2015 (9) TMI 610 - AT - Income Tax

Transfer pricing adjustment - Payment of royalty - Whether the assessee is paying royalty for the receipt of technical guidance, it need not have paid management fee as held by TPO - Commercial and Business expediency of incurring any expenditure - Held that - The TPO while giving the appeal effect to the order of Hon ble ITAT examined the additional evidences submitted by the assessee and deleted the addition on account of management fees vide its order dated 12.01.2015.Further in the AY 2009-10 and AY 2011-12 also the TPO has accepted the transaction of payment of management fees as being at arm s length and did not draw any adverse inference in this regard. Hence, the payment of management fees, therefore, is made entirely for business consideration and is an expenditure incurred wholly and exclusively for the purposes of business.- Decided in favour of assessee. Disallowance under section 40A(2)(b) on account of payment of administrative charges - Held that - It is not necessary for the assessee to show that any legitimate expenditure incurred by him is also incurred out of necessity or the expenditure incurred by him for the purpose of business actually resulted in profit. TPO is not justified in determining the ALP on the payment made for management fees. There is no warrant for disallowance of sum paid to M/s Talbros Automotive Pvt. Ltd. as the Assessing Officer failed to discharge the onus that was lying upon him as per the mandate of the provisions of Section 40A(2) of the Act - Decided in favour of assessee.

Issues Involved:
1. Validity of the assessment order under Section 143(3) read with Section 144C of the Income Tax Act, 1961.
2. Transfer Pricing adjustments related to the payment of management fees.
3. Disallowance under Section 40A(2) for payment made towards administrative services.
4. Levy of interest under Section 234B and Section 234C of the Income Tax Act.

Detailed Analysis:

1. Validity of the Assessment Order:
The appellant challenged the assessment order framed by the Assessing Officer (AO) as per the directions of the Dispute Resolution Panel (DRP) under Section 143(3) read with Section 144C of the Income Tax Act, 1961, claiming it was "bad in law, violative of principles of natural justice and void ab-initio." The AO computed the appellant's income at Rs. 14,52,23,420 against the returned income of Rs. 10,02,94,349. The Tribunal did not specifically address this issue in the judgment, focusing instead on the substantive grounds of the appeal.

2. Transfer Pricing Adjustments:
The AO/Transfer Pricing Officer (TPO) made an addition of Rs. 2,99,52,717 on account of the alleged difference in the arm's length price (ALP) of international transactions related to the payment of management fees. The TPO held the ALP for the international transaction of payment of management fees as Nil, arguing that no benefit was derived by the appellant from such payments. The appellant contended that significant benefits were drawn from the payment of management fees, leading to increased revenue and high profitability, and that the expenditure was wholly and exclusively for business purposes.

The Tribunal referred to OECD guidelines and various judicial precedents, including CIT vs. EKL Appliances Ltd., to conclude that the TPO's determination of ALP at Nil was not justified. It emphasized that the expenditure's legitimacy should be judged from the businessman's perspective and not the Revenue's. The Tribunal allowed the grounds of appeal related to the transfer pricing adjustments, holding that the payment of management fees was justified and incurred wholly and exclusively for business purposes.

3. Disallowance under Section 40A(2):
The AO disallowed Rs. 1,49,76,358 paid to Talbros Automotive Components Ltd. (TACL) for administrative services under Section 40A(2) of the Act, arguing that the appellant failed to prove the reasonableness of the amount. The appellant submitted additional evidence, including approval from the Ministry of Company Affairs for the payment, to support the claim.

The Tribunal noted that the AO did not bring on record any comparable instances to show that the expenses were excessive or unreasonable. It emphasized that the reasonableness of the expenditure should be judged from the businessman's perspective and that the AO failed to meet the requirements of Section 40A(2). The Tribunal allowed the grounds of appeal related to the disallowance, holding that the payment for administrative services was justified and incurred wholly and exclusively for business purposes.

4. Levy of Interest under Section 234B and Section 234C:
The appellant contested the levy of interest under Section 234B and Section 234C of the Act. The Tribunal did not specifically address this issue, as it was consequential to the main grounds of appeal.

Conclusion:
The Tribunal allowed the appeal filed by the assessee company, holding that the transfer pricing adjustments and disallowance under Section 40A(2) were unjustified. The payment of management fees and administrative charges was deemed to be incurred wholly and exclusively for business purposes, and the AO failed to meet the statutory requirements for disallowance. The Tribunal's decision was pronounced in the open court on 28th August 2015.

← Previous Next →