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2021 (8) TMI 276 - AT - Income TaxTP Adjustment - adjustment service tax and withholding tax paid additionally by the assessee over and above the payment to be made in terms of the agreement - HELD THAT - Perusal of master services agreement between the assessee and AE we find the following clause any charges payable under this agreement are exclusive of value added tax or any equivalent which shall be paid by the client additionally in accordance with the prevailing legislation at the tax point date, if applicable as well as any bank charges as might be applicable . Thus, the crucial words which needs to be taken note of are value added tax or any equivalent'. On specific query from the Bench as to whether withholding tax and service tax are equivalent to value added tax, learned counsel for the assessee fairly submitted that they cannot be equated. In our considered opinion, value added tax on one hand and withholding tax as well as service tax on the other, are of distinct and different genre, hence, cannot be equated. Therefore, the terms of the agreement do not provide for payment of withholding tax and service tax to the AE. That being the case, in our opinion, the TPO was justified in making the adjustment being the amount of service tax and withholding tax paid additionally by the assessee over and above the payment to be made in terms of the agreement. These grounds are dismissed. Disallowance of software lease payment u/s 37(1) - assessee has entered into a master services agreement with its AE, FIM Business Solution Ltd for taking on lease software viz. Kastle Factoring for a period of seven years - HELD THAT - This is not the first time the assessee is making payment towards software lease expenses. On a reading of the master services agreement, it is evident, the assessee requires the software for its business activities. In fact, while examining the arm's length nature of software lease expenses paid to the AE, the TPO has gone through all the evidences including the master services agreement. However, except the additional amount paid on account of withholding tax and service tax, the TPO has not found any wrong doing by the assessee in respect of software lease expenses. Further, on perusing the materials placed before us in the paper book, we are also convinced that the allegation of the departmental authorities that the assessee failed to furnish details and documentary evidences to establish its claim is not borne out from record. In view of the aforesaid, we delete the disallowance. This ground is allowed. Disallowance of referral fee paid - Assessee failed to furnish supporting evidence to demonstrate that the expenditure incurred is wholly and exclusively for the purpose of business - HELD THAT - Facts and evidences on record clearly demonstrate that the referral fees paid by the assessee is wholly and exclusively for the purpose of its business. In any case of the matter, it is for the assessee to decided how to conduct its business. So long as the expenditure incurred is for the purpose of the business, it has to be allowed as revenue expenditure irrespective of the fact, whether it ultimately translates into earning of income. Certainly, the departmental authorities cannot step into shoes of the assessee to question a prudent business decision. In any case of the matter, the allegation of the departmental authorities that the assessee failed to furnish supporting evidence to demonstrate that the expenditure incurred is wholly and exclusively for the purpose of business is contrary to the facts on record. In view of the aforesaid, we delete the disallowance. Disallowance being expenditure incurred towards improvement of the lease hold premises - allegation of the departmental authorities that the assessee did not furnish the details of expenditure - HELD THAT - On a perusal of documents furnished before us and particularly the invoices, we find that the expenditure incurred are for variety of work, such as, demolishing and removing certain civil construction, installation of certain furniture and fixtures including chairs, tables, work station, plumbing, wooden partition, light fitting, civil construction etc. - though, major part of the expenditure may be of temporary nature, however, some of the work could be of enduring nature. Further, it can also be a fact that the assessee may not be having all supporting evidences to prove the expenditure. Thus, there is possibility of inflation of expenditure to some extent. - also at this late stage it would be difficult to examine the nature of each item of expenditure to find out whether it is capital or revenue.
Issues Involved:
1. Transfer Pricing Adjustment of ?8,41,616/- 2. Disallowance of software lease payment of ?29,96,384/- under section 37(1) of the Income Tax Act, 1961 3. Disallowance of referral fee of ?23,67,000/- paid to M/s. Blend Financial Services Ltd. 4. Disallowance of ?42,69,567/- towards improvement of the leasehold premises Detailed Analysis: 1. Transfer Pricing Adjustment of ?8,41,616/-: The assessee, a resident company providing factoring and forfeiting services, entered into international transactions with its Associated Enterprises (AE), FIM Business Solution Ltd., Malta. The assessee paid ?38,38,741/- as software lease expenses to the AE. The Transfer Pricing Officer (TPO) found that the assessee also paid ?5,82,151/- as withholding tax and ?2,59,465/- as service tax, which should have been paid by the AE. The TPO proposed an adjustment of ?8,41,616/- for these taxes, which was sustained by the Dispute Resolution Panel (DRP). The Tribunal upheld the TPO's adjustment, noting that withholding tax and service tax are distinct from value-added tax and not covered by the agreement terms. 2. Disallowance of Software Lease Payment of ?29,96,384/-: The Assessing Officer (AO) disallowed the software lease expenses, alleging that the assessee failed to provide sufficient evidence to prove the expenses were incurred wholly and exclusively for business purposes. The DRP upheld the disallowance. However, the Tribunal found that the assessee had provided necessary details and documentary evidence, including the master services agreement and evidence of the transaction's arm's length nature. The Tribunal deleted the disallowance, concluding that the expenses were incurred for business purposes. 3. Disallowance of Referral Fee of ?23,67,000/-: The AO disallowed the referral fee expenses, claiming that the assessee did not provide sufficient evidence to demonstrate that the expenses were incurred wholly and exclusively for business purposes. The DRP upheld the disallowance. The Tribunal found that the assessee had submitted various documentary evidences, including the referral agreement, list of clients referred, invoices, and Form 16-A certificates. The Tribunal concluded that the referral fees were incurred for business purposes and deleted the disallowance. 4. Disallowance of ?42,69,567/- Towards Improvement of Leasehold Premises: The AO disallowed the expenses for leasehold premises improvement, treating them as capital in nature. The DRP upheld the disallowance. The Tribunal noted that the assessee had provided details of the expenses, which included interior work, installation of workstations, and other temporary works. However, some expenses could be of enduring nature. The Tribunal decided to disallow 25% of the expenses to account for potential revenue leakage and inflation of expenses, partly allowing the assessee's claim. Conclusion: The appeal was partly allowed, with the Tribunal upholding some disallowances and deleting others based on the evidence provided and the nature of the expenses incurred. The Tribunal's decision was pronounced in the open court on 20th July 2021.
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