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2021 (4) TMI 778 - AT - Income TaxTP Adjustment - Disallowance on professional fee u/s 40A(2) and alternatively u/s 37 - CIT-A deleted the addition holding that the TPO while determining the ALP has not disputed the genuineness of the payment and has accepted the ALP declared by the assessee - Whether CIT(A) was justified in deleting the above addition made without appreciating the fact that under sub-section (3) of Section 92C the TPO only computes the arm s length price in relation to an international transaction and is not empowered to examine the genuineness of the said payment - HELD THAT - As decided in ORACLE INDIA (P.) LTD. VERSUS ADDITIONAL COMMISSIONER OF INCOME-TAX 2009 (8) TMI 821 - ITAT DELHI Assessing Officer is required to compute the total income of the assessee in regard to the arms length price determined by the TPO - when payments are already been accepted at arms length by the TPO, then there was no justification on the part of the A.O. to hold that the expenditure is unreasonable and invoke the provisions of section 40A(2) of the I.T.Act. See M/S. HERBALIFE INTERNATIONAL INDIA PVT. LTD. 2015 (10) TMI 2794 - ITAT BANGALORE AO has not compared the reasonableness of payment with respect to fair market value of services provided by RNA vis- -vis outside parties. The Hon ble Delhi High Court in the case of CIT v. Nestle India Ltd. 2011 (5) TMI 566 - DELHI HIGH COURT had held that once the assessee has discharged initial onus, the burden would be shifted to the Revenue to show that the expense was unreasonable and excessive having regard to the legitimate needs of business based on material or evidence on record and that the assessee had made less than ordinary profits . Thus we are of the view that the A.O. has erred in invoking the provisions of section 40A(2) of the I.T.Act to disallow the claim of expense as excessive and not legitimate to the business needs, especially in view of the fact that the TPO, in its transfer pricing orders for assessment years 2008-2009 and 2010-2011, had held the impugned transaction at arms length. Disallowance of said expenditure u/s 37 - RNA has rich experience in setting up, running of stores and other related matters. It is providing such inputs to the other group concerns world over. The A.O. has nowhere doubted the genuineness of the agreement, the retention of services as well as the fact of actual payment of professional fees. The A.O. has disallowed the payment merely because he considered that there was no necessity of incurring such expenses by stating that the assessee had full-fledged management team and well-equipped resources. The A.O. cannot take a place of the management of the company and decide from its own point of view, whether an expense has to be incurred or not. Merely because there is expert management and team and resources, it cannot be contended that the expenditure was not at all required - thus we are of the view that the A.O. is not correct in disallowing the expenditure also u/s 37 of the I.T.Act. Disallowance of premium on forward cover - addition made on premium on forward cover u/s 43(5) treating it as speculative loss which is capital in nature and allowing the appeal of the assessee - HELD THAT - The forward contracts were entered into mainly to hedge the import payments and working capital loans repayment which is in the ordinary course of trade or business of the assessee. The hedging contracts are in the nature of foreign exchange contract to purchase foreign exchange on a specified future date at a predetermined date. The bankers levied premium for entering into such forward contract. These are in the nature of actual charges levied by the bankers. It is nothing but bank charges which is purely revenue in nature. The said expenditure is incurred to secure the assessee s business from foreign exchange fluctuation risk. In case the assessee would not have taken the forward contract to cover itself from fluctuation risk, it can lead to making higher payment of imports and incurring huge losses, which could result in lesser profit. As per section 43(5) of the I.T.Act, speculative transaction means a transaction in which the contract for purchase or sale of any commodity including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips - In order to attract the definition of a speculative transaction, all the characteristics mentioned in the said definition is required to be satisfied - The term commodity has not been defined under the Income Tax Act Black s Law Dictionary (8th Edition) defines the term commodity as an article of trade or commerce; the term embraces only tangible goods, such as products or merchandise, as distinguished from services; an economic good, especially a raw material or an agricultural product. As decided in MUNJAL SHOWA LTD. VERSUS DEPUTY COMMISSIONER OF INCOME TAX. 2003 (6) TMI 188 - ITAT DELHI-E foreign currency does not fall within the purview of the term commodity and hence this characteristic of a speculative transaction is not satisfied. Since, the definition of speculative transaction itself is not applicable to the assessee s case as all the conditions were not satisfied, treating the transaction as speculative in nature is not sustainable in law. Therefore, we hold that the CIT(A) is correct in deleting the disallowance of premium on forward contract and no interference is called for. - Decided in favour of assessee.
Issues Involved:
1. Disallowance of professional fees under sections 40A(2) and 37 of the Income Tax Act. 2. Disallowance of premium on forward cover under section 43(5) of the Income Tax Act. Issue-wise Detailed Analysis: 1. Disallowance of Professional Fees: Ground Nos. 2 and 3 (Professional Fees): The assessee paid professional fees to its associate enterprise, RNA Resources Group Limited (RNA), for consultancy services related to setting up and running new stores. The Assessing Officer (AO) disallowed these payments under sections 40A(2) and 37 of the Income Tax Act, citing reasons such as the payments being unreasonable and excessive, the presence of a full-fledged management team within the assessee's organization, and the lack of necessity for such services. The AO also questioned the exclusivity of the expenses for business purposes. The CIT(A) directed the AO to delete the disallowance, stating: - The judicial precedents indicated no deviation when international transactions are declared at arm's length price. - The AO failed to specify what was excessive or unreasonable in the payments and did not bring on record any fair market value analysis. - The AO did not explain why the expenses were not wholly and exclusively for business purposes. - The expenses were capital in nature, making sections 40A(2) and 37 inapplicable. The Tribunal upheld the CIT(A)'s decision, stating: - The professional fees were considered an international transaction and were declared at arm's length price by the Transfer Pricing Officer (TPO). - The AO erred in invoking section 40A(2) without proving that the expenditure was in excess of fair market value. - The AO did not conduct any inquiry or investigation to find out the excessiveness of the payment. - The AO cannot take the place of the company's management to decide the necessity of expenses. - The genuineness of the agreement and the actual payment of professional fees was not doubted by the AO. 2. Disallowance of Premium on Forward Cover: Ground No. 4 (Premium on Forward Cover): The assessee incurred expenses on premium for forward cover contracts to hedge against adverse foreign exchange movements. The AO disallowed these expenses under section 43(5) r.w.s. 73 of the Income Tax Act, considering them speculative transactions. The CIT(A) deleted the disallowance, stating: - The forward contracts were entered into to hedge import payments and working capital loans in the ordinary course of business. - The premium paid to the bank was in the nature of bank charges, which are revenue in nature. - The transactions did not meet the criteria for speculative transactions under section 43(5) as they did not involve the purchase or sale of shares, stocks, or commodities. The Tribunal upheld the CIT(A)'s decision, stating: - The forward contracts were in the nature of foreign exchange contracts to purchase foreign exchange on a specified future date at a predetermined rate. - The premium paid was in the nature of actual charges levied by the bankers, which are revenue in nature. - The transactions did not satisfy the definition of speculative transactions under section 43(5) as foreign currency is not considered a commodity. Conclusion: The appeals filed by the Revenue for the assessment years 2008-2009 and 2010-2011 were dismissed. The cross objections filed by the assessee, supporting the CIT(A)'s orders, were also dismissed. The Tribunal upheld the CIT(A)'s decisions on both issues, confirming that the disallowances made by the AO were not sustainable in law.
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