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2019 (4) TMI 46
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....e support and liaison services iii) Managed network services 2.1 For the year under consideration, the return of income was filed declaring an income of Rs. 6,95,74,835/-. The final assessment order was passed on 29.1.2015 at an income of Rs. 21,64,57,948/-after making the following additions/disallowances:- i) Addition on account of non-deduction of TDS u/s 40(a)(ia) of the I.T. Act, 1961 1,46,84,844 ii) Addition on account of non taxable allowances paid to the expats 2,60,90,328 iii) Addition on account of gratuity liability of employees transferred to AT&T GNS 48,51,041 iv) Addition on account of Prior Period expenses 38,55,230 v) Addition on account of differential amount of mark-up 57,79,795 Vi) Addition on account of interest not charged from AGNS 2,46,141 vii) Addition on account of expenses incurred on behalf of expats 15,45,155 viii) Addition on account of percentage of profit on Network Connectivity Services 7,92,00,000 ix) Addition on account of year end provisons 1,26,30,579 14,68,83,113 2.2 Prior to the pa....
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....e to be in the nature of prior period expenditure. 3. Ground No. 3 - Addition on account of non-taxable allowances paid to expatriate employees 3.1 On the facts and circumstances of the case and in law, the learned AO has erred in disallowing Rs. 2,60,90,328 towards difference between the salary and other costs incurred by the Appellant in relation to the expatriate employees and taxable salary reported by the employees in India. 3.2 On the facts and circumstances of the case and in law, the learned AO has erred in holding that the subject transaction has been routed by the Appellant to understate its income and to avoid payment of taxes thereon without appreciating the fact that the entire amount proposed for disallowance (i.e. Rs. 2,60,90,328) has been charged back from AT&T Communication Services International Inc. ('AT&T US') under the Master Service Agreement ('MSA') at a mark-up of 8%. 3.3 Without prejudice to the above, on the facts and circumstances of the case and in law, in case the above claim of the assessee is not accepted, then the said amount along with mark-up thereon/6f 8% should be reduced from the income of the assessee, being the amount claimed from/....
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.... AO has erred in applying a mark-up of 18.07% instead of the revised mark-up of 12.85% applied by the TPO basis the directions of the Hon'ble DRP, on services rendered by the appellant to AT&T US. 9. Ground No. 9 - Addition on account of notional loss of profit to the Appellant 9.1 On the facts and circumstances of the case and in law, the learned AO has erred in observing that the Appellant should have received compensation for the loss of revenue arising due to transfer of business to AGNSI and has thereby erred in making an addition of 7,92,00,000 on account of notional loss of profit to the Appellant. 10.1 On the facts and in the circumstances of the case and in law, the learned AO has erred in making disallowance of expenses, amounting to Rs. 1,26,30,579 (represented by year-end accruals), by alleging the same as excessive on account of non-submission of supporting documents. 10.2 Without prejudice to the above, on the facts and circumstances of the case and in law, the learned AO has erred in not observing that deduction in respect of the disallowed amount on account of year-end accruals should be allowed in the subsequent year(s) in which such accruals are revers....
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....R submitted that this ground challenges the disallowance of maintenance charges paid to CISCO. It was submitted that the assessee had paid an amount of Rs. 1,46,84,844/- to CISCO towards Annual Maintenance Charges (AMC). It was submitted that during the year, the assessee had undertaken two separate transactions with CISCO Systems International BV which was a tax resident of Netherlands. These separate transactions pertained to purchase of equipment and provision of annual maintenance services. The Ld. AR further submitted that it was the allegation of the Assessing Officer that the assessee had not submitted particulars of the equipment purchased from CISCO in relation to which the annual maintenance charges had been paid. It was also submitted that the Assessing Officer had alleged that no supporting evidences had been submitted by the assessee to substantiate that the equipment did not have any element of royalty embedded therein and further that the payment of annual maintenance charges did not constitute payment towards Fee for Technical Services (FTS). It was further submitted that the Assessing Officer had held that since the assessee had failed to substantiate that the s....
