2020 (4) TMI 746 - AT - Income Tax

TP Adjustment - filters application - HELD THAT - As observed that authorities below have cherry picked on using filters without understanding business model of assessee. It is observed that DRP applied on-site revenue filter suo moto, without being considered by TPO. We are of the opinion that transfer pricing adjustment made by AO/TPO needs to be re-looked in accordance with law. As observed that AO while passing final assessment order in computation of assessed income has not considered transfer pricing adjustment that has been made in para 3 of assessment order. This shows a sheer negligence on behalf of Ld. AO and non-application of mind. Provision for warranty disallowed - HELD THAT - We direct Ld. AO to verify the claim of assessee in the light of decision by Hon ble Supreme Court in case of Rotork Controls India (P) Ltd., vs CIT 2009 (5) TMI 16 - SUPREME COURT and Hon ble Delhi High Court in case of CIT vs Goetz India Ltd., 2010 (1) TMI 29 - DELHI HIGH COURT

Summary

Issues Involved:

1. Disallowance of Provision for Bad and Doubtful Debts
2. Disallowance of Management Fees
3. Disallowance of Reimbursement of Expenses
4. Short Credit of Tax Deducted at Source (TDS)
5. Interest under Section 234D of the Act
6. Dividend Distribution Tax (DDT)
7. Provision for Warranty
8. Disallowance of Software Expenses
9. Consequential Depreciation on Disallowance of Software Expenditure
10. Transfer Pricing Issues

Detailed Analysis:

I. Disallowance of Provision for Bad and Doubtful Debts:
The learned AO disallowed the provision for doubtful debts amounting to ?11,98,944. The assessee contended that the provision for doubtful debts written back should be allowed as a deduction since it pertains to the reversal of provisions from prior years, which were already disallowed. The AO failed to follow the directions of the learned DRP to verify the facts and did not provide the appellant an opportunity to substantiate the claim.

II. Disallowance of Management Fees:
The AO and DRP disallowed management fees amounting to ?6,29,93,042 on the basis that tax was not deducted at source on such payments, contending that these expenses were in the nature of technical services liable for withholding taxes under section 195 of the Act. The assessee argued that the services availed from Ingersoll-Rand Company, USA did not fall within the meaning of fees for included services as per Article 12 of the India-USA DTAA, and hence, withholding was not required.

III. Disallowance of Reimbursement of Expenses:
The AO disallowed reimbursement of expenses made to related parties amounting to ?1,62,42,886 on the basis that taxes were not deducted at source. The assessee argued that these were actual expenses incurred by IRC without any markup, and thus, provisions of section 195 were not attracted. The DRP failed to adjudicate on this ground.

IV. Short Credit of Tax Deducted at Source (TDS):
The AO granted TDS credit of ?6,03,82,774 against ?6,04,24,850 claimed by the assessee in the revised return of income filed on 27 March 2013.

V. Interest under Section 234D of the Act:
The AO levied interest under section 234D amounting to ?21,88,445, contending that a refund of ?1,56,31,750, as claimed in the revised return, had been issued to the appellant, which the appellant denied receiving.

VI. Dividend Distribution Tax (DDT):
The AO computed the DDT payable by the appellant as ?3,63,34,323 against ?3,14,58,302 computed by the appellant. The AO included the shortfall in DDT as a part of the final assessment order without providing an opportunity to the appellant to be heard.

VII. Provision for Warranty:
The AO and DRP disallowed the provision for warranty amounting to ?11,14,118, contending that it was not created on a scientific basis and was ad hoc. The assessee argued that the provision was based on past experience and created on an accrual basis. The DRP directed the AO to verify the claim in light of the Supreme Court's decision in Rotork Controls India (P) Ltd. vs CIT.

VIII. Disallowance of Software Expenses:
The AO and DRP disallowed software expenses amounting to ?39,09,580, treating them as capital in nature and allowed depreciation amounting to ?19,78,025, resulting in a net disallowance of ?19,31,554. The balance amount of ?27,14,473 was disallowed on the basis that it was only a provision and not an actual expense.

IX. Consequential Depreciation on Disallowance of Software Expenditure:
The AO did not grant consequential depreciation of ?17,78,814 on the software expenses disallowed in AY 2010-11, despite directions from the DRP.

X. Transfer Pricing Issues:
The authorities below were found to have cherry-picked filters without understanding the business model of the assessee. The DRP applied an on-site revenue filter without it being considered by the TPO. The transfer pricing adjustment made by the AO/TPO was set aside for reconsideration. The AO failed to follow the directions of the DRP in respect of granting depreciation allowance on software expenses disallowed in AY 2010-11.

Conclusion:
The appeals and cross-objections filed by the assessee and revenue were allowed for statistical purposes. The issues were remanded back to the AO/TPO for reconsideration and verification in accordance with the law, with directions to pass a detailed order having regard to judicial precedents.