Loading judgment…
Facts
The assessee's appeal pertains to an assessment order concerning A.Y. 2021-22. The key issues involved the characterization of services as KPO versus software development, the benchmarking of corporate guarantee fees, and the disallowance of salary expenses due to non-deduction of TDS.
Held
The Tribunal held that the issue regarding the characterization of services was to be decided based on subsequent years' facts. For corporate guarantee fees, the Tribunal directed the AO to restrict the charges to 0.53% of the total guarantee and the actual period. Regarding TDS disallowance, the matter was set aside for verification of additional evidence.
Key Issues
Whether the assessee's services qualify as KPO or software development; correct benchmarking of corporate guarantee fees; validity of disallowance of salary expenses for non-deduction of TDS.
Sections Cited
143(3), 144C(13), 144B, 133(6), 40(a)(ia), 92CA, 192, 194C, 194I
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, HYDERABAD BENCHES “B” , HYDERABAD
Before: SHRI VIJAY PAL RAO, HON’BLE & SHRI G. MANJUNATHA, HON’BLE
O R D E R PER MANJUNATHA, G. A.M:
This appeal filed by the assessee is directed against the assessment order passed under Section 143(3) r.w.s. 144C(13) read with section 144B of the Act dated 03.10.2024 relating to A.Y.2021-22.
The grounds raised by the assessee read as under : 1) The order passed by the Ld. A.O./DRP is bad in law, illegal and non-est. 2) The Ld. TPO/DRP/A.O. has erred in not accepting the characterization of the assessee as software development provider. The Ld. DRP has erred in observing that some of the services provided by the assessee such as engineering services, computer aided design/engineering design and modelling etc are in the nature of 'Knowledge Process Outsourcing (KPO) services. 3) The Ld. TPO/DRP/A.O. has erred in proposing/confirming the addition of Rs. 11,77,81,629/- on account of corporate guarantee fee in respect of guarantees given by the assessee in favour of A.E. The Ld. TPO/DRP/A.O. has erred in proposing/confirming the rate of guarantee fee of 1.95% based on the rates charged by the banks to its customers as against 0.53% charged by the assessee to its AES. 4) The Ld. TPO/DRP/A.O. has erred in proposing/confirming the addition of Rs. 1,03,338/- on account of interest on outstanding trade receivable and reimbursement receivable beyond the 90 days credit period. 5) The Ld. TPO/DRP/A.O. has erred in not appreciating that the transaction of outstanding receivables was already benchmarked by the assessee while benchmarking the transaction of provision of IT services. The Ld.TPO/DRP/AO, ought to have aggregated the outstanding receivable transaction along with the provision of the IT services. 6) The Ld. TPO/DRP/A.O. has erred in not providing copy of the information gathered by the TPO u/s. 133(6) of the Act from various banks. 7) The Ld. TPO/DRP/A.O. has erred in proposing/confirming the disallowance of Rs. 38,55,85,183/-u/s. 40(a)(ia) of the Act on account of non-deduction of tax from salary paid to it's employees. 8) The Ld. TPO/DRP/A.O. has failed to appreciate that the reference made to the TPO by the A.O. is bad in law. The Ld. TPO/DRP/A.O. ought to have appreciated that the mandatory conditions to invoke the jurisdiction u/s. 92CA of the Act did not exist.”
Ground Nos.1, 4, 5, 6 and 8 are not pressed by the learned counsel for the assessee and hence, the same are dismissed as not pressed.
Ground no.2
The learned counsel for the assessee submitted that this issue is covered in favour of the assessee by the decision of Hyderabad Bench in assessee’s own case for A.Y. 2020-21 in wherein similar issue has been considered and the Tribunal after considering facts, expunged the observations of the DRP and kept open the issue to be decided in subsequent years, if need arises.
On the other hand, the ld.CIT-DR fairly agreed that this issue is covered in favour of the assessee by the decision of Hyderabad Bench in assessee’s own case for A.Y. 2020-21 in ITA No.913/Hyd/2024.
