ACIT, NEW DELHI vs. M/S. AT & T COMMUNICATION SERVICES INDIA PVT. LTD., NEW DELHI

PER SUDHANSHU SRIVASTAVA, JM: ITA No.1015/Del/2015 is the assessee’s appeal preferred

against the final assessment order passed subsequent to the

directions of the Ld. Dispute Resolution Panel (DRP) vide

directions dated 16.12.2014 and pertains to assessment year

2008-09. ITA 1770/Del/2015 is the department’s cross appeal

for the same year.

2.0 Brief facts of the case are that the assessee is a

company incorporated under the Indian Companies Income Tax

Act, 1956 and is a wholly owned subsidiary of AT&T

Communication Services International Inc. USA. The business of

the assessee is divided into three broad segments:-

i) Network connectivity services ii) Market research, administrative support and liaison services iii) Managed network services 2.1 For the year under consideration, the return of income

was filed declaring an income of Rs. 6,95,74,835/-. The final

assessment order was passed on 29.1.2015 at an income of Rs.

21,64,57,948/-after making the following

additions/disallowances:-

ITA 1015 & 1779/D/2015 Assessment year 2008-09

i) 1,46,84,844 Addition on account of non-deduction of TDS u/s 40(a)(ia) of the I.T. Act, 1961 ii) 2,60,90,328 Addition on account of non taxable allowances paid to the expats iii) 48,51,041 Addition on account of gratuity liability of employees transferred to AT&T GNS iv) 38,55,230 Addition on account of Prior Period expenses v) 57,79,795 Addition on account of differential amount of mark-up Vi) 2,46,141 Addition on account of interest not charged from AGNS vii) 15,45,155 Addition on account of expenses incurred on behalf of expats viii) 7,92,00,000 Addition on account of percentage of profit on Network Connectivity Services ix) 1,26,30,579 14,68,83,113 Addition on account of year end provisons

2.2 Prior to the passing of the final assessment order, since

the assessee had entered into international transaction, a

reference was made to the Transfer Pricing Officer (TPO) wherein

the TPO had recommended an adjustment of Rs. 1,53,55,412/-

with reference to the international transaction entered into by

the assessee. In the draft assessment order, besides the

adjustment relating to transfer pricing addition/adjustment, the

Assessing Officer (AO) had also made adjustments pertaining to

non-deduction of TDS, non-taxable allowances paid to

ITA 1015 & 1779/D/2015 Assessment year 2008-09 expatriates, gratuity liability transferred, prior period expenses,

differential amount of mark up, interest not charged from the

foreign AE, addition on account of Mutual Services Agreement

(MSA), addition on account of tax deposited on behalf of

expatriates and margins thereof, addition on account of expenses

incurred on behalf of expatriates, addition on account of

percentage of profit on network connectivity services and year end

provisions which is reflected in the table produced above.

2.3 Aggrieved with the draft assessment order, the assessee

approached the Ld. DRP and challenged the proposed

adjustments/additions in the draft assessment order and the Ld.

DRP partly accepted the assessee’s objections. The assessee is

now in appeal before this Tribunal (ITAT) and has raised the

following grounds of appeal:-

“1. Ground No. 1 - No time available with the learned AO for making an order of assessment after excluding the period of limitation

1.1 On the facts and in the circumstances of the case and in law, the impugned order of assessment is bad in law and void-ab-initio as the same has been framed by the learned AO after the expiry of/time limit for completion of assessment as provided in Section 153(1) of the Act.

ITA 1015 & 1779/D/2015 Assessment year 2008-09 2.1 On the facts and circumstances of the case and in law, the learned AO has erred in disallowing Rs 1,46,84,844 towards maintenance charges paid to Cisco under section 40(a)(i) of the Act on account of non-deduction of tax at source thereon.

2.2 Without prejudice to the above, on the facts and circumstances of the case and in law, the learned AO has erred in disallowing an amount of Rs. 89,48,681 out of the total amount of Rs/1,46,84,844 paid to Cisco alleging the same to be in the nature of prior period expenditure.

3.1 On the facts and circumstances of the case and in law, the learned AO has erred in disallowing Rs 2,60,90,328 towards difference between the salary and other costs incurred by the Appellant in relation to the expatriate employees and taxable salary reported by the employees in India.

3.2 On the facts and circumstances of the case and in law, the learned AO has erred in holding that the subject transaction has been routed by the Appellant to understate its income and to avoid payment of taxes thereon without appreciating the fact that the entire amount proposed for disallowance (i.e. Rs 2,60,90,328) has been charged back from AT&T Communication Services International Inc. (‘AT&T US’) under the Master Service Agreement (‘MSA’) at a mark-up of 8%.

3.3 Without prejudice to the above, on the facts and circumstances of the case and in law, in case the above claim of the assessee is not accepted, then the said amount along with mark-up thereon/6f 8% should be reduced from the income of the assessee, being the amount claimed from/AT&T US towards such reimbursements.

ITA 1015 & 1779/D/2015 Assessment year 2008-09

4.1 On the facts and in the circumstances of the case and in law, the learned AO has erred in making an addition of Rs 48,51,041 towards gratuity liability of employees transferred by the Appellant to AGNSI.

5.1 On the facts and in the circumstances of the case and in law, the learned AO has erred in disallowing an amount of Rs 38,55,230 by treating the same as prior period expense.

5.2 Without prejudice to above and in the alternative, on the facts and in the circumstances of the case and in law, the learned AO has erred in not concluding that if the expenses of Rs 38,55,230 are disallowed on the basis that same relate to the preceding financial year (i.e. Financial Year (‘FY’) 2006-07), then the same should be allowed as a deduction in the preceding financial year (i.e. FY 2006-07).

7.1 On the facts and in the circumstances of the case and in law, the learned AO has erred in making an addition of Rs. 2,46,141 towards notional interest not charged from AGNSI by the Appellant on account of delay in settlement of invoices.

ITA 1015 & 1779/D/2015 Assessment year 2008-09 8. Ground No. 8 - Addition on account of expenses incurred on the expatriate employees not charged to AT&T US

8.1 On the facts and in the circumstances of the case and in law, the learned AO has erred in making an addition of Rs. 15,45,155 towards expenditure of Rs 13,08,677 incurred by the Appellant on the expatriate employees and increased it by the mark-up of 18.07% . 8.2 Without prejudice to ground 7.1 above, the learned AO has erred in applying a mark-up of 18.07% instead of the revised mark-up of 12.85% applied by the TPO basis the directions of the Hon’ble DRP, on services rendered by the appellant to AT&T US.

9.1 On the facts and circumstances of the case and in law, the learned AO has erred in observing that the Appellant should have received compensation for the loss of revenue arising due to transfer of business to AGNSI and has thereby erred in making an addition of 7,92,00,000 on account of notional loss of profit to the Appellant.

