BRIGHTCOM GROUP LIMITED,HYDERABAD vs. ASST. COMMISSIONER OF INCOME TAX, CIRCLE-1(2), HYDERABAD

Aggrieved with the final assessment order of Ld. AO, the assessee is in appeal before this Tribunal. The ground no.1 of the assessee is general in nature, accordingly the same is dismissed, as no separate adjudication is required.

We have considered the rival submissions and perused the material available on record. We have gone through Note No. 35 of the financial statements placed at page no. 309 of the paper book, where under segment reporting the company has stated that the assessee is engaged in providing SDS, digital marketing and related services, which is to the following effect : “ Note No.35 : Segment Reporting : The Company is mainly engaged in the area of providing Software Development Services and Digital Marketing and related services. The company publishes standalone financial statements along with the consolidated financial statements in the annual report. In accordance with the AS-17, Segment Reporting, the company has disclosed the Segment Information in the consolidated financial statements.” 9.1 We have also perused Note No. 24 of the financial statements placed at page no. 303 of the paper book, wherein under quantitative details, the assessee has again mentioned that it is engaged in providing digital marketing services, development of computer software, and related services, which is to the following effect : “ Note No.24 : Quantitative Details The company is engaged in providing digital marketing services, development of computer software and services. The production and sale of such digital marketing services and software development services cannot be expressed in any generic unit. Hence, it is not possible to give the quantitative details of sales and certain information as required under paragraphs 5(viii)( c ) of general instructions for preparation of the Statement of Profit and Loss as per Schedule III to the Companies Act, 2013.” 9.2 Thus, on perusal of above we find that there is no dispute on the fact that the assessee is engaged in rendering multiple services, including both digital marketing services and SDS.

Per contra, the Ld. DR relied on the order of Ld. AO/TPO.

We have heard the rival contentions and also gone through the record in the light of the submissions made by either side. The core issue before us is to decide the appropriate interest rate to be applied for trade receivables from foreign AEs. We find that an identical issue has been dealt by this Tribunal in the case of HARSCO India Private Ltd. v/s DCIT in dated 06/03/2025, wherein at para no. 6 to 10 of the order this Tribunal has held as under : “6. It is pertinent to note that, not following the decisions of the Tribunal in assessee’s own case amounts to judicial indiscipline on the part of the DRP. However, since the issue has now come up before the Tribunal, therefore, we will discuss the merits of this issue. The basic question before us is, whether for benchmarking the outstanding receivables from AEs, the comparable interest rate should be PLR rate/SBI short term rate or LIBOR rate/LIBOR+ mark up. This issue was considered by the Chennai Special Bench of this Tribunal in case of Shiva Industries & Holdings Ltd. v. Assistant Commissioner of Income-tax reported in 46 SOT 112/11 Taxmann.com 404 (SB) and held in para 11 as under: “11. We have considered the rival submissions. A perusal of the order of the TPO clearly shows that the assessee had raised the funds by way of issuance of 0 per cent optional convertible preferential shares. Thus, it is noticed that the funds raised by the assessee company for giving the loan to India Telecom Holdings Ltd., Mauritius, which is its Associated Enterprises and which is the subsidiary company, is out of the funds of the assessee company. It is not borrowed funds. The assessee has given the loan to the Associated Enterprises in US dollars. The assessee is also receiving interest from the Associated Enterprises in Indian rupees. Once the transaction between the assessee and the Associated Enterprises is in foreign currency and the transaction is an international transaction, then the transaction would have to be looked upon by applying the commercial principles in regard to international transaction. If this is so, then the domestic prime lending rate would have no applicability and the international rate fixed being LIBOR would come into play. In the circumstances, we are of the view that it LIBOR rate which has to be considered while determining the arm's length interest rate in respect of the transaction between the assessee and the Associated Enterprises. As it is noticed that the average of the LIBOR rate for 1-4-2005 to 31-3-2006 is 4.42 per cent and the assessee has charged interest at 6 per cent which is higher than the LIBOR rate, we are of the view that no addition on this count is liable to be made in the hands of the assessee. In the circumstances, the addition as made by the Assessing Officer on this count is deleted.”

