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TMI Blog2018 (4) TMI 33X X X X Extracts X X X X X X X X Extracts X X X X ..... ntract is unlawful or specially barred by the law of the land. Moreover by such a decision of not charging mark up by the taxpayer on support services charges billed to AGNSI, no loss of tax has been caused to Revenue. So, the findings of the TPO/DRP that the taxpayer is not only to cut charges but mark up also is not sustainable in the eyes of law. So, we order to delete the addition on account of not charging of mark up on support services charges billed to AGNSI. When the taxpayer has worked out the liability by using a substantial degree of estimation by proving 95% of the invoices on the basis of historical trend, no disallowance can be made. So, we order to delete this addition. Comparability analysis - Held that:- We are of the considered view that Government undertakings/companies are not the suitable comparables for benchmarking the international transaction. AO is directed to verify all the Government undertakings / companies from the final set of comparables which are taking preferential treatment from Government in getting contract etc. and are not driven by profit motive alone impacting the profit margin and to exclude the same and then benchmark the internationa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pace on lease. 2. Ground No.2 - Addition on account of non-charging of mark-up on support service charges billed to AT T Global Network Services India Private Limited ('AGNSI') 2.1 On the facts and in the circumstances of the case and in law, the learned AO has erred in making an addition of ₹ 18,414,784 on account of non-charging of mark-up on support service charges billed to AGNSI, an Indian affiliate of the Appellant. 3. Ground No.3 - Disallowance of year-end accruals 3.1 On the facts and in the circumstances of the case and in law, the learned AO has erred in making disallowance of expenses amounting to ₹ 5,615,035 (represented by year-end accruals) on account of non-submission of supporting documents. 3.2 Without prejudice to the above, on the facts and circumstances of the case and in law, the learned AO has erred in not holding that since such year-end accruals have been reversed in the subsequent financial years, the same should be allowed as tax deductible expenditure for the subsequent financial years. 3.3 On the facts and circumstances of the case and in law, the learned AO has erred in not allowi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not considering gains / losses arising out of foreign exchange fluctuations while computing the operating margins of the Appellant as well as comparable companies. 4.8 The learned TPO/ AO/ DRP have erred in not making suitable adjustments to account for differences in the risk profile of the Appellant vis-a-vis the comparable companies. 4.9 The learned TPO / AO / DRP have erred in holding inter- company receivables arising from the international transactions pertaining to provision of inter-company services to constitute a separate international transaction and proceeding to benchmark the same by application of Comparable Uncontrolled Price ( CUP ) method. 4.10 The CUP analysis undertaken by the TPO and upheld by DRP is flawed and does not represent an uncontrolled transaction. 4.11 The learned TPO / AO / DRP failed to appreciate that once working capital adjustment is granted, no separate adjustment is required on account of interest on outstanding receivables. 4.12 The learned TPO / AO / DRP failed to appreciate that in similar uncontrolled transactions, the Appellant does not charge interest on delayed payments 5. Ground No.5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4 Reimbursement of expenses TNMM 15,05,70,738 Total 124,58,26,640 3. The taxpayer in order to benchmark its international transactions in its TP study applied Transactional Net Margin Method (TNMM) as the Most Appropriate Method (MAM) by using multiple year data of comparable companies found all its international transactions at arm's length. 4. However, the ld. TPO considered international transactions entered into by the taxpayer with its AE qua provisions of services under network outsourcing support services at arm's length and international transaction qua reimbursement of AE at arm's length and made ALP adjustment qua the remaining two transactions along with interest on receivables as under :- S. No. Nature of International Transaction ALP determined by assessee (INR ALP determined by this office (INR) Adjustment u/s 92CA (INR) 1 Provision of Network Support Services 68,04,86,952 7 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tribunal by relying upon the decision rendered by the Hon'ble Delhi High Court in case of CIT v. Khaitan Chemicals Fertilizers Ltd. [2010] 326 ITR 114 held the loss of security deposit as a business loss in the revenue field u/s 37(1) of the Act. For facility of reference, operative part of the order rendered by the coordinate Bench of the Tribunal in Fab India Overseas (P.) Ltd. (supra) is reproduced as under :- 18. On this factual matrix the issue before us is whether the loss of security deposit in question is a business loss in the revenue field. In our considered opinion the above loss is a business loss for the reason that the assessee has taken on lease many premises spread over many parts of the country, and this act of taking this show room on lease is in the normal course of business. In fact 84 show rooms are taken on lease at various places. Six months rent was given as security deposit. This was given in the course of business. The transaction is intimately connected with the business of the assessee. The Assessing Officer has not disputed the genuineness of the claim. The CIT(A) has disallowed the amount on the ground that the loss was in the capital fie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n Fab India Overseas (P.) Ltd. (supra) in an identical issue, the addition made by the AO of ₹ 45,90,000/- on account of advances and service tax written off is ordered to be deleted. GROUND NOS.2 2.1 10. The AO made addition of ₹ 1,84,14,784/- on account of non-charging of mark-up on support service charges billed to AT T Global Network Services India Pvt. Ltd. (AGNSI), a group company of the taxpayer which has started its operation from AY 2008-09 on the ground that without any profit motive, no such services can be provided in a business set up. The AO noticed that the taxpayer has charged mark up of 8% from AGNSI in AY 2008- 09 and first three months of AY 2009-10 and thereafter unilaterally reversed the same on the plea that it was management decision and AO considered it an after-thought due to lack of complete documentation in this regard. The ld. DRP held the decision of AO to the extent that the AO should restrict the mark-up as finally determined by the TPO pursuant to the directions issued by this order on TP matters. 