Altisource Business Solutions Private Limited Vs DCIT (ITAT Bangalore)
Held that assessee incurs monthly recurring charges for telecommunication lines and since such expenditure doesn’t bring any benefit of enduring nature the same are revenue in nature.
Facts-
The assessee, M/s. Altisource Business Solutions Private Limited is engaged in the business of providing contract software development and support services and information Technology (IT) enabled services including data analysis, compilation and transmission of customized software to overseas group affiliates (AEs).
Addition/ disallowance was made in the following –
i) Telecommunication line expenses treated as capital in nature – Rs.2,06,53,968/-.
ii) The foreign exchange loss – Rs.13,14,30,000/-.
Based on the final order, assessee has preferred the present appeal.
Conclusion-
Held that from the sample invoices it is clear that the assessee incurs monthly recurring charges, towards internet, telephone lines, port charges, etc. which in our view are of revenue nature. These expenditures do not bring any benefit of enduring nature to the assessee and is incurred in the normal course of business. We therefore delete the addition made with regard to ‘telecommunication lines’.
Held that the assessee has correctly recognized the forex as per the ICDS which is to be recognized as a loss as per the provisions of section 43AA. It is also noticed here that the amount claimed is net loss after considering the forex gains arising in certain transactions and that the assessee has also submitted that the invoice-wise details of forex loss/gain at page 963 of PB. In view of the above discussion we hold that the forex loss claimed by the assessee is an allowable expenditure.
FULL TEXT OF THE ORDER OF ITAT BANGALORE
This appeal is against the final assessment order passed by the National Faceless Assessment Centre (NFAC) u/s. 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 (the Act) dated 30.01.2022 for AY 2017-18.
2. The assessee is a private limited company engaged in the business of providing contract software development and support services and information Technology (IT) enabled services including data analysis, compilation and transmission on customized software to overseas group affiliates (AEs). The assessee also provides IT enabled back-office services to support the business lines of its group. For AY 2017-18, the assessee filed the return of income on 23.11.2017, declaring a total income of Rs.1,32,81,87,980/- under normal provisions of the Act and a book profit of Rs. 1,12,46,32,841/- u/s. 115JB of the Act. The case was selected for scrutiny and notice u/s. 143(2) was served on the assessee. The case was referred to Transfer Pricing Officer (TPO) who made a TP adjustment of Rs.68,55,27,641/. The NFAC made a draft assessment order in which besides the TP adjustments, the following additions/disallowances were made on the corporate tax front: –
i) Difference between revenue reported in ITR and ST3 – Rs. 5,49,66,590/-
ii) Telecommunication line expenses treated as capital in nature – Rs.2,06,53,968/-
iii) The foreign exchange loss – Rs.13,14,30,000/-
iv) Miscellaneous expenditure – Rs. 93,50,000/-
3. The assessee filed objections before the DRP against the draft assessment order. The DRP after considering the submissions of the assessee gave partial relief. The DRP deleted the TP adjustment and on the corporate tax, reduced/sustained the addition/disallowances as given below: –
i) Difference between revenue reported in ITR and ST3 – Rs.4,16,273/-
ii) Telecommunication line expenses treated as capital in nature – Rs.2,06,53,968/-
iii) Foreign exchange loss – Rs.13,14,30,000/-
iv) Miscellaneous expenditure – Rs.16,74,733/-
4. The final order giving effect to the directions of DRP was passed by NFAC against which the assessee is in appeal before the Tribunal raising the following grounds: –
i. Disallowance of telecommunication line expenses as capital in nature
a. The Learned Assessing Officer (“Learned AO”) and the Honourable Dispute Resolution Panel (‘Hon’ble DRP’) grossly erred in considering telecommunication line expenses as capital in nature.
b. The Learned AO/ Hon’ble DRP erred in not considering the copy of invoices which were furnished, evidencing the fact that these expenses are recurring in nature.