Thus, a transaction of loan to the AEs in foreign currency is considered as international transaction between the assessee and its AEs, then the transaction would have to be looked upon by applying the commercial principles in regard to the international transactions. Therefore, the domestic prime lending rate or domestic deposit rate would have no applicability on international transaction, but the international rate being London Interbank Offered Rate (LIBOR) or similar rate i.e. Euro Interbank Offered Rate (EURIBOR) would govern the international transactions of lending by the assessee to the AEs. This issue also came up for consideration before the Hon'ble Delhi High Court in the case of CIT vs. Cotton Naturals (I) Private Ltd, reported in 276 CTR 445 (Del.) and the Hon'ble Delhi High Court has held in para 35 to 40 as under: “35. The LIBOR rate plus markup or the interest rate prevailing in the United States at that time, i.e. 2003 have not been examined and are not the basis on which the TPO made the adjustment and compute the interest rate for the transaction under consideration. It claimed that the LIBOR rates in the year 2002 varied between 1.447 % to 3.006 % and in the year 2003 between 1.201% to 1.487%. Rates in the year 2004 were again marginal, with the highest at 3.100% and the lowest at 1.340%. The LIBOR rate of 5.224% quoted in the TPO's order, it is pointed out, was the rate received on the investment made during the assessment year in question by the assessed. Thus, it was argued that the present case is of a long-term loan granted to the AE and the rate of interest charged was much higher than the then prevailing LIBOR interest rate. There is no finding of the TPO, the DRP or the Assessing Officer questioning the long-term transaction as such.

Under sub-rule (4) to Rule 10B, the data used for comparability of the uncontrolled transaction should be the data relating to the financial year in which the international transaction has been entered into. The proviso permits consideration of data, not more than two years prior to the financial year, if such data reveals facts which would have influenced determination of transfer price in relation to the transaction being compared. The transaction in question was entered into in the year 2002-03 when the loans were granted to the AE. This was the financial year of the international transaction. Payment of interest is also an international transaction but would have reference to the year in which the loan was granted in case of a long term loan. However, in such situations, question may arise whether the case would fall under the second exception mentioned in the case of E.K.L. Appliances (supra), when an AE has the right to recall and ask for repayment of loan. These aspects have not been considered and applied by the TPO, DRP and the Assessing Officer. Neither has this ground been argued before us on behalf the Revenue. We, therefore, would not proceed to examine the said aspect and leave the question open. Similarly, we have not expressed any opinion on the issue or question of "thin capitalization" which does not arise for consideration in the present case.

We observe that whatever the Revenue argues and submits in the case of outbound loans or for that matter what we have observed would be equally applicable to inbound loans given to Indian subsidiaries of foreign AEs. The parameters cannot be different for outbound and inbound loans. A similar reasoning applies to both inbound and outbound loans. Revenue has erroneously argued that different parameters would apply for inbound and outbound loans, which is not acceptable.

The DRP referred to the PLR rates fixed in India. It is evident that the PLR rates were not the basis for fixing the arm's length price. Both TPO and the DRP have referred to the PLR rates only by way of analogy so as to state the prevailing interest rates in India, but while applying CUP method for comparability, they had applied LIBOR rates prevailing and had applied a mark-up of 700 points on account of low credit rating of the subsidiary AE and the cost of transaction.