We have heard both the parties, perused the material available on record and gone through the orders of authorities below. We find that an identical issue has been considered by co- ordinate Bench of the Tribunal, in assessee’s own case for A.Y. 2020-21 wherein in Para 7, it has held as under :
“7. We have heard rival contentions and perused the material available on record. Undoubtedly, TPO / DRP in the present case have not decided the issue about profile of assessee i.e. KPO or software developer, further both have not given any reasons as to why the services rendered by the assessee would fall under the category of KPO and not under software developer services. In the light of the non-availability of the reasons for treating the assessee as KPO by TPO / DRP, we are of the considered opinion that the finding given by the DRP/TPO will not be as binding and issue of whether the assessee is KPO or software developer is left open to be decided based on the facts and circumstances arising in the subsequent year. Therefore, Ground No. 2 is allowed for statistical purposes.
In this view of the matter and by respectfully, following the decision of the ITAT Hyderabad Bench in assessee’s own case for A.Y. 2020-21 in (supra), this issue is kept open to be decided in subsequent years, if need arises. Accordingly, ground no.2 of the assessee is treated as allowed for statistical purpose.
Ground No.3
The learned counsel for the assessee submitted that this issue is also covered in favour of the assessee by the decision of Hyderabad Bench, in assessee’s own case for A.Y. 2020-21 in wherein the Tribunal after considering the facts has directed the TPO / Assessing Officer to benchmark the Corporate Guarantee Fee @ 0.53% on total corporate guarantee given by the assessee and also restrict the commission / fees to the period of actual guarantee given by the assessee.
Per contra, the ld.CIT-DR fairly agreed that this issue is covered in favour of the assessee by the decision of Hyderabad Bench in assessee’s own case for A.Y. 2020-21 in ITA No.913/Hyd/2024.
We have heard both the parties, perused the material available on record and gone through the orders of authorities below. We find that an identical issue has been considered by the Tribunal in assessee’s own case for A.Y. 2020-21 in wherein under identical set of facts and also by following certain judicial pronouncements, directed the Assessing Officer/TPO to benchmark the corporate guarantee fee by applying 0.53% commission on total corporate guarantee fee given by the assessee and also restrict commission to the actual period of guarantee given to it’s A.E. The relevant portion of the Tribunal is as under :
“19. We have heard both the sides and perused the material available on record. In the present case the assessee has given the corporate guarantee to its various AEs as mentioned in the details hereinabove. From the perusal of the details of corporate guarantee hereinabove it is abundantly clear that the guarantees were given for the period varying from 365 days to 95 days. In our considered opinion the interest of corporate guarantee or the charges of corporate guarantee is required to computed on the basis of actual period, instead of one year, as the actual periods were available in the form of chart with the Ld. AO / TPO. Therefore, we are of the considered opinion that the TPO / DRP are required to restrict the charging of the corporate guarantee charges for the actual period as against one year. In the light of the above, we issue the direction to TPO/AO to restrict the charging of the corporate guarantee only for the period for which it was issued. The TPO is directed to recompute the corporate guarantee charges for actual period only.
