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Income Tax Appellate Tribunal, DELHI BENCH “D”: NEW DELHI
Before: SHRI AMIT SHUKLA & SHRI PRASHANT MAHARISHI
O R D E R PER PRASHANT MAHARISHI, A. M.
This appeal is filed by M/s Verizon India private limited (appellant) against the order of The Assistant Commissioner Of Income Tax, circle 17 (1), New Delhi (learned AO or assessing officer) passed on 4/10/2012 u/s 143 (3) read with section 144C of The Income Tax Act, 1961( the Act) in pursuance of the direction of The Dispute Resolution Panel –Ii, New Delhi (learned DRP) dated 20/9/2012 u/s 144C (5) of the act, in objection filed by assessee against draft assessment order dated 26/12/2011.
The assessee has raised following grounds of appeal:- “1. That on the facts and in the circumstances of the case and in law, the orders passed by the Learned Assistant Commissioner of Income-tax, (“Ld. AO”) and the Dispute Resolution Panel („the Panel‟) are bad in law and are void-ab-initio.
2. That on the facts and in the circumstances of the case and in law, the Panel erred in confirming the action of the Ld. AO by alleging that the income from the Indian group company has been Verizon India Pvt Ltd Vs. ACIT (Assessment Year: 2008-09) understated as the entire income of the assessee has correctly been subject to tax in India. 2.1 That on the facts and in the circumstances of the case and in law, the Panel erred in confirming the action of the Ld. AO by arbitrarily applying a margin of 12.82 percent on the operating cost of Rs. 5.661J88 to determine the income of the assessee from the Indian group company at Rs. 63,86,952. 2.2 Without prejudice to the above, that on the facts and in the circumstances of the case and in law, the Panel erred in not appreciating that there is no such provision under the Income Tax Act, 1961 to impute notional profit on such a transaction. 2.3 That on the facts and in the circumstances of the case and in law, the Ld. AO erred in not complying with the directions of the Panel by not reducing Rs. 5,30,352/- (interest for the late deposit of taxes) from the Administrative , and Other Expenses of Rs. 56,61,188/-, before applying the margin, since this has already been offered for tax.
3. That on the facts and in the circumstances of the case and in law, the Panel erred in confirming the action of the Ld. AO by disallowing a part of the travel and conveyance expenses on an ad- hoc basis, despite the relevant facts and evidence and material on record. This is without prejudice to the rectification application filed by the appellant before the Panel to rectify its mistake in not considering the additional evidence filed before it. 3.1 That on the facts and in the circumstances of the case and in law, the Panel erred in not appreciating the fact that the applicant has incurred the aforesaid amount exclusively for the purpose of its business and is an allowable expenditure under Section 37(1) of the Act. 3.2 That on the facts and in the circumstances of the case and in law, the Panel erred in not appreciating the fact that the travel and conveyance expenses have been incurred wholly and exclusively for the purposes of its business in as much as that it has resulted in earning of cost +11% mark-up on account of incurrence of these expenses.
4. That on the facts and in the circumstances of the case & in law, the Panel erred in confirming the proposed order of the Ld. AO making additions of Rs. 6,40,37,615/- made on account of deemed dividend under section 2(22)(e) of the Act. 4.1 That on the facts and in the circumstances of the case and in law, the Panel erred in not appreciating that the sum of Rs. Page | 2 Verizon India Pvt Ltd Vs. ACIT (Assessment Year: 2008-09) 16,73,67,867/- received by the Appellant from its sister concern VCIPL, was an interest bearing loan and was given on account of commercial expediency and hence does not fall within the ambit of Section 2(22)(e) of the Act. 4.2 That on the facts and in the circumstances of the case and in law, the Panel erred in ignoring that the Appellant was not a shareholder of VCIPL during the said assessment year 2008-09, and thus the provisions of section 2(22)(e) of the Act are not attracted in its case. 4.3 That on the facts and in the circumstances of the case and in law, the Panel erred in not directing the Ld. AO to pass orders deleting the additions of Rs. 6,40,37,615/- as deemed dividend, ignoring the fact that no accumulated profits existed in the books of the lender i.e., VCIPL at the beginning of the year. 4.4 That on the facts and in the circumstances of the case and in law, the Panel erred in ignoring the fact that the amount of accumulated profits at the end of the relevant financial year i.e., March 31, 2008, needed to exclude the amount of capital redemption reserve amounting to Rs. 1,90,74,581/- as this is not to be considered as profits available for distribution as a dividend and accordingly, cannot be considered as a deemed dividend, under section 2(22)(e) of the Act.”
