2017 (9) TMI 104 - AT - Income Tax

Nature of expenditure - revenue or capital - cost reimbursement as well as transfer pricing - whether cost reimbursement agreement between the assessee and the parent company of the assessee was only an afterthought and there is no presumption that every reimbursement of expenditure would be capital in nature? - Held that -Though it is contended by the Revenue that the cost reimbursement agreement was not produced before the Assessing Officer, the fact remains that paragraph No. 4.3(i)(e) of the assessment order refers to such an agreement. Therefore, it is beyond any doubt that though claimed the expenditure and debited to the profit and loss account the sums of ₹ 13,22,53,000 spent for acquisition of business and a sum of ₹ 5,65,90,030 the expenditure which is allegedly reimbursable, during the assessment year 2011-12, the assessee voluntarily withdrew such claim in the revised computation of income and offered the same for tax. Whether or not the sum of ₹ 13,21,53,000 was capital expenditure, the fact remains that no deduction was claimed and tax was paid on it. Coming to the contention of the Revenue that the said amount was shown as revenue expenditure in the earlier year, it is patent to note that the revised computation for the assessment year 2011-12 was filed on May 25, 2012 i.e., subsequent to the cost reimbursement agreement that is to be found it page Nos. 63 to 64 of the paper book. All this is much earlier to the assessee filing their return of income for the assessment year 2012-13 on November 27, 2012. Therefore, it cannot be said that it is an afterthought for the assessee to put forth the prior period expenses in the current year. It is borne out by the record that by the date of the revised computation and the filing of the return for the assessment year 2012-13, the revised computation for the assessment year 2011-12 was filed, wherein the claim for deduction of ₹ 18,63,61,346 was withdrawn. Therefore, we are not inclined to accept the contention of the Revenue that the assessee is trying to camouflage the earlier year revenue expenditure as current year s capital receipt. At the same time we are also not inclined to believe that the assessee is guilty of suppressing the best evidence available in their custody and withheld it from producing before the Assessing Officer as contended by the learned Departmental representative basing on section 114(i)(g) of the Evidence Act. In view of the undisputed fact that a sum of ₹ 18,63,61,346 was offered to tax though it was originally debited to the profit and loss account during the assessment year 2011-12, and because of the cost reimbursement agreement between the assessee and the parent entity on May 18, 2012 pursuant to which a sum of ₹ 13,21,53,000 and ₹ 5,44,13,490 was credited to the profit and loss account, we hold that the assessee has rightly deleted the said amounts from computation of income for the assessment year 2012-13 though the same was credited to the profit and loss account. It is only an adjustment of book entries and there is no real income for the assessment year 2012-13. However, the sum representing the 4 per cent. of mark-up as per the transfer pricing agreement to a tune of ₹ 21,76,540 is revenue in nature and the income of the assessee during the assessment year 2012-13. Therefore, the additions of ₹ 13,21,53,000 and ₹ 5,44,13,490 are liable to be deleted, whereas the sum of ₹ 21,76,540 has to be sustained. We, therefore, direct the Assessing Officer to delete ₹ 13,21,53,000 and ₹ 5,44,13,490 while sustaining the addition of ₹ 21,76,540. - Decided partly in favour of assessee.

Summary

Issues:
- Appeal challenging assessment order
- Dispute regarding income addition in assessment year 2012-13
- Claim of capital receipt and business expenses
- Interpretation of cost reimbursement agreement
- Assessment of real income for the year 2012-13

Analysis:

1. The appeal challenged the assessment order dated January 30, 2017, by the Assessing Officer following the order by the Dispute Resolution Panel-1. The assessee, a company previously known as M/s. Alpha Payments Service India P. Ltd., was involved in various business activities related to electronic payment systems. The assessment for the year 2012-13 revealed international transactions with associated enterprises exceeding 15 crores, leading to a Transfer Pricing Officer's involvement. The assessment order added sums related to capital receipt and business expenses, contested by the assessee on both factual and legal grounds.

2. The authorized representative argued that the claimed expenditure in the previous year was voluntarily withdrawn due to a cost reimbursement agreement with the parent company. Despite the expenditure being debited and credited in the profit and loss account, the assessee offered it for tax in the earlier year. The representative emphasized the need to tax real income, not just book entries, and disputed the additions made in the assessment for the year 2012-13.

3. On the contrary, the Departmental representative contended that the assessee's actions regarding the expenditure were questionable, suggesting a lack of evidence and implying that the cost reimbursement agreement was an afterthought. Citing legal precedent and the Indian Evidence Act, the Departmental representative argued that the burden of proof lay with the assessee to establish the non-taxable nature of the credited amounts.

4. After hearing arguments, the Tribunal noted the undisputed facts regarding the expenditure treatment in the previous year and the subsequent tax payment. The Tribunal rejected the Revenue's contention that the assessee misrepresented the expenditure as a capital receipt in the current year. It also dismissed the allegation of withholding evidence, emphasizing the timely filing of revised computations and returns.

5. The Tribunal concluded that the amounts added to the income for the year 2012-13 were merely adjustments of book entries, not reflecting real income. It upheld the addition related to a mark-up as per the transfer pricing agreement but directed the deletion of the disputed sums related to capital receipt and business expenses. The Tribunal's decision resulted in a partial allowance of the assessee's appeal and the dismissal of the stay petition.

6. The judgment, delivered on July 12, 2017, clarified the assessment for the year 2012-13, highlighting the importance of accurate income determination and the proper interpretation of financial transactions. The Tribunal's decision balanced legal principles with factual considerations to ensure a fair outcome for both parties involved in the dispute.