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....e case of ACIT vs. M/s HCL Comnet Ltd. (TS-456-ITAT-2016(Del)) wherein it had been held that while analysing the taxability of annual maintenance charges, no technical services could be said to have been provided to the assessee. It was further submitted that regarding the allegation of the Assessing Officer in respect of prior period expenses, the relevant invoices had been received as well as paid in the year under consideration itself and, therefore, the liability had crystallised in the subject year itself and, therefore, the same was to be allowed as a deduction in the year under consideration only. 3.1.1 In response, the Ld. Departmental Representative (C.I.T. DR) submitted that the assessee had not filed any details regarding the annual maintenance expenses before the Assessing Officer and, therefore, the Assessing Officer had no option but to make the addition. It was also emphasised by the Ld. C.I.T. DR that a special audit u/s 142(2A) of the Act had been ordered by the Revenue in the case of the assessee and even the special auditor appointed by the department had stated in the audit report that the assessee had not provided the relevant information, explanation, refer....
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....y and other costs paid by AT&T Worldwide Personnel Services Inc. whereas as per the returns of income of the expatriates, the taxable salary returned by them amounted to Rs. 1.29 crore. It was also submitted that cost + 8% was charged in this regard. The Ld. AR submitted that the Assessing Officer, on the basis of the special audit report, noted that the amount offered to tax in the returns of income of the expatriates and Form 16 issued to them reflected only Rs. 1.29 crore as against the payment of Rs. 3.90 crores made by the assessee to M/s AT&T Worldwide Personnel Services Inc. and, therefore, the differential amount was disallowed by the Assessing Officer on the ground that the assessee had not submitted any reconciliation statement to justify that the differential amount represented non-taxable component of the expatriate salary. It was also submitted that the Assessing Officer had alleged that the assessee could not substantiate that the impugned payment/s had been made only with respect to the business activity of the assessee. The Ld. AR submitted that the assessee had issued employment letters to three expatriates namely Mr. Mark Shine, Mr. VS Gopinath and Mr. Richard McC....
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.... assessee company and, therefore, the transfer of such sum by the assessee to AT&T GNS cannot be treated as an allowable expenditure. The Ld. AR submitted that the assessee company had made payment of gratuity to AT&T GNS which was duly recorded as a liability in the books of account of AT&T GNS. It was further submitted that the payment had been made through bank which was evidenced through the bank statement. It was further submitted that the transferred employees continued with their employment with AT&T GNS and, therefore, the question of AT&T GNS making the payment of gratuity to such employees at the time of their resignation did not arise at all. It was emphasised that the liability for making the payment of gratuity amount by AT&T GNS to the transferred employees would arise only at the time of termination of their employment with AT&T GNS. The Ld. AR also drew our attention to the copies of consent letters for six employees (on sample basis) which evidenced the consent of the employees on the terms of transfer which were duly submitted before the Assessing Officer and were now also in the paper book filed by the assessee. The Ld. AR also submitted that four employees out o....
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....und was not being pressed. Accordingly, this ground is dismissed as not pressed. 3.5.0 Ground no. 6 of the assessee's appeal pertains to disallowance of differential mount of mark-up leading to an addition of Rs. 37,79,795/-. The Ld. AR submitted that AT&T Global Networks Services India Private Limited, a group company of the assessee had commenced its business operation during financial year 2005-06 and it did not have its own supportservice functions like tax, legal, HR etc. whereas the assessee, which was in operation for more than 10 years, had a fully developed support-service functions. It was further submitted that in view of this, the assessee entered into the support-service agreement with AT&T Global Networks Services India Private Limited for providing these support services. It was submitted that as per the support service agreement, no mark-up was required to be charged on the support service charges. It was further submitted that all the same, the assessee had charged a mark-up of 8% on the cost of support services charges billed to AT&T Global Networks Services India Private Limited. However, the Assessing Officer proposed a mark up of 18.07% which was reduced to ....