Brief facts of the case is that assessee company, appellant, is engaged in providing business support services to other companies in the group, including sales support, marketing, advertisement, IT support and liaison service with locally licensed carrier partners.
It filed its return of income on 30/9/2008 declaring loss of ₹ 5 0462408. As assessee has entered into international transactions, reference was made to the learned Transfer Pricing Officer (The Ld TPO) to determine the arms length price (ALP) of those transactions. The learned TPO passed order under section 92CA (3) of the act on 30/8/2011 and proposed an adjustment of Rs. 22174704/–. Further, the learned AO made an addition of ₹ 1380011/- as estimated margin of 15% on services provided by the assessee as income of the assessee on services shown as other income. Further, the learned AO disallowed 10% of the travelling expenditure amounting to ₹ 1 6108546/– as assessee provided only descriptive explanation about the expenditure without mentioning details Page | 3 Verizon India Pvt Ltd Vs. ACIT (Assessment Year: 2008-09) of domestic and foreign travelling expenses, support, purpose of the travel and expenditure on boarding and lodging et cetera. The learned AO further noted that travelling and conveyance expenditure are unverifiable as to whether the expenditure pertains to the business operations of the assessee. The learned AO further noted that assessee has received advance of ₹ 167367867/– from M/s Verizon communications India private limited as loan. The lender is a subsidiary of Verizon Holdings PVT Ltd, Singapore and similarly the assessee is a subsidiary of that company. Therefore, according to the learned AO provisions of section 2 (22) (e) of the act triggers. He therefore held that according to section 56 (2) (i), the accumulated profit of ₹ 60437651 will be deemed as the dividend under section 2 (22) (e) of the Act. Consequently, the above addition was made per draft assessment order against the returned income of the assessee of loss of ₹ 50462408 proposed assessment was made at Rs. 38740777/– .
The assessee preferred objections before the learned DRP who held that difference between the arms length price determined and the actual price charged by the assessee is less than 5% and therefore, no adjustment was required to be made in respect of international transactions undertaken by the assessee. Further, with respect to addition of applying margin of 15% on the operating cost on other income, it up held above addition, but reduced the margin from 15% to 12.82 % as per the ALP determined by the learned TPO for assessment year 2008 – 09. The learned DRP further directed to reduce the above sum by interest for the late deposit of tax deduction at source after verification. It upheld disallowance of 10% of total travelling and conveyance expenditure and income of deemed dividend. Consequent to the above, the learned AO passed final assessment order under section 143 (3) read with section 144C of the act, making an addition of ₹ 1256597/– on account of an adjustment of margin, 10% disallowance out of the travelling and conveyance expenditure of ₹ 1610855/– and addition on account of Verizon India Pvt Ltd Vs. ACIT (Assessment Year: 2008-09) deemed dividend of ₹ 6 4037615/–. The income was assessed at ₹ 1 64442659/- against the returned loss of ₹ 5 0462408/. Aggrieved by this assessment order assessee is in appeal before us. Only 3 issues are agitated in this appeal in substance which are as under:- a. addition of ₹ 1256597/– on account of operating margin added by the learned assessing officer on support services provided by the assessee to its group concern b. disallowance at the rate of 10% of travelling and conveyance expenditure c. addition on account of deemed dividend of ₹ 64037615/- 6. Ground number 1 of the appeal is general in nature and therefore it is dismissed.
