M/S. TRIANZ HOLDINGS PRIVATE LIMITED,BANGALORE vs. ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE- 7(1)(1), BANGALORE

3 IT(TP)A No.2639/Bang/2019. M/s Trianz Holdings Private Limited. where Trianz India receives the entire revenue earned by Trianz USA from third party customers, considering the pass- through nature of the transaction, CUP methodology was applied as the most appropriate method. According to the assessee, the same is a settled principle and supported by judicial pronouncement in the case of DCIT v. Calance Software Pvt. Ltd. [ITA No.5023/Delhi/2012].

3.1 The TPO rejected TP study of the assessee. The TPO adopted TNMM method instead of CUP method adopted by the assessee in its TP study. The TPO held that all the risks are borne by the AE, Trianz Inc. In coming to such a conclusion, the TPO has relied on the service agreement between the customer and Trianz Inc. The TPO did consider the agreement between Trianz India and Trianz Inc.

3.2 The view taken by the TPO was affirmed by the DRP and assessee is in appeal before us. According to the learned AR it is Trianz India, that bears all the entrepreneurial risks, as was clearly mentioned in the TP report. This FAR analysis has been changed, without any basis or reasoning. In this context, the learned AR relied on the order of the Tribunal in assessee’s own case for assessment year 2014-2015 in IT(TP)A No.3136/Bang/2018 (order dated 26.02.2020). The learned AR submitted that on identical facts for Asst.Year 2014-2015, the ITAT in assessee’s own case set aside the TP adjustment and directed the AO / TPO to redo TP analysis, since business model of assessee was not properly

4 IT(TP)A No.2639/Bang/2019. M/s Trianz Holdings Private Limited. appreciated. It was submitted that facts in this case being similar, an identical view may be taken in this case also.

3.3 The learned Departmental Representative supported the orders of the Income Tax Authorities, without mentioning the ITAT’s order in assessee’s own case for assessment year 2014- 2015, in his written submission.

3.4 We have heard rival submissions and perused the material on record. The primary issue argued is that transfer pricing adjustment has been made without properly appreciating the business model of the assessee. This issue was there in the appeal for the assessment year 2014-2015, wherein the Tribunal in IT(TP)A No.3136/Bang/ 2018 (order dated 26.02.2020), after examining the facts of the case, had accepted the contention of the assessee that the TPO conducted transfer pricing analysis on erroneous understanding of the business model of the assessee. Accordingly, the entire transfer pricing issue was set aside to the TPO with a direction that the transfer pricing analysis may be carried out having regard to the business model of the assessee. The relevant finding of the Co-ordinate Bench of the Tribunal in assessee’s own case, reads as follow:-

“18. We observe that, Ld.TPO considered assessee to be a contract service provider, assuming minimal risk, which is contrary to the business model of assessee. We agree with contention of Ld.AR that Ld.TPO conducted TP analysis on erroneous understanding of business model of assessee, and comparables selected by Ld.TPO cannot be looked into.

3.6 In the result, grounds 7 and 8 are allowed for statistical purposes.

TNMM adopted as the MAM (grounds 11 to 25) 4. These grounds are essentially alternative grounds with regard to TP adjustment. Since the main issue on the business model are not accepted and restored to the files of the AO / TPO, these grounds are rendered infructuous and the same is dismissed as such.

Interest on outstanding receivables (grounds 26 to 31) 5. The TPO computed the delayed trade receivables under the weighted average method. The TPO by adopting the net interest rate of 4.38%, on average net receivables that is outstanding for the period exceeding 60 days, computed the interest adjustment on outstanding receivables amounting to 6 IT(TP)A No.2639/Bang/2019. M/s Trianz Holdings Private Limited. Rs.2,06,65,442. The relevant finding of the AO / TPO, reads as follows:-

“25.1 As discussed in the preceding paragraphs, interest on the delayed trade receivables was proposed to be computed under the weighted average method. To calculate the weighted average delay, the assessee was asked to furnish invoice wise details of all the trade receivables from AEs during the year giving details of the amount raised in invoice, date of invoice, date of receipt, delay in number of days. However, the assessee failed to submit the required data in the format asked. In absence of proper invoice wise details, the average of net receivables from AEs as on opening and closing days of the FY is treated as unsecured loan from the taxpayer to its AEs for the entire year. Interest is calculated, using LIBOR – 6 months + 400 basis points applicable for the FY 2014-15 and which works out to 4.3836%. The detailed computation is as follows:-

