Assessee's appeal partially allowed, transfer pricing adjustment deleted, penalty dismissed

The tribunal partially allowed the assessee's appeal by deleting the transfer pricing adjustment and protective disallowance of employee cost and administrative expenses. The initiation of penalty proceedings and levy of interest were dismissed as infructuous.

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Issues Involved:
1. Transfer pricing adjustment related to international transactions.
2. Disallowance of employee cost and administrative expenses.
3. Initiation of penalty proceedings and levy of interest.

Detailed Analysis:

Transfer Pricing Adjustment:
The primary issue revolves around the transfer pricing adjustment of Rs. 32,35,68,333 related to the international transaction of providing liaisoning support services/indent services by the assessee to its associated enterprise (A.E.). The assessee, an Indian company, is a wholly-owned subsidiary of Turbomach SA and is involved in designing, developing, installing, commissioning, and servicing gas turbines for captive power plants. The Transfer Pricing Officer (TPO) observed that the assessee had entered into a contract with PWD (CWG), Delhi, on behalf of its A.E., for the supply and installation of gas turbines. The TPO concluded that the assessee provided liaisoning services for which no charges were levied to the A.E. The TPO benchmarked the commission rate at 15.83% based on agreements from other parties, resulting in a transfer pricing adjustment of Rs. 32,35,68,333.

The Dispute Resolution Panel (DRP) upheld the TPO's findings, stating that the assessee provided support services to its A.E. for marketing and selling turbines in India. The DRP noted that the A.E. did not have a Permanent Establishment (P.E.) in India, and the assessee did not provide evidence to support its claim of not rendering such services.

However, the tribunal found no substantial evidence to support the TPO's and DRP's conclusions. It was observed that the contract with PWD (CWG) clearly demarcated the responsibilities and payments for the assessee and its A.E. The tribunal noted that the assessee's A.E. directly raised invoices and received payments for the supply of gas turbines, and there was no material to suggest that the assessee had provided any marketing services to its A.E. Consequently, the tribunal deleted the transfer pricing adjustment, allowing grounds 1 to 5 raised by the assessee.

Disallowance of Employee Cost and Administrative Expenses:
The Assessing Officer (AO) disallowed Rs. 4,50,20,744, being 50% of the expenditure incurred towards employee cost and administrative, selling, and distribution expenses, on a protective basis. The AO observed that the assessee incurred significant expenses on business promotion and travel, suggesting that these were not wholly for the assessee's business but also benefited the A.E.

The DRP directed the AO to remove the protective addition and take a without-prejudice stand on the disallowance. However, the AO, in the final assessment order, did not make any substantive addition or state that the amount was telescoped into the transfer pricing adjustment.

The tribunal found that the protective disallowance was not justified as there was no substantive addition in the A.E.'s hands. The tribunal also noted that the assessee's turnover increased by 40%, and the number of employees rose from 16 to 23, justifying the increase in expenses. Therefore, the tribunal held that the ad-hoc disallowance of 50% was not warranted and disposed of ground 7 accordingly.

Initiation of Penalty Proceedings and Levy of Interest:
Ground 8, relating to the initiation of penalty proceedings under section 271(1)(c) and the levy of interest under sections 234A, 234B, and 234D, was dismissed as it became infructuous following the tribunal's findings on the primary issues.

Conclusion:
The tribunal allowed the assessee's appeal partly, deleting the transfer pricing adjustment and the protective disallowance of employee cost and administrative expenses. The initiation of penalty proceedings and levy of interest were dismissed as infructuous. The order was pronounced in the open court on 02.01.2017.

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