2016 (5) TMI 255 - AT - Income Tax

TDS liability - Payment to Association of Tennis Profession (ATP) - disallowance u/s 40(a)(i) - Held that - Section 194E read with Section 115 BBA apply to payments made to a non-resident sports association or an institution. In the instant case, ATP is undisputedly a governing body of the world wide men s professional Tennis Circuit, responsible for ranking of its players and coordinating the Tennis Tournament in the world. In such circumstances we are of the opinion that ATP is a non-resident sports institution and therefore Section 194E applies to the payments made by the assessee to the ATP. In the light of the above, the order of the CIT (A) is reversed and the order of the Assessing Officer is restored - Decided against assessee Working of operating costs - Held that - Reimbursement costs has to be excluded as the same do not involve any functions to be performed so as to consider it for profitability purposes. Thus we direct AO/TPO to exclude reimbursement costs while working out the operating costs. - Decided in favour of assessee Exclusion of Mega Soft Ltd. as comparable and inclusion of Orient Information Technology Ltd. in the set of comparables - Held that - As regards to the inclusion of Orient Information Technology Ltd. is concerned, the TPO had not given any particular reason for its exclusion. The said company also designs, develops and deploys customized software solution and application, so its functionality was comparable with the assessee. The said company was not considered by the TPO because it was a loss making company but that cannot be a reason to exclude it from the set of comparable in view of the decision of the ITAT Delhi Bench in the case of Yum Restaurants India Ltd. 2011 (5) TMI 852 - ITAT DELHI wherein it has been held that merely a company showing loss would not lose its status of comparable if other criteria depicted status of comparable. Thus this issue is remanded back to the Assessing Officer for verification of the calculations furnished by the Ld. A.R of the assessee and to be decided afresh in accordance with law. Disallowance of expenditure incurred in Indian Rupees payable to Indian Residents - non deduction of tds - Held that - The provisions of Section 40(a)(i) of the Act do not apply to A.Y 2004-05 which is the assessment year under consideration. Therefore, no disallowance can be made in respect of expenditure incurred in Indian Rupees payable to Indian Resident on allegation of non-deduction of tax at source in respect of A.Y 2004-05 as there was no such enabling provision in the statute. Therefore, the CIT(A) rightly deleted the disallowances in respect of expenditure incurred in Indian Rupees payable to Indian Residents - Decided in favour of assessee Disallowance of 20% of the miscellaneous expenses - Held that - A.O has not given any basis for making the adhoc disallowance. - CIT (A) has rightly deleted the adhoc estimated disallowance of miscellaneous expenses, and this ground of the Department appeal is liable to be dismissed. - Decided in favour of assessee

Issues Involved:
1. Disallowance of payment to Association of Tennis Professionals (ATP) under Section 40(a)(i) of the Income Tax Act.
2. Addition on account of mark-up to be recovered by the appellant on reimbursement of expenses received from Associated Enterprises (AE) and re-computation of arm's length price (ALP) for services provided.
3. Acceptance of additional evidence by CIT(A) under Rule 46A.
4. Disallowance of personal expenses.

Detailed Analysis:

1. Disallowance of Payment to ATP (Rs.19,22,663):
The CIT(A) confirmed the disallowance made by the AO of the payment to ATP under Section 40(a)(i) of the Act, treating it as royalty chargeable to tax and subject to withholding tax under Section 195. The assessee argued that the payment was for obtaining recognition for an international tennis event and should be considered a legitimate business expenditure. However, the tribunal upheld the CIT(A)'s decision, referencing a previous ruling that ATP is a non-resident sports institution, making Section 194E applicable to the payments.

2. Addition on Account of Mark-Up and Re-Determination of ALP:
The CIT(A) held that the appellant's logistic services to its AE required an arm's length mark-up on its cost base and rejected the appellant's claim that payments made by AEs were pass-through costs. The tribunal agreed with the CIT(A) that reimbursements received from AEs should be excluded from operating costs as they do not involve any functions performed. The tribunal referenced the case of HSBC Electronic Data Processing India Ltd. to support its decision. Additionally, the tribunal noted that the CIT(A) correctly applied the adjusted NCP margin of 11.6% for event management services, rejecting the foreign comparables used by the appellant due to different geographic markets. The tribunal remanded the issue back to the AO for verification of calculations and compliance with the +/- 5% range as per Section 92C(2).

3. Acceptance of Additional Evidence by CIT(A) under Rule 46A:
The CIT(A) admitted additional evidence provided by the assessee regarding sanctions and rights expenses incurred in Indian Rupees payable to Indian residents, which the AO had wrongly treated as payable to non-residents. The tribunal upheld the CIT(A)'s decision to admit this evidence, noting that the AO had not given the assessee an opportunity to explain the disallowance. The tribunal found the CIT(A)'s findings well-reasoned and did not require interference.

4. Disallowance of Personal Expenses:
The AO disallowed 20% of miscellaneous expenses on an ad hoc basis, suspecting them to be personal expenses. The CIT(A) deleted this disallowance, and the tribunal upheld this decision, noting that the AO did not provide a basis for the ad hoc disallowance and that the CIT(A) properly appreciated the facts.

Conclusion:
The tribunal partly allowed the appeal of the assessee, specifically allowing the exclusion of reimbursement costs from operating costs and remanding the issue of ALP determination back to the AO for verification. The appeal of the revenue was also partly allowed, affirming the CIT(A)'s acceptance of additional evidence and deletion of ad hoc disallowance of personal expenses. The tribunal's decisions were consistent with previous rulings and applicable legal provisions.

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