31.03.2015 31.03.2014 Receivables from AEs (A) 493,189,330.00 605,548,935 Payable due to AEs (B) 6,675,690.00 7,804,540 Net receivables (C=A-B) 486,513,640.00 642,744,395 Average net receivables 564,629,017.50 Interest Rate 4.38% Period of delay (days) 305.00 Interest Amount 2,06,65,422

*Period of delay is 365 – allowed period of 60 days. Thus, arms length interest amount to be charged works out to Rs.2,06,65,422. The same is treated as adjustment u/s 92CA for interest on delayed receivables.”

5.1 Aggrieved, the assessee filed objections before the Dispute Resolution Panel (DRP). The DRP by placing on reliance on the explanation 2 inserted by section 92B of the I.T.Act with retrospective effect from 01.04.2002 and the various judicial pronouncements, held non-charging or under charging of interest on excess period of credit allowed to the 7 IT(TP)A No.2639/Bang/2019. M/s Trianz Holdings Private Limited. AE for realization of invoices would tantamount to an international transaction. Further, the DRP held that weighted average method adopted by the TPO is incorrect. The DRP directed the TPO to compute interest adjustment invoice- wise with reference to the amounts received beyond the credit period / not received within the credit period. The relevant directions of the DRP reads as follows:-

“42.11 The weighted average approach method adopted by the TPO is not in line with the above principle. Under the weighted average approach, credit is given to amounts received before the agreed credit period which is incorrect as the TPO’s jurisdiction lies only in regard to amounts received beyond the credit period /not received within the credit period. Accordingly, we consider it appropriate to direct the TPO to compute adjustment invoice wise with reference to amounts received beyond the credit period / not received within the credit period. As per the inter-company agreement, credit period were 30 days. Hence, the Panel is of the considered opinion that the credit period of 60 days allowed by the TPO is more than reasonable. The TPO is directed to allow the said credit period of 60 days from the date of invoice and determine the delayed period of the receivables. Accordingly, the ALP interest adjustment may be recomputed. Taking into account all these factors we consider it appropriate to direct the assessee to file complete information relating to the outstanding receivables such as date of invoice and the date of realisation in respect of the invoice raised during the subject year i.e. 2014-15, and also all the invoices which represent the opening balance as on 1.04.2014. Grounds disposed off accordingly.”

5.2 Aggrieved, the assessee has raised this issue before the Tribunal. The gist of the submissions made by the learned AR are as follows:-

(a) The weighted average method adopted by TPO is incorrect.

8 IT(TP)A No.2639/Bang/2019. M/s Trianz Holdings Private Limited. (b) The assessee has not charged interest on outstanding receivables, both from AEs and Non-AEs and hence the Benchmarking analysis should be done with uncontrolled transactions and not by adopting an arbitrary number.

(c) The average credit period for both the AEs and non- AEs are the same and the credit period is about 99 days for invoices raised during the current year and 74 days for the invoices raised during the earlier year, which is within the credit period allowed in the RBI circular.

(d) The rate of LIBOR at 6 months + 400 basis points adopted by the TPO is without any basis. The rate should be adopted after a proper benchmarking analysis.

(e) The DRP directed the TPO to rework the interest computation based on the delay of individual invoices, which has not been done.

5.3 The learned Departmental Representative supported the order of the AO / TPO.

5.4 We have heard rival submissions and perused the material on record. The DRP has directed the TPO to re-work the interest computation based on the delay of individual invoices. However, the DRP has not complied with the directions of DRP. The TPO was wrong in stating that the assessee did not furnish the invoice wise details of trade

9 IT(TP)A No.2639/Bang/2019. M/s Trianz Holdings Private Limited. receivables. These details are furnished by the assessee vide its letter dated 24.10.2018 and are placed on record at pages 597 to 612 of the paper book, Volume-II. The assessee had given detailed submissions on the issue (refer page 471 to 476 of the paper book) and the same has not been considered by the TPO. The TPO is directed to re-work the interest computation based on the delay of individual invoice as per the directions of the DRP. It is ordered accordingly.