The question whether the interest rate prevailing in India should be applied, for the lender was an Indian company/assessee, or the lending rate prevalent in the United States should be applied, for the borrower was a resident and an assessee of the said country, in our considered opinion, must be answered by adopting and applying a commonsensical and pragmatic reasoning. We have no hesitation in holding that the interest rate should be the market determined interest rate applicable to the currency concerned in which the loan has to be repaid. Interest rates should not be computed on the basis of interest payable on the currency or legal tender of the place or the country of residence of either party. Interest rates applicable to loans and deposits in the national currency of the borrower or the lender would vary and are dependent upon the fiscal policy of the Central bank, mandate of the Government and several other parameters. Interest rates payable on currency specific loans/ deposits are significantly universal and globally applicable. The currency in which the loan is to be re-paid normally determines the rate of return on the money lent, i.e. the rate of interest. Klaus Vogel on Double Taxation Conventions (Third Edition) under Article 11 in paragraph 115 states as under:— "The existing differences in the levels of interest rates do not depend on any place but rather on the currency concerned. The rate of interest on a US $ loan is the same in New York as in Frankfurt-at least within the framework of free capital markets (subject to the arbitrage). In regard to the question as to whether the level of interest rates in the lender's State or that in the borrower's is decisive, therefore, primarily depends on the currency agreed upon (BFH BSt.B1. II 725 (1994), re. 1 § AStG). A differentiation between debt-claims or debts in national currency and those in foreign currency is normally no use, because, for instance, a US $ loan advanced by a US lender is to him a debt- claim in national currency whereas to a German borrower it is a foreign currency debt (the situation being different, however, when an agreement in a third currency is involved). Moreover, a difference in interest levels frequently reflects no more than different expectations in regard to rates of exchange, rates of inflation and other aspects. Hence, the choice of one particular currency can be just as reasonable as that of another, despite different levels of interest rates. An economic criterion for one party may be that it wants, if possible, to avoid exchange risks (for example, by matching the currency of the loan with that of the funds anticipated to be available for debt service), such as taking out a US $ loan if the proceeds in US $ are expected to become available (say from exports). If an exchange risk were to prove incapable of being avoided (say, by forward rate fixing), the appropriate course would be to attribute it to the economically more powerful party. But, exactly where there is no 'special relationship', this will frequently not be possible in dealings with such party. Consequently, it will normally not be possible to review and adjust the interest rate to the extent that such rate depends on the currency involved. Moreover, it is questionable whether such an adjustment could be based on Art. 11 (6). For Art. 11(6), at least its wording, allows the authorities to 'eliminate hypothetically' the special relationships only in regard to the level of interest rates and not in regard to other circumstances, such as the choice of currency. If such other circumstances were to be included in the review, there would be doubts as to where the line should be drawn, i.e., whether an examination should be allowed of the question of whether in the absence of a special relationship (i.e., financial power, strong position in the market, etc., of the foreign corporate group member) the borrowing company might not have completely refrained from making investment for which it borrowed the money."

The aforesaid methodology recommended by Klaus Vogel appeals to us and appears to be the reasonable and proper parameter to decide upon the question of applicability of interest rate. The loan in question was given in foreign currency i.e. US $ and was also to be repaid in the same currency i.e. US $. Interest rate applicable to loans granted and to be returned in Indian Rupees would not be the relevant comparable. Even in India, interest rates on FCNR accounts maintained in foreign currency are different and dependent upon the currency in question. They are not dependent upon the PLR rate, which is applicable to loans in Indian Rupee. The PLR rate, therefore, would not be applicable and should not be applied for determining the interest rate in the extant case. PLR rates are not applicable to loans to be re-paid in foreign currency. The interest rates vary and are thus dependent on the foreign currency in which the repayment is to be made. The same principle should apply.”

There are two facets of the dispute raised by the Revenue on this issue. The first is that the rate of interest should be considered with reference to the prime lending rate prevalent in India and the second is that the reduction in rate to 4.42% by the ld. CIT(A) is not justified.

At this juncture, we consider it expedient to clarify that EURIBOR (Euro Inter-bank Offered Rate) is not a rate of interest, in itself, at which loans are advanced by banks in Euros to borrowers. EURIBOR is a reference rate which is calculated from the average interest rate at which Euro Zone Banks offer lending on inter-bank market. While calculating EURIBOR, 15% of the lowest and 15% of the highest interest rates collected by a panel of European banks are eliminated and the remaining 70% form the basis for its calculation. In such circumstances, EURIBOR, being, not an average rate at which the loans are advanced by European banks to borrowers, cannot per se be characterized as a comparable uncontrolled rate of interest at which loans are advanced in Germany.

Therefore, we find force in the assessee’s case to adopt LIBOR rate for benchmarking the transactions of outstanding receivables from the AEs. Accordingly, the Assessing Officer/TPO is directed to adopt the LIBOR + 200 basis as comparable rate for benchmarking the transaction of outstanding receivables from AEs after allowing a credit period of 60 days as a normal credit period without any interest.”

