TaxTMI 
TaxTMI 
2020 (2) TMI 1719
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.... passing the assessment order dated November 16, 2016 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 Doubl....
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....foreign company incorporated in United Kingdom and has been granted permission by the Reserve Bank of India to set up a branch office in India with effect from 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 tow....
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....472 487 496 491 486 492 489 489 Cable and Wireless Networks India Private Limited 98 101 94 104 104 104 104 103 104 103 104 105 Actual Cost Booked April May June 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 15,94,81....
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.... per the information available the assessee had procured circuit charges which were akin to connectivity services to provide communication facilities to its group entities, which could not be construed as reimbursement of expenses. On the basis of his aforesaid observations the A.O concluded that the circuit charges received by the assessee for providing support services which were technical in nature 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. Accordingly, the aforesaid amount of Rs. 25,93,752/- which 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 ....
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....ources functions using the employee head count as the allocation key. As regards the reimbursement of expense by the assessee for finance function, it was submitted by the ld. A.R that the A.O had changed the allocation key to turnover of the assessee vis-à-vis that of CWNIPL. Accordingly, on the basis of the aforesaid facts, it was submitted by the ld. A.R, that in light of the fact that there had been no change in the nature of the transactions during the year under consideration, therefore, the approach adopted by the A.O/DRP for carrying out an ad hoc disallowance 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 ....
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....e incurred in respect of the aforesaid functions were cross charged by CWNIPL to the assessee on cost to cost basis. However, the claim of the assessee that the cost allocation in respect of the aforesaid expenses was on the basis of number of employees of both the concerns during the year viz. the assessee company and CWNIPL had not found favour with the AO/DRP. As observed by us hereinabove, the A.O/DRP had observed that the fact that though the number of employees had varied during the year but the administration and human resource expenses had remained static throughout 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 th....
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....cords. It was observed by the A.O, that though the monthly Administration expenses and the Human resource expenses had remained static throughout the year, but there was a variation in the number of employees. As such, the A.O/DRP held a conviction that in case head count was to be accepted as the allocation key, than the monthly variation in the number of employees ought to have witnessed a corresponding fluctuation in the aforesaid monthly employee costs. Also, it was observed by the A.O, that even the finance cost did not have a linear variance to the number of employees. On a perusal of the 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 pro....
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....ve its share of reimbursed cost of common pool expenses had also debited similar expenses in its accounts in "Schedule 13". As such, it was observed by the DRP that as the assessee had its own pay roll of employees, therefore, it could not be comprehended that as why additional cost was reimbursed by it. Rebutting the said observations, it was averred by the ld. A.R that as the assessee did not have separate Finance, Administrative and Human Resources team of its own, therefore, for the said activities it had sought assistance from its associate enterprise viz. CWNIPL, wherein the latter after incurring the 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....
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....ncome filed by CWNIPL for the A.Y 2011-12, A.Y 2012-13 and A.Y 2013-14, which therein established that CWNIPL was a profit making entity, and had paid the taxes at maximum marginal rate during the year under consideration. In fact, the assessee vide its letter dated 23/03/2016 that was filed in the course of the assessment proceedings, had brought to the notice of the A.O that CWNIPL was a profit making entity and had paid taxes as per the normal provisions of the Act. Also, in support of its said claim the assessee had filed the copies of the returns of income of CWNIPL for A.Y 2011-12, A.Y 2012-13 and A.Y 2013-14. (Page 28 - 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 ....
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....benchmarking the international transactions of the assesssee, had accepted the ALP of the reimbursement of expenses by the assessee to its AE viz. CWNIPL, thereafter, the A.O as per the mandate of Sec. 92CA(4) of the Act, was statutorily bound to compute the total income of the assessee in conformity with the Arm's length price so determined by the TPO. Although, the A.O in the course of the assessment proceedings continues to remain vested with the jurisdiction to verify as to whether or not an expense claimed by the assessee as a deduction was incurred wholly and exclusively for the purpose of its business, however, in the garb of exercise 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 afores....
