2018 (6) TMI 279 - AT - Income Tax

Disallowance of provision for legal and professional charges - TDS provision adherence - Held that - Parties have been identified - thus the matter needs to be adjudicated afresh hence we restore the matter to the files of the A.O. -the A.O. shall look into the party-wise details of the provision created for software development and testing charges and shall also examine whether the TDS provision has been duly complied with - A.O. shall take a decision after affording a reasonable opportunity of hearing to the assessee. Disallowance under section 36(1)(va)on late payment of employees contribution to PF and ESI - Held that - Contribution towards PF and ESI u/s 36(1)(va) cannot be allowed as a deduction if the said payment has been made after the due dates specified under the respective statutes - this ground of assessee is dismissed. Travelling and accommodation expenses on behalf of its AEs - Held that - Expenses were incurred by the assessee on behalf of and for the benefit of its AEs and thus would come within the meaning / explanation of international transaction in section 92B - hence AO cannot impute interest on balance outstanding from its AEs. As regards the claim of the assessee that a period of six month should be considered as reasonable for making recovery of cost incurred by it from the AE, we are of the view that such a plea cannot be entertained - A period of 60 days is reasonable period within which the expenses ought to have been recovered by the assessee from its AEs - thus AO is directed to impute the interest on the outstanding amounts for a period exceeding 60 days at any point of time during the year in consideration Adoption of rate of interest - Held that - Since the expenditure has been incurred in Indian currency and not in dollars thus adoption of LIBOR is rejected - weightage average interest of SBI-PLR on FDs has been worked out by the DRP at 8.15%. We are of the considered view that only 8.15% should be adopted while calculating ALP interest on the amounts outstanding from the assessee s AEs.

Issues Involved:
1. Disallowance of provision for legal and professional charges.
2. Disallowance under section 36(1)(va) of the Act on late payment of employees’ contribution to PF and ESI.
3. Erroneous imputation of interest on amounts which are not in the nature of loan.
4. Erroneous granting of credit period which is short in normal course of business.
5. Erroneous use of average rate of interest earned by the appellant instead of LIBOR / EURIBOR.

Detailed Analysis:

Issue 1: Disallowance of Provision for Legal and Professional Charges
The Assessing Officer (AO) disallowed a provision amounting to ?1,12,19,079 for legal and professional charges, stating that the expenses were not incurred as the parties were not identified. The Dispute Resolution Panel (DRP) enhanced this disallowance to ?1,74,48,290, reasoning that the provision was made on an estimated basis and was contingent in nature. The DRP also noted that tax at source was not deducted on the entire provision amount.

The Tribunal found that the assessee had placed on record party-wise details of the provision created, showing that the parties were identified, but the amounts due were not quantified during the close of the accounting year. The Tribunal noted that the assessee had complied with TDS provisions before the due date of filing the return for the amount of ?1,12,19,079. The Tribunal concluded that the provision created was based on scientific estimates and past trends, and if TDS provisions were complied with, the expenditure should be considered an ascertained liability, not a contingent one. The Tribunal restored the matter to the AO for fresh adjudication, emphasizing the need to examine party-wise details and TDS compliance.

Issue 2: Disallowance under Section 36(1)(va) of the Act on Late Payment of Employees’ Contribution to PF and ESI
The AO disallowed the employees’ contribution to PF and ESI, amounting to ?32,72,175 and ?60,132, respectively, as the payments were made after the due dates specified under the respective statutes. The DRP upheld this disallowance.

The Tribunal referred to the judgment of the Hon’ble Kerala High Court in the case of CIT v. Merchem Limited, which held that employees’ contributions to PF and ESI cannot be allowed as deductions if paid after the due dates specified under the respective statutes. Consequently, the Tribunal dismissed the assessee's ground on this issue.

Issue 3: Erroneous Imputation of Interest on Amounts Which Are Not in the Nature of Loan
The AO imputed interest of ?6,72,554 on the balance outstanding from the assessee’s Associate Enterprises (AEs), considering a credit period of 15 days. The DRP confirmed this view.

The Tribunal rejected the assessee’s contention that the AO cannot impute interest on balances outstanding from its AEs, noting that expenses incurred by the assessee on behalf of its AEs come within the meaning of international transactions under section 92B of the Act. The Tribunal considered a period of 60 days as reasonable for recovering costs incurred from AEs and directed the AO to impute interest on amounts outstanding for periods exceeding 60 days.

Issue 4: Erroneous Granting of Credit Period Which Is Short in Normal Course of Business
The Tribunal found that the DRP’s grant of a 15-day credit period was too short and directed the AO to consider a 60-day period as reasonable for recovering costs from AEs.

Issue 5: Erroneous Use of Average Rate of Interest Earned by the Appellant Instead of LIBOR / EURIBOR
The AO adopted an ALP interest rate of 17.06%, being the average SBI-PLR rate with a spread of 3%. The DRP reduced this rate to 12.75%. The Tribunal rejected the assessee’s plea to adopt LIBOR rates, as the expenses were incurred in Indian currency. The Tribunal directed that the SBI-PLR rate of 8.15% should be adopted without any additional spread for calculating ALP interest on amounts outstanding from the assessee’s AEs.

Additional Grounds
Ground Nos. 7, 8, and 9 were dismissed as no arguments were raised.

Conclusion:
The Tribunal allowed the first ground for statistical purposes, dismissing the second ground based on jurisdictional High Court judgments. The Tribunal partly allowed grounds 3, 4, and 5, directing the AO to reconsider the imputation of interest and the applicable interest rate. The stay application filed by the assessee was dismissed as infructuous.

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