Ground No. 7 raised by the assessee relates to the disallowance of Rs.2,00,990/- made by the Ld. AO under section 14A of the Act. In this regard, the Ld. AR submitted that during the year under consideration, the assessee has not earned any exempt income. Therefore, no disallowance under section 14A of the Act could be made in the hands of the assessee. He relied upon the decision of the Hon’ble Supreme Court in the case of CIT Vs. Chettinad Logistics (P.) Ltd. [95 taxmann.com 250 (SC)], wherein the Hon’ble Supreme Court dismissed the SLP filed by the Revenue and upheld the principle that section 14A of the Act cannot be invoked in the absence of exempt income. Accordingly, it was pleaded that the disallowance made by the Ld. AO be deleted.

Per contra, the Ld. DR relied upon the order of the Ld. AO/TPO and supported the action taken therein.

We have heard the rival submissions and carefully considered the material available on record. The Revenue has not disputed the fact that no exempt income was earned by the assessee during the relevant assessment year. We have gone through the head notes of the Hon’ble Supreme Court in the case of CIT Vs. Chettinad Logistics (P.) Ltd. (supra), which is to the following effect : “ IT: SLP dismissed against High Court ruling that section 14A cannot be invoked where no exempt income was earned by assessee in relevant assessment year [2018] 95 taxmann.com 250 (SC) SUPREME COURT OF INDIA Commissioner of Income Tax, (Central) 1 v. Chettinad Logistics (P.) Ltd. A.K SIKRI AND Ashok Bhushan, JJ. Special Leave Petition (Civil) Diary No. 15631 of 2018 JULY 2, 2018 Section 14A, of the Income-tax Act, 1961, read with rule 8D of the Income-Tax Rules, 1962 - Expenditure incurred in relation to income not includible in total income (General principle) - Assessment year 2011-12 - High Court by impugned order held that section 14A can only be triggered, if, assessee seeks to square off expenditure against income which does not form part of total income under Act; rule 8D only provides for a method to determine amount of expenditure incurred in relation to income, which does not form part of total income of assessee and it cannot go beyond what is provided in section 14A - It further held that where no exempt income i.e., dividend, was earned in relevant assessment year by assessee, section 14A could not be invoked - Whether SLP against said impugned order was to be dismissed - Held, yes [Para 1] [In favour of assessee]”

Ground No. 8 raised by the assessee relates to the disallowance of Rs.18,72,836/- made by the Ld. AO on account of CSR expenditure. In this regard, the Ld. AR submitted that the assessee has incurred the impugned expenditure towards CSR activities, which, though not directly related to its core business, indirectly facilitated the carrying on of business and enhanced its commercial reputation. It was argued that such expenditure was incurred wholly and exclusively for the purpose of business and hence allowable under section 37(1) of the Act. In support of this contention, reliance was placed on the decisions of Societe General Securities India Pvt. Ltd. v. PCIT [2023] 157 taxmann.com 533 (Mumbai Tribunal) and Optum Global Solutions (India) Pvt. Ltd. v. DCIT in & 482/Hyd/2022 for AYs 2017–18 and 2018–19 dated 16.08.2023, wherein, according to the Ld. AR, the Tribunal had taken a favourable view for the assessee in respect of CSR-related contributions. Accordingly, it was pleaded that the disallowance made by the Ld. AO be deleted.

Per contra, the Ld. DR strongly relied upon the order of the Ld. AO/TPO.

