ADIT, NEW DELHI vs. M/S AT KEARNEY LTD.,, NEW DELHI

The brief facts of the case are that the assessee company, incorporated in United Kingdom as limited liability Company, is engaged in business of providing management consultation services as a subsidiary of EDS, which is a global information ADIT V A T Kearney Limited & 5575/Del/2012 A T Kearney Ltd. V ADIT CO No 74 & 75/Del/2013 A Y 2004-05 & 2005-06 6 service leader. The services are provided in the manufacturing sector. In the year 1997, it opened a branch office in India for carrying on business of those services i.e. providing management consultancy services.

It filed its return of income showing loss of Rs. 136496240/- on 01.11.2004. Subsequently on 07.09.2006 assessee submitted a letter submitting a revised computation of total income in which it added back foreign exchange loss of Rs. 71185887/-. As the revision was made beyond time allowed u/s 139(5) of the Act it was not treated as valid return and therefore foreign exchange loss of Rs. 71185887/- was disallowed. Further, ld Assessing Officer against the returned loss of Rs. 136496240/- assessed the appellant at an income of Rs. 221844556/- making a total addition of Rs. 358340796/. Subsequently, an application u/s 154 was filed in January 2007 on several counts. The ld Assessing Officer rejected rectification application of the assessee except on issue of application of tax rate. The reason for rectification was that assessee has filed an appeal before ld CIT (A) on those issues.

Against the order of AO u/s 143(3) of the Income Tax Act dated 26.09.2008 assessee preferred appeal before ld CIT (A). Before ld CIT (A), certain additional evidences were submitted for which remand report was sought for, however, ld Assessing Officer requested additional evidences should not be admitted and submitted comments on the details submitted. Rejoinder was also submitted on 27.03.2012 on remand report. Ld CIT(A) deleted the disallowance on account of expenses of Rs. 12966567/- as business promotion expenditure, deleted the ADIT V A T Kearney Limited & 5575/Del/2012 A T Kearney Ltd. V ADIT CO No 74 & 75/Del/2013 A Y 2004-05 & 2005-06 7 disallowance of bad debts written off , deleted the disallowance on account of salary to expat employees. He further confirmed addition made by ld AO on upward adjustment of international transactions to some extent and adjustment in PLI was restricted to Rs. 3526787/-. He also granted the benefit of carry forward losses and credit for TDS after verification. Against this, revenue is in appeal before us and assessee has filed cross objection.

First, we take up the appeal of the revenue.

The first and second ground of the appeal is against admission of additional evidences as well as deletion of disallowance of Rs. 12966567 on account of business promotion and advertisement expenses.

The ld DR submitted that during the appellate proceedings the appellant produced two paper books, which were sent to Assessing Officer and ld, CIT (A) asked for the remand report. The ld Assessing Officer submitted remand report on 20.03.2012 objecting admission of additional evidence as before him appellant did not submit adequate details and thus Assessing Officer has made the disallowance. He further stated that though there is a steep increase in the expenditure, it has been allowed by the ld CIT (A) on verification of sample bills/ vouchers etc.

Against this ld AR submitted that during the course of assessment proceedings assessee has submitted sufficient details, which is evident from assessment order itself. He further submitted that during remand proceedings two paper books were sent to ld AO who examined details contained therein but could not point out any defect or any infirmity except alleged disproportionate increase in expenses.

In the paper book - I page no. 190 contains expense report for the month of May and June, 2003 submitted by an employee by name Devendra Chawla which is also supported by various invoices like the travel invoices by Travel agents, hotels bills.

In the paper book - I page no. 250 Mr. Satyajit Lahari an employee of the company has submitted the expense report including various vouchers for the month of June, 2003.

In the paper book - II page no. 90 to 202 are the mobile bills submitted by various employees are placed. As per the submission of the appellant these expenses are primarily incurred for the marketing and business promotion activity.

In the paper book -II page no. 341 Mr. Ravindra Parankushan, an employee of the company has given the expense report for the month of May, 2003 which consists of expenses incurred towards travel, telephone and hotel/ food bills. Paper books contain similar copies of such expenses. The activity of the company is management consultancy services. This activity obviously involves expensive travel by the employees of the company in order to generate business. On the verification of the invoices, I am of the opinion that these are incurred for the purpose of business and they are allowable as deduction in the hands of the assessee while computing its total income. Therefore, the addition made in this regard by the AO should be deleted.”

