2020 (1) TMI 821 - AT - Income Tax

TP Adjustment - addition on account of ALP - Not making reference to Ld. TPO - certain payments to its Associated Enterprises ( AEs ) which is not an expense but in fact an income AND amount as not claimed by the assessee in its P L account and is only the amount of reimbursement which the assessee incurred towards payments to reliance for the ITFS services, but utilised by the Associated Enterprises ( AEs ) and therefore such sum was reimbursed by the AE s - AO reached a conclusion that the assessee failed to substantiate as to when and how the various services were requisitioned from the AE s - whether the services were actually needed by it, whether the same were actually received by it by producing contemporaneous documentary evidence, at the time of entering into the agreement or at the time of availing the services - HELD THAT - On a consideration of the submissions made on behalf of the assessee, we are of the considered opinion that the payments were made for business purpose and the Revenues earned and declared by the assessee show the proportion of benefit, because the assessee travelled from losses to profit after their collaboration with the Arkadin SA, France. Proof of pudding is in the eating. The travel of assessee from losses to profits pursuant to the collaboration with the Arkadin SA, France is evident. Its acquisition of not only the equipment but also the technical knowhow cannot be presumed to be without any cost. As rightly pointed out by the Ld. CIT(A), the findings of the Assessing Officer that the payments were made without any business purpose and without any commensurate benefit to the assessee are not based on any cogent material and without bringing any adverse material on record. We are in agreement with the Ld. CIT(A) in his findings that the Assessing Officer failed to specify how the payments made by the assessee were not in commensurate with the services obtained by the assessee and such findings are without any basis. The very fact of the Assessing Officer disallowing the income and the reimbursement which does not pass through the P L account while disallowing the expenses shows that the disallowance was made by the learned Assessing Officer without any proper verification of the material facts available on record. We also find strength in the submission of AR that inasmuch as AO noticed that the value of the international transaction exceeds ₹ 5 crores, pursuant to the instruction No. 3/2003, dated 20/5/2003, the matter should have been referred to the Ld. Transfer Pricing Officer for determination of ALPB of the international transaction, and for not doing so the adjustment on account of ALP cannot be sustained. In the case of M/s SG Asia Holdings (India) Private Limited referring to the instruction No. 3/2003 held that in view of the guidelines issued by the CBDT instruction No. 3/2003, the Tribunal was right in observing that by not making reference to Ld. TPO, the Assessing Officer had breached the mandatory instructions issued by the CBDT and declined to find the conclusion so arrived by the Tribunal to be incorrect. - Decided against revenue

Summary

Issues Involved:
1. Deletion of addition of ?7,05,54,285/- made by the Assessing Officer (A.O.) on account of Arm's Length Price (ALP).

Issue-wise Detailed Analysis:

1. Deletion of Addition on Account of ALP:
The primary issue in this case revolves around the deletion of an addition of ?7,05,54,285/- made by the A.O. regarding the ALP of international transactions conducted by the assessee with its Associated Enterprises (AEs).

Brief Facts:
The assessee, a subsidiary of Arkadin SA, France, engaged in global collaboration services, filed its return of income for the assessment year 2011-12. During assessment, the A.O. scrutinized international transactions amounting to ?7,05,54,285/- reported under section 92E of the Income Tax Act, 1961. The A.O. sought detailed information and concluded that the assessee failed to substantiate the need, receipt, and benefit of services from its AEs, thus determining the ALP of the transactions at nil and adding the amount to the income of the assessee.

Findings of the CIT(A):
Upon appeal, the CIT(A) reappraised the materials and found that the payments made by the assessee to its holding company were genuine and for business purposes. The CIT(A) noted that the assessee initially incurred losses but became profitable after becoming a subsidiary of Arkadin SA, receiving business, equipment, and software from the parent company. The CIT(A) also identified that out of the ?7,05,54,285/- added by the A.O., ?1,17,38,993/- was income and ?3,34,75,286/- was reimbursement, not claimed as an expense. The CIT(A) concluded that the payments were made through banking channels, after deducting applicable taxes, and were based on agreements, thus deleting the addition.

Revenue’s Appeal:
The Revenue contended that the CIT(A) erred in deleting the addition, arguing that the assessee did not provide sufficient documentary evidence to prove the benefit and rendition of services. The Revenue also argued that the CIT(A) should not have considered documents submitted by the assessee without the A.O.'s verification.

Tribunal’s Analysis:
The Tribunal examined the record and submissions, noting that the assessee’s business improved significantly after collaboration with Arkadin SA. The Tribunal agreed with the CIT(A) that the A.O.'s findings lacked cogent material and adverse evidence. The Tribunal highlighted that the A.O. incorrectly included income and reimbursements in the disallowed amount. The Tribunal also emphasized that the payments were made for business purposes, supported by agreements, and resulted in the assessee's transition from losses to profits.

Non-Referral to TPO:
The Tribunal found merit in the assessee's argument that the A.O. should have referred the matter to the Transfer Pricing Officer (TPO) as the transaction value exceeded ?5 crores, as per CBDT Instruction No. 3/2003. The Tribunal cited the Supreme Court’s decision in M/s SG Asia Holdings (India) Private Limited, affirming that the A.O.'s failure to refer the matter to the TPO breached mandatory instructions, rendering the ALP adjustment unsustainable.

Conclusion:
The Tribunal concluded that the CIT(A)'s order did not suffer from any illegality or irregularity and upheld the deletion of the addition. The appeal by the Revenue was dismissed.

Order Pronouncement:
The appeal of the Revenue was dismissed, and the order was pronounced in the Open Court on 20th January, 2020.