2021 (5) TMI 537 - AT - Income Tax

Enhancement u/s 92CA - MAP margin - as per assessee mutual agreement procedure MAP resolution has already attained finality qua its international transactions with its overseas associated enterprises AEs in USA - HELD THAT - The assessee s international transactions in these three assessment years 2005-06 2006-07 and 2007-08 covered under the above MAP are to the extent of 94.7% to 96% and 93% forming subject matter of the ALP in these assessment years. Coming to the remaining international transactions with associated enterprises in other jurisdictions i.e. Singapore etc. the Revenue fails to dispute that even the Transfer Pricing Officer has not drawn any distinction qua the ALP in all the substantive grounds raised herein. We thus hold that the MAP margin of 15.49% 15.34% and 15.76% deserves to be applied qua the remaining portion of non-USA based international transactions as well. Disallowance u/s 37 - Expenditure on improvements to leasehold premises - revenue or capital expenditure - HELD THAT - We find no merit in Revenue s stand disallowing assessee s claim in view of (i) CIT vs. Citi Financial Consumer Fin Ltd. 2011 (3) TMI 622 - DELHI HIGH COURT ; (ii) Amway India Enterprises vs. DCIT 2008 (11) TMI 432 - ITAT DELHI and (iiii) CIT vs. Amway India Enterprises 2011 (11) TMI 4 - DELHI HIGH COURT holding that such improvements are in the nature of revenue expenditure only. The impugned disallowance is directed to be deleted therefore. Penalty u/s 271(1)(c) - Addition on enhancement in its income on the ground that it had failed to disclose the correct figures - HELD THAT - From a perusal of CIT(A) s lower appellate order in quantum proceedings that the corresponding mistake in omitting to adopt correct figures in assessee s form 3 CEB had been made at the TPO s end which stood admitted in his letter dated 7.2.2011 than involving any concealment of particulars or furnishing of inaccurate particulars of income at taxpayer s behest. This clinching fact has gone unrebutted from revenue side during the course of hearing. We thus accept assessee s instant penalty appeal and direct the Assessing Officer to delete the impugned penalty.

Summary

ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment include:

• Whether the Mutual Agreement Procedure (MAP) resolution for international transactions with associated enterprises (AEs) in the USA for the assessment years 2005-06 to 2007-08 should be applied to other jurisdictions as well.
• The validity of the disallowance of 7,24,122/- under section 37(1) of the Income Tax Act, 1961, treating improvements to leasehold premises as capital expenditure.
• The legitimacy of the penalty imposed under section 271(1)(c) of the Income Tax Act, 1961, for alleged non-disclosure of correct income figures.

ISSUE-WISE DETAILED ANALYSIS

Issue 1: Application of MAP Resolution

• Relevant Legal Framework and Precedents: The MAP resolution was reached under Rule 44G of the Income Tax Rules, 1962, involving the application of the Transactional Net Margin Method (TNMM) as the most appropriate method for determining the Arm's Length Price (ALP).
• Court's Interpretation and Reasoning: The Tribunal noted that the MAP resolution covered a significant portion of the international transactions (94.7% to 96%) with the USA. The Tribunal decided to apply the MAP margin to the remaining non-USA based international transactions, as the Transfer Pricing Officer had not drawn any distinction for the ALP in the substantive grounds.
• Key Evidence and Findings: The MAP resolution was finalized between the Indian and USA Competent Authorities, and the assessee had accepted the resolution, withdrawing appeals related to the resolved transactions.
• Application of Law to Facts: The Tribunal applied the MAP resolution margins of 15.49%, 15.34%, and 15.76% to non-USA transactions, rendering the appeals related to ALP adjustments infructuous.
• Treatment of Competing Arguments: The Revenue did not dispute the MAP resolution's applicability to other transactions, leading to the dismissal of related appeals.
• Conclusions: The MAP resolution was applied to all relevant transactions, resulting in the dismissal of the appeals concerning ALP adjustments.

Issue 2: Disallowance under Section 37(1)

• Relevant Legal Framework and Precedents: Section 37(1) of the Income Tax Act deals with the allowance of business expenditures. Precedents cited include CIT vs. Citi Financial Consumer Fin Ltd., Amway India Enterprises vs. DCIT, and CIT vs. Amway India Enterprises, which held that improvements to leasehold premises are revenue expenditures.
• Court's Interpretation and Reasoning: The Tribunal found that the improvements claimed by the assessee were in the nature of revenue expenditure, not capital expenditure, based on the cited precedents.
• Key Evidence and Findings: The improvements to leasehold premises were similar to those in the cited cases, where such expenditures were treated as revenue in nature.
• Application of Law to Facts: The Tribunal directed the deletion of the disallowance, accepting the improvements as revenue expenditure.
• Treatment of Competing Arguments: The Tribunal found no merit in the Revenue's stand, leading to the acceptance of the assessee's claim.
• Conclusions: The disallowance under section 37(1) was deleted, and the appeal was partly accepted on this ground.

Issue 3: Penalty under Section 271(1)(c)

• Relevant Legal Framework and Precedents: Section 271(1)(c) of the Income Tax Act pertains to penalties for concealment of income or furnishing inaccurate particulars.
• Court's Interpretation and Reasoning: The Tribunal observed that the mistake in figures was made by the Transfer Pricing Officer, not due to any concealment by the assessee.
• Key Evidence and Findings: The Tribunal noted that the error in adopting figures was admitted by the Transfer Pricing Officer, negating any intention of concealment by the assessee.
• Application of Law to Facts: The Tribunal directed the deletion of the penalty, as the error was not attributable to the assessee's actions.
• Treatment of Competing Arguments: The Revenue did not rebut the fact that the error was on the part of the Transfer Pricing Officer.
• Conclusions: The penalty under section 271(1)(c) was deleted, and the appeal was allowed on this ground.

SIGNIFICANT HOLDINGS

• The Tribunal applied the MAP resolution margins to all relevant international transactions, dismissing related appeals as infructuous.
• The disallowance under section 37(1) was deleted, recognizing improvements to leasehold premises as revenue expenditure.
• The penalty under section 271(1)(c) was deleted due to the error being attributable to the Transfer Pricing Officer, not the assessee.
• Verbatim Quote: "We thus hold that the 'MAP' margin of 15.49%, 15.34% and 15.76% deserves to be applied qua the remaining portion of non-USA based international transactions as well."