Now coming to the second issue, i.e., at what rate the corporate guarantee charges are required to be computed. In this regard, the TPO / DRP had relied upon the rate of corporate guarantee charges as charged by the financial institutions namely bank. At Page No.6 of his order TPO taken the median of the 35 percentile and 65 percentiles as bank charges and computed at 1.90%. If we look into the document and the show- cause notice issued by the TPO which is available at Page No. 18 then it is clear that the ALP of interest as applied for ECB loan was computed at 1.67%. At Page No. 20 of the paper book, in paragraph No.21.6 it was mentioned as under: - ”21.6 As the taxpayer had not received any interest amount on the financial commitment / loan provided to the AE, adjustment is warranted in the said issue and computation of the adjustment with respect to interest to be received on ECB is as under:
Sl.No Description Amount 1. ECB loan / financial commitment Rs.59,05,85,810/- 2. Interest Received by the assessee (A) NIL 3. Arm’s Length Interest rate 1.67%
Now the question arises whether the ALP computed for external commercial borrowing @1.67% can be juxtapose or applied to the corporate guarantee @1.9%. In our view the answer is no, and this Tribunal while deciding the issue in the case of Hetero Labs Limited, v. ACIT (supra), as relied upon by the assessee, held that the rate of interest required to be applied is 0.53% and not 1.9%. For that purpose, the Tribunal has relied upon another Co-ordinate Bench decision in the case of Mylon Laboratories Ltd v. ACIT in and held that 0.5% is required to be applied. Accordingly, respectfully following the decision of the Co-ordinate Bench in the case of Hetero Labs Limited, v. ACIT (supra) we direct the TPO to compute the charges at 0.53% as corporate guarantee charges.
The question whether the approach of the Tribunal by restricting the corporate guarantee at 0.53% is correct. For that purpose, we have to see what benefit the assessee would have been passing to the AE by giving the corporate guarantee. In fact, corporate guarantee charges paid for the corporate guarantee cannot be equated with the rate of interest at what the external commercial borrowings has been borrows. In the case of ECB loans, risk and rewards are more than the corporate guarantees. The Corporate guarantee is required to be enforced in case of failure on the part of part of borrower. In case of ECB, not only the principle borrowed, is required to pay borrowed sum beside that other action can also be taken. Moreover, the Co-ordinate Bench in the case of Reliance Industries Ltd. v. ACIT (supra) and Dabar India Limited (supra) have already adjudicated the issue and held that the interest benefit if any is required to be splitted between the guarantor and borrower.
No facts and figures brought to our notice as to whether the credit rating of the AE of the assessee was substantially low and at what rate the interest would have been borrowed by it or at what rate the bank would issue the corporate guarantee in its favour. In our considered opinion that the ECB rate is already determined by the TPO at 1.67%, then in our considered opinion corporate guarantee cannot be 1.67% it is to be substantially less therefore we are of the considered opinion that the view taken by the Co-ordinate Bench in the case of Hetero Labs Limited, v. ACIT (supra) whereby the corporate guarantee charge has been restricted to 0.53% was appropriate and in accordance with law. Accordingly, we allow this ground raised by the assessee.”
In this view of the matter and respectfully following the decision of the co-ordinate Bench of the Tribunal in assessee’s own case, we direct the Assessing Officer to restrict the addition towards corporate guarantee commission @ 0.53% on total corporate guarantee given to A.E. and also restrict the commission / fee to the actual period of guarantee given by the assessee to it’s A.E.
Ground No.7.
During the course of assessment proceedings, the Assessing Officer noticed that the assessee has claimed salaries and wages in Schedule A-PL of ITR at Rs.6,29,76,43,233/- but as per Form 3CD clause 34(a) under TDS provisions, the assessee has admitted to have deducted TDS on salaries and wages of Rs.5,01,23,59,279/-. Since there is a difference of Rs.1,28,52,83,944/-, the Assessing Officer called upon the assessee to file necessary evidences and also explain why TDS has not been deducted. Since the assessee did not respond to the show cause notice, the Assessing Officer has disallowed 30% of Rs.1,28,52,83,944/- and made addition of Rs.38,55,85,183/- u/s 40(a)(ia) of the Act.
The assessee filed objections against draft assessment order before the Dispute Resolution Panel – 1, Bangalore and filed certain additional evidences, including details of salaries paid without TDS, employees names, addresses and their PAN numbers and also explained that in all those cases, the total income of the employees does not come under tax bracket and therefore, the question of deduction of TDS does not arise.
