2018 (9) TMI 1812 - AT - Income Tax

TP adjustment - International transactions with its overseas associate enterprise (AE) - international transactions in the nature of management services provided to its UK based associated enterprise in lieu of having received corresponding management consultancy fee - assessee had applied Resale price method RPM as the most appropriate method MAM for declaring its gross profit by sales @ 9.87% as against that @ 18.64% in its comparables on average basis - assessee has filed application seeking admission of additional evidence in the form of segmental profits in relation to its AE in question - HELD THAT - The assessee s additional evidence application (supra) filed under Rule 29 of ITAT Rules is admitted since the Revenue has failed to express any doubt on relevance of corresponding documents filed thereof as well as the fact that same are very much required for proper adjudication of the issue of ALP determination raised before us. We thus admit assessee s additional evidence and leave it open for the TPO to carry out necessary factual verification. Next submits that lower authorities have also erred in law as well as on facts in treating the assessee to be providing information technology enabled services whereas the TPO s observations hold it to be an entity having provided consultancy including tax regulatory services and software (including resale) as well as related technical services. He refers to a detailed chart of all the relevant heads in both tax regulatory advisory and consultancy services on record. All this assessee s assertions appear to be prima facie correct. The fact however remains that we have already restored the entire issue of correctness of transfer pricing adjustment back to the TPO for afresh adjudication. We therefore leave it open for him to adjudicate all factual as well as legal issues; as the case may be in consequential proceedings. The assessee s former five substantive grounds to this effect are accepted for statistical purposes. Ad hoc disallowance @ 40% of the total expenditure claimed - AO disallowed the same alleging assessee s failure in providing all the relevant particulars of its payees as well as indicating the relevant nexus between its repair and maintenance vis- -vis the corresponding assets - HELD THAT - There is hardly any dispute that lower authorities have already accepted 60% of assessee s expense to be correct as wholly and exclusively incurred for the purpose of the business. The question that arise for our apt adjudication is only qua remaining 40%. AR s case is that there should not be any disallowance at all as he had filed all the detailed and voluminous in support. Our attention is also invited to tribunal s co-ordinate bench s order deleting estimated disallowance even @ 5%. The fact however remains that all this does not form sufficient material to prove that each and every head / item of expenditure to be wholly and exclusively incurred for the purpose of the assessee business. We thus conclude that the impugned disallowance @ 40% is very much on higher side not liable to be sustained. We accordingly conclude that an estimated disallowance of 2% only instead of 40% would meet the ends of justice. Ad hoc disallowance @ 25% of the gross amount incurred on account of travelling and conveyance charges - HELD THAT - Assessing Officer has not carried out one-to-one or even sample verification of the impugned expenditure before invoking the estimated disallowance @ 25%. We therefore accept the assessee s pleadings in principle to restrict the impugned disallowance from 25% to 2% only in order to make both ends meet for the reason that taxpayer has also not been proved all of its expenditure to have been incurred wholly and exclusively for its business activity. The impugned disallowance to be therefore restricted to 2% only. We make it clear that none of such estimation would be as a precedent against assessee in any earlier or succeeding assessment year. Disallowance of payment made towards subscription to US India Business Counsel UBIC n the nature of annual membership fees - addition for the reason that this payment does not have any link with assessee s business - HELD THAT - We make it clear that although it has placed on record its only membership detailed followed by actual payment. it is very much imperative to prove the scheme of above counal or its bye-laws vis- -vis the assessee s relevant business activity. We are of the opinion that mere payment of an amount does not prove the same to be having direct link with business activities. The relevant case law hereinabove (supra) involves instances of contribution paid for construction of chamber and commerce building, contribution towards canal construction irrigating sugarcane fields and participation expenditure in a trade, association or fund set up for advancement of business; respectively. No such facts emerge from assessee s impugned claim. We thus decline the same on this count Disallowance of training expenses in lumpsum as against 25% ad hoc disallowance proposed earlier - as contended that all these expenses have been incurred for upto date knowledge to its work force s knowledge, forming keyelement of operation efficiency - HELD THAT - We find force in assessee s instant claim of staff training expenses in principle. The Revenue fails to indicate any rebuttle regarding first and third heads hereinabove. The only question remain is that of miscellaneous vendor payment whose details are nowhere forthcoming a part from PAN etc. We thus confirm the impugned disallowance of ₹13,93,752/- to the extent of ₹3,23,897/- only. The assessee gets part relief. Addition of PWCDA network form charges - same to have been paid to its eponymous Dutch entity incorporated in Netherlands against invoices raised by PWCDA services in terms of firming Services Agreement - lower authorities seem to have disallowed the above payment mainly for the reason that the assessee could not establish the relevant business nexus / purpose and there was also a failure on its part in not deducting TDS thereupon - HELD THAT - The assessee has also prepared a list of services availed via the