ASSTT. COMMISSIONER OF INCOME TAX-6(1)(1), MUMBAI, MUMBAI vs. EQUIFAX SOFTWARE SYSTEMS PVT. LTD., MUMBAI

The Appellant prays that the order of the CIT(A) on the above grounds be set aside and that of the Assessing Officer be restored.

The appellant craves leave to amend, or alter any grounds or add a new ground, which may be necessary.”

The brief facts of the case are that the assessee had provided services to its sister concern, Equifax Credit Information Services Pvt Ltd (ECIS). As per the agreement between the assessee and ECIS, the assessee recovered certain third partycost on cost to cost basis from ECIS. Accordingly, the expenditure was netted off in the books of account of the assessee. Neither the recovery was reflected in the turnover nor was the third-party cost charged to P&L account. The Ld.AO, in assessment order has considered the difference of expenses in the books of ECIS in relation to the invoices raised to assessee and the turnover of ECIS as income of the assessee. He difference was found in the income declared in P&L Account and the turnover declared in service tax return of ECIS which amount to Rs.8,17,36,986/-. The Ld.AO considered the transaction as undeclared transaction and added back to the total income of the assessee amount to Rs.8,17,36,986/-. Being aggrieved on the assessment order, the assessee filed an appeal before the Ld.CIT(A). The Ld.CIT(A) considered the number of submissions of the assessee and the remand report was called for. The Ld.AO for hearing of remand issued the notice to assessee at a wrong address which was later on informed to the Ld.CIT(A). Finally, the Ld.CIT(A) called for remand report and the notice was issued. The assessee complied the notice of the Ld.AO in remand proceeding. But finally, the Ld.CIT(A) had not received any remand report from the Ld. AO and the appeal attained finality, in favour of the assessee. Being aggrieved on the appeal order, the revenue filed an appeal before us. 4. The Ld. AR argued that the impugned appeal order correctly identified the difference in the amounts between the assessee’s books of account and ECIS. We note that the variation in turnover arises due to the differing definitions of "turnover" under the Income-tax Act and the Service Tax Act. This issue has been explained in detail by the Ld. CIT(A) on pages 12–14 of the order, which are reproduced below: “Adjudication Ground No. 1:- The ground of appeal has been raised on account of an addition of Rs.8,17,36,990/- on account of addition to the turnover of the assessee as reflected in the P&L account. During the course of assessment proceedings, the Ld. AO observed that there was a difference on account of the expenses claimed by Equifax Credit Service Information (ECIS), turnover as claimed in service tax return and income as declared in the P&L Account. Since, the Ld. AO was not satisfied with the reply furnished by the assessee hence, an addition of Rs.8,17,36,986/- was made to the income of the assessee. During the course of appellate proceedings, the appeal has submitted that it has provided services to ECIS which is a joint venture between Equifax Group, USA and various financial institutions. ECIS entered into a services agreement with the appellant to configure and localize its software. The appellant recovers the operating expenses incurred by it from ECIS along with a mark-up. Further, as per the arrangement between the appellant and ECIS, the appellant recovers from ECIS certain third-party costs on a cost-to-cost basis. It has been further submitted by the appellant that the amount recovered from ECIS on a cost-to-cost basis is netted off against the particular expenditure in the books of accounts of the appellant. Thus, neither the recovery is reflected in the turnover not is the third-party cost charged to P&L account making a NIL impact to the P&L account. The appellant has attached copies of debit notes/invoices raised by the appellant on ECIS along with the expenditure ledgers which are netted with its submissions. The appellant has not reflected the reimbursement in its turnover whereas ECIS has claimed the amount as an expenditure in its books of accounts. It is seen that every item included in the sales turnover as per P&L account need be includible in the turnover definition for service tax purposes. Accordingly, the basis for inclusion of amounts in the two sets of documents (i.e. service tax return and P&L account) may be different due to underlying principles governing the same. The appellant has followed Indian accounting standard-1 (Ins AS-1), Para 32 of the Ins AS 1 issued by Accounting Standards Board of ICAI. Further, the appellant follows accrual basis for income recognition by the appellant in the notes to account [note no 17(2)(c)] to the financial statement. It has been submitted by the appellant that it charges service tax on its invoices/debit notes and pays the same to the government treasury after adjustment the cenvat credit on input services (i.e. from third parties) therefore, the net impact on account of the service tax is NIL for the appellant. As the appellant claimed the cenvat credit on the third-party invoices, the service tax component was considered in reimbursements. ECIS has claimed input credit of the service tax levied by the appellant. Thus, the entire scheme of transaction has been undertaken as per the application service tax laws and there is no leakage of revenue at any juncture. The Ld. AO has not made any similar adjustments in earlier A.Ys i.e. 2011-12, A.Y. 2012-13 or in A.Y 2014-15 to the income of the appellant. The various observations made by the Ld. AO in the assessment order are not supported by any substantial arguments. In view of the facts and circumstances as stated above, the addition of Rs.8,17,36,990/- made by the Ld. AO is hereby directed to be deleted. The ground of appeal no. 1 is allowed.”

The Ld.DR argued and fully relied on the assessment order.

We have considered the rival submissions and reviewed the documents available on record. The assessee reimbursed third-party expenses to ECIS on a cost-to-cost basis, resulting in no impact on either the debit or credit sides. Consequently, there was no effect on the Profit and Loss (P&L) Account, which remained neutral. Neither the recovery was reflected in the turnover nor were the third-party expenses charged to the P&L Account. The discrepancy arises because the assessee followed Indian Accounting Standard-1 (IAS-1), whereas the service tax authorities considered these transactions under the definition of "turnover" as per the Service Tax Act. The assessee’s books were audited under Section 44B of the Act, but the inclusion of these transactions as "turnover" under the Service Tax Act caused the variation in the reported turnover of ECIS.Upon review, we find no infirmity in the impugned appeal order. Accordingly, the appeal order is upheld, and the revenue’s ground is dismissed. 6. In the result, the appeal of the revenue is dismissed. Order pronounced in the open court on 15th day of January 2025. (NARENDRA KUMAR BILLAIYA) JUDICIAL MEMBER Mumbai,दिन ांक/Dated: 15/01/2025 Pavanan

अपील र्थी/The Appellant , 2. प्रदिव िी/ The Respondent. 3. आयकरआयुक्त CIT 4. दवभ गीयप्रदिदनदि, आय.अपी.अदि., मुबांई/DR, ITAT, Mumbai 5. ग र्डफ इल/Guard file.