Now we come to the first issue involved in this appeal of addition of ₹ 1256597/–. It is agitated by assessee as per ground number 2 of the appeal. The brief facts of the issue involved are that vide letter dated 19/12/2011, assessee submitted that other income shown of ₹ 5130355/– includes an amount of ₹ 39 lakhs received from Verizone communications India private limited for providing administrative services and remaining amount is received from other group companies for services provided to them. The assessee submitted that entire amount has been included in the total income of assessee and accordingly offered to tax. During the year under consideration, on appreciation of this submission, the learned AO noted that assessee is in the business of providing support services to the group companies in India and overseas. The entire services provided in India are to its group companies and significant portion of which is to Verizon communications India private limited. It was noted by him that TP order of the learned Additional Director of Income Tax (TPO) dated 30/8/2011 margin on services is considered at 15 % of the cost. In these services provided assessee has not shown any mark up so the ld AO took the cost of local overheads amounting to ₹ 5 661188 other than exchange fluctuation. The income against these expenses from the group companies, as reflected in the Verizon India Pvt Ltd Vs. ACIT (Assessment Year: 2008-09) profits and profit and loss account of the assessee is credited only of ₹ 5 130355/–. Therefore, the learned AO noted that income has not been correctly reflected in the books of accounts of the assessee. The learned AO further noted that it is evident from the fact that Assessee Company is providing a wide range of services to the group company. As per service agreement, dated 25/2/2005 Group Company is running its operations with no employees and the income received by the assessee company from the group company has not been correctly recorded. Therefore, applying the provisions of section 145 of the act, The learned AO noted that gross operating cost shall further be increased by a margin of 15% which equals to the total cost of the assessee of ₹ 5 661188 and with 15% margin thereon comes to ₹ 6 510366/–. Therefore, the assessing officer noted that the assessee should have booked the total income of ₹ 6 510366/– against the income recorded by the assessee of ₹ 5 130355/–. Therefore, he proposed an addition of ₹ 1 380011/– to the total income of the assessee. The learned DRP rejected the objection of the assessee and held that for assessment year 2008 – 09, it is evident that the assessee company was underestimating the income received from its associated enterprise. However, as the learned transfer pricing officer estimated the margin at the rate of 12.82 percent thereon. The learned DRP held that the margin adopted of 15% by the learned TPO /AO is on higher side. Therefore, the learned DRP directed AO to reduce the margin to 12.82 %. Consequently, the learned AO made an addition of ₹ 1 256597/–. Further with respect to a sum of ₹ 5 30352/–, DRP further directed the learned AO to verify whether the above amount is interest for the late deposit of tax deduction at source or not. This was not considered by the learned AO in final assessment order. Therefore, assessee is aggrieved and contesting the above addition vied ground number 2 of the appeal.
The learned authorized representative submitted that Verizon India Pvt Ltd Vs. ACIT (Assessment Year: 2008-09) a. Transaction is not an international transactions but between two domestic AES. b. There is no evidence that assessee has received much more than whatever is recorded in the books of accounts. c. Provisions of section 145 have been invoked without jurisdiction. d. AO has not given any opportunity to the assessee.
The learned DR vehemently supported the order of the learned AO and the learned DRP. He submitted that when there is an agreement , assessee is charging margin of 12.82% (ALP) on services provided by it to the AEs the identical amount of margin should have also been charged by the assessee from the sister concern, even though services are provided to any Indian company. He therefore submitted that correct amount of revenue has not been recorded by the assessee and hence the addition has rightly been made.
