2018 (4) TMI 33 - AT - Income Tax

Tribunal allows appeal, directs deduction deletion, excludes govt. comparables, orders TDS credit, notes excess interest levy.

AT & T Communication Services India Private Limited Versus ACIT, Circle 3 (2), New Delhi

AT & T Communication Services India Private Limited Versus ACIT, Circle 3 (2), New Delhi - TMI Issues Involved:1. Disallowance of advance written off2. Addition on account of non-charging of mark-up on support service charges3. Disallowance of year-end accruals4. Transfer Pricing Matters5. Short credit in respect of Taxes Deducted at Source (TDS)6. Levy of excess interest under section 234B and 234C of the Act7. Initiation of penalty proceedings under section 271(l)(c)Detailed Analysis:1. Disallowance of Advance Written Off:The taxpayer deposited Rs. 45,90,000 with M/s. In Time Properties Pvt. Ltd. for leasing office space. Upon deciding not to proceed with the lease, 50% of the deposit was forfeited. The AO/DRP disallowed the deduction, arguing it was due to breach of contract. The Tribunal, referencing the case of Fab India Overseas (P.) Ltd. and CIT v. Khaitan Chemicals & Fertilizers Ltd., held that the forfeited deposit was a business loss deductible under Section 37(1) of the Act. The Tribunal ordered the deletion of the addition made by the AO.2. Addition on Account of Non-Charging of Mark-Up on Support Service Charges:The AO added Rs. 18,414,784 for non-charging of mark-up on support service charges billed to AGNSI. The taxpayer argued that no mark-up was required as per the agreement, and both entities were profit-making without tax incentives to deflate revenues. The Tribunal, citing the case of AGNSI, held that the commercial expediency of the transaction should not be questioned by tax authorities and ordered the deletion of the addition.3. Disallowance of Year-End Accruals:The AO disallowed Rs. 56,15,035 due to the taxpayer's failure to provide supporting documents. The Tribunal noted that the taxpayer followed the mercantile system of accounting and had provided evidence for more than 95% of the expenses. Citing Rotork Controls India (P) Ltd. v. CIT, the Tribunal held that the expenses were based on a substantial degree of estimation and scientific basis, allowing the deduction and ordering the deletion of the addition.4. Transfer Pricing Matters:The TPO made adjustments to the taxpayer's international transactions, selecting 12 comparables. The taxpayer contested the inclusion of government undertakings as comparables. The Tribunal, referencing Bechtel India (P.) Ltd. and Thyseen Krupp Industries India (P.) Ltd., held that government undertakings should be excluded from the comparables set due to preferential treatment and non-profit-driven motives. The AO was directed to exclude such entities and re-benchmark the transactions.5. Short Credit in Respect of TDS:The AO granted TDS credit of Rs. 6,54,89,076 against the taxpayer's claim of Rs. 6,57,84,537. The Tribunal directed the AO to verify and grant full credit of Rs. 6,57,84,537 as claimed in the revised return.6. Levy of Excess Interest Under Section 234B and 234C:The Tribunal noted that the levy of interest under Sections 234B and 234C is consequential and did not require specific findings.7. Initiation of Penalty Proceedings Under Section 271(l)(c):The Tribunal deemed the grounds related to the initiation of penalty proceedings as premature, requiring no adjudication.Conclusion:The appeal was allowed for statistical purposes, with specific directions to the AO to rectify the issues as per the Tribunal's findings.