2016 (12) TMI 1588 - AT - Income Tax

Appeal partially allowed, remand for expenditure disallowance issue. Importance of substantiating payments.

The Tribunal partly allowed the appeal for statistical purposes, remitting the issue of expenditure disallowance back to the Assessing Officer for fresh ... TPA - ALP determination - selection of MAM - TPO jurisdiction to decide allowability of expenditure u/s.37 - Held that:- As find from the order of lower authorities that TPO wanted the assessee to show that services were actually rendered to the assessee and payment was made for the same, also it was noted by the DRP that the invoices submitted by the assessee pertaining to the fees paid by the assessee to its AE for registration of patents developed by AE in their own country with hardly anything to show as to how the assessee benefitted from the same in its business. Similarly, in relation to invoice for MIS, the same had been pertained to the year under consideration and assessee failed to substantiate its claim of service were actually received or that services are not in nature of stewardship services. Further, DRP observed that the TPO had discussed in detail the nature of various services, claimed to have been received the assessee from its A.E. Hence, the DRP directed the AO for disallowance of ₹ 78,57,058/-. In our opinion, if the assessee produces the particulars of actual expenditure for availing these services, then it is to be allowed. With this observation, we remit the issue to the file of AO for fresh consideration. Issues:Transfer Pricing adjustments of Rs. 78,57,058 towards 'management services'.Analysis:1. Transfer Pricing Adjustments: The case involved Transfer Pricing (T.P) adjustments of Rs. 78,57,058 made by the Transfer Pricing Officer (TPO) in relation to payments made by the assessee to its Associated Enterprise (A.E). The TPO applied the Comparable Uncontrolled Price (CUP) method to determine the Arm's Length Price (ALP) and rejected the objections raised by the assessee. The Dispute Resolution Panel (DRP) noted that the services were either stewardship services or the assessee failed to prove the actual receipt of services. The DRP emphasized that the motive to shift profits outside India is not a precondition for transfer pricing provisions to apply. The TPO found that many services claimed by the assessee were in the nature of stewardship, and the assessee failed to substantiate the actual receipt of these services, leading to the adjustments.2. Jurisdiction of TPO: The assessee argued that the TPO exceeded jurisdiction by analyzing profitability and deciding on the allowability of expenditure under section 37 of the Income Tax Act. The assessee relied on the Hyderabad Tribunal's judgment in a similar case to support its argument. The Tribunal held that once the Transactional Net Margin Method (TNMM) is applied, it covers all transactions, including royalty payments. The Tribunal emphasized that royalty payments are closely linked to production and sales activities and should be examined in conjunction with these activities. The Tribunal found the TPO's disallowance of royalty payments erroneous and unsustainable in law.3. Disallowance of Expenditure: The assessee contended that the TPO and DRP disallowed expenditure without considering that services were actually rendered and payments were made accordingly. The DRP observed that the invoices submitted by the assessee lacked details on how the services benefitted the business. The TPO discussed the nature of services but found the assessee failed to substantiate the actual receipt of services. The DRP directed the Assessing Officer (AO) to disallow the amount in question. The Tribunal remitted the issue back to the AO for fresh consideration, emphasizing that if the assessee provides details of actual expenditure for the services, it should be allowed.4. Conclusion: The Tribunal partly allowed the appeal for statistical purposes, remitting the issue of expenditure disallowance back to the AO for fresh consideration. The judgment highlighted the importance of substantiating actual receipt of services and payments made, especially in the context of transfer pricing adjustments and the jurisdiction of the TPO in analyzing expenditure under the Income Tax Act.This detailed analysis covers the key issues and arguments presented in the legal judgment regarding Transfer Pricing adjustments and the jurisdiction of the Transfer Pricing Officer in deciding on the allowability of expenditure.