2011 (11) TMI 487 - AT - Income Tax

Transfer pricing adjustment reference to TPO - payment made to CWS - ALP in respect of reimbursement of expenses made to AE on ground that services availed by the assessee are not intra-group services - assessee s claim regarding the payment made to CWS on the ground that CWS had used one of its employees to render liaison services to IBM on behalf of the assessee Held that - Assessee has been shown to have earned substantial revenues from IBM and according to the business needs of the assessee, these services were required to be obtained. If such services are provided by the employees of the assessee company, then, it has to incur extra expenditure, thus it was justified in availing services of liaison office. Also, there is no absence of evidence submitted by the assessee to support its contention that it has reimbursed the cost in respect of revenues earned by it on account of services rendered by AEs. Therefore, addition made is deleted as for similar services obtained from CWHK as from the chart it is revealed that the main revenue earned is by the assessee only which is 82.44% of the total revenue and re-imbursement of cost is only to the extent of 2,81,265/- out of which cost allocated to the assessee is 2,03,931. The revenue relatable to such cost allocation is 3,037,398. Evidence in the shape of various e-mails sent by Mr. Arshpreet Choudhary to the assessee company with regard to various clients from whom the assessee has earned income are also placed before the AO, TPO and DRP. Thus, it cannot be said that there is absence of evidence submitted by the assessee and it will be incorrect to say that the assessee did not furnish evidence to support its contention that it has reimbursed the cost in respect of revenues earned by it on account of services rendered by CWHK. All the details have been furnished on record. Decided in favor of assessee. Dis-allowance of referral fee paid to AE Revenue contended it to be diversion of income to group concerns and no benefit is derived from such expenditure - Held that - Referral fee has been paid to AE for identifying new business opportunities for the assessee company. The said international transaction has been made subject of determination of ALP by the TPO & TPO found that transaction at arm s length then it will not be permissible for the A.O. to re-examine that transaction and make dis-allowance of the same under normal provisions of the Act. Also, on merits, assessee had submitted ample evidence to support that expenditure is incurred with respect to revenue earned by the assessee on property transaction referred to the assessee by its AE. No adverse material whatsoever has been brought on record to show that either the evidence submitted by the assessee in this respect was incorrect or the contention of the assessee that expenditure relating to transaction entered into with AE s were less costly was incorrect. Addition is not justified Decided in favor of assessee. Unrealized service tax disallowance u/s 43B - It is the case of the assessee that service tax did not become payable and it was not routed through P&L A/c - Held that - It is seen that no reasons have been assigned for not admitting the claim of the assessee and no reference has been made to the decision in case of Real Image Media Technologies (P.) Ltd.(2007 (12) TMI 263 - ITAT MADRAS-C) wherein held that as per regulations of Service Tax Act the service tax will become due by 5th of month immediately following the quarter in which the payments are received and, therefore, the rigors of provisions of Section 43B are not applicable to service tax matter restored back to DRP to pass a reasoned and speaking order. Dis-allowance of depreciation on computer periphals @ 60% - Held that - In view of decision in case of CIT v. BSES Yamuna Power Ltd (2010 (8) TMI 58 - DELHI HIGH COURT) A.O. is directed to allow depreciation to the assessee on computer peripherals @ 60% - Decided in favor of assessee.

Issues Involved:
1. Re-computation of arm's length price of transactions.
2. Disallowance of referral fee paid to associates.
3. Disallowance of unrealized service tax under Section 43B.
4. Depreciation rate applicable to computer peripherals and accessories.
5. Initiation of penalty proceedings under Section 271(1)(c).

Issue-wise Detailed Analysis:

1. Re-computation of Arm's Length Price of Transactions:

The assessee entered into international transactions with its Associated Enterprises (AEs) and submitted a Transfer Pricing (TP) study to support these transactions. The Assessing Officer (AO) referred the matter to the Transfer Pricing Officer (TPO), who accepted most transactions as at arm's length but questioned the reimbursements for common manpower resources. The TPO concluded that the services provided did not constitute intra-group services as per OECD guidelines and disallowed the expenses. The Dispute Resolution Panel (DRP) upheld the TPO's findings, leading to an addition of Rs. 1,06,02,930/- to the assessee's income.

Upon appeal, the Tribunal found that the assessee had provided sufficient evidence, including agreements and email correspondences, to support the claim that the services were indeed rendered and were cost-effective. The Tribunal held that the TPO's observations were incorrect and deleted the TP adjustment of Rs. 1,06,02,930/-, allowing the assessee's ground.

2. Disallowance of Referral Fee Paid to Associates:

The AO disallowed the referral fee of Rs. 1,73,52,922/- paid to group entities, alleging that it represented income diversion and lacked evidence of services rendered. The TPO, however, had accepted this transaction at arm's length. The Tribunal observed that once the TPO determines the arm's length price, the AO cannot re-examine the transaction. The Tribunal also noted that the assessee provided ample evidence of the services rendered and the commercial necessity of the referral fee, which was consistent with industry practices. The Tribunal deleted the disallowance, allowing the assessee's ground.

3. Disallowance of Unrealized Service Tax under Section 43B:

The AO disallowed Rs. 31,81,878/- of unpaid service tax, citing Section 43B. The assessee argued that the liability to pay service tax arises only upon collection from clients, and since the amount was not collected, it was not payable. The Tribunal found that the DRP had not addressed the assessee's detailed objections and relevant case law. Therefore, the Tribunal remanded the issue back to the DRP for reconsideration with a reasoned and speaking order.

4. Depreciation Rate Applicable to Computer Peripherals and Accessories:

The AO allowed depreciation at 15% on computer peripherals and accessories, treating them as normal plant and machinery, instead of the 60% rate applicable to computers and software. The Tribunal referred to the decision of the Delhi High Court in CIT v. BSES Yamuna Power Ltd., which held that computer peripherals form an integral part of the computer system and are eligible for 60% depreciation. The Tribunal directed the AO to allow depreciation at 60%, allowing the assessee's ground.

5. Initiation of Penalty Proceedings under Section 271(1)(c):

The ground against the initiation of penalty proceedings was deemed premature and was not adjudicated upon by the Tribunal, thus dismissed.

Conclusion:

The appeal was partly allowed, with the Tribunal ruling in favor of the assessee on the issues of TP adjustment, referral fee disallowance, and depreciation rate, while remanding the issue of service tax disallowance back to the DRP for reconsideration.

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