2021 (6) TMI 969 - AT - Income Tax

Tribunal allows Revenue's Appeal delay, reverses Transfer Pricing Officer, and partially allows Assessee's appeals

The tribunal condoned the delay in filing the Revenue's Appeal due to a reasonable cause presented by the Income Tax Officer. It admitted the appeal for ... TP Adjustment - Interest on receivables - forms an international transaction U/s. 92B or not? - HELD THAT:- This tribunal's coordinate bench decision 'Bechtel India Pvt. Ltd.' [2017 (5) TMI 965 - ITAT DELHI] holds that interest on receivables indeed comes within the purview of section 92B Explanation (c) inserted vide Finance Act 2012 as applicable with retrospective effect from 1/4/2002. Hon'ble Madras high court's recent judgment in PCIT Vs Reddington India [2020 (12) TMI 516 - MADRAS HIGH COURT] also holds the same view. We thus, accept the Revenue's arguments in principle that interest on receivables is indeed an international transaction U/s. 92B of the Act. Interest adjustments on receivables - We notice with the able assistance of both the parties that neither of the TPO in these three assessment years has given any comparable instance in the very segment whilst charging the impugned interest on the assessee's receivables since he had adopted the SBI's term deposit rates only in benchmarking the same. The Revenue's endeavor before us supports the lower authorities' action on the pretext that such receivables are very much akin to a financial transaction to be benchmarked as per the SBI's short term lending or deposit rates. We find no merit in the Revenue's instant argument since Chapter -X of the Act is a special provision wherein each and every adjustment could only be made going by the uncontrolled market price of the transactions in the very segment; followed by benchmarking thereof as per the international currency 'LIBOR' rates only. We, therefore, reverse the TPO's identical action in all these Assessment Years in view of the foregoing twin reasons regarding non-quantification of the impugned adjustment(s) segment wise and as per the LIBOR rates - We, thus, follow judicial consistency as whilst confirming the DRP's directions in A.Y: 2011-2012 to the Assessing Officer to delete the impugned interest adjustments on receivables. Exclude communication charges from assessee's total turnover - HELD THAT:- AO's draft assessment order had excluded the impugned communication charges from export turnover only which stands modified in the DRP's directions that the assessee's total turnover of ₹ 4,26,963/- must also follow the suit to this limited extent. Suffice to say, the instant issue has also stands settled as per the hon'ble apex court's landmark decision in Addl. CIT vs. HCL Technologies Ltd. [2018 (5) TMI 357 - SUPREME COURT] followed by the CBDT's circular No. 4/2018 dated 14/8/2018 hold that communication charges deserve to be excluded both export as well as total turnover. We thus, decline the Revenue's instant later substantive ground as well. Disallowing business promotion expenses - HELD THAT:- It transpires from a perusal of the case records the DRP had directed the Assessing Officer to examine the Assessee's vouchers which in turn were submitted only to the extent of ₹ 75,49,208/-. AO's final assessment order holds that the vouchers are not wholly and exclusively related to the assessee's business. DR fails to substantiate that such day-to-day expenses very much form part of the regular heads of expenditure per se which cannot be altogether ruled out. We also make clear that the Assessee has further failed to prove the live nexus between its impugned claim to have been incurred wholly and exclusively for the purpose of the business only. Facing with this situation, we deem it appropriate to restrict the impugned disallowance to the extent of 20% only with a rider that the same shall not be treated as a precedent. Necessary computation shall follow as per law. Issues Involved:1. Condoning the delay in filing the Revenue's Appeal2. Arm's length price adjustment3. International transaction - interest on receivables4. Benchmarking of interest on receivables5. Exclusion of communication charges from turnover6. Disallowance of business promotion expensesAnalysis:1. Condoning the Delay in Filing the Revenue's Appeal:The judgment addressed a 2-day delay in filing the Revenue's Appeal due to a mix-up of files in the office. The tribunal condoned the delay after finding a reasonable cause presented by the jurisdictional Income Tax Officer. The delay was considered justified, and the appeal was admitted for hearing on merits.2. Arm's Length Price Adjustment:Both the Revenue and the Assessee appealed against the directions of the Dispute Resolution Panel regarding arm's length price adjustments. The tribunal examined the actions of lower authorities and the DRP's directions. It was noted that the DRP's directions relied on previous tribunal orders and the adoption of specific deposit rates. The tribunal reversed the TPO's actions in the assessment years, citing the need for consistency and adherence to market prices for transactions.3. International Transaction - Interest on Receivables:The key argument revolved around whether interest on receivables constitutes an international transaction under section 92B of the Income Tax Act. The tribunal referred to relevant precedents and held that interest on receivables falls within the purview of section 92B. The tribunal accepted the Revenue's argument that interest on receivables is an international transaction.4. Benchmarking of Interest on Receivables:The tribunal analyzed the benchmarking of interest on receivables and found that the TPO had not provided comparable instances in the segment for charging interest on the assessee's receivables. It was emphasized that adjustments should be based on uncontrolled market prices and benchmarked according to international currency rates. The tribunal reversed the TPO's actions in all assessment years due to non-quantification of adjustments and lack of benchmarking as per LIBOR rates.5. Exclusion of Communication Charges from Turnover:The issue of excluding communication charges from turnover was discussed. The tribunal referred to relevant court decisions and circulars, concluding that communication charges should be excluded from both export and total turnover. The Revenue's argument against this exclusion was declined, and the Assessee's appeal on the same issue was partly allowed.6. Disallowance of Business Promotion Expenses:Regarding the disallowance of business promotion expenses, the tribunal found discrepancies in the vouchers submitted by the Assessee. The tribunal restricted the disallowance to 20% of the claimed expenses, emphasizing the lack of clear nexus between the expenses and business purposes. The Assessee's appeal on this issue was partly allowed.In conclusion, the tribunal dismissed the Revenue's Appeal and partly allowed the Assessee's appeals on various grounds, providing detailed reasoning for each decision. The judgment highlighted the importance of consistency, adherence to legal provisions, and proper documentation in tax assessments.