5.5 In the result, grounds 26 to 31 are allowed for statistical purposes.

Corporate Tax Issues Disallowance u/s 14A of the I.T.Act [ground 32(b)] 6. The assessee has claimed that it has not in receipt of any exempt income during the relevant assessment year. Therefore, it was submitted that the disallowance by invoking the provisions of section 14A of the I.T.Act is untenable. In this context, the learned AR relied on the judgment of the Hon’ble Madras High Court in the case of CIT v. Chettinad Logistics Pvt.Ltd. (2017) 95 taxmann.com 221 (Mad.). It was submitted that the SLP filed against the judgment of the Hon’ble Madras High Court in the case of CIT v. Chettinad Logistics Pvt. Ltd. (supra) was dismissed by the Hon’ble Supreme Court in the judgment reported in 95 taxmann.60 (SC).

6.1 We have heard rival submissions and perused the material on record. It is settled position of law that if the 10 IT(TP)A No.2639/Bang/2019. M/s Trianz Holdings Private Limited. assessee is not in receipt of any exempt income in the relevant assessment year, no disallowance u/s 14A of the I.T.Act can be resorted to. In this context, we rely on the judgment of the Hon’ble Madras High Court in the case of CIT v. Chettinad Logistics Pvt. Ltd. (supra). The SLP filed as against the judgment of the Hon’ble Madras High Court was rejected by the Hon’ble Apex Court. The relevant finding of the Hon’ble Madras High Court reads as follows:-

“10.In the instant case, there is no dispute that no income i.e., dividend, which did not form part of total income of the Assessee was earned in the relevant assessment year. 10.1.Therefore, to our minds, the addition made by the Assessing Officer by relying upon Section 14 A of the Act, was completely contrary to the provisions of the said Section. 10.2.Mr.Senthil Kumar, who appears for the Revenue, submitted that the Revenue could disallow the expenditure even in such a circumstance by taking recourse to Rule 8D. 10.3.According to us, Rule 8D, only provides for a method to determine the amount of expenditure incurred in relation to income, which does not form part of the total income of the Assessee. 10.4.Rule 8 D, in our view, cannot go beyond what is provided in Section 14 A of the Act. 11.Furthermore, we may note that a similar argument was sought to be advanced by the Revenue in the matter concerning, M/s.Redington (India) Limited Vs. The Additional Commissioner of Income Tax, which was, subject matter of T.C.A.No.520 of 2016. 11.1.A Co-ordinate Bench of this Court, vide judgment dated 23.12.2016, rejected the plea of the Revenue advanced in that behalf. 11.2.As a matter of fact, a perusal of the judgment would show that the Revenue had sought to argue that because exempt income could be earned in future years, therefore, recourse could be taken to the provisions of Section 14A of the Act, to disallow expenditure. In other words the stand taken by the Revenue was irrespective of the fact whether or not income was earned in the concerned assessment year

11 IT(TP)A No.2639/Bang/2019. M/s Trianz Holdings Private Limited. expenditure under Section 14A could be disallowed against anticipated income. 11.3.Pertinently, the Division Bench in M/s.Redington (India) Limited case has repelled this precise argument. 12.The Division Bench, in our view, quiet correctly held that, the computation of total income, in terms of Section 5 of the Act, is made qua real income and not, vis-a-vis, notional income. 12.1.The Division Bench went on to hold that Section 4 of the Act brings to tax, that income, which is relatable to the assessment year in issue. The Division Bench, thus, held that where no exempt income is earned in the previous year, relevant to the assessment year in issue, provisions of Section 14 A of the Act, read with Rule 8 D could not be invoked. 12.2.While coming to this conclusion, the Division Bench also took note of the aforementioned Circular, issued by the Board. 12.3.The reasoning of the Division Bench is contained in the following part of the judgment: “4.The admitted position is that no exempt income has been earned by the assessee in the financial year relevant to the assessment year in issue. The order of assessment records a finding of fact to that effect. The issue to be decided thus lies within the short compass of whether a disallowance in terms of s.14A of the Act read with Rule 8D of the Rules can be contemplated even in a situation where no exempt income has admittedly been earned by the assessee in the relevant financial year. 7.Per contra, Sri.T.Ravikumar appearing on behalf of the revenue drew our attention to the marginal notes of s.14 A pointing out that the provision would apply not only where exempted income is 'included' in the total income, but also where exempt income is 'includable' in total income. 8.He relied upon a Circular issued by the Central Board of Direct taxes in Circular No.5 of 2014 dated 11.2.2014 to the effect that s.14A was intended to cover even those situations whether there is a possibility of exempt income being earned in future. The Circular, at paragraph 4, states that it is not necessary for exempt income to have been included in the income of a particular year for the disallowance to be triggered. According to the Learned Standing Counsel, the provisions of s.14A are made applicable, in terms of sub section (1) thereof to income 'under the act' and not 'of the year' and a disallowance under s.14A r.w.Rule 8D can thus be effected even in a situation where a tax payer has not earned any taxable income in a particular year.

