TaxTMI 
TaxTMI 
2019 (8) TMI 988
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.... "1. Ground No. 1 - No time available with the learned AO for making an order of assessment after excluding the period of limitation 1.1 On the facts and in the circumstances of the case and in law, the impugned order of assessment is bad in law and void-ab-initio as the same has been framed by the learned AO after the expiry of time limit for completion of assessment as provided in Section 153(1) of the Act. 2. Ground No. 2 - Ad - hoc disallowance of expenses incurred on account of rejection of Master Service Agreement ('MSA') 2.1 On the facts and in the circumstances of the case and in law, the learned AO has erred in making an ad-hoc addition of Rs. 15,14,74,737 by holding that 50 percent of the costs reported by the Appellant under the Managed Network Services business segment relate to Liaison and Support Services business segment and should have been billed at a mark-up of 12% 3. Ground No. 3 - Addition on account foreign exchange loss incurred on salary of expatriate employees not charged to AT&T Communication Services International Inc. ('AT&T US') 3.1 On the facts and in the circumstances of the case and in law, the learned ....
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.... case and in law, the learned AO has erred in making disallowance of expenses, amounting to Rs. 10,18,94,025, (represented by year-end accruals by alleging excess provisioning, non-submission of supporting documents and/ or non-deduction of tax at source thereon) under section 40(a) of the Act. 6.2 On the facts and circumstances of the case and in law, the learned AO has erred in holding that reversal of year-end accruals in subsequent year(s) evidences that accruals were created without any basis, which were neither required nor backed by commercial expediency. 6.3 On the facts and circumstances of the case and in law, the learned AO has erred in holding that tax was required to be deducted on year-end accruals, which were not only created on an estimated basis but also parties were not identifiable. 6.4 Without prejudice to the above, on the facts and circumstances of the case and in law, the learned AO has erred in not holding that since such year-end accruals have been reversed in the subsequent financial years, the same should be allowed as tax deductible expenditure for the subsequent financial years. 7. Ground No. 7 - Non-grant of full cre....
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....pment, configuration, security, capacity and problem management, contingency planning and disaster recovery. It also provides monitoring, analyzing, diagnosing, interpreting all pertinent network statistics performance indicators on a routine basis. It provides the services to the customers of the overseas group entities. In the network connectivity services business segment it provides services to its customers revenue is earned and cost incurred in relation to the customer premises-based equipment sold to the customer is recorded. 5. On the returned income, draft assessment order u/s 144C read with section 143 (3) of the income tax act 1961 was passed on 25/11/2013 determining the total income of the assessee at INR 5 95944520/-. The assessee aggrieved with the order of the learned assessing officer preferred objections before the learned DRP that passed its direction on 27/8/2014. Further During the course of assessment proceedings the learned assessing officer issued the detailed questionnaire to the assessee and found complexity in the accounts and directions were issued for special audit u/s 142 (2A) of the income tax act. The learned assessing officer proposed the spec....
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....e ld DRP examined the objection of the assessee, directed assessee to produce relevant details before ld AO, assessee produced certain details. However, ld AO was not satisfied about the completeness of the same and its bifurcation in salary and non-salary expenses. AO held that assessee has merely submitted the list of the persons in segments, submitted ledgers but substantiated with bills only to some extent. Hence he proceeded that expenditure included in managed network column amounting to INR 2 70490602 is identified as an expenditure which the assessee company has been claimed for its own business other than the business which should have been charged to the associated enterprises. Therefore, according to the AO, as the income of the assessee is based on the cost incurred, as the markup is to be applied on the total cost incurred by the assessee, the cost basis of the assessee for the purpose of markup should be proper, authentic and accurate to determine the income of the assessee. The real cause of disagreement is chart produced at page number 65 to 71 of the assessment order wherein the cost incurred by the assessee has been allocated to the various segment. The learned....
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.... under which they fall is enclosed as Annexure - 2. iv. Whenever an employee within a particular BU/ business segment incurs an expense, it is only for the purpose of rendering services specific to his business segment. The booking of an expense is initiated when such employee raises a requisition through a Purchase Requisition ('PR') Form. When the employee raises a PR, the BU/ business segment is automatically identified based on organization code corresponding to such employee. Further, basis the nature of expense, the corresponding expense code is reflected. Hence, for every expense booked a business segment can be identified from the organization code, which is a function of the employee who initiates the booking of an expense and customer to which it ultimately pertains to. Typically, the non-customer related expenses such as (Finance, Tax etc.) are booked under the MSA business segment and recouped from AT&T USA. There are certain common costs such as (legal and professional, forex loss etc.) amounting to Rs. 1.78 crores for Financial Year 2008-09 which have been shown as non-allocable expenses in the Final Segmental Disclosure of audited financials. a. For....