10.1 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 Rs 1,26,30,579 (represented by year-end accruals), by alleging the same as excessive on account of non-submission of supporting documents. 10.2 Without prejudice to the above, on the facts and circumstances of the case and in law, the learned AO has erred in not observing that deduction in respect of the disallowed amount on account of year-end accruals should be allowed in the subsequent year(s) in which such accruals are reversed/ utilized. 11. Ground No. 11 - Short credit in respect of Taxes Deducted at Source (‘TDS’) 11.1 On the facts and in the circumstances of the case and in law, the learned AO has erred in granting credit for TDS of Rs 1,78,55,046, as against Rs 1,93,43,8551 claimed by 7

ITA 1015 & 1779/D/2015 Assessment year 2008-09 the Appellant in its return of income for the subject AY. 12. Ground No. 12 - Non-grant of full credit in respect of Advance Tax 12.1 On the facts and in the circumstances of the case and in law, the learned AO has erred in granting credit for advance of Rs 58,63,848, as against Rs 1,00,00,000 claimed by the Appellant in its return of income for the subject AY. 13. Ground No. 13 - Incorrect levy of interest under section 234B and 234 D of the Act 13.1 On the facts and circumstances of the case and in law, the learned AO has erred in charging interest under section 234B and 234D of the Act. 14. Ground No. 14 - Withdrawal of interest under section 244A of the Act 14.1 On the facts and circumstances of the case and in law, the learned AO has erred in withdrawing interest granted under section 244A of the Act. 15. Ground No. 15 - Initiation of penalty proceedings under section 271(l)(c) 15.1 On the facts and circumstances of the case and in law, the learned AO has erred in initiating penalty proceedings under section 271(l)(c) of the Act against the Appellant on account of the above adjustments made in the assessment order.”

2.4 The department is also in cross appeal before the ITAT

and the grounds preferred by the by the department are as

under:-

“On the facts and in the circumstances of the case, the Hon’ble DRP has erred on facts and in law:

ITA 1015 & 1779/D/2015 Assessment year 2008-09 account of tax deposited on behalf of ex pat employees and margin thereof not charged under MSA as the assessee had recovered the said amount from AT&T WPS in the subsequent year.

3.0 The Ld. Authorised Representative (Ld. AR) submitted

that ground no. 1 of the assessee’s appeal was not being pressed;

hence, the same is dismissed as not pressed.

3.1.0 Coming to ground no. 2 of the assessee’s appeal, the

Ld. AR submitted that this ground challenges the disallowance of

maintenance charges paid to CISCO. It was submitted that the

assessee had paid an amount of Rs. 1,46,84,844/- to CISCO

towards Annual Maintenance Charges (AMC). It was submitted

that during the year, the assessee had undertaken two separate

transactions with CISCO Systems International BV which was a

tax resident of Netherlands. These separate transactions

pertained to purchase of equipment and provision of annual

maintenance services. The Ld. AR further submitted that it was

the allegation of the Assessing Officer that the assessee had not

submitted particulars of the equipment purchased from CISCO in

relation to which the annual maintenance charges had been paid.

ITA 1015 & 1779/D/2015 Assessment year 2008-09

It was also submitted that the Assessing Officer had alleged that

no supporting evidences had been submitted by the assessee to

substantiate that the equipment did not have any element of

royalty embedded therein and further that the payment of annual

maintenance charges did not constitute payment towards Fee for

Technical Services (FTS). It was further submitted that the

Assessing Officer had held that since the assessee had failed to

substantiate that the said annual maintenance charges were not

in the nature of fee for technical services, the impugned amount

of Rs. 1,46,84,844/- was liable to be disallowed u/s 40A(ia) of

the Income Tax Act, 1961 (hereinafter called 'the Act') on account

of non-deduction of tax at source. It was also submitted by the

Ld. AR that the Assessing Officer had alleged that out of this

amount, only Rs. 57.3 lakh pertained to the year under

consideration and the balance pertained to assessment years

2006-07 and 2007-08. The Ld. AR submitted that the purchase

of equipment was an outright purchase transaction and,

therefore, the same could not be considered as payment towards

royalty. It was also submitted that the assessee had capitalized

the equipment in its books of accounts and depreciation on the

same had been claimed on the same in the preceding year as well

ITA 1015 & 1779/D/2015 Assessment year 2008-09

as during the the year under consideration. It was also

submitted that the annual maintenance charges in question did

not have any correlation with the nature of equipment purchased

and, therefore, no adverse inference should have been drawn by

the Assessing Officer in relation to the AMC. It was also

submitted that the assessee had duly submitted the purchase

orders and invoices raised by CISCO before the Assessing Officer

to demonstrate that both purchase as well as payment of AMC

were separate transactions. Our attention was also drawn to the

copy of agreement pertaining to annual maintenance charges as

well as invoices etc. which were earlier produced before the

Assessing Officer and were now placed in the paper book filed by

the assessee. The Ld. AR also submitted that the annual

maintenance charges were incurred for the entire lot of machines

purchased by the assessee and were not be identified or related

to any particular equipment. It was emphasised by the Ld. AR

that the payment of annual maintenance charges paid to CISCO

was a regular third party transaction and not a transaction with

any related party and, therefore, it should be considered as an

independent transaction. It was also submitted that the

maintenance services provided by CISCO did not make available

ITA 1015 & 1779/D/2015 Assessment year 2008-09

any technical knowledge, expertise, skill, know-how etc. to the

assessee and, therefore, the AMC would not constitute fee for

technical services under the India-Netherlands Tax treaty.

Reliance was placed on the order of the ITAT Delhi Bench in the

case of ACIT vs. M/s HCL Comnet Ltd. (TS-456-ITAT-2016(Del))

wherein it had been held that while analysing the taxability of

annual maintenance charges, no technical services could be said

to have been provided to the assessee. It was further submitted

that regarding the allegation of the Assessing Officer in respect of

prior period expenses, the relevant invoices had been received as

well as paid in the year under consideration itself and, therefore,

the liability had crystallised in the subject year itself and,

therefore, the same was to be allowed as a deduction in the year

under consideration only.

3.1.1 In response, the Ld. Departmental Representative

(C.I.T. DR) submitted that the assessee had not filed any details

regarding the annual maintenance expenses before the Assessing

Officer and, therefore, the Assessing Officer had no option but to

make the addition. It was also emphasised by the Ld. C.I.T. DR

that a special audit u/s 142(2A) of the Act had been ordered by

the Revenue in the case of the assessee and even the special

ITA 1015 & 1779/D/2015 Assessment year 2008-09

auditor appointed by the department had stated in the audit

report that the assessee had not provided the relevant

information, explanation, reference, documents, clarification and

evidences as were required for the purpose of carrying out the

special audit. The Ld. CIT DR also referred to the order of the

Assessing Officer and pointed out that the Assessing Officer had

provided reasonable opportunity to the assessee for furnishing

the relevant details pertaining to the annual maintenance

contract but the assessee had not submitted any particulars and

neither had submitted any supporting evidence to substantiate

that the equipment purchased did not have any element of

royalty embedded therein and further that the assessee could

demonstrate that the payment of AMC charges did not constitute

payment towards fee for technical services. The Ld. CIT DR

submitted that the disallowance had rightly been made and that

even the Ld. DRP had rejected the assessee’s objections in this

regard and had held that the assessee had failed to discharge the

onus cast upon it and, therefore, the provisions of section 40A(ia)

were applicable in the case of the assessee.

3.2.0 With respect to ground no. 3, the Ld. AR submitted

that this ground pertained to disallowance of non-taxable

ITA 1015 & 1779/D/2015 Assessment year 2008-09

allowances amounting to Rs. 2,60,90,328/- paid to expatriates.

