TaxTMI 
TaxTMI 
TaxTMI 
2020 (2) TMI 1719
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....016 under section 143(3) read with section 1440(13) of the Act, at an assessed income at INR 8,40,79,821, as against returned income of INR 6,71,08,313. Ad-hoc disallowance of expenses allocated: 2. That on the facts and circumstances of the case and in law, the AO has erred in arbitrarily disallowing expenses amounting to INR 70,37,078 being 30% of the expenses reimbursed to the Associated Enterprise (AE") on an ad hoc basis alleging that the Appellant has not been able to substantiate the allocation of the expenses. 3. That on the facts and circumstances of the case and in law, the DRP erred in upholding the ad hoc disallowance of expenses on mere conjectures and surmises questioning the business rationale for incurring such expenses. Recovery of expenses brought to tax as Royalty I FTS: 4. That on the facts and circumstances of the case and in law, the AO / DRIP has erred in holding that the reimbursements I recovery of expenses amounting to INR 25,93,752 was in nature of royalty / FTS paid to Appellant by the AEs under section 9(1)(vi) / 9(1)(vii) and Article 13 of the India -UK Double Taxation Avoidance Agreement ("DTAA"). 5. That on the facts and circumstances o....
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....rom 23.03.1995. The assessee company is engaged in the business of providing telecommunication networking services which includes network design and management, project management and implementation, network management, providing lease circuit and trading of equipment and maintenance. The assessee company had filed its return of income for A.Y. 2012-13 on 30.11.2012, declaring its total income at Rs. 6,71,08,313/-. Subsequently, the case of the assessee was selected for scrutiny assessment under Sec. 143(2) of the Act. 3. During the course of the assessment proceedings the A.O made a reference under Sec. 92CA(1) of the Act to the Transfer Pricing Officer-1(3)(1), Mumbai (for short "TPO") for the purpose of determining the Arm's Length Price (ALP) of the international transactions of the assessee as were detailed in its "Audit report" in "Form No. 3CEB". Further, on a perusal of the financial statements, it was observed by the A.O that the assessee company pursuant to certain related party transactions had received amounts towards reimbursement of expenses. Also, it was noticed by the A.O that the assessee company had reimbursed its share of common pool expenses which were claimed ....
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.... July Aug Sep Oct Nov Dec Jan Feb Mar Finance 9,91,651 9,91,651 9,91,651 9,45,414 9,45,414 9,45,414 11,49,581 11,49,581 11,49,581 9,41,973 9,41,973 11,94,849 Admin 1,90,247 1,90,247 1,90,247 1,90,247 1,90,247 1,90,247 1,90,247 1,90,247 1,90,247 1,90,247 1,90,247 1,90,247 HR 7,63,849 7,63,849 7,63,849 7,64,849 7,64,849 7,64,849 7,64,849 7,64,849 7,64,849 7,64,849 7,64,849 7,64,849 Total cost booked 19,45,747 19,45,747 19,45,747 18,99,509 18,99,509 18,99,509 21,03,676 21,03,676 21,03,676 18,96,069 18,96,069 18,96,069 Allocation to CWIL 15,93,282.34 15,94,817 16,15,602 15,54,144 15,56,542 15,65,247 17,39,039 17,32,897 17,32,859 17,32,859 15,63,537 17,69,080 However, the A.O was unable to persuade himself to accept the aforesaid claim of allocation of expenses on head count basis. It was observed by the A.O, that though the number of employees had fluctuated during the year under consideration but the administrative and human resource expenses had remained static at an amount of Rs. 1,90,247/- and Rs. 7,63,849/-, respectively. In the backdr....
