2017 (1) TMI 1718 - AT - Income Tax

Transfer pricing adjustment - alleged international transaction of provision of liasioning support services/ indenting services by Appellant to its associated enterprise without having regard to functions assets and risk profile of the Appellant - HELD THAT - Though nature and character of the business of the assessee and its A.E. remained the same over the years however in no other assessment year any transfer pricing adjustment on account of provision of marketing support services to A.E. has been made. This is evident from the order passed by the TPO u/s 92CA for A.Y. 2012 13. Though each assessment year is independent and principle of res judicata generally do not apply to income tax proceeding however rule of consistency cannot be ignored if there is no material difference in facts. There being no basis for concluding that the assessee has provided any marketing support services to A.E. or has received any commission from the A.E. for providing such marketing support services the transfer pricing adjustment made is hereby deleted. Disallowance being 50% of the expenditure incurred towards employees cost and administrative and selling of distribution expenses - HELD THAT - There is no concrete evidence before the Departmental Authorities nor any material has been brought on record to establish the fact that the assessee has been providing marketing support services to its A.E. as far as sale of turbines by the A.E. is concerned. On the contrary the information obtained u/s 133(6) from the parties in India to whom the A.E. had sold gas turbines clearly reveal that all these customers have unequivocally stated that they have directly negotiated with the A.E. as far as purchase of gas turbines are concerned and they have independently entered into contract with the assessee for installation maintenance and supply of balance parts. Contention of the assessee that its turnover during the impugned assessment year has increased by 40% and the head count of employees have increased as well as payments of provident fund for the first time payment of participation fee travelling fee incurred for attending conference training of employees etc. have not been disproved by bringing cogent material on record. In the aforesaid view of the matter the ad hoc disallowance of 50% out of the expenditure claimed on protective basis,

Summary

Issues Involved:
1. Transfer pricing adjustment related to international transactions.
2. Disallowance of employee cost and administrative expenses.
3. Initiation of penalty proceedings and levy of interest.

Detailed Analysis:

Transfer Pricing Adjustment:
The primary issue revolves around the transfer pricing adjustment of Rs. 32,35,68,333 related to the international transaction of providing liaisoning support services/indent services by the assessee to its associated enterprise (A.E.). The assessee, an Indian company, is a wholly-owned subsidiary of Turbomach SA and is involved in designing, developing, installing, commissioning, and servicing gas turbines for captive power plants. The Transfer Pricing Officer (TPO) observed that the assessee had entered into a contract with PWD (CWG), Delhi, on behalf of its A.E., for the supply and installation of gas turbines. The TPO concluded that the assessee provided liaisoning services for which no charges were levied to the A.E. The TPO benchmarked the commission rate at 15.83% based on agreements from other parties, resulting in a transfer pricing adjustment of Rs. 32,35,68,333.

The Dispute Resolution Panel (DRP) upheld the TPO's findings, stating that the assessee provided support services to its A.E. for marketing and selling turbines in India. The DRP noted that the A.E. did not have a Permanent Establishment (P.E.) in India, and the assessee did not provide evidence to support its claim of not rendering such services.

However, the tribunal found no substantial evidence to support the TPO's and DRP's conclusions. It was observed that the contract with PWD (CWG) clearly demarcated the responsibilities and payments for the assessee and its A.E. The tribunal noted that the assessee's A.E. directly raised invoices and received payments for the supply of gas turbines, and there was no material to suggest that the assessee had provided any marketing services to its A.E. Consequently, the tribunal deleted the transfer pricing adjustment, allowing grounds 1 to 5 raised by the assessee.

Disallowance of Employee Cost and Administrative Expenses:
The Assessing Officer (AO) disallowed Rs. 4,50,20,744, being 50% of the expenditure incurred towards employee cost and administrative, selling, and distribution expenses, on a protective basis. The AO observed that the assessee incurred significant expenses on business promotion and travel, suggesting that these were not wholly for the assessee's business but also benefited the A.E.

The DRP directed the AO to remove the protective addition and take a without-prejudice stand on the disallowance. However, the AO, in the final assessment order, did not make any substantive addition or state that the amount was telescoped into the transfer pricing adjustment.

The tribunal found that the protective disallowance was not justified as there was no substantive addition in the A.E.'s hands. The tribunal also noted that the assessee's turnover increased by 40%, and the number of employees rose from 16 to 23, justifying the increase in expenses. Therefore, the tribunal held that the ad-hoc disallowance of 50% was not warranted and disposed of ground 7 accordingly.

Initiation of Penalty Proceedings and Levy of Interest:
Ground 8, relating to the initiation of penalty proceedings under section 271(1)(c) and the levy of interest under sections 234A, 234B, and 234D, was dismissed as it became infructuous following the tribunal's findings on the primary issues.

Conclusion:
The tribunal allowed the assessee's appeal partly, deleting the transfer pricing adjustment and the protective disallowance of employee cost and administrative expenses. The initiation of penalty proceedings and levy of interest were dismissed as infructuous. The order was pronounced in the open court on 02.01.2017.