M/S SASKEN COMMUNICATION TECHNOLOGIES LIMITED,BANGALORE vs. DCIT, BANGALORE

These are cross appeals filed by the assessee and the Revenue respectively, against the order of the DCIT, Circle -6(1)(1), Bengaluru, dt.27.03.2004, for the A. Y. 2010-11.

The assessee, Sasken Communication Technologies Ltd, with its headquarters in Bengaluru, and offices in Pune, Chennai, Hyderabad, China, Germany, Japan, Sweden, UK, USA and South Korea, is a provider of IT(TP)A.397 & 376/Bang/2015 Page - 2 telecommunication software services and solutions to network equipment manufacturers, mobile terminal vendors and semiconductor companies around the world. Sasken delivers end-to-end solutions that enable richer content delivery on next generation networks. It has received interest on loans from its AEs, as per the details as under :

However, the TPO considered corporate bonds issued by the companies in India as against the government bonds for comparability of the interest rate earned. The TPO further relied upon the safety level of the corporate bonds based on the grading issued by CRISIL and considered the loans given by the assessee similar to corporate bonds falling within the grade of BB to D . The TPO was of the view that the risks in the loans given were too high for the company and considered the same to be in the grade IT(TP)A.397 & 376/Bang/2015 Page - 3 of BB and corresponding interest rate was computed @14.74 percent and accordingly, Rs.2,67,68,300/ was added to the assessee’s ALP. The DRP confirmed said addition.

Thereafter, the assessee filed a rectification petition dt.10.02.2014 before the TPO submitting, inter alia , that the AO computed interest on loan on an average / closing balance as on 31.03.2010. The loan to Sasken Mexico was received in June 2009 and there was no balance outstanding on March, 2010. Therefore, interest is required to be computed only for the period April 1, 2009 to June 11, 2009 and enclosed the computation in Annexure-A. in respect of Loan to Sasken Inc, it submitted that the loan amount was released at different point of time during FY 2009-10. It was not given on the first day of financial year as assumed by the TPO.

The Ld. AR submitted that its main objections to the TPO’s proposal was that Sasken was a debt-free company, the loans provided were from internal funds. Sasken India earns mostly in foreign currency with 80% of its sales and some of the domestic sales being in foreign currency. As per the newly introduced Safe Harbour rules by the CBDT, the prescribed ALP rate is the base rate of SBI if the loan to Indian subsidiaries outside India is in Indian currency. All these facts are acknowledged by the TPO in his IT(TP)A.397 & 376/Bang/2015 Page - 5 order. Relying on this tribunal decisions in Sami Labs Ltd v DCIT, IT(TP)A no 1358/ Bang/2011 dt 04.12.2015 & Indegene Lifesystems P Ltd v ACIT , 2015 60 taxmann.com28 , he pleaded that the impugned loan to its AEs were out of its own funds , not out of borrowed funds, the loans are given in US dollars, interest was received in Indian rupees and when such transactions between it and its AEs are in international transactions ,the ratio of the above cases ie the transaction would have to be looked upon by applying commercial principles in regard to international transaction and in such cases the domestic prime lending rate would not have applicability and the international rate fixed being LIBOR would come into play.

We have considered the submissions. On the facts and circumstances of the case, we are of the considered opinion that the issue requires to be examined by the TPO afresh in the light of the above materials and the ratios and accordingly remit the issue to the TPO.

Apart from the above TP addition, the A O made the following disallowances on Corporate Tax matters:

On the issue no 1 ,supra, ie on disallowance u/s.14A at Rs.1,28,29,387/-, the AO found that the assessee was in receipt of dividend of Rs.3,90,24,858/- which is an exempt income. The assessee attributed Rs.1,16,773/- i.e., 23% of salary at Rs.4,67,092/- paid to Senior Executive Treasury as the expenses incurred towards earning this income. The AO found that only direct expenses on employees / directors by way of salaries, staff welfare, travelling, communication etc., is considered by the assessee towards disallowance. Various other expenses on corporate establishment are left out as non allocable expenses. As against reserves and surplus of Rs.450.33 crores at the year end, the AO found that Rs.328.57 crores was in investment. So the AO held that the investment is the key function of the corporate office and the management would certainly devote more time to safeguard the earnings deployed in these investments. So he considered that the assessee’s workings of 2% of corporate expenses is not fair , invoked Rule 8D r.w.s.14A and disallowed Rs.1,28,29,387/-.

On an appeal, the DRP, inter alia, found that assessee’s submission is not based upon any tangible evidence in the sense that it has not maintained any separate accounts with regard to investments, the income from which is exempt. It merely denied to have incurred any expenditure IT(TP)A.397 & 376/Bang/2015 Page - 7 vis-a-vis investment made for earning tax-free dividend income even though no such exempt income is earned during the year. It would be fair to note that investment decisions are complex in nature and a company is run by its Board of Directors and the business and investments are managed by key personnel, executives etc., for which experts are often consulted. The very existence of a corporate entity and its structure requires an administrative establishment which require incurring of multifarious expenses including establishment, general and administrative expenses. It held that the case laws relied upon by the assessee cannot rescue it in-as-much as it has not maintained any accounts as mandated in section 14A(2)(3) and such an inaction on the part of the assessee cannot automatically shift the burden to the AO which is otherwise placed upon the assessee at the first instance. In this view of the matter, the Panel found no merit in the arguments of the assessee and held that the provisions of section 14A are attracted in this case and that the working of the disallowance made by the AO as per Rule 8D is in order. Panel also held that this is also in accordance with the circular No.5/2014 of CBDT.

Before us, the AR pleaded that the disallowance made under section 14A read with rule 8D(2)(iii) at Rs. 1,28,29,387/- has been made without demonstrating the incorrectness of the claim of the assessee that it has not incurred any expenditure towards earning exempt income. The said disallowance is therefore bad in law. Further, it IT(TP)A.397 & 376/Bang/2015 Page - 8 was submitted that no effort is required to receive the dividend. Pointing out the relevant portion of the Income Tax Simplification Committee’s report on the disallowance of expenditure incurred in relation to income not includible in total income under section 14 A of the Act, the Hon’ble Finance Ministers Budget Speech Relying on 29.02.2016 under para 167 which read as under :

We have considered the submissions. On the facts and circumstances of the case, we are of the considered opinion that the IT(TP)A.397 & 376/Bang/2015 Page - 9 issue requires to be examined by the AO afresh in the light of the above amendments and accordingly remit the issue to the AO.

On issue no 2, supra, i.e., in respect of the addition of Rs.16,43,07,085/- under the caption ‘Excess deduction u/s.10A /10AA’, the assessee’s effective grounds are extracted as under :

We have considered the above submissions. On the facts and circumstances of the case, it is clear that neither the AO has examined these issues properly nor they received due attention at the hands of the DRP. In view of that we are of the considered view that the above issues are required to be adjudicated by the AO afresh in the light of the above ratio and if the facts are similar to apply the above ratios accordingly and hence these issues are also remitted to the AO .

The next issue is on short credit of TDS. In this regard assessee submitted that since the AO has not allowed TDS credit to the extent of Rs.14,08,748/- (Rs.15,56,38,180/- as claimed in the return of income minus Rs.15,42,29,432/- as allowed in the final assessment order), TDS credit should be fully allowed as claimed in the return of income.

In the next ground, the assessee has challenged the levy of interest u/s.234B of the Act, which is only consequential. AO is directed to give consequential relief to the assessee.

The grounds of appeal taken by the Revenue are as under :

In the result, the appeal of the assessee is allowed for statistical purposes and the appeal of the Revenue is dismissed.