2017 (9) TMI 1257 - AT - Income Tax

Disallowance of interest expenses incurred on External Commercial Borrowings - Held that - There is a very thin line of demarcation between the term expansion and extension, which can be differentiated basis the facts and evidences brought on record. Neither the Ld AO or the Ld DRP has brought any evidence on facts to suggest that there was an extension of business during the year under consideration and the interest paid should be disallowed u/s 36(1)(iii) of the Act. Further, the assessee also distinguished the decisions relied upon by the lower authorities on facts of the present case. While arriving at the above finding we also draw support from the case of DCIT vs. Gujarat Alkalies & Chemicals Ltd. 2008 (2) TMI 11 - SUPREME COURT OF INDIA cited by the Ld. AR wherein it was held that extension implies starting of a new business activity. Keeping in view the above said meaning we are of the view that the telecom equipment purchased by the Appellant using the ECB loans was for continuation of the existing business only and not for the extension of business. Hence, the said proviso to Section 36(1)(iii) does not apply to the facts of the present case. In the result, the ground No. 3 of the appeal of the assessee is allowed. Disallowance of expenses of Capital nature claimed as revenue expenditure - Held that - In the absence of the evidence to substantiate that the payment is made for post implementation of project, we agree with the finding arrived at by the Ld. AO that the payment is for a capital asset. In view of the same, the ground of appeal is hereby dismissed. However, while giving effect to our order, the AO is directed to grant depreciation u/s 32 of the Act on the claim of the assessee after verification. Needless to say that assessee be given an opportunity of hearing and producing working of the claim of the depreciation with respect to the actual cost of the assets and amount of depreciation and rates of depreciation allowance applicable on it. In view of this The ground no 4 of the appeal of the assessee is allowed on alternative arguments with above directions. Disallowance of interest incurred on short term loans - Held that - Since in Ground No. 3 above, we have already held that there has been no extension of existing business, the proviso to Section 36(1)(iii) is not applicable in the facts of the present case. Hence, the above finding would squarely apply to the present ground also. In the result the said ground no 5 of the appeal of the assessee is allowed. Disallowance of circuit accruals - accrual of income - Held that - Practice of disallowing the claim of circuit accrual in the year of creation and allowing it in the next year is nothing but a timing difference. The fact that the expenses are allowed in the subsequent year also proves that the lower authorities have not disputed the incurrence of such expenses. Hence, in accordance with the mercantile provisions it should be allowed in the year of creation itself. The assessee has also drawn reference to the principles laid down by the Hon ble Apex Court in the case of M/s Rotork Controls India (P) Ltd (2009 (5) TMI 16 - SUPREME COURT OF INDIA) and M/s Bharat Earth Movers (2000 (8) TMI 4 - SUPREME Court ). According to us the provision for circuit accruals is made in compliance of accounting standards issued by the Institute of Chartered Accountants of India and also on a proper scientific basis backed by documentation. Therefore , we hold that the circuit accruals are created on scientific basis and thus needs to be allowed in the year of creation on accrual basis Disallowance of credit of additional TDS certificates - Held that - We have heard the parties on this issues , both the parties agreed that if the additional TDS certificates of the assessee are proper then ld AO may verify and allow the claim of the assessee in accordance with law. In this regard, the AO is directed to check the genuineness of the TDS Certificates and give credit of the same in accordance with the provision of the Income -tax Act. This ground no 7 of appeal is allowed for statistical purposes. TPA - royalty payments - ALP - Method to be applied for benchmarking the transaction i.e. CUP v/s TNMM - Held that - In a scenario where no data is available to apply the direct methods, one has to resort to residuary methods for benchmarking a transaction / group of transaction such as TNMM . Considering all these factors the Appellant adopted TNMM to benchmark the transaction. In the absence of any justification by DRP/TPO for application of CUP, we justify the use of TNMM as the most appropriate method. In view of the above findings, we hold that for intra group services (where the evidences have been furnished), the assessee has satisfied the need, benefit and rendition test. However we would also like to mention that out of seven services the assessee has not furnished evidences for following three services namely- country services, information technology, project management. In the absence of any evidences, the test of necessity, need and rendition cannot be commented upon and the assessee is given an opportunity to furnish the evidences for these three services before the AO/TPO for necessary verification. The ld TPO may examine them and decide the issue with respect to those services in accordance with law. With respect to the method as the ld TPO has not examined the comparability analysis under the TNMM method of Intra Group services, he must examine the comparability analysis of IGS ( intra Group Services) and determine ALP. Disallowance of royalty payment which is paid to the overseas entity in the US - Held that - According to us the royalty payments needs to be tested on the basis of factum and quantum both aspects. It also needs to be looked at the functions to be performed by the parties for royalty payments. It also nees to be looked in to nature of the use of the intangibles which are covered in License Agreement with AT&T Corp, pursuant to which it was granted the right to use licensed marks in marketing material for publicity, advertising, signs, product brochures, instruction manuals and in other form of advertising. These intangibles, which are licensed to AGNS India, are key value drivers for the business and benefit it by enabling it to expand its presence in the marketplace. What would be the duration of payments of such license royalty is also determinative of the factor of the payments as it cannot also continue for an indefinite period . It may also happen that India brand because of consumer may become bigger than AE s brand. As the assessee has adopted the TNMM which is crude method of benchmarking royalty payments and Ld TPO has disregarded the transaction only on the benefit analysis and has also rejected the CUP benchmarking of the assessee , we are of the view that this issue needs to be set aside to the file of the ld TPO to determine the ALP of the royalty payments afresh after examining the method, comparability and then ALP afresh. Assessee is also directed to support its ALP determination afresh after submitting the detailed answer to all the questions raised by the ld TPO in para no 9 of his order except the benefit test. Hence this ground no 8 of the appeal is allowed with above directions. Allowability of support service expenditure - Held that - We find that no evidence has been brought on record by the Department to dispute the said claim. Rather, the Department s claim is merely based on 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. 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. - Decided in favour of assessee.