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....h was claimed by the assessee as reimbursement of expenses received by it from its group entities was brought to tax in the hands of the assessee. On the basis of his aforesaid deliberations the A.O vide his draft assessment order passed under Sec. 144C(1) r.w.s 143(3), dated 25.03.2016 proposed to assess the total income of the assessee at Rs. 8,40,79,821/-. 5. Aggrieved, the assessee objected to the aforesaid proposed additions/disallowance before the Dispute Resolution Panel-1(WZ), Mumbai. However, the DRP not finding any infirmity in the aforesaid additions/disallowances that were proposed by the A.O vide his draft assessment order passed under Sec. 144C(1) r.w.s. 143(3), dated 25.03.2016, upheld the same. As such, the objections filed by the assessee in context of the aforesaid issues were rejected by the DRP. 6. The A.O after receiving the order passed by the DRP under Sec. 144C(5), dated 03.10.2016, therein passed an order under Sec. 144C(13) r.w.s. 143(3), dated 22.11.2016 and assessed the income of the assessee company at Rs. 8,40,79,821/-. 7. The assessee being aggrieved with the order passed by the A.O under Sec. 144C(13) r.w.s. 143(3), dated 22.11.2016 has carried th....
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....wance of the aforesaid expenses was erroneous and uncalled for. As such, it was the claim of the ld. A.R. that since the facts and nature of reimbursement of expenses had remained exactly similar to those for the preceding and succeeding assessment years, therefore, as per the principle of consistency the inconsistent approach adopted by the A.O/DRP for the year under consideration was liable to be vacated. In support of his aforesaid contention the ld. A.R had relied on the judgment of the Hon'ble Supreme Court in the case of Radha Soami Satsang Vs. CIT (1992) 193 ITR 321 (SC). As regards the re-characterization of the amount received by the assessee from its group entities by way of reimbursement of their share of expenses, as royalty/FTS by the A.O/DRP, it was submitted by the ld. A.R that a similar view under identical facts taken by the lower authorities had been vacated by the Tribunal in the assesse's own case for the immediately preceding year viz. A.Y. 2011-12. It was submitted by the ld. A.R that a similar re-characterisation of receipt of amount by way of reimbursement of expenses by the assessee, as FTS/Royalty by the A.O/DRP, was on appeal restored by the Tribunal to t....
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.... the year, in itself proved that adoption of the head count basis as the allocation key for the aforesaid expenses was absolutely illogical and fallacious. On the basis of the aforesaid observations, the A.O/DRP had on an estimate basis carried out an ad hoc disallowance of 30% of the aforesaid expenses and held the same as inadmissible under Sec. 37(1)of the Act. 10. We have deliberated at length on the aforesaid issue under consideration. In the course of the assessment proceedings, the A.O made a reference to the Transfer Pricing Officer (for short "TPO) for benchmarking the international transactions of the assessee. As observed by the DRP, the TPO vide his order passed under Sec. 92CA(3), dated 25.01.2016 had held the international transactions of the assessee to be at Arm's length. Accordingly, it has been the claim of the assessee before the A.O/DRP, and also before us, that the TPO had held the reimbursement of expenses by the assessee to CWNIPL to be at Arm's length. Apart from that, it has been the claim of the ld. A.R that the A.O/DRP had most arbitrarily and on the basis of misconceived facts made an adhoc disallowance of 30% of the expenses that were reimbursed by the....
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....e order of the DRP, we find, that it had while concluding as hereinabove referred to certain observations that were recorded by it in context of the facts pertaining to the immediately preceding year viz. A.Y 2011-12. (ii). We have given a thoughtful consideration to the aforesaid observations of the A.O/DRP, and are unable to persuade ourselves to subscribe to the view taken by them. As is discernible from the order of the DRP, it was the claim of the assessee that as it did not have a separate Finance, Administrative and Human Resources team of its own, therefore, assistance for providing of such services was sought from its associated enterprise viz. CWNIPL. Insofar the aforesaid claim of sharing by the assessee of common pool expenses incurred by CWNIPL is concerned, we find that the same had not been controverted by the A.O/DRP, and is principally not in dispute. The controversy involved in the present case revolves around the adoption of the head count basis for the purpose of allocating the common pool expenses inter se the assessee and CWNIPL. The A.O/DRP held a conviction that if there would have been a logic in adoption of the number of employees of the assessee vis-a-v....
