2023 (8) TMI 440 - AT - Income Tax

Tribunal partially favors taxpayer, dismisses Department appeals; sets new guidelines for corporate guarantee, software services.

The Tribunal's decision resulted in a partial allowance of the assessee's appeal for statistical purposes for A.Y. 2011-12, and a partial allowance for ... TP Adjustment - Upward adjustment for financial guarantee given by assessee to AE - HELD THAT:- Bombay High Court in the case of Siro Clinpharm [2021 (10) TMI 754 - ITAT MUMBAI] held that corporate guarantee constitutes international transaction u/s. 92B of the Act and further the ITAT directed the Assessing Officer to adopt 0.5% as an arms length consideration for the corporate guarantee issued by the assessee in favour of its AE. We are of the considered view that extending of corporate guarantee to AE constitutes an “international transaction” and the Assessing Officer is directed to adopt 0.5% as an arms length consideration for the corporate guarantee issued by the assessee in favour of its AE. Upward adjustment for software services by P & C division of assessee to AE - HELD THAT:- Considering assessee as submitted that the facts and issues for consideration for assessment year 2010-11 are completely different and unconnected it was submitted before us, that in the instant case, it may be noted that order of ld. CIT(A) for assessment year 2010-11 [2019 (9) TMI 1702 - ITAT AHMEDABAD] on which reliance has been placed by CIT(A) while confirming the adjustment has been reversed by ITAT subsequently. However, in the instant facts, the matter needs to be set aside to see whether the comparables which have been taken are correct or not. In the instant facts, the TPO would need to examine the comparables in light of earlier years’ orders. Upward adjustment for giving comparables carrying out by assessee to the customers of associated enterprise - HELD THAT:- ITAT in assessee’s own case on identical set of facts for assessment years 2008-09 [2018 (3) TMI 1881 - ITAT AHMEDABAD] and 2009-10 and 2010-11 [2019 (9) TMI 1702 - ITAT AHMEDABAD]has decided the issue in favour of the assessee. Upward adjustment of HRM services - assessee provides it’s own employee on secondment basis to its associated enterprises - HELD THAT:- As decided in own case 2009-10 and 2010-11 [2019 (9) TMI 1702 - ITAT AHMEDABAD] the appellant's contentions find favour. Therefore, MUK's operations can be considered to be correctly characterized as a distributor and a return based on sales which incentives MUK to generate more revenue appears to be appropriate. Allowable business expenses - Disallowance of recruitment expense being 20% of the recruitment and training expense treating the same incurred for the purpose of business) - HELD THAT:- As decided in own case 2006-07 [2012 (5) TMI 206 - ITAT AHMEDABAD] in a situation where the requisite detail in respect of training of employees and the genuineness of the expenditure was very much before the AO and in respect of these two reasons, no disallowance was suggested, then it was unjustifiable on the part of the AO to say that a 20% recruitment and training expenses would be disallowed on mere presumption that it was not wholly beneficial to the assessee. There is no evidence in the possession of the AO to hold that a particular expenditure on training was not business related. In fact, the argument of the assessee appears to be logical that considering the nature of the services provided a training of the technical staff is always a business necessity and because of the trained staff the assessee's revenue has substantially gone up. In the absence of any adverse material, we are not inclined to approve such an adhocism. This disallowance is hereby deleted. TDS u/s 195 - non-deduction of tax u/s. 40(a)(ia) - payment on certain professional and consultancy services to U.K. resident companies - HELD THAT:- As decided in own case 2006-07 [2012 (5) TMI 206 - ITAT AHMEDABAD] since the services in question were neither 'availed' nor 'rendered' and even not 'utilized' in India, therefore no tax was required to be deducted at source. Appeal of revenue dismissed. Issues Involved:1. Upward adjustment for financial guarantee given by assessee to AE.2. Upward adjustment for software services by P & C division of assessee to AE.3. Upward adjustment for performance guarantee given by assessee to customers of AE.4. Deletion of upward adjustment of software development by CIT(A).5. Deletion of upward adjustment for Human Resource Management Services by CIT(A).6. Deletion of disallowance of recruitment expense by CIT(A).7. Deletion of disallowance under section 40(a)(ia) of the IT Act for professional and consultancy expenses paid outside India.Summary:Issue 1: Upward adjustment for financial guarantee given by assessee to AEThe assessee argued that the financial guarantee provided to its AE was a shareholder activity, quasi-equity in nature, and not an international transaction under section 92B of the Act. The Tribunal observed that extending corporate guarantees constitutes an 'international transaction' and directed the Assessing Officer to adopt 0.5% as an arm's length consideration for the corporate guarantee issued by the assessee in favor of its AE. Consequently, ground no. 1 of the assessee's appeal was partly allowed.Issue 2: Upward adjustment for software services by P & C division of assessee to AEThe Tribunal noted that the TPO had made an upward adjustment of Rs. 4.22 crores for software services rendered by the P & C division of the assessee to its AE. The Tribunal set aside the issue to the file of the TPO for a fresh analysis of the comparables, considering the submissions of the assessee. Thus, ground no. 2 of the assessee's appeal was allowed for statistical purposes.Issue 3: Upward adjustment for performance guarantee given by assessee to customers of AEThe Tribunal observed that the CIT(A) had made an upward adjustment of Rs. 38 lakhs for the performance guarantee given by the assessee to the customers of its AE. The Tribunal referred to its earlier decisions in the assessee's own case and directed that the arm's length price for the performance guarantee be decided in light of the observations made in previous assessment years. Ground no. 3 of the assessee's appeal was partly allowed.Issue 4: Deletion of upward adjustment of software development by CIT(A)The Tribunal noted that the CIT(A) had deleted the upward adjustment of Rs. 17.48 crores made by the TPO for software services distributed by MUK, UK. The Tribunal found that this issue had been conclusively decided in favor of the assessee in earlier assessment years and dismissed ground no. 1 of the Department's appeal.Issue 5: Deletion of upward adjustment for Human Resource Management Services by CIT(A)The Tribunal observed that the CIT(A) had deleted the upward adjustment of Rs. 80,70,360/- made by the TPO for Human Resource Management Services. The Tribunal found that this issue had been decided in favor of the assessee in earlier assessment years and dismissed ground no. 2 of the Department's appeal.Issue 6: Deletion of disallowance of recruitment expense by CIT(A)The Tribunal noted that the CIT(A) had deleted the disallowance of Rs. 43,26,027/- made by the Assessing Officer for recruitment and training expenses. The Tribunal found that the disallowance was purely adhoc and not supported by any adverse material. The Tribunal upheld the CIT(A)'s decision, dismissing ground no. 2 of the Department's appeal.Issue 7: Deletion of disallowance under section 40(a)(ia) of the IT Act for professional and consultancy expenses paid outside IndiaThe Tribunal observed that the CIT(A) had deleted the disallowance of Rs. 70,01,53,135/- made by the Assessing Officer under section 40(a)(ia) of the Act. The Tribunal found that the issue had been decided in favor of the assessee in earlier assessment years and dismissed ground no. 3 of the Department's appeal.Conclusion:The appeal for A.Y. 2011-12 of the assessee was partly allowed for statistical purposes, the appeal for A.Y. 2012-13 of the assessee was partly allowed, and the appeals for A.Ys. 2011-12 & 2012-13 of the Department were dismissed.