We have considered the rival submissions and perused the material available on record. The admitted position is that the expenditure of Rs.18,72,836/- incurred by the assessee was towards CSR obligations. In this regard, we have gone to the provision of Explanation 2 to section 37(1) of the Act, inserted by the Finance (No.2) Act, 2014 with effect from 01.04.2015, which is to the following effect : “Explanation 2 - For the removal of doubts, it is hereby declared that for the purposes of sub-section (1), any expenditure incurred by an assessee on the activities relating to corporate social responsibility referred to in section 135 of the Companies Act, 2013 (18 of 2013) shall not be deemed to be an expenditure incurred by the assessee for the purposes of the business or profession.” 18.1 On perusal of above, we find that, the legislative intent is clear and unambiguous that CSR expenditure is not allowable as a deduction under section 37(1) of the Act. Further, the reliance placed by the Ld. AR on the decisions of Societe General Security India Pvt. Ltd. (supra) and Optum Global Solutions (India) Pvt. Ltd. (supra) does not come to the aid of the assessee in the present context. Both those decisions dealt with the issue of whether contributions towards certain CSR funds qualify for deduction under section 80G of the Act, which is a distinct and independent provision. They do not lay down any proposition that CSR expenditure is allowable under section 37(1) in view of the statutory prohibition contained in Explanation 2. Therefore, we find no infirmity in the action of the Ld. AO in disallowing the claim of Rs.18,72,836/- towards CSR expenditure. The disallowance is, therefore, upheld. Accordingly, the ground No. 8 of the assessee is dismissed.

Ground No. 9 raised by the assessee relates to the disallowance of Rs.2,07,247/- made by the Ld. AO on account of prior period expenses. In this regard, the Ld. AR submitted that the impugned expenses had crystallised during the year under consideration and were incurred wholly and exclusively for the purposes of business. Accordingly, they are allowable under section 37(1) of the Act. In support of this contention, reliance was placed on the decision of this Tribunal in the case of M/s. Ocimum Bio Solutions India Ltd. in for AY 2014–15 dated 11.05.2021, wherein the Tribunal, following the judgment of the Hon’ble Gujarat High Court in PCIT v. Adani Enterprises Ltd. (Tax Appeal No.566 of 2016, dated 20.07.2016), decided the issue in favour of the assessee. The Ld. AR pointed out that in those decisions it was held that where the expenditure has crystallised during the year, deduction cannot be denied merely because the liability pertained to an earlier year.

Per contra, the Ld. DR submitted that the expenses under consideration are not related to the year under appeal and, therefore, are liable to be disallowed. He further submitted that verification is required as to whether the corresponding revenue has been offered by the assessee in the earlier year.

We have heard the rival submissions and perused the material available on record. The assessee’s contention is that the expenses crystallised during the current year and should therefore be allowed under section 37(1) of the Act. The Ld. AR has relied on the decision of this Tribunal in Ocimum Bio Solutions India Ltd. (supra), wherein at para no.3 of the order, the Tribunal has held as under : “ 3. Learned departmental representative’s vehement contention during the course of hearing is that both the lower authorities have rightly disallowed the assessee’s impugned prior period expenditure claim for the precise reason that the same ought to have been claimed in the relevant previous year in which the same was incurred. The assessee’s case on the other hand is that it claimed the instant head of expenditure only in the year of crystallisation i.e. AY.2014-15 than the earlier corresponding assessment year(s). It is an admitted fact that the Assessing Officer’s as well as the CIT(A)’s detailed discussions have been fair enough in not disputing this clinching crystallisation aspect. Coupled with this, the assessee has been assessed at the same rate all along. The hon’ble Gujarat high court’s decision in PCIT Vs. Adani Enterprises Ltd., (Tax Appeal No.566 of 2016) holds that the impugned prior period expenditure disallowance in such a case ought not to be made as it is a revenue neutral instance only. We adopt the same reasoning herein as well and direct the Assessing Officer to delete the impugned disallowance. The assessee’s former substantive ground is accepted therefore.” 21.1 On perusal of above, we find that the Tribunal noted that if the expenditure is crystalised during the year under consideration and the issue is revenue-neutral, inasmuch as the assessee is consistently assessed at the same rate, then the claim of prior period expenditure cannot be denied merely on technicalities. The Tribunal in that case followed the Hon’ble Gujarat High Court decision in PCIT v. Adani Enterprises Ltd. (supra). On the other hand, the Ld. DR has argued that factual verification is necessary to ascertain whether the corresponding revenue was offered by the assessee in earlier years. In our considered view, this issue indeed requires factual verification. Accordingly, in the interest of justice, we set aside the matter to the file of the Ld. AO with the directions that the Ld. AO shall verify from the assessee’s books of accounts whether the revenue corresponding to the impugned expenditure of Rs.2,07,247/- has been offered to tax in earlier years. Further, the Ld. AO shall also verify whether the expenditure is crystalised during the year under consideration or not. If, on verification, it is found that the corresponding revenue has already been offered to tax and it is crystalised during the year under consideration then in line with the principle of revenue neutrality laid down by this Tribunal in Ocimum Bio Solutions India Ltd. (supra), the Ld. AO shall delete the addition. The assessee shall be given due opportunity of being heard and to file supporting evidence. Accordingly, the ground no. 9 of the assessee is allowed for statistical purposes.

