2022 (11) TMI 444 - AT - Income Tax

TDS u/s 194J - disallowance of Primary Rate Interface (PRI) line charges paid to telecom companies on account of non-withholding of taxes - HELD THAT - This issue is squarely covered in favour of the assessee by the order of Pune Tribunal in assessee s own case 2022 (6) TMI 737 - ITAT PUNE in the case of Lee Murihead (P) Ltd. 2019 (4) TMI 1871 - BOMBAY HIGH COURT - Further, we find that in the said decision, had referred to the decision of Hon ble Supreme Court in the case of CIT Vs. Kotak Securities Ltd. 2016 (3) TMI 1026 - SUPREME COURT while providing relief to the assessee. This decision of Hon ble Apex Court has been placed before us in the paper book filed - In view of the aforestated judicial pronouncement where the addition on lease line charges have been deleted, respectfully following the same, on the same parity of reasoning this ground of appeal of the assessee is allowed and the A.O/T.PO is directed to delete addition on lease line charges from the hands of the assessee. Ground is allowed. Disallowance of expenditure made pursuant to ESOP scheme floated by the assessee s parent company - Disallowance u/s 40(a)(ia) or u/s 37 - HELD THAT - As noted by the D.R.P that in the said report of the A.O he had constantly harped upon the point that the assessee was not able to substantiate that the amounts were paid to employees as perquisites on which TDS has been deducted. Once the addition is sustained by the D.R.P and made by the A.O for non-deduction of TDS the provisions for addition and confirming the disallowance should have been u/s 40(a)(ia) of the Act and not u/s 37 of the Act as has been invoked by the A.O and sustained by the ld. D.R.P. In view thereof, we set aside the findings of the ld. D.R.P on this issue and allow this ground of appeal of the assessee. Ground is allowed.

Summary

Issues Involved:
1. Transfer pricing adjustment.
2. Disallowance of Primary Rate Interface (PRI) line charges.
3. Disallowance of expenditure pursuant to ESOP scheme.
4. Levy of interest under sections 234B and 234C.
5. Initiation of penalty proceedings under section 271(1)(c).
6. Deduction in respect of education cess.

Detailed Analysis:

1. Transfer Pricing Adjustment:
The appellant challenged the transfer pricing adjustment of INR 44,64,54,953, which included INR 33,06,35,792 for software development services and INR 11,58,19,161 for IT-enabled services (ITeS). The key issues were the non-consideration of comparability analysis documented in the transfer pricing study report, the application of different turnover filters, and the selection of inappropriate qualitative filters. The appellant also contended the inclusion of companies with supernormal profits and the rejection of certain comparable companies. However, post the Advance Pricing Agreement (APA) between the assessee and the CBDT, the quantum of transfer pricing additions was reduced to INR 3,080. The tribunal dismissed this modified ground of appeal as not pressed due to the smallness of the amount.

2. Disallowance of Primary Rate Interface (PRI) Line Charges:
The assessee contested the disallowance of PRI line charges amounting to INR 1,18,04,423 on account of non-withholding of taxes. The AO treated the payments as fees for technical services requiring TDS under section 194J. The DRP upheld this view, stating that the assessee failed to substantiate its claim that PRI lines are standard facilities. However, the tribunal found this issue to be covered in favor of the assessee by the Pune Tribunal's decision in the assessee's own case for AY 2015-16 and the Bombay High Court's decision in Lee & Murihead (P) Ltd. The tribunal directed the AO/TPO to delete the addition on lease line charges.

3. Disallowance of Expenditure Pursuant to ESOP Scheme:
The AO disallowed INR 3,50,51,094 incurred under the ESOP scheme, treating it as a capital item and not deductible under section 37. The DRP upheld this disallowance. However, the tribunal noted that the addition should have been made under section 40(a)(ia) for non-deduction of TDS, not under section 37. The tribunal set aside the DRP's findings and allowed this ground of appeal.

4. Levy of Interest Under Sections 234B and 234C:
The appellant contested the levy of additional interest under sections 234B and 234C amounting to INR 11,33,09,568 and INR 3,37,970, respectively, due to unanticipated additions made to the total income. The tribunal did not provide a detailed analysis on this issue, implying it was consequential.

5. Initiation of Penalty Proceedings Under Section 271(1)(c):
The appellant argued against the initiation of penalty proceedings under section 271(1)(c), stating that the transfer pricing and corporate tax adjustments were due to differences in opinion. The tribunal did not provide a detailed analysis on this issue, implying it was consequential.

6. Deduction in Respect of Education Cess:
The appellant sought a deduction for education cess on income tax paid for the year. However, the appellant's counsel did not press this ground of appeal, and the tribunal dismissed it as not pressed.

Conclusion:
The tribunal partly allowed the appeal. The significant reliefs granted included the deletion of the addition on lease line charges and the allowance of ESOP-related expenditure. The tribunal dismissed the modified ground of appeal related to transfer pricing adjustments due to the small amount involved post-APA and dismissed the ground regarding education cess as not pressed.