TMI Blog2019 (4) TMI 46X X X X Extracts X X X X X X X X Extracts X X X X ..... ing Officer to re-examine the issue and pass appropriate orders in accordance with law Allowability of allowances paid to expatriates - non-taxable allowances - Master Service Agreement (MSA) with AT&T Communication Services - HELD THAT:- 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. Disallowance of gratuity liability of employees - employees transferred to AT&T GNS - HELD THAT:- 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 Off ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntific basis. Therefore, respectfully following the law laid down by the Hon’ble Apex Court in the case of Rotork Controls India Pvt. Ltd. [2009 (5) TMI 16 - SUPREME COURT OF INDIA] and also the order of the Coordinate Bench in assessee’s own case for assessment year 2010-11 as aforesaid, we order deletion of this addition. Short credit of TDS - deletion of addition on account of tax deposited on behalf of the expatriate employees - HELD THAT:- We deem it fit to restore these issues to the file of the AO with a direction to give due credit to the assessee both in respect of tax deducted at source and advance tax after due verification at his end. - ITA No. 1015/Del/2015, ITA No. 1779/Del/2015 - - - Dated:- 26-3-2019 - Shri R.K. Panda, Accountant Member And Shri Sudhanshu Srivastava, Judicial Member For the Assessee : Ms Poonam Ahuja, CA, Ms Chinu Bhasin, CA For the Department : Shri Sanjay Bara, CIT DR ORDER PER SUDHANSHU SRIVASTAVA, JM: ITA No.1015/Del/2015 is the assessee s appeal preferred against the final assessment order passed subsequent to the directions of the Ld. Dispute Resolution Panel (DRP) vide directions dated 16.12.2014 and pertain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rnational transaction entered into by the assessee. In the draft assessment order, besides the adjustment relating to transfer pricing addition/adjustment, the Assessing Officer (AO) had also made adjustments pertaining to non-deduction of TDS, non-taxable allowances paid to expatriates, gratuity liability transferred, prior period expenses, differential amount of mark up, interest not charged from the foreign AE, addition on account of Mutual Services Agreement (MSA), addition on account of tax deposited on behalf of expatriates and margins thereof, addition on account of expenses incurred on behalf of expatriates, addition on account of percentage of profit on network connectivity services and year end provisions which is reflected in the table produced above. 2.3 Aggrieved with the draft assessment order, the assessee approached the Ld. DRP and challenged the proposed adjustments/additions in the draft assessment order and the Ld. DRP partly accepted the assessee s objections. The assessee is now in appeal before this Tribunal (ITAT) and has raised the following grounds of appeal:- 1. Ground No. 1 - No time available with the learned AO for making an order of assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ances of the case and in law, the learned AO has erred in making an addition of ₹ 48,51,041 towards gratuity liability of employees transferred by the Appellant to AGNSI. 5. Ground No. 5 - Disallowance of Prior Period Expense 5.1 On the facts and in the circumstances of the case and in law, the learned AO has erred in disallowing an amount of ₹ 38,55,230 by treating the same as prior period expense. 5.2 Without prejudice to above and in the alternative, on the facts and in the circumstances of the case and in law, the learned AO has erred in not concluding that if the expenses of ₹ 38,55,230 are disallowed on the basis that same relate to the preceding financial year (i.e. Financial Year ( FY ) 2006-07), then the same should be allowed as a deduction in the preceding financial year (i.e. FY 2006-07). 6. Ground No. 6 - Addition on account of non-charging of mark-up on support service charges billed to AGNSI 6.1 On the facts and in the circumstances of the case and in law, the learned AO has erred in making an addition of ₹ 37,79,795 being the difference between the mark-up of 8% charged by the Appellant on support service charges bil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case and in law, the learned AO has erred in granting credit for TDS of ₹ 1,78,55,046, as against ₹ 1,93,43,8551 claimed by the Appellant in its return of income for the subject AY. 12. Ground No. 12 - Non-grant of full credit in respect of Advance Tax 12.1 On the facts and in the circumstances of the case and in law, the learned AO has erred in granting credit for advance of ₹ 58,63,848, as against ₹ 1,00,00,000 claimed by the Appellant in its return of income for the subject AY. 13. Ground No. 13 - Incorrect levy of interest under section 234B and 234 D of the Act 13.1 On the facts and circumstances of the case and in law, the learned AO has erred in charging interest under section 234B and 234D of the Act. 14. Ground No. 14 - Withdrawal of interest under section 244A of the Act 14.1 On the facts and circumstances of the case and in law, the learned AO has erred in withdrawing interest granted under section 244A of the Act. 15. Ground No. 15 - Initiation of penalty proceedings under section 271(l)(c) 15.1 On the facts and circumstances of the case and in law, the learned AO has erred in initiating penalty procee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amount of ₹ 1,46,84,844/- was liable to be disallowed u/s 40A(ia) of the Income Tax Act, 1961 (hereinafter called 'the Act') on account of non-deduction of tax at source. It was also submitted by the Ld. AR that the Assessing Officer had alleged that out of this amount, only ₹ 57.3 lakh pertained to the year under consideration and the balance pertained to assessment years 2006-07 and 2007-08. The Ld. AR submitted that the purchase of equipment was an outright