The ld CIT(A) has held that the details asked by the Assessing Officer were submitted by the appellant however, it seems that instead of verifying the details on test check basis ld AO wanted ADIT V A T Kearney Limited & 5575/Del/2012 A T Kearney Ltd. V ADIT CO No 74 & 75/Del/2013 A Y 2004-05 & 2005-06 11 to verify the complete 100 % details of such expenses but ld AO has never asked for it categorically. In view of above ld CIT (A) has rightly admitted the additional evidences. Furthermore, merely because there is an increase in the expenditure compared to previous year, which may not correspond to increase, or decrease in the revenue cannot be the sole reason for disallowance of any expenditure. The law does not provide sanction for disallowing expenditure in such a manner. Further, during the remand proceedings ld AO has verified all the expenditure but has not pointed out single instance of expenditure, which is not wholly and exclusively incurred for the purpose of the business. In absence of any such instance and ld. CIT (A), after examination of those details allowing those expenditure as deductible, we find no infirmity in the order of the ld CIT (A) in deleting the disallowance of Rs. 12966567/- on account of business promotion and advertisement expenses. In the result ground No. 1 and 2 of the appeal are dismissed.

The ground No. 3 of the appeal is against deleting the disallowance of Rs. 52943436/- on account of bad debts.

During the course of assessment proceedings assessee has claimed bad debts of Rs. 52943436/- on account of services provided to Air India, NTPC, Telco and Tata Tele Services. Ld Assessing Officer disallowed this on the ground that whether such debt has become bad or not is not established as amount written off is pertaining to blue-chip Companies. On appeal the ld CIT(A) deleted this addition and therefore revenue has raised this ground before us.

We have considered the rival contention. The amount of bad debts has been written off in the profit and loss account and assessee has given details of such bad debts showing names of the parties. Ld CIT (A) has noted that there is no requirement in the law that such debts should have been established to become bad before its allowance. We do not find any such condition in the section. Furthermore, the latest circular No. 12/2006 dated 30.05.2016 issued by the CBDT also support the above view wherein it is stated that the claim of bad debt is allowable if it is written off as recoverable in the books of account of the assessee and there is no requirement for the assessee to establish that the debt has in fact become irrecoverable. In view of this, we do not find any infirmity in the order of ld CIT (A) in deleting the addition of Rs. 52943436/- on account of bad debt written off. In the result the ground No. 3 of the appeal is dismissed.

Ground No. 4 of the appeal is against disallowance of Rs. 28759612/- deleted by the ld CIT (A) out of salary expenses. Ld AO disallowed the above sum because out of total salary debited by the assessee to expatriate employees of Rs. 56771896/-. Assessee submitted form No. 16 with respect to only three employees. Assessee submitted employee-wise detail and stated that as these employees’ Income Tax Returns are not available with the assessee and some are not furnished. Therefore, the ld Assessing Officer allowed the salary paid to employees as per form No. 16 submitted by assessee.

We have carefully perused the order of the ld CIT (A) wherein the disallowance is deleted. In fact, assessee has paid salary of Rs. 56771896/- to only three employees whose Form No. 16 was submitted. In that form taxable salary was Rs. 28012284/- and taxable perquisites were Rs. 13160469/-. To these employees non-taxable perquisites were also paid amounting to Rs. 15599143/- which was not therein in Form NO.

