporate sector and accordingly the order of the AO was upheld.

Against this, assessee is in appeal before us. Assessee submits that assessee has produced the donation receipt, 80G approval certificates and based on this, it claimed deduction u/s. 80G of the Act. He submits that except Swachh Bharat Abhiyan Kosh and Clean Ganga Fund, assessee is entitled to deduction u/s. 80G of CSR expenditure. For this proposition, he relied on the decision of the coordinate Bench in the case of FNF India Pvt. Ltd. v. ACIT, Bengaluru and Axis Securities v. PCIT, Mumbai.

The ld. DR vehemently supported the orders of ld. lower authorities.

We have carefully considered the rival contentions and perused the orders of the ld. lower authorities. The solitary issue in this ground is that assessee is denied deduction u/s. 80G of the Act of CSR expenditure, donations given to other charitable trusts. It is an admitted fact that donation was not given to Swachh Bharat Abhiyan Kosh and Clean Ganga Fund. If donation is given to these two organisations, then only assessee can be denied deduction u/s. 80G. This issue is squarely covered in favour of assessee by the decision of the coordinate Bench in FNF India Pvt. Ltd. v. ACIT, 133 taxmann.com 251 and Axis Securities, 175 taxmann.com 982. Accordingly we allow ground No.8 of the assessee and direct the ld. AO to grant donation u/s. 80G of the act amounting to Rs.76,48,794.

Ground Nos. 9 & 10 are consequential in nature with respect to chargeability of interest and therefore same are dismissed.

In the result, the appeal of the assessee is partly allowed.