We have carefully considered the rival contentions as well as perused the order of the lower authorities. The assessee has credited Rs. 51, 30, 355/- in the profit and loss account as other income. On enquiry, it was found that the above sum is received for service fee from associated enterprises situated in India. The learned assessing officer noted that assessee has provided services in terms of agreement dated 25/2/2005. The company, which is receiving the above services, is also running its operation with no employees. Therefore, the learned AO held that the total cost incurred by the assessee is ₹ 5 661188/–, assessee should have earned Mark up on the above cost. The assessee has not shown any markup. Hence, ld AO computed mark up of 15 % and made addition of difference. The assessee also stated before dispute resolution panel that learned AO did not give any opportunity for explaining the above transaction. The dispute resolution panel also did not discuss the above issue. From the records, it is also not possible to decipher whether assessee made any such submission before the learned dispute resolution panel or not. As stated in para number 19.1 of the direction of the DRP Verizon India Pvt Ltd Vs. ACIT (Assessment Year: 2008-09) assessee objected to arbitrary margin of 15% on the local overheads. It further objected to the inclusion of a sum of ₹ 5 30352/– as interest payment on late deposit of tax deduction at source. The assessee has also contested that AO cannot make any such addition under section 145 of the income tax act. The DRP did not consider the objection of the assessee that whether AO can make any such adjustment to the domestic transaction between two parties, applying the margin of international transactions determined by the learned transfer-pricing officer to those domestic transactions and enhances the income of the assessee. Further, the learned DRP also did not verify on its own. Whether the sum of ₹ 5 30352/– is because of late interest of tax deduction at source, which has already been subjected to tax by the assessee in its return of income for the relevant assessment year or not. The issue is simple. However, before us adequate documents have not been laid by the assessee. The assessee has submitted the computation of the total income where apparently assessee has added back to the profits a sum of ₹ 5 30351 being interest on tax deduction at source. The computation is placed at page number 33 of the paper book. According to us, such a disallowance of expenditure in computation of total income does not make any impact on total expenditure incurred by the assessee for rendition of the services to its associated concern in India. However, the moot point is that what are those conditions signed in agreement dated 25/2/2005. Such agreement was not placed before us in the paper book. If that agreement provides for provision of any markup over the total cost and how the total cost is required to be computed, which is the foundation of the whole issue to compute the above income. Accordingly, if the assessee is entitled to charge markup over the total cost incurred then the learned assessing officer is correct in making such adjustment. If the agreement between two resident companies do not provide for any such markup on the total cost then such addition cannot be made. Further, in the paper book filed before us details of other income is also Verizon India Pvt Ltd Vs. ACIT (Assessment Year: 2008-09) not provided. It was also not shown to us that how the other income is computed and what it comprises of and what are the relevant documents by which the assessee has shown such income and estimation thereof, Therefore, in the interest of justice and for the reason that relevant documents are not available before us, we set aside 2nd ground of appeal
back to the file of the learned assessing officer to decide it afresh after affording reasonable opportunity of hearing to the assessee. Accordingly, ground number 2 of the appeal is allowed with above direction.
11. Ground number 3 of the appeal is with respect to the disallowance of travel and conveyance expenses, at the rate of 10%. The brief facts shows that assessee has incurred such expenditure of ₹ 1 6108546/–. During assessment proceedings, the assessee submitted the details vide letter dated 14/12/2011 as descriptive explanation about the expenditure without mentioning the details required by ld AO with regard to the bifurcations between domestic and foreign travel expenditure as well as purpose of the travel and expenditure on lodging and boarding. The learned AO further stated that from the detailed submitted it is unverifiable whether the expenditure pertains to the business operation of the assessee or not. Therefore, he disallowed 10% of such expenditure amounting to ₹ 1 610855/–. The learned dispute resolution panel also confirmed above disallowance because before dispute resolution panel assessee reiterated the submission made by it before the learned assessing officer. The learned dispute resolution panel also noted that assessee was provided enough opportunities by the assessing officer to prove the contention but assessee did not comply with it. Therefore assessee is aggrieved and has raised this ground of appeal wide ground number 3.
12. The learned authorized representative vehemently submitted that assessee has submitted the details of the travelling expenditure which are placed at page number 135 to 176 of the paper book which shows the nature of expenditure, details of the person were incurred it showing the Verizon India Pvt Ltd Vs. ACIT (Assessment Year: 2008-09) reasons for incurring such expenditure and total amount. He submitted that when this detail is available before the learned assessing officer as well as before the learned DRP and it could not be shown that any of the expenditure incurred by the assessee not for the purposes of the business, but for other purposes. In such cases, the ad hoc disallowance at the rate of 10% is not justified.
