2015 (6) TMI 349 - AT - Income Tax

Transfer pricing adjustment - reimbursements of expenses by the Appellant to its holding company/associated enterprise ( AE ) was against a service which was never received (i.e. in other words a sham transaction/colorable devise to shift cash/profits outside India) - Held that - Reimbursement of engineering expenses and software license expenses made by assessee-company to ATI Canada was for the benefit derived by the company and is not a case of payment of extra profit/cash to the AE. Vide that order 2014 (11) TMI 44 - ITAT HYDERABAD , the ITAT has indeed allowed the software expenses and reimbursement of expenses, therefore, the disallowance per se of ₹ 17,88,20,166/- as services not provided and ALP at NIL does not stand. Therefore, ground No.2 raised before us on the issue of disallowance of entire reimbursement of expenditure is to be held in favour of assessee. We notice from the orders of the authorities and from the order of ITAT that for the Financial Year 2008-09 i.e., relevant for AY.2009-10 before us, the order of the ITAT indicate the software expenses at NIL and engineering expenses at ₹ 10,76,77,131/-. However, the orders of TPO as considered in this impugned order indicate that amount was at ₹ 17,88,20,166/-. Even though in principle, we agree with the findings of the ITAT with reference to the nature of services being rendered by the said company, we, however, direct the Assessing Officer to examine the amounts involved and reconcile the payments considered in the order of ADIT, International Taxation u/s.201(1A) and the amounts considered for disallowance in this order by the Assessing Officer.Subject to the above observations and reconciliation of the amounts involved, the disallowance of entire amount does not arise. Even though assessee has objected to the inclusion of various comparables, not giving adjustment on account of difference in depreciation policy and other objections with reference to determination of ALP, we are of the opinion that this issue has to be restored to the file of DRP for fresh adjudication. - Decided in favour of assesse for statistical purposes.

Summary

Issues Involved:
1. Transfer pricing adjustments challenged by the assessee.
2. Disallowance of reimbursement of expenses by the Transfer Pricing Officer (TPO).
3. Arm's Length Price (ALP) adjustment proposed by the TPO for international transactions.

Issue 1: Transfer Pricing Adjustments:
The assessee challenged the transfer pricing adjustments made by the Transfer Pricing Officer (TPO) under section 92CA(3) of the Income Tax Act. The grounds raised included contentions regarding the independent verification of transactions, reliance on previous orders, and the alleged tax benefit derived from the arrangements. The appellant also argued that the TPO erred in not appreciating the additional cash inflow/profits resulting from the reimbursement of expenses. Moreover, the appellant contended that the TPO did not consider the jurisdictional power of a TPO under section 92CA of the Act. The Dispute Resolution Panel (DRP) upheld the adjustments, leading to the appeal by the assessee.

Issue 2: Disallowance of Reimbursement of Expenses:
The TPO disallowed the reimbursement of expenses amounting to Rs. 17,88,20,166, stating that the assessee did not receive any services, resulting in an Arm's Length Price (ALP) determination of NIL. However, the ITAT had previously allowed the reimbursement of engineering expenses and software license expenses, contrary to the TPO's decision. The ITAT directed the Assessing Officer to reconcile the amounts involved and examine the payments considered in the order of ADIT, International Taxation. Consequently, the disallowance of the entire amount was held in favor of the assessee, pending reconciliation by the Assessing Officer.

Issue 3: Arm's Length Price (ALP) Adjustment:
The TPO proposed an ALP adjustment of Rs. 12,12,82,059 for the international transactions of providing Information Technology/software development services to its Associated Enterprises (AE). The TPO's selection of comparables, treatment of abnormal profits, and failure to make appropriate adjustments under Rule 10B were challenged by the assessee. The ITAT directed the issue to be restored to the DRP for fresh adjudication, as the DRP had not examined these objections due to confirming the disallowance of reimbursement of expenses. The DRP was instructed to consider the objections on comparables and depreciation adjustments, consistent with previous orders passed in the assessee's case. The ALP adjustment issue was restored to the DRP for a detailed review and fresh order, leading to the allowance of the appeal for statistical purposes.

This detailed analysis covers the transfer pricing adjustments, disallowance of expenses, and ALP adjustments involved in the judgment, providing a comprehensive understanding of the issues and their resolution in the legal context.