purchase transaction and, therefore, the same could not be considered as payment towards royalty. It was also submitted that the assessee had capitalized the equipment in its books of accounts and depreciation on the same had been claimed on the same in the preceding year as well as during the the year under consideration. It was also submitted that the annual maintenance charges in question did not have any correlation with the nature of equipment purchased and, therefore, no adverse inference should have been drawn by the Assessing Officer in relation to the AMC. It was also submitted that the assessee had duly submitted the purchase orders and invoices raised by CISCO before the Assessing Officer to dem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out the special audit. The Ld. CIT DR also referred to the order of the Assessing Officer and pointed out that the Assessing Officer had provided reasonable opportunity to the assessee for furnishing the relevant details pertaining to the annual maintenance contract but the assessee had not submitted any particulars and neither had submitted any supporting evidence to substantiate that the equipment purchased did not have any element of royalty embedded therein and further that the assessee could demonstrate that the payment of AMC charges did not constitute payment towards fee for technical services. The Ld. CIT DR submitted that the disallowance had rightly been made and that even the Ld. DRP had rejected the assessee s objections in this regard and had held that the assessee had failed to discharge the onus cast upon it and, therefore, the provisions of section 40A(ia) were applicable in the case of the assessee. 3.2.0 With respect to ground no. 3, the Ld. AR submitted that this ground pertained to disallowance of non-taxable allowances amounting to ₹ 2,60,90,328/- paid to expatriates. The Ld. AR submitted that the assessee had entered into Master Service Agreement ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... like copy of master service agreement, copy of Disbursing Agency Agreement, copies of approval letters issued by RBI, copy of invoices raised by AT T Worldwide Personnel Services Inc., copies of Form 16 issued by the assessee to the expatriates, copies of employment letters issued to the expatriates, etc. before the Assessing Officer in support of its claim and contention. The Ld. AR also drew our attention to the copies of these documents placed in the paper book filed by the assessee before this Tribunal. The Ld. AR also submitted that the difference in the taxable salary returned by the expatriates and the payments made by the assessee also included expenditure for travel, accommodation, lodging etc. of these expatriates which, though, did not form part of the taxable income, were reimbursed to the AT T Worldwide Personnel Services Inc. nevertheless. It was submitted that the assessee was under an obligation to reimburse other payments and costs incurred by these expatriates although they might not have been taxable under the provisions of the Income Tax Act and, therefore, the discrepancy in the two amounts was visible bu allowable. 3.2.1 In response, the Ld. C.I.T. DR subm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ir gratuity amount transferred from the assessee had been duly paid to them by AT T GNS and had not been claimed by that company as an expenditure in its return of income. It was also submitted that this fact was also submitted before the Assessing Officer but was not given due credence by him. The Ld. AR also submitted that the provisions of Section 43B of the Act do not postulate that the payment of gratuity should be made directly to the employees and it does not provide a bar on the deductibility of the gratuity amount where such gratuity is paid to another concern to which the employees have been transferred. Reliance was also placed on the judgment of the Hon ble Apex Court in the case of W.T. Suren Co. reported in 230 ITR 643 (SC) wherein it had been held that in case of transfer of employees by one company to another, gratuity liability relatable to the transferred employees and paid to the transferee company was to be allowed as a deduction to the transferor company in the year of payment of the amount to the transferee company. 3.3.1 In response, the Ld. CIT DR submitted that the Assessing Officer had duly considered the ratio of the judgment of the Hon ble Apex Cour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n appeal. The Ld. AR submitted that this issue was covered in favour of the assessee by the order of the ITAT in assessee s own case for subsequent assessment year i.e. 2010-11 in ITA No. 1016/Del/2015. Our attention was drawn to Para 16 of this order dated 15.02.2018 and it was submitted that the ITAT had deleted an identical addition in that year. It was further submitted that this incorrect addition on account of mark-up was not sustainable in law. 3.5.1 In response, the Ld. C.I.T. DR submitted that the purpose of the assessee to charge mark-up at a lower rate was to lower the taxable income. It was also submitted that the differential mark up had been determined by the TPO by comparing it to the expenses charged to AT T Communication Services International Inc. (US) and, further, the assessee had failed to point out the differences between the services provided to AT T Communication Services International Inc. (US) and to AT T Global Networks Services India Private Limited or the difference in business expediency and, therefore, the addition had been rightly made. 3.6.0 With respect to ground no. 7 pertaining to addition on account of notional interest income not charged ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tance services. Accordingly, network services were, thereafter, provided by AT T Global Networks Services India Private Limited instead