13. Learned departmental representative vehemently supported the order of the lower authorities and submitted that when assessee has failed to produce the requisite detail before the assessing officer which justifies its 11 is under section 37 (1) of the income tax act the same is correctly disallowed by the learned assessing officer to the extent of 10% of the total expenditure. He further stated that assessee officer has allowed 90% of the expenditure even in absence of the requisite details. He therefore submitted that even before the assessing officer or before the learned dispute, resolution panel assessee has not produced the complete details of the travelling expenditure as required by the learned assessing officer.
14. We have carefully considered the rival contentions as well as per used the orders of the lower authorities and the details of the expenditure submitted by the assessee at page number 135 – 176 of the paper book. The assessee has submitted the complete details of the expenditure of ₹ 1 6103640 in those pages. The assessee has given the legend listing of that expenditure stating the date of the expenditure incurred as well as the nature of expenses. In most of the cases, the expenditure incurred by the assessee is taxi charges, conveyance charges, and petrol and car maintenance charges. At certain places there are air travel expenditure also incurred by the assessee. The assessee has also given the name of the person in most of the cases as well as the month for which the expenditure has been incurred along with the amount of expenditure incurred. Most of the expenditure incurred by the assessee is of small amount ranging from Rs 70 onwards. Many of the expenditure also Verizon India Pvt Ltd Vs. ACIT (Assessment Year: 2008-09) payment made to a travel agent for booking the Air tickets as well as taxi expenditure. It is not necessary that such expenditure is always incurred in relation to the employees only but may also be for the outsiders. However, that does not mean that such expenditure has been incurred by the assessee for the non-business purposes. Further, with respect to the amount paid to outside Travel Agents assessee has given the period for which the expenditure has been incurred. The learned authorized representative has submitted that all these payments are also supported by the requisite bills of those parties. The major expenditure in the listing of such expenditure also includes the expenditure for the particular months with respect to the bus for the staff. In view of the above facts, we do not agree with the orders of the learned assessing officer in making disallowance of expenditure at the rate of 10% of the total expenditure. Regarding the details of the expenditure not submitted by the assessee where the learned assessing officer has asked for the elaborate details of the travelling and conveyance expenditure, we are of the opinion that many a times details are asked by the revenue in such a manner, which is very difficult to compile. Further, such extensive compilation of the details is also not required by the income tax act or the corresponding rules. Further as per the detailed submitted by the assessee before the learned assessing officer, the learned AO could not point out any instances where the expenditure incurred by the assessee are not incurred for the purposes of the business. Without pointing out such instances, it is not possible for us to uphold any percentage disallowance out of expenditure incurred by the assessee claimed by it is allowable under section 37 (1) of the act. In view of this we allow ground number 3 of the appeal of the assessee and direct the learned assessing officer to delete the ad hoc disallowance at the rate of 10% of the total expenditure amounting to ₹ 1610855/–.
15. Now we come to ground number 4 of the appeal, which is against the addition made by the learned assessing officer of ₹ 64037615 on account Verizon India Pvt Ltd Vs. ACIT (Assessment Year: 2008-09) of deemed dividend under section 2 (22) (e) of the act. The brief facts of the transaction is that assessee has received a sum of ₹ 167367867 from Verizon communications India private limited as a loan during financial year 2007 – 08. Further, the lender as well as the assessee company are subsidiary companies of M/s Verizon Asia-Pacific Holdings private limited Singapore. The learned assessing officer has further noted that that the lender company has accumulated profits of ₹ 6 4037615 and therefore, the learned assessing officer treated the amount to the extent of accumulated profits as income of the assessee under section 56 (2) (i) read with section 2 (22) (e) of the income tax act. The assessee contended before the dispute resolution panel that assessing officer has not given proper opportunity of hearing. It was further submitted that the dividend is taxable only in the hands of the shareholder and the assessee is neither a shareholder of the lender company and hence the provisions of deemed dividend are not attracted. It was further stated that on the date of payment of the loan they were not related profits as per the balance sheet of the lender and therefore there cannot be any deemed dividend in the hands of the assessee. It was further stated that that the cumulative profit stated to be of ₹ 6 4037615 as on 31/3/2008 in the balance sheet of the lender consisted of capital redemption reserve and the same should have been excluded while computing the deemed dividend even otherwise. It was further stated that the amount of loan given by the lender was an interest-bearing loan on account of commercial expediency and handles hence does not come within the ambit of deemed dividend. The learned dispute resolution panel held that it is not necessary that the deemed dividend is required to be taxed in the hence of the shareholder only. It was further stated that that accumulated profits in the books of the lender are always computed at the end of the financial year. The learned DRP also rejected the contention of the assessee. The total cumulative profits included capital redemption reserve which should be excluded for computing deemed Verizon India Pvt Ltd Vs. ACIT (Assessment Year: 2008-09) dividend. With respect to the interest-bearing loan, the learned dispute resolution panel rejected the contention of the assessee, as the assessee has not explained the nature of business transactions of the above loan. The learned dispute resolution panel also stated that the assessee has not even furnish the ledger account of its sister concern in its books of account. Therefore, we addition proposed by the learned assessing officer on account of deemed dividend was upheld.
