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

The Tribunal partly allowed the assessee's appeals, directing specific actions on each issue. Disallowance of professional charges and foreign travel ... TDS u/s 194J - Disallowance u/s 40(a)(ia) - professional charges paid without deduction of tax at source - HELD THAT:- There is no dispute that the payments made to Ms.K.Jyothi and Mr.K.Venkateswara Rao represent the professional charges and the assessee is required to deduct the tax at source and to remit to Government of India account u/s 194J of the Act. Therefore, we do not see any reason to interfere with the order of the Ld.AO and uphold the disallowance. The assessee’s appeal on this ground is dismissed. Adhoc disallowance @10% of the foreign travel expenses - HELD THAT:- AR did not place any evidence to controvert the finding of the AO and to establish the relevance and genuineness of the expenditure with foreign visits made by the Director and the purpose and nature of expenses. Therefore, we do not find any reason to interfere with the order of the Ld.AO. The disallowance made by the AO is upheld and the appeal of the assessee on this ground is dismissed. ALP adjustment towards interest on advances given by the assessee to its Associate Enterprise (AE) - HELD THAT:- If the funds are repatriated to India as observed by the Ld.DRP there would be substantive reduction in the interest cost and potential increase in the profit of the company. Therefore, having observed that the advance is not a trade advance, we hold that the interest is chargeable on the advances given to the AE. The assessee has incurred huge financial cost including the interest on working capital. As rightly observed by the Ld.DRP, had the assessee did not divert the funds, the tax payer would have saved the interest to the extent of diversion of funds. Therefore, the arguments of the Ld.AR not to charge the interest on interest free funds given or advance to the AE is not acceptable and we hold that the AO has rightly made the adjustment. As relying on ACIT, Circle 1(1), Guntur Vs. CCL Products (India) Ltd. [2017 (9) TMI 1737 - ITAT VISAKHAPATNAM] we direct the AO to charge the interest @2% more than the LIBOR which is reasonable and at arms length. Accordingly, the assessee’s appeal on this ground is partly allowed. This issue is involved for the assessment year 2011-12 and 2012-13 and the appeal of the assessee is partly allowed for both the assessment years. Interest on receivables - HELD THAT:- In the instant case the PLI is higher than comparable cases and the TPO held that no ALP adjustment is required with regard to profit margin. The assessee contended that having accepted that the PLI is higher than the comparable cases the potential loss of interest is taken care and embedded in the sale price.The department has not given the specific details such as what was the period of recovery, what was the delay, what was the reasonable delay etc.,thus the department has not made out a case for charging the interest on dealy. The revenue also did not controvert the submission of the assessee that due to higher margins and the long term relations and business considerations the right of interest is waived - we hold that there is no justification for charging the interest on receivables in the case of the assessee, accordingly, we delete the interest levied on receivables and allow the appeals of the assessee Disallowance u/s 36(1)(va) r.w.s. 2(24)(x) towards delayed payment of employees contribution to Provident Fund - HELD THAT:- Issue is squarely covered by the decision of Hon’ble Supreme Court in the case of CIT Vs. Alom Extrusions [2009 (11) TMI 27 - SUPREME COURT]. In this case, though the assessee has not remitted the employers contribution before the stipulated date of 15th of succeeding month, the assessee had remitted the entire amount before filing the return of income. Therefore, we hold that the assessee is entitled for deduction if the employer contribution is paid before filing the return of income before the due date. Accordingly, appeal of the assessee on this ground is allowed. Granting exemption u/s 10A on enhanced profits on account of additions made by the AO on domestic front towards disallowance u/s 40(a)(ia) and towards foreign travel expenses - HELD THAT:- As relying on Gem Plus Jewellery India Ltd. [2010 (6) TMI 65 - BOMBAY HIGH COURT] assessee is entitled for deduction u/s 10A on account of the disallowances/additions made by the AO other than ALP adjustments. Accordingly, we direct the AO to grant exemption u/s 10A on the disallowance made by the AO in respect of section 40(a)(ia) and 36(a)(va) and the adhoc disallowance on foreign travel expenses. Appeals of the assessee are partly allowed. 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.