2018 (12) TMI 276 - AT - Income Tax

Transfer pricing adjustment on account of corporate support services received from AE - allocation of intra group services to be borne by the assessee from its AE in 16 worldwide localities - assessee s allocation is based upon a global agreement between the AEs in this regard. Various allocation keys, i.e., asset, revenue, number of employee, depending upon the nature has been used with allocation is supported by a CPA certificate - Revenue s contented that necessary evidence in this regard for the veracity of allocation and incurring of expenditure has not been submitted and CPA certificate is not credible in absence of supporting documents on the basis of which the said certificate was issued with several errors in the global agreement Held that - A reading of this OECD guidelines makes it abundantly clear that contrary to the Revenue s argument, the using of allocation keys for allocation of intra group services is not alien to international tax jurisprudence. Further, the allocation of concerned group expenses to different accounting units is a duly accepted accounting procedure. Furthermore, the assessee has used a CPA certificate for the allocation of intra group services from the AE. The authorities below have rejected the CPA certificate on the ground that underlying documents on the basis of which the CPA certificate has been issued has not been produced before them. In this regard, we note that the CPA certificate is quite specific and has been duly authenticated. We find that in Rule 10D, containing information and documents to be kept and maintained u/s.92D it has been duly mentioned that the information s required under Rule 10D(2)(A) shall be supported by authentic documents which may include inter alia public accounts and the financial statements relating to the business of the associated enterprises. Hence, the evidence for international transaction can be duly supported by public accounts and financial statements relating to business affairs of the AE. With such mandate of law, in our considered opinion, the action of the authorities below in rejecting the CPA certificate is not sustainable. The various other proposition mentioned by the ld. Counsel of the assessee and case laws in support thereof as noted in para 22 hereinabove are germane and duly support the case of the assessee. As regards the estimation and allocation of IT cost is concerned, the same has been duly accepted for the Dispute Resolution Panel for A.Y. 2013-14 and the Revenue has accepted the same. In the background of the aforesaid discussion and precedent, we set aside the order of the authorities below and decide the issue in favour of the assessee. Hence, the transfer pricing adjustment stands deleted. Disallowance of expense & tax depreciation pertaining to Chennai Unit - Held that - The authorities below are quite correct in holding that it is undisputed fact that no business operation have been/are being carried out from the Chennai premises for the last many years. DRP has noted that the assessee has admitted to the fact that the activities of the Chennai unit stand discontinued since 2009. From the letter to The Development Commissioner, Chennai produced before us by the ld. Counsel of the assessee, it is further fortified that the operation of the business unit has not only been discontinued; rather, the assessee is in the process of disposing of the capital goods imported by them for the initial period. The assessee is leasing out part of premises and offering the income therefrom as income from house property. The assessee itself has disallowed expenses of ₹ 1,39,92,000/- pertaining to repair and maintenance and claims the balance expenditure of ₹ 3,14,07,000/-. Hence, we find ourselves in agreement with the finding of the DRP that this is a clear case that it is not a temporary discontinuation of the business, rather, the business has been completely stopped at this unit. In these circumstances, when there is a complete stoppage of the business and the assessee is offering income from leasing from the unit as income from house property, there is no question of allowance of expenses or depreciation in this regard. In our considered opinion, the orders of the authorities below do not have any infirmity in this regard. Accordingly, this order of the A.O. is affirmed. Appeals of the assessee are partly allowed.

Summary

Issues Involved:
1. Transfer pricing adjustment on account of corporate support services received from AE.
2. Transfer pricing adjustment on account of business support services from AE.
3. Disallowance of expenses pertaining to the Chennai unit.
4. Erroneous levy of interest under section 234B and 234C of the Act.
5. Ad hoc disallowance of tax depreciation pertaining to the factory building located at the Chennai unit.
6. Short-grant of tax credit available under section 115JAA of the Act.

Issue-wise Detailed Analysis:

1. Transfer Pricing Adjustment on Account of Corporate Support Services:
The assessee, JCIPL, received cost allocation charges amounting to ?29,27,90,502 from its overseas Jabil Group entities for support services. The Transfer Pricing Officer (TPO) rejected the arm's length price (ALP) of these charges, citing a lack of direct evidence to substantiate the services rendered and applied the Comparable Uncontrolled Price (CUP) method without identifying comparable transactions. The TPO estimated the value of services at ?1,27,50,000 based on 1500 man-hours at ?8,500 per hour, leading to an adjustment of ?33.36 crores.

The Dispute Resolution Panel (DRP) upheld the TPO's decision, noting that the assessee failed to provide specific details about the services and supporting evidence. The DRP found the CPA certificate submitted by the assessee insufficient and not backed by concrete evidence. The DRP concluded that the TPO rightly applied the CUP method and that the assessee did not demonstrate the receipt or benefit of the services claimed.

2. Transfer Pricing Adjustment on Account of Business Support Services:
JCIPL received business development support charges amounting to ?5,34,80,267 from its AEs. The TPO rejected the ALP of these charges, citing a lack of direct evidence and applied the CUP method. The DRP upheld the TPO's decision, noting that the assessee failed to provide specific details and evidence of the services received.

3. Disallowance of Expenses Pertaining to the Chennai Unit:
The AO disallowed expenses of ?3,14,07,000 related to the Chennai unit, which had ceased operations since 2009. The AO noted that the assessee had leased out part of the premises and shown the income under "income from house property." The DRP upheld the AO's decision, stating that the expenses claimed were not incurred for business purposes and were not allowable under the head "income from house property."

4. Erroneous Levy of Interest Under Section 234B and 234C:
This issue was not specifically addressed in the judgment.

5. Ad Hoc Disallowance of Tax Depreciation Pertaining to the Factory Building Located at the Chennai Unit:
The AO disallowed ?2,71,85,103 in depreciation for the Chennai unit, stating that the unit had ceased operations and the assets were not used for business purposes. The DRP upheld the AO's decision, noting that depreciation is allowable only if the assets are used for business purposes. The DRP rejected the assessee's argument that the assets were part of a block of assets and that depreciation should be allowed until the block is exhausted.

6. Short-Grant of Tax Credit Available Under Section 115JAA of the Act:
This issue was not specifically addressed in the judgment.

Conclusion:
The appeals were partly allowed. The tribunal found that the supporting evidence provided by the assessee for intra-group services was reasonable and cogent, and the TPO's estimation method was whimsical and bizarre. The tribunal set aside the transfer pricing adjustments but upheld the disallowance of expenses and depreciation related to the Chennai unit, as the unit had ceased operations and the income was shown under "income from house property."