2015 (7) TMI 41 - AT - Income Tax

Tribunal remands transfer pricing case for thorough study and reevaluation of ALP determination

Metro Tunneling Group Versus Joint Commissioner of Income Tax -17 (3), Mumbai

Metro Tunneling Group Versus Joint Commissioner of Income Tax -17 (3), Mumbai - TMI Issues Involved:1. ALP adjustment of Rs. 14.98 crores for Head Office Overheads.2. Methodology and evidence for allocation of overhead expenses.3. TPO's rejection of the claim for Head Office Overheads.4. CIT(A)'s confirmation of the TPO's decision.5. Assessee's contentions and legal precedents.Issue-wise Detailed Analysis:1. ALP Adjustment of Rs. 14.98 Crores for Head Office Overheads:The assessee, a joint venture undertaking, contested the ALP adjustment of Rs. 14.98 crores made by determining the ALP of Head Office Overheads at NIL. The TPO accepted the ALP of transactions related to the purchase of assets and reimbursement of direct expenses but rejected the reimbursement of Head Office Overheads, determining the ALP as NIL. Consequently, the entire amount claimed by the assessee was added by the AO, which was confirmed by the Ld CIT(A).2. Methodology and Evidence for Allocation of Overhead Expenses:The assessee justified the allocation of overhead expenses based on an agreed formula in the MOU between the JV members. The formula involved computing the percentage of overhead expenses incurred by the Head Office over the sales revenue reported by the Head Office, subject to a maximum of 8.5% of the revenue attributable to the share of each member. The assessee argued that since it lacked its own infrastructure, the JV members carried out various tasks, and the overheads were charged based on the auditor's certificates.3. TPO's Rejection of the Claim for Head Office Overheads:The TPO rejected the claim for several reasons, including:- Lack of an objective basis for allocating overheads up to 8.5%.- Arbitrary charging of overheads based on auditor certificates without sound objective analysis.- Failure to substantiate the services rendered by the members to justify the reimbursement.- Absence of evidence showing that the payment was only to the extent of the benefit derived by the assessee.- No demonstration of how such services would be valued by an independent entity.- The assessee did not address the willingness of the service recipient to pay under arm's length conditions.4. CIT(A)'s Confirmation of the TPO's Decision:The Ld CIT(A) upheld the TPO's decision, noting:- The allocation of overheads was not scientifically or systematically documented.- Different accounting years and criteria were used by the auditors of the JV members.- The expenses included under indirect costs varied significantly among the members.- The nature of the expenses could not be directly related to specific activities or income.- The auditor's certificates did not confirm the actual rendering of services by the AEs.- The nature of expenses suggested they were operational and not for the benefit of the member as a shareholder.- Previous acceptance of overhead costs did not apply due to negligible quantum of international transactions in earlier years.- The case of Metro Civil Contractors was not comparable.5. Assessee's Contentions and Legal Precedents:The assessee argued that:- The international transaction was bench-marked against the auditor's certificates using the Cost Plus Method, with reimbursements made on an actual basis without markup.- Identical reimbursements in the preceding year were accepted by the AO.- The foreign entities were bound to incur indirect expenses for supplying assets and incurring direct expenses.- The TPO should not comment on the prudence or necessity of incurring expenses.- The disallowance in a similar case (M/s International Metro Civil Contractors) was deleted by the Tribunal.- Legal precedents supported the view that the TPO cannot question the commercial wisdom of the assessee or the necessity to incur expenses.Conclusion:The Tribunal noted that the basis of allocation of overheads and the determination of ALP required fresh examination. The TPO had not determined the ALP of the transactions in accordance with Transfer Pricing provisions. The Tribunal set aside the order of the Ld CIT(A) and restored the matter to the file of the AO/TPO for fresh consideration, emphasizing the need for a comprehensive Transfer Pricing study to validate the claim with external comparables. The appeal was treated as allowed for statistical purposes.