Tribunal rules in favor of assessee on various expense disallowances & arm's length price determination

The Tribunal allowed the appeal in favor of the assessee on all grounds, including disallowance of advertisement and sales promotion expenses, miscellaneous expenses, traveling expenses, foreign exchange fluctuation loss, disallowance under Section 56(2)(viib) of the Income Tax Act, and determination of arm's length price for management and administrative services. The Tribunal emphasized consistency, commercial expediency, and proper application of legal provisions in its decision pronounced on 19.06.2019.

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Issues Involved:
1. Disallowance of advertisement and sales promotion expenses.
2. Disallowance of miscellaneous expenses.
3. Ad hoc disallowance of traveling expenses.
4. Disallowance of foreign exchange fluctuation loss.
5. Disallowance under Section 56(2)(viib) of the Income Tax Act.
6. Determination of arm’s length price for management and administrative services.

Detailed Analysis:

1. Disallowance of Advertisement and Sales Promotion Expenses:
The assessee challenged the disallowance of Rs. 36,48,606/- related to advertisement and sales promotion expenses. The Tribunal referenced its previous order dated 05.04.2017 for AY 2011-12, which adjudicated similar issues in favor of the assessee. The Tribunal reiterated that the Assessing Officer (AO) had disallowed these expenses without valid reasons, emphasizing that commercial expediency must be viewed from the businessman's perspective. Consequently, the Tribunal upheld the deletion of such disallowances, allowing the assessee's appeal on this ground.

2. Disallowance of Miscellaneous Expenses:
The assessee contested the ad hoc disallowance of Rs. 45,41,101/- for miscellaneous expenses. The Tribunal again referred to its prior decision for AY 2011-12, where similar disallowances were deleted. It reiterated that the AO had no basis for disallowing these expenses, as the details were available, and the AO had not justified how these were not business-related. The Tribunal upheld the deletion of the disallowance, allowing the assessee's appeal.

3. Ad Hoc Disallowance of Traveling Expenses:
The assessee disputed the 20% ad hoc disallowance amounting to Rs. 59,37,080/- for traveling expenses. The Tribunal noted that the AO had allowed these expenses in the previous assessment years without any disallowance and that the AO/Dispute Resolution Panel (DRP) had not rejected the assessee's books of accounts. The Tribunal emphasized the principle of consistency and deleted the ad hoc disallowance, allowing the appeal on this ground.

4. Disallowance of Foreign Exchange Fluctuation Loss:
The assessee challenged the disallowance of Rs. 1,55,65,867/- related to foreign exchange fluctuation loss. The Tribunal observed that the AO had allowed such losses in previous years and that the losses were incurred in the normal course of business. Citing the Supreme Court's decision in CIT vs. Woodward Governor India Pvt. Ltd., the Tribunal held that these losses were allowable and deleted the disallowance, allowing the appeal.

5. Disallowance under Section 56(2)(viib) of the Income Tax Act:
The assessee contested the disallowance of Rs. 92,63,192/- under Section 56(2)(viib), related to the issuance of shares at a premium to its non-resident parent company. The Tribunal clarified that this section does not apply to non-residents. It found that the AO and DRP had erred in applying this section and deleted the disallowance, allowing the appeal.

6. Determination of Arm’s Length Price for Management and Administrative Services:
The assessee disputed the adjustment of Rs. 68,81,619/- made by the Transfer Pricing Officer (TPO) by considering the arm’s length price (ALP) for management and administrative services as NIL. Referring to its earlier decision for AY 2011-12, the Tribunal noted that the services rendered by the AE were necessary and beneficial for the assessee's business. It held that the TPO should not question the commercial expediency of the transactions and deleted the ALP adjustment, allowing the appeal.

Conclusion:
The Tribunal allowed the appeal in favor of the assessee on all grounds, emphasizing the principles of consistency, commercial expediency, and proper application of legal provisions. The Tribunal's decision was pronounced on 19.06.2019.

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