Summary

Issues Involved:

1. Double addition on account of income suo moto offered to tax.
2. Double disallowance on account of excess depreciation claimed.
3. Disallowance of interest incurred on External Commercial Borrowings (ECBs).
4. Disallowance of expenses of capital nature claimed as revenue expenditure.
5. Disallowance of interest incurred on short term loans.
6. Disallowance of circuit accruals.
7. Short grant of credit in respect of taxes deducted at source (TDS).
8. Transfer Pricing Matters related to intra-group services and royalty payments.
9. Initiation of penalty proceedings.
10. Levy of interest under sections 234B and 234D of the Act.
11. Disallowance of support services expenditure.

Detailed Analysis:

1. Double Addition on Account of Income Suo Moto Offered to Tax:
The assessee raised a ground regarding the double addition of ?10.91 crores, which was suo moto offered to tax in the revised return. The rectification order dated 22.07.2014 passed by the Assessing Officer addressed this issue, and thus, the ground was dismissed as infructuous.

2. Double Disallowance on Account of Excess Depreciation Claimed:
Similarly, the issue of double disallowance of excess depreciation claimed (?22,89,758) was also resolved by the rectification order dated 22.07.2014, and hence, this ground was dismissed as infructuous.

3. Disallowance of Interest Incurred on External Commercial Borrowings (ECBs):
The AO disallowed ?4,54,131 towards interest on ECBs, invoking the proviso to section 36(1)(iii) of the Act, stating that the interest should be capitalized until the assets are put to use. The DRP upheld this view. However, the appellate tribunal found that the assets were acquired for the existing business and not for the extension of business. Thus, the proviso to Section 36(1)(iii) did not apply, and the disallowance was deleted.

4. Disallowance of Expenses of Capital Nature Claimed as Revenue Expenditure:
The AO disallowed ?3,47,45,337, treating it as capital expenditure related to the Lawful Intercept (LI) project. The DRP upheld the disallowance but directed the AO to verify if the project was completed by 31.03.2009 for depreciation purposes. The tribunal upheld the disallowance but directed the AO to allow depreciation after verification.

5. Disallowance of Interest Incurred on Short Term Loans:
The AO disallowed ?77,76,965, stating that the loan was used for acquiring fixed assets. The DRP upheld the disallowance. The tribunal, however, held that the proviso to Section 36(1)(iii) did not apply as there was no extension of existing business, and thus, the disallowance was deleted.

6. Disallowance of Circuit Accruals:
The AO disallowed ?19,91,52,615, stating that the accruals were not supported by invoices. The DRP allowed partial relief of ?17.04 crores based on additional invoices. The tribunal held that the circuit accruals were created on a scientific basis and should be allowed in the year of creation, thus deleting the disallowance.

7. Short Grant of Credit in Respect of Taxes Deducted at Source (TDS):
The tribunal directed the AO to verify the genuineness of the additional TDS certificates and allow credit accordingly.

8. Transfer Pricing Matters:
The tribunal addressed the intra-group services and royalty payments separately:
- Intra-Group Services: The tribunal held that the assessee had justified the need, benefit, and rendition of services for most of the intra-group services. However, for three services (country services, IT services, and project management), the assessee was directed to furnish evidence before the AO/TPO for verification.
- Royalty Payments: The tribunal directed the TPO to determine the ALP of royalty payments afresh, rejecting the benefit test applied by the TPO.

9. Initiation of Penalty Proceedings:
The tribunal held that this ground was consequential and premature, thus dismissing it.

10. Levy of Interest Under Sections 234B and 234D of the Act:
Similarly, this ground was held to be consequential and premature, and thus, it was dismissed.

11. Disallowance of Support Services Expenditure:
The AO disallowed ?11,61,76,903, stating that the services were not rendered and the expenses were duplicative. The DRP deleted the disallowance, finding that the services were rendered, and the expenses were justified. The tribunal upheld the DRP's decision, affirming the deletion of the disallowance.

Conclusion:
The appeal of the assessee was partly allowed, and the appeal of the revenue was dismissed. The tribunal provided detailed directions for verification and re-examination of certain issues, ensuring that the assessments are made in accordance with the law and based on proper evidence.