Tribunal Appeal Outcome: Disallowances Upheld and Deleted in Business Expense Dispute

The Tribunal partly allowed the appeal, upholding certain disallowances while deleting others. The disallowance of software lease payment and referral fee was deleted, as evidence showed they were incurred for business purposes. However, the disallowance of transfer pricing adjustment and improvement expenses for leasehold premises was upheld partially, considering certain expenses as enduring in nature. The Tribunal's decision was rendered on 20th July 2021.

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Issues Involved:

1. Transfer Pricing Adjustment of Rs. 8,41,616/-
2. Disallowance of software lease payment of Rs. 29,96,384/- under section 37(1) of the Income Tax Act, 1961
3. Disallowance of referral fee of Rs. 23,67,000/- paid to M/s. Blend Financial Services Ltd.
4. Disallowance of Rs. 42,69,567/- towards improvement of the leasehold premises

Detailed Analysis:

1. Transfer Pricing Adjustment of Rs. 8,41,616/-:

The assessee, a resident company providing factoring and forfeiting services, entered into international transactions with its Associated Enterprises (AE), FIM Business Solution Ltd., Malta. The assessee paid Rs. 38,38,741/- as software lease expenses to the AE. The Transfer Pricing Officer (TPO) found that the assessee also paid Rs. 5,82,151/- as withholding tax and Rs. 2,59,465/- as service tax, which should have been paid by the AE. The TPO proposed an adjustment of Rs. 8,41,616/- for these taxes, which was sustained by the Dispute Resolution Panel (DRP). The Tribunal upheld the TPO's adjustment, noting that withholding tax and service tax are distinct from value-added tax and not covered by the agreement terms.

2. Disallowance of Software Lease Payment of Rs. 29,96,384/-:

The Assessing Officer (AO) disallowed the software lease expenses, alleging that the assessee failed to provide sufficient evidence to prove the expenses were incurred wholly and exclusively for business purposes. The DRP upheld the disallowance. However, the Tribunal found that the assessee had provided necessary details and documentary evidence, including the master services agreement and evidence of the transaction's arm's length nature. The Tribunal deleted the disallowance, concluding that the expenses were incurred for business purposes.

3. Disallowance of Referral Fee of Rs. 23,67,000/-:

The AO disallowed the referral fee expenses, claiming that the assessee did not provide sufficient evidence to demonstrate that the expenses were incurred wholly and exclusively for business purposes. The DRP upheld the disallowance. The Tribunal found that the assessee had submitted various documentary evidences, including the referral agreement, list of clients referred, invoices, and Form 16-A certificates. The Tribunal concluded that the referral fees were incurred for business purposes and deleted the disallowance.

4. Disallowance of Rs. 42,69,567/- Towards Improvement of Leasehold Premises:

The AO disallowed the expenses for leasehold premises improvement, treating them as capital in nature. The DRP upheld the disallowance. The Tribunal noted that the assessee had provided details of the expenses, which included interior work, installation of workstations, and other temporary works. However, some expenses could be of enduring nature. The Tribunal decided to disallow 25% of the expenses to account for potential revenue leakage and inflation of expenses, partly allowing the assessee's claim.

Conclusion:

The appeal was partly allowed, with the Tribunal upholding some disallowances and deleting others based on the evidence provided and the nature of the expenses incurred. The Tribunal's decision was pronounced in the open court on 20th July 2021.

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