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.... said common expenses had cross charged the same to the assessee (its share of expenses) on cost to cost basis. As such, it was submitted before the lower authorities, as well as before us, that the expenses reimbursed by the assessee were towards its share of allocated support costs consisting of salary costs, leave encashment and gratuity expenses in respect of the common staff under the payroll of CWNIPL, that was rendering administrative, human resource and finance services, while for those debited in the accounts of the assessee pertained to the operational staff that was on the pay rolls of the assessee. In fact, we find that as claimed by the ld. A.R, the assessee on being called upon by the DRP on September 6, 2016 to furnish the break-up of its personnel expense of Rs. 38.19 crores between its own personnel expenses and the amount reimbursed to CWNIPL, had furnished such bifurcated details viz. (i). assesse's own personnel expenses: Rs. 35.84 crores; and (ii) amount reimbursed to CWNIPL towards shared personnel expenses : Rs. 2.34 crores. (ii). We have deliberated at length on the aforesaid contention of the ld. A.R, and find substantial force in the same. In our conside....
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....33) of the assesses "Paper book" (for short "APB"). In the backdrop of the aforesaid facts, we are of the considered view that the assessee had sufficiently substantiated its claim that CWNIPL was a profit making entity not only during the year under consideration, but also, in the immediately preceding and succeeding years. D(i). As is discernible from the records, the A.O had in the course of the assessment proceedings made a reference to the Transfer Pricing Officer-1(3)(1), Mumbai (for short "TPO") for the purpose of determining the Arm's Length Price (ALP) of the international transactions of the assessee as were detailed in its "Audit report" in "Form No. 3CEB". On the basis of his order passed under Sec. 92CA(3), dated 25.01.2016, the TPO had held the international transactions of the assessee to be at Arm's length. It has been the claim of the assessee before the lower authorities, and also before us, that once the TPO had held the transaction of reimbursement of expenses to be at Arm's length, then the A.O as per Sec. 92CA(4) was obligated to pass an order in conformity with the ALP determined by the TPO. As such, it was the claim of the ld. A.R, that after the TPO had h....
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.... of such jurisdiction he is precluded to redetermine the Arm's length price of an international transaction, in any way. In our considered view, now when the TPO while benchmarking the international transactions of the assessee, had not disturbed the Arm's length price of the transaction of reimbursement of expenses by the assessee to its AE viz. CWNIPL, therefore, a relooking into the basis of allocation of such expenses inter se the assessee and CWNIPL would clearly militate against the express provisions of Sec. 92CA(4) of the Act. Our aforesaid view, that the A.O as per the mandate of Sec. 92CA(4) is obligated to compute the income of the assessee in conformity with the ALP so determined by the TPO, is fortified by the judgment of the Hon'ble High Court of Bombay in Vodafone India Service (P) Ltd. Vs. Union of India (2013) 359 ITR 133 (Bom) and that of the Hon'ble High Court of Delhi in CIT Vs. Oracle India (P) Ltd. (2011) 243 CTR 103 (Del). Also, support is drawn from the order of the ITAT, Delhi in DCIT vs, YKK India Pvt. Ltd. Accordingly, on the basis of our aforesaid observations, we are of a strong conviction that the rejection of the allocation key of reimbursement of exp....
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....allowance of expense on an ad hoc basis had not been approved by various courts/tribunals. In support of our aforesaid view reliance is placed on the judgment of the Hon'ble High Court of Delhi in National Industrial Corpn. Limited vs. CIT (2002) 124 Taxman 413 (Del). Also, a similar view had been taken by ITAT, Ahmedabad in Mahendra Oil Cake Industries Pvt. Ltd. Vs. ACIT (1996) 55 TTJ 711 (Ahd) and ITAT, Pune in Ador Technologies Ltd. Vs. Dy. CIT (2007) 112 TTJ 24 (Pune). Accordingly, on the basis of our aforesaid observations we are unable to uphold the ad hoc disallowance of 30% of the amount of expenses reimbursed by the assessee to CWNIPL. (F). Lastly, we may herein observe, that the DRP while disposing off the objections of the assessee for the year under consideration, had observed, that in absence of any tangible material to the contrary, the adoption of head count basis as the allocation key for allocating of employee costs cannot be faulted. Accordingly, it can safely be concluded that the DRP itself had opined that de hors material to the contrary the head count basis can safely be adopted as the allocation key. In fact, we find that the A.O in A.Y. 2011-12 while re-ad....
