2018 (9) TMI 708 - AT - Income Tax

Addition on account of operating margin added on support services provided by the assessee to its group concern - Held that - If the assessee is entitled to charge markup over the total cost incurred then the learned assessing officer is correct in making such adjustment. If the agreement between two resident companies do not provide for any such markup on the total cost then such addition cannot be made. In the paper book filed before us details of other income is also not provided. It was also not shown to us that how the other income is computed and what it comprises of and what are the relevant documents by which the assessee has shown such income and estimation thereof - relevant documents are not available before us, we set aside 2nd ground of appeal back to the file of the learned assessing officer to decide it afresh after. Disallowance at the rate of 10% of travelling and conveyance expenditure - Held that - Regarding the details of the expenditure not submitted by the assessee where the learned assessing officer has asked for the elaborate details of the travelling and conveyance expenditure, we are of the opinion that many a times details are asked by the revenue in such a manner, which is very difficult to compile. Further, such extensive compilation of the details is also not required by the income tax act or the corresponding rules. Further as per the detailed submitted by the assessee before the learned assessing officer, the learned AO could not point out any instances where the expenditure incurred by the assessee are not incurred for the purposes of the business. Without pointing out such instances, it is not possible for us to uphold any percentage disallowance out of expenditure incurred by the assessee claimed by it is allowable under section 37 (1) of the act. Addition on account of deemed dividend u/s 2(22)(e) - Held that - Payment in this case is to be treated as payment to the shareholder, holding company, i. e. Verizon Asia Pacific Holdings Pvt Ltd, Singapore, if at all. When payment has been made to any concern as loan or advance, such payment shall be deemed to have been made to the shareholder and the payment shall take the character of deemed dividend . The person liable in such situations would be the shareholder and not the person or entity to whom the money may have actually been paid as loan. In view of above findings, we reverse the findings of the ld AO and direct to delete the addition of ₹ 64037615/- in the hands of the assessee u/s 2 (22)(e). Accordingly, Ground no 4 of the appeal of the assessee is allowed.

Summary

Issues Involved:
1. Addition on account of operating margin on support services.
2. Disallowance of travel and conveyance expenses.
3. Addition on account of deemed dividend under Section 2(22)(e) of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Addition on account of operating margin on support services:
The appellant contested the addition of ?12,56,597 made by the Assessing Officer (AO) on the grounds that the income from support services provided to group companies was understated. The AO applied a 15% margin on the operating cost of ?56,61,188, which was later reduced to 12.82% by the Dispute Resolution Panel (DRP). The appellant argued that the transaction was between two domestic associated enterprises (AEs) and not international, and that there was no evidence of underreported income. The Tribunal found that the relevant documents, including the agreement dated 25/2/2005, were not available for review, and thus remanded the matter back to the AO for fresh consideration.

2. Disallowance of travel and conveyance expenses:
The AO disallowed 10% of the travel and conveyance expenses amounting to ?1,61,08,546 due to lack of detailed information regarding the purpose and nature of the expenses. The DRP upheld this disallowance. The appellant provided detailed expenditure records, including the nature of expenses, names of individuals, and amounts. The Tribunal found that the AO did not point out any specific instances where the expenses were not business-related and concluded that the ad hoc disallowance was unjustified. The Tribunal directed the AO to delete the disallowance.

3. Addition on account of deemed dividend under Section 2(22)(e):
The AO added ?6,40,37,615 as deemed dividend, arguing that the loan received from Verizon Communications India Pvt Ltd, a subsidiary of the same holding company, fell under the purview of Section 2(22)(e). The appellant contended that it was not a shareholder of the lending company and that the loan was an interest-bearing one for commercial expediency. The DRP upheld the AO's addition. The Tribunal examined the provisions of Section 2(22)(e) and concluded that the deemed dividend should be taxed in the hands of the shareholder, not the borrowing entity. Therefore, the Tribunal directed the AO to delete the addition.

Conclusion:
The Tribunal allowed the appeal partly for statistical purposes, remanding the first issue back to the AO for fresh consideration, directing the deletion of the disallowance on travel and conveyance expenses, and deleting the addition on account of deemed dividend.