2017 (6) TMI 126 - AT - Income Tax

Determination of arms length price with regard to receipt of second line support services - Held that - TPO has erred in holding that a subsidiary does not have to pay for audit accounting and such other functions performed by the parent company as owner of the subsidiary company and in further holding that if the subsidiary was independent company, it would neither require such services nor it would pay for the same. Hon ble jurisdictional High Court in CIT vs. EKL Appliances Ltd. (2012 (4) TMI 346 - DELHI HIGH COURT ) followed by the coordinate Bench in assessee s own case for AY 2007-08, held that, it would be wrong to hold that the expenditure should be disallowed only on the ground that these expenses were not required to be incurred by the assessee or those expenses have not benefited the assessee. So, in 13 the instant case also, the duty of the TPO is to examine the quantum of expenditure as per law but the allowability of the expenses as business expenditure is required to be examined by the AO. So, following the decision rendered by the coordinate Bench of the Tribunal in assessee s own case for AY 2007-08, we hereby restore the issue regarding determination of arms length price with regard to receipt of second line support services to the file of TPO/AO to redetermine the issue. Ad hoc disallowance being 10% of the advertisement and business promotion expenses by treating the same to be capital in nature - Held that - Despite the fact that in case of Sony India Private Limited vs. ACIT (2008 (9) TMI 420 - ITAT DELHI-H ), coordinate Bench of the Tribunal has deleted similar disallowances on the ground that expenditure incurred by the assessee company on advertisement and sales promotion has not resulted in accrual of any advantage of enduring nature and the same are in the nature of Revenue field and not in the capital field so as to treat the same as capital in nature. Ld. DRP has merely directed the AO to make disallowance of 10% of advertisement expenses only after ascertaining the fact that if the department has accepted the judgment of Tribunal rendered in case of Sony India Private Limited (supra). But till date the department has not come up if findings returned by the Tribunal in Sony India Private Limited (supra) have been overturned. So, in these circumstances, ad hoc disallowance made by the AO is not sustainable. Addition back of provisions for leave encashment and provision for gratuity for computation of income - Held that - In the face of the undisputed fact that the issue as to the allowability of provision of gratuity and leave encashment for the purpose of section 115JB of the Act has already been determined by the Tribunal in assessee s own case for AY 2001-02 to 2004-05 and for AY 2005-06, CIT(A) has deleted the addition made by the AO and no such addition 15 has been made in the preceding AY 2007-08, the addition is not sustainable. This addition has only been made as directed by DRP on the basis of assumption that in case, the department has already accepted the Hon ble High Court and Tribunal s order in favour of the assessee for earlier assessment years by not filing further appeal the benefit should be extended to the AO otherwise AO shall retain the aforesaid additions. However,the Revenue has failed to bring on record if decisions rendered by Tribunal in assessee s own case have been overturned by the higher forum. So, the addition is not sustainable in the eyes of law

Issues Involved:
1. Validity of assessment order and jurisdictional error.
2. Arm's Length Price (ALP) determination for second line support services.
3. Ad-hoc disallowance of advertisement and business promotion expenses.
4. Addition of provision for leave encashment and gratuity while computing book profits.
5. Computation of interest under sections 234B and 234D of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Validity of Assessment Order and Jurisdictional Error:
The assessee challenged the assessment order passed under section 143(3) read with section 144C, asserting that the Dispute Resolution Panel (DRP) erred in confirming the addition made by the Transfer Pricing Officer (TPO) without appropriate application of mind. The assessee argued that the reference to the TPO was made without recording necessary reasons as required under section 92CA(1) of the Act.

2. Arm's Length Price (ALP) Determination for Second Line Support Services:
The primary issue was whether the TPO/AO erred in making an upward adjustment of ?16,60,70,145 to the assessee's income on account of ALP for second line support services (SLS) provided by the Associated Enterprises (AE). The Tribunal referred to its earlier decision in the assessee’s case for AY 2007-08, where it was held that the assessee had the right to enter into an arrangement for business expediency to ensure the efficient functioning of equipment. The Tribunal emphasized that the TPO’s role is to examine the quantum of expenditure as per law, not to disallow it on the grounds of business necessity. The Tribunal restored the issue to the TPO/AO for redetermination in light of the observations made in the previous order.

3. Ad-hoc Disallowance of Advertisement and Business Promotion Expenses:
The AO, following DRP's directions, made an ad-hoc disallowance of ?60,72,481, treating 10% of advertisement and business promotion expenses as capital in nature. The Tribunal referred to the decision in Sony India Private Limited vs. ACIT, where similar disallowances were deleted on the grounds that such expenses did not result in any enduring benefit and were revenue in nature. The Tribunal found the ad-hoc disallowance unsustainable and ruled in favor of the assessee.

4. Addition of Provision for Leave Encashment and Gratuity While Computing Book Profits:
The AO added back provisions for leave encashment (?5,40,47,748) and gratuity (?4,85,96,365) while computing book profits under section 115JB, treating them as unascertained liabilities. The Tribunal noted that similar additions were deleted in the assessee’s own case for earlier assessment years, and no such additions were made in AY 2007-08. The Tribunal ruled that these additions were not sustainable in law and determined the issue in favor of the assessee.

5. Computation of Interest Under Sections 234B and 234D:
The assessee contested the computation of interest under sections 234B and 234D, arguing that it was done mechanically without satisfactory reasons. The Tribunal noted that this ground was consequential in nature and did not require separate adjudication.

Conclusion:
The Tribunal allowed the appeal for statistical purposes, restoring the issue of ALP determination for second line support services to the TPO/AO for redetermination and ruling in favor of the assessee on the other issues. The order was pronounced on May 29, 2017.

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