The Ld. AR submitted that the assessee had entered into Master

Service Agreement (MSA) with AT&T Communication Services

International Inc, USA for provision of market research,

administrative support and liaison services and other support

services. It was submitted that the copy of the Master Service

Agreement was submitted before the Assessing Officer and was

also now part of the paper book submitted by the assessee before

this Tribunal. The Ld. AR further submitted that for the

provision of some of these services, the assessee had employed

senior expatriate employees and since these expatriates were to

be paid directly by transfers in the overseas bank account of

such expatriates, the assessee had entered into disbursing

agency agreement with AT&T Worldwide Personnel Services Inc.

which was an entity incorporated in the United States under

which the salary payable by the assessee to such expatriate

employees was disbursed to AT&T Worldwide Personnel Services

Inc. which credited the same to the foreign bank account of the

expatriates outside India. It was also submitted that during the

year under consideration, the assessee had reimbursed an

amount of Rs 3.90 crores for salary and other costs paid by AT&T

ITA 1015 & 1779/D/2015 Assessment year 2008-09

Worldwide Personnel Services Inc. whereas as per the returns of

income of the expatriates, the taxable salary returned by them

amounted to Rs. 1.29 crore. It was also submitted that cost + 8%

was charged in this regard. The Ld. AR submitted that the

Assessing Officer, on the basis of the special audit report, noted

that the amount offered to tax in the returns of income of the

expatriates and Form 16 issued to them reflected only Rs. 1.29

crore as against the payment of Rs. 3.90 crores made by the

assessee to M/s AT&T Worldwide Personnel Services Inc. and,

therefore, the differential amount was disallowed by the

Assessing Officer on the ground that the assessee had not

submitted any reconciliation statement to justify that the

differential amount represented non-taxable component of the

expatriate salary. It was also submitted that the Assessing

Officer had alleged that the assessee could not substantiate that

the impugned payment/s had been made only with respect to the

business activity of the assessee. The Ld. AR submitted that the

assessee had issued employment letters to three expatriates

namely Mr. Mark Shine, Mr. VS Gopinath and Mr. Richard

McComick. It was also submitted that the assessee had

submitted documents like copy of master service agreement, copy

ITA 1015 & 1779/D/2015 Assessment year 2008-09

of Disbursing Agency Agreement, copies of approval letters issued

by RBI, copy of invoices raised by AT&T Worldwide Personnel

Services Inc., copies of Form 16 issued by the assessee to the

expatriates, copies of employment letters issued to the

expatriates, etc. before the Assessing Officer in support of its

claim and contention. The Ld. AR also drew our attention to the

copies of these documents placed in the paper book filed by the

assessee before this Tribunal. The Ld. AR also submitted that

the difference in the taxable salary returned by the expatriates

and the payments made by the assessee also included

expenditure for travel, accommodation, lodging etc. of these

expatriates which, though, did not form part of the taxable

income, were reimbursed to the AT&T Worldwide Personnel

Services Inc. nevertheless. It was submitted that the assessee

was under an obligation to reimburse other payments and costs

incurred by these expatriates although they might not have been

taxable under the provisions of the Income Tax Act and,

therefore, the discrepancy in the two amounts was visible bu

allowable.

3.2.1 In response, the Ld. C.I.T. DR submitted that the Ld.

DR has noted that the assessee had, neither before the special

ITA 1015 & 1779/D/2015 Assessment year 2008-09

auditors nor before the Assessing Officer and nor even before the

DRP, submitted particulars of non-taxable allowances. The Ld.

C.I.T. DR pointed out to the observation of the Ld. DRP in Para

5.4.1 of its directions that the assessee had not submitted any

reconciliation statement to justify its claim that the differential

sum of Rs. 2,60,90,328/- actually represented non-taxable

component only. It was submitted that in view of the failure of

the assessee to substantiate its claim, the assessee was not

entitled to make the claim.

3.3.0 With respect to ground no. 4 of the assessee’s appeal

challenging the disallowance of gratuity liability of employees

transferred to AT&T GNS amounting to Rs. 48,51,041/-, the Ld.

AR submitted that the Assessing Officer disallowed this amount

alleging that the liability was transferred to AT&T GNS and had

not paid been paid the employees directly. It was further

submitted that the Assessing Officer had alleged that AT&T GNS

had not paid this amount to the employees even on their

resignation from the assessee company and, therefore, the

transfer of such sum by the assessee to AT&T GNS cannot be

treated as an allowable expenditure. The Ld. AR submitted that

the assessee company had made payment of gratuity to AT&T

ITA 1015 & 1779/D/2015 Assessment year 2008-09

GNS which was duly recorded as a liability in the books of

account of AT&T GNS. It was further submitted that the

payment had been made through bank which was evidenced

through the bank statement. It was further submitted that the

transferred employees continued with their employment with

AT&T GNS and, therefore, the question of AT&T GNS making the

payment of gratuity to such employees at the time of their

resignation did not arise at all. It was emphasised that the

liability for making the payment of gratuity amount by AT&T GNS

to the transferred employees would arise only at the time of

termination of their employment with AT&T GNS. The Ld. AR

also drew our attention to the copies of consent letters for six

employees (on sample basis) which evidenced the consent of the

employees on the terms of transfer which were duly submitted

before the Assessing Officer and were now also in the paper book

filed by the assessee. The Ld. AR also submitted that four

employees out of the transferred employees had resigned from

AT&T GNS and their gratuity amount transferred from the

assessee had been duly paid to them by AT&T GNS and had not

been claimed by that company as an expenditure in its return of

income. It was also submitted that this fact was also submitted

ITA 1015 & 1779/D/2015 Assessment year 2008-09

before the Assessing Officer but was not given due credence by

him. The Ld. AR also submitted that the provisions of Section

43B of the Act do not postulate that the payment of gratuity

should be made directly to the employees and it does not provide

a bar on the deductibility of the gratuity amount where such

gratuity is paid to another concern to which the employees have

been transferred. Reliance was also placed on the judgment of

the Hon’ble Apex Court in the case of W.T. Suren & Co. reported

in 230 ITR 643 (SC) wherein it had been held that in case of

transfer of employees by one company to another, gratuity

liability relatable to the transferred employees and paid to the

transferee company was to be allowed as a deduction to the

transferor company in the year of payment of the amount to the

transferee company.

3.3.1 In response, the Ld. CIT DR submitted that the

Assessing Officer had duly considered the ratio of the judgment

of the Hon’ble Apex Court in the case of W.T. Suren & Co. Vs. CIT

(supra) and had, thereafter, reached the conclusion that the facts

in the assessee’s case were distinguishable. The Ld. CIT DR also

submitted that in terms of provisions of section 40A(7) and in

view of the judgement of the Hon’ble Apex Court in the case of

ITA 1015 & 1779/D/2015 Assessment year 2008-09

Shree Sajjan Mills Limited (1986) 156 ITR 85 (SC), deduction for

gratuity payment cannot be allowed on general principles under

any other section of the Act. The Ld. CIT DR submitted that a

perusal of the consent letters would show that there is no

termination of employees by the assessee and the employees have

been transferred to AT&T GNS. The Ld. CIT DR also drew our

attention to the directions of the Ld. DRP, as contained in Para

4.6.3 of its directions, that the assessee had not been

forthcoming in bringing out the relevant facts on record to

facilitate the adjudication of the issue. The Ld. C.I.T. DR

submitted that the disallowance had been correctly made and the

same should be upheld.