c. Without prejudice to the above, the Hon’ble DRP failed to appreciate that even if the expenses is to be considered as rendering enduring benefit, the same may not be treated as capital in nature as the expenditure only results in furtherance of the business profits and revenue.
d. In addition to and without prejudice to the above, the Hon’ble DRP grossly erred in not considering the Assessee’s argument that similar adjustment was proposed in the show cause notice for proceedings of AY 2018-19; however, upon furnishing of sample invoices for relevant period which are similar in nature as incurred in AY 2017-18, the adjustment was not made in the draft order passed, since the Learned AO was satisfied that the expenses are revenue in nature.
e. The Hon’ble DRP erred in not providing any reasonable justification for not considering the technical arguments provided by the Assessee while rejecting the objection raised.
ii. Disallowance of foreign exchange loss
a) The Learned AO/ Hon’ble DRP erred in not considering foreign exchange loss as revenue in nature and hence, an allowable deduction under the Income-tax Act, 1961 (‘the Act’).
b) The Hon’ble DRP erred in not considering the break-up of foreign exchange loss establishing the fact that losses entirely pertain to year end restatement of foreign currency trade receivables/ payables.
c) The Hon’ble DRP erred in passing ambiguous directions on the objection raised by evidently misconstruing the objection against corporate tax adjustment as an objection related to transfer pricing adjustment.
d) The Learned AO failed to consider the above ambiguity highlighted by the Assessee.
iii. Disallowance of miscellaneous expenditure
a. The Learned AO erred in adding entire miscellaneous expenditure without issuing any show-cause notice and without providing an opportunity of being heard, after the Assessee inadvertently missed to provide the break-up of expenditure during course of assessment.
b. Subsequent to DRP directions, the Learned AO failed to provide the Assessee adequate time to furnish additional details sought by the AO.
iv. Levy of interest under section 234D of the Act
The learned AO has erred in levying interest under section 234D of the Act amounting to INR 8,44,222 which is consequential in nature.
v. The assessee craves leave to add, alter, rescind and modify the grounds herein above or produce further documents, facts and evidence before or at the time of hearing of this appeal.
For the above and any other grounds which may be raised at the time of hearing, it is prayed that necessary relief may be provided.
Disallowance of telecommunication line expenses as capital in nature
5. In the course of assessment proceedings the assessing officer (AO) noticed that the assessee has claimed a sum of Rs.10,32,69,841/-under the head ‘Telecommunication Lines’ and called for details pertaining to the same. The assessee submitted that –
i. The company submits that majority of the telecommunication line expenses pertains to internet link, data circuit charges used for telephone, internet, or other data communication services.
ii. The company operates from 2 major cities (Bengaluru & Mumbai) and employs substantial number of employees, who need to communicate internally over telephone and have constant access to internet. Accordingly, the volume of requirement for a stable internet line, data circuit is high, to keep the business running without any disruptions. The company does not derive any benefit from such lines apart from daily usage, which is billed on a monthly basis by the respective vendors.
iii. Accordingly, the company has not capitalised the said expenditure. In support of the company’s claim, it is in the process of collating sample invoices evidencing the nature of expenditure and will share the same along with other pending details.”
6. The assessee also furnished sample invoices before the AO to substantiate that there are monthly internet and telecommunication charges. The AO did not accept the contentions of the assessee and proceeded to treat the expenditure as capital in nature by holding that the expenditure pertain to ‘centrex wireline’ or ‘port charges’ which are capital expenditure. The AO also stated that these expenditure bring enduring benefit to the assessee and therefore to be treated as capital asset. The AO allowed 80% of the amount as depreciation and disallowed the balance Rs.2,06,53,968/-.
7. Aggrieved the assessee filed the objections before the DRP sustained the disallowance on the ground that the assessee has claimed internet and telephone expenses separately and that the telecommunication line expenses pertain to expenses incurred for IT infrastructure which is capital in nature. Aggrieved by the final order passed in pursuance to DRP directions, the assessee is in appeal before the Tribunal.
