2018 (11) TMI 130 - AT - Income Tax

Non charging of interest from non-AEs - interest foregone by the assessee on outstanding receivables from non-AEs - Held that - It is pertinent to mention here that a similar adjustment was made in assessment year 2009-10 and the DRP deleted the same by observing that the interest foregone by the assessee on outstanding receivables from non-AEs is higher than the interest foregone from AEs. For the sake of completeness of the adjudication, we find that the working capital adjustment subsumed in main international transaction has been accepted by the TPO inasmuch as working capital adjusted in operating margin of the comparable companies was taken by the TPO at 6.38% whereas appellant s margin was 16.78% in respect of Provision of network support services. The appellant s margin is 16.60% whereas arm s length margin accepted by the TPO was 7.01%. Once the working capital adjustment has been accepted, then, we do not find any merit in making further adjustment in respect of outstanding receivables. Adjustment made by the Assessing Officer. We, accordingly, direct the Assessing Officer to delete the addition Disallowance u/s 43B - disallowance on account of statutory liabilities payable - Held that - AO has not properly appreciated the accounting entries in their due perspective. The marginal heading of section 43B clearly states that certain deductions to be allowed on actual payment. This means that if the assessee has claimed deductions, the same can be disallowed u/s 43B of the Act. However, in the case in hand, the assessee has not claimed any deduction as the input service tax and the output service tax have never been routed through the P&L Account. However, in the interest of justice and fair play, we restore this issue to the files of the Assessing Officer. The assessee is directed to explain the entries and the Assessing Officer is directed to verify the same. Disallowance of year end accruals - Held that - Following the law laid down by the Hon ble Apex Court in Rotork Controls India (P) Ltd. (2009 (5) TMI 16 - SUPREME COURT OF INDIA) 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. Addition on account of non-charging of mark-up on support service charges billed to AGNSI - Held that - 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. Non-deduction of tax at source on reimbursement made to AT &T World Personnel Services Inc. (AWPS) - Held that - Reimbursement made by the appellant company cannot be classified as FTS/FIS under the provisions of the Act and Indo-US DTAA. It would not be out of place to mention here that total tax deducted by the assessee u/s 192 of the Act is ₹ 1,97,36,176/- which is much higher than the withholding tax sought to be levied by the Assessing Officer which comes to 10% of ₹ 4,17,56,851/-. Considering the facts in totality, we direct the Assessing Officer to delete the impugned addition.

Issues Involved:
1. Adjustment on outstanding receivables from associated enterprises (AEs).
2. Disallowance on account of statutory liabilities payable.
3. Disallowance of year-end accruals.
4. Addition on account of non-charging of mark-up on support service charges billed to AGNSI.
5. Addition on account of non-deduction of tax at source on reimbursement made to AT&T World Personnel Services Inc. (AWPS).

Issue-wise Detailed Analysis:

1. Adjustment on Outstanding Receivables from Associated Enterprises (AEs):
The appellant company, a wholly-owned subsidiary of AT&T Communication Services International Inc., USA, had international transactions with AEs, which were considered at arm's length by the Transfer Pricing Officer (TPO). However, the TPO re-characterized outstanding receivables from AEs as loans and imputed notional interest, leading to an upward adjustment of ?7.84 crore. The Dispute Resolution Panel (DRP) reduced this addition to ?2,85,19,002/-. The Tribunal observed that outstanding receivables do not constitute a separate international transaction requiring separate benchmarking, as they are embedded in the main transaction of 'Provision of Network Support Services.' The Tribunal noted that the appellant did not charge interest from non-AEs either and that the working capital adjustment was already factored into the operating margin. Following the jurisdictional High Court's decision in Kusum Healthcare Pvt. Ltd., the Tribunal directed the deletion of the addition of ?2,85,19,002/-.

2. Disallowance on Account of Statutory Liabilities Payable:
The Assessing Officer (AO) disallowed ?58,60,552/- under section 43B of the Act, as service tax payments of ?6,90,777/- were made after the due date of filing the return. The appellant argued that the output service tax payable and input service tax credit were not routed through the Profit & Loss Account. The Tribunal found that the AO did not properly appreciate the accounting entries and restored the issue to the AO for verification and fresh decision, treating the ground as allowed for statistical purposes.

3. Disallowance of Year-End Accruals:
The AO disallowed ?1.58 crore out of year-end accruals, as the appellant did not have invoices for the same and could not substantiate utilization/reversal of such accruals in subsequent years. The appellant argued that it followed the mercantile system of accounting and that year-end accruals were reversed when invoices were received/paid in subsequent years. The Tribunal, following its decision in the appellant's own case for the assessment year 2010-11, held that expenses with a substantial degree of estimation should be allowed in the year of creation itself and ordered the deletion of the addition.

4. Addition on Account of Non-Charging of Mark-Up on Support Service Charges Billed to AGNSI:
The AO made an addition of ?1.84 crore on account of non-charging of mark-up on support services provided to AGNSI, a group company, based on the previous year's addition. The Tribunal noted that similar additions were deleted in the appellant's own case for the assessment year 2010-11, as there was no tax loss to the Revenue and the arrangement between two resident entities cannot be questioned unless specifically provided under the Act. The Tribunal directed the deletion of the impugned addition.

5. Addition on Account of Non-Deduction of Tax at Source on Reimbursement Made to AT&T World Personnel Services Inc. (AWPS):
The AO disallowed ?4,17,56,851/- under section 40a(i) of the Act, treating the reimbursement to AWPS as Fees for Included Services (FIS)/Fee for Technical Services (FTS) under the Indo-US DTAA and section 9(1)(vii) of the Act, relying on the Delhi High Court's decision in Centrica India Offshore Pvt. Ltd. The appellant argued that the seconded employees were under its control and supervision, and the payments were subject to TDS under section 192 of the Act. The Tribunal concluded that the seconded employees were effectively working as employees of the appellant company, and the provisions of section 195 were not applicable. The Tribunal directed the deletion of the impugned addition, distinguishing the facts from the Centrica case.

Other Findings:
- For the assessment year 2011-12, the Tribunal followed its findings for the assessment year 2012-13 on the issues of mark-up on support services, year-end accruals, and statutory liabilities, allowing the grounds accordingly.
- The transfer pricing adjustment of ?1,10,99,474/- for the assessment year 2011-12 was deleted by the AO under section 154 of the Act, rendering the ground infructuous.

Conclusion:
The appeals were allowed in part for statistical purposes, with directions for deletion of certain additions and remand for verification of statutory liabilities. The decision was pronounced in the open court on 31.10.2018.

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