3.4.0 With respect to ground no. 5 pertaining to prior period

expenses amounting to Rs. 38,55,230/-, the Ld. AR submitted

that this ground was not being pressed. Accordingly, this ground

is dismissed as not pressed.

3.5.0 Ground no. 6 of the assessee’s appeal pertains to

disallowance of differential mount of mark-up leading to an

addition of Rs. 37,79,795/-. The Ld. AR submitted that AT&T

Global Networks Services India Private Limited, a group company

of the assessee had commenced its business operation during

ITA 1015 & 1779/D/2015 Assessment year 2008-09

financial year 2005-06 and it did not have its own support-

service functions like tax, legal, HR etc. whereas the assessee,

which was in operation for more than 10 years, had a fully

developed support-service functions. It was further submitted

that in view of this, the assessee entered into the support-service

agreement with AT&T Global Networks Services India Private

Limited for providing these support services. It was submitted

that as per the support service agreement, no mark-up was

required to be charged on the support service charges. It was

further submitted that all the same, the assessee had charged a

mark-up of 8% on the cost of support services charges billed to

AT&T Global Networks Services India Private Limited. However,

the Assessing Officer proposed a mark up of 18.07% which was

reduced to 12.85% by the Ld. DRP against which the assessee

was in appeal. The Ld. AR submitted that this issue was covered

in favour of the assessee by the order of the ITAT in assessee’s

own case for subsequent assessment year i.e. 2010-11 in ITA No.

1016/Del/2015. Our attention was drawn to Para 16 of this

order dated 15.02.2018 and it was submitted that the ITAT had

deleted an identical addition in that year. It was further

ITA 1015 & 1779/D/2015 Assessment year 2008-09 submitted that this incorrect addition on account of mark-up was

not sustainable in law.

3.5.1 In response, the Ld. C.I.T. DR submitted that the

purpose of the assessee to charge mark-up at a lower rate was to

lower the taxable income. It was also submitted that the

differential mark up had been determined by the TPO by

comparing it to the expenses charged to AT&T Communication

Services International Inc. (US) and, further, the assessee had

failed to point out the differences between the services provided

to AT&T Communication Services International Inc. (US) and to

AT&T Global Networks Services India Private Limited or the

difference in business expediency and, therefore, the addition

had been rightly made.

3.6.0 With respect to ground no. 7 pertaining to addition on

account of notional interest income not charged from AT&T

Global Networks Services India Private Limited, leading to

addition of Rs. 2,46,141/- , the Ld. AR submitted that ground

was identical/consequential to the adjudication of ground no. 6

and the arguments also would remain the same.

3.6.1 In response, the Ld. C.I.T. DR placed reliance on the

findings of the Assessing Officer/TPO and the directions of the

ITA 1015 & 1779/D/2015 Assessment year 2008-09

Ld. DRP in this regard and submitted that it was a strong case

for applying notional interest in the case of the assessee.

3.7.0 With respect to ground no. 8 pertaining to addition on

account of certain expenses incurred on behalf of the expatriates

leading to an addition of Rs. 15,45,155/-, the Ld. AR submitted

that this ground was not being pressed. Accordingly, this ground

is dismissed as not pressed.

3.8.0 With respect to ground no. 9 pertaining to addition on

account of notional profit on transfer of business to AT&T Global

Networks Services India Private Limited leading to an addition of

Rs. 7,92,00,000/-, the Ld. AR submitted that the assessee had

entered into a contract with Videsh Sanchar Nigam Limited

(VSNL) for providing telecommunication services to the customers

of AT&T in India. It was further submitted that the assessee had

engaged VSNL as all the necessary corporate and legal approvals

to offer such services were available with VSNL. The Ld. AR

submitted that the assessee was acting as a service support

organisation for VSNL which was responsible for marketing of

AT&T Global Networks Services in India to the customers of the

assessee pursuant to the agreement entered into between the

AT&T Worldwide Telecommunication Services Singapore Pvt. Ltd.

ITA 1015 & 1779/D/2015 Assessment year 2008-09

Our attention was drawn to the copy of agreement placed in the

paper book in this regard. It was also submitted that this

agreement had been submitted before the Assessing Officer also.

It was further submitted that the revenue earned by the assessee

from the rendition of services to the customers of VSNL was

accounted for under the network connectivity services business

segment. It was further submitted that during the year under

consideration, another group entity i.e. AT&T Global Networks

Services India Private Limited commenced its business operation

and this entity had obtained international long distance, national

long distance and internet services licence and had also

commenced providing international long distance services.

Accordingly, network services were, thereafter, provided by AT&T

Global Networks Services India Private Limited instead of VSNL.

It was also submitted that subsequently the support services

agreement with VSNL was terminated and the assessee stopped

providing services to the customers of VSNL. The Ld. AR

submitted that there was no transfer of business but termination

of contract with VSNL as the connectivity services being provided

by the VSNL were no longer required by the assessee. This led to

the revenues being earned by the assessee from rendition of

ITA 1015 & 1779/D/2015 Assessment year 2008-09

support services of VSNL being reduced. It was further

submitted that the Assessing Officer noted that there was a

reduction in revenue from network connectivity services segment

from Rs. 62.30 crores to Rs. 7.11 crore and, thereafter, the

Assessing Officer alleged that the assessee had transferred assets

as well as employees to AT&T Global Networks Services India

Private Limited leading to reduction in revenues and further that

there was a transfer of business. The Ld. AR further submitted

that it was the allegation of the Assessing Officer that the

assessee should be entitled to certain additional compensation

from AT&T Global Networks Services India Private Limited.

Accordingly, the Assessing Officer applied profit percentage and

determined an amount of Rs. 7,90,00,000/- to be added to the

assessee’s income. The Ld. AR argued that there was no transfer

of business by the assessee but only termination of the support

service agreement with the VSNL which led to the decrease in

revenue income. He drew our attention to the notes on account

forming part of the financial statements of the assessee company

(which is placed in the paper book filed by the assessee) wherein

it has been specifically mentioned that the assessee company had

discontinued services being provided to various customers under

ITA 1015 & 1779/D/2015 Assessment year 2008-09

services agreement with VSNL. It was submitted that the

question of receiving any consideration from AT&T Global

Networks Services India Private Limited does not arise. It was

also submitted that there was no provision under the Act which

provides for imputing consideration in the hands of the taxpayer

on account of transfer of business despite there being no transfer

of business. It was submitted that there was no transfer of

employees as alleged by the Assessing Officer and further no

assets had been transferred by the assessee and, therefore, this

addition was not sustainable.

3.8.1 In response, the Ld. C.I.T. DR submitted that the Ld.

DRP had observed that the setting up of a new company under

the name of AT&T Global Networks Services India Private Limited

was not devoid of any planned exercise and that it was only due

to such restructuring of such business activities that the

assessee had terminated its agreement with the VSNL. The Ld.

