2021 (8) TMI 66 - AT - Income Tax

TP Adjustment - determining the ALP of the international transaction pertaining to payment for intra group services as Nil - determining ALP in the case of cost contribution agreement - TPO, AO DRP disallowed the expenditure on the ground that the ALP was 'Nil' as no real services had been availed by the assessee and the arrangement was not genuine - whether intra group services are duplication of services for which the AE has already paid in addition to what is paid by way of allocation? - HELD THAT - The assessee has in the present case filed material before the TPO to demonstrate the nature of services rendered. In the paper book filed before us the index of the paper book gives a description of the service - above description alone would not suffice. As we have already seen the TPO had specifically called upon the assessee to give details of the services rendered and how the same were utilized by the assessee and its relevance for the assessee's business. The evidence filed by the assessee in this regard is in the form of e-mails between parties, reports etc. As to how the evidence filed by the assessee was actually useful in its business has also to be highlighted as the assessee will be the best person to know these facts which are within its knowledge. It is only if such a stand is taken by the assessee can the TPO take the issue forward to arrive at a proper conclusion. In our opinion filing of voluminous correspondence, reports etc., would not be a proper way of discharge of assessee's burden to establish the ALP of expenditure in question. We would therefore direct the assessee to comply with the queries raised by the TPO in his show cause notice which has been set out in his order u/s. 92CA of the Act. We therefore allow the appeal of the assessee for statistical purpose on this issue. The order of the CIT(A) is set aside and the issue is remanded to the TPO/AO for fresh consideration in the light of the directions given above. The TPO/AO will afford opportunity of being heard to the assessee in the set aside proceedings. Disallowance u/s 14A - assessee is engaged in the business of insurance - plea of the assessee that the total income of the assessee has to be computed in the manner laid down under section 44 of the Act and therefore provisions of section 14A of the Act would not be applicable - HELD THAT - As relying on assessee's own case 2021 (2) TMI 179 - ITAT BANGALORE we hold that the assessee is governed by section 44 of the Act read with first schedule to the Act which has special provisions governing computation of income of insurance business and those provisions do not provide for making any addition to disallowance under section 14A of the Act. The addition made by the Revenue authorities in this regard is therefore directed to be deleted.

Summary

Issues Involved:
1. Determination of Arm's Length Price (ALP) for intra-group services.
2. Applicability of Section 14A of the Income Tax Act to an insurance company.

Issue-wise Detailed Analysis:

1. Determination of Arm's Length Price (ALP) for intra-group services:

The primary issue in this appeal was whether the CIT(A) was justified in upholding the AO's determination of the ALP for the international transaction related to intra-group services as Nil, against the claimed payment of ?4,06,89,430/-. The assessee, engaged in life insurance and annuity business, reported receiving technical, administrative, and training support services from its AE, ING Insurance Asia Pacific (INGAP), and paid the actual costs incurred by INGAP without any markup.

The TPO questioned the necessity and proof of these services, noting insufficient documentation and the lack of a cost-benefit analysis. The TPO and AO concluded that the assessee failed to provide evidence of receiving the services and deemed the ALP of the services as Nil. The CIT(A) upheld this view, emphasizing that the benefits claimed were intangible and the payment arrangement lacked economic substance, citing OECD guidelines and the arm's length principle.

The assessee argued that the TPO exceeded his authority by questioning the necessity of the services and should have focused on whether the price paid was what an independent enterprise would have paid. Judicial precedents, including Dresser Rand India (P.) Ltd. v. Addl. CIT and CIT v. EKL Appliances Ltd., support the view that the TPO should not question the commercial wisdom of the assessee's decisions but should determine if the price paid is at arm's length.

The Tribunal concluded that the AO must reconsider the ALP determination, focusing on whether the price paid aligns with what an independent enterprise would pay, without questioning the necessity of the expenses. The Tribunal directed the assessee to provide detailed documentation supporting the services received and their relevance to its business. The issue was remanded to the AO/TPO for fresh consideration, with instructions to afford the assessee an opportunity to be heard.

2. Applicability of Section 14A of the Income Tax Act to an insurance company:

The second issue was whether the disallowance under Section 14A of the Act applies to an insurance company. The assessee argued that its total income should be computed under Section 44 of the Act, which overrides other provisions, including Section 14A. The Tribunal referred to the Delhi High Court's decision in Pr. CIT v. The Oriental Insurance Co. Ltd., which held that Section 44, with its non-obstante clause, excludes the applicability of Section 14A for insurance companies.

The Tribunal, following this precedent, concluded that the provisions of Section 44 and the first schedule of the Act, which govern the computation of income for insurance businesses, do not allow for disallowance under Section 14A. Consequently, the addition made by the Revenue authorities under Section 14A was directed to be deleted.

Conclusion:

The appeal was partly allowed. The issue regarding the ALP for intra-group services was remanded to the AO/TPO for fresh consideration, while the disallowance under Section 14A was deleted, affirming that Section 44 governs the computation of income for insurance companies, excluding the applicability of Section 14A.