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....ts are booked under the respective business segments based on whether the expenditure has been incurred for rendering services under the MNS/ NI or MSA division. For e.g. all repair and maintenance cost related to the equipment installed at the premises of a customer is booked under the Non-MSA business segment. Those costs, which are not attributable to rendering of any particular services, are recouped from AT&T USA and charged under the MSA business segment. He thus claimed that there is a well-designed robust procedure for booking of expenses under each of the business segments which has been laid down in the organization because of which there cannot be even an inadvertent error while booking expenses. The moment an employee initiates the requisition of a service, the subsequent procedure of booking expenses in respect thereof is triggered automatically. Since the entire process is system driven, an employee does not have the discretion of booking expenses in a particular business segment. The expenses will automatically and unavoidably get booked in the respective business segment to which the employee belongs. Thus, there arises no question of an expense being incorrec....
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....iness segment. In addition to the aforesaid factual position, he placed reliance on the following judicial precedents wherein it has been held that ad-hoc disallowances are bad in law: i. Good Year India Ltd. vs. ITO (2000) 73 ITD 189 (Delhi ITAT) ii. Express Movers (P) Ltd. vs. DCIT (1997) 61 ITD 128 (Delhi ITAT) iii. ACIT vs. Arthur Anderson and Co. (2004) 94 TTJ 736 14. He further submitted that the Transfer Pricing Officer - 1(1) has duly examined the Transfer Pricing Documentation maintained by the Applicant (wherein the transaction with AT&T US was also recorded) and has not drawn any adverse inference in his order under section 92CA (3) dated January 03, 2013 with respect to the genuineness of revenues earned by ACSI from its international transactions and the costs incurred in relation to such revenues. He therefore submitted that once the TPO has passed his order, it would not be correct for the learned AO to make any adjustments in relation to the transactions already examined by the TPO. He also submitted that the assessment proceedings of the preceding year i.e. AY 2008-09 were completed subsequent to the year in question. Similar issue rel....
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....o its customers in India. 20. Therefore it is important and of utmost importance that cost base of the assessee must be accurate as the revenue of the assessee is determined on cost plus basis. 21. A pictorial representation of the business segments along with a brief description of the services rendered and revenues earned by them is as under: 22. For the Assessment Year 2009-10, the Ld. AO has made an addition of Rs. 15.14 crores by alleging that 50 percent of the costs ( Rs. 27 Crores+ 12 % mark up thereon ) incurred under the MNS business segment relate to the MSA business segment and should have been billed to AT&T USA along with a mark-up of 12%. The learned AO has observed that the Applicant has not provided complete details to substantiate that the entire cost pertaining to the services rendered to AT&T US has been billed to it correctly. The learned assessing officer at page number 82 of the order has held as under:- " The above submissions were considered in detail and the same is not accepted as in the said submission the assessee has fast simply bifurcated the total cost between salary and non-salary expenses. Further, with respect to salary e....
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....ary cost of INR 937,600,000. Thus it is apparent that the assessee has failed to substantiate its cost base. Further the learned AO also appropriated on ad hoc basis 50% of the total indirect cost of Rs. 270490602/- of non-MSA segment as cost incurred by the assessee for MSA segment. Even otherwise such percentage also does not have any sanctity. However, we are of the opinion that it is the primary duty of the assessee to substantiate the cost base of its revenue model before the assessing Officer completely. When the assessee has failed to substantiate 68% of non salary cost and 83% of salary cost before the lower authorities, we are unable to agree with the argument of the learned authorised representative that cost base of the assessee for deriving the revenue from associated enterprises is correct. In view of this we set aside the whole issue back to the file of the learned assessing officer, with a direction to the assessee to substantiate it cost base with respect to the segment, which has been challenged by special auditor and the learned assessing officer to derive at the correct income of the assessee. The learned assessing officer may examine the details submitted by ....