C.I.T. DR also placed reliance on the observations of the Ld. DRP

that the cancellation of contract with VSNL by the assessee was

not a standalone activity as it involved shifting of 29 employees

as well as transfer of relevant assets to the tune of Rs.

6,71,57,014/- (being the written down value) and, therefore, it

ITA 1015 & 1779/D/2015 Assessment year 2008-09 was obvious that there was a transfer of business. The Ld. C.I.T.

DR also emphasised the fact that the assessee had not brought

full facts of the transaction on record and that since by this

arrangement the income of the taxpayer had substantially

reduced, the proposed addition was to be upheld.

3.9.0 With respect to ground no. 10 pertaining to

disallowance of Rs. 1,26,30,579/- pertaining to the year-end

provisioning, the Ld. AR submitted that the assessee follows

mercantile system of accounting and during the year under

consideration, provision amounting to Rs. 7.12 crore had been

created. It was further submitted that invoices aggregating to Rs.

5.27 crore along with extract of bank statement/s evidencing

payment of such invoice in the immediately succeeding financial

year were also submitted before the Assessing Officer and out of

the remaining provision of Rs. 1.84 crore, additional evidences

were submitted for provision of Rs. 0.09 crore with respect to

foreign exchange fluctuation loss and of Rs. 0.49 crore created for

lease equalisation. It was submitted that the Assessing Officer

disallowed the balance amount of Rs. 1.26 crore on the ground

that no documentary evidences were furnished with respect to

reversal of these provisions in the subsequent year. The Ld. AR

ITA 1015 & 1779/D/2015 Assessment year 2008-09

submitted that the assessee had been able to produce

documentary evidences supporting payment of more than 80% of

the expenses represented by year end provisioning and it

substantiated the fact that even the balance provisioning would

not have been created without a reasonable basis and, therefore,

no disallowance could have been made in this regard. The Ld.

AR also submitted that this issue was covered in favour of the

assessee by order of the ITAT Delhi Bench in assessee’s own case

for assessment year 2010-11 (vide ITA No. 1016/Del/2015 dated

15.2.2018) wherein the issue had been decided in favour of the

assessee vide Para no. 25 and 26 of the said order.

3.9.1 In response, the Ld. C.I.T. DR drew our attention to

the comments of the special auditor in this regard that no details

had been filed by the assessee and further that the Ld. DRP had

partially allowed the assessee’s claim. The Ld. C.I.T. DR

submitted that no further relief was required to be allowed to the

assessee.

3.10.0 With respect to ground no. 11 pertaining to short

credit in respect of tax deducted at source, ground no. 12 relating

to non-grant of full credit in respect of advance tax, both the

parties agreed that suitable directions may be given to the

ITA 1015 & 1779/D/2015 Assessment year 2008-09 Assessing Officer to allow full credit to the taxpayer after due

verification.

3.11.0 With respect to ground no. 13 pertaining to levy of

interest u/s 234B and 234D of the Act, ground no. 14 pertaining

to withdrawal of interest under section 244A of the Act, both the

parties agreed that these grounds were consequential.

3.12.0 With regard to ground no. 15 pertaining to initiation of

penalty proceedings u/s 271(1)(c), the ld. AR fairly agreed that

this ground was premature in the quantum proceedings.

4.0.0 Arguing for the department’s appeal in ITA No.

1779/Del/2015, the Ld. CIT DR submitted that the sole ground

under challenge was the direction of the Ld. DRP in directing

deletion of addition of Rs. 98,63,013/- on account of tax

deposited on behalf of the expatriate employees and margin

thereof not charged under MSA as the assessee had recovered

the said amount from AT&T WPS. The Ld. C.I.T. DR submitted

that the special auditor had stated that while remitting the

amount of salaries of the expatriates, tax had not been deducted

and, therefore, by reason of such non-deduction of taxes, such

amount has been shortly charged under the Mutual Services

Agreement. The Ld. C.I.T. DR also drew attention to the

ITA 1015 & 1779/D/2015 Assessment year 2008-09

observations of the Assessing Officer that no reconciliation or any

corroborative evidence had been filed by the assessee in this

regard and, therefore, the assessee’s contention that such

amount has been charged under the mutual services agreement

is not tenable.

4.0.1 In response, the Ld. AR submitted that the tax and the

liability were paid by the assessee in the month of July 2008.

Our attention was drawn to the copy of challans evidencing the

payment of the same and attached as Annexure to the written

submissions filed before the Bench. He also drew our attention

to copy of bank statements in this regard. He also drew our

attention to the directions of the Ld. DRP as contained in Para

11.4 of its directions wherein it has been duly noted that the

since taxpayer has borne the tax to the extent of income offered

for taxation in India by such expatriate employees in India and

the balance tax payable in the home country is borne by the

employee/s concerned, the addition was not warranted. The Ld.

AR submitted that in view of the factual finding recorded by the

Ld. DRP, the department’s challenge to the deletion does not

stand.

ITA 1015 & 1779/D/2015 Assessment year 2008-09 5.0 We have heard the rival submissions and perused the

material available on record. We now take up the appeals one by

one. First we take up the assessee’s appeal no. 1015/Del/2015.

5.1 Ground no. 1 is dismissed as not pressed.

5.2.0 Ground no. 2 challenges the addition of Rs.

1,46,84,844/- on account of maintenance charges paid to CISCO

Systems International BV. This disallowance has been made on

the ground of the assessee’s failure to deduct tax at source. It

has been submitted by the Ld. AR that no identical disallowance

had been made either in the preceding or subsequent assessment

years and the department has accepted the annual maintenance

charges paid to CISCO Systems International BV in these years

but has given an altogether new dimension to the issue by taking

a view that annual maintenance charges paid were in the nature

of fee for technical services and that the payment for purchase of

machinery had an element of royalty in it and, therefore, the

assessee was liable to deduct tax at source prior to making

payment for the annual maintenance charges. The Ld. AR has

referred to voluminous documents claiming to have been filed

before the lower authorities in this regard which include

agreements, invoices and FAQs issued by CISCO. It has already

ITA 1015 & 1779/D/2015 Assessment year 2008-09

been submitted by the Ld. AR that these documents were entirely

disregarded by the lower authorities and even the submissions of

the assessee were not considered. It has been emphasised by the

Ld. AR that the annual maintenance contract was for the

purpose of providing regular maintenance services and it did not

have any element of ‘make available’. On the other hand, it is the

contention of the department that no details were filed before the

Assessing Officer and a reference has also been made to the

comments contained in the special audit report wherein it has

been mentioned that the assessee had not cooperated during the

proceedings of special audit. It has already been pointed out by

the Ld. C.I.T. DR that even the Ld. DRP has taken note of non-

compliance by the assessee during the course of special audit

and further that the relevant documents in respect of this claim

were not furnished before the lower authorities. Thus, the stand

of the department and the assessee is contrary on the factual

aspect of the issue i.e. as to whether the assessee had provided

the relevant details and documents before the Assessing Officer

or not. Looking into the facts of the case and in the interest of

justice, it is our considered opinion that the issue should be re-

examined by the Assessing Officer specially in the light of claim

ITA 1015 & 1779/D/2015 Assessment year 2008-09 of the assessee that the assessee had submitted voluminous

documents and explanations before the Assessing Officer which

had not been given due credence by the Assessing Officer.

