2023 (11) TMI 442 - AT - Income Tax

TP Adjustment - Disallowance of non-operating and non-allocable expenses incurred for exploring new business in the line of Maintenance and Operations of Transportation - HELD THAT - AO in the assessment order has not disallowed any expense out of Personnel expenses, Finance Cost and Depreciation. Further, no adverse inference was drawn by the TPO with respect to these expenses. The power of CIT(A) is confined to considering the matter which has been considered by the AO and determined in the course of assessment. Thus, CIT(A) was not justified in raising a new matter to make such disallowance. CIT(A) acted beyond its power by directing the AO to make such disallowance which was not subject matter of appeal before him. CIT(A) has not properly appreciated the facts of the case and disallowed the expenses under various heads on irrelevant facts. It is pertinent to note that for rendering management consultancy services to its AEs, as per the agreement, the assessee charged mark-up of 15% on the operating expenses directly attributable to the services rendered. An organization incurs both operating expenses as well as non-operating expenses for running the business. There are certain expenses which are not allocable to a particular activity. Non-allocable expenses even for a management consultancy providing company are costs that cannot be directly attributed to specific projects or client engagements and therefore cannot be allocated on a project-by- project basis. These expenses are more general in nature and are incurred to support the overall operations of the company rather than any particular client work. There have been non-operating non-allocable expenses in the range of 40% to 49% in these years and the position of the current year is also consistent with that of earlier years. Therefore, even on merits, we hold that the Ld. CIT(A) is not justified in allowing only operating expenses allocable to the segment of rendering management consultancy services and direct expenses on sub-letting and disallowing all the nonoperating and non-allocable expenses incurred by the assessee company. Further, it is essential to note that during the year under consideration the assessee company has also started expansion of its business activities towards maintenance and operation of transport such as road transport, rail transport etc. It is evident from the details of expenses furnished by the assessee that the assessee has incurred expenses as fees for professional services for bidding for Metro Rail projects and Road Transport projects - The agreement for Indore BRTS Bus Operation and Maintenance was executed on 26.11.2012. These activities clearly demonstrate that the assessee had incurred expenses for preparing technical and financial bids for obtaining contracts for maintenance and operation of BRT buses in Indore. Similarly, assessee had incurred expenses in preparing bids for metro rail and other road transport projects. The assessee was also successful in getting contract during the year related to Indore BRT Bus Operations and Maintenance of 50 buses for an initial period of six years. Hence CIT(A) was not justified in disallowing non-operating non-allocated expenses and expenses incurred for exploring new business in the line of Maintenance and Operations of Transportation by the assessee. Personnel Expenses - addition made mainly observing that there was a marginal increase in salary and wages and further that the proposal for maintenance and operations of BRT bus services in Indore was floated by the Government Authorities and any such proposal of bidding does not require manpower or employees as claimed by the assessee for which the assessee would have paid - HELD THAT - The marginal increase in salary wages from earlier year that as mentioned above, in earlier years also there were nonoperating and non- allocable personnel expenses of about 43% in F.Y. 2010-11 and about 27% in F.Y. 2011-12 respectively whereas in the year under consideration, non-allocable personnel expenses were 24% only. The observation of Ld. CIT(A) that for getting contract of BRT bus services does not require manpower or employees is not tenable. The assessee has to prepare technical bid and financial bid to file tender for obtaining contract of BRT bus services in Indore which were required to be competitive with other bidders/parties and therefore, the assessee has to employ special manpower and lot of time and effort was involved in preparing the bids. These activities also required availing of consultancy services as well as traveling and other expenses. Assessee had incurred expenses for preparing technical and financial bids for obtaining contracts for Maintenance and Operation of BRT buses in Indore. Further, the assessee had also participated in bid for Maintenance and Operation of Chennai Metro Rail. The assessee was successful in getting one contract during the year related to Indore BRT Bus Operations and Maintenance of 50 buses for an initial period of six years. There were other employees also who were looking after the general administration of the company and their salary wages were not allocable to a specific segment. It is also a trite law that Income Tax Authorities cannot step into the shoes of the businessmen to determine as to how much expenditure should have been incurred for the purpose of business. We hold that the CIT(A) was not justified in disallowing total non-operating and non-allocable personnel expenses. Administrative and other expenses - CIT(A) observed that the assessee did not furnish evidence regarding the genuineness of the claim that these expenses were at all incurred or were related to particular business activity other than the management consultancy services being provided to the AEs - HELD THAT - From the details of expenses furnished, it is clear that certain expenses were incurred for expansion of the business other than the main segment of Management Consultancy services such as the assessee has engaged the services of KPMG to assist the assessee company in reaching out to other potential target companies in sectors namely Transportation, Healthcare and Education and paid fee for such advisory services. Another payment of fees for professional services for Chennai Metro Rail Projects was given to M/s Indian Law Partners - These instances clearly prove that the assessee has incurred other expenses on business activities other than the main segment of rendering management consultancy services. Thus expenses debited by the assessee company were not genuine. Finance Cost - addition made observing that these expenses were on account of inter-corporate deposits and finance lease obligation outstanding for a number of years and have nothing to do with business development activities - HELD THAT - Assessee has incurred finance cost in respect of Interest on Inter-Corporate deposit obtained from its related party Serco BPO India Private Limited in earlier years and paid interest @12% during the year - These funds were utilized for business purposes. Interest on Finance Lease as assessee had entered into finance lease with OAIS Auto Financial Services Ltd. for the cars taken on finance lease and has incurred interest expense as these cars were used for general business purposes of the company. Non-allocable depreciation - Disallowance made observing that the assessee has merely filed consolidated depreciation schedule pertaining to total assets owned by the company and the allocation of depreciation pertaining to management services being provided to the AEs was not genuine - HELD THAT - As pertinent to mention that the total depreciation was as per books and which was added back in the computation of income and the assessee has claimed depreciation as per Income Tax Act which is less than the amount of depreciation charged from AEs for management consultancy service, therefore, on this account, no disallowance was required to be made. Addition u/s 68 - difference in opening balance and closing balance of sundry creditors (Trade Payables) - HELD THAT - There is no contrary material on record to suggest that these were non-genuine expenses. The other liabilities of trade payables were also paid in the subsequent financial year. It is also evident from the fact that trade payables as on 31.03.2015 were of Rs. 33,85,497/- only, as shown in the Audited Balance Sheet of the assessee company for F.Y. 201415 which was nominal. This fact also establishes that the sundry creditors (trade payables) were subsequently paid and were genuine. Hence, on consideration of above-mentioned facts, we hold that no addition is called for u/s 68 on account of unexplained increase in sundry creditors in the books of account during the previous year. In the result, the disallowance u/s 68 made on account of difference in opening balance and closing balance of sundry creditors is hereby deleted.