11. Challenging the impugned order passed by AO/DRP, the ld. AR for the taxpayer contended that there is no provision under the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cts of the case. The facts of the case as explained by the appellant are that, ACSI, a group company of appellant and an entity in operations for more than 10 years by then, was having developed support services functions. Accordingly, since such functions were already housed in ACSI, appellant entered into a support services agreement with ACSI for provision of the aforesaid support services to appellant. We have gone through the submission of the assessee and find that necessary evidences in the form of the support service agreement, invoices, the details of payments made and the bank statements evidencing the payment thereof have been furnished by the assessee to prove the genuineness of the expenses. We find that no evidence has been brought on record by the Department to dispute the said claim. Rather, the Department's claim is merely based on suspicion as also noted by the DRP while deleting the above disallowance. We also find that even otherwise, both ACSI and appellant are profit making entities and hence, there was no tax incentive for the parties to deflate the revenues earned by appellant. The decision was totally based on commercial considerations. By transferring ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the eyes of law. So, we order to delete the addition on account of not charging of mark up on support services charges billed to AGNSI. GROUND NOS.3 TO 3.3 17. AO disallowed an amount of ₹ 56,15,035/- and added back the same to the income of the taxpayer on the ground that the taxpayer does not have the basis of recording year end accrual. The ld. DRP approved the proposed addition on this account. 18. Undisputedly, the detail of year end accrual outstanding as on March 31, 2010 are as under :- Particulars Accruals as on March 31, 2010 Accrual Control Accunt 11,25,51,600 Salary payable 50,26,782 IPA Accruals 24,21,901 SIP Accruals 51,00,353 Internal LSP Liability 25,24,592 Total 12,76,25,228 19. It is also not in dispute that out of the aforesaid amount of ₹ 12.76 crores, invoices of ₹ 10.69 crores were submitted and accepted by the AO. It is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r words, the warranty stood attached to the sale price of the product. In this case the warranty provisions had to be recognized because the assessee had a present obligation as a result of past events resulting in an outflow of resources and a reliable estimate could be made of the amount of the obligation. Therefore, the assessee had incurred a liability during the assessment year which was entitled to deduction under section 37 of the Income-tax Act, 1961. The present value of a contingent liability, like the warranty expense, if properly ascertained and discounted on accrual basis can be an item of deduction under section 37. The principle of estimation of the contingent liability is not the normal rule. It would depend on the nature of the business, the nature of sales, the nature of the product manufactured and sold and the scientific method of accounting adopted by the assessee. It would also depend upon the historical trend and upon the number of articles produced. A provision is a liability which can be measured only by using a substantial degree of estimation. A provision is recognized when: (a) an enterprise has a present obligation as a result of a past event; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9;s worldwide network service delivery business functions. 28. Post directions of DRP, the TPO selected 12 comparables with OP/OC as Profit Level Indicator (PLI) which are as under :- S. No. Company Name Comparables as per TP STUDY Comparables introduced by TPO OP/TC (as per TPO Order) Working Capital Adjusted OP/TC (as per Final Assessment Order) 1 Telecommunications Consultants India Ltd. (Seg.) - - 10.73% 5.61% 2 Cades Digitech Pvt. Ltd. - - 8.80% 5.55% 3 Certification Engineers International Ltd. - - 78.63% 70.24% 4 Engineers India - - 62.94% 59.99% 5 HSCC (India) - - 18.32% 3.89% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en Public Sector undertakings are not driven by profit motive along but other consideration also weigh in such as discharge of social obligations etc. 32. By applying the decision rendered by the coordinate Bench of the Tribunal in Bechtel India (P.) Ltd. (supra) and Hon'ble Bombay High Court in Thyseen Krupp Industries India (P.) Ltd. (supra), the coordinate Bench of the Tribunal in case of WSP Consultants India (P.) Ltd. in ITA No.344/Del/2016 ordered to exclude Kitco, a 100% Government undertaking. 33. So, in view of the matter, we are of the considered view that Government undertakings/companies are not the suitable comparables for benchmarking the international transaction. So, the AO is directed to verify all the Government undertakings / companies from the final set of comparables which are taking preferential treatment from Government in getting contract etc. and are not driven by profit motive alone impacting the profit margin and to exclude the same and then benchmark the international transactions qua Network Support Services. Consequently, grounds no.4 to 4.12 are determined in favour of the taxpayer. GROUND NOS.5 5.1 34. The AO allowed credit of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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