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....the customers of AT&T in India. It was further submitted that the assessee had engaged VSNL as all the necessary corporate and legal approvals to offer such services were available with VSNL. The Ld. AR submitted that the assessee was acting as a service support organisation for VSNL which was responsible for marketing of AT&T Global Networks Services in India to the customers of the assessee pursuant to the agreement entered into between the AT&T Worldwide Telecommunication Services Singapore Pvt. Ltd. Our attention was drawn to the copy of agreement placed in the paper book in this regard. It was also submitted that this agreement had been submitted before the Assessing Officer also. It was further submitted that the revenue earned by the assessee from the rendition of services to the customers of VSNL was accounted for under the network connectivity services business segment. It was further submitted that during the year under consideration, another group entity i.e. AT&T Global Networks Services India Private Limited commenced its business operation and this entity had obtained international long distance, national long distance and internet services licence and had also ....
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....he Assessing Officer and further no assets had been transferred by the assessee and, therefore, this addition was not sustainable. 3.8.1 In response, the Ld. C.I.T. DR submitted that the Ld. DRP had observed that the setting up of a new company under the name of AT&T Global Networks Services India Private Limited was not devoid of any planned exercise and that it was only due to such restructuring of such business activities that the assessee had terminated its agreement with the VSNL. The Ld. C.I.T. DR also placed reliance on the observations of the Ld. DRP that the cancellation of contract with VSNL by the assessee was not a standalone activity as it involved shifting of 29 employees as well as transfer of relevant assets to the tune of Rs. 6,71,57,014/- (being the written down value) and, therefore, it was obvious that there was a transfer of business. The Ld. C.I.T. DR also emphasised the fact that the assessee had not brought full facts of the transaction on record and that since by this arrangement the income of the taxpayer had substantially reduced, the proposed addition was to be upheld. 3.9.0 With respect to ground no. 10 pertaining to disallowance of Rs. 1,26,30,57....
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....ction 244A of the Act, both the parties agreed that these grounds were consequential. 3.12.0 With regard to ground no. 15 pertaining to initiation of penalty proceedings u/s 271(1)(c), the ld. AR fairly agreed that this ground was premature in the quantum proceedings. 4.0.0 Arguing for the department's appeal in ITA No. 1779/Del/2015, the Ld. CIT DR submitted that the sole ground under challenge was the direction of the Ld. DRP in directing deletion of addition of Rs. 98,63,013/- on account of tax deposited on behalf of the expatriate employees and margin thereof not charged under MSA as the assessee had recovered the said amount from AT&T WPS. The Ld. C.I.T. DR submitted that the special auditor had stated that while remitting the amount of salaries of the expatriates, tax had not been deducted and, therefore, by reason of such non-deduction of taxes, such amount has been shortly charged under the Mutual Services Agreement. The Ld. C.I.T. DR also drew attention to the observations of the Assessing Officer that no reconciliation or any corroborative evidence had been filed by the assessee in this regard and, therefore, the assessee's contention that such amount has been charg....
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....emphasised by the Ld. AR that the annual maintenance contract was for the purpose of providing regular maintenance services and it did not have any element of 'make available'. On the other hand, it is the contention of the department that no details were filed before the Assessing Officer and a reference has also been made to the comments contained in the special audit report wherein it has been mentioned that the assessee had not cooperated during the proceedings of special audit. It has already been pointed out by the Ld. C.I.T. DR that even the Ld. DRP has taken note of noncompliance by the assessee during the course of special audit and further that the relevant documents in respect of this claim were not furnished before the lower authorities. Thus, the stand of the department and the assessee is contrary on the factual aspect of the issue i.e. as to whether the assessee had provided the relevant details and documents before the Assessing Officer or not. Looking into the facts of the case and in the interest of justice, it is our considered opinion that the issue should be reexamined by the Assessing Officer specially in the light of claim of the assessee that the assessee ha....
