2017 (7) TMI 1001 - AT - Income Tax

Tribunal remands tax case for verification of salary, expenses, and consultancy charges.

The Tribunal remanded the case back to the Tax Authorities for verification and re-examination of various disputed issues, including salary expenses of ... Arm’s length price - salary expenses of two expatriate employees and reimbursement of actual expenses - Held that:- While the employees were sent to India for a certain period of time, the employees were still rightfully entitled to the same level of salary as they were earning in their country origin. This fact has to be verified by the TPO. Further the Ld. AR pointed out that both the employees brought with them the valuable expertise and experience for the assessee company. The Ld. AR demonstrated the same with the relevant documents which was before the DRP, but the DRP has not taken cognizance of the same. During the hearing, the Ld. DR pointed out that all the relevant documents in support of Ld. AR’s submissions related to salary expenses of two expatriate employees, the same was not tendered before the TPO in the aforementioned. There is no finding to that effect in TPO’s order but though it was submitted before the DRP, the DRP also failed to look into this crucial evidence. Therefore, this issue needs to be looked into and these documents have to be verified. The DRP order is non speaking order. Therefore, this issue is remanded back to the TPO/A.O. Needless to say, the assessee will be allowed a reasonable opportunity of hearing. Payments in the nature of cost contributions/ reimbursements - Held that:- TPO has disallowed this expenses by making adjustment with respect to consultancy charges of ₹ 2.68 crores which was totally ignored by the Assessing Officer while giving effect to its order dated 15/11/2010. The A.O is directed to make proper adjustment as relates to consultancy charges and then quantify the addition. Appeal of the assessee partly allowed for statistical purpose. Issues Involved:1. Validity of the Assessment Order.2. Addition of Rs. 9,20,98,565 as Arm’s Length Price (ALP) for cost contributions/reimbursements.3. Enhancement of returned income by Rs. 2,68,61,146 for consultancy charges.4. Confirmation of balance addition of Rs. 6,52,37,419.5. Initiation of penalty proceedings under Section 271(1)(c) of the Income Tax Act.Detailed Analysis:1. Validity of the Assessment Order:The assessee challenged the assessment order passed under Section 143(3)/154 read with Section 144C, claiming it was vitiated as the Dispute Resolution Panel (DRP) erred both on facts and in law in confirming the addition made by the Assessing Officer (AO).2. Addition of Rs. 9,20,98,565 as Arm’s Length Price (ALP) for cost contributions/reimbursements:The assessee argued that the DRP grossly erred in considering the ALP of certain payments in the nature of cost contributions/reimbursements amounting to Rs. 9,20,98,565. The Transfer Pricing Officer (TPO) had made an upward adjustment, stating that the assessee failed to prove the nature of services received and the benefits accrued from the cost contributions/reimbursements. The TPO determined the ALP of these transactions as nil due to the lack of evidence provided by the assessee.3. Enhancement of returned income by Rs. 2,68,61,146 for consultancy charges:The DRP upheld the enhancement of the assessee’s returned income by Rs. 2,68,61,146, considering the ALP of consultancy charges as nil. The assessee contended that it had not claimed a deduction for these charges in its return of income, leading to double taxation. The Ld. AR provided detailed explanations and evidence, including the nature of reimbursements and the computation of income tax audit reports, to demonstrate that the consultancy charges were already disallowed by the assessee.4. Confirmation of balance addition of Rs. 6,52,37,419:The DRP confirmed the addition of Rs. 6,52,37,419, disregarding the ALP determined by the assessee in its TP documentation. The DRP noted that the assessee failed to substantiate its claims with evidence, particularly regarding the services received and the economic or commercial benefits derived. The DRP also observed that the assessee did not furnish reliable allocation keys for the expenses reimbursed. The Ld. AR provided extensive documentation and argued that the payments made for expatriate salaries, testing charges, maintenance of NIR equipment, and other cost contributions were legitimate business expenses and should be accepted at arm’s length.5. Initiation of penalty proceedings under Section 271(1)(c):The DRP confirmed the initiation of penalty proceedings under Section 271(1)(c) of the Act without recording adequate reasons. The Ld. AR argued that the penalty proceedings were initiated mechanically and should be reconsidered.Judgment:The Tribunal noted that the evidences submitted by the assessee were not before the TPO but were presented to the DRP, which failed to consider them. The Tribunal remanded the issues back to the TPO/AO for verification of the documents and re-examination of the claims, particularly regarding the salary expenses of expatriate employees and the reimbursement of actual expenses. The AO was directed to make proper adjustments concerning consultancy charges and quantify the addition accordingly. The appeal was partly allowed for statistical purposes, and the order was pronounced in the open court on 29th March 2017.