8. The learned A.R. made the following submissions before us
i. That the vendorwise break-up of the expenditure along with invoices (pages 733 to 942 of PB) was submitted before the lower authorities.
ii. That the AO in the assessment proceedings of AY 2018-19 have verified invoices pertaining the similar expenses and have accepted the same as revenue in nature.
iii. That the nature of expenditure remain unaltered, as the assessee incurs the same expenditure year on year and therefore the expenditure is revenue in nature to be allowed as a deduction.
iv. That the expenditure claimed by the Assessee as telecommunication line expense broadly pertain to invoices raised by the following vendors:
a. Tata teleservices (Tata Docomo) — payment towards telephone line bills;
b. Dishnet Wireless Limited (Aircel) — payment towards port charges;
c. Verizon Communications India Private Limited — payment towards recurring private IP ethernet, internet, LAN charges etc.
v. That the AO has misconstrued it to be Centrex wireline (EPABX system), even though the copy of sample invoices did not carry any such description on the invoices and despite providing explanations, the AO has erred in observing and concluding as under:
“As can be seen in the assessee’s reply, the nature of these expenses pertains to laying the infrastructure for seamless internet & telephone connectivity. While the internet and telephone usage are recurring expenses, and have even been claimed separately in “Communication Expenses” by the assessee, the telecommunication lines expense is a onetime expense. It is an asset of enduring nature, and thus is liable to be treated as a capital asset.”
vi. That the AO failed to appreciate that “communication expenses” was the master head of expenses and ‘telecommunication line expense’ was a part of such expenditure. Break-up of ‘communication expenses’ as furnished before Learned AO can be referred at page 638 of the paperbook.
vii. That the ssignificant portion of expense pertain to port charges and recurring private IP, LAN charges etc. Port charges are broadly towards charges for providing a place of termination on a switch/ distribution frame to provide a point of access or interconnection for ingress and egress of traffic between the two interconnecting networks. These expenses facilitate communications within the company, which is critical for day-to-day operations. Private IP charges are towards having a non-internet facing IP addresses using an internal network. It does not support any direct customer access connections. This helps in protection of data used by the Assessee in providing services and is a critical aspect in IT sector. LAN charges are towards internet line connectivity offered through Local Area Network connections which are intended for local areas such as a house or office building and are designed to connect a handful of clients to each other. Each computer in a LAN network is connected to a central server which acts as a go-between within the LAN and beyond. This helps better and faster connectivity to internet which helps in smooth processing of work.
viii. That from the above explanation of charges incurred, these are incurred by the Assessee to facilitate an increase in efficiency, leaving the fixed capital unaltered. In the given case, the expenditure towards recurring telecommunication expenses does not result into any enduring benefit. Further, the above expenses are incurred to ensure smooth running of operations, leading to effective man hours. Hence, the telecommunication expenses enables the business operations to be carried out more efficiently.
ix. That reliance is placed on the following judicial precedents:
a. Assam Bengal Cement Co. Limited 27 ITR 34 (SC);
b. Empire Jute Co Ltd vs CIT [1980] 124 ITR 1 (SC);
c. Bombay Steam Navigation Co [1953] (P) Limited v CIT [1965] 56 ITR 52 (SC)
9. The learned D.R. supported the orders of the DRP and submitted that the assessee had claimed the telephone and internet charges separately. The learned D.R. also submitted that the DRP after perusal of the invoices has held that the expenditure to be capital in nature and therefore prayed that the same needs to be upheld.
10. We have perused the evidences submitted and have heard both the parties. The assessee is in the business of providing IT/ITES services to its group companies. The assessee is having operations in Bangalore & Mumbai. Given the number of employees employed in different locations, the argument that the assessee is incurring huge expenses towards interest and data circuit charges, has to be accepted. During the course of hearing the learned A.R. submitted the below table giving the breakup of expenditure along with a note on the nature of expenditure :-
