2022 (11) TMI 681 - AT - Income Tax

Tribunal allows appeal on transfer pricing issues, adjusts loss amount, dismisses some claims

The appeal was partly allowed by the Tribunal. Grounds related to transfer pricing adjustments for expenses and purchases were allowed, resulting in the ... TP adjustment - reimbursement of expenses on the ground that the same pertained to Assessment Year 2007-08 (and not the relevant Assessment Year 2008-09), a period prior to the execution of the Inter-Corporate Agreement - HELD THAT:- As per Clause 5 of Schedule-17 of Notes to Accounts forming part of the financial statements for the Financial Year 2007-08 relevant to Assessment Year 2008-09 dealing with related parties disclosures, the reimbursement made to the related parties for the Assessment Year 2008-09 was INR 3,98,09,317/- as opposed to INR 7,87,13,678/- for the Assessment Year 2007-08. Thus, it clear that the aforesaid amount of INR 7,87,13,678/- was not debited to the Profit & Loss Account for the Assessment Year 2008-09. Since the deduction for the aforesaid amount was not claimed by the Appellant while computing taxable income for the Assessment Year 2008-09, the question of making the disallowance or addition of the same during the relevant previous year does not arise. Accordingly, Ground No. 2.1 raised by the Appellant is allowed and addition is deleted. TP adjustment - upward adjustment of ALP of transaction of purchase of asset - HELD THAT:- In the case before us, the TPO has determined ALP by computing WDV of the Asset without making any effort to identify a comparable transaction or the price paid by third party. Further, while doing so the TPO has taken depreciation rate of 60% as per the provisions of the Act without considering any other factor(s). Therefore, we delete the transfer pricing addition - Ground No. 2.2 raised by the Appellant is allowed. Addition of reimbursement of out of pocket expenses by the Appellant to its AE - HELD THAT:- TPO/AO has not pointed out any defect/discrepancy in the bills/supporting documents furnished by the Appellant which constitute 78% of the out of pocket expenses reimbursed by the Appellant to its AE. The Appellant has not furnished bills/supporting documents which constitute balance 22% out of pocket expenses reimbursed and only 3.5% of the total expenses reimbursed by the Appellant to its AEs for the relevant assessment year. In view of the aforesaid facts, we are inclined to accept the submission advanced by the Ld. Authorised Representative for the Appellant that the Appellant has substantially complied with the directions given by the Assessing Officer and therefore, in our view, the TPO/AO was not justified in making additions - Further, in our view, the TPO has also failed to determine the ALP of the transaction and has, in effect, made disallowance holding that the Appellant had failed to substantiate the claim. Accordingly, in view of the aforesaid, we delete the addition - Ground No. 2.3 raised by the Appellant is allowed. Computation of loss - Appellant submitted that while computing the total loss the Assessing Officer has committed computation error - HELD THAT:- Assessing Officer has incorrectly added the depreciation amount of INR 48,04,318/- to arrive at incorrect figure of loss of INR 10,68,91,995/- instead of correct figure of INR 11,65,00,631/-. In view of the aforesaid, the Assessing Officer is directed to increase the amount of loss by the amount of by the depreciation amount of INR 48,04,318/-. Ground No. 5 raised by the Appellant is allowed. Disallowance after carrying out verification of total expenses incurred by the Appellant during the relevant previous year but prior to execution of the Inter-Corporate Agreement - HELD THAT:- Having perused the material on record including invoices, we concur with the Assessing Officer to the extent of disallowance being payments made by the Appellant for arrival/departure tax briefing for employees and tax returns for employees only. In our view, the aforesaid amount was not incurred wholly and exclusively for the benefit of the Appellant and was for the personal benefit of employees. The aforesaid amount has also not been taxed as prerequisite in the hands of the employees. Accordingly, disallowance is confirmed while balance disallowance is deleted. In view of the aforesaid, Ground No. 7 is partly allowed. Issues Involved:1. Assessment of loss under normal provisions of the Act.2. Adjustment of transfer price for international transactions.3. Computation of double adjustment.4. Classification of IT connectivity and software expenses.5. Computation error in determining the loss.6. Addition of contract receipts.7. Disallowance of professional fees.Detailed Analysis:Ground No. 1 & 2:Grounds No. 1 and 2 are general in nature and do not require adjudication.Ground No. 2.1:The issue pertains to the transfer pricing adjustment of INR 4,90,78,826/- for reimbursement of expenses related to the Assessment Year 2007-08. The Appellant claimed deduction for INR 2,46,19,542/- in the Assessment Year 2008-09 after deducting/depositing tax at source. The Tribunal found that the amount of INR 7,87,13,678/- was not debited to the Profit & Loss Account for the Assessment Year 2008-09. Therefore, the question of disallowance or addition does not arise. Accordingly, Ground No. 2.1 was allowed, and the addition was deleted.Ground No. 2.2:This issue concerns the transfer pricing adjustment of INR 1,50,75,835/- for the purchase of an IBM Server. The TPO reduced the purchase price by charging depreciation, which was recalculated by the DRP. The Tribunal concluded that the asset was used for the first time by the Appellant in India and that the TPO's method of determining ALP by computing WDV was not justified. The Tribunal deleted the transfer pricing addition of INR 1,50,75,835/-. Ground No. 2.2 was allowed.Ground No. 2.3:The issue involves the transfer pricing adjustment of INR 42,40,116/- for reimbursement of out-of-pocket expenses. The Appellant furnished bills for INR 1,52,70,694/-, but the TPO determined the ALP of the balance expenses to be 'Nil'. The Tribunal noted that the Appellant had substantially complied by providing supporting documents for 78% of the expenses. The TPO/Assessing Officer was not justified in making the addition. Ground No. 2.3 was allowed, and the addition was deleted.Ground No. 3:The Appellant contended a double adjustment of INR 19,94,441/-. The Tribunal remanded this issue back to the Assessing Officer for verification/re-computation, considering the findings related to Grounds No. 2.2 and 2.3. Ground No. 3 was allowed for statistical purposes.Ground No. 4 & 5:Ground No. 4, concerning the disallowance of IT Connectivity Charges and Software Expenses, was dismissed as not pressed. Ground No. 5, regarding the computation error in determining the loss, was allowed. The Tribunal directed the Assessing Officer to increase the amount of loss by the depreciation amount of INR 48,04,318/-.Ground No. 6:The Appellant did not wish to press this ground due to the smallness of the amount in dispute (INR 24,855/-). Ground No. 6 was disposed of as not pressed.Ground No. 7:This issue pertains to the disallowance of INR 6,27,151/- for professional fees paid to KPMG. The Tribunal concurred with the Assessing Officer's disallowance of INR 5,53,039/- for expenses incurred for employees' personal benefit but deleted the balance disallowance of INR 74,112/-. Ground No. 7 was partly allowed.Additional Grounds:The Appellant raised an additional ground for claiming deduction of INR 71,93,907/- for payment made to a non-resident. However, this additional ground was disposed of as not pressed.Conclusion:The appeal was partly allowed. The Tribunal provided detailed reasoning for each ground, ensuring that the legal principles and facts were thoroughly considered. The order was pronounced on 13.10.2022.