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.... observations recorded hereinabove as regards the sustainability of the view taken by the A.O as regards the selection of the allocation key for apportionment of common expenses, in case, the A.O was of the view that the same could not have been applied, then it was incumbent upon him to determine the allocation key which in the backdrop of the facts of the case, to his understanding, could have been safely applied. We are of a strong conviction that rejection of the basis of allocation of expenses, and substituting the same by an ad hoc disallowance which is devoid and bereft of any basis, cannot be sustained. In fact, we find that even a simpliciter disallowance 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 ....
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....its group companies. It was the claim of the assessee, that the aforesaid arrangement with its group entities was more of an administrative convenience. It was submitted by the assessee that the aforesaid expenses were primarily in the form of circuit charges which mainly comprised of Ethernet charges, lease line expenses and bandwith charges which were provided by the third party vendors in India, and were thereafter recovered by the assessee from its group entities towards their share in such expense. However, the A.O/DRP declined to accept the aforesaid claim of the assessee and recharacterised the receipt of the aforesaid amount as royalty/FTS. In fact, we find 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 con....
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....of Circuit facilities provided by telecom companies. Accordingly he attempted to substantiate the claim of the assessee that it has acted as pipeline between the telecom companies and group companies. However, the orders passed by tax authorities do not bring out exact nature of services provided by the assessee and hence we are unable to appreciate the above said contentions of the assessee. However, we are of the view that the said contentions of the Ld A.R may require proper examination, as it may bring out the factual aspects relating to this issue. We notice that the factual aspects have not been brought on record by the tax authorities. Accordingly, we are of the view that this issue 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 t....
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....e before or at, the time of hearing, of the appeal." 17. Briefly stated, the assessee company had filed its return of income for A.Y. 2013-14 on 29.11.2013, declaring its total income at Rs. 5,58,28,031/-. Subsequently, the case of the assessee was selected for scrutiny assessment under Sec. 143(2) of the Act. A reference under Sec. 92CA(1) of the Act was made to the Deputy Commissioner of Income tax (Transfer Pricing)-1(3)(1), Mumbai (for short "TPO") for computation of Arm's length price of the international transactions of the assessee detailed in Form No. 3CEB. AS per te order passed by the TPO under Sec. 92CA(3), dated 24.10.2016, no adjustment was made to the Arm's length price of the international transactions of the assessee. In the 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 assesse....
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....ources ; (iii). finance; and (iv). managerial functions, as had rightly been done by the assessee by using the average number of employee as the allocation key. Accordingly, finding the reimbursement of the allocated common expenses by the assesee to CWNIPL in order, we "set aside" the order passed by the A.O. 21. Resultantly, the appeal filed by the assessee is allowed in terms of our aforesaid observations. A.Y. 2014 -15 ITA No. 6075/Mum/2017 22. We shall now take up the appeal of the assessee for A.Y. 2014-15. The assessee has assailed the impugned order passed by the A.O under Sec. 143(3) r.w.s 144C(13) of the Act on the following grounds of appeal before us: "1. That on the facts and circumstances of the case and in law, the Assessing Officer has erred in passing the assessment order dated August 11, 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 (....
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....7/- to Rs. 1,58,08,044/-, and instead of restricting the consequential disallowance at Rs. 1,10,46,572/-, therein vide his draft assessment order passed u/s 144C(1) r.w.s 143(3), dated 14/12/2016 proposed to make an disallowance of Rs. 1,24,11,947/-. 24. Aggrieved, the assessee filed objections with the DRP. However, the DRP not finding favour with the contentions advanced by the assessee rejected the same. 25. The A.O after receiving the order passed by the DRP under Sec. 144C(5), dated 28.06.2017, therein passed the assessment order under Sec. 143(3) r.w.s. 144C(13), dated 23.08.2017. As per the assessment order the AO disallowed reimbursement of expenses amounting to Rs. 1,06,03,894/-, which were claimed by the assessee to have been paid to CWNIPL. Accordingly, the A.O assessed the income of the assessee company at Rs. 10,73,19,550/- vide his order passed under Sec. 143(3) r.w.s. 144C(13), dated 23.08.2017. 26. The assessee being aggrieved, with the assessment order passed by the A.O under Sec. 143(3) r.w.s 144C(13), dated 23.08.2017 has carried the matter in appeal before us. We find that the facts and the issue involved in the present appeal principally remains the sa....