Summary

Issues Involved:
1. Disallowance of Expenses
2. Addition under Section 68 of the Income Tax Act

Disallowance of Expenses:

The assessee company, a subsidiary of Serco Group PLC, UK, established to provide IT and IT-enabled services, filed a return declaring a loss. The assessment was completed with additions and disallowances, leading to an appeal. The primary issue was the disallowance of Rs. 10,18,44,938/- by the CIT(A), who enhanced the disallowance initially made by the Assessing Officer (AO). The CIT(A) believed these expenses were related to management services provided to AEs and should have been charged with a 15% markup, thus proposing an addition of Rs. 11,71,21,620/-. The assessee argued that these expenses were incurred for exploring new business opportunities and were not related to the management services provided to AEs. The Tribunal found that the CIT(A) acted beyond its power by raising new matters not considered by the AO and disallowed the expenses on irrelevant facts. The Tribunal noted that non-allocable expenses are essential for the overall functioning of the company and cannot be directly attributed to specific projects. The Tribunal held that the CIT(A) was not justified in disallowing non-operating and non-allocable expenses and expenses incurred for exploring new business in the line of maintenance and operations of transportation by the assessee.

Addition under Section 68 of the Income Tax Act:

The AO made an addition of Rs. 11,73,19,373/- under Section 68 due to the difference between the opening and closing balances of sundry creditors, which the assessee failed to furnish details for. The CIT(A) confirmed this addition, noting that the assessee did not provide sufficient evidence to prove the genuineness of the creditors. The assessee argued that the sundry creditors were genuine and provided details and evidence of subsequent payments. The Tribunal found that the trade payables to Serco UK were on account of reimbursement of part-salary of expatriate employees and were genuine. The Tribunal held that no addition is called for under Section 68 as the sundry creditors were genuine and subsequently paid.

Conclusion:

The Tribunal deleted the disallowance of Rs. 10,18,44,938/- out of the expenses and the addition of Rs. 11,73,19,373/- under Section 68, allowing the appeal of the assessee.