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Income Tax Appellate Tribunal, ‘D’ BENCH, CHENNAI
Before: SHRI A.MOHAN ALANKAMONY & SHRI DUVVURU RL REDDY
आदेश / O R D E R
Per A. Mohan Alankamony, AM:-
This appeal by the assessee is directed against the order passed by the Ld. Members of the Dispute Resolution Panel-2, Bengaluru vide order dated 01.12.2015 in F.No.357/DRP-2-BNG/2015-16, U/s.144C(5) of the Act and the consequential assessment order U/s.144C(13) by the Ld.AO dated 29.01.2016 for the assessment year 2011-12.
The assessee has raised several grounds in its appeal however the cruxes of the issues are that:-
(i) The Ld.Members of the DRP as well as the Ld.AO has erred in determining the ALP of the sales of software at Rs.21,92,61,000/- without following any of the methods prescribed U/s.92C of the Act. (ii) The Ld.AO has erred in disallowing the bad debts amounting to Rs.10,13,26,350/- sic., Rs.7,54,20,377/- though it was written off in the books of accounts. (iii) The Ld.AO has erred in estimating the disallowance U/s.14A r.w.r. 8D of the Rules at Rs.10,36,466/-. (iv) The Ld.AO has erred in disallowing the software expenses amounting to Rs.2,72,97,809/-. (v) The Ld.AO has erred in disallowing auditor’s fee amounting to Rs.3,92,300/- invoking the provisions of Section 40(a)(ia) of the Act.
The brief facts of the case are that the assessee is a limited company engaged in the business of trading of electronic safety & security system, filed its return of income for the assessment year 2011-12 on 25.11.2011 admitting total income of Rs.32,52,21,511/-. Initially the return was processed U/s.143(3) of the Act and subsequently the case was selected for scrutiny and notice U/s.143(2) of the Act was issued on 10.08.2012. Finally assessment order was passed U/s.143(3) r.w.s. 92CA(4), 144C(5) & 144C(13) of the Act on 29.01.2016 wherein the Ld.AO made several additions.
Ground No. 2(i) : Erroneous determination of ALP:-
The assessee had sold its software which was developed internally called “Signet” for a consideration of Rs.18,61,65,000/- (Euros 3.15 million) based on the valuation conducted by an independent valuer. The Ld.TPO while computing the Arms-Length Price U/s.92C of the Act, rejected the valuation report of the independent valuer relied by the assessee and thereafter computed the Arms-Length Price of the sale consideration at Rs.21,92,61,000/- and thereby made upward adjustment of Rs.3,30,96,000/- by observing as under:- “10.3 The valuation report on the capital asset transferred viz., SigNet Technology is dated 26th November, 2009. The summary of Values refers to valuation based on two methods viz., Relief from Royalty (RFR) method and historical cost method as the methodology used for valuation of the asset SigNet. In fact the summary of values presents the values for each method under three different scenarios on a standalone basis as well by a proper mixture of the two methods assigning weights in the ratio of 1:3 to Cost and RFR methods respectively. To understand the same, the summary of valuation is presented as under:
Scenario RFR Historical Cost Weighted Method Method Average 8-Years Projection 2.68 5.12 3.29 10-Years Projection 3.20 5.12 3.68 15-Years Projection 3.85 5.12 4.17 The Ld.Members of the DRP upheld the order of the Ld.TPO by stating that the Ld.TPO has rightly taken the average of three values worked out by using three different methods for estimated life of the asset as 8 years. The relevant portion of the order of the Ld.DRP is extracted herein below for reference: “3.1 The submissions of the assessee have duly been considered. The TPO has discussed the issue in detail in his order. He has arrived at the ALP of the transaction on the basis of the valuation got conducted of the capital asset transferred viz Signet Technology, by the assessee itself. The Euro 3.15 million for transfer of the Capital asset. The fact that the software license sold to its AEs, had been written off in the immediate succeeding year by the AEs is of no consequence as this event could not have altered the price of the asset at the time of its sale. Had the event been anticipated, then the AE would not have made such a huge investment. Further assessee could not provide details of the reason which made the asset obsolete within an year. The valuer had made his projections on the basis of estimated life period of 8,10 and 15 years. This also shows that at the time of sale the asset was estimated to have useful life for at least 8 years. Considering above aspects, the TPO has rightly taken average of the three values, worked out by using three different methods, for estimated life of asset as 8 years. So the objection of the assessee is not appreciated.”