Ground No.10 raised by the assessee relates to the addition of Rs.38 lakhs made by the Ld. AO on account of non-reconciliation between the income as per the profit and loss account and the income reflected in Form 26AS. In this regard, the Ld. AR submitted that during the year under consideration, an amount of Rs.38 lakhs was received by the assessee from M/s. Smile Foundation as an advance, on which tax had been deducted at source (TDS). Consequently, the said sum was reflected in the assessee’s Form 26AS for the relevant year. It was further submitted that the corresponding sale was actually effected by the assessee in the subsequent financial year relevant to the next assessment year, and the same was duly offered to tax in that year. To substantiate this contention, the Ld. AR invited our attention to the copy of the ledger account of M/s. Smile Foundation in the books of the assessee, evidencing receipt of Rs.38 lakhs in F.Y.2015– 16 and the recognition of sale in F.Y.2016–17 (page nos.1416 & 1417 of the paper book). It was contended that if the impugned sum is taxed in the present year merely on the basis of reflection in Form 26AS, it would result in double taxation, since the assessee has already offered the income in the subsequent year. Accordingly, the Ld. AR pleaded before the Bench to delete the addition made by the Ld. AO.

Per contra, the Ld. DR submitted that the assessee’s contention regarding recognition of the impugned income in the subsequent year requires factual verification from the books of accounts of the assessee. Therefore, it was submitted that the issue may be remitted back to the file of the Ld. AO for the limited purpose of such verification.

We have heard the rival submissions and perused the material available on record. The assessee has placed reliance on the ledger account of M/s. Smile Foundation (page nos.1416 & 1417 of the paper book), which prima facie shows that Rs.38 lakhs was received during F.Y.2015–16 as an advance and the sales were booked in F.Y.2016–17. The plea of the assessee is that taxing the amount in the present year would result in double taxation, since the same has already been offered to tax in the subsequent year. On the other hand, the Ld. DR has rightly pointed out that this factual aspect requires verification from the books of accounts and return of income for the subsequent year. In our considered opinion, this issue can be resolved only after due verification by the Ld. AO. Therefore, in the interest of justice, we remit the matter to the file of the Ld. AO with a direction to verify from the books of accounts and return of income of the assessee for the subsequent year whether the impugned sum of Rs.38 lakhs has been duly offered to tax. If the assessee is able to substantiate that the said amount has been accounted as income in the next assessment year, the Ld. AO shall delete the addition made in the current year. Needless to mention, the assessee shall be afforded adequate opportunity of being heard and to furnish supporting evidence. Accordingly, the ground no.10 of the assessee is allowed for statistical purposes.

The additional grounds of the assessee relates to the validity of the final assessment order passed by the Ld. AO on the issue of limitation. The Ld. AR has submitted that the final assessment order passed by the Ld. AO is barred by limitation and in this regard placed reliance on the decision of the Hon’ble Madras High Court in the case of Roca Bathroom Products Pvt. Ltd. Vs. DRP in WP No.919, 922, 1068 and 1070 of 2020 dated 23.12.2020. In this regard, we find that the decision of the Hon’ble Madras High Court in the case of Roca Bathroom Products Pvt. Ltd. Vs. The DRP (supra) is presently under challenge before the Hon’ble Supreme Court and the matter is sub judice. Considering the pendency of the identical legal issue before the Hon’ble Supreme Court, we set aside the issue to the Ld. AO with the direction to follow the outcome of the decision of the Hon’ble Supreme Court in the case of Roca Bathroom Products Pvt. Ltd.(supra) while giving effect to the order of the Tribunal in the present appeal. Accordingly, the additional ground raised by the assessee is kept open with the above directions.

In the result, the appeal of the assessee is partly allowed for statistical purposes.