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....ts claim that the differential sum of Rs. 2,60,90,328/- actually represented the non-taxable component. The Ld. C.I.T. DR, however, has submitted that the matter could be re-examined by the Assessing Officer. Accordingly, in view of the divergent claims of both the parties regarding the factual aspect of the issue and in the interest of justice, we deem it fit to restore this issue also to the file of the Assessing Officer with the direction to the Assessing Officer to reexamine the issue and pass appropriate orders in accordance with law after giving due opportunity to the assessee to present its case. We also direct the assessee to cooperate with the assessing authority and furnish all the relevant details and documents when called upon to do so by the Assessing Officer failing which the Assessing Officer shall be at liberty to proceed ex parte qua the assessee and pass appropriate orders in accordance with law. 5.3.1 Ground No. 3 stands allowed for statistical purposes. 5.4.0 Ground no 4 of the assessee's appeal challenges the disallowance of gratuity amounting to Rs. 48,51,041/- pertaining to employees who have been transferred from AT&T Global Network Services India P....
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....e company in this regard and further the payment of gratuity of transferred employees had been paid through banking channels which could be evidenced from the bank statement coupled with the fact that the Ld. DRP has noted that the taxpayer had not been forthcoming in bringing relevant facts on record to facilitate the adjudication, in our considered opinion, ends of justice would be met if this issue is also restored to the file of the Assessing Officer for examining them afresh and thereafter passing an order in accordance with law. We deem it fit to restore this issue also to the file of the Assessing Officer with the direction to the Assessing Officer to re-examine the issue and pass appropriate orders in accordance with law after giving due opportunity to the assessee to present its case. We also direct the assessee to cooperate with the assessing authority and furnish all the relevant details and documents when called upon to do so by the Assessing Officer failing which the Assessing Officer shall be at liberty to proceed ex parte qua the assessee and pass appropriate orders in accordance with law. 5.4.1 Accordingly, ground no. 4 stands allowed for statistical purposes. ....
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....CSI as is duly explained in the agreement between ACSI and AGNS; that it was decided between the parties that no mark up is charged by ACSI on the support service charges billed to AGNS and recovery should be made on cost to cost basis as per agreement; that commercial expediency of a particular transaction would be examined from the perspective of a businessman; that both AGNSI and the taxpayer are profit making entities and there was no tax incentives for the purpose to deflate the revenues earned by the taxpayer and relied upon the judgment of Hon'ble Apex Court in CIT vs. A. Raman & Company (1968 AIR 49) and the judgment of Hon'ble Allahabad High Court in Smt. Sumanlata Didwania vs. ITO (1986) 17 ITD 830 (All.). 12. However, on the other hand, the ld. DR for the Revenue contended that if something is charged by a company, there must be some agreement that there is no mark up and in this case, no such agreement has been produced and relied upon the order passed by the AO/DRP. 13. Undisputedly, the taxpayer as well as AGNSI, its group company are profit making entity and there is no tax incentive for the purpose to deflate the revenues earned by the taxpayer. Even i....
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....e so incurred. Reliance in this regard is placed on the following judicial precedents furnished by the assessee: i. CIT v. Panipat Woollen & General Mills Co Ltd (103 ITR 66) (Supreme Court) ii. CIT v. Sales Magnesite (P) Ltd [1995) 214 ITR 1 iii. Binodiram Balchand vs. Commissioner of Income Tax (48 1TR 548) iv. Calcutta Landing and Shipping Co Ltd vs. CIT (65 ITR 1) (Cal High Court) v. CIT Vs B Dalmia Cement Ltd (254 ITR 377) 76. Respectfully following the principles laid down in the aforesaid judicial precedents, we find that where the appellant has actually incurred the aforesaid support services cost and no evidence has been brought by the Department to controvert the same, such expenditure cannot be disallowed merely on suspicion. We affirm the finding of the ld DRP on this issue. In view of the above, the appeal of the revenue on this ground is dismissed." 16. So, in the instant case also, the Revenue has failed to controvert the invoices, the details of payment made and evidencing the payments thereof to dispute the genuineness of the expenses and the fact that the taxpayer as well as AGNSI are profit making entities and there was no tax incentive....