payee concerned in respect of all member firms of the group involving sample cases of e-learning and education, mandatory foundation programmes, training programmes alloys specific / technical programmes etc. All this has gone unrebutted from the Revenue side whose case is that there is no business link forthcoming from the impugned expenditure. We find no substance in Revenue s instant stand. We make it clear that the assesseecompany is engaged in multi functional consultancy services as a group entity of PWCDA organization based in Netherlands. Learned counsel has also filed before us relevant assessment records with regard to the payee entity pertaining to the impugned assessment year itself accepting the returned income without making any addition. Tribunal s decision in DCIT vs. Ernst & Young (P) Ltd. 2015 (3) TMI 931 - ITAT KOLKATA also holds that no TDS is deductible in case of such firm services agreement payments not including any income component but only reimbursement of expense on cost allocation formula. Additions deleted Non deduction of tds on professional fee - Addition 40a(ia) - HELD THAT - Assessing Officer had initially computed the impugned disallowance of ₹ 1,28,70,0840/- out of which the tax payer suo-moto added a sum of ₹ 1,03,70,00,000/-. This is what has given raise to the disallowance of ₹ 2,50,00,840/-. The Learned Counsel submits that the assessee s main grievance is not pressed to the extent of ₹ 22,01,972/- . We therefore affirm the Assessing Officer s action invoking the impugned disallowance to the extent of ₹ 22,01,972/-. Payment to Tax Administration Capacity in taxpayer services project and Bangladesh Railways - HELD THAT - Learned Counsel quotes section 91(vii)(b) of the Act and more particularly the latter portion involving exception clause to the main provision that where fees are payable in respect of services utilized in a business or profession carried on by a non-resident outside India or for the purposes of making or earning income from any source outside India. The assessee s case therefore is that the main payment instances are squarely covered by the above exception provision itself since it has been paid in respect of services utilized in a business or profession carried on by Bangladesh based payees in the said country only. There is no dispute on this clinching facts as highlighted during the course of hearing at the Revenue s behest. We thus quote hon ble Delhi high court s decision in DIT vs. Lufthansa Cargo Limited 2015 (5) TMI 873 - DELHI HIGH COURT to delete the impugned disallowance. Withholding of tax - HELD THAT - Payment to M/s Lorman Zyrwa & Maryline Nong Kynrih not inviting TDS deduction in view of nil withholding certificate. . Remaining amount as per assessment order involving payments without non-deduction of TDS out of ₹ 30,19,942/- are stated to be ₹ 22,34,904/-. Coupled with this, the assessee submits that another payment of ₹ 21.24 lacs pertains to payment Bhutan based payee on account of the said nation s government initiative which is akin to Bangladesh payment provided u/s 9(1)(vii)(b) of the Act. We therefore accept the assessee s argument to the extent indicated hereinabove. Professional payments to non-resident payees - as per assessee Section 90(2) makes it clear that it is very much open for an assessee to opt for more beneficial provision either in under domestic law or as per the relevant Double Taxation Avoidance Agreement; as the case may be - HELD THAT - Double Taxation Avoidance Agreement with Australia, Singapore, France s DTAA to be not involving any FTS clause or the same to be taxable only if make available condition is satisfied.. All these submissions have gone unrebutted from the Revenue s side. We still feel it appropriate that in case the Assessing Officer heeds to conduct a detailed exercise payee-wise vis- -vis the relevant conditions incorporated in the corresponding DTAAs and take fresh a fresh callas per the necessary Articles therein regarding taxation of fee for technical services payments. We thus accept assessee s contention in principle and leave it open for the Assessing Officer to conduct necessary factual verification more particularly in view of the fact that we have already restored the main issue (supra) back to the Assessing Officer for afresh proceedings in preceding paragraphs. Disallowing rent claim pertaining to provision made and guest house rent paid without deducting TDS - HELD THAT - The above payee has already obtained nil withholding tax certificate dated 21.02.2011 of the Act. It is also stated to be exempt u/s. 10(26) of the Act. We therefore delete the impugned disallowance to the extent of ₹44,000/-. Coming to the balance provision amount for rent of learned counsel fails to offer any explanation regarding the basis thereof as per the case records. We accordingly affirm the impugned provision disallowance in these peculiar facts and circumstances. Claim tax credit relief u/s. 90 qua various sums withheld foreign tax jurisdiction - assessee s plea before us that all the relevant details for raising the impugned claim of foreign tax credits are very much available vis- -vis the list of such nations - Revenue submits that those detailed exercises of factual verification regarding India s Double Taxation Avoidance Agreement with the assessee s list of countries needs to be undertaken in elaborate manner - HELD THAT - Restore the instant issue back to the Assessing Officer for above necessary verification about India s Double Taxation Avoidance Agreement with assessee s list of foreign tax jurisdiction in consequential proceedings as per law. Needless to say, the assessee s claim would stand accept in those countries with which no such agreement exists in twin conclusion sec. 91. This substantive ground is treated as accepted for statistical purposes. Granting TDS credit only in respect of sum as claimed in the return of income and in view of its Form 26AS - HELD THAT - Both parties are ad idem during the course of hearing that instant issue also requires a detailed factual verification. We thus restore assessee s grievance back to the Assessing Officer for necessary factual verification as per law.

