2013 (12) TMI 942 - AT - Income Tax

Tribunal directs reassessment of corporate expenses, rejects Transfer Pricing Officer's determination.

The Tribunal allowed the appeal for statistical purposes, directing the Assessing Officer to re-examine the details of corporate expenses and consider the ... Transfer price adjustments - arm's length price (ALP) - Held that:- there is no cogent basis for sustaining the addition made with regard to the payment of technical fee, training fee, testing expenses, payment of modification of tools and payment of design and development expenses. - DRP has not given any cogent reasons. - No additions - Decided in favor of assessee. Whether the matter should be remanded back - Held that:- TPO has made the elaborate order whereby he has only dealt with royalty aspect and not dealt with the other allied payments. The royalty payment has been allowed by the DRP. In these circumstances, assessee will be put to great hardship, if the TPO is given a second inning to make out a fresh case. - Decided against the revenue. Excessive and unreasonable expenses u/s 40A(2) - Secondment of employees - AO in the assessment order amongst other things, has alleged that the expenses are bogus in nature and the same have been booked by way of some tax avoidance measures. However, the Assessing Officer towards the end, has allowed 50% of such expenses as excessive and unreasonable - Held that:- DRP has also affirmed Assessing Officer's action by stating that claim of assessee that 17% of the time of employees of MIL has been spent for the assessee is also without any supporting evidence. Thus, we find that there is conflict between submissions of the assessee and finding by the authorities below. - Issue remitted back. Issues Involved:1. Assessment of the Assessee's income.2. Determination of the arm's length price (ALP) for various payments.3. Disallowance of corporate expenses.Issue-wise Detailed Analysis:1. Assessment of the Assessee's Income:The Assessee contested the assessment of its income at Rs. 8,79,70,228/- against the returned income of Rs. 8,08,05,625/-, resulting in total additions of Rs. 71,64,603/-. The Assessee argued that the assessment was made on wholly illegal, erroneous, and untenable grounds.2. Determination of the Arm's Length Price (ALP) for Various Payments:The core issue revolved around the determination of the ALP under section 92CA(3) of the Income-tax Act. The Transfer Pricing Officer (TPO) scrutinized the payments made by the Assessee, including royalty payments, technical fees, training and testing expenses, and design and development expenses.a. Royalty Payments:The TPO determined the ALP of royalty payments at NIL, citing reasons such as the lack of evidence on how the royalty rate was fixed, absence of cost-benefit analysis, and no proof of economic benefit derived from the know-how received from the Associated Enterprise (AE). The TPO also noted that the profitability of the Assessee was below the arithmetical mean margin of comparable companies, suggesting no tangible benefit from the technology.b. Other Payments (Technical Fees, Training and Testing Expenses, Design and Development Expenses):The TPO aggregated these payments with royalty payments and determined the ALP at NIL without independent discussion. The Dispute Resolution Panel (DRP) held that the payment under the head of royalty was at arm's length but approved the TPO's stand on other payments. The Tribunal found no cogent basis for the addition made regarding these payments and noted the lack of detailed discussion by the TPO.3. Disallowance of Corporate Expenses:The Assessing Officer disallowed 50% of the corporate expenses amounting to Rs. 45,00,000/- paid to M/s Minda Industries Ltd., citing reasons such as the routine nature of services, overlapping expenses, and lack of verification of actual services rendered. The DRP sustained the disallowance, stating that there was no direct evidence for the services claimed to have been rendered. The Tribunal found a conflict between the Assessee's submissions and the findings of the authorities. The matter was remitted back to the Assessing Officer to examine the details and break-up of the expenses afresh.Conclusion:The Tribunal allowed the appeal for statistical purposes, directing the Assessing Officer to re-examine the details of corporate expenses and consider the issue afresh, while rejecting the TPO's determination of the ALP for other payments due to lack of detailed discussion and cogent reasons. The Tribunal emphasized the need for adequate opportunity for the Assessee to present its case.