2024 (4) TMI 1242 - AT - Income Tax

Technical know-how fees adjustment allowed on parity basis, employee cost reimbursement restored for fresh consideration

M/s. UPS Express P. Ltd. Versus The Assistant Commissioner of Income Tax-11 (1) (2), Aaykar Bhavan, Mumbai And (Vice-Versa) And M/s. UPS Express P. Ltd. The Assistant Commissioner of Income Tax-11 (1) (2), Aaykar Bhavan, Mumbai

M/s. UPS Express P. Ltd. Versus The Assistant Commissioner of Income Tax-11 (1) (2), Aaykar Bhavan, Mumbai And (Vice-Versa) And M/s. UPS Express P. Ltd. ... ISSUES PRESENTED and CONSIDEREDThe core legal questions considered in this judgment include:Whether the Transfer Pricing Officer (TPO) was justified in making adjustments to the arm's length price (ALP) in respect of technical know-how fees and reimbursement of employee-related expenses.The correctness of the TPO's rejection of comparable companies in the benchmarking analysis.The applicability of Section 40(a)(i) of the Income Tax Act concerning disallowance of reimbursements for legal services.The validity of disallowance of depreciation on fixed assets under Section 32.The imposition of interest under Section 234B.Whether foreign exchange gains and excess provisions written back should be considered as operational income.The appropriateness of disallowance under Section 40(a)(i) for payments made to Receivable Management Services (RMS).ISSUE-WISE DETAILED ANALYSISTransfer Pricing Adjustments for Technical Know-How FeesThe legal framework involves Section 92C of the Income Tax Act and Rule 10B, which provide methods for determining the ALP. The Court noted that the TPO had determined the ALP at NIL without following prescribed methods, which was contrary to statutory provisions. The Tribunal previously held that the TPO cannot determine ALP based on estimation and must apply one of the prescribed methods. The Court reiterated that the TPO's role is limited to determining ALP and cannot question the business expediency of payments. Thus, the adjustment was not justified, and the Assessee's appeal was allowed on this ground.Reimbursement of Employee-Related ExpensesThe Assessee argued that reimbursements were for employees working in India, supported by visa and passport details. The TPO had rejected the claim due to insufficient evidence. The Court accepted additional evidence submitted by the Assessee and remanded the issue to the Assessing Officer (AO) for reconsideration, allowing the ground for statistical purposes.Rejection of Comparable CompaniesThis issue was linked to the Department's appeal concerning forex gains and provisions written back. The Tribunal decided to address this issue alongside the Department's appeal. The Assessee's ground became infructuous following the dismissal of related grounds in the Department's appeal.Disallowance under Section 40(a)(i) for Legal ServicesThe Tribunal had previously addressed similar disallowances, directing the AO to verify if the tax liability was discharged by the recipient. If so, no disallowance under Section 40(a)(i) would be warranted. The Court followed this precedent, allowing the Assessee's ground for statistical purposes.Disallowance of Depreciation under Section 32The Tribunal had allowed depreciation in earlier years for the same assets. The Court upheld this precedent, allowing the Assessee's claim for depreciation in the current year.Levy of Interest under Section 234BThe Court noted that the levy of interest under Section 234B is consequential and mandatory, dismissing the Assessee's ground.Foreign Exchange Gains as Operational IncomeThe legal framework includes precedents where forex gains/losses were treated as operational. The Court noted that in previous and subsequent years, the TPO considered forex losses as operational. Therefore, forex gains should also be treated as operational, dismissing the Department's ground.Excess Provisions Written BackThe DRP had included excess provisions written back as operational income, consistent with accounting practices and supported by precedents. The Court upheld this treatment, dismissing the Department's ground.Disallowance under Section 40(a)(i) for Payments to RMSThe Assessee argued that payments to RMS were reimbursements without a profit element, protected under the India-US DTAA. The Tribunal had previously ruled similarly, finding no merit in the disallowance under Section 40(a)(i). The Court followed this precedent, dismissing the Department's ground.SIGNIFICANT HOLDINGSThe Court reiterated that the TPO must determine ALP using prescribed methods and cannot question business expediency. The Court upheld the treatment of forex gains and excess provisions written back as operational income, consistent with prior decisions and accounting practices. The Court affirmed that reimbursements without a profit element do not warrant disallowance under Section 40(a)(i) when protected by DTAA provisions.The Assessee's appeal was partly allowed, the Department's appeal was dismissed, and the Assessee's cross-objections were deemed infructuous. The judgment reinforces the importance of adhering to statutory methods for ALP determination and the treatment of certain financial items as operational income based on established accounting practices and precedents.