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TMI Blog2018 (9) TMI 708X X X X Extracts X X X X X X X X Extracts X X X X ..... o;the Panel‟) are bad in law and are void-ab-initio. 2. That on the facts and in the circumstances of the case and in law, the Panel erred in confirming the action of the Ld. AO by alleging that the income from the Indian group company has been understated as the entire income of the assessee has correctly been subject to tax in India. 2. 1 That on the facts and in the circumstances of the case and in law, the Panel erred in confirming the action of the Ld. AO by arbitrarily applying a margin of 12. 82 percent on the operating cost of Rs. 5. 661J88 to determine the income of the assessee from the Indian group company at Rs. 63, 86, 952. 2. 2 Without prejudice to the above, that on the facts and in the circumstances of the case and in law, the Panel erred in not appreciating that there is no such provision under the Income Tax Act, 1961 to impute notional profit on such a transaction. 2. 3 That on the facts and in the circumstances of the case and in law, the Ld. AO erred in not complying with the directions of the Panel by not reducing Rs. 5, 30, 352/- (interest for the late deposit of taxes) from the Administrative, and Other Expenses of Rs. 56, 61, 188/-, before ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tances of the case and in law, the Panel erred in ignoring the fact that the amount of accumulated profits at the end of the relevant financial year i. e. , March 31, 2008, needed to exclude the amount of capital redemption reserve amounting to Rs. 1, 90, 74, 581/- as this is not to be considered as profits available for distribution as a dividend and accordingly, cannot be considered as a deemed dividend, under section 2(22)(e) of the Act. " 3. Brief facts of the case is that assessee company, appellant, is engaged in providing business support services to other companies in the group, including sales support, marketing, advertisement, IT support and liaison service with locally licensed carrier partners. 4. It filed its return of income on 30/9/2008 declaring loss of Rs. 5 0462408. As assessee has entered into international transactions, reference was made to the learned Transfer Pricing Officer (The Ld TPO) to determine the arms length price (ALP) of those transactions. The learned TPO passed order under section 92CA (3) of the act on 30/8/2011 and proposed an adjustment of Rs. 22174704/-. Further, the learned AO made an addition of Rs. 1380011/- as estimated margin of 15% on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion on account of deemed dividend of Rs. 6 4037615/-. The income was assessed at Rs. 1 64442659/- against the returned loss of Rs. 5 0462408/. Aggrieved by this assessment order assessee is in appeal before us. Only 3 issues are agitated in this appeal in substance which are as under:- a. addition of Rs. 1256597/- on account of operating margin added by the learned assessing officer on support services provided by the assessee to its group concern b. disallowance at the rate of 10% of travelling and conveyance expenditure c. addition on account of deemed dividend of Rs. 64037615/- 6. Ground number 1 of the appeal is general in nature and therefore it is dismissed. 7. Now we come to the first issue involved in this appeal of addition of Rs. 1256597/-. It is agitated by assessee as per ground number 2 of the appeal. The brief facts of the issue involved are that vide letter dated 19/12/2011, assessee submitted that other income shown of Rs. 5130355/- includes an amount of Rs. 39 lakhs received from Verizone communications India private limited for providing administrative services and remaining amount is received from other group companies for services provided to them. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earned DRP directed AO to reduce the margin to 12. 82 %. Consequently, the learned AO made an addition of Rs. 1 256597/-. Further with respect to a sum of Rs. 5 30352/-, DRP further directed the learned AO to verify whether the above amount is interest for the late deposit of tax deduction at source or not. This was not considered by the learned AO in final assessment order. Therefore, assessee is aggrieved and contesting the above addition vied ground number 2 of the appeal. 8. The learned authorized representative submitted that a. Transaction is not an international transactions but between two domestic AES. b. There is no evidence that assessee has received much more than whatever is recorded in the books of accounts. c. Provisions of section 145 have been invoked without jurisdiction. d. AO has not given any opportunity to the assessee. 9. The learned DR vehemently supported the order of the learned AO and the learned DRP. He submitted that when there is an agreement, assessee is charging margin of 12. 