4.1 At the outset, the Ld.AR argued before us by stating that the Ld.Revenue Authorities has not followed any of the methods prescribed U/s.92C(i) of the Act while computing the ALP and therefore the ALP determined by the Ld.Revenue Authorities is erroneous. The Ld.AR further submitted that in the case of the assessee, it is a lone transaction and there are no comparables available in order to exercise any of the methods prescribed U/s.92C(i) of the Act. It was therefore pleaded that the upward revision made by the Ld.Revenue Authorities may be deleted. Reliance was placed in the decision of Maruti Suzuki India Ltd., vs. CIT reported in 381 ITR 117 and in the case CIT vs. Kotak India Pvt. Ltd., IT Appeal No.15 of 2014 order dated 11.07.2016 by the Hon’ble Bombay High Court. The Ld.DR though conceded that the Ld.Revenue Authorities had failed to follow any of the method prescribed U/s.92C(i) of the Act, pleaded for the matter to be remitted back to the file of Ld.AO / Ld.TPO in order to determine the Arms-Length Price by following the appropriate method U/s.92C(i) of the Act. He further submitted that there are ALP in the case of the assessee.
4.2 We have heard the rival submissions and carefully perused the materials on record. From the facts of the case, it is apparent that the Ld.Revenue Authorities as well as the assessee has not adopted any of the methods prescribed U/s.92C(i) of the Act for determining the ALP. The Ld.AR has pleaded that the upward revision made by the Ld.Revenue Authorities is to be deleted without giving any further opportunity to the Revenue for determining the ALP in accordance with the provisions of the Act, because there were no comparables to compare with the transaction of sale of software made by the assessee with its AE. He has also relied in certain decisions cited herein above. However the Ld.DR has expressed his strong confidence that there are various other comparables available to compare with the transaction made by the assessee and hence the provisions of Section 92C(i) of the Act can be complied with if another opportunity is provided to both the parties. In this situation, we do not find the decisions relied by the Ld.AR to be relevant because it apparent from the facts of the case before us that both the Revenue as well as the assessee had failed to adopt with any of the method prescribed U/s.92(i) of the Act while determining the ALP when it appears that there are certain comparable available. Considering these facts and circumstance of the case, we are of the considered view that the issue is required to be remitted back to the file of Ld.AO / Ld.TPO for fresh consideration. Accordingly we hereby remit the matter back to the file of Ld.AO who shall refer the matter to the Ld.TPO for ALP of the assessee in the transaction of the sale of software by the assessee to its AE following the most appropriate method prescribed U/s.92C(i) of the Act. It is Ordered accordingly.
Ground No. 2(ii): Disallowance of Bad Debts:- The assessee had written-off bad debts to the tune of Rs.7,54,20,377/- and claimed as deduction. Since the assessee could not produce the details and nature of bad debts, the Ld.AO disallowed the same (as observed in para 6, page 3 of the assessment order dated 29.01.2016). The Ld.AR pleaded that the matter may be remitted back to the file of Ld.AO thereby granting one more opportunity to the assessee to furnish the details and nature of bad debts. The Ld.DR strongly opposed to the submission of the Ld.AR.
5.1 Since already the issue of ALP is remitted back to the file of Ld.AO / Ld.TPO, we are of the considered view there is no harm in remitting this issue also back to the file of Ld.AO thereby granting with one more opportunity to the assessee for furnishing the details of the bad debts. Accordingly, in the interest of justice this issue is also remitted back to the file of Ld.AO for de-nova consideration.
Ground No.2(iii) : Disallowance U/s.14A r.w.r.8D of the Rules amounting to Rs.10,36,466/-:- The assessee has invested in shares amounting to Rs.4,15,00,000/- earning exempt income. Therefore the Ld.AO invoked the provisions of Section 14A r.w.r. 8D of the Rules and computed the disallowance at Rs.10,36,466/-. Aggrieved by the computation of disallowance U/s.14A r.w.r. 8D of the Rules, the assessee is in appeal before us.