Summary

Issues Involved:
1. Transfer Pricing Adjustment
2. Selection of Tested Party
3. Rejection of Resale Price Method
4. Application of Transactional Net Margin Method (TNMM)
5. Ad hoc Disallowance of Expenditure
6. Disallowance of Travelling and Conveyance Charges
7. Disallowance of Subscription to US India Business Counsel
8. Disallowance of Training Expenses
9. Disallowance of PWCDA Network Form Charges
10. Foreign Exchange Loss on Maturity of MTM Contracts
11. Disallowance of Software Charges under Section 40(a)(ia)
12. Disallowance of Professional Fees under Section 40(a)(ia)
13. Disallowance of Rent Claim
14. Claim of Tax Credit under Section 90
15. Grant of TDS Credit

Detailed Analysis:

Transfer Pricing Adjustment:
The assessee challenged the correctness of a transfer pricing adjustment amounting to ?345,51,562/- related to its international transactions with its UK-based associate enterprise, PwCDA. The TPO rejected the Resale Price Method (RPM) applied by the assessee and instead used the Transactional Net Margin Method (TNMM) for determining the Arm’s Length Price (ALP). The TPO’s approach was upheld by the Dispute Resolution Panel (DRP).

Selection of Tested Party:
The assessee argued that its AE, PwCDA, should be the tested party due to its simpler functional profile. However, the DRP upheld the TPO’s decision to select the assessee as the tested party, citing that the AE was more complex and retained major functional responsibilities.

Rejection of Resale Price Method:
The DRP supported the TPO's rejection of the RPM, noting that the assessee added value to the services provided, which made the RPM inapplicable. The DRP emphasized that the services rendered involved significant value addition, contrary to the RPM's requirement of resale without substantial modification.

Application of Transactional Net Margin Method (TNMM):
The TPO applied TNMM at the entity level, averaging the profit level indicators of 11 comparable entities. The DRP upheld this application, finding no infirmity in the TPO’s methodology.

Ad hoc Disallowance of Expenditure:
The assessee contested an ad hoc disallowance of ?10,51,88,324/- (40% of total expenditure). The Tribunal found the 40% disallowance excessive and reduced it to 2%, concluding that the assessee had provided sufficient documentation to support its claim.

Disallowance of Travelling and Conveyance Charges:
The assessee challenged a 25% ad hoc disallowance of travelling and conveyance charges amounting to ?913,48,803/-. The Tribunal reduced this disallowance to 2%, citing the lack of specific irregularities in the assessee’s records.

Disallowance of Subscription to US India Business Counsel:
The Tribunal upheld the disallowance of ?10,35,400/- towards subscription to the US India Business Counsel, finding no direct link between the payment and the assessee’s business activities.

Disallowance of Training Expenses:
The Tribunal partially allowed the assessee’s claim for training expenses, disallowing only ?3,23,897/- out of the total ?30,97,752/- due to insufficient documentation for miscellaneous vendor payments.

Disallowance of PWCDA Network Form Charges:
The Tribunal deleted the disallowance of ?150,046,130/- for network form charges paid to PwCDA, finding that the payments were for services rendered and not liable for TDS as they were reimbursements under a cost allocation method.

Foreign Exchange Loss on Maturity of MTM Contracts:
The assessee did not press this ground, and the Tribunal dismissed it as not pressed.

Disallowance of Software Charges under Section 40(a)(ia):
The assessee did not press this ground due to the small amount involved, and the Tribunal affirmed the disallowance.

Disallowance of Professional Fees under Section 40(a)(ia):
The Tribunal accepted the assessee’s argument for partial relief, deleting the disallowance for payments covered under Double Taxation Avoidance Agreements (DTAAs) and remanding the remaining issues for further verification by the Assessing Officer.

Disallowance of Rent Claim:
The Tribunal deleted the disallowance of ?44,000/- for rent paid with a nil withholding certificate but upheld the disallowance of ?2,73,000/- for the provision of rent due to lack of explanation.

Claim of Tax Credit under Section 90:
The Tribunal remanded the issue back to the Assessing Officer for verification of the assessee’s entitlement to foreign tax credits under the relevant DTAAs.

Grant of TDS Credit:
The Tribunal remanded the issue back to the Assessing Officer for verification of the correct TDS credit amount.

Conclusion:
The Tribunal provided partial relief to the assessee on several grounds, remanding certain issues for further verification and reducing ad hoc disallowances. The appeal was partly allowed.