2018 (5) TMI 1686 - AT - Income Tax

Disallowance of entertainment expenditure since incurred for non-business purposes - Held that - Assessee produced sufficient documentary evidences to prove the genuineness of the expenses - however, without properly examining the evidence brought on record, AO disallowed the expenditure on ad hoc basis - thus disallowance made by the AO is deleted - Decided in favor of assessee. Disallowance u/s 40(a)(i) for payment towards global support service fees - Held that - It has not been established on record that while rendering the services, EMCAP has made available technical knowledge, knowhow, skill, etc. - thus payment made by the assessee cannot be considered as fees for technical services as defined under Article 12(4)(b) of the India Singapore tax treaty - in earlier AYs also assessee has not deducted TDS on payment of global support service fee and no disallowance was made - thus being no difference in facts in the impugned assessment year, considering that the payment was made under the same contract, even, applying the rule of consistency, no disallowance under section 40(a)(i) can be made - Decided in favor of assessee. Additions made on account of non-reconciliation of AIS payment of sales tax/professional tax - Held that - AO has not brought on record sufficient evidence to prove that claim made by the assessee was factually incorrect - thus further investigation is required - matter is restored back to the file of AO for fresh adjudication. Transfer pricing adjustments - method of determination of Arm s Length Price - selection of comparables - Held that - To determine the ALP of the IT s entered into by the assessee with its AE s, under the head BOSS, further verification is required - thus in the interest of justice, the issue is restored back to the file of the AO /TPO - also reasonable opportunity of hearing shall be given to the assessee - Decided partly in favor of assessee.

Issues Involved:
1. Disallowance of entertainment expenditure.
2. Disallowance under section 40(a)(i) of the Income Tax Act.
3. Reconciliation of AIS payment of sales tax/professional tax.
4. Transfer pricing adjustments.

Detailed Analysis:

1. Disallowance of Entertainment Expenditure:
The first issue revolves around the disallowance of an estimated ?4.33 lakhs, being 25% of the entertainment expenditure of ?17.32 lakhs, on the ground that it was incurred for non-business purposes. The Tribunal noted that in a similar case for the assessment year 2007-08, the disallowance was deleted because the Assessing Officer (AO) had made the disallowance on an ad-hoc basis without properly examining the evidence. The Tribunal concluded that if the assessee could prove the genuineness of the expenses with proper documentary evidence, there was no reason for disallowance. Following this precedent, the Tribunal decided the first ground of appeal in favor of the assessee.

2. Disallowance under Section 40(a)(i) of the Income Tax Act:
The second issue pertains to the disallowance of ?1.28 crores under section 40(a)(i) for non-deduction of tax at source on payments made to ExxonMobil Chemical Asia Pacific Pte. Ltd. (EMCAP) for global support services. The AO had treated these payments as fees for technical services and disallowed them. The Tribunal, however, found that the services provided did not make available any technical knowledge, experience, skill, or knowhow to the assessee, which would enable it to apply the technology independently. The Tribunal also noted that in previous years, similar payments were made without any disallowance under section 40(a)(i). Applying the rule of consistency and following the precedent set in the assessee's own case for earlier years, the Tribunal deleted the disallowance.

3. Reconciliation of AIS Payment of Sales Tax/Professional Tax:
The third issue involves the addition of ?3.32 crores due to the failure of the assessee to reconcile the sales tax/professional tax payments as per the AIR information. The assessee argued that it had not made any sales during the year and thus the question of sales tax payment did not arise. The Tribunal observed that AIR information is a good starting point for investigation but is not conclusive. The AO had not provided sufficient evidence to prove that the claim made by the assessee was factually incorrect. Therefore, the Tribunal restored the issue to the AO for fresh adjudication, directing the AO to provide necessary information to the assessee about the differences.

4. Transfer Pricing Adjustments:
The last issue concerns transfer pricing adjustments for international transactions with associated enterprises (AEs). The AO had made adjustments based on the Transfer Pricing Officer's (TPO) determination of the Arm's Length Price (ALP) for technical services (TS) and back office support services (BOSS). The Tribunal noted that in the earlier year, certain comparables were included/excluded based on their functional similarity to the assessee. For the TS segment, the Tribunal directed the inclusion of Pfizer and exclusion of NMIAL from the list of comparables. For the BOSS segment, the Tribunal directed further verification and reconsideration of the comparables, following the order for the assessment year 2007-08. The Tribunal restored the issue to the AO/TPO for fresh adjudication, directing them to consider the Tribunal's previous orders and afford a reasonable opportunity of hearing to the assessee.

Conclusion:
The appeal filed by the assessee was partly allowed, with the Tribunal deciding some issues in favor of the assessee and remanding others for further verification and fresh adjudication by the AO/TPO. The order was pronounced in the open court on 23rd May, 2018.

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