6.1 At the outset, we find that with respect to disallowance U/s.14A of the Act, we had held in & 1730/Chny/2016 in the case M/s. Sthithi Insurance Services Pvt. Ltd., vide order dated 18.06.2018 that application of Rule 8D is not automatic. If the assessee computes to the satisfaction of the Ld.Revenue Authorities, the expenses incurred by it with respect to investments earning exempt dividend then the same should be disallowed. Only when such computation is not possible Rule 8D should be applied for computing the disallowance U/s.14A of the Act. The relevant portion of the order is reproduced herein below for reference:-
“5.2 We have heard the rival submissions and carefully perused the materials on record. It is apparent from the facts of the case, that the assessee has made huge investments in shares which earn dividend income exempt from tax. According to Section 14A of the Act the expenditure incurred towards earning exempt income cannot allowed as deduction from the taxable income of the assessee. In the case of the assessee, it is evident that for the process of decision making as to which shares the assessee has to invest, dis-invested, and at what point of time etc., will involve cost. Such expenditures incurred towards earning dividend income which is exempt from tax cannot be claimed as deduction from the taxable profit of the assessee company. As per the provisions of the Act, the assessee is bound to compute the actual expenses incurred by it towards investment that would earn exempt income and disallow the same. In the case of the assessee, such computation is neither made nor the expenditure towards earning exempt disallowed by the assessee. Therefore we are of the view that the Ld.AO was right in his realm to invoke the provisions of Section 14A r.w.r.8D of the Rules. Further it is pertinent to mention that there is no correlation between the dividend income earned by the assessee and the expenditure incurred by the assessee towards investment that earns exempt income. For example:- during a particular year the assessee would not have earned any dividend income though it has made heavy investments during the previous year or the earlier years, but the assessee is bound to incur cost for acquiring / maintaining /dis- investing such investments. Hence it cannot be inferred that the dividend income would be directly proportional to the expenditure incurred on the investment earning exempt income. Therefore we do not find any merit in the order of the Ld.CIT(A) for having restricted the disallowance U/s.14A of the Act to the extent of exempt income earned by the assessee. However since the assessee has not computed its actual expenditure incurred towards the investment that earns exempt income, in the interest of justice, we remit back the matter to the file of Ld.AO for both the assessment years thereby affording one more opportunity to the assessee to work out the actual expenditure incurred by it towards the investment that earn exempt income and disallow the same. We further hereby direct the Ld.AO to verify the computation submitted by the assessee for both the assessment years and thereafter decide the matter in accordance with law and merit.”
Since we have already decided the issue with respect to computation of disallowance U/s.14A r.w.r. 8D of the Rules in the decision cited supra, we remit back the matter to the file of Ld.AO to compute the disallowance U/s.14A of the Act in the similar manner. It is ordered accordingly.
Ground No.2(iv) : Disallowance of software expenses amounting to Rs.2,72,97,809/-:- The Ld.AO disallowed the claim of expenses towards software amounting to Rs.2,72,97,809/- because the assessee had not produced the bills and the proof of tax deducted at source. Before us the Ld.AR submitted that the matter may be remitted back to the file of Ld.AO because the assessee is in possession of the bills and proof for tax deducted at source which the Ld.Revenue Authorities have failed to examine on the earlier occasions. The Ld.DR strongly opposed to the submission of the Ld.AR. Since for various other additions the matter is being remitted back to the file of Ld.AO, we are of the considered view that this issue may also be remitted
back for fresh consideration. Accordingly in the interest of justice we hereby remit back the matter to the file of Ld.AO for de-nova consideration.
Ground No. 2(v): Disallowance of audit fee expenses amounting to Rs.3,92,300/- invoking the provisions of Section 40a(ia) of the Act:- The Ld.AR pleaded that with respect to the issue of disallowance of expenditure incurred towards audit fee amounting to Rs.3,92,300/- may also be remitted back to the file of Ld.AO because the assessee is in possession of all the requisite evidence and proof of tax deducted at source. The Ld.DR strongly opposed to the submission of the Ld.AR. Since for various other additions the matter is being remitted back to the file of Ld.AO, we are of the considered view that this issue may also be remitted back for fresh consideration. Accordingly we hereby remit back the matter to the file of Ld.AO for de-nova consideration.
In the result, the appeal filed by the assessee is allowed for statistical purposes.
Order pronounced on the 17th July, 2018 at Chennai.