Ground No. 5 of the appeal is against the deletion of upward adjustment of Rs. 192485293/-. The brief facts of the issue are that during the year appellant has entered into international transactions of provision of management consultancy services amounting to Rs. 20612706/- and procurement of management consultancy services of Rs. 17490020/-. The most appropriate method applied by the assessee was TNMM and assessee’s margin of 12.57% and 6.67% considering 12 comparables wherein comparable margin was 4.6%, it was submitted that international transactions with its AE are at arm’s length. In its computation of margin assessee has considered segmental information and stated that exchange rate fluctuation of Rs. 71185887/- and miscellaneous expenses of Rs. 67754267/- were non-operating expenses and therefore they were not considered in working operating profit of the assessee. During the ADIT V A T Kearney Limited & 5575/Del/2012 A T Kearney Ltd. V ADIT CO No 74 & 75/Del/2013 A Y 2004-05 & 2005-06 14 assessment proceedings, there was no dispute on the most appropriate method as TNMM as well as the profit level indicator of operating profit by total cost (OP/TC). However, ld Transfer Pricing Officer rejected the use of multiple year data and hence rejected nine comparables out of 12 as well as also rejected ‘transaction by transaction’ benchmarking approach of the assessee. Further, while working the total cost of the assessee the provision for work in progress written back and provision for doubtful debts were considered as non-operating income. Further, the ld TPO considered the miscellaneous expenses as operating expenses. The final set up of comparables taken by TPO were three and their average PLI was 17.41% and then proposed an adjustment of Rs. 192485293/-. On appeal before ld CIT (A), he upheld the approach of ld. TPO in considering entity level margin. Further, the adjustment in the total cost base with respect to write back of WIP, write back of provision for bad in doubtful debts and miscellaneous expenditure was accepted. Based on this he computed the PLI of the assessee at 7.36% and restricted the adjustment to Rs. 3526787/-.

Before us, the ld DR submitted that only dispute in the case is regarding the working of total cost and the ld CIT (A) has reduced the total cost of the assessee without verifying the facts with respect to provision for work in progress and write back of provision for doubtful debts. He therefore stated that such an adjustment is made incorrectly. Against this, the ld AR submitted that adjustment with respect to these two items is incorrect reading of the financial statement by ld. AO that is appreciated by ld CIT (A) and adjustment is granted.

However, in its T P Documentation, assessee has taken the operating revenue and operating cost as under:- Particulars Provisions of Provision of Non- Per audited service of services to operating accounts non AE AE items 162400472 20612706 183013178 Operating revenue 915835 915835 Non operating income 162400472 20612706 915835 183929013 Total revenue Expenditure 223992721 17701997 247694718 Other office and administration expenses 31331 3977 35308 Loss on sale of goods (921838) 71185887 70264049 Exchange rate fluctuation 1235934 156871 67754267 69147072 Miscellaneous expense (36672464) (36672464) Provision for bad & doubtful debts written back ADIT V A T Kearney Limited & 5575/Del/2012 A T Kearney Ltd. V ADIT CO No 74 & 75/Del/2013 A Y 2004-05 & 2005-06

The above two items i.e. provision for bad in doubtful debts and provision for work in progress which are in ( ) i.e. these items are in brackets and are negative figures. Firstly, it is not the argument of the ld. TPO that provision for bad and doubt full debts is not a part of total cost of the appellant. Then if expenditure of provision for bad in doubtful debts is an operating cost, naturally When this expenditure have been reversed by credit to the profit and loss account then they should be considered part of the operating cost working for the purpose of deriving the PLI. In this case, there is provision of Rs. 36672464/- written back by the assessee and assessee has claimed it as reduction in total cost of the assessee. Ld Assessing Officer has not considered this adjustment and took total cost by further adding the negative figure of this item. The adjustment made by the AO is apparently incorrect. Secondly in case of provision for work in progress which is the credit to the profit and loss account it was also added to the total cost as it was mentioned in brackets. The provision for work in progress is the operating revenue of the assessee and this has been rightly reduced by the assessee from the total cost and has not been included as the operating revenue. In the present case, working ADIT V A T Kearney Limited & 5575/Del/2012 A T Kearney Ltd. V ADIT CO No 74 & 75/Del/2013 A Y 2004-05 & 2005-06 17 placed before us does not show that it has been considered in operating revenue. Therefore, the adjustment made by the ld AO of further increasing the cost by this sum is incorrect. We fully agree with the view of the ld CIT (A) in working out the correct PLI on this count. Further, the miscellaneous expenses of Rs. 67754267/- which is part of the total cost of the assessee but in the computation of the total income it has not been claimed as expenditure and therefore it has rightly been excluded from the working of the total cost by the assessee. We draw support from the decision of coordinate bench in Haworth (India) ( P ) Limited V DY CIT 11 taxmann.com 76 [131 ITD 215] ( Delhi) which held that amounts suo-moto disallowed by the assessee cannot form part of PLI while determining ALP. Hence, we confirm the findings of ld CIT (A). In view of above we hold that the ld AO has incorrectly increased the total cost by making adjustment on account of write back of provision for bad & doubtful debts of Rs. 36672464/- and also credit of provision for work in progress of Rs. 44919716/-. Ld Assessing Officer further was incorrect in considering the miscellaneous expenses of Rs. 67754267/- which was not claimed by the assessee as expenditure as part of total cost. In the result as there are no other issues of dispute with respect to transfer pricing adjustment other than adjudicated by us above, we dismiss ground No. 5 of the appeal of the revenue.