Accordingly, the issue of payment of annual maintenance charges

paid to CISCO System International BV stands restored to the file

of the Assessing Officer with the direction to the Assessing Officer

to re-examine the issue and pass appropriate orders in

accordance with law after giving due opportunity to the assessee

to present its case. We also direct the assessee to cooperate with

the assessing authority and furnish all the relevant details and

documents when called upon to do so by the Assessing Officer

failing which the Assessing Officer shall be at liberty to proceed

ex parte qua the assessee and pass appropriate orders in

accordance with law.

5.2.1 Ground no. 2 stands allowed for statistical purposes.

5.3.0 Ground No. 3 challenges the disallowance of Rs.

2,60,90,328/- being non-taxable allowances paid to the

expatriates. This addition pertains to the differential amount

which the assessee had paid to AT&T Worldwide Personnel

Services Inc. being a sum of Rs. 3.90 crore being salary and other

expenses paid to expatriates outside India and the taxable salary

ITA 1015 & 1779/D/2015 Assessment year 2008-09

returned by the expatriates amounting to Rs. 1.29 crore. In this

regard, the assessee has submitted copies of Master Service

Agreement and has also submitted that cost plus mark-up of 8%

had been charged in this regard. It has also been submitted that

the entire cost has been recovered by the assessee as income

along with mark-up. The Ld. AR has also submitted that the

difference between the two amounts was on account of expenses

incurred on behalf of the expatriates which were in the nature of

reimbursements and were not in the nature of salary which

would fall within the ambit of taxability under the Indian Income

Tax Act. It has been submitted that Form 16 had been issued to

the expatriates only for the amount/s which had been paid as

salary and, therefore, the difference arose. The Ld. C.I.T. DR has

emphasised that the invoices submitted by the assessee in this

regard were not specific and clear so as to verify the claim of the

assessee in this regard. The Ld. C.I.T. DR has also referred to the

observations of the Ld. DRP on the issue wherein it has been

noted by the Ld. DRP that the assessee did not submit any

reconciliation statement to justify its claim that the differential

sum of Rs. 2,60,90,328/- actually represented the non-taxable

component. The Ld. C.I.T. DR, however, has submitted that the

ITA 1015 & 1779/D/2015 Assessment year 2008-09 matter could be re-examined by the Assessing Officer.

Accordingly, in view of the divergent claims of both the parties

regarding the factual aspect of the issue and in the interest of

justice, we deem it fit to restore this issue also to the file of the

Assessing Officer with the direction to the Assessing Officer to re-

examine the issue and pass appropriate orders in accordance

with law after giving due opportunity to the assessee to present

its case. We also direct the assessee to cooperate with the

assessing authority and furnish all the relevant details and

documents when called upon to do so by the Assessing Officer

failing which the Assessing Officer shall be at liberty to proceed

ex parte qua the assessee and pass appropriate orders in

accordance with law.

5.3.1 Ground No. 3 stands allowed for statistical purposes.

5.4.0 Ground no 4 of the assessee’s appeal challenges the

disallowance of gratuity amounting to Rs. 48,51,041/- pertaining

to employees who have been transferred from AT&T Global

Network Services India Pvt. Ltd. It is seen that the disallowance

has been made on the ground that it is just a transfer of liability

from the assessee company to AT&T Global Network Services

India Pvt. Ltd. and it is not an actual payment to the employees

ITA 1015 & 1779/D/2015 Assessment year 2008-09

directly on their attaining superannuation or in the event of their

resignation. It has been submitted by the Ld. AR that the

assessee company has made the payment of gratuity liability to

AT&T Global Network Services India Pvt. Ltd. which was recorded

as a liability in the books of accounts of that company. Reliance

has also been placed on the evidence in the form of bank

statement which evidenced the payment of the impugned amount

to the other company. It has also been submitted that since the

transferred employees continued their employment with the other

company, therefore, the question of AGNS making payment to

such employees at the time of their resignation/superannuation

does not arise. It has also been emphasised that out of the

transferred employees, four employees resigned from AT&T

Global Network Services India Pvt. Ltd. and their gratuity amount

had been duly paid by that company but had not been claimed as

a deduction by that other company in its return of income. Apart

from this, reliance has been placed on the judgment of Hon’ble

Apex Court in the case of W.T. Suren & Co. Ltd. (1988) 230 ITR

643 (SC) for the proposition that where the employees are

transferred from one unit to another with continuity of services,

payment of gratuity to transferee could be allowed as deduction

ITA 1015 & 1779/D/2015 Assessment year 2008-09

in the hands of the assessee. On the other hand, it is the

contention of the department that the Ld. DRP has noted that the

taxpayer had not been forthcoming in bringing out the relevant

facts on record to enable adjudication of the issue in proper

perspective. It has been noted by the Ld. DRP that in the

absence of relevant facts, it could not be said that the impugned

amount had become payable during the year under consideration

and was therefore allowable u/s 40 A(7)(b) of the Act. The Ld.

DRP has also noted that the judgment of the Hon’ble Apex Court

in the case of W.T. Suren & Co. Ltd. (supra) pertained to the

1922 Act in which there was no provision equivalent to section

40A(7) of the 1961 Act. On an overall consideration of the

facts, especially in view of the submissions of the Ld. AR that no

deduction has been claimed by the transferee company in this

regard and further the payment of gratuity of transferred

employees had been paid through banking channels which could

be evidenced from the bank statement coupled with the fact that

the Ld. DRP has noted that the taxpayer had not been

forthcoming in bringing relevant facts on record to facilitate the

adjudication, in our considered opinion, ends of justice would be

met if this issue is also restored to the file of the Assessing Officer

ITA 1015 & 1779/D/2015 Assessment year 2008-09 for examining them afresh and thereafter passing an order in

accordance with law. We deem it fit to restore this issue also to

the file of the Assessing Officer with the direction to the Assessing

Officer to re-examine the issue and pass appropriate orders in

accordance with law after giving due opportunity to the assessee

to present its case. We also direct the assessee to cooperate with

the assessing authority and furnish all the relevant details and

documents when called upon to do so by the Assessing Officer

failing which the Assessing Officer shall be at liberty to proceed

ex parte qua the assessee and pass appropriate orders in

accordance with law.

5.4.1 Accordingly, ground no. 4 stands allowed for statistical

purposes.

5.5.0 With respect to ground no 5 pertaining to disallowance

of prior period expenses, since it has been submitted by the Ld.

AR that this ground is not being pressed, the same is being

dismissed as not pressed.