12 IT(TP)A No.2639/Bang/2019. M/s Trianz Holdings Private Limited. 9.We are unable to subscribe to the aforesaid view. The provisions of section 14A were inserted as a response to the judgments of the Supreme Court in Commissioner of Income Tax Vs. Maharashtra Sugar Mills Limited (1971) (82 ITR 452) and Rajasthan State Ware Housing Corporation Vs. Commissioner of Income Tax ((2002) 242 ITR 450) in terms of which, expenditure incurred by an assessee carrying on a composite business giving rise to both taxable as well as non-taxable income, was allowable in entirety without apportionment. It was thus that s.14A was inserted providing that no deduction shall be allowable in respect of expenditure incurred in relation to the earning of income exempt from taxation. As observed by the Supreme Court in the judgment in the case of Commissioner of Income Tax vs. Walfort Share and Stock Brokers (P) Ltd (2010) 326 ITR 1 '.... The mandate of s.14A is clear. It desires to curb the practice to claim deduction of expenses incurred in relation to exempt income against taxable income and at the same time avail of the tax incentive by way of an exemption of exempt income without making any apportionment of expenses incurred in relation to exempt income.' 10.The provision this is clearly relatable to the earning of actual income and not notional or anticipated income. The submission of the Department to the effect that s.14A would be attracted even to exempt income 'includable' in total income would entail the assessment of notional income, assumed to be exempt in the future, in the present assessment year. The computation of total income in terms of s.5 of the Act is on real income and there is no sanction in law for the assessment of admittedly notional income, particularly in the context of effecting a disallowance in connection therewith. 11.The computation of disallowance in terms of Rule 8D is by way of a determination involving direct as well as indirect attribution. Thus, accepting the submission of the Revenue would result in the imposition of an artificial method of computation on notional and assumed income. We believe this would be carrying the artifice too far. (emphasis is ours) 13.Mr.Senthil Kumar, seeks to distinguish the judgment in M/s.Redington (India) Limited case based on the fact that Rule 8D had not kicked-in by AY 2007-08, which was the AY being considered in the said case. 14.According to us, this was not the argument, put forth, before the Division Bench. As a matter of fact, the Revenue relied heavily on Rule 8D. 14.1.Mr.Ravikumar, who appeared for the Revenue, in that matter and who is present in this Court, informs us that he had in fact argued that the Rule was clarifactory in nature and would apply retrospectively,

13 IT(TP)A No.2639/Bang/2019. M/s Trianz Holdings Private Limited. and that, the Division Bench, therefore, discussed the impact of Rule 8D of the Rules. 15.However, it is, our view, as indicated above, independent of the reasoning given in M/s.Redington (India) Limited case that Rule 8D cannot be read in a manner, which takes it beyond the scope and content of the main provision, which is, Section 14 A of the Act. 15.1.Therefore, as adverted to above, Rule 8D, cannot come to the rescue of the Revenue. 15.2.In any event, the Tribunal, via, the impugned judgment has remitted the matter to the Assessing Officer. 15.3.Therefore, for the foregoing reasons, we are of the view, that no interference is called for qua the impugned judgment. 16.To our minds, questions of law, which could have arisen are already covered by the judgment of a Co-ordinate Bench of this Court rendered in M/s.Redington (India) Limited case. 6.2 In light of the above judicial pronouncements, we hold that since the assessee was not in receipt of any exempt income during the relevant assessment year, the A.O. has erred in making disallowance u/s 14A of the I.T.Act. It is ordered accordingly.