The DRP forwarded the additional evidence field by the assessee to the Assessing Officer asking for remand report, however, the said remand report was not received by the DRP. Therefore, the DRP on the basis of reasons given by the Assessing Officer / TPO, rejected the explanation of the assessee and sustained addition towards 30% of disallowance of salary u/s 40(a)(ia) of the Act on the ground that the assessee could not substantiate the claim with evidence like bank statements, Form – 16 and other documentary proof to show that they are the employees of the assessee.
The learned counsel for the assessee submitted that, no doubt the assessee could not respond to the show cause notice issued by the Assessing Officer, because the notices issued by the Assessing Officer was missed the attention of the assessee, but the fact remains that the assessee has filed complete details of employees, salaries paid to them and also explained why TDS has not been deducted. The DRP has admitted the additional evidence filed by the assessee and also called for the remand report from the Assessing Officer. But the Assessing Officer failed to submit the remand report to the DRP and the DRP without considering additional evidence filed by the assessee, sustained addition made by the Assessing Officer and therefore, he submitted that the addition made by the Assessing Officer should be deleted.
On the other hand, the ld.CIT-DR submitted that going by the facts brought on record, it shows that the additional evidence filed by the assessee are not admitted while passing the order. Therefore, the matter may be remanded back to the file of Assessing Officer/ TPO, as claimed by the learned counsel for the assessee for further verification and decide the issue in accordance with the law.
We have heard both the parties, perused the material on record and gone through the orders of authorities below. The Assessing Officer made addition towards 30% of difference in salary paid by the assessee when compared to salary reported in ITR and salary reported under Form 3CD, on the ground that the assessee has failed to deduct TDS on salaries and wages paid to employees in accordance with the provisions of Section 192 of the Act. It is the argument of the learned counsel for the assessee that unlike other TDS provisions under Section 192 of the Act, the assessee is required to deduct TDS on estimated income of the employee and in case, the estimated income of the employee, including income from salary is less than the taxable income, then there is no requirement of deducting TDS. Since many of the employees income does not come under taxable net income, the assessee has not deducted TDS, however, reported salary payment by furnishing TDS details along with names, addresses of the employees and their PAN numbers and the assessee also issued Form 16 to the employees. This evidence has been filed before the DRP, which is evident from the additional evidence filed by the assessee, however, the DRP although called for remand report from the Assessing Officer, but because the Assessing Officer has not submitted remand report, has upheld the addition made by the Assessing Officer.
18. We find that the assessee has furnished list of names of employees, their addresses and PAN numbers and the DRP without verifying the facts, simply sustained addition. We find that as per Section 192 of the Act, the employer / payer is required to deduct TDS on estimated income of the employees. Unlike other TDS provisions, like provisions of Section 194C to 194I of the Act, where the assessee is required to deduct TDS on the total payments made by the payee but under provisions of Section 192 only, in case payment comes under taxable net, then TDS needs to be deducted. Since the assessee claims that in many of the employees’ cases, the income does not exceed the taxable net, the assessee has not deducted TDS. In our considered view, the Assessing Officer and the DRP completely erred in disallowance of 30% of salary expenses under Section 40(a)(ia) of the Act without verifying the evidence filed by the assessee. Since the assessee has filed various evidences to justify its case and the DRP has not considered additional evidence filed by the assessee and further, these evidences were not filed before the Assessing Officer during the assessment proceedings, in our considered view, the matter needs to be set aside to the file of Assessing Officer for further verification. Thus, we set aside the order passed by the Assessing Officer on this issue and restore the issue back to the file of JAO for the limited purpose of verification of additional evidence filed by the assessee with reference to salaries and wages paid to the employees without deducting TDS as per Section 192 of the Act in light of various averments of the learned counsel for the assessee. In case, the Assessing Officer finds the income of the employees does not come under taxable net, then the question of deduction of TDS does not arise and accordingly, the Assessing Officer is directed to delete the addition made under Section 40(a)(ia) of the Act. Accordingly, this ground is allowed for statistical purposes.
In the result, the appeal of the assessee is partly allowed for statistical purposes.
Order pronounced in the Open Court on 31st January, 2025.