5.6.0 With respect to ground no. 6 which pertains to

disallowance of differential amount of mark-up with respect to

services provided by the assessee to AT&T Global Network

Services India Pvt. Ltd. leading to an addition of Rs. 53,15,246/-

ITA 1015 & 1779/D/2015 Assessment year 2008-09 and ground no. 7 pertaining to addition of Rs. 2,46,141/- being

addition on account of notional interest income not charged from

AT&T Global Network Services India Pvt. Ltd., it is seen that both

these issues are covered in favour of the assessee by the order of

the Tribunal in assessee’s own case for assessment year 2010-11

in ITA No. 1016/Del/2015. Vide order dated 15th February,

2018, an identical issue has been discussed and adjudicated by

the Coordinate Bench of the Tribunal in paragraphs 10 to 16

which are being reproduced hereunder for ready reference:-

“10. The AO made addition of Rs.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 Act to impute notional income for domestic transactions and moreover transfer pricing provision as has been amended by the Finance Act, 2012 specifically to cover the domestic transactions, however

ITA 1015 & 1779/D/2015 Assessment year 2008-09 w.e.f. April 1,2013, and would not be applicable to the transaction prior to April 1, 2013; that no mark up is applicable and required to be charged on the support services charges paid by AGNSI to ACSI as is duly explained in the agreement between ACSI and AGNS; that it was decided between the parties that no mark up is charged by ACSI on the support service charges billed to AGNS and recovery should be made on cost to cost basis as per agreement; that commercial expediency of a particular transaction would be examined from the perspective of a businessman; that both AGNSI and the taxpayer are profit making entities and there was no tax incentives for the purpose to deflate the revenues earned by the taxpayer and relied upon the judgment of Hon'ble Apex Court in CIT vs. A. Raman & Company (1968 AIR 49) and the judgment of Hon'ble Allahabad High Court in Smt. Sumanlata Didwania vs. ITO (1986) 17 ITD 830 (All.). 12. However, on the other hand, the ld. DR for the Revenue contended that if something is charged by a company, there must be some agreement that there is no mark up and in this case, no such agreement has been produced and relied upon the order passed by the AO/DRP. 13. Undisputedly, the taxpayer as well as AGNSI, its group company are profit making entity and there is no tax incentive for the purpose to deflate the revenues earned by the taxpayer. Even in case higher amount have been charged by the taxpayer from AGNSI, no added tax advantage is being availed by the taxpayer by charging support services cost from AGNSI at cost to cost basis without any mark up. 14. Issue of non-charging of mark up on support services being built up to AGNSI has come up in the appeal for AGNSI for AY 2008-09 to AY 2011-12 wherein the Revenue has raised a ground that such support services expenditure should be disallowed in the books of account of AGNSI. 15. The coordinate Bench of the Tribunal in case of AGNSI for AY 2009-10 in ITA No.2538/Del/2014 upheld the

ITA 1015 & 1779/D/2015 Assessment year 2008-09 decision rendered by the ld. DRP in favour of the assessee on identical issue by returning the following findings :- "75. We have carefully considered the rival contentions and perused the facts 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 the cost from ACSI to appellant no added tax advantage is being availed by appellant. We are also of the view that commercial expediency of a particular expenditure incurred by a businessman should be examined from the perspective of the business person and no third party, including the tax authorities, is entitled to question the commercial reasoning/ justification of the expenditure so incurred. Reliance in this regard is placed on the following judicial precedents furnished by the assessee: i. CIT v. Panipat Woollen & General Mills Co Ltd (103 ITR 66) (Supreme Court) ii. CIT v. Sales Magnesite (P) Ltd [1995) 214 ITR 1 iii. Binodiram Balchand vs. Commissioner of Income Tax (48 1TR 548) iv. Calcutta Landing and Shipping Co Ltd vs. CIT (65 ITR 1) (Cal High Court) v. CIT Vs B Dalmia Cement Ltd (254 ITR 377)

ITA 1015 & 1779/D/2015 Assessment year 2008-09 76. Respectfully following the principles laid down in the aforesaid judicial precedents, we find that where the appellant has actually incurred the aforesaid support services cost and no evidence has been brought by the Department to controvert the same, such expenditure cannot be disallowed merely on suspicion. We affirm the finding of the ld DRP on this issue. In view of the above, the appeal of the revenue on this ground is dismissed." 16. So, in the instant case also, the Revenue has failed to controvert the invoices, the details of payment made and evidencing the payments thereof to dispute the genuineness of the expenses and the fact that the taxpayer as well as AGNSI are profit making entities and there was no tax incentives for the purpose to deflate the revenues earned by the taxpayer, the Revenue has based its decision on commercial consideration. Moreover, in case of both the resident parties, terms and conditions of the arrangement cannot be questioned by the Revenue unless specifically provided under the Act. In case of a contract by both the parties who are admittedly resident Indian entities, they make the law for themselves which cannot be interfered unless contract 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.” 5.6.1 Therefore, respectfully following the order of the

Coordinate Bench in assessee’s own case for assessment year

2010-11 as aforementioned, we order deletion of addition on

account of notional charging of mark-up as sustained by the Ld.

DRP. On the same reasoning, we allow ground no. 7 also and

ITA 1015 & 1779/D/2015 Assessment year 2008-09 hold that notional interest could not have been charged on this

account and we order deletion of this addition also.

5.6.2 Accordingly, ground nos. 6 and 7 stand allowed.

5.7.0 With respect to ground no. 8 pertaining to addition of

Rs. 15,45,155/- in respect of expenses incurred on behalf of

expatriates, the Ld. AR has submitted that this ground is not

being pressed. Accordingly, ground no. 8 of the assessee’s appeal

stands dismissed as not pressed.

5.8.0 Ground no. 9 pertains to addition of Rs. 7,92,00,000/-

on account of percentage of profit of network connectivity services

which has been added to the income of the assessee on a notional

basis. The main reason behind this addition is the reduction in

revenue of Network Connectivity Services segment from Rs. 62.30

crores to Rs. 7.11 crore for the reason that the assessee had

terminated the support services agreement with VSNL after the

commencement of business of AT&T Global Network Services

India Pvt. Ltd. It is the allegation of the department that the

reduction of revenues under this segment was on account of

termination of the support services. It is a further allegation that

this arrangement and termination of agreement had been

executed by the assessee with a view to reduce its taxable profits.

ITA 1015 & 1779/D/2015 Assessment year 2008-09 In this regard, the Ld. DRP has also noted that the taxpayer has

not explained/brought on record any document either before the

Assessing Officer or before the DRP so as to explain:-

i) Why a new entity namely AT&T Global Network

Services India Pvt. Ltd. was set up by the AT&T Group?

ii) What were the contents of the restructuring exercise of

the AT&T Group operations in India?

iii) If there was any resolution of the Board of Directors on

this issue, what were the contents of the said

resolution?

iv) Whether the clients of the AT&T were informed of the

employee structure or whether they remained under

the impression that the services were being rendered to

them in the same manner by the same entity?

v) Whether the relevant facts were brought to the

knowledge of any competent authority in this regard?

5.8.1 Apart from this, the Ld. DRP has also noted that 29

employees were shifted from the assessee company to AT&T

Global Network Services India Pvt. Ltd. who were performing

relevant activities in this segment and further there was a

transfer of assets to AT&T Global Network Services India Pvt. Ltd.

ITA 1015 & 1779/D/2015 Assessment year 2008-09

from the assessee company to the tune of Rs. 6,71,157,014/-.

However, on the other hand, it is the contention of the assessee

that neither were any employees transferred with respect to this

segment nor were any assets transferred to the other company

with respect to this segment and, therefore, there was no transfer

of business as alleged by the department. Thus, in view of the

contradictory stand of both the parties with reference to the

relevant facts, we have no other option but to restore this issue

also to the file of the Assessing Officer with the direction to the

Assessing Officer to re-examine the issue and pass appropriate

orders in accordance with law after giving due opportunity to the

assessee to present its case. We also direct the assessee to

cooperate with the assessing authority and furnish all the

relevant details and documents when called upon to do so by the

Assessing Officer failing which the Assessing Officer shall be at

liberty to proceed ex parte qua the assessee and pass appropriate

orders in accordance with law.