6.3 In the result, grounds 32(b) is allowed. Non-deduction of TDS on software expenses (ground 33) 7. The A.O. disallowed software expenses u/s 40(a)(ia) of the I.T.Act by treating the same as “royalty”, hence liable for TDS.

7.1 Before the DRP, details of the expenses were furnished and it was pointed out that bulk of the expenses were paid to residence and not liable for TDS. On verification of the same, partial relief was granted and payments made to non- residents towards purchase of software was disallowed u/s 14 IT(TP)A No.2639/Bang/2019. M/s Trianz Holdings Private Limited. 40(a)(ia) of the I.T.Act by treating the same as “royalty” and hence liable for TDS.

7.2 Aggrieved, the assessee has raised this issue before the Tribunal. The learned AR submitted that the payments made for purchase of software whether it is “royalty” or not is covered in favour of the assessee by the judgment of the Hon’ble Apex Court in the case of Engineering Analysis Centre of Excellence Private Limited v. CIT & Anr. [(2021) 432 ITR 471 (SC)] 7.3 The learned Departmental Representative was duly heard.

7.4 We have heard rival submissions and perused the material on record. In view of the latest judgment of the Hon’ble Apex Court in the case of Engineering Analysis Centre of Excellence Private Limited v.CIT & Anr. (supra), we restore the issue to the files of the A.O. The A.O. is directed the examine whether expenses incurred for purchase of software is “royalty” and liable for deduction. The A.O. is directed to follow the dictum laid down by the Hon’ble Apex Court in the case of Engineering Analysis Centre of Excellence Private Limited v.CIT & Anr. (supra). It is ordered accordingly.

7.5 In the result, ground 33 is allowed for statistical purposes.

15 IT(TP)A No.2639/Bang/2019. M/s Trianz Holdings Private Limited. Deduction u/s 10AA of the I.T.Act is to be allowed as assessed income

8.1 We have heard rival submissions and perused the material on record. The Hon’ble jurisdictional High Court in the case of M Pact Technology Services Pvt. Ltd. in (judgment dated 11.07.2018) had held that deduction u/s 10AA of the I.T.Act should be computed on the assessed income and not on the returned income. The relevant finding of the Hon’ble Karnataka High Court reads as follows:-

“6. The relevant portion of the Circular No.37/2016 dated 02.11.2016 issued by the Central Board of Direct Taxes, Department of Revenue, Ministry of Finance, Government of India, relating to the subject: Chapter VI-A deduction on enhanced profits, is quoted hereunder: "The issue of the claim of higher deduction on the enhanced profits has been a contentious one. However, the courts have generally held that if the expenditure disallowed is related to the business activity against which the Chapter VI-A deduction has been claimed, the deduction needs to be allowed on the enhanced profits. Some illustrative cases upholding this view are as follows: [i] If an expenditure incurred by assessee for the purpose of developing a housing project was not allowable on account of non-deduction of TDS under law, such disallowance would ultimately increase assessee's profits from business of developing housing project. The ultimate profits of assessee after adjusting disallowance under section 40[a][ia] of the Act would qualify for deduction 16 IT(TP)A No.2639/Bang/2019. M/s Trianz Holdings Private Limited. under section 80IB of the Act. This view was taken by the courts in the following cases: [a] Income-tax Officer-Ward 5[1] vs. Keval Construction, Tax Appeal No.443 of 2012, December 10 2012, Gujarat High Court [b] Commissioner of Income-tax-IV, Nagpur vs. Sunil Vishwambharnath Tiwari, 2015, Bombay High Court [ii] If deduction under section 40A[3] of the Act is not allowed, the same would have to be added to the profits of the undertaking on which the assessee would be entitled for deduction under section 80-IB of the Act."

8.3 In the result, ground 34 is allowed.