The learned authorized representative explained the transaction, which is also similar to the facts stated by the learned dispute resolution panel in its order at para 21. The learned authorized representative also submitted a detailed come violation of the various judicial precedents to show that assessee when not a shareholder of the lender company the deemed dividend cannot be taxed in its hands. He further referred to the decision of the Hon‟ble Supreme Court in case of NATIONAL TRAVEL SERVICES VS CIT dated 18/1/2018. He therefore submitted that the above sum cannot be taxed in the hence of the assessee company as deemed dividend.
The learned departmental representative vehemently submitted that loan has been given by one subsidiary to another subsidiary and therefore it is covered under the second limb of the provisions of section 2(22) (e) of the act. The learned departmental representative also stated that that loan is given by the subsidiary company for the benefit of the holding company and therefore it is covered in the definition of deemed dividend.
We have carefully considered the rival contention and the orders of the lower authorities. The facts are fitted in error, pass that the transaction between two subsidiaries of the same holding company. One of them is a lender of a sum of ₹ 1 67367867 and having accumulated profits of ₹ 6 4037615. The above transaction has been tested by revenue as taxable in the hands of the assessee company i.e. borrowing subsidiary as deemed dividend. On careful examination of the provisions of section 2 (22) (e) of the act it is apparent that it envisages three situations for taxation in Verizon India Pvt Ltd Vs. ACIT (Assessment Year: 2008-09) case a loan is given by a company having accumulated profits higher than the amount of loan to be taxed as the income under that section. When a loan is given directly to the shareholder as loan or advance by the company only condition is that shareholder must be having shares not less than 10 % of that company. If the loan is not given to the shareholder but to a specified concern, in which a shareholder is a member and any payment made by the company on behalf of or for the benefit of such shareholder. In the case before us, the amount is given as a loan to a company in which the shareholder of the company is holding more than 10 % of the shareholding as well the shareholder is also the holding company of the borrower, therefore the above transaction falls in to the second situation where the loan is given by the one subsidiary company to another subsidiary company of the same holding company. However in this situation there is no doubt that transaction is a „deemed dividend “but now the issues is whether such sum can be taxable in the hands of the borrower or in the hands of the shareholder. In this situation, it is apparent that though some is borrowed by the assessee company but it is deemed to have been made to the shareholder, though in the second situation payment is made to a concern of which such shareholder is a member. From this analysis, it is apparent that payment in this case is to be treated as payment to the shareholder, holding company, i.e. Verizon Asia Pacific Holdings Pvt Ltd, Singapore , if at all. When payment has been made to any concern as loan or advance , such payment shall be deemed to have been made to the shareholder and the payment shall take the character of "deemed dividend.” The person liable in such situations would be the shareholder and not the person or entity to whom the money may have actually been paid as loan. In view of above findings, we reverse the findings of the ld AO and direct to delete the addition of Rs 64037615/- in the hands of the assessee u/s 2 (22) (e) of the act. Accordingly, Ground no 4 of the appeal of the assessee is allowed.