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....y to the services rendered under the MSA and should have been billed to AT&T US along with a 12% mark up. Accordingly, the Ld. AO has made an addition of 2.10 crores (Rs. 1.87 crores + Rs. 0.22 crores). The ld DRP upheld the action of the AO. 25. Ld AR submitted that The MSA provides for recoupment of the operating costs incurred by ACSI in the course of and for provision of services to AT&T US under the MSA. The MSA does not contemplate recoupment of losses, if any, incurred by ACSI, as a result of change in the foreign currency exchange rate between the date on which the expense is incurred and the date on which payment in respect of such expenses is made. It is submitted that foreign exchange loss incurred by ACSI in relation to salary payable to expatriate employees represents loss incurred as a result of change in the foreign currency exchange rate and does not form part of operating costs incurred by ACSI for provision of services under the MSA. Hence, such loss was not charged to AT&T US under the MSA. It is further submitted that it has always been the understanding between ACSI and AT&T US that no adjustment in respect of foreign exchange gain/ loss earned/ incurred by ....
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....rein the transaction with AT&T US was also recorded) and not drawn any adverse inference in his order under section 92CA(3) dated January 03, 2013 with respect to the genuineness of revenues earned by ACSI from its international transactions and the costs incurred in relation to such revenues. Further, once the TPO has passed his order, it would not be correct for the learned AO to make any adjustments in relation to the transactions already examined by the TPO. Further, ACSI's margins even after considering foreign exchange losses is still higher than that of comparable companies. He also submitted that the Ld. AO failed to take cognizance of the fact that already a higher cost (i.e. Rs. 45 crores) was charged under the MSA business segment rather than the cost (of Rs. 43.17 crores) actually incurred in relation to the services rendered to AT&T US under the MSA business segment. The excess cost charged covers the foreign exchange fluctuation amounting to Rs. 1.87 crores, which is alleged to be cross-charged in the present ground. Accordingly, the allegation of the Ld. AO that foreign exchange loss of Rs. 1.87 crores incurred in relation to salary of expats is incidental ....
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.... 5 expatriate's employees who services have been used by the AT & T US and therefore there is no basis to consider that the said cost is not the cost to be recovered along with the markup from AT & T US. . The honourable DRP also rejected the assessee's view on treatment of forex gains/losses in the safe harbour rules on the ground that such rules and applicable for transfer pricing study is. Further, it was held that the AO is competent under the act to compute the income as well as carry out transfer pricing of international transaction and the order of the TPO becomes part of the assessment order. Accordingly, the honourable DRP upheld the addition made by the assessing officer." Thus the learned assessing officer made an addition of INR 2 1026663/- to the total income of the assessee. 28. The learned Dispute Resolution Panelhas given its direction as under:- "9.4 the panel has examined the matter. The compensation clause, which has been reproduced in para number 4.4.3 of this order, clearly shows that the assessee has to be compensated by AT&T US for the services provided by the assessee with a markup of 12% of such cost. The term cost has not been defin....
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....ncome as well as carry out transfer pricing of an international transaction. Moreover, the order of the TPO is not standalone order for taxation but becomes part of the assessment order and ultimately income worked out as per the computation of income is made by the AO." 29. We do not find any infirmity in the order of the learned Dispute Resolution Panelin their direction to the assessing officer to include the same for working out the correct revenue of the assessee. Admittedly even before us the assessee did not show any clauses in the agreement, which even remotely suggest that only "operating cost", are to be charged to the AE. According to us the assessee is to be reimbursed on "cost" plus basis with 12% mark up. In the agreement there is no reference to exclusion of any foreign exchange loss or gain or same is not to be considered as " cost". It was not denied that the expat of salary was not related to the impugned segment and also foreign exchange loss was also on account of the salary payment. We also agree with the finding of the ld DRP with respect to applicability of safe Harbour rule. Naturally assessee has not opted for it and so cannot claim so. Further in man....
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....um utilization of the existing resources available with the group and to mitigate the costs that would have been incurred by AGNS in establishing its own support service functions. For the subject FY, mark-up of 8% was mistakenly charged by ACSI during the first 3 months. However, such mark-up was reversed during the subsequent months, in accordance with covenants of the support services agreement entered into with AGNSI. 32. Aggrieved, the ld AR submitted that :- a. At the outset, kind attention is drawn to the fact that the matter is squarely covered by the recent order of Hon'ble Tribunal, Delhi Benches, in its own case in AY 2010-11 (ITA No. 1016/Del/2015). In this regard, it is submitted that the facts of the present year are exactly similar to that of the preceding year. Relevant para of the order is produced below: (Para 16, Page 13 of the ITAT Order) "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 incentives for the ....