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....d that the A.O while concluding as hereinabove had relied on the order passed by the DRP in the assesse's own case for the immediately preceding year viz. A.Y. 2011-12, wherein a similar view in respect of the aforesaid receipt was taken. Accordingly, the A.O/DRP on the basis of necessary deliberations had concluded that the circuit charges which were received by the assessee were to be treated as royalty /FTS under Sec. 9(1)(vi)/9(1)(vii) and Article 13 of the India - U.K. Tax Treaty. 13. We have given a thoughtful consideration to the aforesaid issue pertaining to recharacterisation of the amount received by the assessee towards reimbursement of expenses from its group entities, as royalty/FTS by the A.O/DRP. We find that involving identical facts a similar claim of the assessee was rejected by the A.O/DRP in the assesse's own case for the immediately preceding year viz. A.Y. 2011-12. On appeal, the Tribunal vide its order passed in ITA No. 1166/Mum/2016, dated 08.06.2016 r.w. M.A. No. 274/Mum/2016 dated 04.01.2017, had restored the matter to the file of the A.O for fresh adjudication, observing as under: 7. We heard the parties on this issue and perused the record. According ....
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....sue also requires fresh examination. Accordingly, we set aside the order of Ld CIT(A) and restore the issue to the file of AO/DRP for fresh examination. The assessee is also directed to furnish all the information and explanations that may be called for by the AO/DRP." As is discernible from the records, the A.O while giving effect to the order of the Tribunal had vide his order dated 08.03.2017 after verifying the copies of back to back invoices as regards the payments for the services rendered to the third parties had accepted the claim of the assessee, and had concluded that the amounts received from the third parties was towards reimbursements on cost to cost basis of their share of common pool expenses, and not FTS. As the facts and the issue involved in the year under consideration remains the same as were there before us in the case of the assessee for A.Y. 2011-12, therefore, we respectfully follow the same and direct the A.O to vacate the addition of Rs. 25,93,752/- that was made by him by treating the receipts as FTS/Royalty. The Ground of appeal No. 4 of the assessee is allowed in terms of our aforesaid observations. 14. As the ld. A.R had not raised any contentions as....
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....he course of the assessment proceedings, it was observed by the A.O, that expenses incurred by CWNIPL in respect of the employees which were under its payroll for rendering of administrative functions (consisting of finance, administrative and human resources) and managerial functions were cross charged at cost to cost to the assessee on head count basis. As the A.O was not persuaded to subscribe to the basis of allocation adopted by the assessee company, therefore, he adopted the allocation key of turnover of the assessee vis-à-vis that of CWNIP in respect of finance cost and managerial remuneration expenses and reallocated the same as under : Actual cost CWIL CWNIPL Remarks Average no. of employees 534 114 Allocation basis no. of employees or turnover Turnover ratio 5.58 : 22.07 0.2018083 0.7981917 Turnover Finance 80,75,386/- 1629680.10 64,45,706.04 No. of Employees Admin 24,92,205/- 2045559.80 4,39,989.39 No. of Employees HR Managerial remuneration 1,06,64,834/- 1,18,38,014/- 8753516.10 23,89,010/- 18,82,836.25 94,49,004.30 No. of Employees Turnover 3,30,70,439/- 1,48,17,766/- 1,82,17,536/- Accordingl....
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....2017 under section 143(3) read with section 144C(13) of the Act, at an assessed income at INR 6,71,17,571, as against returned income of INR 6,71,08,313. 2. That on the facts and circumstances of the case and in law, the AO I DRP has erred in arbitrarily disallowing expense s amounting to INR 1,12,89,539 reimbursed to the Associated Enterprise ("AE") alleging that the basis of allocation is not scientific and / or has not been able to substantiate the allocation of the expenses. 3. That on the facts and circumstances of the case and in law, the AO I DRP has erred in not appreciating that expenses were incurred for the purposes of business of the Appellant. 4. That on the facts and circumstances of the case and in law, the AO has erred in charging interest under sections 234B and 234C of the Act. Each of the above grounds is independent and without prejudice to the other grounds of appeal preferred by the Appellant. The appellant prays for leave to add, alter, vary, omit, substitute or amend the above grounds of appeal, at any time before or at, the time of hearing, of the appeal." 23. Briefly stated, the assessee had filed its return of income for A.Y. 2014-15 on 29.11.2....