2022 (5) TMI 1512 - AT - Income Tax

Simultaneous addition u/s 40(a)(ia) and 92CA - amount pertaining to Intra Group Services - HELD THAT - If the interpretation sought to be taken by the AO/CIT(A) is accepted in the instant situation, then the assessee would be fastened with the liability to pay taxes on the same amount twice within the same assessment year. In the instant case, once the amount pertaining to Intra Group Services has been disallowed u/s 40(a)(ia) and added back to the total income, disallowing the same by treating the ALP has Nil and adding the same again to the total income certainly leads to a situation of taxing the same amount twice. Revenue is hereby directed to allow depreciation @ 15% instead of 10%.

Summary

Issues involved:
1. Transfer pricing adjustments on management fees paid to associated enterprise
2. Adhoc addition of management fees based on misapplication of Section 92CA(3)
3. Disallowance of excess depreciation on electrical fittings

Transfer pricing adjustments on management fees paid to associated enterprise:
The appellant filed appeals against the orders of the CIT(A) upholding transfer pricing adjustments on management fees paid to an associated enterprise. The appellant argued that the CIT(A) erred in upholding the adjustments made by the AO under Section 92CA(3) of the Act. The appellant contended that the same amount was disallowed under Section 40(a)(ia) by the AO, resulting in potential double taxation. The TPO determined the value of management services to be in the nature of shareholder services, leading to an addition to the taxable income of the appellant. The CIT(A held that Sections 40(a)(ia) and 92CA(3) of the Act operate simultaneously and are not contradictory. The appellant argued that this approach would result in taxing the same transaction twice, contrary to taxation principles.

Adhoc addition of management fees based on misapplication of Section 92CA(3):
The appellant contested the adhoc addition of 70% of the management fees paid to its associated enterprise, arguing a misapplication of Section 92CA(3) of the Act. The appellant provided documentary evidence to support the services received and their value, challenging the arbitrary disallowance without applying the appropriate method prescribed under Rule 10B of the Income-tax Rules, 1962. The CIT(A) was criticized for misinterpreting OECD Guidelines and basing conclusions on incorrect statements of fact. The appellant emphasized that the disallowance under Section 40(a)(ia) had already been accepted, making the transfer pricing addition academic and potentially leading to double taxation.

Disallowance of excess depreciation on electrical fittings:
The CIT(A) confirmed the disallowance of excess depreciation on electrical fittings, alleging misclassification under 'Furniture and Fittings' instead of 'Plant and Machinery.' The appellant challenged this decision, stating that the fittings should be depreciable at 15% under 'Plant and Machinery.' The tribunal directed the Revenue to allow depreciation at 15% instead of 10%, resulting in the appeals of the assessee being allowed.

This detailed analysis covers the issues of transfer pricing adjustments, adhoc addition of management fees, and disallowance of excess depreciation addressed in the judgment delivered by the Appellate Tribunal ITAT Delhi.