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....tax incentives for the purpose to deflate the revenues earned by the taxpayer, the Revenue has based its decision on commercial consideration. Moreover, in case of both the resident parties, terms and conditions of the arrangement cannot be questioned by the Revenue unless specifically provided under the Act. In case of a contract by both the parties who are admittedly resident Indian entities, they make the law for themselves which cannot be interfered unless contract is unlawful or specially barred by the law of the land. Moreover by such a decision of not charging mark up by the taxpayer on support services charges billed to AGNSI, no loss of tax has been caused to Revenue. So, the findings of the TPO/DRP that the taxpayer is not only to cut charges but mark up also is not sustainable in the eyes of law. So, we order to delete the addition on account of not charging of mark up on support services charges billed to AGNSI. 25. Respectfully following the findings of the coordinate Bench, we direct the Assessing Officer to delete the impugned addition. Ground No.4 is allowed. " d. The matter is also squarely covered by the recent order of Hon'ble ....
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.... Indian entities forming part of the same group, it was decided between the parties that no mark-up shall be charged by ACSI on the support service charges billed to AGNS and recovery should be made on a cost to cost basis, which is duly corroborated by the support services agreement entered into between ACSI and AGNS. h. That resident parties are free to agree and decide the terms of arrangement, including consideration to be paid for services rendered by one party to another, and in absence of any specific provision under the Act to this effect, it is not open for the tax authorities to disregard such terms and make any adjustment on account of noncharging of mark-up by the service provider to the service recipient. Thus, in the present case as well, any adjustment/ addition on account of non-charging of mark-up by ACSI from AGNS would be unwarranted, unjustified and untenable in law. i. It has been judicially upheld that commercial expediency of a particular transaction (including expenses incurred by a businessman) would be examined from the perspective of a business man and no third party, including the tax authorities, are entitled to question the c....
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.... suspicion as also noted by the DRP while deleting the above disallowance. We also find that even otherwise, both ACSI and appellant are profit making entities and hence, there was no tax incentive for the parties to deflate the revenues earned by appellant. The decision was totally based on commercial considerations. By transferring the cost from ACSI to appellant no added tax advantage is being availed by appellant. We are also of the view that commercial expediency of a particular expenditure incurred by a businessman should be examined from the perspective of the business person and no third party, including the tax authorities, is entitled to question the commercial reasoning/justification of the expenditure so incurred. Reliance in this regard is placed on the following judicial precedents furnished by the assessee: b. CIT v. Panipat Woollen & General Mills Co Ltd (103 ITR 66) (Supreme Court) c. CIT v. Sales Magnesite (P) Ltd [1995) 214 ITR 1 d. Binodiram Balchand vs. Commissioner of Income Tax (48 1TR 548) e. Calcutta Landing and Shipping Co Ltd vs. CIT (65 ITR 1) (Cal High Court) f. CIT Vs B Dalmia Cement Ltd (2....
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....ly covered by the recent order of Hon'ble Tribunal, Delhi Benches, in its own case in AY 2010-11 (ITA No. 1016/Del/2015). In this regard, it is submitted that the facts of the present year are exactly similar to that of the preceding year. Relevant para of the order is produced below: (Para 25-26, Page 17 of the ITAT Order) "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.1059/Del/2015 for AY 2010-11, we are of the considered view that when the taxpayer has worked out the liability by using a substantial degree of estimat....
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.... order of Hon'ble Tribunal, Delhi Benches, in its own case in AY 2008-09 (ITA No. 1015/Del/2015) dt. March 26, 2019. In this regard, it is submitted that the facts of the present year are exactly similar to that of the preceding year. Relevant para of the order is produced below: (Para 5.9.0- 5.9.2, Page 45-49 of the ITAT Order) "5.9.0 In respect of ground no. 10 pertaining to disallowanceof year end provisioning amounting to Rs. 1,26,30,579/-, it isseen that this issue is also covered in favour of the assessee bythe order of the Tribunal in assessee's own case for assessmentyear 2010-11 in ITA No. 1016/Del/2015. 5.9.1 In the present appeal also, undisputedly no mistakehas been pointed out by the Assessing Officer in the calculationand nor is it the case of the Revenue that the taxpayer has notpaid certain bills. It is also undisputed that more than 80% ofthe evidence/s for the year end provisioning have been producedby the assessee and there is no finding by the Assessing Officerthat the provisioning was not reasonable or did not have anyscientific basis. Therefore, respectfully following the law laiddown by the Hon'ble Apex Court in the case of Rotork ControlsIn....
