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10-01-2020, Metric Stream Infotech, Section 37(1), 43B, 145A, Tribunal Bangalore

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8 months 1 week ago #12043 by amit
Section - 37(1), 43B, 145A, 28, 34, 33B, 147, 263
Order Date - 10-01-2020
Favouring - Revenue
Court - Tribunal Bangalore
Appellant - Metric Stream Infotech (India) Pvt. Ltd.
Respondent - ACIT
Justice - N.V. VASUDEVAN VP & B R BASKARAN AM
Citation - 120Taxpundit107
Appeal No. - ITA No.1688/Bang/2018
Asstt. Year - 2014-15

Order

PER : N.V. Vasudevan

This appeal by the assessee is against the order dated 20.04.2018 of the Principal Commissioner of Income-tax, Bengaluru-4, Bengaluru [hereinafter referred to as “Pr.CIT”] passed u/s. 263 of the Income-tax Act, 1961 [the Act] in relation to assessment year 2014-15.

2. The assessee is a company engaged in the business of rendering software development services. For the AY 2014-15, the assessee filed a return of income declaring a total income of Rs.22,85,60,630. The order of assessment u/s. 143(3) of the Act was passed by the AO accepting the total income returned by the assessee.

3. The Pr. CIT in exercise of his powers u/s. 263 of the Act was of the view that the aforesaid order dated 27.9.2016 passed by the AO was erroneous and prejudicial to the interests of the revenue for the following reasons:-

“1. On verification of assessment record it was noticed that the assessee had debited Rs.2,15,89,831/- towards Service Tax input receivable written off in the P&L account/Notc20/Other Expenses. However, the service tax r ceipts and expenditure were not routed through the P&L account. The same are maintained in a separate ledger account and therefore. does not qualify as an admissible expenditure.

3. The AO has failed to conduct adequate enquiries regarding the above issue and has failed to bring to tax the correct income while completing the assessment U/s 143(3). Therefore, action u/s.263 is warranted and the assessment for the A.Y.2014-15 was proposed to be revised according1y.”

4. In reply to the aforesaid show cause notice of the Pr.CIT, the assessee filed reply pointing out that the Assessee was engaged in the business of development of software services. These software development services are provided to its Holding company MetricStream Inc, USA During the financial year relevant to AY 2014-15, the Assessee exported software services to MetricStream Inc to the tune of Rs. 1,68,77,13,290/- and as per the relevant Service tax law prevalent during FY 2013-14, no service tax was required to be paid by any exporter of service. However, various vendors who provided services to the Assessee in India had charged service tax on the services they provided to the Assessee during the relevant previous year. The service tax so charged was a cost/expenditure for the Assessee which was incurred wholly and exclusively for the purpose of business. The Assessee could not utilize the service tax so charged as input service tax because the services provided by the Assessee to its parent company was export of service which is not subject to levy of service tax. Since service tax which was charged by the service providers to the Assessee and since the service tax so charged was not available for use as service tax input credit, the service tax charged by the vendors who provided services to the Assessee had to be regarded as an expenditure which was incurred wholly and exclusively for the purpose of business and hence allowable as deduction under section 37(1) of the Act. The service tax input credit to the extent not available to the Assessee was written off and the same should be regarded as expenditure that should be allowed as deduction u/s.37(1) of the Act.

5. It was further submitted that the service tax paid and written off in the books of account was actually paid by the Assessee to various vendors who provided services to the Assessee during the year and therefore the service tax paid was allowable deduction under section 43B of the Act also.

6. The Assessee also pointed that as per the provisions of section 145A of the Act, the cost of goods for the purposes of determining the income chargeabl under the head "profits & gains of business or profession" shall be adjusted to include any tax, duty, cess or fee (by whatever name called) actually paid or incurred by the assessee to bring the goods o the place of its location and condition as on the dale of valuation. Applying the same principles to even the valuation of services utilized by the assessee, the input service tax being of revenue nature has been rightly claimed by as deductible expenditure as part of the valuation of the services utilized during the year under the provisions of section 37 r.w.s. 145 of the Act. In this regard the assessee relied on the following cases laws. TVC Sky Shop Ltd vs. DCIT ITA No. 7907/Mum/2011 (I TAT. Mumbai) (A.Y2008-09) NCS Distilleries Pvt. Ltd v ITO ITA No. 699/Hyd/2012 (ITAT, Hyderabad)

7. Without prejudice to the above contention, the Assessee contended that the service tax input credit written off is also allowable as a 'business loss' under section 28 itself in computing the business income for the year under consideration. The write off of service tax input credit which was already paid by the Assessee and would amount amount to business loss and hence was allowable in computing the business income. The contention that write off of service tax input credi amounting to Rs.2,15,89,831 does not qualify as an admissible expenditure is therefore incorrect.

8. Besides the above, the assessee also submitted that the condition precedent for exercise of jurisdiction u/s. 263 of the Act by the Pr.CIT was not present in the case of asse se In this regard, the assessee pointed out that AO before concluding the assessment has issued a notice u/s. 143(2) of the Act dated 29 8.2015 and in response to the same, the assessee filed audited financial statement, tax audit report, IT return, etc. on 29.4.2015. The assessee also pointed out that in Note 20 to the financial statement, the details of Other Expenses which include service tax input receivable written off has been specifically mentioned. The assessee therefore cla med that the AO is deemed to have made enquiry with regard to service tax input receivable written off in the P&L account.

9. The assessee also pointed out that the AO after conclusion of the assessment proceedings issued a notice u/s. 154 of the Act 5.12.2017 proposing to disallow service tax input receivable written off amounting to Rs.2,15,89,831. The assessee sent a reply to the aforesaid notice u/s. 154 of the Act dated 5.12.2017. After receipt of the said reply dated

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