82% (ALP) on services provided by it to the AEs the identical amount of margin should have also been charged by the assessee from the sister concern, even though servi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted the computation of the total income where apparently assessee has added back to the profits a sum of Rs. 5 30351 being interest on tax deduction at source. The computation is placed at page number 33 of the paper book. According to us, such a disallowance of expenditure in computation of total income does not make any impact on total expenditure incurred by the assessee for rendition of the services to its associated concern in India. However, the moot point is that what are those conditions signed in agreement dated 25/2/2005. Such agreement was not placed before us in the paper book. If that agreement provides for provision of any markup over the total cost and how the total cost is required to be computed, which is the foundation of the whole issue to compute the above income. Accordingly, if the assessee is entitled to charge markup over the total cost incurred then the learned assessing officer is correct in making such adjustment. If the agreement between two resident companies do not provide for any such markup on the total cost then such addition cannot be made. Further, in the paper book filed before us details of other income is also not provided. It was also not show ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es. In such cases, the ad hoc disallowance at the rate of 10% is not justified. 13. Learned departmental representative vehemently supported the order of the lower authorities and submitted that when assessee has failed to produce the requisite detail before the assessing officer which justifies its 11 is under section 37 (1) of the income tax act the same is correctly disallowed by the learned assessing officer to the extent of 10% of the total expenditure. He further stated that assessee officer has allowed 90% of the expenditure even in absence of the requisite details. He therefore submitted that even before the assessing officer or before the learned dispute, resolution panel assessee has not produced the complete details of the travelling expenditure as required by the learned assessing officer. 14. We have carefully considered the rival contentions as well as per used the orders of the lower authorities and the details of the expenditure submitted by the assessee at page number 135 - 176 of the paper book. The assessee has submitted the complete details of the expenditure of Rs. 1 6103640 in those pages. The assessee has given the legend listing of that expenditure stating ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 37 (1) of the act. In view of this we allow ground number 3 of the appeal of the assessee and direct the learned assessing officer to delete the ad hoc disallowance at the rate of 10% of the total expenditure amounting to Rs. 1610855/-. 15. Now we come to ground number 4 of the appeal, which is against the addition made by the learned assessing officer of Rs. 64037615 on account of deemed dividend under section 2 (22) (e) of the act. The brief facts of the transaction is that assessee has received a sum of Rs. 167367867 from Verizon communications India private limited as a loan during financial year 2007 - 08. Further, the lender as well as the assessee company are subsidiary companies of M/s Verizon Asia-Pacific Holdings private limited Singapore. The learned assessing officer has further noted that that the lender company has accumulated profits of Rs. 6 4037615 and therefore, the learned assessing officer treated the amount to the extent of accumulated profits as income of the assessee under section 56 (2) (i) read with section 2 (22) (e) of the income tax act. The assessee contended before the dispute resolution panel that assessing officer has not given proper opportun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore submitted that the above sum cannot be taxed in the hence of the assessee company as deemed dividend. 17. The learned departmental representative vehemently submitted that loan has been given by one subsidiary to another subsidiary and therefore it is covered under the second limb of the provisions of section 2(22) (e) of the act. The learned departmental representative also stated that that loan is given by the subsidiary company for the benefit of the holding company and therefore it is covered in the definition of deemed dividend. 18. We have carefully considered the rival contention and the orders of the lower authorities. The facts are fitted in error, pass that the transaction between two subsidiaries of the same holding company. One of them is a lender of a sum of Rs. 1 67367867 and having accumulated profits of Rs. 6 4037615. The above transaction has been tested by revenue as taxable in the hands of the assessee company i. e. borrowing subsidiary as deemed dividend. On careful examination of the provisions of section 2 (22) (e) of the act it is apparent that it envisages three situations for taxation in case a loan is given by a company having accumulated profits hig ..... X X X X Extracts X X X X X X X X Extracts X X X X
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