of VSNL. It was also submitted that subsequently the support services agreement with VSNL was terminated and the assessee stopped providing services to the customers of VSNL. The Ld. AR submitted that there was no transfer of business but termination of contract with VSNL as the connectivity services being provided by the VSNL were no longer required by the assessee. This led to the revenues being earned by the assessee from rendition of support services of VSNL being reduced. It was further submitted that the Assessing Officer noted that there was a reduction in revenue from network connectivity services segment from ₹ 62.30 crores to ₹ 7.11 crore and, thereafter, the Assessing Officer alleged that the assessee had transferred assets as well as employees to AT T Global Networks Services India Private Limited leading to reduction in revenues and further that there was a transfer of business. The Ld. AR further submitted that it was the allegation of the Assessing Officer that the assessee should be entitled to certain additional c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year-end provisioning, the Ld. AR submitted that the assessee follows mercantile system of accounting and during the year under consideration, provision amounting to ₹ 7.12 crore had been created. It was further submitted that invoices aggregating to ₹ 5.27 crore along with extract of bank statement/s evidencing payment of such invoice in the immediately succeeding financial year were also submitted before the Assessing Officer and out of the remaining provision of ₹ 1.84 crore, additional evidences were submitted for provision of ₹ 0.09 crore with respect to foreign exchange fluctuation loss and of ₹ 0.49 crore created for lease equalisation. It was submitted that the Assessing Officer disallowed the balance amount of ₹ 1.26 crore on the ground that no documentary evidences were furnished with respect to reversal of these provisions in the subsequent year. The Ld. AR submitted that the assessee had been able to produce documentary evidences supporting payment of more than 80% of the expenses represented by year end provisioning and it substantiated the fact that even the balance provisioning would not have been created without a reasonable basis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... charged under the mutual services agreement is not tenable. 4.0.1 In response, the Ld. AR submitted that the tax and the liability were paid by the assessee in the month of July 2008. Our attention was drawn to the copy of challans evidencing the payment of the same and attached as Annexure to the written submissions filed before the Bench. He also drew our attention to copy of bank statements in this regard. He also drew our attention to the directions of the Ld. DRP as contained in Para 11.4 of its directions wherein it has been duly noted that the since taxpayer has borne the tax to the extent of income offered for taxation in India by such expatriate employees in India and the balance tax payable in the home country is borne by the employee/s concerned, the addition was not warranted. The Ld. AR submitted that in view of the factual finding recorded by the Ld. DRP, the department s challenge to the deletion does not stand. 5.0 We have heard the rival submissions and perused the material available on record. We now take up the appeals one by one. First we take up the assessee s appeal no. 1015/Del/2015. 5.1 Ground no. 1 is dismissed as not pressed. 5.2.0 Ground ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee had submitted voluminous documents and explanations before the Assessing Officer which had not been given due credence by the Assessing Officer. Accordingly, the issue of payment of annual maintenance charges paid to CISCO System International BV stands restored 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. 5.2.1 Ground no. 2 stands allowed for statistical purposes. 5.3.0 Ground No. 3 challenges the disallowance of ₹ 2,60,90,328/- being non-taxable allowances paid to the expatriates. This addition pertains to the differential amount which the assessee had paid to AT T Worldwide Personnel Services Inc. being a sum of ₹ 3.90 crore being salary and other expenses paid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AT T Global Network Services India Pvt. Ltd. It is seen that the disallowance has been made on the ground that it is just a transfer of liability from the assessee company to AT T Global Network Services India Pvt. Ltd. and it is not an actual payment to the employees directly on their attaining superannuation or in the event of their resignation. It has been submitted by the Ld. AR that the assessee company has made the payment of gratuity liability to AT T Global Network Services India Pvt. Ltd. which was recorded as a liability in the books of accounts of that company. Reliance has also been placed on the evidence in the form of bank statement which evidenced the payment of the impugned amount to the other company. It has also been submitted that since the transferred employees continued their employment with the other company, therefore, the question of AGNS making payment to such employees at the time of their resignation/superannuation does not arise. It has also been emphasised that out of the transferred employees, four employees resigned from AT T Global Network Services India Pvt. Ltd. and their gratuity amount had been duly paid by that company but had not been claimed a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s allowed for statistical purposes. 5.5.0 With respect to ground no 5 pertaining to disallowance of prior period expenses, since it has been submitted by the Ld. AR that this ground is not being pressed, the same is being dismissed as not pressed. 