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....ent and termination of agreement had been executed by the assessee with a view to reduce its taxable profits. In this regard, the Ld. DRP has also noted that the taxpayer has not explained/brought on record any document either before the Assessing Officer or before the DRP so as to explain:- i) Why a new entity namely AT&T Global Network Services India Pvt. Ltd. was set up by the AT&T Group? ii) What were the contents of the restructuring exercise of the AT&T Group operations in India? iii) If there was any resolution of the Board of Directors on this issue, what were the contents of the said resolution? iv) Whether the clients of the AT&T were informed of the employee structure or whether they remained under the impression that the services were being rendered to them in the same manner by the same entity? v) Whether the relevant facts were brought to the knowledge of any competent authority in this regard? 5.8.1 Apart from this, the Ld. DRP has also noted that 29 employees were shifted from the assessee company to AT&T Global Network Services India Pvt. Ltd. who were performing relevant activities in this segment and further there was a transfer of assets to ....
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....dispute that reversal entries of Rs. 1.50 crores were made in the succeeding years by giving benefit of the same to the taxpayer. It is also not in dispute that Rs. 5.02 crores for the disallowance made in the preceding assessment year has been allowed to the taxpayer against the above disallowance resulting in credit of Rs. 4.46 crores. It is also not in dispute that taxpayer is following mercantile system of accounting and has produced documentary evidence supporting payment/reversal of more than 95% of the expenses represented by the year end accrual. 20. The ld. AR for the taxpayer contended that year end accruals being provisions made towards routine business expenditure incurred are based on past trends as well as scientific and reasonable basis and are liable to be allowed as deduction in view of the decisions rendered by Hon'ble Apex Court in Rotork Controls India (P) Ltd. - 314 ITR 62. 21. The ld. AR for the taxpayer further contended that the issue is also covered by the decision of the coordinate Bench of the Tribunal in case of AGNSI in ITA No.1059/Del/2015 for AY 2010-11. 22. Ld. DR for the Revenue contended that before the ld. DRP, the taxpayer has not pr....
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.... estimate can be made of the amount of the obligation. If these conditions are not me, no provision can be recognized. The principle is that if the historical trend indicates that a large number of sophisticated goods were being manufactured in the past and the facts show that defects existed in some of the items manufactured and sold, then provision made for warranty in respect of such sophisticated goods would be entitled to deduction from the gross receipts under section 37." 25. When undisputedly no mistake has been pointed out by the AO in the calculation nor it is the case of the AO that the taxpayer had not paid certain bills and the taxpayer is following mercantile system of accounting and the expenses are having element of estimation as well as scientific basis, keeping in view the past trend, the expenses are required to be allowed in the year of creation itself, particularly, when the Revenue authorities has allowed the entire claim of expenditure in the subsequent years. 26. So, following the law laid down by the Hon'ble Apex Court in Rotork Controls India (P) Ltd. (supra) and the decision rendered by the coordinate Bench of the Tribunal in AGNSI in ITA No.....
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....that the Ld. DRP has given a categorical finding that the assessee had borne the taxes to the extent of the income offered for taxation in India and the balance tax payable in the home country was borne by the employee/s concerned. The relevant observations of the Ld. DRP are contained in Para 11.4 of its directions and the same are being reproduced hereunder for a ready reference:- "11.4 The Panel has examined the matter. The draft assessment order shows that the AO proposed to disallow the payment (along with mark-up) for the reason that he considered that the taxpayer has borne the expenses of tax of the expat employees and did not deduct the same while reimbursing AT&T WPS. In other words, the AO is of the view that ultimately the employees concerned should have borne the tax expenses rather than the taxpayer and for this reason, the taxpayer should have paid lesser amount to AT&T WPS correspondingly. The AO has not disputed the taxpayer's version that the tax amount of Rs. 83,53,530/- has been recovered along with mark-up of 8% from AT&T US in August 2008. The primary argument of the AO has been that the taxpayer has been burdened by the tax of Rs. 83,53,530/- which sho....