2019 (1) TMI 1674 - AT - Income Tax

Tribunal decisions on tax assessments: adjustments, disallowances, and appeals

The Tribunal partly allowed the assessee's appeal for the assessment year 2007-2008 regarding Arm's Length Adjustment for Marketing Expenses and Central ... TP adjustments - Arm's Length price - marketing expenses - cost allocation of Central Service Charges - corresponding expenditure of comparable companies - common service center services provided by AE - the cost incurred thereon would have to be shared by all the participant countries including the assessee-company in the ratio of turnover. These services are in the nature of shared services and are therefore customized for the Abbott group. Held that:- the assessee obviously had to incur certain advertisement and marketing expenses for distribution of its products. In any case, we also hold that the ld.TPO cannot look into the propriety of incurrence of expenses by the assessee. - The role of ld.TPO is to see whether all transactions carried out by the assessee with its AEs fall within the ambit and meaning of international transaction u/s 92B of the Act and that whether the same was transacted at arm's length price, for which purpose the determination of price should be made in accordance with any of the methods prescribed in the statute u/s 92C of the Act. It is not disputed that the total cost incurred by the group and the cost allocation made to assessee-company under each head was duly certified by an independent Accountant, who was appointed for this specific purpose in accordance with the conditions laid out in the Service Centre Agreement. When such costs that had been allocated to the assessee-company had been absorbed by making the payment to AEs for the services rendered by AEs (which is not disputed by the Revenue before us), then the action of the lower authorities in determining the arm's length price of such services at Rs.Nil is unwarranted. The lower authorities were not justified in determining the arm's length price in respect of marketing expenses at Rs.Nil as against the claim of ₹ 79,04,690. - Decided in favor of assessee. Bad debts - landlord refused to refund the deposit. - deposit was duly written off in the books of account by the assessee - Held that:- the ground raised by the Revenue itself is patently wrong inasmuch as the Revenue is expecting the assessee to comply with the conditions of section 36(2) of the Act by offering the income in the hands of the assessee in earlier years. The ground also suggests that the assessee had made claim u/s 36(1)(vii) of the Act, which in the instant case is not claimed by the assessee. The assessee has claimed deduction only u/s 28 of the Act after duly satisfying the conditions laid down for such claim. - Decided against the revenue. Issues Involved:1. Arm's Length Adjustment for Marketing Expenses and Central Service Charges.2. Disallowance under Section 14A of the Income-tax Act.3. Addition based on AIR Information.4. Disallowance of Expenses based on AIR Information.5. Bad Debts Write-off.6. Bogus Purchases.Issue-wise Detailed Analysis:1. Arm's Length Adjustment for Marketing Expenses and Central Service Charges:The primary issue in the assessee's appeal for the assessment year 2007-2008 was whether the Dispute Resolution Panel (DRP) was justified in upholding the Arm's Length adjustment made in respect of marketing expenses of Rs. 79,04,690 and cost allocation of Central Service Charges of Rs. 15,74,895. The assessee, a subsidiary of Abbott Laboratories, USA, engaged in the distribution of healthcare products, used the Transactional Net Margin Method (TNMM) to benchmark its international transactions. The Transfer Pricing Officer (TPO) observed that the assessee's marketing expenses were higher than those of comparable companies and made adjustments accordingly. However, the Tribunal held that the TPO cannot determine the propriety of expenses and should only assess if transactions were at Arm's Length Price (ALP). The Tribunal also noted that the cost allocation was certified by an independent accountant, and thus, the TPO's adjustment to the marketing expenses and cost allocation was unwarranted.2. Disallowance under Section 14A of the Income-tax Act:For the assessment year 2008-2009, the assessee challenged the disallowance made under Section 14A of the Act read with Rule 8D of the Income-tax Rules, amounting to Rs. 10,34,897/-. The Tribunal noted that the Assessing Officer (AO) did not record any dissatisfaction with the assessee's computation method before applying Rule 8D. Citing the Tribunal's decision in Solvay Pharma India Ltd., the Tribunal held that the AO must record dissatisfaction before invoking Rule 8D. Consequently, the disallowance was deleted.3. Addition based on AIR Information:The AO made an addition of Rs. 12,250/- based on AIR information, which the assessee claimed did not pertain to it. The Tribunal found that the assessee had not claimed the corresponding TDS and had maintained its accounts meticulously. Therefore, the addition was deleted.4. Disallowance of Expenses based on AIR Information:For the assessment year 2008-2009, the AO disallowed Rs. 35,81,950/- based on unreconciled AIR information related to credit card transactions. The Tribunal noted that the disallowance was made on an ad-hoc basis without rejecting the assessee's books of account. Consequently, the disallowance was deleted.5. Bad Debts Write-off:For the assessment year 2010-2011, the AO disallowed Rs. 41,65,500/- claimed as a deduction for doubtful deposits. The assessee provided evidence of efforts to recover the deposit and the write-off in its books. The DRP allowed the deduction, and the Tribunal upheld this decision, noting that the deposit was paid for business purposes and had become irrecoverable.6. Bogus Purchases:The AO disallowed Rs. 21,78,563/- as bogus purchases from two parties listed as bogus dealers by the Sales Tax Department. The assessee provided extensive documentation to substantiate the purchases. The DRP deleted the addition, and the Tribunal upheld this decision, noting that the documentation provided by the assessee was sufficient to prove the genuineness of the transactions.Summary of Judgments:1. Assessee's Appeal for AY 2007-2008 (ITA No.535/Mum/2012): Partly allowed.2. Assessee's Appeal for AY 2008-2009 (ITA No.7595/Mum/2012): Allowed.3. Assessee's Appeal for AY 2009-2010 (ITA No.1320/Mum/2014): Allowed.4. Assessee's Appeal for AY 2010-2011 (ITA No.1797/Mum/2015): Allowed.5. Revenue's Appeal for AY 2010-2011 (ITA No.2383/Mum/2015): Dismissed.