2018 (9) TMI 1938 - AT - Income Tax

Tax Tribunal: Rulings on Disallowances, ALP Adjustments, and Exemptions

M/s Mahati Software Pvt. Ltd. Versus Asst. Commissioner of Income Tax, Circle-3 (1), Visakhapatnam

M/s Mahati Software Pvt. Ltd. Versus Asst. Commissioner of Income Tax, Circle-3 (1), Visakhapatnam - TMI Issues Involved:1. Disallowance of professional charges under Section 40(a)(ia) of the Income Tax Act.2. Adhoc disallowance of foreign travel expenses.3. Arm's Length Price (ALP) adjustment towards interest on advances given to Associate Enterprise (AE).4. ALP adjustment towards interest on receivables.5. Disallowance of employee contributions to Provident Fund under Section 36(1)(va) r.w.s. 2(24)(x).6. Grant of exemption under Section 10A on enhanced profits due to disallowances/additions.7. Charging of interest under Section 234B.Detailed Analysis:1. Disallowance of Professional Charges under Section 40(a)(ia):The first issue pertains to the disallowance of Rs. 10,00,000 under Section 40(a)(ia) for professional charges paid without deduction of tax at source. The assessee failed to furnish evidence of tax deduction and payment to the Central Government account. The Dispute Resolution Panel (DRP) confirmed the disallowance, and the Tribunal upheld the Assessing Officer's (AO) order, dismissing the assessee's appeal on this ground.2. Adhoc Disallowance of Foreign Travel Expenses:The AO disallowed 10% of foreign travel expenses, amounting to Rs. 2,04,215, due to the assessee's failure to satisfactorily explain the nature and purpose of the expenses. The Tribunal found no reason to interfere with the AO's order as the assessee did not provide evidence to establish the relevance and genuineness of the expenses. The appeal on this ground was dismissed.3. ALP Adjustment Towards Interest on Advances Given to AE:The AO, based on the Transfer Pricing Officer's (TPO) recommendation, proposed an ALP adjustment by charging interest at 12.25% on advances given to AE. The DRP scaled down the interest rate to 8.5%. The Tribunal, following the ITAT Vizag Bench's decision in a similar case, directed the AO to charge interest at LIBOR plus 2%, deeming it reasonable and at arm's length. The appeal was partly allowed for both assessment years.4. ALP Adjustment Towards Interest on Receivables:The AO made adjustments for interest on receivables not received in due time, amounting to Rs. 34,17,765 for AY 2011-12 and Rs. 2,44,65,964 for AY 2012-13. The Tribunal, considering the higher Profit Level Indicator (PLI) of the assessee compared to comparable companies and the lack of evidence for undue credit extension, held that no interest should be charged on receivables. The appeals were allowed, and the interest levied on receivables was deleted.5. Disallowance of Employee Contributions to Provident Fund:The AO disallowed Rs. 9,77,039 under Section 36(1)(va) r.w.s. 2(24)(x) for delayed payment of employee contributions to Provident Fund. The Tribunal, following the Supreme Court's decision in CIT vs. Alom Extrusions, allowed the deduction as the payment was made before filing the return of income. The appeal on this ground was allowed.6. Grant of Exemption Under Section 10A on Enhanced Profits:The assessee sought exemption under Section 10A on enhanced profits due to disallowances/additions made by the AO. The Tribunal, citing the Bombay High Court's decision in Gem Plus Jewellery India Ltd., held that the assessee is entitled to exemption under Section 10A on enhanced profits due to disallowances other than ALP adjustments. The appeals for both assessment years were allowed.7. Charging of Interest Under Section 234B:The Tribunal noted that charging interest under Section 234B is mandatory as per the Act. Therefore, this ground of appeal was dismissed for both assessment years.Conclusion:The appeals of the assessee were partly allowed, with specific directions on each issue as detailed above. The order was pronounced in the open court on 7th September 2018.