2018 (4) TMI 33 - AT - Income Tax

Additions on account of advances and service tax written off - Held that - We are of the considered view that depositing the security deposit for taking the office space on lease by the taxpayer and subsequently terminating the agreement due to business consideration is a business decision which cannot be questioned by the Revenue. So, following the decision rendered by the coordinate Bench of the Tribunal in Fab India Overseas (P.) Ltd. (2013 (9) TMI 301 - ITAT DELHI) in an identical issue, the addition made by the AO on account of advances and service tax written off is ordered to be deleted. Addition on account of non-charging of mark-up on support service charges billed to AT&T Global Network Services India Pvt. Ltd. (AGNSI) - Held that - 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. 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. Comparability analysis - Held that - We are of the considered view that Government undertakings/companies are not the suitable comparables for benchmarking the international transaction. AO is directed to verify all the Government undertakings / companies from the final set of comparables which are taking preferential treatment from Government in getting contract etc. and are not driven by profit motive alone impacting the profit margin and to exclude the same and then benchmark the international transactions qua Network Support Services. TDS credit - Held that - AO allowed credit of TDS 6,54,89,076/- as against the claim of ₹ 6,57,84,537/- claimed by the taxpayer in its revised return of income filed for the year under assessment. When the taxpayer has brought on record the complete detail of TDS to the tune of ₹ 6,57,84,537/- by filing revised return of income, the AO has erred in granting short credit thereof. So, we direct the AO to provide full credit of TDS of ₹ 6,57,84,537/- after duly verifying the facts.

Issues Involved:
1. Disallowance of advance written off
2. Addition on account of non-charging of mark-up on support service charges
3. Disallowance of year-end accruals
4. Transfer Pricing Matters
5. Short credit in respect of Taxes Deducted at Source (TDS)
6. Levy of excess interest under section 234B and 234C of the Act
7. Initiation of penalty proceedings under section 271(l)(c)

Detailed Analysis:

1. Disallowance of Advance Written Off:
The taxpayer deposited ?45,90,000 with M/s. In Time Properties Pvt. Ltd. for leasing office space. Upon deciding not to proceed with the lease, 50% of the deposit was forfeited. The AO/DRP disallowed the deduction, arguing it was due to breach of contract. The Tribunal, referencing the case of Fab India Overseas (P.) Ltd. and CIT v. Khaitan Chemicals & Fertilizers Ltd., held that the forfeited deposit was a business loss deductible under Section 37(1) of the Act. The Tribunal ordered the deletion of the addition made by the AO.

2. Addition on Account of Non-Charging of Mark-Up on Support Service Charges:
The AO added ?18,414,784 for non-charging of mark-up on support service charges billed to AGNSI. The taxpayer argued that no mark-up was required as per the agreement, and both entities were profit-making without tax incentives to deflate revenues. The Tribunal, citing the case of AGNSI, held that the commercial expediency of the transaction should not be questioned by tax authorities and ordered the deletion of the addition.

3. Disallowance of Year-End Accruals:
The AO disallowed ?56,15,035 due to the taxpayer's failure to provide supporting documents. The Tribunal noted that the taxpayer followed the mercantile system of accounting and had provided evidence for more than 95% of the expenses. Citing Rotork Controls India (P) Ltd. v. CIT, the Tribunal held that the expenses were based on a substantial degree of estimation and scientific basis, allowing the deduction and ordering the deletion of the addition.

4. Transfer Pricing Matters:
The TPO made adjustments to the taxpayer's international transactions, selecting 12 comparables. The taxpayer contested the inclusion of government undertakings as comparables. The Tribunal, referencing Bechtel India (P.) Ltd. and Thyseen Krupp Industries India (P.) Ltd., held that government undertakings should be excluded from the comparables set due to preferential treatment and non-profit-driven motives. The AO was directed to exclude such entities and re-benchmark the transactions.

5. Short Credit in Respect of TDS:
The AO granted TDS credit of ?6,54,89,076 against the taxpayer's claim of ?6,57,84,537. The Tribunal directed the AO to verify and grant full credit of ?6,57,84,537 as claimed in the revised return.

6. Levy of Excess Interest Under Section 234B and 234C:
The Tribunal noted that the levy of interest under Sections 234B and 234C is consequential and did not require specific findings.

7. Initiation of Penalty Proceedings Under Section 271(l)(c):
The Tribunal deemed the grounds related to the initiation of penalty proceedings as premature, requiring no adjudication.

Conclusion:
The appeal was allowed for statistical purposes, with specific directions to the AO to rectify the issues as per the Tribunal's findings.

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