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.... to arrive at the correct profit for any given year, it is required to account for all expenses pertaining to the year, in accordance with 'matching principle'. g. Appellant had accounted for all the expenses relatable to the subject financial year, for which bills/ invoices would have been received/ paid after the close of the financial year, by way of year-end accruals. As and when the invoices relatable to the aforesaid year-end accruals, were received/ paid by appellant in the subsequent year(s), the actual expenses were charged in the books of accounts after appropriate deduction of tax on such expenses. h. Accordingly, since the year-end accruals created by appellant represent accruals towards normal business expenditure incurred by appellant for the financial year relevant to the subject assessment, deduction in respect thereof should be allowed to appellant. i. Further, the Appellant has been able to produce documentary evidence supporting payment/reversal of majority of the expenses represented by year - end accruals, it substantiates the fact that even the balance accruals have also been created on a reasonable basis and hence, no disal....
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....d on account of non-submission of supporting documents is bad in law and ought to be deleted. 37. With respect to disallowance of the year-end accruals under section 40(a) of the Act on account of non-deduction of tax at source , the ld AR submitted that :- i. Out of the aggregate disallowance of year-end accruals of Rs. 10.18 crores, an amount of Rs. 9.49 crores (this includes amount of Rs. 5.84 crores out of the amount mentioned in point (i) above disallowed for non-production of evidences) has been disallowed by the Ld. AO on account of non-deduction of tax at source from such accruals. ii. Out of the aforesaid disallowance, Rs. 4.63 crores pertained to accruals which were subsequently utilized towards payments made to Cisco Netherlands ('CISCO'), a tax resident of the Netherlands, for provision of offshore maintenance support services to ACSI. The Appellant, vide its letter dated November 12, 2013 filed detailed submission explaining that the services rendered by CISCO were standard services, and did not make available any technical skill, knowledge or experience to the Appellant. Thus the same would not fall under the purview of FTS as contemplated by the ....
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....tax obligation arises on the provisions: b. DIT vs. Ericsson Communication Ltd (2015) 378 ITR 395 (Del.) c. Karnataka Power Transmission Corporation Pvt Ltd vs DCIT (2016) 383 ITR 59 (Kar.) d. Dishnet Wireless Ltd vs. DCIT ( Chennai Tribunal) 172 TTJ 394 1. Ld DR Could not point out any contrary decision . Therefore respectfully following the above decisions and in light of the factual matrix of the case we are of the considered view that since creation of the year end accruals does not result accrual of income to an identified vendor, the same cannot trigger a withholding tax liability on the part of the appellant. " ii. Reliance is also placed on the decision of the Hon'ble Delhi High Court in the case of a. DIT vs. Ericsson Communication Ltd (2015) 378 ITR 395 (Del.) wherein it was held that: 1. "22. In our view, mere passing of the book entries, which are reversed, would not give rise to an obligation to deduct TAS by the Assessee, as clearly, there is no debt that can be said to be acknowledged by the Assessee. Imposition of an obligation to deduct TAS in these circumstances would amount to enforcing payments from one perso....
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....CIT Vs M/s Shoorji Vallabhdas & Co. 46 ITR 144 wherein it was held as follows; 2. "That the subsequent agreement had altered the rate of commission in such a way as to make the income which really accrued to the assessee different from what had been entered in the books of account. This was nota case of a gift by the assessee to the managed companies of a portion of income which had already accrued, but an agreement to receive a lessor remuneration than what had been agreed upon. The assessee had in fact received only the lesser amount in spite of the entries in the account books, and this lesser amount alone was taxable. Incometax is a levy on income. Though the Income-tax Act, takes into accounts two points of time at which the liability to tax is attracted, viz. the accrual of the income or its receipt, yet the substance of the matter is the income. If income does not result at all, there cannot be a tax, even though in book-keeping, an entry is made about a 'hypothetical income;, which does not materialize. Where income has, in fact, been received and is subsequently, given up in such circumstances that it remains the income of the recipient, even though given up, the ....