5.8.2 Accordingly, Ground no. 9 also stands allowed for

statistical purposes.

5.9.0 In respect of ground no. 10 pertaining to disallowance

of year end provisioning amounting to Rs. 1,26,30,579/-, it is

ITA 1015 & 1779/D/2015 Assessment year 2008-09 seen that this issue is also covered in favour of the assessee by

the order of the Tribunal in assessee’s own case for assessment

year 2010-11 in ITA No. 1016/Del/2015. The relevant

observations of the ITAT are contained in Para 17 to 26 and the

same are being reproduced here in under for a ready reference:-

“17. AO disallowed an amount of Rs.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.

Particulars Accruals as on March 31, 2010

Accrual Control Account 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

ITA 1015 & 1779/D/2015 Assessment year 2008-09

" Held, reversing the decision of the High Court, that the valve actuators, manufactured by the assessee, were sophisticated goods and statistical data indicated that every year some of these were found defective; that valve actuator being a sophisticated item no customer was prepared to buy a valve actuator without a warranty. Therefore, the warranty became an integral part of the sale price; in other words, the warranty stood attached to the sale price of the product. In this case the warranty provisions had to be recognized

ITA 1015 & 1779/D/2015 Assessment year 2008-09 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; (b) it is probable that an outflow of resources will be required to settle the obligation, and (c) a reliable estimate can be made of the amount of the obligation. If these conditions are not me, no provision can be recognized.

The principle is that if the historical trend indicates that a large number of sophisticated goods were being manufactured in the past and the facts show that defects existed in some of the items manufactured and sold, then provision made for warranty in respect of such sophisticated goods would be entitled to deduction from the gross receipts under section 37."

ITA 1015 & 1779/D/2015 Assessment year 2008-09 the expenses are required to be allowed in the year of creation itself, particularly, when the Revenue authorities has allowed the entire claim of expenditure in the subsequent years.

5.9.1 In the present appeal also, undisputedly no mistake

has been pointed out by the Assessing Officer in the calculation

and nor is it the case of the Revenue that the taxpayer has not

paid certain bills. It is also undisputed that more than 80% of

the evidence/s for the year end provisioning have been produced

by the assessee and there is no finding by the Assessing Officer

that the provisioning was not reasonable or did not have any

scientific basis. Therefore, respectfully following the law laid

down by the Hon’ble Apex Court in the case of Rotork Controls

India Pvt. Ltd. and also the order of the Coordinate Bench in

assessee’s own case for assessment year 2010-11 as aforesaid,

we order deletion of this addition.

5.9.2 Ground no. 10 accordingly stands allowed.

ITA 1015 & 1779/D/2015 Assessment year 2008-09 5.10.0 Ground no. 11 agitates the action of the department in

allowing short credit in respect of the tax deducted at source and

ground no. 12 agitates non-granting of full credit. We deem it fit

to restore these issues to the file of the AO with a direction to give

due credit to the assessee both in respect of tax deducted at

source and advance tax after due verification at his end. The

Assessing Officer shall also give an adequate opportunity to the

assessee in this regard. Accordingly, ground nos. 11 and 12

stand allowed for statistical purposes.

5.11.0 Ground nos. 13 and 14 pertaining to incorrect levy of

interest u/s 234B and 234D of the Act and withdrawal of interest

under section 244A of the Act are consequential and the AO will

take adequate steps in this regard.

5.12.0 Ground no. 15 challenging the initiation of penalty

proceedings u/s 2712(1)(c) is dismissed as being premature.

6.0 In the result, the assessee’s appeal bearing ITA No.

1015/Del/2015 stands partly allowed for statistical purposes in

light of our specific observations and directions.

7.0.0 We now take up department’s appeal. The only ground

being agitated is the direction of the Ld. DRP in deleting the

addition of Rs. 98,63,013/- on account of taxes deposited on

ITA 1015 & 1779/D/2015 Assessment year 2008-09 behalf of expatriate employees. In this regard, it is seen that the

Ld. DRP has given a categorical finding that the assessee had

borne the taxes to the extent of the income offered for taxation in

India and the balance tax payable in the home country was borne

by the employee/s concerned. The relevant observations of the

Ld. DRP are contained in Para 11.4 of its directions and the same

are being reproduced hereunder for a ready reference:-

“11.4 The Panel has examined the matter. The draft assessment order shows that the AO proposed to disallow the payment (along with mark-up) for the reason that he considered that the taxpayer has borne the expenses of tax of the expat employees and did not deduct the same while reimbursing AT&T WPS. In other words, the AO is of the view that ultimately the employees concerned should have borne the tax expenses rather than the taxpayer and for this reason, the taxpayer should have paid lesser amount to AT&T WPS correspondingly. The AO has not disputed the taxpayer's version that the tax amount of Rs.83,53,530/- has been recovered along with mark-up of 8% from AT&T US in August 2008. The primary argument of the AO has been that the taxpayer has been burdened by the tax of Rs.83,53,530/- which should have been otherwise pertaining to the employees themselves and to that extent, the profits are relatively lesser.

11.4... From the above, it is evident that the taxpayer has borne the taxes to the extent of the income offered for taxation in India by such expat employees in India and the balance tax payable in the home country is borne by the employee concerned. Thus, the view of the AO that the amount of tax borne by the taxpayer should have been reduced while making payment to AT&T WPS is not

ITA 1015 & 1779/D/2015 Assessment year 2008-09 correct as the Indian component of tax has been borne by the taxpayer under a contractual obligation. The Panel further notices that the taxpayer has recovered the said amount from AT&T US in the next year i.e. FY 2008-09 in August 2008 and accordingly, it has not ultimately suffered out go on this account. Thus, the Panel is of the view that the addition proposed by the AO is not on the sound footing. Consequently, when the addition is held to be not warranted, the Panel is of the view that the issue of mark-up on such amount does not require any discussion. The AO is therefore, directed to delete the addition proposed on this account.” 7.0.1 The Ld. CIT DR could not point out any factual

inaccuracy in the directions of the Ld. DRP. Accordingly, we find

no reason to interfere with the finding of the Ld. DRP in this

regard as the ld. DRP has recorded a categorical finding and has

held that even an addition proposed by the Assessing Officer was

not on a sound footing. Therefore, ground no. 1 raised by the

department stands dismissed.

7.1.0 Ground no. 2 is general in nature and does not need

any separate adjudication.

8.0.0 Therefore, the department’s appeal stands dismissed.

9.0.0 In the final result, the appeal of the assessee stands

partly allowed for statistical purposes whereas the appeal of the

department stands dismissed.

ITA 1015 & 1779/D/2015 Assessment year 2008-09

Order pronounced in the open court on 26th March, 2019.

Sd/- Sd/- (R.K. PANDA) (SUDHANSHU SRIVASTAVA) ACCOUNTANT MEMBER JUDICIAL MEMBER

Dated: 26th MARCH, 2019 ‘GS’