5.6.0 With respect to ground no. 6 which pertains to disallowance of differential amount of mark-up with respect to services provided by the assessee to AT T Global Network Services India Pvt. Ltd. leading to an addition of ₹ 53,15,246/- and ground no. 7 pertaining to addition of ₹ 2,46,141/- being addition on account of notional interest income not charged from AT T Global Network Services India Pvt. Ltd., it is seen that both these issues are covered in favour of the assessee by the order of the Tribunal in assessee s own case for assessment year 2010-11 in ITA No. 1016/Del/2015. Vide order dated 15th February, 2018, an identical issue has been discussed and adjudicated by the Coordinate Bench of the Tribunal in paragraphs 10 to 16 which are being reproduced hereunder for ready reference:- 10. The AO made addition of ₹ 1,84,14,784/- on account of non-charging of mark-up on support service charges billed to A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se to deflate the revenues earned by the taxpayer. Even in case higher amount have been charged by the taxpayer from AGNSI, no added tax advantage is being availed by the taxpayer by charging support services cost from AGNSI at cost to cost basis without any mark up. 14. Issue of non-charging of mark up on support services being built up to AGNSI has come up in the appeal for AGNSI for AY 2008-09 to AY 2011-12 wherein the Revenue has raised a ground that such support services expenditure should be disallowed in the books of account of AGNSI. 15. The coordinate Bench of the Tribunal in case of AGNSI for AY 2009-10 in ITA No.2538/Del/2014 upheld the decision rendered by the ld. DRP in favour of the assessee on identical issue by returning the following findings :- 75. We have carefully considered the rival contentions and perused the facts of the case. The facts of the case as explained by the appellant are that, ACSI, a group company of appellant and an entity in operations for more than 10 years by then, was having developed support services functions. Accordingly, since such functions were already housed in ACSI, appellant entered into a support services agreement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g entities and there was no 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. 5.6.1 Therefore, respectfully following the order of the Coordinate Bench in assessee s own case for assessment year 2010-11 as aforementioned, we order deletion of addition on account of notional charging of mark-up as sustained ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his segment and further there was a transfer of assets to AT T Global Network Services India Pvt. Ltd. from the assessee company to the tune of ₹ 6,71,157,014/-. However, on the other hand, it is the contention of the assessee that neither were any employees transferred with respect to this segment nor were any assets transferred to the other company with respect to this segment and, therefore, there was no transfer of business as alleged by the department. Thus, in view of the contradictory stand of both the parties with reference to the relevant facts, we have no other option but 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. 5.8.2 Accordingly, Ground no. 9 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ered 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 produced any documentary evidence nor pressed the addition and moreover AO has already been directed to verify and proceed accordingly. 23. So far as question of not pressing the issue before the ld. DRP, as contended by the ld. DR for the Revenue, is concerned, when we see the entire discussion on this issue in para 8.1, it goes to prove that the issue was pressed and disposed of by the ld. DRP on merits and merely on the basis of one sentence it cannot be said that the issue has not been pressed. 24. Hon'ble Supreme Court in case cited as Rotork Controls India (P) Ltd. (supra) decided the identical issue in favour of the taxpayer by returning the following findings :- Held, reversing the decision of the High Court, that the valve actuators, manufactured by the assessee, were sophisticated goods and s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 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 estimation by proving 95% of the invoices on the basis of historical trend, no disallowance can be made. So, we order to delete this addition. 5.9.1 In the present appeal also, undisputedly no mistake has been pointed out by the Assessing Officer in the calculation and nor is it the case of the Revenue that the taxpayer has not paid certain bills. It is also undisputed that more than 80% of the evidence/s for the year end provisioning have been produced by the assessee and there is no finding by the Assessing Officer that the provisioning was not reasonable or did not have any scientific basis. Therefore, respectfully following the law laid down by the Hon b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ₹ 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 ₹ 83,53,530/- which should have been otherwise pertaining to the employees themselves and to that extent, the profits are relatively lesser. 11.4... From the above, it is evident that the taxpayer has borne the taxes to the extent of the income offered for taxation in India by such expat employees in India and the balance tax payable in the home country is borne by the employee concerned. Thus, the view of the AO that the amount of tax borne by the taxpayer should have been reduced while making payment to AT T WPS is not correct as the Indian component of tax has been borne by the taxpayer under a contractual obligation. The Panel further notices that the taxpayer has recovered the said amount from AT T US in the next year i.e. FY 2008-09 in August 2008 and accordingly, it has not ultimately suffered out ..... X X X X Extracts X X X X X X X X Extracts X X X X
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