2021 (7) TMI 666 - AT - Income Tax

Tribunal decision: Exclusion of company, disallowance of membership fees, and direction on interest payments

The Tribunal partly allowed the appeal by directing the exclusion of Acropetal Technologies Ltd. as a comparable company due to fraudulent activities ... TP Adjustment - inclusion of M/s. Acropetal Technologies Ltd. as comparable company - HELD THAT:- SEBI has conducted inquiry about the activities of M/s. Acropetal Technologies Ltd. and observed that it has diverted its IPO proceeds to various group companies for non-business purposes and concluded that diversion of IPO funds is a fraud within the meaning of PFUTP regulations. Therefore, we are of the considered view that a company which has committed a fraud, as per findings of SEBI regulations cannot be considered as good comparable for a company, which is providing captive service to its AEs in the area of engineering design service. M/s. Acropetal Technologies Ltd. is not a good comparable and hence, we direct the TPO to exclude M/s. Acropetal Technologies Ltd. from the list of comparables and re-compute margin after exclusion of the company. Disallowance of expenditure incurred on membership fees paid to Madras Club - AO has disallowed membership fees paid to Madras Club on the ground that it is in the nature of personal expenditure cannot be allowed as deduction - as per assessee expenditure towards club membership fees was for business purpose and without providing adequate opportunity of being heard to the assessee, the Assessing Officer has treated same as personal in nature - HELD THAT:- No merit in the arguments of assessee that membership fees paid to Madras club is having bearing on business of the assessee - club membership fees paid is definitely in the nature of personal expenditure, unless the assessee demonstrates with evidence that it has been incurred for the purpose of promoting business of the assessee. In this case, the assessee has not produced any details to prove that club membership fees paid to Madras club is having been incurred for the purpose of promoting business of the assessee - there is no error in the findings recorded by the Assessing Officer to disallow club membership fees paid to Madras club and hence, we are inclined to uphold the findings of the DRP and reject the ground taken by the assessee. Disallowance of interest on delayed statutory payments - HELD THAT:- As regards interest on delayed payment of income-tax, there is no dispute with regard to the fact that the learned DRP has recorded categorical finding that assessee itself has added back said interest in the statement of total income and hence, same cannot once again be disallowed. If the assessee has already disallowed interest paid on delayed payments of income tax, then the Assessing Officer is not required to disallow once again said payment, because it amounts to double disallowance. Hence, we direct the Assessing Officer to verify claim of the assessee and take appropriate decision. Interest on delayed payment of PF - We find that it is a penal in nature for delayed remittance of statutory dues payable under respective Acts and cannot be allowed as deduction. Therefore, there is no merit in the arguments of the assessee that interest paid on delayed remittances of Provident Fund is an allowable deduction. Delayed remittance of service-tax - We are of the considered view that since service tax is an indirect expenditure, which is allowable under the Act, any interest paid on delayed remittances of such indirect taxes is also in the nature of revenue expenditure, because it is compensatory in nature. Hence, we direct the Assessing Officer to allow deduction towards interest on delayed payment of service tax Appeal filed by the assessee is partly allowed. Issues Involved:1. Inclusion of Acropetal Technologies Ltd. as a comparable company.2. Disallowance of expenditure incurred on membership fees paid to Madras Club.3. Disallowance of interest on delayed statutory payments.Detailed Analysis:1. Inclusion of Acropetal Technologies Ltd. as a Comparable Company:The primary issue was whether Acropetal Technologies Ltd. should be considered a comparable company. The assessee argued that Acropetal Technologies Ltd. had high margins and was involved in fraudulent activities as per SEBI's findings, making its financials unreliable. The Tribunal noted that SEBI had found Acropetal Technologies Ltd. guilty of diverting IPO funds for non-business purposes, which significantly affected its operating margins. The Tribunal referenced previous cases, including M/s. Bloom Energy India Pvt. Ltd. and M/s. Cameron Manufacturing India Pvt. Ltd., where it was held that companies with abnormal operating margins and fraudulent activities should not be considered good comparables. Consequently, the Tribunal directed the TPO to exclude Acropetal Technologies Ltd. from the list of comparables and re-compute the margin.2. Disallowance of Expenditure Incurred on Membership Fees Paid to Madras Club:The assessee contended that the club membership fees were for business purposes. However, the Tribunal upheld the Assessing Officer's decision, stating that club membership fees are generally personal expenses unless proven otherwise. The assessee failed to provide evidence that the fees were incurred to promote business activities. Therefore, the Tribunal found no error in the disallowance of the club membership fees.3. Disallowance of Interest on Delayed Statutory Payments:The Tribunal addressed three components under this issue:- Interest on Delayed Payment of Income Tax: The Tribunal noted that the DRP had found that the assessee had already added back the interest on delayed income tax payments in the statement of total income. Therefore, it should not be disallowed again, as it would result in double disallowance. The Tribunal directed the Assessing Officer to verify and ensure no double disallowance occurs.- Interest on Delayed Payment of Provident Fund (PF): The Tribunal held that interest on delayed PF payments is penal in nature and not allowable as a deduction.- Interest on Delayed Payment of Service Tax: The Tribunal considered interest on delayed service tax payments as compensatory and allowable as revenue expenditure. Therefore, the Tribunal directed the Assessing Officer to allow the deduction for interest on delayed service tax payments.Conclusion:The appeal filed by the assessee was partly allowed. The Tribunal directed the exclusion of Acropetal Technologies Ltd. from the list of comparables, upheld the disallowance of club membership fees, and provided specific directions regarding the disallowance of interest on delayed statutory payments.