2021 (8) TMI 1213 - AT - Income Tax

Revision u/s 263 by CIT - Addition u/s 40(a)(ia) - assessee had claimed expenditure of Corporate Management Services paid to its AE - claim so made included 'year-end' provision made for an outstanding and assessee voluntarily disallowed above said amount u/s. 40(a)(i) - TPO determined ALP of Corporate Management services at NIL. and while computing TP adjustment, he reduced the amount voluntarily disallowed u/s. 40(a) - HELD THAT - There should not be any dispute that the claim of the assessee is as per the provisions of sec. 40(a) of the Act - under Explanation to section 92(1) of the Act, the allowance for any expense shall also be determined having regard to arms length price - TPO has determined the arms length price at NIL in AY 2009-10, the entire claim made in the profit and loss account should have been considered as transfer pricing adjustment - TPO has reduced the amount disallowed u/s. 40(a) and made transfer pricing adjustment for the balance amount only in AY 2009-10 The question of making disallowance u/s. 40(a) shall apply, only if the relevant expenditure was found to be allowable, but for the provisions of sec. 40(a). Hence the action of TPO in reducing the T.P adjustment amount by the disallowance made u/s. 40(a) may not be right and in that case, the error lies in AY 2009-10. Having not done so, the Ld. CIT should not find fault with the claim of the assessee made u/s. 40(a) of the Act on the reasoning that the TDS has been made in this year, i.e., in AY 2010-11. the order passed by Ld. CIT(A) on this issue cannot be sustained. Foreign services Employees expenses - TPO had determined ALP of intra group services at NIL - AR also took us through the query posed by the TPO during the course of TP proceedings. TPO has specifically asked whether the assessee is claiming any reimbursements as expenses without routing though the Profit and Loss account? - The assessee has also furnished reply to the same stating that reimbursement claims have been routed through the Profit and Loss account, meaning thereby, the TPO has specifically applied his mind on this issue. Hence the TPO has examined this issue and has taken a possible view, in which case, the revision order passed by Ld. CIT on this issue is also liable to be quashed. In the case of Malabar Industrial Co Ltd. as 2000 (2) TMI 10 - SUPREME COURT as expressed the view that the assessment order cannot be considered to be prejudicial to the interests of revenue, if the AO has taken a plausible view - impugned revision order is not sustainable in law. - Decided in favour of assessee.

Summary

Issues Involved:
1. Validity of the revision order passed by CIT under section 263 of the Income-tax Act, 1961.
2. Disallowance of ?2.80 crores claimed under section 40(a) in AY 2010-11.
3. Inclusion of Foreign Service Employee expenses in the computation of Arm's Length Price (ALP).

Issue-wise Detailed Analysis:

1. Validity of the revision order passed by CIT under section 263:
The assessee challenged the revision order dated 19.1.2017 by CIT(LTU), Bangalore, for AY 2010-11 under section 263 of the Income-tax Act, 1961. The CIT initiated revision proceedings after concluding that the assessment order was erroneous and prejudicial to the revenue's interest. The CIT set aside the issues and remitted the matter to the AO for reconsideration. The assessee contended there was no error in the AO's order and appealed against the revision order.

2. Disallowance of ?2.80 crores claimed under section 40(a) in AY 2010-11:
The assessee had claimed expenditure for Corporate Management Services paid to its AE in AY 2009-10, including a provision of ?2.80 crores, which was voluntarily disallowed under section 40(a) due to non-deduction of TDS. The TPO determined the ALP of the services at NIL but did not make a separate TP adjustment for ?2.80 crores as it was already disallowed under section 40(a). In AY 2010-11, the assessee claimed the deduction of ?2.80 crores after deducting TDS, which the AO allowed. However, the CIT viewed that the disallowance in AY 2009-10 should be considered under section 92CA as a TP adjustment and not under section 40(a), thus disallowing the deduction in AY 2010-11. The assessee argued that the claim was in accordance with section 40(a) as TDS was deducted during the payment in AY 2010-11. The Tribunal found that the CIT's view was incorrect as the AO accepted the disallowance under section 40(a) in AY 2009-10, and the CIT's revision order did not point out any error in the assessment order for AY 2010-11. The Tribunal concluded that the CIT's order on this issue could not be sustained.

3. Inclusion of Foreign Service Employee expenses in the computation of ALP:
The CIT viewed that Foreign Service Employee expenses of ?2,56,47,834/- should be included in "Support services/Management Fees" and its ALP should be NIL, resulting in an addition. The assessee contended that these expenses were part of salary reimbursed to AE and included in Salary expenses. The TPO had accepted the TNM method for benchmarking other international transactions, including these expenses, and found them at arm's length. The Tribunal noted that the TPO had specifically examined this issue during TP proceedings and accepted it as part of the TNM method. Hence, the CIT's revision order on this issue was also quashed.

Conclusion:
The Tribunal held that the CIT's revision order was not sustainable in law as the AO had taken a plausible view, and there was no error in the assessment order for AY 2010-11. The appeal filed by the assessee was allowed, and the revision order was set aside.