Ground No. 6 of the appeal is against deletion of interest u/s 234B of the Income Tax Act. The contention of the revenue submitted by ld DR was that the interest u/s 234 B of the Act is mandatory and therefore ld CIT(A) has incorrectly deleted the interest levied u/s 234B. Against this ld DR relied upon the order ADIT V A T Kearney Limited & 5575/Del/2012 A T Kearney Ltd. V ADIT CO No 74 & 75/Del/2013 A Y 2004-05 & 2005-06 18 of the Hon’ble Delhi High Court in case of DIT Vs. GE Package Power Incorporation 56 Taxmann.com 190 (Del).

We have carefully considered the rival contentions. We have also carefully considered the decision of Hon’ble Delhi High Court and we are aware that Hon’ble Supreme Court has also dismissed SLP against the above decision. Therefore respectfully following the decision of Hon’ble Delhi high court in case of DIT Vs. GE Packaged power (Supra) we hold that on the payments received by the assessee the payer were required to deduct tax at sources u/s 195 of the act. As the tax was ‘deductible’ u/s 195 of the act, there is no failure on part of the assessee in terms of section 209(1) (d) of the act in payment of advance tax. In view of this, we do not find any infirmity in the order of ld CIT (A) in holding that 234B interest in the case of the assessee is not chargeable. In view of this, the appeal of revenue on this ground is dismissed.

In the result, appeal of the revenue is dismissed.

Now we come to the cross objection of Assessee being CO No. 74/Del/2013 wherein five grounds of the appeal are raised on transfer pricing addition of Rs. 3526787/- upheld by the ld CIT (A).

The first ground of appeal

We have carefully considered the rival contentions. The ld AO has disallowed this sum without giving proper reason whereas he has simply stated that claim of foreign exchange loss of Rs. 1928500/- is not allowable, as it has been realized towards management fees charges. In fact, ld CIT (A) has noted that these expenses are management consultancy services, which is the core function of assessee. The amount of foreign exchange fluctuation is also not a notional loss but is a determined loss and is governed by the ICAI. ld CIT (A) has further held that this issue is squarely covered by the decision of Hon’ble Supreme Court in case of Woodward Governor Vs. CIT (supra) wherein it is held that forex loss is not a notional loss. In view of above, we do not find any infirmity in the order of the ld CIT (A) in deleting the disallowance of Rs. 1928500/- on account of forex loss relating to management consultancy services. In the result ground No. 1 of the appeal is dismissed.

Ground No. 2 of the appeal is against the disallowance of Rs. 12817622/- deleted by ld CIT (A) on account of bad debts. Both the parties confirmed that this ground of appeal

Therefore, similarly we dismiss ground No. 2 of the appeal of the revenue.

In the result, appeal of the revenue is dismissed.

Now we come to CO No. 75/Del/2013 for AY 2005-06 where the solitary ground taken by the assessee is about disallowance of Rs. 21668771/- incurred by the assessee as management fees which was subject to TDS and therefore disallowed u/s 40A(1) of the Act.

Before us no specific arguments were raised and findings of the ld CIT (A) and Assessing Officer are very categorical and clear that assessee has not deducted tax at source on this sum and therefore disallowance is made. We find no infirmity in the ADIT V A T Kearney Limited & 5575/Del/2012 A T Kearney Ltd. V ADIT CO No 74 & 75/Del/2013 A Y 2004-05 & 2005-06